Wednesday, 30 September 2009

Northern Ireland review of economic policy

John Barry: To balance the focus of this blogsite on political and economic developments in the Republic of Ireland - here's one about Northern Ireland.

In Northern Ireland, the Barnett review - Independent Review of Economic Policy (DETI and Invest NI) - - published yesterday, is weighty and provides much food for thought in terms of the economic challenges and opportunities for NI. However whether the NI executive (aka Sinn Fein and the DUP) will use it to create a new economic strategy or whether it will sink only time will tell (my bets are on the latter). Some of the main findings of the report - commissioned by the Department and Enterprise Trade and Investment - are outlined below.

While the report finds that Invest Northern Ireland has contributed to job creation and NI's overall economic performance, it confirms the views of those, like me, who have viewed NI's economic strategy as partly a 'race to the bottom' in terms of seeking low-wage and insecure service sector jobs. As the report puts it:

"When compared to other UK regions, NI has attracted a higher number of new foreign-owned investment projects and promoted a higher number of jobs per head of population. However, many of these jobs, particularly those in the service sector, offered wages below the private sector average (e.g. contact centres). Furthermore, a significant proportion of support was associated with safeguarding jobs in the manufacturing sector" (p.7).

While recognising that a lot of the policy drivers affecting economic performance lie outside the NI Executive, it also notes the lack of improvement in NI's productivity and sees R&D as a key driver of economic growth, which it views as - surprise, surprise - FDI attracting and export-led. One of the report's most striking recommendations - and one likely to cause perhaps most political upset within the NI executive - is the proposal for the creation of a single 'Department of the Economy' - (requiring the amalgamation of two existing Departments - DETI (which the DUP hold) and DEL (which the UUP hold)). Re-carving political power within the 4 party executive - especially given the increasing hostility betwene the DUP and UUP - is not politically feasible, even though it make make economic and policy sense (but then when did the latter have anything to do with how the NI executive operates?!).

Another, unsurprising finding is that Universities should support STEM and 'Innovation relevant' subjects more (which in the current financial constext facing Universities in NI means less 'non-economic' subjects, and further increasing the trend towards viewing the primary role of University as providing skills for the economy), and create more industry-university innovation links. However, the report also suggests the creation of: "A new institution for commercially-oriented research should be explored in NI, along the lines pioneered by the successful VTT institute in Finland. The institution should be outside the University system and not subject to the constraints of the Research Excellence Framework (REF)" (p.10). So, speaking as an academic, the authors of the report either thought universities were not deemed to be up to the task, or were inappropriate, or that it was accepted that there is some scope (just) and rationale for universities to also engage in non-economic research and teaching. If the latter - how big of them!

There is mention of the 'Green New Deal' (and indeed support for the social economy) for NI but this is not seen as a central plank for economic recovery. Here the report echoes the short-sightedness of the Matrix report - which likewise viewed a green, low-carbon economic strategy as something that was of future, but not of immediate relevance to the regional economy in NI.

It views the Green New Deal not as a distinct, innovation-led strategy to provide jobs,enhance energy security and begin the process of putting Northern Ireland on a 'low carbon' path, but as something which merely contributes to 'energy saving and conservation' (p.11) as part of the 2008 Strategic Energy Framework. Sadly, this indicates to me the authors of the report did not either read what the GND is about and what they possibilities are for a GND in NI, or did and decided rather to present a conventional 'business as usual' economic analysis and set of recommendations.

While the report does outline some good ideas, provides a wealth of information, data and critical analysis of the NI exeutive's economic policy, it is regretable for a report that focuses on and arguges for the centrality of 'Innovation', that it contains precious little innovative economic thinking.

Tuesday, 29 September 2009

Towards a Progressive Economics: Programme now available for download

The line-up of speakers for the TASC Autumn Conference - Towards a Progressive Economics - has been finalised and now includes David Begg and Fintan O'Toole. The full programme is available for download here.

There are still limited places available; please e-mail to register.  Remaining places will be allocated on a first-come, first-served basis.

Tea and coffee will be available, and a light lunch will be provided. Registration is free, but we would welcome a small donation on the day to help defray costs.

Monday, 28 September 2009

What about the other 70% ?

Slí Eile: Opinion poll data are used by the print and other media on a regular basis not only to asses trends in public opinion but to generate interest …. and news …. on topics of current attention. Seen in that light, today's Irish Times/MRBI poll offers insights into what the public think about NAMA, taxing child benefit, cutting public spending and cutting social welfare.

There is a lot of wisdom in the old joke 'If 70% of people think one way what about the other 70%?'. A lot depends on (i) the current political, economic and social context in which various issues are aired, (ii) what questions you chose to ask, (iii) what questions you chose not to ask, (iv) how you ask any given question. In other words, a lot of opinion polling is down to how you pick and frame the issues. That’s not to say that such exercises lack scientific credibility or public value. Just because one might not like a result or appear surprised about some finding is not sufficient reason to dismiss such polls.

Take the finding that :
"The Government has received reports from ‘An bord Snip Nua’ and the Commission on Taxation which will influence the Budget in December. In addressing the crisis in the public finances, should the Government put more emphasis on cutting public spending or on increasing taxes?"

70% opted for cutting public spending while 14% opted for increasing taxes (and 16% had no opinion). One assumes that these were the only possible response categories. No mistaking the message there. Almost 3 out of 4 adults would prefer spending to be cut than taxes raised. Part of the reason for this response is linked to the way in which taxes means less money in my pocket and greater hardship whereas spending is something that tends to effect others more. Added to this is the widespread notion that much of public spending is wasteful and going towards over-paid public sector workers (although if you pin this one down people will exclude most teachers, nurses and civil servants that they know). And, on top of all this, most people are swamped in a very simple but crude message arriving day after day ‘We are borrowing €400m a week, we are spending way beyond our means, the money isn’t there, the economy is banjaxed, shure why wouldn’t we cut spending we have no alternative.’ Just don’t raise class size in my childrens school, don’t cut social welfare – wouldn’t be nice or fair (75% of respondents not for cutting welfare), don’t cut the arts because they are special, don’t fire health sector workers in the hospitals my family might be using, don’t tax social welfare benefits, don’t introduce third level fees for my children, don’t close the three-teacher school down the road (its fine as it is), don’t take away school transport (petrol will be raised more as people congest the roads driving children to school).

The punch line in the poll was:
"In order to reduce the public sector pay bill, should the Government put more emphasis on redundancies or on salary cuts".
Well, with a question like that no wonder 58% said salary cuts and only 25% redundancies. Shure, nobody would want to deprive a school leaver or apprentice a job if a salary cut is the better option (but salary and wage cuts will not impact on unemployment - see other blog.

If the debate were to be framed differently then, perhaps, the answers would be a lot different.
For example, a poll commissioned by TASC (TASC Inequality Survey, carried out by Behaviour & Attitudes between May 1st and May 10th 2009) and published in July of this year showed that a majority of 85% of people in Ireland believe that wealth is distributed unfairly and ‘the Government should take active steps to reduce the gap between high and low earners’

Another survey commissioned by TASC in June 2008 found that the percentage of respondents willing to pay higher taxes to fund improved public services was 41% (compared to 9% in the 2003 Irish Times MRBI poll and 23% in the 2007 Irish Times TNS/MRBI)
The 2008 TASC Survey showed that ‘when broken down by social class, 50% of ABCI respondents professed themselves willing to pay higher taxes to fund improved public services - thus, those most able to afford increased taxes are also the most willing to do so.’

A number of key issues arise in regard to public perceptions and receptivity to increased taxes:

Fairness – that all sections of the community should share in the raising of taxes in proportion to their means and circumstances (there is a sense that this has not and is not the case while super-rich income earners avoid – or evade – tax)
Efficiency and Effectiveness in the way taxpayers money is spent (people are rightly cynical about waste when they witness – for example – the FAS debacle and official response to same)

Relevance to their needs and circumstances (if taxes were more clearly associated with delivery of public services so that people see where their money is going – especially at a local level where a range of public services could be funded by a combination of central government transfers and locally-raised taxes on businesses and households)

If it were possible to accelerate positive and constructive reform of the public services in a significant way by openness, transparency, accountability, local democratic control and participation by local authorities and local communities in pre-budget democratic deliberation then more people would be prepared to share an appropriate part of their income to fund key public services to the betterment of all. If they think that their hard-earned income is going to bail out banks, prop up dysfunctional public organisations and overpaid and incompetent senior executives and subsidies to those who can well afford to pay for a service is it any wonder that a majority say that they are not prepared to pay more taxes in answer to an either-or opinion poll question.

