Paul Krugman on Ireland – again

So yesterday, Paul Krugman told us his worst case scenario for the world economy is that the USA ‘could turn Irish’. That is the USA could find itself in a position where it was unable to administer a neo-Keynesian counter-fiscal stimulus . Unsurprisingly as Paul Krugman is probably neo-Keynesianisms’ leading light. For the record, what he did not say was that Ireland had the world’s worst outlook.

He has been busy on the topic of Ireland on his blog

Shabby Tigers – a recommendation of the irisheconomy.ie blog (I agree – go read it )

Irish cronies – An interesting rhetorical comparison of the crony capitalism that afflicts both Ireland and the USA.

There’s a pretty poor ‘rebuttal’ of Krugman’s article Erin go Broke over on Irish Central. The sense of perspective that seems to have been missing on this side of the Atlantic is that Krugman is critiquing not Ireland, but the USA viewed through an Irish prism.

and anyway Ireland basically is just like us, only more so

And having detailed Ireland’s woes, in language that so obviously strikes parallels with the American experience

So, do we have anything like that here? What do you think?

  • kensei

    Hmmm, I was going to blog this, but I don’t want to gum up the site with stuff on the same topic.

    Interesting point on that article for those that like to rant about Keynesian stimulus as simply racking up debt. Krugman at no point states that Ireland si doing the wrong thing and should try and spend its way out of trouble. He accepts that the constraints imposed force Ireland into austerity merits.

    Having read Stephanie Flanders article on the BBC: http://news.bbc.co.uk/1/hi/business/8004567.stm, I wonder if those sorts of limits are being reache din the UK too. Is the UK turning Irish?

  • Mack

    Yeah, I was thinking to myself did it make sense to put it as a comment on Pete’s entry or as a top level blog post. I thought it was important to make it very clear what Krugman was actually saying about the Irish economy in terms of worst-case outlook for the global economy, so thought a top level post was the best place for it.

    I don’t think Krugman is actually an expert on Ireland, he’s read the irisheconomy.ie blog and seems willing to defer to the consensus opinion there (based on the quality of their posts).

    As a layman, I’d prefer to see some sort of stimulus (the only economist I’ve read who is calling for one is ultra-lefty Michael Taft), though I may be calling for my country to jump of a cliff. This forecast is pretty scary stuff –

    http://derekbrawn.com/IrlEconJobs.html

    Did you read the Brad De Long and Mario Rizzo articles on public vs private stimulus, there are some ranters but the debate can be more nuanced than that.

  • kensei

    Mack

    I don’t think Krugman is actually an expert on Ireland, he’s read the irisheconomy.ie blog and seems willing to defer to the consensus opinion there (based on the quality of their posts).

    Totally. But even that houses an implicit acceptance of the limits of policy.

    Haven’t had the time to check out the other articles, will get round to it at some point.

  • Scaramoosh

    Household debt in Ireland currently stands at 190pc of disposable income, compared with 160pc in the UK.

    When the Japanese experienced the lost decade, they actually had net savings – the problem was that they did not want to spend them.

    The Irish do not have any money to spend; a significant proportion of the population (and rising by the day) are in negative equity. The real credit card crunch has not yet happened, as people have been able to shuffle their debts around. It is estimated that the average irish family had debts of 140000 Euros.

    It is very very difficult to see how demand is going to be stimulated?

  • j

    Irelands recovery is going to be export led no matter what. So short of Irelands government giving EU, US and UK citizens a stimulus to buy our goods it wont do any good. We are a relative drop in the ocean. In a globalised economy fiscal stimulus goes all over the world (eg NTR will be bringing some of the US fiscal stimulus back to Ireland).

    From a purely selfish point of view, small countries are better off letting the big countries do the stimulus and saving their own cash – all things being equal this should increase exports while not affecting imports (in the short term).

    This ignores the massive fiscal stimulus the Irish Government is already providing via it capital spending programme and current spending vastly outstripping tax.

