One of the strangest reactions to last week’s budget was that it was dangerously expansionary. This is quite bizarre, particularly when the economy has so much spare capacity. When you have a rate of unemployment twice that of your nearest and most important trading partners and when your rate of interest is lower than theirs, what is the world telling you?
It is telling you that there is excess capacity everywhere in the economy; there is plenty of room to grow and plenty of scope to invest. High levels of Irish unemployment and historically low interest rates, plus a current account surplus – it all means that the economy can’t possibly be overheating or anywhere near to it.
A current account surplus of nearly €3 billion was registered in the three months to June of this year. This means that in the three months to June of this year, Irish people and companies saved €3 billion more than we spent. That doesn’t strike me as an economy in danger of hurtling out of control. In fact, it appears to be an economy that is not spending enough. It is not an economy with too much demand.
This is also an economy with a dramatic housing shortage and a rate of inflation that is actually falling, not rising. According to the CSO, consumer prices in Ireland decreased by 0.3 per cent year-on-year last month. And what about wages, are they rising rapidly? No they are not.
In short, there is scant evidence of the economy overheating. With a rate of unemployment of 10 per cent, the idea that the economy is operating at full throttle is an insult to all those thousands of people who are available for work and can’t find any.
Yet during the week, it was impossible to turn on the radio without hearing an economist or seven, warn the government about expansionary budgets. Some strange outfit called the “fiscal council” – which has yet to explain why it exists – was warning about the dangers of too much expansion.
Apparently the “fiscal council” got their numbers wrong last week, which is okay because we all make mistakes. I am less worried about their numbers than their understanding of economics. The notion that the economy is expanding into dangerous territory is weird because the economy has loads of spare capacity to grow and there is no danger of overheating – anywhere.
Look at this checklist.
The housing market has too few houses, the labour market has too few jobs and hundreds of thousands of idle people looking for work, the current account is in dramatic surplus, the rate of interest has never been lower and there has never been so much money on deposit in the banking system. Large swathes of rural Ireland are economically crippled and in farming, Ireland’s biggest indigenous industry, deflation not inflation is the problem.
Rarely have arguments for public investment in housing in the right place, broadband in the right place and education in the right sectors been more compelling.
Today, the state in partnership with whomsoever it wants to do business with, can borrow at rates never entertained before to invest in projects that have been on hold for years.
However, it appears that most of the “respectable” economists are screaming caution. These are largely the same “soft landing brigade” who told you that the housing market wouldn’t crash.
In truth, the problem today with the budget is not that it was too expansionary, but that it wasn’t expansionary enough.
All the indicators suggests that, while consumer spending may be back and certain parts of the south Dublin housing market were/are a bit frothy, there is no evidence of too much demand. There is still significant evidence of spare capacity – and the most telling indicator is unemployment.
Just before you think I am overlooking the job creation that is occurring, I am not. What I am saying is the level of job creation needs to keep going at an even faster rate to reduce the rate of unemployment down to acceptable levels. In order to achieved this, we have to maintain demand or amplify it.
I am writing this article from Lexington Avenue in New York. Chatting to Americans here its clear that they would not countenance 10 per cent unemployment. They simply wouldn’t tolerate it.
The American establishment is only now beginning to think about raising interest rates off zero after unemployment has come down to 5 per cent from 11 per cent at its peak.
The US still runs a budget deficit and America believes that low unemployment is a target for the central bank. It seem to me to be a much more humane policy than our obsession with government deficits which the whole world wants to finance.
In Ireland, we tolerate double-digit levels of unemployment and yet are intolerant of government spending. Why not target unemployment, rather than the budget deficit or some other notional ratio?
Employment is related to the growth rate and higher employment will bring down the debt targets anyway. Think about it for a minute. The higher the national income, the higher the level of employment and the lower the level of unemployment. And because the targets such as the budget deficit are always expressed as a proportion of income, if income is rising quickly, the debt ratio will fall on its own.
Rather than thinking differently, it seems that the economic establishment is suffering another bout of “groupthink”. Last time it was the ‘soft landing”, this time it is the “hard expansion”. The truth is there is no real evidence of this dangerous expansion.
Our aim should be to bring unemployment down to the level of that of our neighbours and do it quickly. This means more, not less demand.
The problems associated with full employment are problems we can deal with. Bring them on.
There is little danger of the economy overheating, so why are economists making worried noises about a spendthrift budget?
