Monday, 31 August 2009

Ostriches, Democracy and Dr. Fitzgerald

Michael Taft: Dr. Garret Fitzgerald is not impressed with the notion that if the majority of legislators believe that Government proposals are wrong or misguided, they should vote against them. No, according to the good Dr.Fitzgerald, whatever legislators think of Government policy, whether on NAMA or public expenditure cuts, they should just bite their lip and support it. Because if the Government is defeated a destabilising effect will set in, leading to the takeover of the country by the IMF, the withdrawal of lending by international markets and our inevitable enslavement in the economic salt-mines. Our only salvation is to shut up and support Fianna Fail. Dr. Fitzgerald has spoken.

This is the extreme edge of the TINA argument (‘There Is No Alternative’,) and Dr. Fitzgerald has been hanging around at the extreme edges of late. In a previous column, he attacked anyone who dared question the desirability of the McCarthy Committee proposals:

‘. . . there is an air of total unreality about most of what has been said and written by many of those who have attacked these proposals and who are still in absolute denial about the scale of the crisis we currently face . . . We are at present a country of ostriches. It is time for everyone to wake up to reality.’

Unreality. Absolute denial. Ostriches. Wake Up. Well, I guess that puts some of us in our place. Dr. Fitzgerald was at it again in his most recent column – this time raising all manner of woe and betide if anyone dared to exercise their democratic responsibility.

‘Responsible opposition is vital if the State is to be kept out of the IMF’s hands . . . No worse fate could befall an opposition than to precipitate themselves into government by defeating measures, the rejection of which could throw our State into the hands of the IMF.’

Dr. Fitzgerald has moved from a legitimate position of supporting the McCarthy Committee proposals and NAMA, to a more extreme position that anyone opposed to such is risking opening the door to the IMF. Okay, a bit robust but it’s a tough debate. However, it turns near-hysterical when such a position denounces the democratic process itself – the very idea of the politics of choice.

For instance, if opposition parties can mobilise public opinion to such an extent that the Government is prevented from implementing the McCarthy Report or setting up NAMA; this would no doubt precipitate an early election. In such a scenario, people may wish to support an alternative approach and elect a government that reflects that desire. It is this process that is deeply disturbing to Dr. Fitzgerald. In any other country, it would be called democracy.

Sunday, 30 August 2009

Meanwhile, in the UK ...

Following last week's debate in the UK surrounding a Tobin Tax, Ruth Sunderland - writing in today's Observer, has a few other suggestions for putting manners on the UK financial system, including an updated version of the US Glass-Steagall Act, enacted during the Depression and rescinded by former President Bill Clinton. You can read her full piece here.

Saturday, 29 August 2009

Access must be part of banking equation

Michael Taft: With all the debates over the crucial issues of NAMA, bank recapitalisation, purging impaired assets, etc. – it is sometimes easy to forget that these are instrumental; that we are not repairing broken banks for the sake of it (as if their dereliction constituted an environmental eyesore), but rather in pursuit of the goal of providing credit to the productive sectors of the economy. But there’s another goal that should be equally prioritised; namely, ensuring that all citizens have access to banking services.

TASC has previously highlighted the high levels of financial and banking exclusion. Now we have the findings of the CSO’s Survey of Income and Living Conditions’ Housing Module – showing that huge swathes of the population have difficulties accessing banking services.

More than one-in-five of all households in the state have difficulty accessing banking services. However, this proportion becomes higher in particular categories:

• Rural households: 34 percent
• Single Elderly households: 40 percent
• Lowest 20 percent income groups: 34 percent
• Households Headed by Disabled: 36 percent
• Households Headed by those with primary education only: 32 percent

There are a number of reasons behind the difficulties in accessing banking services: people’s lack of familiarity with financial institutions, literacy levels, personal mobility, etc.

However, many of the reasons are down to the banking institutions themselves: closures of local branches, bureaucratic obstacles to setting up simple accounts, the fact that many banks are not interested in this type of client base.

When the Government announced the bank recapitalisation scheme, it included a clause obliging the banks involved to provide basic bank accounts. That was last December, and little has happened since.

Financial inclusion is an economic and social good. If public resources are being used to repair the banks then the public has some calls to make on banking policy. One of those is that credit become more freely available to businesses and households.

And the other is that banks be required to facilitate access to discriminated groups.

Friday, 28 August 2009

A Smart Approach

Nat O'Connor: I agree with some of what Philip R Lane wrote today about taking a smart approach to balancing the public finances.

I agree when he says that “a smart approach to expenditure cuts would avoid crude, across-the- board solutions in favour of a clear ranking of projects and programmes, by which those expenditure lines that offer the highest economic and social benefits suffer the least.”

He argues that due to a lack of cost-benefit analysis “it seems clear that the pre-crisis levels of public spending in many areas were not set at the socially optimal level.” I’m not so sure about “many”, or the infallibility of CBA, but I agree that some programmes probably need to be seriously revised. In fact, I believe that the Government should take a hard look at every year’s Budget and cut out poorly performing programmes of expenditure, but I might disagree about the criteria for measuring success and hence which ones are poorly performing. I would question the value for money of many tax incentives for example.

Professor Lane argues that “The long-term level of public spending must be closely matched by the sustainable level of government revenues” and I agree with that, although logically there are always two ways to achieve this: cut spending or raise revenue. And raising revenue doesn't have to mean an increased tax burden, as it can also result from additional economic activity.

But then I disagree. Professor Lane argues that as “A richer population will typically desire better-quality public services” and Ireland’s income per capita looks likely to decrease, so “the economic forces driving demand for higher public spending in many areas will be quelled.” I would argue instead that a better educated population, and one in which more people have travelled or worked abroad, will be more critical of public services here. And once the population has tasted the fruits of better services, it is not going to cease wanting them during a recession. So I think demand for public spending will remain high.

I don’t disagree that some public expenditure can be cut, if we can agree on the evidence of inefficiency. But I also think that there is plenty of scope for continued public spending, funded by borrowing (within limits) especially if it lays the foundations for sustainable economic development in the future. There is a pressing need to generate new areas of economic activity as part of the solution to the crisis, from which higher revenue can be raised and better public services can be funded.

Finally, I have a problem with the suggestion that “Once the crisis phase is over, a new fiscal debate will be required concerning the optimal level of long-term public spending in the economy.” That debate is needed now, and is happening now, as the role of the state in the economy, including the level of public services that people desire, is a major part of what path we take out of the current crisis.

Thursday, 27 August 2009

Tobin tax revisited?

An interesting proposal from the chair of the UK Financial Services Authority for a tax on financial transactions to combat excessive risk taking. The idea of such a tax was first mooted by American economist James Tobin in the 1970s, but never took off. Is the Tobin Tax an idea whose time has come? Comments?

Wednesday, 26 August 2009

The NAMA controversy

Slí Eile: The controversey generated over NAMA cannot go without some comment on this site. Some 45 economists (some of them accountants ...) endorsed an article published in the Irish Times today. It has generated some heat and controversy over on

Not surprisingly, Alan Ahearne, advisor to the Minister for Finance, has countered the position take by the economists.

In yesterday's Irish times, Fintan O'Toole wrote a masterly piece on NAMA getting to the core issues.
Much has been written and said about NAMA on the basis of what is known to date about Government intentions. The devil is going to be in the detail. However, it is abundantly clear, by now, that this is a massive undertaking with huge and uncertain implications for spending, taxation and borrowing.

Suppose your best friend was wiped out in a Casino session and you agreed to hand over the equivalent of six months of your annual income (90 bn divided by 180bn) as a downpayment with nothing to say how long it would be paid back and how much would be returned. Basically, you have bought your best friend's negative risk and adjusted your own savings and expenditure to make up for any shortfall in his debts. No greater love for your friends than to lay down your own future and that of future generations to redeem them from insolvency. The desperate attempts by the Political-Financial-Property Complex to see this one through Courts and Oireachtas is nothing short of amazing. And some wonder why the implementation of the 1974 Kenny Report never got through the Oireachtas.

Some things are sacred and one of them is wealth, property, land. That's why under a predominantly conservative Government which we have had straight through for decades we have not seen real and sustained progress on capital taxation, land price control and effective measures to control the financial speculation. One of the first gifts of the new Government in 1997 was to cut Capital Gains Tax in half. Any wonder we have such economic problems now.

