Sunday, 27 February 2011

The Irish have suffered enough ...

Slí Eile: Interesting piece from today's editorial in the Observer via the Guardian website here.

Friday, 25 February 2011

Problems and Solutions

Sli Eile: Due to Blogger formatting problems, can't post this directly - but click here for a breakdown of the economic issues facing us, counterposing orthodox and unorthodox analyses and responses.

Wednesday, 23 February 2011

From tiger to bailout

Ireland’s deep financial and economic crisis results from failings in its growth model, policy mistakes and systemic failures within European Monetary Union. The bail-out agreement with the IMF and the European authorities and the associated austerity package will not resolve the problems faced by the country and must be renegotiated. Instead a package is needed to promote economic recovery and jobs growth involving elements including: sovereign debt rescheduling and a lower interest rate, fundamental tax reform, and an investment programme financed by the sovereign wealth fund. That's the opening of an ETUI Policy Brief co-authored by former TASC Director Paula Clancy and Policy Analyst Tom McDonnell. The full paper is available for download here.

Tuesday, 22 February 2011

Happy Birthday, Progressive Economy!

Slí Eile: Today, Progressive Economy is two years old. 872 posts later this blog site is learning to walk and talk economics in the market place of ideas. Are you a regular user of this site? What do you think of it? Do you think that it has played a useful role in informing public debate?
Progressive Economy (PE) was set up an alternative forum for debate about ‘progressive economics’. In one way it competes with Irish Economy (IE); in another it complements it. Many people follow Irish Economy and it is cited frequently in blogosphere, the media and elsewhere. While academic economists post for Irish Economy, its readership and commentariat is far and wide and contains not a few critics of the ‘existing order of things’. The focus of IE tends to be a lot on banking and fiscal debt.
Progressive Economy is not defined by what it is not. It seeks to create a different space where the focus of topics and some of the underlying values and assumptions of those post to this site are different. The use of the term ‘progressive’ does not necessarily imply that the views of the mainstream of applied political economy are always regressive. But, sometimes they are because they start from false assumptions, unsubstantiated assertions and a questionable set of values (like we are not short of compassion but cash as if money was a value in itself apart from human labour and society). Many contributors to PE have identified and analysed various data sources that escape mainstream media debates and commentary. One of the services that PE can offer is a commentary on trends, distributions and comparisons in regard to employment, spending, taxation, income, wealth, debt etc Many who continue to post to this Site provide a useful sounding board and criticism of views. This is a vital part of democratic and civil debate to clarify ideas, test assumptions and suggest that there is more than one of conceptualising a problem and certainly more than one way of finding solutions.

So, what conclusions can be drawn from the last two years and what pointers for the next two years? I suggest that:

- The contribution base needs to be expanded while retaining the focus on economics
- More guest posts, ‘head-to-head’ discussions and cross-posting with other sites should be considered.
- Issues around job-creation and industry/services development need greater attention.

At the launch of PE on 23rd February 2009, former Director of TASC Paula Clancy wrote:
Economics has been described as the 'dismal science'. Economists are often stereotyped as conservative, wallowing in bad news, unfeeling and sometimes allied to powerful financial, economic circles and interests…..TASC believes that it is time to reclaim 'economics' by rediscovering the political, social and cultural in 'economics'. We assert that economics is not, and cannot be, neutral. ….A new Political Economy must address the fundamental choices, values and alternative possible ways forward that the traditional practice of 'economics' shies away from. For this reason, TASC has created progressive-economy@tasc to provide a public forum for economic debate.

Michael O'Sullivan on need for a 'New Republic'

"As this week’s general election approaches, Irish voters look set to unceremoniously eject the incumbent Fianna Fáil government. But more than a simple change of party, Ireland needs a restructuring of its debt, and profound reckoning with its failed institutions. Only a second Irish Republic can achieve both tasks.

In the bond markets, Ireland’s error has been to take bank liabilities on to its national balance sheet. By then connecting this with entry into Europe’s bail-out fund, the country has set out on a road to serfdom, in which the scale of indebtedness is now likely to smother growth and curb policy flexibility. This week’s election ought to be about how to turn off this road, not how long it should be. Yet Ireland’s national debate still focuses on how to fund debt, rather than how to end insolvency."

You can read Michael O'Sullivan's full opinion piece in today's Financial Times here.

The manifestos and economic policy

Jim Stewart: The publication of the various party manifestos has not been accompanied by detailed scrutiny of many of the policies proposed. There are exceptions (see, for example,the analysis of Parties' proposals for pension reform by Gerard Hughes and Jim Stewart here). One reason for this may be that without expected electoral success, a party manifesto is irrelevant. It may also be because control over the budgetary process and much of economic policy is prescribed by the EU/IMF Memorandum of Economic and Financial Policies which is subject to extensive monitoring (weekly, monthly and quarterly reports). Nevertheless, in some areas there is discretion.