  • j

    Household debt is 190% – what do you offer as a reasonable amount?

    Is this a net or a gross figure? This is way over historic norms but interest rates have never been so low so maybe this is reasonable?

    The vast majority of people are not in massive difficult (except for no pension provision but that will come down the tracks).

    It was literally only a couple of years ago that nearly every man woman and child in the country was saving a few hundred euro a month for SSIA and got massive lump sums at the end – was it all spent on property? Nobody saved anything? Interest rates are way down so disposable income is probably up as a whole – when was this 190% calculated?

  • Mack

    J – I largely agree with your points.

    VAT cuts or income tax cuts would result in money leaking out of the economy overseas – even government spending may facilitate this if the long run benefits aren’t carefully considered as wages get spent on imported consumer goods.

    Tax breaks carefully targeted to benefit real economy businesses might boost employment now while helping build sustainable export-led businesses for the long term. Cutting employers prsi would help Irish companies become more competitive. Keeping income and corporation tax levels competitive could keep Ireland attractive for FDI.

  • Mack

    Scaramoosh –

    It is very very difficult to see how demand is going to be stimulated?

    Yes, stimulating demand for consumerism / spending & borrowing would be a terrible idea. Households need to pay down debt and ‘repair their balance sheets’ as the cliche goes. They can’t do that when they’re unemployed though, or when the country is experiencing debt deflation (the Japanese have been running down their savings during the lost 2-decades).

    Welfare is costing the state a growing €21bn (tax revenues est. €36-37bn in total) a year, better if we encourage those who have money to invest it in creating productive long term employment. If we don’t what is the welfare bill going to be in 2 years time when unemployment is at 20%?

  • j

    Agreed Mack – households need to pay down debt. I imagine this is happening at quite a fast rate – we only hear about the unemployed etc but vast majority are working away (in my case it is with 10% of my capital on mortgage being paid per quarter – interest is basically zero so this is not too hard to do – though I am helped by earning euros with stg mortgage!).

    Immediate concern should be to:

    (i) Pay down debt
    (ii) Focus on competetiveness

    In future competitiveness should be the only consideration (particularly within eurozone – If you are most competive there currency devaluation should take care of the rest).

    In future government needs to be aware of the impact debt has on future competiveness as debt always needs to be repaid and wages need to be sufficient to allow this.

  • j

    I would also consider a tax break to help people pay capital off their loans.

    This would have to be expertly targeted (perhaps only to include those in negative equity or lower incomes). It may be unworkable but this would have the effect of:

    (i) improving banks balance sheets
    (ii) reducing leveraging

  • kensei

    j

    Why exactly should my taxes go down to pay down people with negative equities mortgages? How about you pay down mine, you’re obviously loaded.

    I should also add: paradox of thrift, kids.

  • j

    Kensei

    I presume you are talking about taxes going up?

    From a ROI point of view some of your and my taxes already go to paying mortgage interest relief. We are also giving massive money to recapitalize the banks.

    I propose if some of this helped those who were ultimately screwed (though I think they have to face up to their mistakes) by the property boom to help pay down some of the debt it would reduce the amount of recapitalization needed (in theory anyway).

    I wouldnt say loaded. Lucky in that I have a (relatively) small mortgage and dont spend much on other stuff and want to just get it paid off asap so whatever else happens I wont have the bank knocking on my door kicking myself, wife and child onto the street.

    Didnt want to offend anyway so hope none taken. Just throwing ideas out there. I am open to all ideas and have no problem in criticism of mine but make sure its the ball!

  • kensei

    j

    I just don’t see how a scheme could be just. My mate has negative equity, probably pretty nasty. But he’s a doctor and earns twice as much as me. I don’t see why my taxes should be going to him simply becasue the hit I’ve taken on my house isn’t enough to send me under. Yet. Such a scenario also leads to moral hazard issues.