The challenge for all NAMA critics - myself included - is to figure out a credible, workable and fair strategy to move forward in this current economic debacle. I would welcome debate through this forum on what such a strategy would entail - including those who have endorsed the letter in today's paper and some of whom have contributed to this blog site.

Taxing Surveys

Slí Eile: Do you think the Government can tax its way out of its economic difficulties?
In answer to this online Irish Times poll, it is surprising that as many as 20% thought it could. I wonder what the proportion would be if, instead, the question was:
Do you think the Government can cut its way out of its economic difficulties?
or try this one:
Do you think the Government can borrow its way out of its economic difficulties?

What choices do you have? The implication with the 'tax the country out of its economic difficulties' question angle is that it tilts towards the view that spending has to be cut, or borrowing increased, or both. It’s a loaded question to start with.

My answer to the tax question is no. No, because tax increases, alone cannot generate the economic vitality to restore spending, confidence and job creation. Many things are involved. When it comes to fiscal policy we do best to:

Do no harm, by not adopting a deflationary approach which is exactly what Government is doing and will continue to do;
Redirect spending from areas of inefficiency and inequitable subsidisation of the well-off, to areas of greater impact on equality and public service delivery;
Increase taxes by broadening the tax base, removing many of the inequitable tax breaks, increasing carbon taxes, property taxes and marginal tax rates on high-income earners;
Use a range of 'real economy' measures to complement a strategic focus on job creation, capacity building;
Use off-balance sheet borrowings through a National and European Recovery Bond.

Tuesday, 25 August 2009

The McHale recipe

John McHale's piece in yesterday's Irish Times, advocating an alternative fiscal strategy,  has attracted some comment.  Michael Taft has taken a look at the details over at Notes on the Front. Comments?

Creating a Truly Democratic Culture

Colm O'Doherty: Michael D. Higgins article in the Irish Times on Saturday sought to engage with the real issue facing Irish people – “what sort of society we wish to create”. He takes issue with the essentialism of the economic model position, and argues that its dominant ideas have infiltrated our thoughts as common sense when they make no sense at all.

If we search behind current political statements and policy debates, we are confronted with a culture of compliance and a misleading active citizenship discourse. Our broken economy has generated a financial crisis which is being played out in the media, but the continuing malfunctioning of our political system is not being discussed to the same degree. What is lacking are clear policy alternatives to the imposition of a market logic onto political processes.

There is no debate and discussion taking place in any forum on what alternative forms of social relations might be substituted for economic ones. A friend of mine, commenting on the political culture of compliance in this society, wondered if Ireland had in any way profited from the Enlightenment, as most people still believed in the divine right of a certain political party to reign. Within our culture of compliance, the government is pre-occupied with altering the behaviour of citizens rather than vice versa. The main development during the life of successive governments has been to instrumentalise citizens, reducing politics to the achievement of goals established not by people themselves, but by a small governing elite – speculators, builders, bankers – who believe they know best. Civil society has been mobilised in support of this political agenda. Successive governments have, under the guise of supporting its independent role, been intent on influencing and controlling it, and using community and voluntary organizations as deliverers of services. Over the past decade, the state has not only become more active in controlling its citizens, but it has also been asking more of them. To do this it has recourse to new governance strategies in which self-regulation of conduct becomes a cornerstone of social order. The best basis for social order is then realised through self-responsible individual citizens, who are competent free market actors, who compete, work, save and consume in pursuit of their own interests.

The services provided by community and voluntary groups are regarded as goods and are consumed by customers. Those who seek to uphold the rights of an entitled citizenship through purposeful collectivism are labelled unpatriotic. It is of the gravest concern that the illusory nature of economic growth, based on credit,house price inflation and commercial service expansion, is not disrupting the longstanding managerial politics based on a culture of compliance. The divide-and-rule policy stratagems of this and previous governments are underwritten by the iron law of the economic model, which is that markets and trade only function through the promotion of a spurious meritocracy. A cult of success which dresses up selfishness as socially desirable esteems those with “entrepreneurial skills”, and the “unproductive” are deemed to be without merit unless they adapt their behaviours to service the economic good and become self-actualizing citizens. What one can do in economic terms, and what one can offer, become more important than relational skills which contribute to the interpersonal economy and increase wellbeing.

Real active citizenship is urgently needed to challenge this culture of compliance supporting the political status quo. An active citizenship not just about learning the rules of the game and how to participate within existing models and structures, but encompassing active learning for political literacy and empowerment.

'...the problems facing Ireland are too important to be left to the economists…'

Slí Eile: Speaking at the Michael Collins annual commemoration in Béal na mBláth, County Cork, former President Mary Robinson made a number of very interesting points in regard to where we stand. Two in particular caught my interest:

Ireland needs a vision of where it hopes to go; and
We should drawing on the Swedish model of consensus and tough medicine.

On the vision thing - I completely agree.
On the consensus issue - I am not sure.

Mary Robinson speaking of the Swedish response in the 1990s:
A key factor was that all sides of society, the opposition included, were brought on board so as to have as broad a consensus as possible around the tough measures that needed to be taken...The likelihood is that, in the absence of a vision of our future which enjoys broad support, every interest group will put its own concerns first and fight to protect what it has. That would be a recipe for disaster.
The '1987-88' economic consensus, here, gave us social partnership, and with it the favourable conditions (along with many other factors, of course) that saw jobs double, the population increase and living standards rise very significantly. It worked - up to a point. Poverty also continued in its various forms, and we have seen a growing inequality in access to health services - to take one area. We also built up huge 'economic dependencies' - a bizarre tax profile leaving us vulnerable in many ways, massive dependence on foreign direct investment, a relatively enfeebled indigenous sector and 'growth' - plenty of it with lots of trickle-down. As long as world markets boomed, most of us could boom along and not face the hard and difficult decisions that now arise around sharing a declining national cake, and who should be made redundant first.

The alternative to a consensus is widespread social strife. That is a recipe for disaster, as Mary Robinson correctly said. It is what gave rise, in the 1930s, to the Swedish model of partnership stretching back over decades. However, the nature of any 'consensus' needs to be considered. If the Dublin Consensus is the only variety, on offer it may be that strife is - regrettably - the only way to proceed. I sincerely hope not.

Incidentally, the two principles proposed by Mary Robinson are worth highlighting:

Example from the 'top'; and
Protecting the weakest

But taking this latter point, along with Mary Robinson's comments on education (the need to defend it), I am sure that she would also apply the same reasoning to health. So, there you have the three major components of current spending: social welfare, health and education. If we wish to continue funding these 'big three' (not to mention the banks) then we need to pay for it by way of taxes - local, income, capital, spending etc. No other way.

Sunday, 23 August 2009

The failure of 'Economics' and Collective Imagination

Sli Eile: Calls have been made for an inquiry into banking in Ireland. While the proposal is not without some merit I am wary of inquiries - especially when they focus on attention away from the larger context in which banking failed so abysmally. It is a little rich to see economists adding their voices to such an inquiry.

The failure of banking, politics and the economy is clear. But why have economists failed? I don't just mean failure to foretell what would happen. I mean failure to understand properly the nature of economic activity; to learn from history and above all to offer a vision and a set of values to chart a way out of the terrible mess that the world finds itself in? This post explores some possible reasons.

Although trained in the school of positivist economics I have never submitted to its core ideology and premises. Still, political economy fascinates me and so it fascinates more and more people.

Just as CAO points have fallen for civil engineering and property management courses they have risen for business and economics at least in some places. I think that the study of political economy, philosophy and the great thinkers and theories of our time should be encouraged in all second level schools.

Recently, the Queen (of England) asked ‘why didn’t you tell us’ when visiting the London School of Economics. In response, an august group of the great, the good and the mighty (British Academy Forum – The Global Financial Crisis – Why Didn’t Anybody Notice) wrote a letter to the Queen on 22 July last. You can read it (its only 3 pages but its very clear and concise) here.

The letter pulls no punches. I would summarise it in my own words as simply: "People lost sight of the bigger picture".

The ‘bigger picture’ was the way society, politics and economies constitute an organic whole where everything has consequence now, next year and in a 100 years time (you can’t slice off one sector, domain, period or action from another)
The ‘people’ include everyone but especially those at the top – of banking, politics, civil service, media, academia ….. and the economics profession.

Recently, a debate has opened up internationally about the failure of economics as a ‘social science’. In a short article Economists, Economics and the Crisis, Luigi Spaventa tackles the matter.

