Alan Ahearne: only stimulus in small open economy is cost reduction

[cd27]

Interesting analysis from government economist Alan Ahearne who addressed the FF parliamentary party last week,

http://www.irishtimes.com/newspaper/...250106425.html

"The money borrowed for stimulus would “leak out of a small open economy through higher imports”, he argued. That was unlike big economies like the US or Japan where stimulus money is mostly spent on home-produced goods and services.

The only stimulus possible in a small country like Ireland is to reduce costs, both in Government and in the private sector.

One positive development he said has been the 4 per cent fall in unit labour costs in the past year, partly attributed to pay cuts, voluntary and imposed. Ireland is the only State in the EU which has shown a decline (there has been a 6 per cent increase in the Netherlands). That swing of about 7 per cent has helped eat into the 25 per cent loss of competitiveness experienced over the previous decade.

Ahearne said it demonstrated an impressive “agility” in the Irish work force. Wage cuts were tried but failed in Hong Kong in the 1980s and in Sweden and Japan in the 1990s. Here they have occurred, with some moaning, but ultimately without resistance. The effect is akin to a stimulus. The loss of earnings is somewhat cushioned by a 4.5 per cent fall in the Consumer Price Index.

The figures in retrospect are incontrovertible and indefensible. By 2008 Ireland had lost 25 per cent of competitiveness compared to 1998. That situation was exacerbated by the sharp depreciation in sterling in 2008".



I love that, "in retrospect" the figures look bad, nevermind that Garret Fitzgerald & others warned about the destruction of competitiveness in the early part of this decade.

[goosebump]

Interesting analysis from government economist Alan Ahearne who addressed the FF parliamentary party last week,

Exports will be vital part of economic recovery - The Irish Times - Mon, Jul 06, 2009

"The money borrowed for stimulus would “leak out of a small open economy through higher imports”, he argued. That was unlike big economies like the US or Japan where stimulus money is mostly spent on home-produced goods and services.

The only stimulus possible in a small country like Ireland is to reduce costs, both in Government and in the private sector.

One positive development he said has been the 4 per cent fall in unit labour costs in the past year, partly attributed to pay cuts, voluntary and imposed. Ireland is the only State in the EU which has shown a decline (there has been a 6 per cent increase in the Netherlands). That swing of about 7 per cent has helped eat into the 25 per cent loss of competitiveness experienced over the previous decade.

Ahearne said it demonstrated an impressive “agility” in the Irish work force. Wage cuts were tried but failed in Hong Kong in the 1980s and in Sweden and Japan in the 1990s. Here they have occurred, with some moaning, but ultimately without resistance. The effect is akin to a stimulus. The loss of earnings is somewhat cushioned by a 4.5 per cent fall in the Consumer Price Index.

The figures in retrospect are incontrovertible and indefensible. By 2008 Ireland had lost 25 per cent of competitiveness compared to 1998. That situation was exacerbated by the sharp depreciation in sterling in 2008".



I love that, "in retrospect" the figures look bad, nevermind that Garret Fitzgerald & others warned about the destruction of competitiveness in the early part of this decade.

And he's right.

Not to mention that fact that we are implementing a stimulus, in the form of a €30bn current spending borrowing requirement, whereas sensible measures, like changing the motor tax system to reduce the amount of money leaving the current for imported fuels, are ridiculed by economic 'heavyweights' like Bill Cullen.

[20000miles]

"The money borrowed for stimulus would “leak out of a small open economy through higher imports”, he argued. That was unlike big economies like the US or Japan where stimulus money is mostly spent on home-produced goods and services.

I guess this is why they refer to Keynesian economics as Neo-mercantilism.

[Mar Tweedy]

His NUI Galway staff page says this:

Dr. Alan Ahearne is on leave of absence from March 2009 as Special Advisor to Minister for Finance Brian Lenihan.

So he's behind Brian Lenihan sounding like he had some bit of a clue on Vincent Browne the other night. Though whether it is the right analysis remains to be seen - obviously.

[sandar]

if the money is borrowed it would also act as inflationary measure in the medium term, meaning that the economy would sink back into uncompetitioveness as soon as itr started to pick up

[joel]

Interesting analysis from government economist Alan Ahearne who addressed the FF parliamentary party last week,

Exports will be vital part of economic recovery - The Irish Times - Mon, Jul 06, 2009

"The money borrowed for stimulus would “leak out of a small open economy through higher imports”, he argued. That was unlike big economies like the US or Japan where stimulus money is mostly spent on home-produced goods and services.

The only stimulus possible in a small country like Ireland is to reduce costs, both in Government and in the private sector.

One positive development he said has been the 4 per cent fall in unit labour costs in the past year, partly attributed to pay cuts, voluntary and imposed. Ireland is the only State in the EU which has shown a decline (there has been a 6 per cent increase in the Netherlands). That swing of about 7 per cent has helped eat into the 25 per cent loss of competitiveness experienced over the previous decade.

Ahearne said it demonstrated an impressive “agility” in the Irish work force. Wage cuts were tried but failed in Hong Kong in the 1980s and in Sweden and Japan in the 1990s. Here they have occurred, with some moaning, but ultimately without resistance. The effect is akin to a stimulus. The loss of earnings is somewhat cushioned by a 4.5 per cent fall in the Consumer Price Index.

The figures in retrospect are incontrovertible and indefensible. By 2008 Ireland had lost 25 per cent of competitiveness compared to 1998. That situation was exacerbated by the sharp depreciation in sterling in 2008".



I love that, "in retrospect" the figures look bad, nevermind that Garret Fitzgerald & others warned about the destruction of competitiveness in the early part of this decade.

So why the policy of low taxes? Who were the geniuses behind that? The money, naturally going straight out of the country!

[sandar]

the low tax policy attracts money to the ********************ry and while some of the money leaves enough stays to make it worthwhile. But to get the benefit from this model, you need to deveklop inidgenious industry alongside the FDI and also be a bit conservative in spending terms.

[cd27]

you said it sandar, you need a reason to tax people not the other way round, people benefit from imports

[Wendy]

I'm delighted he's thrown down the gauntlet to his fellow economists and hoping a decent debate will ensue. They may find entertainment in referring to Lenihan as a "corpulent tooth fairy" (Kelly) or "beyond incompetent" (Doom O'Brien) but it ain't either edifying or instructive for the general public.

[Oldira1]

Why is a civil servant addressing a Fianna Fail meeting? This is an abuse of power.