(Technical point: The claim that ‘The margin of error is plus or minus 3 per cent’ can be misleading in any opinion poll. Such polls generally use a method known as ‘Quota Sampling’ which increases the standard error on all estimates by the ‘Design Effect’. Suffice it to say that the +/- 3% margin is on the low side. Even without such a Design effect, any movements of around 1 up to 3 percentage points are hardly significant (hence recent media claims of a recovery of confidence in a given party by 3% points is very misleading).

NAMA, the Commission on Taxation and rent reviews: the rogue's guide to Irish finance

An Saoi: I have refrained from making any comment on the Commission on Taxation Report to date, mainly because of its lack of any new content and silence about many issues, in particular VAT and property-based incentives. We now know why they ignored the property tax incentives - the Government’s NAMA plan is dependent on the re inflation of the property bubble.

Rónán Lyons of Daft in an analysis of NAMA points out that rents are continuing to fall. His earlier work, the Daft Rental Report for Quarter 2 2009 showed the degree of the fall and also suggested that there was no sign of it reaching a floor. Any Government Minister who bothered to leave the bunker and take a stroll around Grafton St and surrounds would see the effects of inflexible rents described recently in the Sunday Business Post.

The developers also seem happy to put it up to State and NAMA. Real Estate Opportunities (REO) announced that they intend to go ahead with the development of the Ballymun town centre (to be called Spring Cross, not Ballymun) and are pressing for huge loans to commence the project next year. Now REO itself is hopelessly insolvent and intends as part of this project to add 35,000 sq m of office space to an already oversupplied market, 60,000 sq m to North Dublin, which already has a surplus of shops and 360 apartments to an area where there are thousands vacant. Now this company has debts of over €1,700M on its balance sheet at 30th June and wants NAMA to pony up another €800M! A quick look at their interim accounts to June 2009 paints the picture.

Dermot Ahern announced recently that he was not now going to ban upward only commercial rent reviews. This again is another part of the vain attempts to prop up the silly levels of rents. Commercial rents need to fall dramatically, at least 20% to ensure retail businesses survive and perhaps by 50% to enable the retailers pass on meaningful price reductions to customers. Rónán Lyons' piece in Friday’s Irish Times explains simply as to how rental changes influence valuations.

Apart from the dud loans the State has already agreed to take over, it appears that NAMA will be expected to produce money to complete half-finished projects. NAMA also parks approx. €13,000M of small developer/builder/speculator loans, which remain with the banks. It also leaves the residential landlord outside the tent. They account for approx. 20% of mortgage borrowing or around €30,000M of total mortgage debt. We can only presume that the banks will be back to get help with those also, particularly as the tenants continue to disappear.

Banks, builders and their shareholders have successfully transferred all their risk to the rest of us and we will pay for it for the next fifty years.

Sunday, 27 September 2009

Hunting for woolly mammoths

Michael Taft: In a previous post, where I disputed the economic benefits of cutting wages, Professor Alan Mathews and Pavement Trauma questioned aspects of my analysis, raising important issues which deserve a considered response. For this goes beyond ‘what wage levels are best’; it is about defining what the critical issues behind our competitiveness and prospects for future employment really are. We we may put a lot of time, energy and resources going down one path only to discover that is dead-end, that we should have gone down an altogether different path. We may go hunting for woolly mammoths and may end up finding ourselves being the hunted.

Indeed, we have to be sure we are addressing the same issue. The argument that we should reduce wages to increase employment is not quite the same as the argument that we should reduce wages to increase competitiveness. The first assumes that wage ‘correction’ will facilitate new, more employment-friendly market conditions. The second assumes that wages are a structural part of the ‘loss of competitiveness’. So which are we addressing – or, if we cut wages, do we get a two-for-one?

Wage Share and Final Demand

Both Alan and Pavement Trauma suggested my use of wages was too restrictive, not taking into account the economy-wide benefits of a general wage reduction. I had argued that, taking one example, cutting wages in the computer services sector would have little effect since wages make up only 13 percent of total operating costs in that sector.

Alan stated that a more correct approach would be to look at the totality of wage cuts – for in a firm, wage cuts will not only affect its particular labour costs, but affect the labour costs of those companies sourcing it:

‘. . . think about those purchases of goods and services which the computer service firms have to make. Some of these goods and services will be imports, whose price is not affected by Irish wage levels. However, to provide the domestically-sourced goods and services bought by the computer services industry, other firms have to combine both imported and domestically-sourced raw materials and inputs with domestic labour and capital. So a reduction in wages in the industries supplying the computer services sector would also reduce the cost of its purchases of domestically-sourced inputs . . Thus the problem in your analysis is that you do not take into account the indirect as well as the direct effects of a general reduction in wages across the economy.’

Alan goes on to suggest using the CSO’s input-output tables to get a better assessment of the impact of a generalised wage cut:

‘ . . .the economy-wide ratio can be calculated as pay costs (€66.0bn) as a percentage of final expenditure (€232.6bn) or 28%. The other shares are imports (38% contribution to the final price) and gross operating surplus (33% contribution to the final price) with taxes not related to products playing a negligible role.’

In this construction, wages make up 28 percent of the final expenditure of all industries and services. Even so, cutting wages by 5 percent (the figure I used in the previous post) would still only reduce economy-wide final expenditure by 1.4 percent.

Therefore, the impact on direct and indirect inputs from a 5 percent general reduction is questionable. There are many inputs which would be unaffected by a wage reduction. As Alan pointed out, imports are one. 38 percent of final expenditure goes on imports but in many areas – notably, our modern export sectors – imports make up considerably more.

• Chemicals / Pharmaceuticals: 58.4 percent
• Office Machinery: 88 percent
• Recorded Media: 52.2 percent

In these sectors, dominated by import consumption, not only will reductions in direct wages have little effect, wage reductions among domestic suppliers will have little effect as well, since these, and the general multi-national sector, source so little from Ireland.

Moving to the enterprise level we would find inputs that would be little affected by the reduction in wages (that is, if we had more than just sketchy data). For instance, wages in Dublin retail enterprises are considerably lower than retail enterprises in Maastricht – considerably so. Yet, operating costs in Maastricht enterprises are lower. One reason is commercial rents which are six times less than in Dublin. Cutting wages will have no effect on this input.

We might even look to the energy sector, as these costs are high. But with the main supplier – the ESB – you could slash wages by a considerable amount with no effect on prices, since the Regulator sets ESB tariffs at a high non-market rate to facilitate private investment.

In conclusion, if wages were cut by 5 percent, the total amount of final demand would fall by 1.4 percent (and for key export sectors – even less). It is not unreasonable to ask whether this fall would result in enhanced competitiveness.

Comparative Wage Costs

In any event, to suppose that competitiveness will improve with a reduction in wages presupposes that wage increases are, themselves, an issue in competitiveness. How can we measure this? One way of doing this is by comparing labour costs. The latest figures come from the Destatis, the German Statistical Board – 2008 4th quarter:

Irish labour costs in the private sector are below – well below – labour costs (measured in per hour) than all other countries, bar one, in our peer group (that is, the top 10 EU economies).

Even the one exception – the UK: it’s not that Irish wages are rising faster but that Sterling is deteriorating. Destatis states that UK private sector wages fell by 10 percent in the year up to 2008 4th quarter but this didn’t happen in the UK – it happened in the currency markets. In the UK, wages actually increased by 4.4 percent (compare that to Irish wage increases of 3 percent according to Destatis).

The important point here is that if Irish labour costs are already substantially below those of other countries, how can reducing our overall labour costs even further contribute to an increase in our ‘competitiveness’? It’s interesting to note that a spokesperson for Failte Ireland which commissioned a study on costs in restaurant (where wages do make up a significant proportion of costs), was somewhat blasé about the role of wages.

‘“While the recent economic slowdown has moderated cost pressures and, in some cases, led to cost reductions, concerted action will nevertheless still be required on the part of restaurants to contain costs.”

Asked if wages should be reduced, Mr Pender said wages were not all that high to start with. Of the restaurants surveyed, the average hourly rate was €11.67 for chefs, €9.49 for kitchen porters and €9.78 for waiting staff. Ireland’s current minimum wage is €8.65 per hour.’

Understandable. It’s not like anyone could argue that an annualised wage of less than €25,000 per year for trained chefs could be considered ‘too high’.

Will What is Happening Continue to Happen?

Another argument is that reducing wages will contribute to employment creation, thus cancelling out any deflationary effects (e.g. lower consumption, less tax revenue per head). But this contains a number of assumptions that may not play out in the economy – never mind, the Irish economy – in the way that it is intended. Let’s take one small look at what is happening with earnings and employment in the manufacturing sector – always remembering that is just a snapshot which might not reflect longer-term trends.

• In the first quarter of this year, the hourly earnings of production workers fell by nearly 1 percent. The number employed fell by 7,000, or by 5.8 percent.

• In that same quarter, the hourly earnings of management rose by 6.5 percent and experienced no job losses.