In an observation that strikes very close to home, he takes economics to task not for failing to see the housing bubble – they did – but for the fact that ‘the financial consequences of bursting this bubble in the brave new world of securitisation were never considered’. The new generation of Dynamic Stochastic General Equilibrium Models so loved by mainstream macro-economists have been described as a ‘costly waste of time’ (Willem Buiter). The problem – over the recent two decades – is that most economists took their eye off the dangers inherent in the financial market ball and were preoccupied with other things. Yes, many did see the bursting of the property bubble. But extremely few saw the potentially devastating connection between what was going on in the FIRE economy (finance, insurance and real estate) and the rest of the world.

In 2008 the game was up and the house of cards came tumbling down (but not the accretion of IOUs in nominal amounts of trillions…)

The idea of failure in the natural world is not new. Paul Ormerod (‘Why most things fail’) claims that 99.9% of all biological species which have ever existed are now extinct. He also asserts that economic theory cannot explain business failure. In the Preface to that book he argues:

"An argument which I first made ten years ago in the Death of Economics is that conventional economics views the economy and society as machines, whose behaviour, no matter how complicated, is ultimately predictable and controllable. But on the contrary, human society is more like a living organism".

The key question posed by Spaventa is whether the ‘tools’ were wrong (mainstream economic theory and modelling) or the economists themselves who were subject to ‘cognitive capture’ (in other words enthralled to their own world view or to their employers). Spaventa quotes Barry Eichengreen (2009) as follows:
It was not that economic theory had nothing to say about the kinds of structural weaknesses and conflicts of interest that paved the way to our current catastrophe the problem [was] a partial and blinkered reading of [the] literature on the part of economists afflicted by a problem of cognitive capture and choosing to stick to mainstream models.
Is there any possibility that many household name Irish economists continue to the miss the wider picture and dangers of deflation as they remain in ‘cognitive capture’ to orthodox thinking?

And what of the media, politicians and policy-makers? To cite Barry Eichengreen again:
The consumers of economic theory …tended to pick and choose those elements of [a] rich literature that best supported their self-serving actions.
I suggest that both were at fault, and especially here in Ireland where the economics gene pool is limited.

In a recent Opinion Leader article in the 18 July issue of the Economist - 'What went wrong with economics?' - the author writes:
….In the wake of the biggest economic calamity in 80 years that reputation [of economics] has taken beating. In the public mind an arrogant profession has been humbled.

Though economists are still at the centre of the policy debate — think of Ben Bernanke or Larry Summers in America or Mervyn King in Britain — their pronouncements are viewed with more scepticism than before. The profession itself is suffering from guilt and rancour.
For Bernanke, Summers and King substitute the names of the first three Irish economists that comes to your mind. And hold those names in your mind for a minute.

I don’t detect much ‘guilt’ and ‘rancour’. In fact I detect huge confidence, ‘told you so’ and an alarming degree of agreement on the big five issues underpinning the Dublin consensus.

Humility is not the first word that springs to mind when examining the role of various actors – including economists – closer to home. However, I note that a discussion has begun recently on

And closer to home, economist Colm McCarthy comes under the spotlight in a satirical piece in the Phoenix Magazine last month. (Ironically, McCarthy is among those called for a commission of inquiry into what went wrong in the local financial world). The article contains the following very telling observation:
Aspiring economists are taught that their involvement with numbers and mathematical models magically and uniquely confers on them a scientific status which practitioners of messier social sciences such as sociology can only envy. This aura of science is, however, purchased at a heavy price. Economists are incredibly squeamish about contact with the real world of the economy. You won’t find economists studying the political process by which taxation decisions are made, asking corporate decision-makers about how prices are actually set, or on factory floors investigating how capital and labour are actually combined to make cars. Instead economists make deductions from abstract models they learned in the classroom and test them against statistics downloaded from the internet. When the models appear confirmed, often after a lot of massaging of the numbers, a publication is produced. When the models are disconfirmed, the study is quietly binned as involving “negative results”........Economists often bring to their deliberations a preconceived preference for the small state.
Is it possible to redeem ‘economics’? The Economist argues that:
But a broader change in mindset is still needed. Economists need to reach out from their specialised silos: macroeconomists must understand finance, and finance professors need to think harder about the context within which markets work.
In my view it is going to take much more than that. To start with, ‘economics’ needs to go back to its roots – Political Economy – and make political, institutional and legal structures more explicit in its analysis of complex economies and markets. Second, economics needs to learn much more from other disciplines such as sociology, ethics and philosophy, if only to acknowledge that the rational homo economicus is only 80% true in practice. That 20% makes a mighty difference.

Beginning some time in the 1970s/1980s, economics took a sharp turn to an uncritical view of the markets – championing privitisation, deregulation, flexible labour and product markets and a rolling back of unions, the State in general and the Nation State in particular. It ushered in during the nineties and ‘noughties’ the period of partying – the supposed end of ideology and with it history, socialism and much else. Government was the problem and unfettered Markets were the solution. It is no exaggeration to say that a study of the business cycle had been relegated to the economic history section of the library, while many proclaimed a ‘new economy’ based on continual change and innovation in information technology. The possibility of simultaneous, synchronised and systemic collapse in days rather than years simply never featured in the limited thinking of many macro-economists and financial analysts. The model – based on a particular range of assumptions and empirical observations from recent decades - did not factor in such a possibility.

To summarise, thus far, my claim is that economics and economists both failed because:
* they worked within a set of narrow assumptions and models that reflected their interests (political, economic, personal);
*they saw empirical economic models and associated theories as adequate in explaining economic human behaviour and thus failed to see ‘the bigger picture’ and the inter-connectedness – now more than ever – of natural, social and market environments;
* amidst the fall of one of the biggest tyrannies spawned by the 20th Century Great 'Socialist' Experiment, we had party time in the industrialised capitalist economies with plenty of goods for most people in the audience.

No need to think radically or outside the box went the line when the above signalled the triumph of markets, light-touch regulation and individualised liberalism. ‘It works’! There you have it.

Until the summer of 2008.

But, there was one other factor on which, I think, nearly all of us failed – left, right, centre, economics, political, moral… We lack imagination – collective imagination.
And, so, in concluding their letter to the Queen, the British Academy forum said:
So in summary, Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.
A failure of the collective imagination indeed.

What guarantee is there that the same people working in the same banks, the same Governments, the same university departments and the same offices who failed in ‘collective imagination’ will not fail again? Frankly, I think that only a new generation of leaders from the younger generation can embrace a collective imagination. Recall Einstein – ‘Imagination is more important than knowledge’.

And imagination is more important than assumptions, models, partial equilibria, ideology and interests. I would argue that too many people ‘at the top’ (of State, Church, Corporations, Banks ….) have too much of a vested interest in the current models of thinking and responding.


Saturday, 22 August 2009

Placing citizenship centre-stage: Michael D's take on the debate and what's missing

Michael D. Higgins' opinion piece in today's Irish Times is well worth a read, especially in view of recent debates here on social welfare, rent supplements and the minimum wage. He writes:

Missing from the debate so far is any concept of citizenship. Indeed, former taoiseach Bertie Ahern reduced the debate on citizenship to a debate on volunteering, important but not the same thing. This is quite extraordinary in a republic. It is regarded as radical and unacceptable by the conservatives who cheered on the property rackets to speak of social security, of a floor below which citizens would not be allowed to fall. After all, the most extensive interview given on our public service broadcaster by the leading banker/gambler who did the most damage to Ireland’s financial reputation called for cuts in social welfare. Yet citizenship is what we should now be discussing. The more socially-concerned elements of the public surely do not want a return of more of the same.

Read the full piece here.

Admin note: commenting on Blogger

For Aidan and anyone else who has trouble commenting on Blogger: the simplest method is to ignore all the 'openID' etc. options in the drop-down menu, and arrow straight down to 'Name/URL' or, if you prefer, Anonymous. There is no need to enter a URL, unless you have a website or blog. Simply input your name and leave the URL space blank.

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Friday, 21 August 2009

Financial double-think

Hat tip to Aidan C. for this link to Gillian Tett's piece on financial double-think in yesterday's Financial Times. Tett has been mentioned on PE before, and yesterday she wrote:

One of the founding principles of free market theory, for example, is the idea that markets work best when there is a free flow of information.

