tag:blogger.com,1999:blog-2826531655042170344.post5535891854613300233..comments2024-03-26T11:29:52.986+00:00Comments on Economic Incentives: A “Demand-Side Recession”Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-2826531655042170344.post-33323315447670049572011-04-22T21:55:11.656+01:002011-04-22T21:55:11.656+01:00Quite an interesting blog entry Seamus. I hadn'...Quite an interesting blog entry Seamus. I hadn't visited your blog before. I was referred to it by a link on Mr. Kinsella's blog today. All the best. BOH.Brian O' Hanlonhttps://www.blogger.com/profile/09185216066875647495noreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-53116402026197811682011-04-21T09:34:08.419+01:002011-04-21T09:34:08.419+01:00Hi Stephen,
Thanks for the link. That was some p...Hi Stephen,<br /><br />Thanks for the link. That was some presentation. Some serious graphs in there.<br /><br />We seen to be hitting a lot of bases of what Koo has described as a "balance sheet recession". Maybe he will add Irish data in an updated version!<br /><br />I think it could be illuminating because we are going through a different sort of balance sheet recession than the Japanese one described by Koo. In Ireland it is household balance sheets that are a mess and if 'Exhibit 16' was repeated for Ireland all the action would be in the household and government sectors rather than the corporate sector.<br /><br />From 2007 to 2009 the net lending/borrowing position of the household sector has gone from (€16 billion) to €9 billion. This €27 billion reversal has fed through somewhat to consumption but mostly to the collapse in investment.<br /><br />Over the same time the net lending/borrowing position of the government has gone from €0 to (€24 billion). The corporate sector has moved from borrowing €1 billion to a surplus is €3 billion.<br /><br />This move to deficit in the government sector almost fully offsets the move to surplus in the household sector. It is this move that has kept household disposable income from exhibiting serious falls up to now (tax revenue is down and transfer payments are up).<br /><br />Of course, these changes were not very planned and the structure of them may be questioned (and of course some of the money borrowed in 2009 went into Anglo!).<br /><br />I'd like to think there was some perfect way of keeping "domestic demand buoyant" but I'm struggling. We're almost entirely dependent on households to generate the demand but for those with money, debt repayment is high on the agenda. The government doesn't really contribute to demand (G is only 17% of GDP) as about half of government expenditure is actually transfer payments. See <a href="http://economic-incentives.blogspot.com/2010/12/government-expenditure.html" rel="nofollow">here</a>.<br /><br />Can that government support domestic demand in a way that doesn't see people simply save the money used? That is a question that has exercised us for a long, long time and I'm sure there will be plenty of more economists who will make a career out if it.<br /><br />It'd be great to say that fiscal policy can stimulate to economy but nearly two-thirds of government expenditure is giving people money (pay, pensions and transfers). How do we get them to spend it?<br /><br />Targetted schemes offer some potential but we have a penchant for universal payments in this country. I think a redesign of universal payments like child benefit, mortgage interest relief and pensions offers some potential and we wouldn't have to spend any extra money. I'm not holding my breath though.<br /><br />Capital expenditure is one clear avenue that could be taken, but the low-lying fruit of an "austerity" programme is capital expenditure. The capital budget has been decimated. There is scope here to support domestic demand through capital expenditure and capital spending is the one that actually justifies borrowing!Seamushttps://www.blogger.com/profile/15679299530222667673noreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-81973526824634897982011-04-20T22:11:25.175+01:002011-04-20T22:11:25.175+01:00Excellent post Seamus. When you write "Consum...Excellent post Seamus. When you write "Consumption has fallen because the demand has shifted from consumption to paying down debt."<br /><br />Do you have a Koo-style balance sheet recession (or some kind of debt-induced lack of sustained growth) in mind?<br /><br />If so, Koo's prescription is to keep domestic demand buoyant, almost exactly the opposite of what we're doing here: http://bit.ly/dFTUKjStephen Kinsellahttps://www.blogger.com/profile/02467967365815026744noreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-5467026534507098982011-04-20T21:56:48.230+01:002011-04-20T21:56:48.230+01:00This is true and is a European objective ala the c...This is true and is a European objective ala the competitiveness pact however there is some merit to supply side responses to a demand side recession given the constraints on fiscal policy faced by the government. Namely an export driven recovery as the goal capitalising on external demand. In addition it is highly likely that the fiscal multiplier is small or at least less than one rendering our constrained fiscal policy ineffective.Anonymousnoreply@blogger.com