All parties propose renegotiating the terms of the EU/IMF agreement. Electoral change in Germany may make this more likely as the German Governments hard line stance is to some degree determined by electoral strategy (see Quentin Peel, Financial Times, February 21, 2011). As regional elections take place in Germany with defeats for the ruling government, electoral strategy may also lead to a change in economic strategy in relation to EU policies towards peripheral countries, and the role of the European Financial Stability Facility.

The Fine Gael manifesto is of particular interest, as Fine Gael is likely to form the largest party in the next Dail and may even have an outright majority.

Fine Gael Policy Areas/Statements that Require Analysis

The decision to sell state assets (Less Waste, Lower Taxes, Stronger Growth, p. 4) deserves considerable analysis. The assets to be privatised are listed as Bord Gais, ESB Power Generation, ESB Customer Supply Companies, and RTE Transmission Network (Working for Our Future p. 21). Fine Gael criticise (and rightly) the forced fire sale of bank assets (Credit Where Credit is Due, p. 6), yet any sale of Sate owned assets would amount to just that. The economic justification for privatising assets is poorly developed. In addition, the EU/IMF Memorandum of Understanding states “under the period of this financial assistance programme, any additional unplanned revenues must be allocated to debt reduction”. This means selling State assets will be used for debt reduction as in the case of Greece (see Guardian Newspaper 18/11/2019 ‘Greek PM denies plans to sell off national treasures’);

The statement that our effective corporate tax rate is actually higher than that of most EU countries (p. 7) is not supported by the most reliable data available, that is US Bureau of Economic Analysis data;

It is proposed to replace the HSE by new systems by 2016 (Less Waste, Lower Taxes, Stronger Growth, p. 13). In another document it is stated “that the big top down bureaucracies like FAS and the HSE will have been replaced by new systems” (Less Waste Lower taxes Stronger Growth, p. 13). The Manifesto (p. 47) states that the ‘dysfunctional HSE will be dismantled’. Is the fixation with structures really the solution? Are we facing into another five years of chaos while the health system is restructured at the expense of services? It is not clear what institutional structures would replace the HSE, how the new social insurance model will work and how budgets would be allocated.

The Department of Finance is criticised because “it failed to deliver good value for money for taxpayers through public service modernisation and because of the excessive breath of its responsibilities and its culture of centralised control and distrust of the front line” p. 20, See also Reinventing Government, p. 26)).
The Department of Finance can be criticised on many points, but the main failure in economic policy was the destructive policies pursued by McCreevy (decentralisation, deregulation, etc.). Avoiding the pursuit of catastrophic policies in future requires change at many levels, including the near ‘monopoly of the consensus’ in discussions/writing about economic policy, and the consequent silencing of alternative voices.

The formation of an ‘independent’, unelected, fiscal council to which the Minister for Finance will be obliged to either “comply or explain (p. 20) poses many questions. Are we not voting with the intention that those candidates with a majority will have a democratic mandate to form the next Government and be responsible for fiscal policy? Who will be appointed to this independent Council? Many ‘experts’ are not independent of vested interests and especially not independent of an outdated and failed ideology (see blog by Paul Sweeney, A Code of Ethics for Economists). How will such a body avoid being captured by the cosy consensus?

There are welcome proposals, such as the proposed introduction of a loan guarantee scheme. (Working for Our Future p. 265) - but why is it being introduced as a ‘temporary’ measure?

The proposal to use existing banks to administer such this scheme will largely neutralise the scheme and end up subsidising banks as existing loans will be displaced by loans issued under the guarantee scheme.

(1) For example, there is an analysis of Fine Gael and other Parties proposals for pension reform by Gerard Hughes and Jim Stewart at

Monday, 21 February 2011


For a novel definition of SWINE, read Alistair Fraser's trenchant post on Ireland After NAMA here.

Sunday, 20 February 2011

Message for the undecided

Slí Eile: Its not all about economics but economics is a big part of what motivates people to vote or not vote and to vote for that party or candidate and not this. But economics is not a pure science. It is based on values and ideology. Yes, ideology. By this time next week we will know what the coming years will hold by way of Government. It is one part of a long-term process to change our priorities and values.

Election 2011 has been more about the economy than any previous election in living memory. Such strange and novel turns of phrase as burning bondholders, sovereign defaults, Government deficits, deleveraging, firesales, double-dip and 'sharing the pain' etc have become common place in the newspaper, twitter world, radio and some conversations (and people are not entirely switched off as it is claimed over 900,000 people watched some or all of the five-party leaders debate earlier this week).