Yet, some of those bankers who have been promoting free market rhetoric in recent years have also been preventing the widespread dissemination of detailed data on, say, credit derivatives prices. Similarly, while bankers have taken the idea of creative destruction as an article of faith, in terms of how markets are supposed to work, they have been operating on the assumption that their own industry would never suffer too violent a wave of creative destruction.

You can read the whole piece here. Comments?

A wages reality check

Do Irish workers really enjoy the fourth-highest wages in the world? It seems the headline writers didn't really read the 2009 UBS Prices and Earnings Report. Michael Taft has taken a look at the figures over on Notes on the Front.

Thursday, 20 August 2009

Tax breaks for the very wealthy

Slí Eile: If in doubt about the capacity of some people to pay more tax check out the Department of Finance Analysis of High Income Individuals' Restrictions 2007
Joan Burton, T.D. has a good comment on this here.

Pro-cyclical economics

Slí Eile: Today's excellent article by Michael O'Sullivan in the Irish Times (Crash may offer chance of a 'Second Republic') raises an interesting point: In an economy that is expanding too quickly, the normal approach is to try to slow it down; and when it is contracting, the typical response is to support or even stimulate it. In the early years of this decade, our politicians and policymaking “elite” responded to a very “hot” economy by lashing on more fuel. Now they respond to one of the sharpest contractions ever in a developed economy by squeezing harder on the brakes. In essence, they are trying to do something that very few countries have tried before and that is to implode an asset bubble.

Social welfare debate: What it really boils down to

Michael Taft: Having previously shown that the claims that we have a comparatively ‘lavish’ social welfare system’ are clearly false and not backed up by the data in the hotly debated OECD report, let’s address another issue this debate has raised (or should raise). That is, how low social welfare payments are in the Irish context.

There is a crude and, at times, vicious populist attack on the living standards of social welfare recipients. The OECD report showed that the overwhelming number of unemployed and lone parents survive on net replacement ratios well below the EU-15 average. But let’s use some numbers close to home – and use the 2007 figures on which there is considerable data (later years would require extrapolating and estimating) – to give a full picture of poverty and low incomes in this country.

The CSO – in line with international practice – uses the relative poverty line (60 percent of median income) as a measurement of how many people are ‘at-risk’ of poverty. There is some controversy over how valid this measurement. But all it tells us (and all it seeks to tell us) is how many are ‘at-risk’. It provides a starting point, a set of parameters. For instance:

• In households where the head is unemployed, 58 percent are at-risk
• In lone parent households, 36 percent are at-risk
• In households headed by someone ill or disabled, 49 percent are at-risk

Indeed, it is disconcerting to realise that of all households in the state, nearly one-in-five are at-risk of poverty. There’s a lot of risk out there and when one examine the level of social welfare payments, one begins to understand why.

The figures below show how much weekly welfare rates in 2007 would have had to increase to bring, in cash terms, the different categories up to the at-risk poverty line (for those with children, it includes Child Benefit). These are the categories which the OECD report dealt with:

Single Unemployed: €42.06
Lone Parent – 1 Child: €59.08
Lone Parent – 2 Children: €76.11
Unemployed Couple: €70.67
Unemployed Couple – 1 Child: €87.70
Unemployed Couple – 2 Children: 104.72

No payment in these categories exceed the 50 percent threshold of median income (remember that the poverty line is 60 percent).

Of course, this is not all there is to social transfers – whether cash or in kind. There will be (or was) the Christmas bonus. Households with children may receive school and clothing allowance. Social welfare recipients are eligible for the medical card (but short-term unemployed, especially younger people with little demand on medical services, are not as likely to hold one). But, as can be seen, these transfers are necessary if people are to have any chance of reaching the poverty line.

One of the bigger additional payments is rent supplement (or Housing Benefit in the OECD). This is an example of a well-targeted payment. Some recipients will need it; others won’t (those living in local authority housing, owner-occupiers, young people living at home, etc.). In 2007, the average weekly rent supplement (and this is an annualised figure) was €126 per week, or €546 per month.

As pointed out previously, only a small minority of unemployed and lone parents receive this benefit – less than 14 percent. If that payment was abolished and the expenditure distributed through the basic social welfare payment, it would increase the social welfare rate by €17.37. This would still leave all categories well short of the poverty line (especially in households with children) and would be insufficient to assist those who face high rents in the private sector.

Rent Supplement is a curious thing. It puts money in the hands of the recipient in order to purchase shelter in the open market. Therefore, the level of Rent Supplement is inextricably tied to both market rates and the recipients’ need of it. For instance, as Nat O’Connor points out, Rent Supplement varies geographically. Recipients in Dublin will get a higher rate than those in Waterford. Does this mean that Dubliners have a resulting higher standard of living? No, just the opposite – since rent is much higher than in Waterford. They will get a higher social transfer but potentially live in worse conditions - all by accident of location.

There is considerable debate over the cost of Rent Supplement and, given the fall in rents, whether it should be cut pro-rata. Again, as Nat points out, this misses the point of both the continuing high need (getting higher in these recessionary times) and the continuing high market price vis-à-vis welfare recipients’ living standards. Of course, there are other solutions rarely canvassed by those demanding social welfare cuts (more public housing, direct state provision in the private rented sector based on the model proposed by Threshold, rent control, etc.).

All this goes to show that, whether one examines the OECD report or the current economic conditions in Ireland – we can only conclude that social welfare payments are too low, much too low.

But we tend to get lost in all these arguments and ratios and percentages. So let’s use two figures to put this debate into context as it inextricably moves its way towards the next budget and the strong possibility that social welfare rates will be cut. In the social welfare system there are:

Over 500,000 the age of 60 years
Nearly 450,000 are children

Elderly and children - nearly a million. Whether intentional or not, they are the true target of those who want to cut social welfare rates.

Is this how far we have come?

Wednesday, 19 August 2009

Current pension tax reliefs inequitable and unsustainable

Gerard Hughes: Reading Paul O’Faherty’s opinion piece in the Irish Times on 29 July one would not suspect that it is the private pension system rather than the State pension system which is in crisis.

In 2008 Irish pension funds lost €27 billion as the value of the average managed fund fell by almost 35 per cent. This was the greatest relative loss in value of 37 OECD and non-OECD countries. The loss of over one-third in pension assets resulted in an estimate by the Minister for Social and Family Affairs that up to 90 per cent of defined benefit schemes were underfunded at the end of 2008. Rubicon Investment Consulting estimates that returns on group managed pension funds in the ten years up to the end of 2008 amounted to 0.2 per cent per annum on average, or well below the annual rate of inflation of 3.7 per cent. This is an abysmal performance. Contributors to pension funds would have been better off if they had put their money in the Post Office.

Recent pension surveys indicate that up to half of all defined benefit schemes are closed to new members and that over 40 per cent of firms which have defined benefit schemes are considering reducing member benefits. Some employers and employees are considering reducing their contributions to defined contribution schemes even though the government’s Green Paper on Pensions points out that the average contribution to these schemes is too low to provide an adequate income in retirement. There is a long-term change from defined benefit to defined contribution schemes which is shifting the risk of poor pension returns from employers to employees.

None of these weaknesses of the private pension system are mentioned by O’Faherty. Instead he argues that pension tax relief, which cost €3.2 billion in 2006, amounts only to tax deferral because the tax forgone will be recovered during retirement when pensions are paid. His argument ignores the more favourable tax exemption limit for people aged over 65, the fact that up to ¼ of the value of the pension is taken as a tax free lump sum, and that a great many taxpayers who pay tax at the higher rate during their working life only pay tax at the standard rate when they retire. In its country report on Ireland in 2008 the OECD concluded that the overall effect of our favourable tax arrangements for pensions “ … is in effect fairly close to being … [a] system where income channelled through pensions is unlikely to be taxed at any point of the life-cycle.” An earlier report in 2004 by OECD researchers Yoo and de Serres showed that the tax deferral argument of the pensions industry is wrong as the long-term budgetary cost of pension tax reliefs in Ireland, on a present value basis, amounted to nearly 2 per cent of GDP.

