ESRI have it all wrong??

[Conor]

I came across this comment over at irisheconomy.ie, and thought it might be of interest. It certainly goes against the mainstream consensus; I wonder what anyone here makes of it?

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John Says:

April 29th, 2009 at 9:33 am
The analysis contained in this ESRI report is a fraud. There is a gaping hole in its logic. I am not at all left-wing myself, but social justice demands that some of our moderately left-wing journalists and trade union leaders started challenging the analyses of Ireland’s economic problems that are being passed down to us by right-wing economists in ESRI, in various banks and stockbroking firms, Finfacts and, last but not least, George Lee.

The question that needs to be addressed is whether the ongoing increase in unemployment in Ireland is primarily due to a loss of competitiveness, resulting in loss of market share by Ireland Inc, as all of the above claim, or whether its due to a collapse in domestic demand. The appropriate policy response depends on which of these is primarily behind the increase in unemployment. Those economists who represent vested interests, such as the ones mentioned above, will always claim that its loss of
competitiveness. This is hardly surprising since, if that were the case, the appropriate policy response would be to cut wages and generally deflate demand in the economy. However, if the increase in unemployment is not due to any loss of competitiveness or market share, but due to a collapse in demand in the economy, then cutting wages and deflating demand are akin to trying to cure someone suffering from anorexia by putting him/her on a lettuce diet.

So, let’s look at what ESRI say.

On their own admission, Ireland’s exports are faring exceptionally well. ESRI forecast that Ireland’s exports will be down 5% in 2009. They also forecast that U. Kingdom’s will be down 9.8% (despite devaluation of sterling), France’s down 11.4%, Germany’s down 16.5%, and the OECD’s down 14%. So, on ESRI’s forecasts Ireland Inc is gaining almost 10% market share of OECD exports in 2009.

The obvious conclusion is that Ireland Inc is highly competitive. This is confirmed by recent statistics. The trade surplus is going through the roof (averaging 1.5 billion a year more than a year ago). The balance of payments is headed for surplus, Manufacturing output is down just 1% in Jan and Feb, compared to 20% average in EU countries..

So, why then is ESRI advocating massive pay cuts? Not modest 1% or 2% pay cuts, but 10% to 15%. Wages are not being cut elsewhere, even though their export volume falls are 2 or 3 times that of Ireland.

The predictable effect of massive wage cuts on this scale, allied to other deflationary measures, is a collapse in demand. And its precisely because of the collapse in demand that unemployment is soaring. Its got nothing to do with any loss of market share by our exporters. In other countries, even though their exports are faring much worse than Ireland’s, jobs are not being lost on the same scale as Ireland because domestic demand is holding up better. Those countries are not mad enough to cut wages and increase taxes at a time of global recession.

The Government should throw the ESRI report in the bin, recognise that its the collapse in demand in the economy that is the problem and not any fictitious loss of market share by Ireland’s exporters. That would involve: (a) no further cuts in general wage rates (although there may be specific exceptions) (b) cancel the recently-announced tax rises (c) take whatever measures are necessary to get banks lending again.


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Further to my last post:

Since I posted it only 30 mins ago, the February trade figures have been published by the CSO. Given the current global collapse in trade, they are quite spectacular. I’d describe the export performance as ’sensational’.

http://www.cso.ie/releasespublicatio...nt/extrade.pdf

exports in Feb 09 UP 1% on Feb 08
imports in Feb 09 down 20% on Feb 08

trade surplus in Feb 09: 3.7 billion, or 44 billion annualised - compared to 26 billion in 2007

Proves my point.

I’ll wager no other OECD country is seeing a y-o-y increase in exports in Feb 09. In most, exports are down 20%. In some, exports are down 50%.

So, again I ask, given how well exports (and manufacturing) in Ireland are performing, why are we suffering the fastest-rising unemployment? Its unnecessary and criminal.

Answer: its the collapse in domestic demand, stupid (as Bill Clinton might say) - as illustrated by the 20% fall in imports and the stratospheric trade surplus

So, let’s have done with this ‘loss of competitiveness is the cause of the rise in unemployment’ argument (which doesn’t mean competitiveness
is unimportant or should be ignored). Instead, let’s get demand back in the economy.

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What does politics.ie think?

[Digout]

The ESRI are a bunch of morons. All they is tell us what we already know.

[Duth Ealla]

Hmm, is there enough domestic demand in an is;and economy of 6 million people?

[X-ray]

The ESRI are a bunch of morons. All they is tell us what we already know.

Finally something we both agree on

[politicaldonations]

ESRI, another quango stocked with overpaid academics. inaccurate forecasts, own agendas etc.

[X-ray]

Is ERSI state funded? That's some low lying fruit if so.
Tarot cards would be cheaper, more entertaining, quicker and probably more accurate.

[Shambo]

It would be interesting to see if anyone could supply a breakdown of people losing their jobs in sectors heavily dependent upon imported goods, eg Shipping, retail etc

[Andrew49]

Is ERSI state funded? That's some low lying fruit if so.
Tarot cards would be cheaper, more entertaining, quicker and probably more accurate.

The men who tend to the spiritual needs of politicians are suggesting restraint and introspection to tide over the rough and tumble of changing political fortunes. A vaastu expert, numerologist, tarot card reader, reiki master, healer and guru of sundry politicians he declines to name feels that politicians should meditate to cope with the stress generated by election-related lifestyle changes, campaigns, cut-throat competition, cutting edge decision-making and the ensuing fatigue.

Concentrate, stay cool, gurus tell campaigning politicians

[LDF]

A couple of points.

The Irish economy never has and never will survive on domestic consumer demand. We've tried that for the past seven years - building houses and selling them to each other and it has been shown to be unsustainable.

The problem with current salary levels, as identified by ESRI, is in the public sector. The years of benchmarking, increments and pay increases have created a gap between public and private sector earnings of 20%-30%. That is where the problem in the public finances lies. That is the issue which needs to be resolved.

Yes, our exports are holding up well. This is largely due to the pharmaceutical sector whose products are required equally during boom and bust. The trade surplus number is also helped by the significant drop in imports of motor vehicles.

[Chrisco]

Finally something we both agree on

It is also something George Lee would agree with, I suspect.