Wynne Godley, the brilliant Anglo-Irish economist who sadly died last year, once declared that, because he wasn’t much good at mathematics, he was one of those economists who was ”obliged to learn how to think”.
Godley’s people come from Carrigallen in Co Leitrim, where he spent his childhood summers. Gladstone granted a title to Wynne’s grandfather, Lord Kilbracken, because of his support for the Liberal cause of Home Rule in Ireland.
Godley was one of those (far too few) renaissance men in the economics game. Not only was he a professor at Cambridge, but he was also a professional musician, the principal oboist at the BBC’s Welsh Orchestra.
Like the great Keynes, he hung around with interesting people. His wife had been married to the painter Lucian Freud, and his father-in law, Jacob Epstein, was a renowned sculptor who led a bohemian lifestyle.
What made Godley so interesting was his ability to predict things using basic economic rules and principles, rather than mathematical models — what might be termed ”common sense economics”.
Maybe this was because, unlike other academic economists, he worked for many years in the normal world before setting foot in Cambridge.
Godley’s perceptiveness and ability to think laterally made him one of Britain’s most brilliant economic minds. I thought about him last Friday when I heard the report on Dublin from the so-called troika.
I couldn’t quite figure out how they could report that everything in Ireland was moving along just fine and yet the markets were pricing Irish debt as junk, almost guaranteed to default.
The two views could not both be right. So let’s see what’s happening in Ireland.
We know that punters who have money are saving. But didn’t Mr Noonan exhort the nation to spend? So if we are saving, who is spending? And if we are not spending and the government is set to cut its spending, what happens to the level of demand in the economy?
This is where our economist friend from Leitrim comes in.
He was, a bit like myself, interested in the hydraulics of economics or the ”if this goes up, what goes down” end of things.
One of Godley’s insights was a straightforward economic truism, which was that the balance of trade of an economy is nothing more than a reflection of the balance of savings in the economy.
If the punters are saving or hoarding and not spending, then the government will have to spend to offset this saving, otherwise the economy will contract.
The only way to prevent this is if we can persuade foreigners to buy stuff from Ireland in huge quantities. But why would they buy stuff in Ireland that they can get at home?
Bear this basic idea in mind when we look at why the markets are scarpering from Ireland, and why Irish money is still leaving the Irish banks looking for a safe deposit abroad.
Who is right? Are people right to be taking their money out? Are the financial markets right to be selling Irish bonds and also taking their money out?
Or is the troika right in saying everything is more or less hunky-dory?
If we follow the troika’s austerity programme and bring the government deficit down from14 per cent of GDP to 3 per cent in (say) three years, where will that missing 11 per cent of GDP come from? If government spending isn’t replaced, the economy will shrink by the same amount.
We are talking about 11 per cent of total income. If the economy shrinks by the same amount, so does the tax base.
If the tax base shrinks, what happens? Well, if we are to achieve the austerity targets and the tax take falls, the cuts will have to be much bigger.
But this won’t make the economy grow — it will have the opposite effect. The cuts will make the economy shrink.
Unless, of course, the trade surplus can increase dramatically, which would mean that our savings and the government savings were offset by demand from foreigners.
But the simple back-of-the-envelope calculations would mean that, for the economy to stay stable, the trade surplus would have to increase by at least 11 per cent of GDP from here.
The trade surplus today is ‘2.8 billion. But, given that our GDP is about ‘170 billion, our trade surplus would have to move sharply from ‘2.8 billion to ‘21.5 billion in the next three years to keep the economy stable.
Our main export markets are the US, which accounted for ‘13.3 billion last year, Belgium and Britain. What Belgium is doing there is beyond me, though it appears to be due to the shipping of some multinational products through that country to other final destinations.
But these three territories comprise 52 per cent of the total value of our exports.
How likely is it that we can increase exports to these countries when we know that the US economy is struggling and we also know that Britain is pursuing its own austerity programme? In addition, how likely is it that we can increase exports to these countries with our high cost base, when they are allowing their currencies to drop?