O’Faherty argues that tax relief for private pensions should not be curtailed because private pension provision “offers the only prospect of alleviating the burden [of an ageing population] on the State.” The evidence which is available from a study by Hughes and Watson for the ESRI of the performance of the State and private pension systems shows that the private pension system does a very poor job of delivering pensions except for higher income earners. Over 90 per cent of pensioners receive an income from the State compared with about one-third who receive an income from a private pension. The State pension is also by far the most important source of income for 80 per cent of pensioners. The top 20 per cent of pensioners is the only group for which the private pension system provides a significant share of their retirement income. This is hardly surprising as around two-thirds of the tax relief on employee and self-employed pension contributions accrues to higher rate taxpayers.

The inequitable distribution of the tax relief for pensions, the low level of the State pension and the challenge of providing adequate pensions for an ageing population are the main reasons why the TCD Pension Policy Research Group, TASC and others have argued that the tax relief for pensions should be given at the standard rate of tax and that the revenue which would become available should be used to increase the State pension above the poverty level. As an ESRI study by Callan, Nolan and Walsh showed in 2008, this policy would eliminate the risk of poverty for people who are already retired. If it were adopted it would provide protection against poverty in retirement for the increasing number of people in the future who are likely to receive lower private pensions relative to pre-retirement earnings than current pensioners and it would contribute to a sustainable basis on which to pay for State pensions as the population ages.
Gerard Hughes is a Visiting Professor in the School of Business Trinity College Dublin and a member of the TCD Pension Policy Research Group

Tuesday, 18 August 2009

Trends in competitiveness

Slí Eile: Today's publication by the National Competitiveness Council - Annual Competitiveness Report Vol 1 - provides a good, up-to-date summary along with copious data to benchmark the Irish economy. On page 24 (Chart 2.A), the Report provides a particularly good birds-eye view of some of the key elements of 'sustainable growth' (organised under 'national income', 'quality of life' and 'environmental sustainability').
The red-coloured 'traffic light' indicators warn of significant trouble or under-performance. These relate, principally, to environmental sustainability indicators as well as public debt under 'national income'. Although the State has improved its relative position in the EU15 on 'at-risk-of-poverty' rates after social transfers, it remains in 10th place out of 15 States - significantly above the EU average with greater numbers in poverty. Ahead of Republic on this measure is Spain, Italy and the UK (beware of social welfare comparisons with Newry!).

The Report also shows information on changes in the cost of employing workers over time. Ireland’s growth rates exceeded the EU-15 average during 2004- 2007. However, growth rates in Irish labour costs slowed significantly in 2008 and were lower than the EU average.
The Report confirms that unit labour costs - the ratio of changes in productivity to earnings - show little change for the manufacturing sector over the 2000-2007 period (Fig. 3.26).

Under the heading of non-pay costs, the Republic compares poorly with other countries across a range of business inputs including utilities (electricity, mobile communications and waste)
and a range of services, such as accountancy, information technology and legal services fees. The Tánaiste has reason for concern especially in regard to the latter fees judging by the data in this Report.

Two areas where I think Ireland stands out in need of urgent attention are:

Science, Technology and Innovation
where expenditure on R&D in 2008 was estimated to be 1.68% of GNP. This is well below other countries and is now under threat from the impact of recession on businesses as well as the Bord Snip 'menu'.

Childhood care
where costs net of benefits are the highest out of 26 OECD countries for which data are available. What an indictment of the Celtic Tiger. And what a prospect for the million children as the impact of Bord Snip takes its toll on education, health and state transfers to families.

In reviewing the macro-economy, the NCC/Forfas maintain that:
In order for the economy to make the necessary transition from a reliance on domestic demand to sustainable export-led growth in the medium term, policies need to facilitate the convergence of Irish costs, charges, professional fees, rents and incomes/wages towards the levels of our trading partners. Ultimately, a quick adjustment in the price level is preferable to a gradual decline over several years. While painful and deflationary in the short term, the alternative is a prolonged period of weak or negative growth, high unemployment and emigration of many highly educated young Irish people.
NCC clearly endorses a deflationary approach in achieving additional quick pain (for everyone) to secure long-term gain quickly. However, I doubt if this is approach is feasible or sustainable politically given the scale of deflation required to meet budgetary balance.

Myth of 'lavish' Social Welfare spending revisited

The myth of Ireland's lavish Social Welfare rates refuses to go away - its latest proponent was Constantiv Gurdgiev on RTE's Prime Time. The myth has been debunked several times, most recently by Sli Eile here on PE. Click here to read Michael Taft's deconstruction of Gurdgiev's claims.

Lower Rents Still Higher Than Rent Supplement in Dublin

Nat O'Connor: Rents drop 17% over 12 months according to DAFT’s latest Rental Report. This headline will be referred to in the next Budget to justify cutting Rent Supplement payments. But it isn’t that simple.
As noted previously, the Rent Supplement maximum payment will cover a significantly different proportion of average rents, depending on what part of the country you live in. So people in some areas are more likely to be squeezed into poorer accommodation and/or to make further top-up payments from their social welfare than are their equivalents in other areas, by the mere chance of what administrative area they live in.

Another problem with the headline figures is that it is an average across all housing units, from one-bed studios to 5 bed+ houses. However, some detail is given on page 7 of the report based on the number of bedrooms in the dwelling. So, let’s illustrate what Rent Supplement will do for you (bearing in mind the limits of the available data):

A three-bed unit will cost an average of €695 in Waterford City, €780 in West Leinster, €1,273 in Dublin 8 or €1,486 in Dublin 1.

Rent Supplement for a family with 3 or more children is the highest possible Rent Supplement payment, and it varies across the administrative regions of the health services (who administer the payment). Including the family’s contribution of €103 per month, the maximum payment is €788 in Waterford City, €909 in Meath or €1,203 in Dublin.

So far so good, if you don’t live in Dublin. Maximum Rent Supplement covers average asking prices. But given that it has already been cut and rents have fallen, is there really much scope for cutting RS further? Also, it is a maximum, so a CWO can simply decide to pay a lower amount. Do we need a further blanket cut of payment ceilings? Dublin already lags behind by €70 per month in Dublin 8 or €283 per month in Dublin 1, which is a lot of money for a family on welfare. So there is a clear problem with how this payment is calculated. And if other social welfare payments are cut in the next Budget, people’s ability to pay for their housing will be put further at risk.

Now take the example of a one-bed housing unit, which will be an apartment in most cases. A one-bed will cost an average of €532 in Waterford City, €511 in West Leinster, €849 in Dublin 8 or €892 in Dublin 1.

Maximum Rent Supplement for a single person living on his/her own (plus contribution) will cover €571 in Waterford City, €571 in Meath or €632 in Dublin. So, it’s sufficient in Waterford or Meath, but €217 too low in Dublin 8 and €260 too low in Dublin 1 (and these are not the most expensive areas in Dublin either). There is a massive gap in Dublin between average rents and Rent Supplement, which is likely to force single people into the cheapest accommodation and to make further top-up payments from their welfare payments.

Some people will say that we should expect people on Rent Supplement to move into the cheapest accommodation. But let’s examine this logic.

If lower Rent Supplement forces people into the cheapest accommodation, the taxpayer ends up subsidising the worst flats, which are often owned outright and can undercut modern apartments (e.g. buy-to-let) in terms of low rent. It also increases ghettoisation, as families on welfare become priced out of large areas of Dublin. The fact that market rents are lowering is an opportunity to move people into better quality, modern apartments and to achieve a better social mix. These are stated goals of national housing policy.

Bedsits have been banned, which is a move towards higher quality standards in the private rented sector. But this means that rents will be higher. So, we have to look at how we meet those costs. Rent Supplement will cost an estimated €490 million in 2009. But part of the problem is the decision to pay near-market rent rates to private landlords, rather than take a long-term view and build (or acquire) more social housing, which very soon becomes a cheaper option for the taxpayer.

Monday, 17 August 2009

So - who is taking the hit then?

Slí Eile: See post by Aedin Doris on irisheconomy 'Where are the wage cuts?' Michael Taft observes in a comment on the thread to that post:
Whatever the explanation, clearly from this, admittedly limited time span, some people are sharing the pain, some are not.
(Evidence is also emerging of increases in managers' pay in the private sector while some other groups are losing out at least at least up to Q1 of 2009). I seem to recall more than one person proclaiming wage cuts in the private sector as fact.

