The surge northwards was a PR own goal
The six mile tail back on the road into Newry, splashed in glorious full colour on the front page of today’s Indo, helped yesterdays strike undermine the strongest argument opposing cuts in public sector pay. With various studies putting public sector pay approx. 20% higher than equivalent private sector pay levels (without taking into account superior benefits), the main argument against cuts was that they would reduce the amount of money being spent in the Irish economy, leading to a shrinkage in the total size of the economy and in tax returns to the state.
Union economists such as Michael Taft have produced estimates showing that the size of the deficit reduction of a given cut in spending may turn out to be a fraction of the size of the cut. It is highly unlikely that the models employed took into account the “Newry Effect” – that with significant pricing differentials between north and south, money borrowed by the Irish state to pay state employees is not being spent in this state. In all likelihood spending cuts may well be less deflationary than first thought. Regardless, those who travelled north to shop yesterday fundamentally undermined the argument that the rest of us should borrow more money, and pay more tax to maintain their salary levels because it is beneficial to this (southern) economy.
Itwas SammyMcNally whatdoneit -
You’d think – stores tend to change prices even store to store depending on the demographics they get, so maybe it is a little complicated. There’s a good chapter in the Undercover Economist on that.
In terms of groceries, you’d barely notice the difference, in fact I think some of the time it’s cheaper down here.
Alcohol is still a lot cheaper up north, and big ticket items for the wean are cheaper up there too (car seats etc).
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At this stage I’m worried about jobs down here. We have a relatively hard currency, people with jobs are doing well, while more and more people are being thrown to the wolves – and per Pete’s thread perhaps an entire generation…
greagoir o frainclin -
They were heralded as ‘low paid’ too. The median salary was €25,000 in 2006, it’s likely lower today (now in fairness, that would be dragged down significantly by part-timers) – but €50k is a good wage. It’s around about the top 30% of earners.
Mack,
there should be clarity. end of.
Mack
I don’t think so, as shoppers are purchasing nappies anyway, and if they’re spending that money in the north now then it’s already lost to this economy.
You are getting away from your original point. It is a relatively bigger drag on a smaller economy, and therefore increases price pressure.
In order for your though experiment to hold, the shoppers would have to sacrifice Irish products and services (not northern, or imported products, or cut back on savings or any other alternative). Given that these make up a larger proportion of lower income groups earnings – it’s reasonable to assume that they disproportionately contain essentials provided locally.
Most of our luxury goods are imported – whether it’s cars, household appliances, furniture or foreign holidays (hidden imports). It doesn’t make a huge difference whether these are purchased in the north or south (although it does make some).
In which case you are contradicting yourself. If Northern shopping is mostly large, imported, goods, then apparently this has no impact and the North shopping can be discounted when considering deflationary impact. I don’t thik you can take your assumption – people are driving fairly largely distances to do their weekly shop, not just buy TVs.
Given this will happen, it’ll be interesting to see what happens to Southern Euros flowing North.
In which case you are contradicting yourself.
No. That spending (northern) is gone – where it lies on the scale of luxuries to essential doesn’t matter in itself. Undoubtedly some of it will be neccesities some of it luxuries.
What does matter though is what the marginal purchases are (which will always be further up the scale). We know though that the bulk of the money recirculated in the Irish economy is spent on essentials (i.e. it’s a fixed spend). The marginal Euro is spent on Imports, or saved.
Before NI –
TotalIncome = Imports + Savings + Recirc
After NI
TotalIncome = (Imports+NE) + Savings + (Recirc-NE)
NE=Newry Effect
Shopping in NI has reduced consumer spending in the republic and increased imports.
GDP = C + I + E + G
(C = consumer spending, I = capital investment, E = net exports (gross exports – gross imports), G = government spending)
The Newry Effect reduces E (net exports) by increasing imports and also reduces C (consumer spending).
We can’t affect the NE effect on C by cutting government spending – that component is lost to us.
We can reduce imports (marginal spending on non-essentials) and thus increase E and reduce G (by cuttting current spending). The question is, will the increase in E offset the decrease in G ? What will be the impact on C? I imagine as C has already fallen, there will be some impact, but a reduced one of cuts in G.
* I’ve updated the above section to make the reasoning a little clearer.
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If reducing G has less impact on decreasing C, than presumed in the original models, and more impact on increasing E, then the effect of reducing G is less deflationary than the first thought.
Mack
GDP = C + I + E + G
Those terms are related. C is clearly dependent on the slice of G that represents public sector wages. So cut G, cut C, and you mulitply your impact on GDP – more deflation. But G is also going impact on I too.