How can Irish exports to the US and Britain be competitive, particularly when a small change in their currencies, which can happen overnight, will more than compensate for any fall in our cost base which, because we can’t devalue, has to come gradually and with political consensus?
Obviously, to achieve this type of trade turnabout quickly, we would need our own, highly competitive exchange rate to give our exports a chance, and to make us think twice about buying imports, particularly non-essential consumer ones.
Taken together, it seems highly implausible that we can increase our trade surplus eightfold from’2.8 billion to ‘21.5 billion, without a change in our currency. Countries such as Finland, Sweden, all The Asian tigers and, more recently, Iceland have responded to banking crises with massive devaluations — all of which have been successful in terms of trade enhancement.
This has to be an option for us, particularly As we can’t go on borrowing, otherwise we are caught in what could be termed ‘Godley’s paradox’. The domestic economy — as we have already seen with the latest GNP figures — will contract with austerity because we won’t be able to export enough, quickly enough.
Wynne Godley, like that other great Cambridge economist, Keynes, was never scared to change tack. Keynes once famously said: ”When events change, I change my opinion.
What do you do, sir?” We should not be afraid to change our policy.
This is particularly the case when basic, straightforward economics tells us that the present course of action simply cannot succeed.
The Fall of the House of Usher.
Well, if the exchange rate is the key to recovery, then based on previous scenarios where a country had to devalue it’s currency – we are in the category of countries that are fully deserving of “Junk” rating. I am saying this because the media, the government, IBEC, and the EU Comm. all are telling the world that Moodys made a mistake – and that our Junk rating is not deserved. Now the media, the goverment and IBEC have a track record in coming together to sing from the same hymm sheet every time the Irish people are about to… Read more »
I think that a hard currency regime works, when you are disciplined and organized with regard to participation.
As can be seen by the Celtic Binge, we were disciplined and organized to the extent that an unavoidable cathastrophe was completely predictable.
Irish exports have very little to do with the exchange rate. Most of them are made by companies whose trade from Ireland with the US is largely internal and is based on their own internal transfer pricing arrangements and whose trade with Europe is facilitated by the common currency – and by Ireland’s encouragement of using its low corporate tax rate, and the absence of a common corporate tax base, as a means of offering tax arbitrage. Those exports to Belgium are mostly paper exports, literally bits of paper which create a plausible tale to tell the taxman in one… Read more »
Oh maybe that was Wynne Godley’s modesty that led him to declare that he wasn’t good at Mathematics. When I took undegraduate courses in Mathematics – which was my favourite, the Professor started with sequences. Never could I have imagined that what I now love – Macroeconomics can be looked at as sequences. And Wynne’s usage of sequences is flawless.
Nice phrase Godley Paradox. Maybe his policies can be said to lead to Wynne-Wynne situations.
The original headline for David’s piece ‘Troika’s claim that Ireland is doing fine is a load of junk’ was controversial, but was better than the above headline ‘The exchange rate is the key to recovery’. Ireland does NOT have an exchange rate and no amount of wishful thinking will get us one this side of Christmas. The crisis is moving too fast to allow Ireland to establish a separate currency, starting from scratch. Wolfgang Munchau in today’s FT says that the odds for a breakup of the eurozone is now 50:50 and a eurozone bond backed by all member states… Read more »
I have the solution. Raise Dirt on deposits from 25% to 100%. Tell depositers the new rate will come into effect on the 1st of September. Now, reduce VAT to 0% immediately until the 31st of August.
Davids Subconscious Revelations
Wynn or No Wynn David says the center of gravity is the number 11 .
