Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
I am back from the US now and have been reading a lot about how Ireland is poised to show all of us deficit supporters the “what for”. The crazies (the Flat Earthers or deficit terrorists) are now starting to suggest that the recent Irish national accounts results for the first quarter 2010 are the sign that the austerity drive has made Ireland more competitive and that an export-led growth era is emerging. You always have to be careful when using official data to conclude anything. The reality is that the national accounts data show that the Irish economy is still declining domestically and this is causing the labour market to deteriorate even further. The growth that is being observed is generating income that is being expatriated to foreigners. So not only is the Irish economy sacrificing real goods and services to increase exports but then the benefits of that sacrifice are being sent abroad to foreigners. If that is an example of how austerity benefits the local population then it just shows how impoverished the conception held by the crazies is. Ireland remains a good example of what happens when you withdraw public spending support for an economy facing a major collapse in private spending.
The Irish Times reported on Saturday (July 3, 2010) that there were now “(h)opeful signs on the economy”. The article said:
THE ECONOMIC tide is slowly turning. For the first time in three years, there are now more reasons for hope than for despair.
This week a raft of indicators, when taken together, give grounds to believe that the foundations of a jobs-generating recovery are falling into place. By economists’ standard definition, the recession ended in the first three months of the year according to the CSO’s latest GDP data. There are tentative signs that consumers are spending again. Every measure of retail sales in April was up, albeit marginally, on the low points registered at the turn of the year. All the latest exports numbers – also available to April – show strong growth, and a weaker euro since then should provide some additional boost.
Ireland was the first of the EMU nations to embrace the austerity mantra – the first of the governments to openly engage in economic policy malpractice by abandoning their responsibilities to advance public purpose. The data supporting that claim is easily available (see below).
But the deficit terrorists are starting to claim victory as a result of the latest national accounts data. The Central Statistics Office for Ireland released the National Accountsdata for the first-quarter 2010.
The CSO said in their release that:
Initial estimates for the first quarter of 2010 show an increase, on a seasonally adjusted basis, of 2.7 per cent in GDP and a decline of 0.5 per cent in GNP compared with the previous quarter. In comparison with the corresponding quarter of 2009, GDP at constant prices was 0.7 per cent lower while GNP was 4.2 per cent lower.
The following graph shows quarterly growth rates in real Gross Domestic Product (GDP) and Gross National Product (GNP) from the first quarter 2007 to the June 2010 quarter. Clearly the GDP growth in the June 2010 quarter is what everybody is focusing on. The most recent quarter shows a 2.7 per growth although GNP continues to be negative.
Before I come back to analysing what is driving this result, you need to first understand the difference between GDP and GNP. Wikipedia is a reasonable place to start in this respect (but not always). A more thorough (very) understanding of these concepts is provided in the excellent publication from the Australian Bureau of Statistics – Australian National Accounts: Concepts, Sources and Methods, 2000
The two concepts are defined as such:
- Gross domestic product (GDP) is defined as the market value of all final goods and services produced in a country in any given period”.
- Gross National Product (GNP) is defined as the market value of all goods and services produced in any given period by labour and property supplied by the residents of a country.
The Irish CSO publication says that GNP = GDP + Net factor income from the rest of the world (NFI). NFI is defined as:
Net factor income from the rest of the world (NFI) is the difference between investment income (interest, profits etc.,) and labour income earned abroad by Irish resident persons and companies (inflows) and similar incomes earned in Ireland by non-residents (outflows). The data are taken from the Balance of Payments statistics. However the components of interest flows involving banks in this item in the national accounts are constructed on the basis of “pure” interest rates (that is exclusive of FISIM) whereas in the balance of payments the FISIM adjustment is not carried out. There is an equal and opposite adjustment then made to the imports and exports of services in the national accounts which is not made to these items in the balance of payments. The deflator used to generate the constant price figures is based on the implied quarterly price index for the exports of goods and services. In some years exceptional income payments have had to be deflated individually.
