Defying logic

Michael Taft is a frequent poster and commentator. He’s apparently associated with TASC, a so-called think tank.

TASC, and Taft, are fervent proponents of the idea that higher taxes and more borrowing are the solution to Ireland’s problems.

I wish it were so.

If we weren’t already so far in the hole more borrowing might help, even if higher income taxes than we already have would be a bad idea almost all of the time.  However, we are in that hole. Bertie and co spent the bubble on benchmarked public sector pay, pensions, and welfare. Then they spent money we didn’t have on the banks and the current govt is finding it difficult to borrow enough to keep paying that pay, those pensions, and that welfare without selling our sovereignty and our children down the river.  Yet Mr. Taft wants to keep borrowing and selling.

I’m afraid my comment on his article isn’t the most concise and is tinged with sarcasm and anger. Forgive me.

I hope he’ll let my comment stay on his article, but in case he doesn’t it’s reproduced here below. I should probably expand some of the comments to explain them fully, but I confess I don’t see the point. His mind is made up.

Find his article at http://notesonthefront.typepad.com/politicaleconomy/2012/01/answering-the-sceptics.html

________________My Comment___________________

Oh dear…more lunacy.

On the 1st point, investments in education and physical infrastructure are long term investments and will have no impact on our extreme short term problem. More spending now just means more debt now. Similarly, many of our struggling or dying domestic companies are residential construction or home/retail related, and those business are NOT going to recover any time soon.

Strike one.

On the 2nd point, while it’s slipped in their very quietly, Taft argues that the way to have a “growth friendly fiscal consolidation” is to increase taxes…..which is counter to pretty much every experience in the world. He also ignores the vast consensus that Ireland’s tax base is too narrow already, and that Ireland already has some of the highest marginal income tax rates around.

Strike two.

On the 3rd point, Taft invents a whole bunch of makey-uppey sources of investment, up to and including incentivized private pension funds (aren’t those the ones being levied) and “public enterprise development”….ignoring that the pension funds need to make a commercial return and our “public enterprises” are already screwing the country’s businesses with high costs – plus they’re all going to be on the slate since they make up some of the “assets” that Taft wants the govt to spend on his magical investment programme.

Strike three. He’s out.

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2 Comments

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2 responses to “Defying logic

  1. Hugh – I left the following comment on the blog in response to your comment.

    Thanks for that Hugh. I find it interesting that you use ‘baseball’ references in your comments – a game that I was brought up on. In that spirit, let’s replay your pitches and see how close to the plate you come.

    First pitch: Investments have two parts – the demand-side (the part in which the actual work is done) and the supply-side (the part in which the investment is used). Both parts bring benefits to the economy. For instance, when a road is built – there is the benefit of actual construction (employment, sourcing and transporting materials, and the resulting demand arising from the activity). Then there’s the benefit in terms of productivity – actually using, or consuming the road. Both have measurable economic and fiscal benefits. Or take education: this is one of the best benefits you can make. It takes awhile for the benefit to be fully realised but there is the benefit in the short-term from employing teachers, buildings, etc. So an investment may take a while to be fully realised, but once it starts being consumed there is the benefit, never mind the short-term ‘building’ phase.

    As for companies – a next generation broadband network (an innovation-spawning investment) would create opportunities for new and expanding enterprises throughout the island. We can start to build new businesses through smart investment.

    Umpire’s call: that pitch was low and away for Ball one.

    Second pitch: tax-based fiscal consolidation. Certainly, the literature is mixed (though a recent report from the IMF have thrown cold water on research which alleges the superiority of spending-based consolidation). Let’s turn to the ESRI – they show that taxation is far less damaging than spending cuts and, therefore, is more beneficial in terms of deficit reduction (http://www.esri.ie/UserFiles/publications/20090403095300/WP287.pdf ). Or the IMF paper here (http://www.relooney.info/0_New_7038.pdf ) which shows spending measures have a larger shock on the economy than tax measures. Let’s have a fact-based debate.

    Common sense actually tells us that if you tax someone on high income (their income, property, capital) the impact on demand is less than taxing low-average income earner or cutting public employment or social transfer given the higher propensity to consume and the impact on direct employment.

    Umpire’s call: that pitch was high and inside for Ball two.

    Third pitch: makey-uppy sources for investment? €15 to €20 billion (on the Government’s own accounting) makey-uppey? European Investment Bank, which recently half-funded the inter-connector to Wales? Makey-uppey? Diverting a small portion of the 75 percent of pension funds in foreign assets into domestic commercial investment (again, a next generation broadband network)? Makey-uppey? Even the pension funds have made to offers to do this.

    Umpire’s call: in the dirt for Ball three.

    It’s your pitch, Hugh. But be careful. The bases are loaded and you don’t want to walk in the winning run.

    • HSH

      The supposed riposte to the first TASC strike out is fascinating.

      Again, the problem with the “investment” view of education spending is that the period of return is really quite long. In the meantime this is just spending. That is simply driving the country deeper into debt, at least unless you believe that the multiplier on such spending is implausibly high. Now education is worthwhile, absolutely. But spending more on it today isn’t going to solve our problem today. It’s the equivalent of proposing that a drowning man be sent on a swimming course. Moot, at best….and still a strike against TASC.

      As for the other points, I’ve commented on the ESRI HERMES model before. No need to do it again. Suffice it to say that the ESRI hasn’t exactly outdone itself in the historical accuracy of its predictions. The other models and discussions are all reasonably consistent. In the SHORT TERM there MAY be a stimulating effect from govt spending. There’s argument on the size. In the LONG TERM there’s much more agreement. Let’s quote the IMF Paper. “On the other hand, permanent stimulus, that is a permanent increase in deficits, is much more problematic than temporary stimulus. It leads to a long-run contraction in output, but in addition it substantially reduces short-run fiscal multipliers.” We’re well in to permanent deficit territory in Ireland. A short blip in activity driven by more borrowing might work for 6 months…but we can’t get the money anyway. Still a strike against TASC.

      Honestly, I’m tired of TASC. Same story every time. Spend more money that we don’t have. We’ve run out of our own money, and we’re running out of other people’s money really fast. The Long Run is here.

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