September 11 2011 is MOON WOBBLE
( the end is nigh )
I would also be extremely concerned about a meltdown in the UK. I do not see the Con-Lib government breaking up, simply because the Lib-Dems know well that they are competing with the British Labour Party for seats, and will want to see reforms to Britain’s skewed and unrepresentative constituency map before a General election. Basically, the Lib Dems will stick it out, for the sake of the type of reforms that will reduce the probability that the Labour Party will be the largest political party in Britain – so that their role as the “add-on” will be more likely… Read more »
What David is really saying is that we must leave the euro ! utter rubbish , we are so intertwinned with the euro e.g. 160 billion emergency funding from the ECB and half a million tracker rate mortgages. DMcW is really scrapping the bottom of the barrel here , his soft information on economics is really immature drivel, what I would like to see is hard facts and figures from any credible economist. Gurdgiev is good at this type of economics , McWilliams is just a populist. Austerity is our future the fall in GDP over the next few years… Read more »
We are now facing a great many issues in the western world at once. The exchange rate is a non issue and indeed will further spook an already spooked financial community who as far as I can read it are finished. The ar$€ has fallen out of the Euro and the Dollar and Ireland is seriously endangered by its overreliance on an uncontrollable cost input – i.e. oil. It also has other uncopntrollables resulting from being an island and having a low population. The Euro has been a boon and elitist incompetence has brought us to our knees – not… Read more »
Retail in Ireland in dire trouble ? http://www.independent.ie/national-news/bid-to-save-3000-jobs-as-superquinn-seeks-buyer-2824714.html This is a big headline because it is a single event. However, beyond this there are thousands of retailers up and down the country which are in rag order. The work is rotated amongst family members to long term employees. The issue of commercial rates, and the fact that most of the money is wasted by local authorities, by people who are members of political parties is being completely ignored by the political establishment. The politicians are killing retail. And then we had that famous incident where BIFFO the Clowen opened a… Read more »
The Receivership of Super Quinn is to me the end of the middle class in Ireland as we knew it .
Another problem for the Euro.
Just wait until Spain starts to see stuff that it was previously not seeing…
substitute ‘ dancing at the crossroads’ with ‘ tesco at the roundabouts’ …what visions have we left ?
It is of course a fallacy of composition that everybody can be an export nation.
Moreover what you are doing there is exporting your unemployment to another country due to a lack of domestic consumption. That is what Germany has been doing and the collapse of the net-importing nations in the Euro is the result.
Nations that rely on others to keep their population employed are part of the problem – not the solution.
Water Exchange Rate from Shannon river to Dublin
I wonder if we can measure the distance from 1,500 acreas in Offally to the doorstep of Klown and count more quango quango foot prints in stuffed wellingtons boots .
Short-term devaluations have been used constantly as a way of helping countries get out of difficult spots. One of their benefits is that as exports are cheaper, more is exported and more people are employed. Another benefit is that it is cheaper to come in and set up a business in your country and cheaper to hire people. Another benefit is that more people will come to your country for tourism. Usually the devaluation is short term in nature to help a country out of a rough patch and after a couple of years the currency appreciates again. There are… Read more »
Getting the monkey of exposure to banks is also another key to recovery. Iceland got rid of that exposure and devalued their currency. They are in a much stronger position than Ireland and can borrow money on the markets. Their currency will most likely appreciate over the next few years. Iceland like Ireland was heavily dependent on the financial industry and not a big manufacturing country.
I tend to agree with Manofiona’s line of reasoning. I believe it to imprudent to even think of a linked EU-exit followed by a neat devaluation of the Punt Nua. Let us imagine the practicalities of such an event: 1) Our energy bill would increase immediately by the % of the devaluation against the € & $; 2) The multinationals would en masse migrate in about a week as a measure to protect their revenues denominated in €; 3) Ireland would become known as a pariah in the International financial and commercial arenas of the western world; 4) Triple digit… Read more »
The creditors of Anglo Irish Bank got an almighty bailout.
What will the creditors of SuperQuinn get ?
The bill, for the entire misadventure, probably.