In this blog – The sick Celtic Tiger getting sicker – I argued that the so-called “Celtic Tiger” growth miracle was an illusion and was driven by major US corporations evading US tax liabilities by exploiting massive tax breaks supplied to them by the Irish government.
I cited the work of Boone and Johnson who concluded that:
… 20 percent of Irish gross domestic product is actually “profit transfers” that raise little tax for Ireland and are owned by foreign companies – the Irish miracle was a mirage driven by clever use of tax-haven rules and a huge credit boom that permitted real estate prices and construction to grow quickly before declining ever more rapidly. The biggest banks grew to have assets twice the size of official G.D.P. when they essentially failed in 2008.
I created the following Table to show you the breakdown between these aggregates and their evolution between Q4 2009 and Q1 2010 for Ireland using the CSO National Accounts data.
So the growth in GDP has spawned a rapid fall in net NFI. What is the significance of this?
The recent growth is coming exclusively from exports (which is signalled by the GDP figure). However, the domestic economy is still declining with unemployment rising further.
The following graph shows the quarterly growth in the major spending aggregates since the downturn took hold in Ireland (March quarter 2007). All domestic spending aggregates remain negative.
By excluding the expatriated profits of foreign multinationals, GNP provides a better picture of how the domestic economy is delivering welfare improvements to its residents. The fact is that Ireland continues to go backwards in this regard.
So they are exporting real goods and services which are a cost to the domestic economy (forgoing local use) to generate growth and the growth dividend is then being expatriated to foreigners as rising income.
The only conclusion you can draw at this stage is that the austerity package is further impoverishing the local residents and handing over increasing quantities of Ireland’s real resources to the benefit of foreigners. That doesn’t sound like a very attractive option to me.
In March 2005, the OECD Observer said this:
Ireland is another country where GDP has to be read with care. Ireland’s position has risen up the GDP per head rankings since 1999, and is now in the top five countries in the OECD … But does GDP per head accurately reflects Ireland’s actual wealth, since all that inward investment (and foreign labour) generates profits and other revenues, some of which inevitably flows back to the countries of origin?
Another measure, Gross National Income, accounts for these flows in and out of the country. For many countries, the flows tend to balance out, leaving little difference between GDP and GNI. But not so for Ireland, as outflows of profits and income, largely from global business giants located there, often exceed income flows back into the country. This means that in a GNI ranking, rather than being in the top five, Ireland drops to 17th. In other words, while Ireland produces a lot of income per inhabitant, GNI shows that less of it stays in the country than GDP might suggest.
The reality is that the GDP growth has not impacted positively on Ireland’s labour market – which presumably matters more than whether the economy is producing net income for foreigners.
The following graph shows the evolution of the official (standardised) unemployment rate in Ireland taken from CSO labour force estimates from January 2007 to June 2010. You can see that in recent months the unemployment rate is rising again. This is also in the context (not shown) of a continuing plunge in participation rates. So not only is the economy failing to generate enough jobs to satisfy the available labour force, but it is also driving more and more workers into inactivity (not in the labour force).
To see how much has been lost in Ireland, the following table shows the changes in the major labour market aggregates since Q1 2007 to Q1 2010. The job losses have been huge and are continuing in net terms.
In general, Ireland’s growth is coming as a result of the modest growth in the US economy in the recent quarters. There are over 600 American companies with major operations in Ireland. As the Euro depreciates Ireland’s exports (pharmaceuticals, software, food and services) are increasingly cheaper and more attractive to its two major trading partners Britain and the US.
That is what is driving its growth. But with the UK economy about to nosedive as a result of its very harsh budget cuts and the US economy slowing again, the Irish recovery will be stopped in its tracks. The lack of any spending recovery in the domestic components and the rising unemployment will take care of that.
So if Ireland is highly dependent on the US economy, what is happening there?
The latest labour market news from the US Bureau of Labor Statistics doesn’t bode well. The first graph shows the seasonally-adjusted labour force, employment (both left-axis in thousands) and total unemployment (right-axis) from January 2000 to June 2010. The gap between the labour force series (red line) and total employment (blue line) is official unemployment.