Interesting that the sector that saw their hourly earnings fall was also the sector that saw job numbers fall. I wouldn’t push this too far – we’ll have the opportunity to review a longer time span when the new quarterly earnings survey comes out in a few weeks.

The point here is that we shouldn’t automatically assume that a wage decline will, of its own, create the conditions for increased employment. From this snapshot, we see that wage decreases and job losses among production workers have helped the management sector to increase their earnings and maintain their job numbers.

In other words, going forward in our analysis we will have to be careful to distinguish a labour market that is the totality of inputs that readjusts on the basis of changes in the supply-demand curve, and a labour market where outcomes are dependent on relative power-relations between certain, sometimes competing groups.

* * *

None of this is to dismiss the role that wages can play in economic recovery. But what it may require is a more forensic approach, combined with complementary social and industrial policies, rather than the mere fiat of wage reductionism. I will be addressing this issue shortly, for clearly in a relatively low-waged economy (relative to our EU peer group) with a high level of wage and income inequality and a very limited ‘social’ wage – action will need to be taken. If, however, we assume the ability of the market to ‘correct’ itself to the benefit of lower unemployment, we had better be on strong ground. Otherwise, we might end up making matters worse without addressing the real issues behind ‘competitiveness’ and unemployment.

We could get stampeded by a horde of woolly mammoths. And not a lot of good ever comes from that.

Saturday, 26 September 2009

Those CSO migration figures: A health warning

An Saoi: Our friends in the CSO have given us at long last their estimates of migration in the year to April last. The figures reflect the return of net emigration, but not to the extent that I would suggest is really happening.

A quick perusal of the tables raises many questions. For example, it suggests in both 2008 and 2009 periods there was net immigration from the United States. Does that tally with your personal experience? Because it certainly does not tally with that of anyone I have spoken to on the subject. However, without some real figures from other sources, we must accept them. I decided instead to look at the UK figures, where there are figures available. Here, the CSO suggests there was small net emigration.

I decided to do some digging and compare figures. The UK National Statistics office provided me with the following number of adult Irish people whoobtained National Insurance Nos. (NiNo)

But, these figures do not include anyone moving from Ireland to the UK who already has a National Insurance Number, or students moving to the UK who apply for a health card.

The ability of the CSO to accurately estimate migratory flows in a country which does not oblige its residents to register their place of abode is akin to going into a boxing ring with both hands tied behind your back. The Lithuanian CSO reviewed their own estimates of migratory trends, and felt that they had massively underestimated population movements (see Tables here). Now, if they cannot accurately estimate the figures in a country where registration of residence is obligatory, how are the CSO here to do so? The Lithuanians can tell us the number of little Litthuanians born each year in Ireland, but our friends in Skehard Road, Cork, cannot.

A comparison with inward migration and the issuance of PPS Numbers to UK Nationals (over 15) in Ireland also throws up discrepancies. The most recent CSO report on the issue is available here. A word of warning however: issuance of PPS Nos. is not directly comparable with National Insurance Numbers in the UK. A number is, for example, required when a person takes an inheritance, however small, under an Irish will - even though not resident in the State.

The publication of the report is to be welcomed, but the figures should come with a serious health warning.

Friday, 25 September 2009

Brendan Hayes on why he didn't sign the Taxation Commission report

"Low taxes, inequality in the provision of health and education, a growing income gap and sub-optimum economic growth: these are not separate, unrelated issues, but are inextricably connected and bound up together". You can read the rest of Brendan Hayes' article explaining why he declined to sign the Commission on Taxation Report here.

Thursday, 24 September 2009

Economics of Lisbon

Slí Eile: Different points of view in relation to the economic impact of the accepting or rejecting the Lisbon Treaty are raised in the Economists for Europe meeting today (see Press release and line up of economists speaking) as well as a discussion on (the Economics of Lisbon) including reports of the Indecon survey of economists, as well as different views for and against on irishleft review. Clearly, there are significant potential economic consequences from any decision made on 2 October. The great issues of the day and this generation are inter-linked inextricably: climate change, jobs, social protection, human rights, competition, banking, toxic debts, fiscal imbalance, ageing populations, lifelong learning.

The value of public service

Slí Eile: In the midst of the shrill debates on public sector workers, their pay, their pensions, their tenure and a host of other matters such as social welfare, health and education it is good to step back and ask ourselves what sort of society do we want.

Every society decides its own mix of public, private, community effort, responsibility and obligation. Underlying all this is a set of civic values and objectives. In terms of international comparisons Ireland tends towards the lower end of public provision with a mix and pick of universalism, means-testing, meritocracy and a very patchy provision of public health (think of the quality and extent of dental care for all children) low corporate taxes, low capital taxes, low local taxes and a narrow tax base.

Currently, proposals are emerging for a huge and sustained attack on our public services by means of an 'adjustment' of some 3-4 billion in 2010 and the same again next year (but for every €1bn adjustment only part of it will reduce borrowing due to higher unemployment, lower taxes etc). The stage is being set for across-the-board pay cuts, social welfare cuts and service deterioration. We will hear a lot about wasteful public spending, things we can no longer afford, FAS trips, rich people getting child benefit and medical cards as well as quangos, overpaid public servants. That there is scope and need to reduce spending in some areas and redirect these to more urgent priorities and defence of frontline services is not disputed. That the overall level of public spending must be cut and that there is no alternative to this is disputed.

Before any recession we had an inadequate public service. Our society was and continues to be an unjust one with unjust distribution of income, wealth and opportunities for social participation. The recession is greatly exacerbating these problems. The slash and burn and amputate policy will erode our services, damage the health of the nation and lead to higher levels of social inequality. In the coming weeks we will hear and more and more of the following:

better to cut public sector pay than social welfare
better to cut social welfare than vital health services
better to cut all public spending than be taken to the cleaners by IMF or ECB

Like a desperate patient in the trenches - we will be told 'we can amputate just this leg otherwise we can take your arms'. Sensible people with social consciences will be driven to despairing, boxed-in, tunnel-vision, Liveline type 'if you don't go for X then you are effectively bringing abougt Y.

The economic analysis and political values behind this rush to amputate our public services is wrong-headed, badly thought through and potentially ruinous for our future. It must be opposed and positive alternatives argued for.

Above all, we need Hope, we need Vision, we need an Economic Strategy to get Ireland back to work and not condemn us to a lost generation and a lost opportunity to address inequality.

Steinbrueck on the Tobin Tax

Earlier this month, Paul Sweeney reported on German calls for a Tobin Tax; today, German Finance Minister Peer Steinbrueck makes the case in a piece written for the Financial Times in advance of the G-20 meeting in Pittsburgh.

Tuesday, 22 September 2009

Emigration is back - maybe?

Slí Eile: Before anyone gets carried away with claims that newcomers are heading home and families are abandoning their homes and schools …latest published CSO data (Population and Migration Estimates) confirm that:

* inward migration is down but is still running at twice the annual average of what it was in the late-1980s (57,000 in the 12 months to April 2009)

* emigration is picking up and this is clearly impacting on ‘EU12’ (including Polish workers affected by the building slump)

* there were more children under the age of 15 entering the State than leaving up to last April (table 5)

* the collapse in employment and the severity of the recession in Ireland will, undoubtedly, give rise to some net outward migration. This process may even accelerate in the course of 2010 as unemployment peaks, here, and labour market conditions improve abroad. However, there are major caveats:

* family migration is much slower to respond which explains the absence of any significant flows for persons under 15 (as distinct from those in their 20s and 30s)

* conditions, today, are very different to those in mid-1980s Ireland (welfare for families has improved in relative terms even if these are now under threat)....

* employment conditions across Europe are precarious - countries like Poland has an unemployment rate of 8% and rising in Q1 of this year (and higher still in the Baltic Republics) – check out Table 25 of today's CSO Quarterly National Household Survey.

Also, the following profile of migration in Ireland is of interest - click here.

As we peer into the future there is much uncertainty (NAMA long-term values and demographics please note) about what will happen here, in the UK, across the EU27 and elsewhere. Some period of prolonged and slow recovery, here, allied to ‘jobless growth’ is one possible outcome. The relationships, drivers and ‘push and pull’ factors are not as they were in the past and it would be foolish to extrapolate too much from the past. Migration used to be the joker in the demography pack. Births and fertility have now joined migration as the great unknown. Some commentators are predicting a fall in births and in the birth rate as the recession kicks in. The latest available data indicate that births continue to run at a very high level – the highest since the late 19th Century with a total period fertility rate of close to 2.1 in 2008 (replacement level).

The implications for population growth and continuing demand for service provision are ominous. There is no comfort for those of the view that the recession will solve the excess demand for social housing, education and a decent health service. A Malthusian market response is not on the cards any time soon. Our economy and society is more closely enmeshed in the global situation than ever.