Ironically, the people most affected by the outcome of this election will be the younger people who will carry the debts and scars of unemployment/emigration for a long time after some politicians have used up their pensions. Yet, the younger under 18 have no voice or say in this election and the sad fact is that in previous recent elections just less than 50% of 18-24 year olds voted and the figure was even lower again among young, male working class voters in urban areas - the very ones most hit by the great moral and economic crisis or our time.

Who would have thought, in 2007, that the nature of politics has changed at least to some extent: a wider choice of parties and candidates on the left, FG and LP arguing furiously over taxation and spending policies, talks of hard bargaining before the outcome of the ballot and the meltdown of that great institution founded in 1926 (but do not assume that death is imminent and do not rule out a recovery...). Who said in 2006 that Ireland was a shining example of the art of the possible in long-term economic policy making' (he is now chancellor of the exchequer across the water)?

What an extraordinary crisis this has been! Financial meltdown, mass unemployment, growing emigration, further and partial loss of national economic sovereignty despair, anger, uncertainty, hope, protest, fear, new expressions of alternative....Will election 2011 bring that much needed transformation of values, vision, policies and delivering of positive outcomes ? - especially for those who have suffered the most (so far) from this crisis (and certainly not those who caused the crisis and suffer much less because of where they lie in the HEAP).

Lets focus on what the 'key issues' are. Never try to answer a badly framed question until you have figured out the right questions first. These, I suggest, are the right questions to start from:
- What is the most effective way to enable people to create and find jobs and income in a way that sustains human life and dignity?
- How do we leave a legacy to the next generations of a cohesive society founded on justice, equality and sustainability?
- How do we as a society manage the distribution of opportunities, capabilities and outcomes relevant to peoples lives?
- How do we provide for a healthy, learning and flourishing society where individuals, families and communities can find their dynamic niche?

Motherhood and apple pie say some commentators, perhaps. Note the absence, so far, in the above list of questions of such terms as fiscal correction, economic growth, competitiveness, debt, borrowing, spending, taxation. Now, all of these latter issues are crucial and without taking a view and course of action on these we cannot properly achieve our individual and social goals. But, the Market, the State, the Economy are not ends in themselves. They are means towards an end - the development of a flourishing society of individuals, families and communities in where well-being comes before one narrow measure of one aspect of well-being, where the needs of the next generations count as much as those of the present, where human rights and needs come before the wants of a few in powerful economic and political positions. In other words people matter and that's the only reason politics, markets and institutions matter.

Wednesday, 16 February 2011

Guest post by Bruce Campbell: Death of the Tiger - a cautionary Irish tale

PE readers may remember that Bruce Campbell, Executive Director of the Canadian Centre for Policy Alternatives, spoke last year at the FEPS/TASC Autumn Conference. An edited version of this article, with input from another Autumn Conference speaker, Lawrence Mishel (President of the Washington-based Economic Policy Institute) has just appeared in The Huffington Post.
The Irish people go to the polls on February 25. The governing Fianna Fail party — that created the fallen Celtic Tiger economic model and is now the object of widespread public outrage — will almost certainly be banished to political wilderness, much like the conservative regime casualties of economic crisis in Greece and Iceland.

The Celtic Tiger went from boom to bust with breathtaking speed. In the wake of (in part because of) four austerity budgets—seen as the toughest in Europe-- Ireland is locked in depression with ten successive quarters of economic contraction.

Over the last three years Ireland has seen its national income plummet by over 17%–the deepest and most rapid collapse of any Western country since the Great Depression. Official unemployment climbed 10 points to 14%, and by some measures now exceeds 20%.

Canada’s Finance Minister Jim Flaherty made several trips to Ireland in recent years: pitching Canada-Ireland trade, flaunting his economic management credentials, and it would seem, promoting opportunities in Canada for Irish youth who have been leaving in growing numbers. When I was in Dublin last October, I happened upon a huge banner spanning an imposing building in one of Dublin’s main squares, advertising working holiday opportunities in Canada for Irish students (which I found odd in light of the fact the Canadian youth unemployment rate was hovering around14%.)

On a visit to Dublin in late August 2010, Flaherty—rightly proud of his Irish heritage praised the Irish government on Irish public radio for its draconian public sector budget cuts. “Ireland,” he enthused, “certainly has led the European Union in taking the necessary courageous decisions toward fiscal consolidation”

This was at odds with his government’s own policy of fiscal stimulus. Could it be that Flaherty, the self-professed friend of average working families, was unaware of the catastrophic impact of the savage cuts were having on the Irish population?