The severity of the recession as shown by first the slowing down on employment and the labour force (as participation rates fell) is very striking.
The next graph shows monthly employment growth (per cent) since January 2009. Over that period, the US labour market has shed a net 4.1 million jobs. In the last two months, the net job loss has been 336 thousand and the job losses gathered pace in the last month. If the job decline is not reversed in the coming month, then the double-dip option becomes the strongest contender.
But the situation is worse than depicted by these two graphs. You will note that the labour force growth rate has also slowed. The peak labour force participation rate in the previous growth cycle was 66.4 per cent (January 2007) and it now sits at 64.7 per cent after rising in early 2010 as workers were attracted by the positive employment growth. In the last month, participation fell by 0.3 per cent, which amounts to around 712 thousand workers less in the labour force in June 2010 than there would have been if the May 2010 participation rate had have held.
Those workers join the ranks of the discouraged or hidden unemployed and should reasonably be added back into the calculation to assess the true unemployment rate.
The combination of negative employment growth and falling participation are the two signs of a failing (weakening) labour market. While some commentators saw the fall in the unemployment rate as a good thing, the reality is that it signals the falling participation rates. The official unemployment rate would have edged up a little if participation rates had not have fallen between May and June 2010.
But as the next graph depicts, if we were to consider what the unemployment rate would have been if the participation rate had remained at the peak value in January 2007 (66.4 per cent) – that is, considering the job loss but also the labour force withdrawal – then, the adjusted unemployment rate would be much worse.
The adjusted unemployment rate (blue line) is computed by estimating what the labour force would have been in each period show if the participation rate was constant at its peak level. The extra workers are then added to the unemployment pool and a new rate calculated using the new labour force as the denominator. Remember the official unemployment rate is the number of unemployed as a percentage of the labour force.
In June 2010, the official unemployment rate is estimated to be 9.5 per cent, wherease the adjusted figure is 11.8 per cent. The difference is due to participation effects and represents a rough measure of the change in discouraged workers over the time period.
The other point to note is that the official rate has declined in recent months whereas the adjusted rate is increasing. This means that the participation losses are continuing.
Also plotted on the graph (right-axis) in grey bars is the average duration of unemployment (weeks). You can see that the participation rate effects took some time before the plunge began and this coincided with the spiking upwards of average duration. In January 2007, average duration of unemployment was 16.54 weeks and by June 2010 it had risen to 35.7 weeks. It will continue to rise over the coming year or two even if the weak growth persists.
Neo-liberal austerity solution: all new workers just volunteer!
The story in yesterday’s UK Guardian (July 4, 2010) – Police recruits ‘should work for free’ – tells you how bad things are getting. Apparently:
Chief constables are planning to introduce a national scheme that would see people wanting to become police officers working for free before they can join the force.
The move is part of their response to the large budget cuts they will have to make as part of the government’s slashing of public spending.
The Association of Chief Police Officers has asked the National Policing Improvement Agency for guidance on a scheme to be introduced across all 43 forces, senior sources have confirmed.
While the circumstances were less dire, the last conservative Australian government (1996-2007), which ran increasing budget surpluses over their period of tenure while high rates of labour underutilisation persisted, promoted volunteerism relentlessly. They tried to convince the population that scrapping paid work (particularly in the public sector) and replacing the essential functions with volunteer labour was a demonstration of the virtue of the community.
The sad thing was that the voters believed them.
I hate volunteerism – when it undermines paid work!
From an Modern Monetary Theory (MMT) perspective, the austerity push is draining the domestic capacity of the Irish economy to engender growth.
There is no growth in the labour market coming from the export drive and the latter is dependent on the British and the US economies for any sustainability.
But I would not be holding Ireland out as an example of a succesful outcome for austerity. Things are very dire there indeed.
The problem is that the Irish government has no real options while they remain constrained by the Maastricht Treaty and their lack of sovereignty.
That is enough for today!