The Fetishists of Farmleigh

Colm O'Doherty: The conceit at the heart of the Global Economic Forum at Farmleigh was that it lacked the will and resolve to make any alternative to "more of the same"realistic. It is hardly surprising that it elevated "celebrity crisis management"over a genuine inquiry into what Irish citizens want from capitalism.Our current political crisis has been aggravated by economic growth which binged on consumer credit.

Advice from rich entrepreneurs only serves to validate a complacent self-serving worldview where growth for its own sake without any judgement of its wider value in society is promoted.There is a general awareness amongst most thinking people that this recession was triggered,to a large degree,by profligate consumerism-and the mountain of debt that accompanied it.

Farmleigh should have been an opportunity,therefore,to consider the case for a less consumer-oriented society. Instead of fetishising money-capital growth -"Ireland needs to monetise its culture businessman Dermot Desmond told the conference"(Irish Tines, 21/09/09)-we should be thinking about whether we want less consumption and more and better public services. Ironically one of the key note speakers, Dr.Craig Barrett, former head of Intel, did argue for more investment in a public service, education, but only so that it could be the lackey of the self-serving growth for growth's sake merchants.In order for a real debate to have taken place on what kind of ireland we want to live in the Forum needed the participation of social scientists from disciplines other than the dismal science of economics.

The social sciences can and should contribute to a greater understanding of the workings of our society and the dynamics of Irish social life. In so doing, they provide us with a mirror upon which we can gaze in order to understand not only what we have been and what we are now, but to inform ideas about what we might become.

Economists are not only incapable of this - they reduce everything to crude instruments of value - but they break the cardinal rule of social scientists by being prescriptive at every turn. They do this continually because they assume that they can predict human behaviour with certainty, ignoring the fact that a necessary condition of human freedom is the ability to have acted otherwise and to imagine and practice different ways of organising societies and living together.

More Talk about Public v Private Pay

The ESRI released a study today showing a gap between public and private pay. And IMPACT have released an objection to it.

But is there anything new in all this?

In many ways, the ESRI paper is academic. It is a twenty-one page report of a statistical comparison of 2003 and 2006 data, which means that it doesn't include recent changes, including further pay awards, but also pay cuts and the pension levy.

IMPACT argues that it doesn't compare 'real jobs'. Certainly, the statistical analysis doesn't seem to include trade union membership as a variable (although it does include 'membership of a professional body'). There is obviously a large different in the private sector between the 'good jobs' in large, unionised firms and the full range of private sector wages.

Are there any recent studies comparing unionised versus non-unionised levels of pay (cutting across the artificial public-private divide)? That would seem to be more pertinent. It also would refocus the question on the right to join a trade union and the right of workers to negotiate good wages. As mentioned before in relation to this issue, low wages lead to increased state expenditure, such as income supports, social housing, etc.

There probably needs to be more attention paid to the differences between managerial pay and other pay. Although there is less of a 'pay gap' at managerial level, because higher grades in the public service received higher awards in order to catch up with managerial pay in the private sector that had soared, that process failed to address the question of whether private sector managerial pay was reasonable in the first place. There probably is much more scope for re-examining managerial wages in the public sector than the broad wages of ordinary public servants - but that would involve a debate about what is a reasonable managerial wage.

The ESRI's figures, presumably from a press release, were trotted out on the radio yesterday. And the argument predictably turned to whether the public service is overpaid. But it is equally the case that workers in the private sector are underpaid, at least in some sectors. Again, it would be nice to see some international figures on this, based on purchasing power parity.

There is no doubt that the state's financial situation is dire, and some radical action will have to be taken in the immediate future. But Vincent Browne argued recently that the country's financial situation is nothing like as bad. There is still plenty of wealth in Ireland. So, it is a pity that the Government seems reluctant to grapple with the need for tax reform - and a large scale broadening of the tax base.

Further cuts in public wages will also surely depress the economy further. And then there are a lot of households who have taken out large mortgages on the basis of an ability to pay them back. Housing costs represent the stubborn bottom line in terms of the pay levels that people need to get by, and undermining people's ability to pay these loans will further weaken the banks.

All of this is to say that we are likely to see another round of arguments about public versus private pay in the media, but it is only part of the bigger picture.

Monday, 21 September 2009

"Beat the recession - pay less tax"

Slí Eile: I have heard of calls for beating the recession by spending more, spending less, taxing more, taxing less, doing nothing, doing lots of stuff but this is a new one aimed, as it is, at hard some pressed tax-payers already operating in a virtual tax-free environment, a declining tax share in total national income (more anon) and the threat of a serious recession in Irish public services (=education, health, social welfare, social housing…). 'Beat the recession - pay less tax' is the headline to an advertisement in a Newspaper for a new book aimed at Irish taxpayers (well clearly not all of them since the cost of the book is €79.50 including VAT). The advert says: "The only publication that shows you how to avoid the traps and cut your tax bills…..line by line computations for all taxes so you won't miss any exemptions. '

Could this have anything to do with the fact that:

There are currently an estimated 111 tax exemptions - many of which have an unknown cost (and benefit) estimate.
'Changes to the tax system' will be slow (weekend reports)
Notwithstanding any of the above this will not stop an attempt to roll back 'universal' child benefit in the coming weeks.

Somehow I don't think the average PAYEE person will be buying the book or consulting their tax accountants.

Friday, 18 September 2009

The next 100 days: thinking about risk, trust and ethics

Slí Eile: “the citizens of this country are understandably angry about the state of the banks. They are bitterly disappointed by the failure of our regulatory system. They are appalled by the details of the reprehensible behaviour of some in the financial system and in the property sector in whom they placed their trust and they are also angry with the Government. Many ask why we are putting money into the banks while they endure the brunt of the difficult budgetary decisions which we must take. There is now unfortunately a breakdown of trust in the entire system.” (Minister for Finance, Dáil Eireann, 16 September 2009).

…. a ‘breakdown of trust’ …. ‘in the entire system’

Lets mull over that especially as it is said by the elected representative with responsibility for spending close to one half of GDP, overseeing the banks, NAMA, macro-economic policy and all those major choices and ‘hard decisions’ pending in the next 100 days.

How did we arrive at this point? Why? If trust is like a pane of glass shattered in an instant or over many instants – how can it ever be rebuilt again? We are all only too familiar with the story of betrayed trust from residential institutions for children to banks to politicians and many other organs of respectable society.

A surprising feature of any economic system is trust. Trust is to the operation of markets as oxygen is to life. A collapse in market ‘sentiment’ – read ‘feeling’, ‘mood’, ‘instinct’, ‘perception’, ‘belief’ – can be dramatic, sudden and stampede-like.
That soft, touchy-feely, hard to quantify, hard to legislate for thing is known as trust. At its core, trust is what people expect others to do or not do. It is an expectation founded on experience or something else related to human evolution and experience over many generations.

Trust is predicated on the basis of perceived or acknowledged risk – where I risk some good or resource on the assumed or perceived good will of others to act honourably. I trust you to reciprocate a favour or service at some future date; you trust another to reciprocate a favour done to you; I trust that person and that person trusts me on the basis of his/her trust in you. Generalised inter-personal trust is the result of a countless number of exchanges over time.

But ….. trust among various social groups and between various political, legal and corporate institutions is the agent which sustains economic progress. For all its warts and limitations, social partnership between 1987 and 2008 helped us to emerge from where we were to a position of relative economic strength. It was built – to some degree on cooperation and trust – the idea that give and take can yield gains for everyone in the medium-term that are would not be possible if each economic interest seeks to maximise its interests without regards to others.

Clearly, trust has been shattered ‘in the entire system’ and this is as serious as it gets. Rebuilding it will require radically different policy responses and joined up thinking. If some form of social and economic partnership is to emerge from this current impasses it will have to take a very different form to what went before. It may even have to take a much more emphatic cross-border and transnational dimension where, increasingly, the only way to deal with global issues such as the race-to-the-bottom, climate change and market instability is through combined global cooperation allied to local initiative.

NAMA, Post-Lisbon, Sovereign debt defaults, Social Cohesion, Global Warming, future pension liabilities, terrorism, poverty….. or loss of employment and income, break-up of relationships, ill-health – the list is endless. Risk – like power – is everywhere. But, is it such a bad thing?
Have we too much of the wrong type like cholesterol? How do we manage risk – personally, corporately, at the level of society?

If we as parents, community, society do not invest in our young children what are the risks for them and everyone else? Everything has consequences and sometimes we have to make difficult choices with different types of risks. If only we could calculate the risk mathematically and feed it into a risk model to give us the optimum response strategy! But, life is of course not that simple.