IMF warning of a global slowdown. Strengthening Euro. US shale industry (and debt) ready to go pop. I’d say there’s a few things to be worried about on the horizon.
When I read this yesterday my eyebrows moved upwards, and my jaw moved downward. The one thing that is never necessary in economic management is to encourage politicians to goose up the economy before an election. Politicians never need encouragement to let rip. I agree with Professor McHale. I do not remember him (or any others in the Galway economics department encouraging the manic borrowing that occurred in the first five years of Trichet at the helm of the ECB years). Maybe we have Ryanair to thank for that. The dominant feature of the Irish economic system at the moment… Read more »
Sorry, David – but can we afford to implement US style economics ? we don’t have a reserve currency. We are up to our neck in debt. And we have serious internal inefficiencies (often the result of state or oligopolistic power). I reckon we should instead focus on business competitiveness, and state efficiency. We have a debt problem. Debt to GDP is illusionary because GDP is inflated with so many multinationals playing games with “transfer accounting”. Time to invest in structural reforms of the state system so that state services are more efficient. This will enable us to keep borrowing… Read more »
Maybe we have a variation of French economic syndrome. An oversized public sector. A private sector that is highly competitive in some sections, and suffering badly in others. Rising debts, and rising savings. And it all being propped up by low interest rates, and a range of regulations. And loads of resource misallocation as a result. Money is not being invested, but is instead being saved, and held. For good reason too. Individuals know what to do with money that is in their own individual interests. Wage deflation, and increasing public debts have people on tenderhooks. The state ensures that… Read more »
Subscribe :-)
Should we be taking economic advice from Washington ?
http://cnsnews.com/news/article/barbara-hollingsworth/economist-tells-congress-us-may-be-worse-fiscal-shape-greece
Does anyone believe the US unemployment figures?
What about discouraged workers?
I wonder – is David still reading our blog entries or, perhaps, he does not think that labour participation rate is more important than unemployment figures (which are without U-3 anyway?). So this time I have decided, after months of verbal attacks on FED officials, change my strategy and quote… FED official, without any comments, so that no one can say that I am getting influenced by Fox News or the Tea Party – as if inbe could not interpret economic data without watching TV stations): “If one considers the people who would like a job but have stopped looking… Read more »
Hi G. I read all the responses and then I just have to choose which ones to take up. Thank you all for your comments they make me think again and hopefully I won’t fall into the trap of the conventional man (as Galbraith pointed out) who when faced with a choice between changing his mind and finding the proof not to do so, he gets busy on the proof!
D
How should I read: “The higher the national income, the higher the level of employment and the lower the level of unemployment.”
Thanks
Something that I’ve been wondering about regarding the FED. The US is not an homogenous 50 states. Anything but. Based on an admittedly small, personal sample and comments from the natives, Tennessee is a thriving State. Building industry is not booming but it is ticking along nicely, exactly what you want. The shopping malls are nearly always advertising for part time staff. A lot of the part time staff are 60+ and are retired from full time work so the part time employment suits them. So TN is doing fine. They are very, very friendly people I’d have to say.… Read more »
Mr McCawber wouldn’t agree with David. Main reason – increased Government spending means less efficiency, more waste. Bench-marking was a ruse to give civil servants enough of a pay rise so that they could afford to buy over priced houses. We all know how that ended up. And David you predicted it. Shame on you for not calling the government out on their plans to raise public service pay. The only people who actually needed the BM rise, and still do, are those people who are in negative equity(30s to 40s). The rest of them don’t and I should know… Read more »
David if you’re one of the 10% (thankfully I’m not) letting rip seems like a very good idea. The question is what do you let rip on considering that it’s taxpayers money that must be borrowed? The usual housing antics will just inflate prices again and that borrowed money will be filtered into whatever is today’s equivalent of the Galway tent. It’s easy enough to moan so how about some positives. 1. Make the welfare system fully contributions based to discourage welfare tourism. 2. Provide decent bottom up tax incentives for the one man(and woman) bands running small businesses and… Read more »
My difficulty with such prognostications is that they tend to be based on the same three economic indicators that the western central banks and governments clearly, and repeatedly, stated were targets of direct policy intervention, with the intention of pushing them up (or down): Stock Markets, Unemployment, Property. None of these, in and of themselves, mean much. These are all merely used as indicators of the underlying economy. Not surprisingly, all governments have used a whole range of policies to directly intervene in all three. For example, in the UK, it’s almost impossible to be on the unemployment register if… Read more »