Flaherty also praised the Irish government’s decision to guarantee all the debts of its insolvent banks, and criticized the credit rating agencies for not responding positively to what he termed “a solid plan.” What was he thinking? Praising a bank bailout that absolved (mainly foreign) creditors from any liability for their reckless lending; a plan that ballooned the government’s deficit from 12% to 32% of GDP, and public debt to a crushing 130% of GDP.

Until its collapse, the Irish model was widely seen as the poster child of successful development in a globalized era. The darling of conservative policymakers and think tanks, the Heritage Foundation declared Ireland the third most “economically free” country in the world after Hong Kong and Singapore in 2008. George Osborne, now Britain's finance minister, praised Ireland in 2006 as “a shining example of the art of the possible in long-term economic policy making.

It also drew praise from policymakers in Canada, including then Finance Minister Paul Martin. Industry Canada commissioned Québec economist, Pierre Fortin, to do a study of the Irish model and how it could be adapted for Canada. The C.D. Howe Institute praised its positive effects on corporate tax revenue. And of course, its low tax, business friendly, “light touch” regulation aspects greatly appealed to the ideologically conservative Jim Flaherty.

For both men, it provided inspiration for their own corporate tax cut initiatives—Martin lowering the corporate rate (plus surtax) from 28% to 22%, and Flaherty continuing the downward slope from 22% to 15% by next year.

A key pillar of the Irish model was an ultra-low 12.5% corporate tax rate (reduced from more than 40% in the late 1980s) and other tax subsidies to entice high tech multinational corporations to set up bases in Ireland from which to export into the vast European market of which it was now part.

This is not unlike Flaherty’s plan to entice foreign corporations to establish export platforms targeting the US market, a strategy that continues to be hampered by the post-9/11 “thickening” of the Canada-US border. Despite adopting numerous to US security related practices, Canadian efforts to reverse border restrictions have had limited success. The latest of these attempts, the so-called North American Security Perimeter, currently under negotiation, is likely to meet the same fate as earlier efforts, short of a major surrender of Canadian control over, for example, immigration, refugee and information privacy policies.

The Irish model produced a stunning record of economic growth that dramatically reduced unemployment and reversed the historic outflow of Irish labour, and on paper, converted Ireland from Europe’s poor cousin to one of Europe’s richest members.

Foreign direct investment—led by the computer and pharmaceutical sectors--poured in. It became the preferred location of (mainly US) multinational corporations seeking to keep their profits out of reach of their home country tax authorities. (Google, for example, is reported to have saved $3.1 billion over the last three years by setting up shop in Ireland). Ireland became the largest jurisdiction outside the US for declared pretax profits by American firms. The transfer of profits out of Ireland accounts for 20% of Irish GDP.

While indigenous Irish industry expanded, it never lived up to expectations. The hallmark characteristics of an enclave economy--weak linkages to the domestic economy, benefits accruing to a narrow segment of society--were clearly in evidence. Industry remained dominated by a relatively small group of multinationals. Data from the Irish Development Agency, show that while the foreign and domestic sectors each employed about 150,000. The foreign-owned sector accounted for over 80% total output.

While it created a lot of employment—much of it in the form of low wage service jobs—the Irish boom accentuated income and wealth inequality. Rather than apportioning gains to strengthen the welfare state to be more in line with European norms, the Irish model gave precedence to the interests of foreign capital and to a small domestic elite that had successfully ridden the Irish prosperity wave.

The most recent phase of the Irish “miracle” was built on a tsunami-like surge of reckless lending by a loosely regulated banking sector to property developers and homebuyers. They drew on unlimited funds borrowed from willing European and U.S. banks at interest rates cut in half by its membership in the European Monetary Union, and spurred on by government subsidies.

A cozy cabal of politicians, bankers and property developers produced an orgy of speculation, which drove a monstrously unsustainable construction boom and real estate bubble.

At the height of the boom in 2006, construction accounted for 20% of GDP and a fifth of the workforce. Bank lending for construction and real estate rose 1730% from 1999 to 2007. House prices doubled from 2000 to 2006 as household debt soared to 80% of disposable income. Between 2003 in 2008, net foreign borrowing increased from 10% to 60% of GDP. Bank lending standards rivaled the US subprime mortgage fiasco.

Income and capital gains tax cuts left the government coffers with a narrower tax base much more vulnerable to collapse of the construction and real estate sectors.

When the global crisis hit, the bubble burst: foreign finance dried up, exports tanked, construction came to a halt and property values plunged, exposing the toxic debt at the heart of the Irish banks. Ireland’s budget surplus and low public debt turned bad with lightening speed.