Facing up to the grave reality of our situation

Slí Eile: Writing in today's Irish Times, Arthur Beesley says that it is 'Time the Unions faced up to the grave reality of our situation'. The unions get a scolding for being party to the current malaise (high pay increases, tax cuts etc.) The unions, we are told, need to accept the need for 'big Government cuts..' (by the way, the tax credit on union contributions is capped at €70 per annum - not much compared to tax relief at the margin on a lot of other things)

Oddly, on the very same page, the same journalist recounts that the Bailey brothers (last seen in public at the late Charlie Haughey's funeral) are in a spot of financial trouble and are engaged in 'ongoing discussions' with .... Anglo-Irish Bank. (Recall the said brothers had a record-breaking tax settlement in 2006). Their Irish company - Bovale Development - described as one of the 'largest landowners in the State' is an unlimited company so, according to this piece in the Irish Times, 'information on its financial position is not available' (yes, Beesely does refer, also, to 'Fianna Fáil's sickening alliance with the property sector' in the union bash piece).

Now has the grave reality of increasing class size, lengthening hospital surgery waiting lists, cut-backs in rural transport and tax levies on the lower paid anything to do with the grave reality facing bankers, land developers and such like? Had the 1974 Kenny Report (on land rezoning and pricing) ever been acted on I wonder how less grave the current situation might be?

The case for a High Pay Commission?

The high pay/maximum wage debate is certainly heating up in the UK. Ten days ago Andrew Simms of the New Economics Foundation made the case for a salary cap in the Guardian, and today British think-tank Compass has launched its campaign for a High Pay Commission monitor excessive pay. Suggestions include imposing a maximum pay ratio within enterprises.


Sunday, 16 August 2009

Other hidden costs of the minimum wage

Nat O'Connor: The debate so far has not considered all aspects of the minimum wage.

Employers are quick to point out that the hourly amount paid to workers is not in fact the only cost of employing them. Employers’ PRSI contributions, HR and recruitment costs, training, etc all add to the cost of labour. That’s fair enough. Likewise, the call for a cut in the minimum wage is not necessarily to punish the 5% of workers currently on that wage, but it is to bring people from unemployment into low wage employment. At least, that seems to be the idea.

What is not often mentioned is that the taxpayer subsidises low wage employment.

For example, benefits like Family Income Supplement or subsidised rent (through the local authorities or the Rental Accommodation Scheme) assist low income workers. These costs may be less than the cost of payments to people who are unemployed, and I think it is generally better for people to be employed than not. But when employers and commentators call for a lower minimum wage, are they assuming that the state will step in to spend taxpayers’ money on subsidising those businesses that employ low wage workers (regardless of how profitable those businesses might become)? Are they aware that these supplements are often insufficient; for example, the growing waiting list for social housing or that nearly one in six households are at risk of poverty after benefit transfers?

If we are going to have a debate on reducing the minimum wage, we need to also have a debate on state subsidy of employment and what we regard as a minimum acceptable standard of living for working families.

Not to mention that many of the same commentators advocating a lower minimum wage also want to reduce social welfare payments.

Saturday, 15 August 2009

How to distract from the main issues

Slí Eile: The right have uncovered evidence that, with the average rate of price deflation accelerating, the 'real' value of social welfare rates to the unemployed, sick, children, pensioners etc has increased by some few percentage points since the 'pre-October 2008' position (post by Colm McCarthy on irisheconomy Friday 14 August). And they're going to town on this. A number of observations are in order:

1 The real value of SW rates, as measured by changes in the CPI and HICP, has increased (as have some other forms of income, by the way as CSO earnings data series confirm). So what?

2 Cutting nominal SW rates is clearly on the agenda of those determined to shift the burden of fiscal adjustment wide and far. Lets say the Snip Report was a spray-gun approach. The actual impact socially, fiscally and economically has not be tested or seriously debated (see points raised by Michael Taft on Notes on the Front). In other words, the deflationary impact of these cuts is an issue that is not being dealt with by those arguing for cuts.

3 In a very good article in yesterday's Irish Times (Minimum wage debate is a fatal distraction), Ray Kinsella points out that:
So, at the level of the individual, the family, and the firm, the issue of the minimum wage matters. But at the macro level – ie turning the economy around – it is distracting attention from what really needs to be done.
I very much agree. Ray Kinsella could have also said 'social welfare rates' for 'minimum wage'.

4 The fundamental issue in the ensuing debate about SW rates is one of justice. Significant gains were made in recent years, not least thanks to the campaigning by some of the social partners. The appalling economic mess we find ourselves in was not caused by those who now find themselves without employment and very often without hope. But, as Kinsella observed:
...there is the devastating decline in self-esteem of those who lose their job, for reasons beyond their control. The significant increase in the number of people presenting at GPs with psycho-social stress would seem to confirm this.
5 Why should some well-paid economists in relatively secure positions of employment pursue - relentlessly - a campaign to reverse the gains made (including the unforeseen very small gain of recent months - notwithstanding the rise in overall SW numbers and cuts in welfare to young people)?

6 Nobody calling for SW cuts is dealing with the wider social trauma and the fundamentally unjust distribution of income and wealth at the heart of the now defunct Celtic Tiger.

7 Lets get back to a debate on how to get people into work through new employment. Lets give hope, not continuing despair and threats of Latvian punishment on those least able to afford it.

Kinsella wrote:

The only way out of the growth and competitiveness cul de sac into which the economy has been driven is a strategy for growing the economy. The Government doesn’t have one.

I couldn't agree more. But, does the 'left' have one?

Friday, 14 August 2009

Profiting from the downturn

Nat O'Connor: We are reminded again in today's Irish Times that some people are not living in the same economy as the rest of us. Despite cuts to frontline wages, managers in manufacturing are giving themselves a pay rise of 6.5 percent.

One of the results of the recession is that it shows how contingent our economic systems are on state intervention, especially as the insurer of last resort. Today's evidence is a further reminder that, once the economic system is patched up at our expense, businesses will return to business (and profit) as usual.

So, since we are funding economic recovery by risking our money on buying bad debt from the banks, maybe it's time to start raising our voices about the need to regulate profit; for example, by linking managerial wages to those of frontline staff.

Thursday, 13 August 2009

Falling prices and social welfare rates

Slí Eile: The preoccupation of some economists and commentators with falling prices and how they impact on the 'lower income deciles' is noticeable. The latest entry on irisheconomy can be found here.
An alternative perspective can be found at the new 'poor can't pay' where some background papers have been made available.
There was a debate on this site last week

Money, money everywhere (but here)

Michael Taft: If you took some commentators seriously, you’d be excused for believing that Ireland Ltd. is on the verge of going into liquidation. Whether it’s defaulting on our debt, a growing inability to borrow more, or just despairing over that ‘€400 million we’re borrowing every week – yes, you’d assume the country is out of dosh.

But that doesn’t tally with the recent US Treasury release of data identifying the major holders of Treasury Securities – that is, US debt. China is the biggest holder of US debt – about a quarter of the foreign total. Japan, the tax havens in the Caribbean and the UK (with its tax havens) are also up there. But guess who else is. Yes, poor ol’ broke Ireland.

Irish ‘residents’ hold $50 billion worth of US Treasury securities. That’s almost as much as Germany (even though German GDP is nearly 14 times larger than our own) and more than twice as much as French holdings. Our holdings are worth over $12,000 for every man, woman and child.

Irish holdings have shot up recently. Only last year Irish holdings amounted to $15 billion. In just 12 months, $35 billion fled Ireland for the safety of US debt. Yes, there’s money swilling around – but it’s not swilling here.

This is of a piece. Irish holdings of foreign portfolio securities throughout the world amounted to €1.3 trillion at the end of 2007, with €440 billion held foreign equity and another €575 billion in bonds and notes. The increase since 2000 has been substantial – up from about €500 billion.

To put this in some perspective, Ireland’s €1.3 trillion held abroad compares to the foreign holdings of French residents of €2 trillion – even though the French economy is more than ten times larger than the Irish economy.

Of course, it will be argued that Ireland’s wealth holdings are too big to be maintained in the limited domestic investment opportunities. Foreign Direct Investment may come here by the truckload, wooed by prospects of high returns – but not high enough to satisfy our own residents. They must go abroad to find financial satisfaction; US debt, for instance.

There’s some validity to this argument but there’s another picture. It’s long been a complaint, by politicians and commentators, that money is tight here, but pretty loose everywhere else. Back in the 1950s Flann O’Brien wrote:

‘It is almost a cliché that this country is chronically undercapitalised, that money for productive capital works cannot be got. The administration recently started capital works concerned with land reclamation and drainage and is about to clear all the rocks out of Connemara. With money borrowed from the banks deposited by thrifty farmers? Not on your life. With borrowed American dollars which are twice as costly as pounds.’

