Wednesday, 26 May 2010

Dare we take note?

Michael Taft: Lawrence Summers, Director of President Obama’s National Economic Council, is articulating sound economic common sense(thanks to Michael Burke for the heads up on this):

‘It is not possible to imagine sound budgets in the absence of economic growth and solid economic performance.’


‘Appropriate short-run expansionary budget policy can make an important contribution to establishing the confidence necessary for sound growth.’


‘(It is) impossible to sensibly address either unemployment or long-run fiscal challenges in isolation.’

Anyone in the Irish Government want to take note?


Rory O'Farrell said...

Spain has just lost its AAA rating BECAUSE of its cutbacks.

As any regular reader here knows, the cutbacks will reduce growth and the ability to raise taxes.

I know I mentioned it before, but Ireland's bond spread did not decrease following the last budget. It is just a myth put out by the government, and which the media are too lazy to check (the publicly available data) themselves.

Mack said...

@Rory -

That's interesting, if it's accurate it would certainly imply that Ireland is taking the wrong approach. I'm not sure that is what Fitch themselves are saying though.

You can read the report itself here

Requires registration, but it's free.

The report itself seems to be rather different to the Associated Press news story.

To quote -

The downgrade reflects
Fitch’s assessment that the process of adjustment to a lower level of private sector
and external indebtedness will materially reduce the rate of growth of the Spanish
economy over the medium term. Despite these expectations, the Stable Outlook on
Spain’s sovereign rating reflects Fitch’s view that the country’s credit profile will
remain very strong and consistent with its ‘AA+’ rating, even in the event of some
slippage relative to official fiscal targets.
The Spanish government has announced an ambitious fiscal consolidation plan to
ensure a return to sustainable public finances after the global financial crisis. Fitch
believes the Spanish government could find it hard to implement some of the
expenditure cuts. In particular, the agency has some doubts over the feasibility of
the cuts that need to be made by Spain’s autonomous communities, who may also
see a reduction in the transfers they will receive from the state budget.

and later on

Less than full implementation of the austerity plan, weaker than expected growth, deflation or a larger disbursement for the banking sector
would further increase debt.

Michael Burke said...


thanks for the link.

But I think the earlier interpretation is supported by the quotes you provide and the piece as a whole.

First sentence summary; lower growth will push the deficit higher, hence the downgrade.

Then, immediately after the long section you quote which ends with doubts about the autonomous regions' commitment to cuts is a new para., which I'm sure you omitted for reasons of space. That's a shame, because it reads as follows,

"Nevertheless Fitch believes that the risks economic growth will fall short of the government's projections is a more important consideration [than non-implementation of the cuts package]".

And the entire concluding 4 pages of the piece is titled "Slow Growth Would Hurt the Public Finances".

Mack said...

Michael no doubt.

They didn't specifically mention government cuts as negatively impacting growth - rather private sector deleveraging and paying off external debt (the cuts probably part of that, but they seem to regard the fiscal adjustment as a good thing - which suggests they feel the impact of those policies on growth are more than offest by the benefits?). I was thinking that this was related to sorting out Spain's balance of trade deficit and her competitiveness vis a vis Germany. I.e. They are critical of the real devaluation strategy. Maybe I've got that wrong. But if not, the constraint here is the Euro... BTW, most of the news outlets in the UK led with Spain was downgraded _because_ of the cuts, Bloomberg in the US led with _despite_ the cuts and the Irish press ignored that angle entirely.

I strongly suspect this is outside of the control of the governments of the PIIGS. Blogged here -

Ambrose Evans-Pritchard went to town on that strategy in the Telegraph (including Zapaperto's cuts).

Edward Hugh and Paul Krugman think Spain needs to cut labour costs 20-30% to restore competiveness.

Though I've seen other economists argue that Germany should increase wages 20-30%. Which would be fairer all round.

Incidentally, I recommend Nouriel Roubini's new book "Crisis Economics". I think it gives a balanced overview of the advantages and disadvantages of the debt management and Keynesian approaches. Generally supportive of your view that capital spending gives the best bang for the buck in terms of stimulus (but critical of waste on unproductive projects, governmental salaries!)

Mack said...

Also thought this was a good article on their predicament -

Mack said...

Further to this, Fitch released a report on the UK today

Fitch Ratings-London-08 June 2010: Fitch Ratings says in a new special report that following an unprecedented economic and financial shock, the scale of the United Kingdom's (UK) ('AAA'/Stable Outlook) fiscal challenge is formidable and warrants a strong medium term consolidation strategy - including a faster pace of deficit reduction than set out in the April 2010 Budget.

Michael Burke said...

The Fitch piece on Britain accepts entirely two plank of government points:

* Faster growth should not be fostered by govt. investment

* The burden of taxes should remain broadly unchanged, with spending slashed.

These are policy choices. Fitch combines this acceptance of Tory policy with no assessment of the impact of cuts on growth.

However, it does provide an assessment of the deficit path based on its own, more sceptical growth forecasts, 1% lower.

From this it's easy to see then how the debt could be reduced by a 1% higher growth path, induced by govt. investment.

The axe taken to public spending is therefore policy-driven, not an inevitable consequence of the current fiscal position.

Mack said...

The axe taken to public spending is therefore policy-driven, not an inevitable consequence of the current fiscal position.

Nobody said it was, on the other hand if you were trying to ascertain Fitch's world view - it looks more deficit hawk than neo-Keynesian.

Incidentally, could someone make some sort of stab at reverse engineering the actual multipliers for government spending from this years cuts? If we are at or near the bottom of the collapse would that make it a good time to isolate the impact of government spending. If the multiplier really is between 2 and 4, it would almost be a no-brainer. I have one question though..

If we did have a fiscal stimulus - that did help close the deficit. What would happen if private sector growth didn't bounce back? E.g. We build a ton of roads, hospitals, schools, trams, broadband infrastructure and whatever else, but the world enters into a double-dip recession or even just anaemic growth. As those programs end, could GNP collapse leaving us with a massive debt-to-GNP ratio a la Japan? Would the deficit re-open in those circumstances (but with a worse debt-to-GNP ratio?)
Or do we keep on having the government spend? And at what point does the government sector become unsustainably large? Possiblty not worth worrying about as a severe double dip might finishes us off regardless..

Anonymous said...

As those programs end, could GNP collapse leaving us with a massive debt-to-GNP ratio a la Japan?

We'll never get to Japan because they use their own savings to finance debt + save more abroad, while we need to find gamblers living abroad who want to send moeny and take that gamble on us. If we assume this government continues to take bank balance sheets as a public liability, then we already have a massive debt-GNP ratio. GNP is 126bn, we get quickly to a ratio of 150% debt/GNP with NAMA + the guaranteed bonds ( not including all bank liabilities which of course are much more) or we will be at 100% in a couple years on our current debt path. I doubt foreign lenders will finance this unless they see the economy improving in the next 6-12 months (as the government promises) and that must come without more stimulus needed.