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Tuesday, May 22nd 2012

At least one party gets it

Author: Donagh of Dublin Opinion

Published: November 2nd, 2010

Section: Articles, Economy

Discussion: 10 comments ↓

Possibly Related: , ,

Michael Taft responds to Sinn Fein’s Pre-budget submission.

With the political consensus obsessed with a €15 billion deflationary juggernaut, it’s a relief that one party gets it. Sinn Fein’s pre-budget submission argues for a major stimulus programme combined with a growth-friendly consolidation package that, taken together, would increase growth and job creation. This would put deficit-reduction on a sustainable path, unlike the calls for contraction which could land the economy in what the ESRI calls a ‘deflationary cycle’.

Does that mean that every one of their proposals can’t be improved on? No. But let’s get this out of the way – put 100 progressives in a room, all working to the same strategy (an expansionary fiscal strategy) and they will come up with 100 different pre-budget submissions and a heated debate about some of the details.

Read the rest on Progressive Economy.

Discussion

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  1. Comment by: Roisin de Rossa

    Nov 2nd 2010 at 14:11

    Michael says quietly…
    “First, Sinn Fein presents its capital stimulus as permanent increases in expenditure. I wonder how sustainable this is going into the medium-term. They acknowledge this issue when they state: ‘. . .the state might have to continue with some form of stimulus in later years . . .’”
    I didn’t notice this when I read it first but now I see the massive error that enables SF to claim that a €7 bn stimulus tax receipts will rise by €16 bn!!! Surely Michael Taft should have understood this as a professional economist but no doubt he is being generous with them.
    SF are assuming a roll-over of stimulus from one year to the next - in fact they are applying the multiplier repeatedly to the same income (completely erroneously!)
    If the mainstream press realise this they will be made to look incredibly stupid.
    They have completely misused the multipliers which estimate net *final* demand arising from stimulus. Thinking about it more there are even more fundamental questions whether these multipliers can even be used to assess impact of one-off investments as they are calculated on the basis of a permanent increase in demand. If they are standard type I or type II then I think that they can’t.

  2. Comment by: Michael Taft

    Nov 2nd 2010 at 15:11

    Roisin - I think you might be being a bit too critical of Sinn Fein’s method of calculating the multiplier and, so, the revenue raised. If anything, from my own calculation, they may have under-estimated the GDP boost because they are assuming no increase in Year 0 (the year the expenditure is released). From my reading, the Lane-Benetrix multipliers actually start at Year 0 - that is, a 1.24 boost. When I do up the numbers, I get an €24.5 boost by 2014 with more to come. In their calculation, they have a €16.1 billion because of the year lag. Of course, I am open to correction.

    It should be kept in mind that the multipliers they are using come from an average between 1970 and 2006. Therefore, we can expect those multipliers to be even higher in a situation of excess capacity. They could be higher still in a situation of credit-constraint. All told, Sinn Fein’s estimates are the minimum that could be expected.

    As to tax revenue, they have used a dynamic 0.6 sensitivity. This was the relationship between tax revenue and the GDP in falling output extremis. Whether this would hold in a period of boost is a subject for further discussion. However, while I’m a bit sceptical, I accept that tax revenue would rise above the current 0.33 - when the economy is in the doldrums. Even if one uses this doldrum measurement, the stimulus would result in €8 billion tax revenue by 2014 - with more to come.

    And none of the above counts the supply-side benefit (the economic benefit that comes from actually using the asset created). There have been various assessments from the ESRI - from a permanent GDP increase of 5% of the stimulus to 15% but this depends on the asset being created. For instance, rolling out next generation broadband would have an extremely high supply-side benefit. Imagine 90% of businesses availaing of NGB in terms of productivity, enterprise expnsion, new market opportunities. Education also has a high supply side multiplier - though the return takes longer for pre-education level. A new water & waste network also has a long return, but in the current context it would reduce annual maintenance costs on our victorian age network in many parts of the company.

    The only issue I have is the fuly permanent basis of the investment. But this is only an issue of smoothing out the fiscal supply and withdrawal. A more calibrated temporary/permanent relationship might have been appropriate.

    But, hey, if that is the only problem arising out of an investment strategy which will promote growth, job-creation, enteprise support and deficit reduction, we should be celebrating.

  3. Comment by: Michael Burke

    Nov 2nd 2010 at 23:11

    Roisin

    I think you have misunderstood how the multiplier works and its impact on government finances. In the literature genrally, and in Philip Lane’s research, there is indeed a multi-year effect from a single increase in government investment. In his case a €1bn investment has a cumulaitve 6yr impact of €2.19bn, having been a high as €4.44bn after 4 years.

    These are Lane’s estimates of a permanent increase in investment. He actually has much higher multipliers from a one-off increase in investment which is later reversed, ie cut.

    Perhaps a more considered response might be in order.

