ESRI – Thought-provoking or depressing?

There’s another ESRI report out today. Below are two takes on it, one from a Nobel Prize winner in Economics and the other from the Editor of a newspaper that has an expensive sideline in property advertising and has championed fiscal consolidation since the ‘downturn’:

“In a thought-provoking excercise, published today, the ESRI sketches both a “high growth” rebound and a more plodding “low growth” pace of recovery.

Stronger international demand for Irish-made goods and services will act as an engine of growth, hauling the economy back to sustainable prosperity.

But the positive effect on the overall economic outlook of its upward revision for exports is more than offset by its more downbeat analysis of the costs of the banking crisis. These are far greater than it believed just 14 months ago.

[T]he ESRI concludes that even in its best- case scenario, the Government will need to introduce further budgetary consolidation measures, on top of those to which it has already committed, if it is to bring its budget deficit below 3 per cent of GDP by 2014, as it has targeted.

At a time when kites of many kinds are being launched in anticipation of the forthcoming budget, the ESRI flies its own. It suggests that there may be real benefits, in the short term and long, of a more front-loaded fiscal adjustment.

Specifically, the report’s lead author, Prof John FitzGerald, calls for the Government to consider a reduction in the deficit next year of €4 billion, rather than the planned €3 billion. This additional pain could yield gains in terms of lower debt servicing costs and higher investment. The Cabinet will begin its consideration of all these matters today.” [The Irish Times, July 21, 2010]

“There’s a new report out from Ireland’s Economic and Social Research Institute (pdf) calling for even more austerity, arguing that this will lead to faster economic growth. And the report looks authoritative: it’s full of charts and tables, and frequently refers to an underlying quantitative model.

What the careless reader might miss, however, is the fact that the policy conclusions are not, in fact, derived from the analysis — they come out of thin air. The authors simply assert that more austerity now would lead to a lower risk premium and hence higher growth, based on no evidence I can see. They don’t even offer any quantitative assessment of the extent to which more austerity while the economy is still depressed would reduce future debt burdens. In short, it’s a pure appeal to the confidence fairy.

One more thing: a key element in the ESRI analysis is the assumption that the financial crisis has permanently lowered Ireland’s growth track. That may be so — but if it is, a large part of the reason is the effect of a prolonged slump on investment and structural unemployment (the long-term unemployed tend to stay that way even after recovery). Now, some of us would argue that these effects suggest that government should do all they can to avoid prolonging the slump even further, that austerity may be self-defeating. But such concerns don’t even get mentioned.” [The New York Times, July 21, 2010]

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