    As for the general point. the entire populace cannot pay down its debts at once. If they do so, you get a collapse in demand which leads to further declines which leads to…. and so on. Most of the balance sheets repair must happen over the medium to long term and while the economy is growing, ideally.

  • j

    Agreed Kensei – hence my unworkable line! Probably should have said negative equity and lower incomes rather than negative equity and higher incomes.

    Agree to some extent your paradox of thrift argument but what if someone say on a variable rate mortgage just keeps paying what they are paying? Surely if interest rates come down the populace can spend the same amount on loan servicing as before but pay off more capital? Given the massive reduction in i there must be a halfway house?

    I fear if leveraging isnt reduced we could be storing up a massive inflation problem where it will be very hard to raise i without wrecking the economy and inflation starts to take off? Where to then?

    Some evidence that markets are beginning to price in big inflation increases in a couple of years. This will of course help in real values of debt (and restoring ROI competitiveness if they keep inflation down) but inflation is hard to put back in the box.

  • Mack

    Kensei –

    As for the general point. the entire populace cannot pay down its debts at once. If they do so, you get a collapse in demand which leads to further declines which leads to…

    And the inverse – excessive leveraging leads to excess demand.

    What can we do now? The easy way out is to inflate away our debts, but we don’t control the currency our debts are denominated in.

    As a small open economy, our one advantage is that a lack of domestic demand isn’t a big problem (we import less, employ less retailers), if there’s demand elsewhere we can tap into.

  • kensei

    j

    Agree to some extent your paradox of thrift argument but what if someone say on a variable rate mortgage just keeps paying what they are paying? Surely if interest rates come down the populace can spend the same amount on loan servicing as before but pay off more capital? Given the massive reduction in i there must be a halfway house?

    I am reminded of that West Wing episode where they complained people didn’t spend their tax rebate.

    Mack

    To be honest I can’t see much alternative to the course the Irish government is pursuing; the only question is the precise rate it does it, and the pattern of the hair shirt. I’d guess domestic demand needs supported to some degree though, while an export relaint country is less at risk, a paradox of thrift situation at the point where the exports are going down the tubes is not good.

    It’s as Krugman said, basically. Hope for the best and an export led recvoery. Taking some educated bets on potential future growth areas and supporting new business is probably not a bad idea, and relatively cheap.

  • Mack

    J – The government appears to be moving away from that, mortgage interest rate relief is to be phased out I think (while ensuring the most indebted, those who bought at the peak of the boom get some benefit from it).

    One problem with giving a tax break for paying down debt is that it makes it more tax efficient to be highly leveraged. In boom times this is lethal as it encourages speculation (though would be counter-cyclical now).

  • Dave

    There are very simple solutions to two of Ireland’s debt-related problems.

    The first problem is the government’s attempt to make the every citizen responsible for underwriting the debts of private investors. This problem can be solved by cancelling the underwriter’s guarantee. Yes, it’s that simple: don’t assume responsibility for the debts of others. None of those external lenders received a guarantee from the state when they lent money to private businesses in this state, and no such guarantee should have been retrospectively issued. In addition, it is not true that the state must guarantee all loans made by such external lenders to one or more or all private businesses in this state in order to prevent one or more or all external lenders from refusing to lend to one or more or all private businesses in this state in future. That is not how it works – see the collapse of countless banks and financial institutions for reference. That is simply a cover story that the government is using to conceal the fact that those who hold the applicable sovereignty have issued guidelines to the government to the effect that systemic importance applies to all banks within the Eurozone, so where a debt is owed in one state to a lender of systemic importance in another state, the state that the borrower is resident in must underwrite the debt. Problem solved.