Frank Aiken had his own run-ins. When he attempted to finance an expansionary programme shortly after the war, the Irish banks refused to loan, preferring to keep their money safe in the UK. He declared:

‘I regard their turning down of the request (to loan the government money) . . as an act of undeclared war upon our people’.

The banks won and Aiken surrendered unconditionally: the people paid the price

Patrick Honohan wrote only a couple of years before the financial crisis:

‘ . . .despite the emergence of the International Financial Services Centre (IFSC) as a leading player in some subsectors of offshore finance; despite the high profitability and unusually high percentage of the banking system not domestically controlled; and despite the absence of any significant bank failures for over a century; there is little evidence to suggest either that recent Irish growth has been finance-rich in the sense understood by the literature, or that the previous low-growth experience was explicable in terms of a weak financial system.’

Irish banking and financial investment played little role in the Celtic Tiger economy. They were too busy playing away and plotting the eventual chain of events which would lead us to the Carroll liquidation and NAMA.

Michael Hennigan of Finfacts points out that between 2001 and 2007, nearly €41 billion left the economy in search of commercial property abroad, while only a fraction of that was invested in indigenous high-tech companies.

Of course, it would be too simplistic to point out that only a small percentage of these resident holdings abroad would be needed to pay off the entire national debt (of course). Or that even a smaller percentage would be needed to recapitalise the banks without taxpayer intervention (of course). To maintain such a position would betray a profound misunderstanding of capital flows in a highly globalised system (of course).

Besides, it’s not as if Brian Lenihan is unaware of the problem of ‘money flowing abroad’. Only recently, in a fit of patriotic fervour, he called on hard-pressed consumers not to go to Newry to shop. Unfortunately, Lenihan’s ‘Irish money for Irish business’ is a pretty limited. I’ve not recalled him calling on Irish investors to stop crossing the oceanic border and buying US debt.

So the next time you hear a commentator or economist calling on the Government to slash social welfare spending, claiming that we have been paying ourselves too much; the next time you hear some politician saying we have to take ‘tough-love measures’ (usually without the love) because otherwise we’ll go broke; just remember all those hundreds of billions of ‘Irish money’ circulating throughout the world Remember those billions that have fled the country in the last few months to buy US debt. Remember all the money that is going everywhere but here – to invest in our industries, enterprises, and infrastructure.

And if you think this is a curious way to run a modern economy, you’d be right.

How to create jobs

Slí Eile: From a Financial Times editorial (The Luck of the Irish) of 10 August on the current state of the Irish economy:

‘The next few years will be harsh, and the burden of the adjustment will be borne by those least able to cope. Dealing with the fiscal crisis will mean it will be difficult to protect the country’s most vulnerable people. But, as the wreckage of the boom is washed away, older, safer sources of growth will be uncovered.’

Let’s parse this:

‘The next few years will be harsh’

You will search hard to find an industrialised country in the West that has seen a fall of around 15% in national output in the space of two years (2009-2010). Any recovery in global conditions will, most likely, lead to ‘jobless growth’, last seen in this country as we pulled out of the 1980s recession and before lift-off in employment levels in 1993.

‘.. and the burden of the adjustment will be borne by those least able to cope…’

Exactly. That is the whole point of the Dublin Consensus.

‘… Dealing with the fiscal crisis will mean it will be difficult to protect the country’s most vulnerable people.’

In other words, per the Dublin Consensus, There-Is-No-Alternative line, either because the political progressive wing is too weak in electoral terms (or too divided in terms of what to do), or because a rapidly shrinking cake means some adjustment in real income of social welfare recipients. This is the nub of the McCarthy et al argument – incomes have fallen all over the place – it is only inevitable (and fair?) that the incomes of those at the bottom of the income distribution should take a hit.

‘…. But, as the wreckage of the boom is washed away, older, safer sources of growth will be uncovered’

Interesting point which challenges us to think about how recovery can be generated. What will be these ‘older’ and ‘safer’ sources of growth – more foreign direct investment in pharmaceuticals, information technology? Back to horticulture and wind power? Or, green agriculture and food? New manufacturing technologies? New types of services? A reformed and re-equipped public service ready to deliver a better service?

We need to start thinking this through. For all its limitations and vagueness, the ‘Smart’ Report (remember?) of December 2008 contains some useful ideas particularly in regard to new sustainable technologies.

In previous contributions to this debate, Paul Sweeney, Jim Stewart and Sean O Riain have pointed to the importance of high value added, innovative enterprises as the mainstay of industrial policy. Key to this is an innovation-rich environment, with universities, research institutes and state agencies all providing support, skills and knowledge. We will still need foreign direct investment but we need to give much more attention to growing indigenous enterprises trading on home and world markets.

The State has a vital role to play in providing a more rigorous regulatory environment, as well as a complete overhaul of banking and finance. The Property-Financial-Political Complex has been dealt a blow and is on the floor. Let’s make sure that it doesn’t resume business ever again. Somehow, I fear that the lessons of history are often missed for lack of proper analysis and understanding.

In reference to the McCarthy Report, in the Irish Times on 10 August, Chris Horn of Iona Technologies (Our economic future lies with innovative exporters) said:

However, while the report tells us where we can cut back, it has not told us where we could focus our investment for recovery. In all the hubris and grappling for position after the publication of the McCarthy report, I have been surprised by the absence of public discussion on just how we now expect to drive growth in our economy.

The nub of his argument (in contrast to the strategy of relying on the safe, old and big investors) is that we should be focused on creating a culture and environment of a very large number of innovative, export-led companies at the heart of our new economy.

I agree. I would argue that we need to defend the income of those in relative, and especially consistent, poverty through a Basic Income for all citizens and residents, while at the same time, using fiscal policy to redistribute income and wealth, while at the same time using a reformed state infrastructure to enable private and public firms to compete on the basis of new ideas, technologies and markets.

That's the business of any future Government committed to economic development and social justice.

Wednesday, 12 August 2009

Play the game

Hat-tip to Notes on the Front for this link to the Keynes Game - a simulation exercise from Dreamscape which will allow you to play around with a range of economic variables, the ultimate aim being to get re-elected on the back of your economic performance.

Supreme Court judgement in Carroll case

The text of the Supreme Court judgement in the Carroll case is available for download here, and the Irish Times analysis is available here. Comments?

Tuesday, 11 August 2009

Can we provide a Progressive Consensus?

Slí Eile: What type of society do we have (A)? What type of society do we want? (B) How do we move from A to B? Is such a move possible and, if it is, over what realistic time scale? I suggest that in a history of the Irish (and world) economy around the new Millennium some extraordinary findings will emerge:How little was achieved – humanly – compared to the extraordinary growth rates in (measurable economic) output at the end of the last millennium; How, for many people, ‘economic growth’ did not matter and only gave rise to an over-hang of debt, insecurity and animosity; How much lipservice was paid to environmental sustainability and how little was really done to change patterns of consumption and investment to avert catastrophe.

Not that living standards have not improved dramatically over the last quarter century and with them standards of health, education, self-confidence.

But, we are still a long way from an economy and polity that places human need as the primary goal and all else as instrumental in serving such need.

The alarming narrowing of vision and discourse in recent months as a selection of headline economic indicators instill fright, panic, caution and eventually capitulation. At the height of the 1940 Blitz in London in the underground tube stations where people were talkng refuge some people took to chalking up the daily scores in terms of enemy craft downed. It was a morale-boosting move.

After a period of despondency, terror and ‘did you hear the latest,,, unemployment figures, factory closure, tax returns, Moody’s downgrade ….’, it might be advisable to stop talking about it in company and keep up the spirits and keep going. Somehow V signs are not emerging – yet – on the balcony windows of Kildare Street

This is no ordinary economic war. One of the extraordinary features of political economy 2009 is the emergence of:

A confident, strident and ebullient Dublin Consensus
A partial but very pressing focus, more than ever, on issues to do with income distribution.

I say partial because the focus here is on a new class enemy – the over-paid and under-worked public sector worker, the cosseted social welfare recipient who has enjoyed more than workhouse levels of income (has society ever moved beyond subconscious assumptions about poverty, entitlement and incentives?) and the broad mass of workers (public and private) who are deemed to be over-paid and uncompetitive.