In strictly market terms, ‘risk’ denotes that which is associated with effort or capital (any type including physical, human, community, ethical) where the ‘return’ or the outcomes are uncertain. The uncertainty of return provides a justification for a premium ‘payment’ to the one who undertake the risk. Underlying any risky venture whether in terms of economic production, medical intervention or venture sport … there is a time element. One decides to chose one option or course of action over another on the basis of rational, moral or instinctive grounds. The result of such a choice may not be apparent for a long time. The ‘payback’ or secondary impacts (on others as well as oneself) takes time to yield.

How does risk apply to trade in goods, services and finance capital? Since the world is far from the deterministic machine image used by some 19th century social engineers and theorists, the impact of any investment or consumption strategy is unknown. All we have to go on is (i) past experience and data (of which we have more than ever), (ii) some theory or set of theories about the way people, markets, institutions work and (iii) preferences with regard to which things matter most in life.

In many ways the financial swinger market party of the last two decades gave a huge outlet for indulgence in ‘risky’ behaviour. Ironically, a lot of the party goers got infected and now very few will party anymore for fear of contracting more bad assets. Put another way, banks stop lending to each other and nobody trusts anyone else or what the value of anything will be in a year’s time. Short-termism which drove us to where we are now becomes even more dominant. And so we have an extraordinarily short-termist approach to correcting the fiscal deficit while people just assume that one or both of the following will happen: property values will recover by a sufficient amount as to pay for NAMA in the coming decade and international recovery will, eventually, lift us out of the slump in demand and consumer/investor confidence.

Greed has been cited as a key ingredient in the current crash. We had a relentless, ego-driven, empire-building, look at my stash mentality. Compete, grow, conquer, excel …. It gave full vent to primitive instincts. That amazing book ‘Lord of the Flies’ by William Golding tells a story about school boys stranded on an isolated island where chaos breaks out as they divide into competing groups. I often wonder how thin a veneer civilisation is over an underground of very destructive forces…..check out Dick Fuld who drove Lehman to collapse. But, we would be very wrong to think that the sum of greed on the part of many individuals was the only factor that brought us to where we are. The very institutions, cultural norms, societal structures and assumptions that underpinned our ‘entire system’ were based on a view of how things worked and how things should work.

Just when many in Government, economics and finance thought that a bit regulation and fiscal smoothening would see off any repetition of the Great Depression we got the Great Recession. If people just looked at the recent experiences of Japan, Sweden, Finland and many other places and thought through the possible sequence of triggers set off by one big banking collapse in the US economy they would have realised that a massive and systemic collapse in confidence, trust and coordinated market response is possible. People can act like rational beings in a way that wrecks the larger polity and market. It is a type of Prisoners’ dilemma so beloved by game theorists.

The next 100 days will tell a lot. A courageous Government in Ireland would:

* acknowledge the full truth of how we got to where we are now
* give example and take the lead by applying its own medicine to itself
* engage all those charged with economic recovery in an open dialogue based on facts and values leading to practical solutions and policy adjustments painful as they will inevitably be
* take charge of the seriously ill banking system in a way that is just, workable and effective from the point of view of restoring economic confidence in the medium-term (none of which I think NAMA meets)
* afflict the comfortable and comfort the afflicted.

I am afraid that on this very last point, we are witnessing more the exact converse.

OECD on Employment in Ireland: the outlook is "grim"

Nat O'Connor: The OECD has just published its Employment Outlook 2009. The main site is here, and there is also a report on Ireland.

The OECD is predicting up to 15 percent unemployment by end-2010.

They state: "To avoid a return to the high and persistent unemployment of the 1980s and early 1990s, a key priority is to provide effective employment services to a rapidly rising pool of jobseekers and ensure that the most vulnerable of them do not lose contact with the labour market and drift into inactivity."

They also question "whether re-employment assistance to jobseekers is adequate to prevent the sharp recession from turning into a long-term unemployment crisis."

Could there be a worse time for FÁS to be in such disarray?

Thursday, 17 September 2009

NAMA: Gamble of the Century

Slí Eile: Its now N-Day plus one. So, what do we know now that we didn’t know last Tuesday? And what would people outside this island say about NAMA? The acronym NAMA can mean different things like The North American Mycological Association (NAMA) which, according to Wikipedia is a ‘non-profit organization of amateurs and professionals who are interested in fungi, including mushrooms, morels, truffles, molds, and related organisms.’

Growing mushrooms is a science of sorts. A feature of some mushrooms is the sudden way they can spring up over night. Still, some mushrooms are very poisonous and are best left in the ground. Some reactions are along the lines of ‘leave bad alone’ when considering the morels, truffles, molds and related organisms in the lunar landscapes about us fenced in with hoarding announcing the ultimate living experience of shopping, carousing, sporting and playing and now literally going to the dogs. It mirrors similar post-crash paradise schemes in California which by now add a whole new meaning to sink estates.

Dermot Desmond (fourth in the Irish rich list – not to be sneezed at) has an interesting take on NAMA. His line is (i) don’t nationalise (no surprise I suppose) (ii) oppose NAMA-as-is because he says it doesn’t address the core problem of liquidity, and (iii) let each bank set up its own ‘delinquent asset management subsidiary (MgmtCo) which would hold all of the assets which would otherwise be transferred into Nama’. He urges that the primary risk of bad loans should rest with ‘the equity and capital providers in the banks that made the loans.’ I don’t disagree with him on that latter point.

The risk – under NAMA-as-it-is is threefold:
1 Current market prices of the assets in question (€47bn) could fall further and there is plenty of historical and international evidence to support this view – that leaves those Citizens who do actually pay significant taxes (as distinct from those super rich to whom we are all indebted in more ways than one) to pick up any increases in the shortfall of €7bn between current value (€47bn) and estimated bond issue (€54bn)
2 The capital/liquidity position of the main banks is still a problem and will in all likelihood require further massive injections of capital – some of it borrowed from ECB but with the risk largely on the backs of our children and grandchildren.
3 The discount factor of 30% together with the total book value involved (€77bn) seem to be like moving targets.

We simply don’t know whether we are facing into an L-shaped economic future, a W-shaped future or a U-shaped future. (it seems as if most commentators are assuming U). If the Dublin Consensus gets it ways we could be heading for some combination of L and W.

On the unlikely assumption of no further drop in the average price of assets, it looks as if the total risk-exposure for the banks is in subordinated debt coming to €2.7bn (or 5% of the total bond issue of €54bn). That’s a drop in the ocean (for the banks) – just about what is spent on primary schools. The idea that assets will track long-term trends in consumer prices is risible. US economists like Paul Krugman might call it ketchup economics: ‘two-quart bottles of ketchup invariably sell for exactly twice as much as one-quart bottles of ketchup’ from which some conclude that the ketchup market is perfectly efficient. ‘Fanciful’ as a Supreme Court Judge said recently.

A feature of NAMA, as it filters through from stage 0 rumours about banks in difficulty to stage 1 suppositions to stage 2 partial insight to stage 3 clarifications on Morning Ireland to stage 4 no we never meant that to stage 5 that was 2009 but we have moved on now … is the way in which risky economic assets are traded between the State, banks, commercial property and land interests and ultimately international lending institutions including the European Central Bank. In many ways, the debate about NAMA has descended into a debate about risk and how risk should be shared out between economic and institutional actors – and between generations.
Over the summer, NAMA 2.0 emerged. Its proponent, Patrick Honohan now Governor of the Central Bank designate, outlined a scheme that would shift much of the risk to the banks. Essentially, it involved paying a low price for the assets today and compensate bank shareholders with a prospective share in future NAMA profits on rising asset values – only if that happens (the key point). The current NAMA-as-is proposals are a far cry from NAMA2.0. Not a mention of a greenish bank levy in the draft legislation so far. What guarantee is there that a future Government will deliver on this promise in any significant way? Previous promises on bank levies were not delivered.

To put it another way, it is proposed that the banks get €51.3bn by way of low-interest bonds in the coming 12 months with the remaining €2.7bn in subordinated debt accruing only if all goes to plan. We are told that NAMA only needs to see an average 10% growth in asset prices over the coming decade. The maths behind this will be interesting to see especially as there is no account of what NAMA itself will cost or what a scenario of ECB rates climbing back up to much higher levels (which is very likely). After all the complex discussions and speculation, it looks like a very simple model based on very simple assumptions in a very risk-controlled world.

A big fish in the pond is our dear Anglo-Irish now in state ownership requiring a transfer or €28bn in toxic mushrooms. The, by now, iconic picture of unfinished Anglo HQ by the Liffey is a work of surrealist art along with all the other monuments across the land – exceeding in number the magic forts where wild mushrooms grow. The case of Anglo is the most obscene of all. It would be tragic-comic case were it not so crippling for those facing cuts, job losses, income decline and erosion in public services. On the one hand, further borrowing or targetted fiscal stimulus is out of the question says the Dublin Consensus. At the same time, we are being asked to underwrite a huge financial exchange involving massive risk exposure - to free up liquidity. This is called Quantitative Easing Irish style.

