The Irish miracle
There’s been a lot of recent discussion of the new GDP statistics out of Ireland, which show 2015 RGDP growth of 26.3% and NGDP growth of 32.4%. Almost everyone agrees that the data is somewhat fishy, but it’s not clear whether that means “wrong” or “accurate but misleading”. Based in what I’ve read, I vote for “wrong”.
Half of the growth in NGDP is due to a massive jump in depreciation. This sector had been rising at a very gradual pace from many years, from 25,087 in 2010 to 30,891 in 2014. Then it doubled to 61,558 in 2015. That almost certainly did not actually happen; rather it probably represents multinationals writing off certain assets in a lumpy fashion.
Paul Krugman links to another explanation:
The increase in investment, although you can’t see it in the national accounts, is being driven by airline leasing. My hunch is that this has increased by about 110%. Airline companies of the world are effectively transferring their financial activities (as new aircraft machinery) into Ireland for tax purposes. As a student of mine nicely put it: imagine all those massive Boeing planes flying around the world, then imagine them in Ireland, and hundreds of people working on them. Where are they?
In truth. We couldn’t even fit these planes in Ireland. It’s just around 20 people managing a financial fund for tax avoidance purposes. Then using the generated money for profit redistribution. That’s what’s really go on.
The increase in exports, although more real, and somewhat more complicated, is a result of a similar dynamic. It’s large corporations transferring assets and IP patents into Ireland – with no real connection to employment – and then booking it as real investment, for tax purposes.
This makes no sense to me. Suppose assets like airliners or patents were transferred to Ireland. That would indeed represent investment, as their capital stock would rise rapidly. But it should also show up as a boost in imports, which subtract from GDP. So there is no first order effect on GDP (which isn’t to say it might not make Ireland more productive, and gradually boost NGDP over time). Even worse, the article suggests the airplanes were not even located in Ireland.
I’ve argued that NGDP targeting is not always appropriate for small open economies, citing examples such as Australia and Kuwait. Actually, it’s probably much more appropriate for Australia than Ireland. The key is whether NGDP tracks total labor compensation fairly closely. Where it does, as in the US, then NGDP targeting is appropriate. Where it doesn’t, as in Kuwait, then you want to target total labor compensation, perhaps per capita.
In terms of monetary policy, it doesn’t matter whether the Ireland data is wrong, or correct but misleading. Either way that huge surge in reported NGDP does not reflect labor market conditions, and hence is not an appropriate target for NGDP. (I didn’t even check the wage data, it’s one of those things you just “know”, if you are numerate.)
And the Irish really need to get some better national account statisticians.
HT: Tyler Cowen, Gordon