“Modern economics is getting everything wrong and merely performing experiments on humanity, Hugo Salinas Price of the Mexican Civic Association for Silver writes today, because it is using the wrong scientific method. Or as Plato said — or was it Yogi Berra? — garbage in, garbage out. Salinas Price’s commentary is headlined “The Fundamental Flaw of ‘Mainstream Economics'” and it’s posted at the association’s Internet site” –Chris Powell, gata.org
http://www.plata.com.mx/Mplata/articulos/articlesFilt.asp?fiidarticulo=270
Ya what David ??? Debt debt debt debt……hello !!!! DEBT DEBT… A debt based service economy with no manufacturing….. The country & people have too much debt.. America as a example ????? Are you winding us up David ??? A leper wearing a nice suit is still a leper…just harder to see the scars… Debt is the 21st century version of slavery…too much debt ? Say bye bye to your freedom. China visiting England this week to see if it will invest and build nuclear power plants. Why ? Because UK does not have the money to do this. Or… Read more »
Hi David, When I read this article it terrified the life out of me. If somebody as clued in as you can’t see what’s actually happening then it really is God help us all. The best way I can explain it is a little anecdote based on farming to illustrate the point. We need to define wealth first however which is; “an accumulation of valuable possessions or resources” With that in mind let us proceed. Last year a suckler farmer produced 100 new heifers. His output in wealth terms is 100 heifers. At 1000 apiece in monetary terms his out… Read more »
“I am writing this article from Lexington Avenue in New York. Chatting to Americans here its clear that they would not countenance 10 per cent unemployment. They simply wouldn’t tolerate it.” That may be true if they knew it is in reality more than 23%. http://www.shadowstats.com With 15% of the population on food stamps valued at 260 a month or 20% of all households how do you suppose they do not show up as unemployed on the official listings.. “The American establishment is only now beginning to think about raising interest rates off zero after unemployment has come down to… Read more »
My main source of up-to-date economic thought comes from a podcast called ‘Econ Talk’, hosted by someone called ‘Russ Roberts’ a researcher at Stanford University’s Hoover Institution. He’s been doing this weekly podcast on Economics for years – I’ve been listening for about 6 years. He’s had famous economists, less famous economists, researchers, finance guys, media people, businessmen, authors, etc etc. In all that time, I’ve never heard anyone give any really convincing arguments to back up the thesis that if everyone, including governments, goes out and borrows, and spends their savings, that the economy will do anything other than… Read more »
This is what a big government does. Becomes insensitive to its citizens needs. Most of us know who is Peter Schiff. This is an account of the last weeks of his father’s life.
http://www.schiffradio.com/death-of-a-patriot/
Here a thought about a budget
Here is a thought for today David since you keep trotting out the official US Govt. stats; The US gubernment ordered the US armed farces to shoot their way into eyeraaaaaaaaaaackkkkkk massacring 100k of the locals on the way in and starving to death hundreds of thousands more since on the pretext that Hussein had weapons of mass destruction with launch capability and subsequently went onto find that even the joke shops in Baghdad didn’t have so much as farting gas and you think anyone reading your post trotting out official US gubernment stats will take them seriously? Say I… Read more »
As a result of US Sanctions against Iraq. UN and independent observers reported the deaths of 500,000 children. In 1996 Madeline Alright was questioned about this fiqure. She said they were collateral damage and laid the blame with the former US employee Saddamm Hussein !! You are wrong Micheal. Their is almost a million dead in Iraq. Talk about Economics ?? Their are none It’s printing presses & pawn shops I am impressed and amazed at how many paragraphs can be written about markets , banking , currencies & economies. The entire is now clearly based on fraud . What… Read more »
Posted today at @ http://www.lemetropolecafe.com The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country. We are governed, our minds molded, our tastes formed, our ideas suggested, largely by men we have never heard of. The invisible government tends to be concentrated in the hands of the few because of the expense of manipulating the social machinery which controls the opinions and habits of the masses. It is… Read more »
The real unemployment rate in the UK
“The real level of unemployment across Britain is nearly 3.5 million – almost a million more than the highest official estimate and two million more than the number claiming Jobseeker’s Allowance”
https://www.shu.ac.uk/research/cresr/news/real-level-unemployment-almost-35million-new-report
“The differences in unemployment between the best and worst parts of the country are far bigger than official figures have led us to believe, the report finds.
In Knowsley in Merseyside, for example, the real rate of unemployment is estimated to be nearly 17 per cent, compared to just over three per cent in Stratford on Avon.”