By the way, the book value of €77bn includes €9bn in ‘rolled up interest’ not paid by borrowers. Remember that the next time a ‘cleaned up bank’ comes after you if you can’t afford the interest on your home mortgage.

NAMA and 'Systemic Importance'

Nat O'Connor: According to the Bill, Section 65 (2) "The Minister shall not designate an applicant credit institution as a participating institution unless he or she is satisfied that— (a) the applicant credit institution is systemically important to the financial system in the State,"

According to RTÉ "The breakdown among the five institutions is: Anglo Irish €28bn, AIB €24bn, Bank of Ireland €16bn, EBS €1bn, Irish Nationwide €8bn."

Now that we have more detail about the numbers, are these banks/loans really all of systemic importance? What criteria will the Minister use to determine 'systemic importance'? Will we get to see this systemic analysis? And if not, why not?

The Bill doesn't define 'systemic importance' but the explanatory notes (65) refer to achieving the aims of the Bill set out in Section 2.

Section 2 lists the following aims:
(i) facilitate the availability of credit in the economy of the State;
(ii) resolve the problems created by the financial crisis in an expeditious and efficient manner and achieve a recovery in the economy;
(iii) protect the State’s interest in respect of the guarantees issued under the Credit Institutions (Financial Support) Act 2008 and underpin the steps taken by the Government in that regard;
(iv) protect the interests of taxpayers;
(v) facilitate the restructuring of credit institutions of systemic importance to the economy;
(vi) remove uncertainty about the valuation and location of certain assets of credit institutions of systemic importance to the economy; and
(vii) restore confidence in the banking sector and to underpin the effect of Government support measures.

This gives some indication of what 'systemic importance' means but it is far from a full definition. Also, points (v) and (vi) restate 'systemic importance' - in other words, it is a circular reference that fails to say how the Minister will determine this!

As I argued earlier, a billion euro is a lot of money. So if we can shave off a couple of billion, even a few hundred million, from the above loans, by showing they are NOT of systemic importance, then so much the better for taxpayers (and their children, and grandchildren).

Wednesday, 16 September 2009

A lucid account of NAMA

Slí Eile: Details of the NAMA arrangement are still sketchy. In a post on irisheconomy Karl Whelan has provided a very clear and concise overview of some basic facts in six sentences here. Worth reading.

Creditworthiness: Ireland v Peru

Brian Lucey is quoted in the Irish Times as saying “Right now we’re seen as being less creditworthy than Peru.”
“Peru, of course, has natural gas, oil and literally mountains of gold. But they can give it to Peru or they can give it to Ireland.”
This is not correct.

The Financial Times (15/9/09) quotes the yield on Irish Government debt at 3.35% for bonds redeemed in January 2014 and quotes the yield on Peruvian Government debt for bonds redeemed one year later (February 2015) as 4.40%. Yields rise as the maturity of the bond extends, hence an equivalent maturity bond from Peru will yield slightly less than 4.4%. but more than on Irish Government debt.

Earlier this year Moody’s reduced Irelands credit rating to AA1 and Standard and Poors reduced Irelands credit rating from AAA to AA+. The Peruvian bond quoted in the above example is assigned a rating by Moody’s of Ba1 and by Standard and Poors BBB-

On these two standard measures of creditworthiness (yield on government bonds and credit rating) Peru is less creditworthy than Ireland.

A demographic take

An Saoi: Accurate and current information is crucial to giving an up to date view of what is really going on in the Irish economy. The Commission for Communications Regulation (ComReg) have just produced the latest issue of their quarterly statistical review of the communications industry, covering Quarter 2 of 2009 published on 10th September.

A huge amount of relevant current information is available, not just relating to telephones and internet but also to broadcasting. I am glad to see that the number of we refuseniks without cable or satellite connections is increasing. Spending on communications and on television are core parts of household expenditure and substantial cuts in such expenditure suggest major changes in the focus of household budgets.

My own personal interest is in mobile communications. The Report confirms a continued substantial decline in mobile phone numbers with penetration levels falling to 2006 levels. The one area of growth was mobile broadband, which also made up over 50% of the increase in total broadband connections . However there was an overall decline in internet connections because of the reduction in narrowband usage. Internet usage appears to be peaking. The dire state of broadband in Ireland was well covered here on this site by Dr. Dónal Palcic of UL, and for a more sobering view, have a read of this piece by Kathleen Barrington.

I have previously written here suggesting that the decline in the number of active mobile connections was a clear sign of emigration. Local Demographics alone should be providing a substantial increase in the market as there are far more young people reaching the age of their first mobile than customers dying. Michael Taft has produced some interesting figures on the August unemployment figures, which raise similar issues.

The degree of decline in income from mobile calls and texts between Q2 2008 & Q2 2009 is a massive 18% or €75.65M. The moderate increase in Data revenue of €16M hardly makes up for this loss of income, considering the addition costs of hardware etc. The decline has been particularly marked since the start of 2009, however the year on year decline in the first quarter was just 7.5%

The income decline in the Irish mobile market is extraordinary and considerably exceeds that of other mature markets. Indeed it exceeds that of Germany , a country with a seriously declining population. Certainly some of the decline is down to price reductions and economic conditions however the suddenness of the decline suggests the disappearance of a large number of customers.

Between Quarter 2, 2008 and Quarter 2, 2009, the number of mobile phones declined from 4,985,987 to 4,809,857. Natural population increases should have added at least 40,000 customers, leaving a discrepancy of well over 200,000.

The next report is due in the middle of December, and I await its publication with interest.

Tuesday, 15 September 2009

We’re broke (O no we’re not)

Slí Eile: This is September 2009. We’re economically broke. Well not quite…The recent
Commission on Taxation Report has drawn attention to the matter of property tax – usually understood as applying to taxes on houses or residential houses. Residential homes are only one type of wealth. There is a vast array of wealth types from cash, shares, bonds, houses, buildings, lands to other types of immovable assets. Although three years of out date and firmly ensconced in the ‘pre-2008’ world, The Wealth of the Nation report by Pat O’Sullivan, Senior Economist in the Bank of Ireland Private Banking Group makes for interesting reading.

Some of the highlights from that Report include the following:
‘Net wealth’ of Irish households was estimated at €804bn in 2006 (965bn assets less 161 in debt)
Growth in 2006 was ‘one of the fastest growth rates in the OECD’
‘The asset base (excluding residential property) of the top 1% of the population increased by €14bn to €100bn, an increase of 16%’
‘Irish per capita wealth still ranks second among leading OECD countries’
‘We estimate that the number of millionaires increased by 10% to 33,000’
‘the top 1% of the population holds 20% of the wealth, the top 2% holds 30% and the top 5% holds 40%. However, if we exclude the value of housing wealth and focus primarily on financial wealth, the concentration of wealth increases. In this instance, 1% of the population accounts for around 34% of the wealth.’

That was 2006. It would be interesting to know the current position especially in light of the very visible toxic wastelands of half-finished housing estates and non-residential properties around the country. Monuments to hubris, risk gone mad, regulation my hat. For sure, residential and commercial property has been hammered since 2007 (50%?) and equity has taken a battering in 2008 (30%?) with some quiet recovery in recent months. However, the extent to which wealth is concentrated in the hands of very few individuals is incontrovertible. Composition of asset holdings and values are an area where information is somewhat limited and comparisons over time or across countries are hard to arrive at. It is easier to deal in information about income poverty. It is much more difficult to measure the extent of such elusive concepts as negative equity, current market value, long-term ‘hope’ value (otherwise known as Long-term Economic Value) and net assets.

A short-term downturn in the economy leading to a sudden drop in income can be buffeted by drawing on savings or disposal of assets. However, a prolonged period of unemployment or very low income (as in many smaller businesses and farms) can spell ruin for individuals and families.
Economic wealth is a stock at one point in time which potentially yields a flow of benefits over time. Normally, for national or public accounting purposes, expenditure is measured as a flow over 12 months. The total level of liabilities or promises to pay in the future are expressed as a stock of values and divided by the annual flow of income or expenditure. Hence, it is estimated that close to 60% of GDP in 2009 will be accounted for by all types of Government debt. However, some cash reserves and ‘off balance sheet’ assets can be set against the total debt to arrive at net debt. So much for Government debt. The level of personal and corporate debt in Ireland is enormous following the politically and tax-driven commercial & residential property bubble.

It would be interesting to have an overall view of all types of income, expenditure, assets and liabilities in Ireland – distinguishing between Irish households and domestic enterprises, on the one hand, and large-scale financial asset-holding companies parked here on the other. Some idea of the sheer scale of the latter can be gleaned from CSO data on ‘Resident Holdings of Foreign Portfolio Securities’.