So if we have
G = (PSW + OE) (public sector wages / other expenditure)
C = (PSS + OS) (public sector spending + other spending)
Then on a very simple model (no savings, other income etc) for clarity:
PSW = PSS
Cut PSW 10%, 10% reduction in PSS
but the reality is:
PSW = PSS + PSNE (public sector newry effect)
Let’s rephrase that:
xG = yC + zI, with x, y and z various fractions. Those terms are all related to some degree. Cut G = reduce C, reduce I, multiply GDP effect.
If PSNE, stays the same, then a 10% cut in PSW implies a more than 10% cut in PSS. Trivial example
10 = 8 + 2
9 = 7 + 2
1/8 = 12.5%
In order to for things to be less deflationary than you thought, PSNE would need to be cut more than the amount you cut PSW. Which is *possible* if it really is all TVs and holidays, but you could well drive more people and money North. Perhaps the big weekly shop tries to cut out the need for smaller things during the week. Perhaps it is suddenly worth the hassle to get the Christmas presents North. And so on.
Kensei -
Which is *possible* if it really is all TVs and holidays,
Yep, it is critical which spending is cut. More imports to force E to rise (net exports) faster than C falls. If it forces more people north then that may increase imports balancing out that effect somewhat.
I am assuming that there is a core of essentials represented in C, that won’t change and that cutting G will primarily affect imported goods (the fall in C, being compensated by a rise in E).
Mack
I am assuming that there is a core of essentials represented in C, that won’t change and that cutting G will primarily affect imported goods (the fall in C, being compensated by a rise in E).
Which looks to me an unsafe assumption, given that people are goign North to buy their weekly shop and maybe alcohol and Christmas mwans bigger purchases of soem description. If you were asking me to take a stab, I’d say money flowing to Newry would drop, but less than the overall fall.
No doubt there’ll actually be data to back it up. In any case, there is clearly a multiplier off the back of reducing G.
Just thought of this – if take your example, assume a 20% saving on items actually purchased (I’d wager it’s higher as shoppers are deliberately choosing the savings & stocking up)
(Without NE)
10 = 10
(With NE)
10 = 7.6 + 2 + 0.4 (savings)
10% reduction, taking an extreme view – it all comes of the southern spend
9 = 7 + 2
=7.89% fall in spending from 10% fall in wages
By the way – the multiplier from I is much higher than from G (according to Michael Burke of progressive-economy – in comment to me here :-http://www.irisheconomy.ie/index.php/2009/11/24/pre-emptive-strikes-and-public-sector-pay/#comment-25671).
Cutting G and boosting I makes real sense at the minute, especially seeing as I has fallen by 35% or so this year!
http://www.finfacts.ie/irishfinancenews/article_1017047.shtml
Mack
Damn I’s should E’s above. But yes, you’d rather be sticking limited resources into investment than current expenditure. Not only will it give a bigger bang for buck, but it will have positive affects going forward.
In any case, you are cheating, because you just nuked savings.
Without NE would be
10 = 9.6 + 0.4
9 = 9
0.6/9*100 = 6.25%
You ain’t getting off that deflationary hook so easily
Kensei -
The 0.4% savings comes from shopping in Newry instead of Dublin. It doesn’t exist unless they shop up there.
In effect the state can confiscate the savings made in the north by public sector workers by cutting their salaries. The bigger the saving, the less deflationary the cut..
Machiavellian or what?
Mack
Still cheating. You are assuming the 0.4 in savings is going to be spent entirely in the Southern economy. In which case
10 + 7.6 + 2 + 0.4 is:
10 = 8 + 2
The terms above meant something!
Kensei -
Well, no I wasn’t. I was assuming it was saved, and yes, that it would be nuked entirely.
Obviously, if savings rates are maintained and spending on Irish goods and services is cut instead then that would be deflationary. Just based on my own habits, I’m sceptical about that
Wages = Fixed local costs (bulk of expenditure on – rent, running costs of car, heating, electricity, vhi), variable local costs (pub, entertainment, petrol), groceries (generally purchased in north – sometimes south 60/40 split), big ticket items (generally purchased where cheapest – mostly north – _always_ imports), holidays (abroad cheaper), savings.
When my salary drops, or when our household income drops (it maybe almost halved last year *updated forgot tax credits, benefit payments etc) – savings were cut first, then big ticket items.
Mack
When my salary drops, or when our household income drops (it more than halved last year) – savings were cut first, then big ticket items.
Which makes it highly unlikely that people are going to actually save the savings! And that 0.4 is still lost to the Southern economy. Bigger spend North and it all going into savings does not help the Southern economy anyway you spin it, despite how less deflationary it may be.
Be happy. We will be able to answer this question with actual data in about a year! Don’t you love natural experiments?
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