It became increasingly clear during the fall of 2010, that the Irish state had sealed its own financial fate by bailing out its banks and now was at the mercy of the European Central bank. In late November, the government basically handed control over to the ECB and International Monetary Fund concluding a massive $110 billion “rescue” package, likened by some to the post-World War I German reparations accord.

The conditions of the loan were punishing: massive public spending cuts and tax increases whose impact would fall disproportionately on low income and vulnerable groups. Ireland’s National Pension Reserve Fund was thrown into the Agreement thereby greatly limiting its ability to make the strategic investments necessary for recovery. It clearly was not a rescue of the Irish taxpayers who were saddled with the entire cost of adjustment.

Those actually rescued by IMF-EU deal were foreign bondholders (mainly European and US banks) who suffered no loss whatsoever. Not a single cent of Irish private bank debt taken over by the government was written down, and the punitive 5.8% interest rates imposed meant that Ireland will be transferring 7% of its national income to foreign bondholders for years to come. Nor did the ECB admit its own culpability or pay any price for failing to rein European banks’ lending spree to the Irish banks.

The Irish think tank TASC reflected the view of many in its assessment of the EU-IMF agreement: “The deal is inequitable, won't work and will either lead to a sovereign default or will condemn the Irish people to a prolonged period of economic stagnation.”

In early December, the government implemented the IMF-EU directive with its fourth and most extreme austerity budget since the crisis began. Three quarters of the spending cuts were to social transfers and public services. They included a 4% cut to social welfare payments and a 12% cut in the minimum wage. The budget’s regressive tax increases fell hardest on middle and low-income workers. Significantly, under pressure from US multinationals and to the dismay of EU countries, the 12.5% corporate income tax rate was spared.

The budget’s cumulative (mainly) spending cuts and tax hikes are equivalent to an astonishing 18% of GDP; or put in a Canadian context, would amount to a $300 billion adjustment. Government officials are predicting this will be offset by rapid export growth. However, with its main markets—Europe and the US—in the doldrums, and no longer able to devalue its currency, this seems like wishful thinking.

The government’s bleeding-the-patient budgetary plan is doomed to failure. It will not produce recovery, create jobs, or restore public finances. And it will increase already high levels of inequality and poverty. As it stands, it condemns the country to years of economic stagnation and untold hardship. A blight on future generations, it accelerates the exodus of youth in search of jobs abroad.

The bank bailout and the ECB-IMF agreement are major issues in the election campaign. The new government will likely push for renegotiation of the Agreement, including a partial debt default or restructuring, perhaps legitimized by a referendum as occurred in Iceland. Failure by the European Central Bank respond to these demands, will raise calls for Ireland to exit the Eurozone, an option seen by many as the “nuclear option:” a cure worse than the disease.

Clearly the Irish model was deeply flawed. Its dynamism was highly dependent on foreign capital and strong export demand. Linkages from the foreign sector to indigenous industry were limited. The rapid accumulation of wealth during the boom years either flowed out of the country or, to the extent that it remained, benefited a small minority. Resources were not used to strengthen public services and distribute income widely. Cuts to personal income and capital gains taxes left the government coffers with a narrower tax base highly dependent property taxes, and hence on continued expansion of the construction and real estate sectors. And in the end, the boom surfed on a construction-real estate bubble in a sea of rotten debt.
All of these features made the Irish model highly vulnerable to collapse as events have shown. At its root was a free market economic orthodoxy that, despite being discredited by the global economic crisis and the failure of many of its star pupils around the world, is unfortunately far from dead.
Long term, the path out of the crisis will involve reconfiguring its development model in a way that more closely resembles the solidaristic Northern European model: greater emphasis on broad based internally generated income and wealth, and its wider distribution in a way that responds to the needs and aspirations of the Irish people.
In Canada, under the Conservative government, disturbing elements of the Irish model are in evidence: a dramatically smaller tax base available for social programs and public services, themselves further crowded out by increased military/security expenditures; a narrower tax base increasingly dependent on commodity (mainly oil) revenues which are vulnerable to major fluctuations in the external environment; a sluggish economy whose main private sector engine over the last two years has been a housing mini-boom that has pushed household debt to unprecedented levels; and historically high and growing levels of income and wealth inequality.

The result of moving down this path is more likely to be a slow motion economic decline than a spectacular flare out as occurred in Ireland. Regardless, continuing to extol the virtues of the now extinct Celtic Tiger will require more than a touch of blarney from our Finance Minister.
Thanks to Sinéad Pentony, head of policy at TASC, for her valuable comments and for making sure I didn’t say anything outrageous. TASC is CCPA’s sister think tank in Ireland.