(A sinister and deeply worrying under-current is of course the view taken on the streets about newcomers in the labour force – a topic not encountered in fora like irisheconomy and progressive economy). To deflect attention, 'bankers' get the blame often (but who let them away with it?), or 'the Government' (and who elected them and why?)

This is no normal recession. I agree with Paul Sweeney that getting out of this one will be slow (and clearly very painful). It is now timely and urgent to provide an alternative strategy to the one that has clearly emerged under the Dublin Consensus. What shall we call it? A progressive consensus?

Would it consist of broad principles or detailed policy prescriptions? What budgetary, financial and economic scenarios are needed? Does public spending need to be cut? Taxes raised? Borrowing increased? Which institutional reforms are needed? What mix of policies now – this year – and next to address the crisis and move towards the society we dream of?

Monday, 10 August 2009

Another take on Exchequer returns

An Saoi: The tax figures for July were published last Wednesday, slightly delayed by the Holiday weekend.

This month, however, there were no statements expressing encouragement regarding “green shoots”. We can only assume that Mr Cowen was busy in his garden selecting his prize produce for display at the Tullamore Agricultural Show.

Indeed, the underlying trend is worse than ever and points towards an end of year outturn in the region of €31,100M. The degree of collapse cannot be overstated. The current Dept. of Finance target of €34,400M is just four months old and was made with the figures for first three months known, and I presume knowledge of the trend for the fourth month. Tax yield in 2009 will be below that of 2003. Assuming the Central Bank’s economic assumptions are correct, tax yield for 2010 is likely to be in the region of just €28,000M. Remember, just 27 months ago Brian Cowen predicted in the Fianna Fáil manifesto that the tax yield for 2009 would be €57,034M.

What is to be done? Jim O’Leary writing in last Friday's Irish Times suggested that severe cuts in Government current expenditure were required. Mr. O’Leary clearly sees the immediate imperative as closing the gap between income and expenditure, which I accept. However, from a tax point of view, such cuts are likely to reduce tax yield even further, risking the danger of falling into a spiral of further decline.

It is unclear from Mr. O’Leary’s article whether he includes tax expenditure within his spectrum of cuts, because if he does, I certainly can agree with him. The biggest beneficiaries of the Irish tax/welfare system are the better off. Many of these arrangements have played a role in causing our current predicament. For example I would suggest,

• Removal of interest deduction against rents & other passive income
• Removal of mortgage interest relief on house purchase
• Taxation of inheritances as income.
• Limiting business retirement relief to the normal termination limits.
• Removing of relief on Social Insurance contributions on certain income, e.g. capital gains, inheritances etc.
• Terminating relief for all existing capital allowance schemes.
• Slashing private rent subsidies paid to landlords.

Looking at the current tax picture, our tax base has narrowed incredibly. I would suggest that perhaps 90% of this year’s corporation tax will be paid by perhaps no more than 20 multi-national companies. The native Irish contribution to Corporation Tax is likely to be negative, as tax paid in 2008 & 2007 is repaid. The losses for 2008 can be set back against 2007 earnings, leading to a refund of a) preliminary tax paid in 2008 b) creating a refund in 2007, and c) no preliminary tax in 2009.

Outside of workers with multi-nationals and in the Public Service, very little Income Tax is being paid. Tax may be deducted by many employers, but the union representing Tax Inspectors suggests that it is not being paid to the Collector General. Much of the collapse in employment has affected a core group of taxpayers, males in well-paid full-time employment.

VAT has collapsed and is back to 2004 levels. Much of this may be down to people having to live within their means. VAT is now at close to core levels and is unlikely to fall much further unless price differentials widen considerably with Northern Ireland. There is, I think, a strong argument to reduce the core rates, particularly if the UK increases its rate as planned.

Mr O’Leary refers to the need to regenerate private sector spending. But private sector debt is perhaps our biggest problem. NAMA will deal with one minor part of private sector debt - at what cost, we do not know. But the mountain of personal private debt is still sitting there hidden by the foothills of developers’ debts. Reliance on private sector spending may leave us waiting for ten or more years in a Japanese style depression.

Mr. O’Leary has argued in the past that everyone should pay something towards the upkeep of the State, and again I agree completely with him. The best way to ensure that they do so is to keep as many as possible in employment. The key is to ensure that the medicine does not kill the patient.

For the record I set out below my own current estimate of the outturn:

Customs 182
Excise duties 4160
Capital Gains Tax 402
Capital Acqs. Tax 233
Stamp Duties 547
Income Taxes 11770
Corporation Tax 3770
VAT 10237

Total Revenue: 31145

Is the end of the recession nigh?

Paul Sweeney: Is the recession beginning to end? It is far too soon to say. It has been the worst recession in living memory, and Ireland is one of the worst economic performers, with the economy shrinking by a staggering 10.3% in 2009. Compare this to the Euro area of – 4.4%, UK 3.7%, US -2.7%, France at -2.9%. Then there are the other very poor performers, with Germany at -6% and Russian at -5%.

Over east, Japan is shrinking by -6.1%, while Singapore is registering an even bigger fall in GDP of -6.8%. Korea is at -5%, and Thailand at -4.5%. The Celtic Tiger is falling with the new and the old Asian Tigers!

The very few economies which are growing include China at (a now reduced) +7.2%, India at +5.5%, Indonesia at +2.5%, Pakistan at +1.3% and Egypt at +4%. Virtually every other economy in the world is shrinking in size this year. For 2010, forecasts are more optimistic, with growth in the vast majority of economies, albeit low growth. This excludes Ireland in 2010.

Conventional wisdom among economists is that large falls in growth mean the recession will be long, and that when the recovery happens, it will be slow. Yet the economist Paul Ormerod argues “very few recessions last longer than two years. And most recoveries, once they start, are strong.” He argues that that, as late as the autumn of 2008, economic forecasters in general were far too optimistic about 2009. He asks: are these same forecasters now too pessimistic about recovery? He argues that “the historical evidence reveals a typical pattern of recession and recovery that suggests this may be so.”

Ormerod says that “since the late 19th century, there have been 255 recessions in western economies. Of these, 164 have lasted just one year and only 32 have lasted for more than two years. In other words, two-thirds of recessions last a single year, and only one in eight lasts more than two years. If we strip out the peculiar circumstances at the end of the two world wars, 70 per cent of all recessions last just one year.” He also says that the “pattern of duration is virtually identical regardless of the size of the initial shock.” He says that even with a fall in growth of 6 per cent, 70 per cent of recessions have lasted just one year.
Ormerod, who is author of Why Most Things Fail and the Death of Economics (a critique of orthodox economics), says that recovery was rapid even after the Great Depression, and he argues that it will be again this time because “capitalism seems to be a very resilient beast”.

However, he is probably optimistic, as are the economic forecasters arguing for the rapid turnaround and resumption of growth next year. This recession is very different from previous ones, especially the Great Depression. With globalisation, the world is greatly interlinked, as the negative growth figures almost everywhere demonstrate. This is a really synchronised recession. Few countries are importing so much that they can pull out other countries with export growth (a line argued in Ireland by the Wages Cuts Chorus who equate wage cuts with increased competitiveness!). Secondly, this recession differs in that it was caused by the collapse of what was, in essence, a corrupt and poorly supervised financial sector. This sector had come to dominate the more productive economy, with the approval of governments.

So this recession, generated by the deep Financial Crisis (remember it was initially called the “Credit Crunch” by journalists and apologists), and which is globally synchronised, will be particularly difficult to arise from. But in the meantime, we hope that Ormerod may be right.

The financial crisis is on the way to be solved. Stock markets are recovering, the taxpayer is bailing out the banks (and builders, in Ireland), liquidity is returning slowly to markets, and the extreme uncertainty in markets has ended. The state rescued the (self-regulating!) market. The OECD and IMF are revising upwards their projections for the first time in a couple of years.

So we probably have passed the turning point, the absolute bottom. But we are a long way from recovery, from the emergence of the “Green Shoots”. In Ireland, our bankers, builders, government, and the so-called financial regulator screwed up particularly badly, ill-advised or not advised by most economists. We really ruined a very prolonged boom with a deep bust, which could have been so much less than a fall of 14%+ in GDP from peak to trough. It will be late 2010 before the shoots even begin to arise here. In the meantime, unemployment will rise and will take time to shift down again.