The International Investment Position (IIP) comes some of the way to providing an overview of the value and composition of the balance sheet stock of Ireland’s foreign defined as ‘financial assets (i.e. the economy's financial claims on the rest of the world) and its foreign financial liabilities (or obligations to the rest of the world)’

The latest available figures indicate a total of €1.338 Trillion (yes trillion and not billion) in Irish resident holdings of ‘foreign portfolio securities’ (equity, bonds and various money market securities) on 31 December 2007 (claims on the rest of the world). Holdings by Irish ‘residents’ of US Treasury securities, alone, was close to $46billion in June of this year (up from $20billion in June of 2008) according to the US Treasury (table here)

That amount exceeds total holdings of US Treasury securities in any of these countries: India, Canada, France, Netherlands, Norway (Luxembourg holds over $100billion)
In another interesting comparison, as Michael Taft has pointed out

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.

However, an unknown but extremely large proportion of this is accounted for by various financial funds located in Ireland (including, for example, some housed at the IFSC). Some of these include ‘corporate bodies who have a centre of economic interest located here, including branches of foreign-registered companies.’ Along with Luxembourg and Iceland, Ireland appears to be a major hub of cross-national financial flows and deposits – relative to its small size in terms of population and GDP.

The total extent of liabilities to the rest of the world is larger still. If we add Government, corporate debt we get €1.692 Trillion in March 2009

Out of this total, Government debt comes to a mere €60billion in March 2009 (up from €34bn in March 2008)
To get some idea Table 3 of the Report shows that of €2.267 Trillion, €1.181 is accounted for IFSC alone. There are other huge-scale foreign financial interests ‘parked here’ (in referring to such interests as parked I am assuming that such entities are availing of low taxes as well as other benefits). A small proportion of their total asset/liability position is represented by financial service production which enters into Irish GDP.

On the liabilities side, there are equally vast sums – the bulk of which is portfolio investment (obligations to the rest of the world).

Table 1 in that Report shows an additional €831 in ‘financial derivatives and trade credits’ on the asset side matched by €839bn on the liabilities side. To put this in perspective, total annual income in Ireland is projected at about €160 billion this year. So, we are talking about big sums.(The ‘net IIP’ position was just a tiny €31bn in 2007 – merely the entire size of projected tax revenue this year).

Irish banks wouldn’t be so heartless as to invest in overseas bonds rather than job-creating industry here in Ireland would they? Yes they would. An exclusively privately owned banking system runs for profit for people in the first place. What did the regulators ever do for us as Monty Python might have said. We need at least one State retail bank, one National Enterprise Recovery Corporation and one local community bank building on, and extending, the work of Credit Unions.

The best argument for retaining at least one State Retail Bank and not privitising all future nationalised banks is provided by the following:
"We have a growing population, full employment, strong job creation, rising household income, a high savings ratio together with strong retail sales and industrial production. This economy is in great shape and the outlook remains positive," Brian Goggin, Bank of Ireland Chief Executive said at a press briefing on the bank's results (Finfacts June 2007).

As Michael Hennigan wrote on 6 June 2007
“Irish Economy: No crash in sight nor credible strategy to maintain export-led growth in long-term; Overseas commercial property to remain investment of choice”

During the Great Famine of 1848 grain in plenty was being exported as millions starved and over a million emigrated in the immediate aftermath of that calamity. Without signalling a prophecy of doom or attempting to draw a serious comparison between what happened then and what might be coming our way in the coming decade: Is it possible as the Irish exchequer takes on the winding down of fictitious loans and asset values a whole generation is condemned to high personal income taxes, consumption taxes, borrowing to pay off the lenders, economic stagnation and resumption of outward migration? Nobody wants that to happen but if there is any basis for it in the future I cannot see how a much better educated, confident and fair-minded younger generation will put up with it. They might just be prepared to support a political stimulus package involving a different way forward to the neo-liberal Dublin Consensus that is a plague on our house.

US economists

Slí Eile: Thank goodness for some US economists. 'saltwater economists'.
I see Paul Krugman, writing in the New York Times (I notice that NYT has just restricted access to subscribers ...), has lots to say about how we got here and where we should go from here. As a result a petition is being organised - online - to back his case. In a previous blog I discussed the role of ideology in economics. It can apply anywhere. Krugman said:

"Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy ... the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth ... economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations ... Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets – especially financial markets – that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation. ... When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly." (New York Times, September 6th, 2009.)"

TASC economics conference

Towards a Progressive Economics, DCU School of Business, Saturday October 10th: click here for more information and registration details.

The wooly mammoth conundrum

Michael Taft: How frustrating to read a generalised statement that has the hallmarks of authority but completely breaks down after a mere few minutes of looking up the facts. In the Irish Times this morning, Brian Devine – an economist with ‘stockbroking firm NCB’, is reported as making an authoritative statement:

‘The high cost of services used by business, ranging across accounting, law, waste disposal and energy, are seen as “non-pay” items, but Devine agrees wages in these are a big element of those costs, as pay accounts for 58 per cent of the overall economy.’

Now let’s look up some facts. First, that ‘pay’ accounts for 58 percent of the overall economy. The CSO’s National Accounts show that total ‘wages and salaries’ came to 47.6 percent in 2008. Now, this is a long ways off from 58 percent. Throw in employers’ social security contributions and it’s still a long ways (51 percent).

Of course, this ‘wages and salaries’ figures is not just about workers’ pay. It includes management and proprietary owners where they take income through wages, including their bonuses, benefit-in-kind, etc. The latest CSO data shows that management remuneration makes up over 36 percent of all labour costs in the manufacturing sector. I’ll go into more detail on this in a later post. Suffice it to say, when looking at gross wages and salaries in the economy – one has to remember this includes the pay, bonuses and benefit-in-kind of highly paid CEOs and senior management.

But let’s return to this alleged ’58 percent’ figure. It is cleverly used as an argument that wages are a big component of the high costs of services used by businesses. The equation works like this: Services are high cost, wages make up 58 percent of the overall economy; ergo, wages must make up a significant proportion of those high costs.

Neat. Except that those darned facts get in the way again. Let’s turn to the CSO’s Annual Services Inquiry. Unfortunately, the latest data we have is from 2006 – but these proportions don’t change much from year to year.

Under Business Services, there is helpful breakdown of the different services. These categories that I’ve selected make up nearly 90 percent of all non-real estate business services in the state.

What do they tell us about wages?

 Wages, including employers’ labour costs (PRSI, etc.) make up 22.6 percent of total operating costs. Less than a quarter. In some sub-sectors, wages make up a higher proportion – in the more labour intensive business. But even here, we are light-years from the alleged ’58 percent’.

I have constructed a ‘real devaluationist’ test. With Dr. John Fitzgerald and others going around saying we need to cut wages in the private sector to up our competitive game – let’s test this. What would be the effect of cutting wages by 5 percent on the operating costs in these sectors?

1.1 percent.

Let’s put this in perspective. If there are problems with high costs, lack of competition, sheltered sectors, etc. – is reducing total operating costs by 1 percent really going to set things right?

Of course, this doesn’t take into account the fact that a significant proportion of these wages are management and proprietary owners/directors pay, bonuses and benefit-in-kind (and as we’ve seen before, they don’t do cuts – at least, not for themselves).

And this doesn’t take into account the deflationary impact on domestic demand – which would drive down income to other businesses selling goods and services into the domestic economy.

And this doesn’t take into account the deteriorating impact of the Exchequer deficit – less income = less tax revenue (income tax, PRSI, VAT, etc.).

So all this – to reduce operating costs by 1 percent.

It’s like taking a pea-shooter to hunt a woolly mammoth.

Casino capitalism and the way forward

Click here to read an article by NUIM's Proinnsias Breathnach in Irish Left Review, in which he argues that:

The crisis was not caused by trade unions, the public service or the level of public spending, which is quite low by international standards. Furthermore, a recent report by the National Competitiveness Council concluded that the productivity of the Irish public sector is favourable by international standards. A lot of commentators have seized on the current crisis to pursue old hoary agendas.

At national level, we need much more effective leadership than we have got from the present government. We need to get across-the-board agreement on what needs to be done, and a commitment to supporting the agreed recovery programme from all stakeholders and interest groups.

We need a national forum of experts (not just economists) to advise the government - reliance on just one economic advisor is just not good enough.

We need a comprehensive plan for national recovery and development with clear strategies, priorities, and targets - not the kind of piecemeal approach to reforms and savings which An Bord Snip and the Commission on Taxation represent.

You can read the rest of the article here.

Monday, 14 September 2009

French to measure happiness

French President Nicolas Sarkozy today announced that France will implement new indicators of economic performance incorporating measures of “well-being” and environmental degradation drawn up by a panel of international economists. Click here to read the full story, and here to read Joseph Stiglitz' explanation of why GDP may not necessarily be a reliable indicator of societal well-being.