Economists on Ireland's export performance - more sad stories

Proinnsias Breathnach: One thing that has always struck me about Irish economists is that, despite the importance of foreign direct investment and international trade to Ireland’s economy, they actually know very little about the activities of the transnational firms in question, or the structure of Ireland’s foreign trade and, above all, about the factors which attract foreign firms to Ireland and allow them to use Ireland as a base for serving external markets.

Rather than conducting real research in these areas, most economists who write on these topics appear to draw on undergraduate textbook models of how markets operate – models which in turn were originally devised to explain the kinds of competitive markets for commodity-type products (clothing, food, furniture) which were fairly typical of the British and US economies in the 19th century. Subsequent developments, such as industrial concentration, globalisation, rising living and educational standards, advertising and marketing and technological change, appear to have bypassed many of these people entirely.

Thus, a few weeks ago, we had Anthony Leddin of the University of Limerick (writing in The Irish Times) postulating trends in Ireland’s foreign trade which anyone with knowledge of this area would have realised right away were completely wrong. More recently (January 28), and again writing in The Irish Times, former Central Bank Chief Economist Michael Casey wrote: “At present the only bright spot in the economy is the output and exportation of pharmaceutical products”. This is an extraordinarily uninformed statement for a person of this status to make. Of the nine broad product categories into which the CSO divides Ireland’s merchandise exports, eight experienced growth in nominal export value in the first ten months of 2010 compared with the same period in 2009. Of the total growth in these eight categories, pharmaceutical products accounted for less than half (46.5%).

The growth in total merchandise exports, in turn, accounted for only one half of the overall growth in exports (including services) in the first three quarters of 2010. The growth in exports of computer services in this period exceeded that in pharmaceutical products by 24 per cent. Many economists have been unable to internalise the fact that services exports exist at all, never mind that they have been the main growth sector in Irish exports for many years and, in 2009, accounted for 46.5% of total exports. In the five years to 2009, exports of both computer services and business services grew much more strongly than exports of pharmaceuticals. In 2009, exports of both computer services and business services exceeded exports of pharmaceutical products in value terms.

In that year, these three sectors, along with organic chemicals, accounted for over half of Ireland’s total exports. If we throw in insurance & financial services, food & beverages and office & data processing machinery, the proportion rises to almost three quarters. If one were seeking the key to Ireland’s international competitiveness, one should be looking at why these seven very disparate sectors are able to use Ireland as a successful base for serving external markets.

But this would require some real research. Instead, our economists reach for simplistic and largely irrelevant statistics which are both readily available and tend to confirm deeply-entrenched prejudices. We got a good example of this in an article on Ireland’s competitiveness by The Irish Times’s chief economics journalist, Dan O’Brien, in the issue of February 4 last. While acknowledging that there are many ways of measuring competitiveness and that the National Competitiveness Council employs more than 100 competitiveness indicators in its annual reports,O’Brien then devotes most of the rest of his article to the old diehards – prices and labour costs.

Irish economists have an extraordinary tendency to rely on the EU’s harmonised index of consumer prices (HICP) as a measure of competitiveness, even though its relevance to Ireland’s export competitiveness is not immediately obvious – it is hard to see what bearing the price of a meal or a CD player has on the competitiveness of the organic chemicals or software sectors. Nevertheless, O’Brien regards the fact that Ireland’s HICP fell relative to the rest of the EU between late 2008 and early 2010 as evidence of Ireland “regaining” competitiveness.

O’Brien then suggests that trends in economy-wide unit labour costs (the ratio of wages to net output) are a better indication of Ireland’s improved competitiveness. However, the fact is that the vast majority of the Irish workforce are not engaged in export activity and, again, it is hard to see how the unit labour costs of a waitress or CD player salesperson have a bearing on the competitiveness of the main export sectors identified above. While Ireland’s economy-wide unit labour costs have tended to rise relative to the rest of the EU over the last ten years, the opposite has been the case in unit labour costs in manufacturing, the great bulk of whose output is exported. Yet, while the latter are to be found in the same page in the OECD website as the former, they are rarely, if ever, quoted by Irish economists.

There are no comparable data for export services, but the Forfás Economic Impact surveys indicate that payroll costs as a proportion of value added in foreign-owned export services (which account for 95% of the total) fell from 19% in 2000 to 9% in 2008 – a fall of over 50% in unit labour costs.