1 “What would be your reaction if it could be shown that a set of policies would result in deepening the recession, increasing unemployment, reducing domestic demand (meaning more business closures) while having only a minimal effect on the fiscal deficit?” Michael Taaffe, 28 June 2009, ie 2 years ago (taken at random – there’s lots of similar articles) Taaffe quotes ESRI scenarios, including one where 10% of all health and ed. staff are fired: – GNP down by 0.9% – unemployment up by 0.9% – public sector wage bill down by 1bn – defecit reduced by 0.2% of GDP… Read more »
Yep DmcW is using plain logic, so here’s the skinny of an answer to his conundrum. The fact is the insiders have control of the rudder and have steered the economy to sup all benefits they can accrue from the ECB EMU. They’ve built roads and ghost estates all over the country in celebration of their power to access such unregulated riches. On the way up, there were the confetti loans from Anglo. On the way down, there is the confetti support of the ECB through ‘bailout’ or ‘more lending’. They do not want to lose their position at the… Read more »
The Public Service Unions are way ahead of the curve on this exchange rate solution – The Croke Park agreement is nothing but a holding position in anticipation of the “ big drop” from a devaluation. Howling is doing a brilliant job on the fudge front and the media would appear to be in on it as well. It’s time to start hoarding those foreign Euro notes – codes below: Z Belgium Y Greece X Germany V Spain U France T Ireland S Italy P Netherlands N Austria M Portugal L Finland H Slovenia G Cyprus F Malta E Slovakia… Read more »
http://www.examiner.ie/business/trade-is-keeping-our-economy-afloat-153639.html This is a useful little article from Seamus Coffey, economics lecturer at UCC. What it shows is that the improvement in balance of trade for goods, which is often bandied about as a cure to our ills, is more due to a falloff in imports than a boom in exports (which on aggregate have remained static). It means that Paddy is no longer importing the bouncy castles, the JCBs, or the 50 inch flatscreens, at the rate he was. Hence the retail sector which trades in imported goods has collapsed. That is unfortunate for the ordinary people who worked… Read more »
Good Observation on your part …well done.
This begs the question why are indiginous irish companies too small to export our natural resources and products from the land .Take for example France owns the monopoly of many Irish companies that export food and dairy and drink from this country so they make a profit on our exports …they also sell to the irish market motors , cosmetics , food , waste disposal , banking etc So they have it wrapped up on both sides of the Irish Brush ( scuab).
I have yet to see an Irish Bus Driver in France or Poland or Nigeria for that matter .I could count all day the foreign bus drivers in our cities.
Will tomorrow, Thursday 21st July, be remembered in the annals of triumph or infamy? Will it be D-day for the Euro or its Dunkirk? Will the EC leaders rise to the challenge or continue to obfuscate?
EC President Jose Barroso has just laid it on the line:
“Nobody should be under any illusion; the situation is very serious. It requires a response. Otherwise, the negative consequences will be felt in all corners of Europe and beyond.
“The situation requires full engagement by everyone at the summit and I believe we’ll have it.”
Let’s hope his prayers are answered.
We need high grade think tank stimulus of the economy that doesn’t pour money into the wasted property and financial industry and the banks, but one that targets an indigenous, home grown productive enterprise at the high corporate and low end. Money spent on education isn’t wasted and a long term strategy to create a public service along the lines of the Swedish model with investment in industrial and educational infrastructure should be our goal, instead of pouring taxpayer resources into the coffers of banks, bondholders, and odious debt tricked from taxpayers. The experiment with the euro has been badly… Read more »
Papandreou to Frau Merkle:
Greece is the word:
We take the pressure and we throw away
Conventionality belongs to yesterday
There is a chance that we can make it so far
We start believing now that we can be who we are.
I got debts they’re multiplying
And I’m losing control
Cause the credit you’re supplying
You’re the one that I want, oh oh oh honey
You’re the one that I want, oh oh oh honey
More lyrics: http://www.lyricsmode.com/lyrics/g/grease/#share