  4. Comment by: roisin de rossa

    Nov 3rd 2010 at 00:11

    Okay lets assume you are correct and the Lane multipliers are not standard multipliers (like the ones I use at work and the CSO produced back in 2005!) but reflect the impact of a one off stimulus over time. These have to be scheduled separately for each year of the stimulus. When I do this, I find overall fiscal benefit (assuming a 0.60 sensitivity) of €9.2 billion at the end of year 8 - which is the last year of the schedules. (This is equivalent to your figure Michael multiplied by 7 and then 0.60)
    If you assume a 0.33 sensitivity as you suggest it turns out to be €5.1 billion.
    I agree with you that they should have commenced the multiplier benefit in year 0 and I point out that their figures are further improved if you discount for the value of money (as this reduces the negative figures later on disproportionately).

  5. Comment by: Pope Epopt

    Nov 3rd 2010 at 08:11

    There seems to be disagreement on figures here. Can we have the algorithm used please - then we can check for ourselves?

  6. Comment by: Michael Burke

    Nov 3rd 2010 at 10:11

    Roisin

    The CSO 2005 data are ‘Leontief Inverse’ multipliers which apply to output only and are single year. The model is different in two key respects.

    Lane uses his model for the whole economy, that is, including incomes and expenditure, which is customary. This is important as, even though all 3 national accounts measures ought to sum, any ’shock’ (like a fiscal stimulus) will actually impact on them in an uneven way (which is is obvious, when considering the impact, say, of a cut in PS pay, or welfare payments). Secondly, he considers the multi-year effects, which CSO data cannot.

    In my judgement, he does so very conservatively, assuming for example, lower private sector demand arising from higher private sector spending, when the opposite has been the case. This is pointed out in the SF submission. There was too a conservative approach to how quickly this stimulus would impact on government finances, taking into accout identification of projects, implementation and the delay in the tax (and spending) harvest from that.

    If so, SF is culpable only of underestimating the beneficial effects of ther own policy. Which makes it distinct in the curent political culture.

  7. Comment by: William Wall

    Nov 5th 2010 at 09:11

    Look, I’m a complete layman here, but am I right in thinking that there’s a consensus building among you number-heads that the SF proposals are worthwhile and, if anything, conservative in their outlook. I think it’s important as this is the only mainstream party that has stood outside the national consensus that we have to screw ourselves in order to get better. I’m not an SF supporter, but if what they’re saying makes sense here, I may be voting for them next time round (though bearing in mind that my constituency is Cork North West I’m highly unlikely to be able to vote for anyone!).

  8. Comment by: William Wall

    Nov 5th 2010 at 09:11

    Re. “screwing ourselves to get better” above. I think we Cork people may start referring to it as Doing a Prenderville.

  9. Comment by: Roisin de Rossa

    Nov 5th 2010 at 12:11

    Michael,

    After studying his figures I had realised the difference - hence my alternative calculation on Nov 3rd. And I’m still not happy with the way Lane’s multipliers have been used - they are really for permanent cuts not one-off stimulus.

    I just don’t see a €7 billion stimulus resulting in a net gain in taxation of €16 billion (and certainly not as €25 billion as suggested by Michael Taft).

    Incidentally, I agree with your own approach on prog economics and I think your analysis adds weight to the discussion. I certainly don’t agree with the Government or the neo-cons.

  10. Comment by: Michael Burke

    Nov 5th 2010 at 14:11

    Roisin,

    The Lane model has estimates for both permanent increases in government investment and for temporary increases (ie, ones which are later cut). They are very different in his model, because he includes all sorts of assumptions about confidence and ‘crowding out’ of private sector investment which are highly questionable.

    In his estimates the two different sets of multipliers look like this (fingers crossed it comes out OK in this format):

    ………..Temporary……………Permanent

    Year 0……..1.24………………1.24
    Year 1……..1.61………………1.61
    Year 2……..0.51………………1.13
    Year 3……..0.43………………0.46
    Year 4……..0.16……………..-0.54
    Year 5……..0.06……………..-1.71

    Total………4.01 ……………..2.19

    The research paper is here

    ESRI, Vol. 40.4, Autumn 2009, Benetrix & Lane, http://www.esr.ie/Vol40_4/Benetrix.pdf

    SF did indeed use the permanent increase multiplier, which is much lower in sum. This was, I think, because a permanent increase in investment makes more sense and probably endgenders more confidence than a temporary boost which is later reversed, despite what Lane’s model suggests.

    There is too a credibility issue; a net 2.19 cumulative multiplier is met with scepticism enough- imagine the reaction to a 4.01 multiplier.

    The recent IMF research http://www.irishtimes.com/newspaper/finance/2010/1014/1224281062242.html , which got an airing here shows that under conditions where everyone else is cutting and there’s no scope to cut rates or to lower the currency, the negative multiplier is 2 in the first year and accumulates to 6 (the chart showing that is reproduced here http://socialisteconomicbulletin.blogspot.com/2010/10/comprehensive-spending-review-turns.html ).

    All in all, SF used a cautious estimate in a conservative way- the real impact of their policy is likely to be much more favourable.

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