PREDICTING THE FUTURE WITH THE ESRI

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Much of the damage to the economy, and the consequential dramatic rise in unemployment was avoidable. If fiscal policy had been used to reduce demand rather than to exacerbate the inflationary pressures it could have defused the property bubble well before it became dangerous. This would have required budgetary policy to have targeted in increasing surplus over the period of at least 2003-2007. In addition, instead of using taxation policy to stimulate investment in building and construction it should have been used specifically to discourage such investment. (Conefre and Fitzgerald, 2010). The inappropriate nature of fiscal policy over this period was signalled as far back as 2001 (Fitzgerald, 2001).” Recovery Scenarios for Ireland: An Update, p.61

Now, the impression I get from the above quote is that the ESRI was warning about property bubbles as far back as 2001. It doesn’t actually say that, I know. What it says is that John Fitzgerald was signalling ‘the inappropriate nature of fiscal policy’ as far back as 2001, but the way the paragraph is structured, it leads one to conclude that Fitzgerald was warning about bubbles in his warnings about fiscal policy.

Well, this is what he said back in 2001. It’s from Fiscal Policy in a Monetary Union: The Case of Ireland, which is the only 2001 article by Fitzgerald that’s cited in the bibliography for Recovery. It’s available online here.

The danger for the Irish economy with the current expansionary stance of fiscal policy is that, by adding to inflationary expectations in the labour market and the property market, the real exchange rate may overshoot – there may be an excessive rise in labour costs. Unless wage rates adjust instantaneously to clear the market, wage rate overshooting could prove costly. For this reason stimulatory fiscal policy, that accelerates the rate of wage inflation, is unwise. It could expose the economy to unnecessary dislocation in the event of an unexpected external shock. The cost that would be involved in pursuing a tighter fiscal stance today would be a temporary delay in consumption. The cost involved in the current pro-cyclical stance is an increased danger of increased economic disruption in the future.” Fiscal Policy in a Monetary Union: The Case of Ireland, p.15

There is absolutely NOTHING about bank lending and bubbles in the footnoted paper. Its concern with 2001 fiscal policy is with regard to its effect on wages, not housing and commercial property.

This is the Irish average industrial wage with regard to inflation. Fitzgerald saw this as one to watch.

And here’s the average industrial wage in relation to house prices, which Fitzgerald didn’t.

And here’s Alan Vega and Martin Rev, ‘cos after reading not one but two papers by John Fitzgerald, I need something to remind me of the beauty that human talent and energy is capable of.

 

One Response

  1. Michael Burke

    July 23, 2010 3:54 pm

    We could also update the 2001 Fitzgerald article thus,

    “The danger for the Irish economy with the current contractionary stance of fiscal policy is that, by adding to deflationary expectations in the labour market and the property market [in fact the whole economy], the real exchange rate may undershoot – there may be an excessive fall in labour incomes. Unless demand adjusts higher instantaneously to clear the market, wage rate undershooting could prove costly. For this reason contractionary fiscal policy, that accelerates the decline of wage deflation, is unwise. It is exposing the economy to further unnecessary dislocation following a series of shocks. The cost that would be involved in pursuing a looser fiscal stance today would be a temporary boost in consumption. The costs involved in the current pro-cyclical stance is curently increasing the danger of further economic disruption in the future.”