Thursday, 18 June 2009

What did you do during the Great Recession, Grandad?

Slí Eile: Some time in the future this question will be asked and, perhaps, the answer will be (at least in an Irish context):

A small number of us discussed a domestic fiscal stimulus and likely multipliers. And then what? In what could be considered an extraordinary article (‘ Instead of a stimulus package we have gone in the other direction. It could be the worst own goal in our history’) written by Michael Casey (formerly of the Central Bank) and tucked away on page 10 of the ‘Innovation’ Supplement published by the Irish Times the fall-out from not pursuing a fiscal stimulus package is considered. You would think that the subject might get a bigger airing in domestSearch in vain for a considered view on this. Economic textbooks produced for the Irish market deal with Keynesian multipliers like an elderly relative in a nursing home to be rounded off with the assertion that ‘it doesn’t apply here’ (small open economy and all that). Neither recent Economic Crises workshops in Dublin, or publications of the ESRI or other macro-economists deal with the issue in any depth. An exception is to be found in the current edition of the ESRI Economic and Social Review, where Philip Lane concludes that the appropriate response, here, is to stick to the medicine with - at best targetted investment in key infrastructure areas - even though the US, EU and other jurisdictions are following some form of fiscal stimulus approach to a greater or lesser extent (1.5% of GDP in the case of the EU as a whole). Michael Casey writes:

Evidence from the IMF and World Bank indicates that the majority of countries fail to complete three-year stabilisations; the pain and civil unrest almost invariably throws the programmes off track. In the few cases where programmes have been successful, the governments involved have been able to convince people that there is light at the end of the tunnel. In Ireland, the absence of a plan is regrettable.

In the mid-1950s there was a fiscal stabilisation that lasted only a year. The economy nose-dived. But it led to the momentous First Programme for Economic Expansion - a plan that gave hope and a feeling that someone was minding the store. What are the chances of that kind of enlightened follow-up this time?

1 comment:

Damian said...

Michael Casey makes some very interesting points about the one way bet being taken by the government. It seems that it is economically and politically convenient to dismiss the role of fiscal stimulus on the grounds of an open economy, particularly in the absence of any real debate (and research) on the policy efforts are needed by government to make fiscal policy more effective.

It is worrying that the debate on a fiscal stimulus is so easily dismissed by the “small open economy” / “low multiplier” argument - when surely this is the best argument for a coordinated and targeted fiscal policy? In the absence of a serious and targeted industrial policy that supports domestic consumption (including exportable goods) one could hardly expect a high multiplier. Policy makers need to examine the value of promoting world class export industries in pharmaceuticals, info tech, food etc. if these products cannot also be traded competitively and consumed in the domestic economy?

It is also curious that the debate has tended to focus on the loss from trade openness. What about the potential losses to any stimulus from corruption, light touch regulation and the black market? A fiscal stimulus is only one element of fiscal policy. It strikes me that there are numerous opportunities for the state credibly commit to reduce the gains from corruption, improve transparency and end the perception of a lightly regulated tax shelter that tolerates poor business practice? Were this to happen, Ireland would undoubtedly be well place to benefit from international stimulus, let alone a domestic one.