Ireland : Real Devaluation or Keynesian Stimulus?

David Begg, leader of the Irish Congress of Trade Unions (board member of the Irish Central Bank, Aer Lingus and member of the Irish Times Trust) has kicked of a debate on the fundamental direction of Ireland’s response to the fiscal crises, in todays Irish Times. He argues against the current deflationary policies, in particular spending cuts – although tax rises are also deflationary, perhaps even to a greater degree.

The point is that we know that pro-cyclical deflationary policies will drive down the domestic demand side of the economy and increase unemployment but there is no evidence to suggest any immediate boost to exports which would counterbalance this.

The alternative is for the government to borrow extra money and pump it into the economy, perhaps as David Begg argues by expanding the public sector, or as the Americans are doing by investing in large scale capital projects. Over at Notes On The Front, chief-economist, at Union Unite, Michael Taft has been arguing that Ireland has had no problem in selling government debt to date.

Professor of Macro Economics at Trinity College Dublin, Phillip Lane, responded to David Begg’s challenge at irisheconomy.ie

David Begg argues that there is little evidence that deflation facilitates recovery. However, there is a strong body of evidence that real devaluation is helpful. Just taking Irish economic history, the devaluations of 1986 and 1993 were contributory factors to economic growth.

And the issue as to whether Ireland can afford to borrow to stimulate on top of borrowing to close the fiscal gap and bail out the banks –

The real question is whether there is a credible alternative. If Ireland had run a counter-cyclical fiscal policy during the good years, there may have been room to do more in terms of counter-cyclical fiscal expansion now. However, the scale of the fiscal deficits and the fragile state of international bond markets mean that significant fiscal expansion cannot be entertained.

Either we find a way to borrow to invest, or we duke it out over how to divy up the pain via tax rises and pay / spending cuts.

  • kensei

    It looks to me much too risky for Ireland to attempt to borrow witht he bomd markets as they are. It doesn’t really if they could more or less handle it, the bond markets are too jumpy and speculators will be far too tempted to take a pop and put the country in a dangerous position.

    So, Ireland is stuck more or less in the paarmeters it has defined. It needs to carve out some cash not simply for cuts though, but to take a few sensible measures that can be helpful goign forward. Much better broadband infrastructure, for example, or incentives towards green tech.

    A thought is – Ireland’s social safety net is relatively generous. Unemployment benefits etc are by their nature Keynesian and stimulative. This would not be popular on the left but is it is possible to cut back on their levels a bit — the remainder would still, after all be Keynesian and stimulative as this is money not otherwise spent, and transfer it to capital projects? Have you any idea how much money could be saved that way?

    As an aside, I genuinely don’t know what the correct response of the left should be. There is probably some scope for tax increases, but the borrowing situation means there have to be fairly hefty cuts and all choices look very bad here.

  • Greenflag

    mack ,

    ‘or we duke it out over how to divy up the pain via tax rises and pay / spending cuts.’

    Or we could drag out the political standoff for a decade like they did from 1973 through 1987 swinging from one extreme to the other and ending with the IMF knocking on the door and 250,000 fleeing the country in the mid 1980’s ?

    David Begg along with most of the public ‘sector’ will of course not be fleeing the country eh this time around ?

    For the UK it’s much more simple . They can keep up the charade of ‘dealing ‘ with the problem up to the point when the pound comes under international speculative attack and then it’ll be the ‘devaluation’ route .

    Ireland politicians mercifully being constrained by the European Monetary System will be kept tethered a safe distance from the printing presses .

    I still long for the day of public retribution on which the banking fraternity , wretched mortgage brokers , their political buddies and property developers and other pie in the sky neo con gangsters are dragged out to a place of public execution ( Smithfields for daytime guilloting or the Temple Bar for nightime executions ) seem like good locations 😉

    I promise to read Phillip Lane’s response when the blood lust quietens down 🙂

    Anti Euro and rabid Anti EU Dave will no doubt be disappointed at the Icelanders for having now applied to join the EU and Eurozone . Fishing as a basis for long term economic growth obviously has it’s limitations.

