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(Modified) Irish national income Q1, 2017.

Summary:
To circumvent the internationally approved rules of national accounting, irish economists developed new national income indicators: Modified Gross National Income and Modified Total Domestic Demand. They were right to do this. And these are not minor changes. Modified Income is almost a third (a third!) lower than ‘normal’ income. AlsoIn today’s quarterly results, the modified Total Domestic Demand indicator decreased by 2.7% in Quarter 1 2017, while the traditional indicator decreased by 17.3%’. Wow. What are the differences between the indicators and why did the Irish statisticians do this? First, a quote from the press release of Irish National Income in Q1, 2017: Modified GNI (or GNI*) is defined as GNI less the effects of the profits of re-domiciled companies and the depreciation

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To circumvent the internationally approved rules of national accounting, irish economists developed new national income indicators: Modified Gross National Income and Modified Total Domestic Demand. They were right to do this. And these are not minor changes. Modified Income is almost a third (a third!) lower than ‘normal’ income. AlsoIn today’s quarterly results, the modified Total Domestic Demand indicator decreased by 2.7% in Quarter 1 2017, while the traditional indicator decreased by 17.3%’. Wow.

What are the differences between the indicators and why did the Irish statisticians do this? First, a quote from the press release of Irish National Income in Q1, 2017:

Modified GNI (or GNI*) is defined as GNI less the effects of the profits of re-domiciled companies and the depreciation of intellectual property products and aircraft leasing companies.  This new indicator of the level of the Irish economy will be a useful additional input to debt ratio analysis.

Modified Total Domestic Demand is defined as Total Domestic Demand less the effects of the trade in aircraft by aircraft leasing companies and the imports of intellectual property.  This modified indicator gives insight into the activity within the domestic economy and is designed to be more closely related to employment growth as it is focuses on the physical capital used to produce domestic output

Which means: profits are only Irish profits when they are made by genuinely irish companies and fixed capital is only Irish fixed capital when it is mainly used by Irish companies working in Ireland. And shifting ownership of patents from one part of a company in the USA to another part in Ireland is not a genuine investment.

Why did they do this? Slightly simplified: as organizations like Microsoft can use Ireland as a tax haven, they relocated their official headquarters and therewith total profits to Ireland. If this was just a post box operation economic statisticians would not accept this as a genuine addition to Irish National Income. But as there are about 1900 people working for Microsoft Ireland, as far as I know a few hundred at the headquarter, the present rules of national accounting force irish statisticians to treat worldwide Microsoft profits as purely Irish income. The same for patents. Microsoft owns a lot of patents, when the headquarter moves to Dublin these patents are now owned by an ‘Irish’ company, which leads to a large increase of the ‘Irish’ stock of fixed capital. There is a legal logic to this. But in an economic sense this is of course bonkers (as stated earlier on this blog). Which is why the new indicators were developed. And they were right to do this. Two years ago these profits were added to official Irish National Income, which overnight increased with about 25%, without any matching increase in employment. Also, all kind of indicators like the profit share of national income, productivity and government and private debt to national income ratios are completely out of whack. This led to panic at the headquarters of Eurostat as well as the irish Central Statistics Office and as an ad hoc solution it was decided to develop the modified metrics. A more permanent solution will have to wait for the periodical change of the international rules of national accounting, which will have to be changed back to a format which is less ownership and more work oriented. A less neoliberal format, so to speak.

Merijn T. Knibbe
Economisch historicus en statisticus, wadloopgids, docent, vader en blogger

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