    The second problem is how to ensure that a bank is properly capitalised so that it can lend to businesses and individuals. This is also very simple to solve: the government should create a new bank with 5 billion in Tier 1 capital under the Basel II accord, thereby allowing it to leverage up to 12 times that amount. You then have a new bank with 60 billion to lend, and no toxic debt to destabilise it. The government can then sell this bank when it is established and realise a large capital gain for the taxpayer while protecting them from debts that are belong to third parties. Problem solved.

    Klugman (oh dear) is also wrong about exports as Ireland’s salvation. Exports stagnated after joining the Eurozone and are now less than they were when we joined it. In real terms, exports should have doubled over the last 10 years just to stand still, so stagnating over a period of 10 years means that they have halved in real terms. Between 90% and 94% of these exports are owned by foreign companies, so the profits from these exports are repatriated. That’s the key difference between the US and Ireland. The only advantage they offer is in job creation but again, this advantage is academic since it is the Irish taxpayers who pay thousands of euros per job to create jobs that are usually filled by foreign workers (and this practice cannot be stopped under EU regulations).

    Sadly, Ireland is fucked. It borrowed 1.67 trillion from external lenders in just 10 years of Eurozone membership, but only invested a mere 1.5 billion in venture capital into indigenous entrenuarial start-ups in Ireland since 2001. In other words, not even one thousandth of that speculators’ money went into actual wealth-creation in the economy. Too bad, since if you haven’t created the means to create wealth in your economy, then you can’t repay all of that borrowed wealth to foreign creditors. For the last 10 years, borrowing hundreds of billions per year of easy Eurozone capital markets money has been the source of the wealth that was distributed around your economy. Now you have to stop borrowing and start paying it all back.

    The smartest thing to do, kids, is to emigrate. It doesn’t matter where you go, just don’t stay here.

  • j

    I’ll take my chances here dave thanks very much

  • DC

    “Now you have to stop borrowing and start paying it all back.”

    It seems really unfair that fictious capital was used to create fake money that will need now to be repaid back using real money from proper business work.

    For example the banks have created toxic debt but they also interfered with the economy, as we can see quite clearly now.

    It seems a bollocks that the banks issued a mortgage for say £160,000 at the time based on specious credit lines which the purchaser of the loan thought to be proper, but now has a house worth £100,000 or so yet has to repay that all back.

    The old argument is that something is only worth what you are willing to pay, but willing to pay nowadays is linked to what the banks are willing to loan, hence the catch 22, especially when people place their faith in banks and give way to their judgement calls on the housing market and views on economic outlook.

    Bailing out the banks but bankrupting the taxpayer while shafting Jo(e) Public who still have on their accounts shoddy loans. Their house value having been devalued due to the bursting of the housing bubble because a lot of money in the economy wasn’t actually real in the end. A downfall in which the banks played a major role.

  • Reader

    DC: The old argument is that something is only worth what you are willing to pay…
    It’s an old argument because it’s true. If people paid the 160,000 in your example it’s either because that’s what they were willing to pay for a home of their own (so – no problem then!), or they were speculating themselves (is sympathy waning now?).
    Meanwhile, pity the poor bankers – sacked if they don’t push big loans up to the last moment of the boom, then pilloried the day after the crash. OK: maybe “We were only obeying orders” isn’t that great a defence, and there are more worthy jobs for the numerate. But there’s hell to pay for not riding the boom to its conclusion, or not spotting the end; and poor regulation and low interest rates were a real part of the problem.

  • DC

    Reader, in relation to property what you are willing to pay is linked to what the bank is willing to lend you.

    That’s the beauty of the catch 22, a reinforcing cycle of increased lending, more ‘value’ ergo more money paid back.

    Your argument is wrong simply because people don’t buy properties outright, and can in practice only really afford to ‘buy’ property via the ability to get a mortgage.

    It was the banks who assured them that they could tailor loans to their needs. And that didn’t work out, hence the toxic debt and dissolving of those specious credit lines as well. It was the banks that created the risks with 125% mortgages which were always looking doubtful in terms of payback in the face of even a very tiny downturn, let alone this crash.