  • Mack

    Kensei –

    The McCarthy report advocated a 5% cut in social welfare rates. I know from a northern perspective the southern rates seem high, but I find it difficult to justify cutting benefits on people, the bulk of which have contributed PRSI (social insurance) throughout their working lives – just when they need it most.

    There is probably some scope for tax increases

    I agree, but probably not much room left to maneuver on income tax. Some form of property tax, I think for now anyway Ronan Lyons’ proposal is best –

    http://www.ronanlyons.com/2009/06/15/a-property-tax-in-ireland-yes-we-can/

    http://notesonthefront.typepad.com/politicaleconomy/2009/07/risking-ayn-rands-ire.html

    Touching corpo tax is beyond the pale for me..

    http://www.ronanlyons.com/2009/06/22/can-ireland-afford-to-increase-its-corporate-tax-rate/

    A new benchmarking round, with the power to adjust up or down as appropriate would be fair. If the Trade Unions are right, they’ve nothing to fear (although I don’t think they are ).
    http://www.ronanlyons.com/2009/07/13/public-sector-versus-private-sector-pay-update/

    http://notesonthefront.typepad.com/politicaleconomy/2009/07/boy-have-public-sectors-workers-been-kicked-around-the-block-for-drill-they-wear-the-mark-of-cain-they-are-one-of-the-ma.html

    —-

    The other option floating around in the back of my mind, that’s probably a really bad idea, but might make things easier politically, is leaving the Euro. We could stimulate (and devalue) without tearing society apart in the process. Though I imagine it would be very, very costly for everyone.

  • kensei

    Greenie

    The UK has essentially already done a beggar thy neighbour devaluation.

  • Greenflag

    kensei ,

    ‘As an aside, I genuinely don’t know what the correct response of the left should be.’

    You are not alone 😉 Neither does the left neither here nor in the UK . The right as per usual in times like these simply returns to it’s atavistic past and will attack and lash out at the defenceless , the poor , the weak and anybody who is’nt defended by a strong union or a political base strong enough to turn an election.

    Of course the right can’t just promise havoc and let loose the dogs of war prior to an election . They first have to don sheep’s clothing -paint over the leopard spots and find a viable personable charismatic smiling front man to sell the ‘elixir ‘ of hope . And it seems the British ‘right’have picked a more credible ‘front’ man for the job than the Irish .

  • Greenflag

    kensei ,

    ‘The UK has essentially already done a beggar thy neighbour devaluation.’

    yes but there’s more to come. It’s a cert sooner or later although I’m not sure whether it will be under Gordon Brown’s ‘watch’ or his putative successor’s . It will of course be accompanied by the usual fanfare , publicity and the standard speech for these occasions will be dragged out from the files in No 11 i.e ‘we are left with no option etc etc etc -we will improve our competitive edge -blah blah .

    Nothing like economic and political sovereignty these days eh ?

  • kensei

    Mack

    The McCarthy report advocated a 5% cut in social welfare rates. I know from a northern perspective the southern rates seem high, but I find it difficult to justify cutting benefits on people, the bulk of which have contributed PRSI (social insurance) throughout their working lives – just when they need it most.

    I know. But there are some nasty choices to be made here, and there is a deflationary environment.

    The other option floating around in the back of my mind, that’s probably a really bad idea, but might make things easier politically, is leaving the Euro. We could stimulate (and devalue) without tearing society apart in the process. Though I imagine it would be very, very costly for everyone.

    There is no way out. Instant run on the new currency and an uncontrolled devaluation. Likely higher borrowing terms. Likely entanglements with debts in foreign currencies. Damage Ireland as a portal to Europe. Tempting in the abstarct, pain in the reality.

  • Mack

    Kensei –

    On income tax Ronan Lyons pointed out that the average worker (median salary) pays only 4% in income tax. 2/3 of the population pay less than 10% in income tax (hello Comrade Stalin HELLO! 😉 ).

    http://www.ronanlyons.com/2009/07/28/a-little-quiz-on-irelands-income-tax/

    For a variety of reasons (two sets of tax credits chief among them), I’m only paying 13% in income tax at the moment. The top marginal rate is 52-53% at the moment (with those earning over 70k paying having a lower top marginal rate that those below), when the government takes more than half a Euro earnt that’s a severe incentive not to bother working harder / studying to get promoted or take on that extra overtime / nixer etc. So there is more scope for, em, broadening the tax net than raising tax rate. Though that is also political dynamite..