Economic Stimulus and Objective Economics

Tom O'Connor: Most of the academic economic advisors to the government have done a Master's or PhD in the USA and though believing that they are 'objective' are actually working ex-ante from a neoliberal mindset, based on neoliberal training. The economics they studied in the USA or the US-led economics they base their views on is already ideologically driven before they make a single pronouncement.

This has huge significance for the obvious need to stimulate the economy. I asked several senior eminent economists how they could justify non stimulation. Their answers were, ' it's the banks job to lend' or 'the money would leak from the economy'.

My response to these economists was: the banks are not lending, and when they did they didn't do so appropriately. Ergo, the state is the only entity that can stimulate the economy and get funds to existing and new businesses. The responses included blanket rejections of lean neo-keynesian solutions, 'you can have that' based on nothing more than ideological opposition.

The 'leakage' arguments do not hold water: if the government was to invest in indigenous exporting industries, this would increase Irish exports and improve the balance of payments. Ergo, no leakage. If the government was to invest money in building schools, mental health services and other internationally non-traded areas, there obviously would be no leakage either. If the government set up state-owned enterprises which were competitive in high knowledge areas, there would be no leakage either.

None of these forms of stimulation have been tried. I have had discussions with Prof.Aldo Mustacchio of Harvard Business School on the subject of setting up state-owned enterprises (SOEs). His view is that these have always been a part of the capitalist system and that, in the post-financial collapse era, SOEs are a hugely viable option.

The Irish cabinet does not have any economic competence itself and depends on paid economists to advice it. These are overwhelmingly either American-trained or American-led. They set their face against bold solutions such as the above and the cabinet follows suit. This is the antithesis of democracy.

At the heart of neoliberal ideology is the classsic Phillips Curve mindset. In times of recession, the government must wait for the economy to naturally correct itself despite the huge increases in unemployment. This will be good in the long run, as the over supply of wage labour will drive down wages to incentivise employers to rehire, and then the economy will grow again without government intervention. The fact that wages may fall to slave labour proportions can only be good for the competitiveness of the economy.

This is essentially the way the Irish model works. That is why there are no plans for government intervention, even though 500,000 people will be signing on the live register by june 2010. If you read the Winter Quarterly Economic Commentary from the ESRI at the end of 2008, it advises the government to do nothing, sit tight and wait for an international recovery. This is precisely the type of ideology I am referring to. In the meantime, the unemployed person, to quote Norman Tebbitt, ex-Chairman of the Thatcher's Conservative Party, should 'get on your bike'.

It is imperative that this mindset be challenged and ultimately changed.
Tom O'Connor lectures in Economics at the Cork Institute of Technology

Sunday, 13 September 2009

Beyond NAMA – seeing a bigger picture

Sli Eile: Two television documentaries shown, recently: one called ‘Freefall’ a dramatic story of the current economic climate as it unfolded for individuals in the City and a family; the other a story of the demise of Lehman Brothers last year, leave room to wonder how close the parallel to Anglo-Irish and the late-night agonies in board rooms and Merrion Street this time 12 months ago.

Globally, as well as in Ireland, the world of finance is reminiscent of Hamlet's "an unweeded garden" of "things rank and gross in nature".

The explanations are familiar: greed, lack of adherence to moral codes, lack of regulation, blind faith in markets, senior policy makers and public servants asleep at the wheel. It was and continues to be a systemic failure of huge proportions with devastating results for ordinary people.

One of the features of the current financial turmoil in Ireland is the way in which many sharp differences have opened up across the political, media and socio-economic interests fronts. There is no consensus on how to sort out banking (but there is on most other things - hence the Dublin Consensus).

Each political party in the Oireachtas has its own version of how best to proceed from here (NAMA as is, NAMA modified, ‘Good, bad bank’, Nationalisation of the big two banks and other variations of these). It is probable that a mix of sectional economic interest and remnants of past ideology influence the position adopted. I think that it is also true to say that most people haven’t a clue what the mumbo jumbo means and leave it to the ‘experts’ to work it out (but which experts?). It is also true to say that there are massive uncertainties built into any policy response at this time. We simply do not know what the future holds in terms of growth in GDP, lending, equity valuesor property values, as well as Euro currency movements. In this climate it is little wonder that different groups wish to minimise the risk to themselves:

Political parties are aware of the huge electoral implications of ‘getting it wrong’, not to mention the long-term pay-back in fiscal liabilities that might cripple the exchequer for years;

Bankers (as in those who manage banks) need to defend their capital reserves and avoid a run on their deposits and other liabilities post summer-2010 – and (another small point) they need to safeguard their own remuneration out of maximised short-term profits;

Many people working in the finance sector and their families are worried sick about losing their jobs in any rationalisation of banks (whether through nationalisation, or majority state holding, or some other change);

Depositors – large and small – want to be sure of their savings 3-5 years out from now;

Share-holders have taken a hammering but want to regain something – these include pension savers;

Bondholders – large and small, senior and subordinated – need some acceptable non-dire level of predictability of likely return and security of asset;

And …significant borrowers in the toxic wastelands want to cover their losses, move on and start all over again if they can (they will go to any lengths, as we saw in the Courts recently…).

The ‘Regulators’ and other public officials need to be seen to perform and deliver, especially as they failed so abysmally heretofore.

The truth is you can’t please everyone – at least not all of the time. And you certainly can’t fool everyone – at least not all of them all the time.

Essentially, banking in Ireland today is a lame duck. And when the duck is lame the State moves in, at least temporarily, to either subsidise or take-over. Everyone agrees about that. Even Adam Smith would have signed up to that (but I doubt he would have approved of NAMA). At the moment, it is a question of subsidise as the State takes the risk, while citizens pay the premium through higher debt servicing and taking on the value of future losses on over-paid assets through NAMA. Some ducks in the past didn’t matter so much . Hence, steel, shipbuilding, car assembly, mining and the like eventually went to the wall in many European countries. The problem with banking is that it is too central to everything else, so that it cannot be allowed to wreck the rest of the economy - especially those businesses without credit.

I am sceptical about the claims of unique knowledge, expertise and certainty made by those who said only a year ago that banking is fine and does not need to be recapitalised ... or, it does but only a bit. Twelve months later, why should anyone put too much trust in the judgment of those at the helms of banking, regulation, economics and media punditry? Even today, we simply don’t know the scale of bad loans.

Good old fashioned banking needs to be brought back, except this time as mixed economy.

Let me explain. I think we need a single public retail bank constituted from AIB and BOI in competition with other retail banks, an ICC and ACC as they were for business credit and re-structuring, and the Credit Unions when it comes local economy and households. With a tough regulatory regime, corporate democracy and ethics, and public ownership of at least one key financial institution in each of the three key areas: high-street retail, business/wholesale and local community banking. Let the privately owned institutions compete with that on this home ground, and lets have some mixed economy.

In the meantime, what are going to do with the toxic stuff? Without getting lost in technical and legal detail,we need to see the big picture. To the extent that individuals and corporates lost in their gambling, then let them take the hit with one proviso – that individuals and households suffering large drops in incomes are protected by a basic income floor through the social welfare system, plus some attenuated means-tested compensation payment to shareholders reflecting a fair price for shares. That’s only fair, especially if those on social welfare face cuts this winter.

Playing the stock market has to be understood as a game where losses mean losses and moral hazard is opposed.

Let anything guaranteed to September 2010 stand, but that’s it. Let some version of a State asset agency buy up bank debts at some estimate of current market prices (as the Swedes did in the 90s), rather than some fanciful long-term economic value (implying a huge loss on many assets held by the banks), while the State moves in and nationalises AIB and BOI without further delay and starts putting in place a plan for a National Recovery Bank as proposed by Fine Gael some months ago. Any future windfalls from a recovery in the value of some assets could be re-cycled into credit towards new green businesses, as well as re-structuring of those which have a chance of survival. In other words, instead of over-paying for rotten debts through NAMA, lets use the surplus over current market price to capitalise a National Recovery Bank.

As I understand it, the key point in the Labour Party line on nationalisation (which is exactly what Karl Whelan and Brian Lucy have being saying since the beginning of the year) is that

A crucial feature of the nationalisation approach is that it dramatically reduces the risk involved in having to value the bad loans.

I agree that an asset agency would be useful – once nationalisation has gone through.

I am not proposing a nationalised, but unreformed, banking arrangement and corporate ethos. Old-boy networks are everywhere from company boardrooms to a future asset agency to property developers to estate agencies to the golf course.

….in the year 2020 - sure he is a decent chap and you know how much trouble he has had and we can put it all behind us….an equity stake in return for their helpfulness is in order….a levy on windfall profits needs to take account of international market sentiment… blah blah

Question: If nationalisation of the big two banks, AIB and BOI, is the answer, as more and more people agree(including some very respectable and conservative economists) then why should it be only temporary? What advantages arise from a private sector-owned, only, banking system? Discuss.