This is not to say that labour costs are important (never mind crucial) in the competitiveness of Ireland’s main export sectors. If general labour costs were a key determinant of competitiveness, then one should expect exports in all sectors to be influenced by labour cost trends. However, Ireland’s main export sectors have been very variable in their export performance, and there is no evidence that this variability has been influenced in any way by labour cost trends. Between 2000-2006 (the last year for which the relevant data are available), the chemicals & pharmaceuticals sector experienced volume output growth of 50%, despite a rise of 50% in the share of costs accounted for by pay (up from 12.6% to 18%). In the electronic components sector, there was a more modest rise in the labour share of costs from a lower base (up from 13.1% to 16.4%) yet production volume fell by 7%. In the office machines and computers sector, a fall in labour’s already very low share of total costs (down from 4.1% to 3.5%) produced volume growth of 22% - much more modest than that experienced by chemicals & pharmaceuticals.

The key point is that the idea of Ireland Inc. gaining or losing competitiveness is meaningless. Ireland’s exports are dominated by a small number of sectors whose characteristics are extremely varied and whose export performances are equally varied. Adding up these performances and then concluding from the total that Ireland is becoming more or less competitive is pointless. Over the last ten years Ireland has experienced strong export growth in a range of export services, and in pharmaceuticals and medical devices, modest growth in chemicals, and, overall, a sharp fall in exports of electronics hardware. A wide range of factors account for this export variability, of which labour costs play, at most, a minor role. In compiling its Global Competitiveness Index, the World Economic Forum employes no less than 113 quantitative criteria; in Ireland’s case labour cost factors account for less than two per cent of the total value of the competitiveness index.

The economists’ disconnect from the real world is nicely demonstrated from a passage towards the end of Dan O’Brien’s article. Referring to evidence that average productivity in Ireland has been raised by the collapse of the low-productivity construction sector, he suggested as an example that “a bricklayer produces less than the average assembly-line worker or office drone (sic)”. Productivity in the construction industry is indeed low when compared with manufacturing or business services, but O’Brien’s choice of bricklayers for his example was surely unfortunate. Assuming that earnings bear some relationship to productivity, in 2006, when industrial production workers were earning €601 per week, clerical and secretarial workers €540 and administrative civil servants €819, the average weekly earnings of all skilled construction workers came to €877 and there was one report of bricklayers at that stage earning over €3000 per week! The company making these payments was also reportedly paying its Turkish labourers €2.50 per hour. They might have been a better choice for O’Brien’s example.

Tuesday, 15 February 2011

'Job Pact', not 'Competitiveness Pact'

Tom McDonnell: Useful post (here) from Andrew Watt. He looks at the latest uninspiring growth figures in Europe (0.3% quarter-on-quarter in the euro area and just 0.2% in the wider EU27). We cannot assume such anaemic growth will be improved upon as austerity bites down in 2011. Weak employment growth will be the upshot.

One interesting point relates to the newly fashionable idea that increased ‘competitiveness’ is the solution to the jobs crisis. Andrew notes that the Euro area has actually maintained a balanced trade account virtually throughout its existence and achieved a trade surplus in 2010. If the Euro area had a severe competitiveness problem it would surely be reflected in the trade statistics.

Ireland of course has the second highest ( trade surplus in the whole of the EU. Ireland has many problems but competitiveness does not appear to be at the top of the list. Worth bearing in mind as the attacks on the minimum wage and other wage floors continue...

Thursday, 10 February 2011

Who benefits?

Michael Burke: This is from the IMF’s latest Interim Staff Report (in effect making sure the Dublin government is doing as it’s told). To quote one section of the IMF Report: [click to enlarge]

Two points:
• According to IMF, Irish yields have only been falling because the ECB have been buying bonds- other market participants don’t want to touch them (as of yesterday 10yr yields are back over 9% and closing in on the previous high). This deal is making any future market access less, not more likely
• The chart shown is the IMF’s and suggests that Irish debt yields are going the same way as Greece did after its EU/IMF programme was announced
Market yields reflect an underlying truth. Ireland is becoming less creditworthy as its resources are depleted. This economy is no being bailed out- if it were yields would be falling as the outlook improved. Irish taxpayers are bailing out EU banks – and the outlook is deteriorating because of it.

Tuesday, 8 February 2011

Credit cards in December

An Saoi: The Central Bank provides an analysis of credit cards as part of its monthly statistical report. It is the very final Table in the monthly report. It is of interest because expenditure on credit cards follows the trend of movement in retail sales, excluding motor vehicles (a person is unlikely to buy a car on a credit card.).

The December figures don't disappoint, and reflect the trend CSO estimates for December (Table 2). Helpfully, the report provides a split between cards held personally and those held for business purposes. The new expenditure on business cards is holding steady, but expenditure on personal cards fell by 11.3% against December 2009 & 27.5% against December 2007, when the Irish recession was getting going. Seamus Coffey has a vey good review, complete with numerous graphs, of the December retail sales available here.