  • Glencoppagagh

    Greenflag
    Are you stuck in a 1960s time warp? There is no such thing as devaluation any more as sterling is a freely floating currency. It depreciates and appreciates against other currencies according to market forces.
    I know you’re still dreaming of parity but if it ever does happen, the biggest loser will be the RoI as they’ll be driving all the way from Kerry to shop in NI.

  • Mack

    Glencoppagh it seems to be pretty standard these days to refer to depreciation as devaluation, regardless of their original meanings wrt floating & fixed exchange rates.

  • Glencoppagagh

    Sorry Mack I have to disagree. It is not standard to use devaluation and depreciation interchangeably. Devaluation is an instrument of policy and this is clearly how Greenflag sees it. He clearly can’t accept the idea that sterling floats freely.
    Of course, authorities can attempt to influence the direction of a currency through interest rates. If I recall correctly the Swiss central bank has had occasion to impose negative interest rates on overnight money to deter speculative inflows.

  • Greenflag

    glencoppagh,

    ‘Are you stuck in a 1960s time warp?’

    No . I remember Norman Lamont’s devaluation circ 1990 which was 30 years later than the 1960’s .

    ‘There is no such thing as devaluation any more as sterling is a freely floating currency.’

    Right . But I prefer to call a currency that’s set on ‘freely floating downwards ‘ as a devaluing currency . Call me old fashioned if you will but I also hold the view that gravity is gravity and not ‘intelligent falling ‘ And a spade by another name is a shovel and a financial abyss of debt is a deep hole which can be more easily paid with a ‘devalued ‘ currency .

    ‘Of course, authorities can attempt to influence the direction of a currency through interest rates’

    Indeed – That’s what Norman Lamont tried to do back in 1990 . He did’nt succeed against the ‘speculative ‘ hordes including the infamous George Soros . I’ve no good reason to believe that either the present Chancellor or his successor will be any more successful in preventing a future ‘freely floating down of the pound ‘.

    As for the those Kerry f***ers I’d watch them like hawks . They’ve been known to live in your ear and charge you rent . The tightest and meanest pack of culchies south of Cavan 😉 Do not turn your back to them and nail everything down that can be nailed down 😉

  • Glencoppagagh

    Greenflag
    The ERM debacle was the consequence of trying to adhere to a fixed exchange rate, something of an aberration at the time.
    What makes you think that the UK has any kind of exchange rate target at the moment and if so, what is it?
    If as you allege Kerry folk are congenitally dishonest I shouldn’t think they’d bother travelling all that way when they can thieve what they want closer to home.

  • Greenflag

    Glencoppagh,

    ‘If as you allege Kerry folk are congenitally dishonest I shouldn’t think they’d bother travelling all that way when they can thieve what they want closer to home.’

    ‘New business is easier with folks who may be shall we say more innocent of the wiles and ways of our south western mountaineers . Anyway it was a tongue in cheek comment based on the personal experience of one Scottish tenant who had a Kerry landlord 🙂 A great epic story but not for slugger .

    ‘What makes you think that the UK has any kind of exchange rate target at the moment and if so, what is it?’

    Trying to figure out a target or a new equilibrium in present circumstances is a job for economists or gypsy fortune tellers or other necromancers . The pound ‘free fall /devaluation process is a bit like a limbo dancing competition i.e to get as low as possible without falling on one’s arse and being booted out of the contest:(

    It’s a strategem that can have temporary benefits just like the one back in the roaring ‘nineties ‘.

    I notice with increasing concern that when one reads the ‘international ‘ press /currency columns these days one will sometimes see the Dollar /Yen and Dollar /Euro rates marked prominently with the pound much less prominent than say 10 years ago .