The report also shows an extraordinary decline in the number of personal credit cards issued in Ireland, a drop of 36,000 cards in just one month and a drop of 103,000 in the last twelve, leaving just 2,072,000 in use, still a huge number by continental European standards. This fall is significant in itself as it reflects the closing off of access to short-term borrowing for a very large number of people.

New personal expenditure on the cards has fallen back to the levels of December 2004 and indebtedness is also falling albeit at an excruciatingly slow pace. The balance outstanding (owed) is now “just” 3.37 times the monthly expenditure
It would be interesting to know how many of the cards were cancelled by the issuer or voluntarily handed back. Also how much outstanding debt was written off or converted or “consolidated” into loans on cancellation.

However if we look at the trend, then it is clear that activity in the economy will continue to fall for sometime yet. Credit cards are used by many Irish people for their regular out of pocket purchases. This is called "Froopp" in the language of Eurostat (Frequent Out Of Pocket Purchases), which represent a large proportion of personal expenditure. A drop in credit card activity represents a decline in overall consumer activity. A decline in credit card numbers represents a serious decline in the confidence levels of both the issuing banks and consumers for the future.

Credit card spending is not restricted by weather, indeed bad weather is a boon for internet shopping, for which a credit card is a pre-requisite. The bad weather should be reflected by greater use of credit cards, not less as people used the internet instead of venturing from their homes.

Unless we see some upturn in the domestic economy very soon, the Central Bank's recent gloomy forecasts will begin to look overly optimistic.

Monday, 7 February 2011

Guest post by Dale Tussing: Chinese Health Care - Its Rise and Fall and Current Struggles

With healthcare one of the items on the General Election agenda, Professor Dale Tussing takes a look at the Chinese experience.
It is quite a jump, from the health care system of the Republic of Ireland, population just over 4 million, to the health care system of the People’s Republic of China, where just under 4 million people call themselves doctor! With a colleague, I have been investigating the Chinese system lately and have hopes of publishing our research findings someday soon. I will share with readers here some of what I have learned.

Recently an on-line journal called FP: Foreign Policy ( included China (together with Russia, the USA, and Turkmenistan) as having achieved one of the four worst health care reforms in the world. A system which was once globally admired is now despised. As China’s productivity soared, something bad happened to health care. What happened? I want to answer that question and assess current Chinese efforts to rebuild their health care system.

The Communist Party of China (CPC) came to power through revolution in 1949. They began to build healthcare institutions, often in areas that had never been served by doctors, hospitals, or clinics. That was especially true in rural areas, which held the vast bulk of Chinese population, and which still today accounts for a large majority. In 1958, the commune system established collectivized agriculture, and shortly thereafter China built a system of Cooperative Medical Care (CMC), based in communes. Care was inexpensive, partly because it was rudimentary.

Primary care was provided by paramedics with limited education and training, who became known as the “barefoot doctors”. Care was predominantly traditional Chinese medicine, or TCM, relying on herbal medicine, much of it grown by the barefoot doctors in their own gardens. Participation was universal and compulsory. Under this regime, life expectancy almost doubled (from 35 years to 68) between 1952 and 1982, and infant mortality fell from 200 to 34 per 1000 births.

The World Health Organization, meeting at Alma-Ata in 1978, was inspired by the Chinese rural CMC system to issue a declaration about the possibilities for health care in third-world countries. Ironically, it was in the same year of 1978 that the Chinese leaders began the process of abandoning the system. The “household responsibility system” and markets replaced the communes. The CMC system was ditched. It had been based on the communes, and without major changes would be inconsistent with the new rural economy. Moreover, the CMCs had enemies in the Chinese leadership.

There must have been something special about the year 1978. The radical Chinese shift to privatize their economy occurred in the same year that privatisation began in earnest in Western Europe, Great Britain, and the United States. In the USA, President Jimmy Carter brought in Professor Alfred Kahn, the Cornell economist who introduced privatization in many areas, beginning with deregulation of commercial air service. Professor Kahn died in January of this year. Just two years later, Ronald Reagan, who was to accelerate the process, was elected president. In Britain, Margaret Thatcher became Prime Minister in 1978, and began her campaign to undo nationalization by privatizing large parts of the British economy. In Western Europe, privatization began in several countries in 1978.

In China, the result of privatisation was that the majority of the population lost their health insurance, and almost all medical care began to be sold on an out-of-pocket basis (the process of marketizing medical care was a process that took a long time, not overnight after 1978. Even till this day, many government employees continue to enjoy “free” healthcare). Many people with serious illnesses could not get care, and they became disabled or died. Most barefoot doctors returned to farming, and those who continued as paramedics began to charge fees. China’s primary care system virtually disappeared and has never really been replaced. Most Chinese people seek care from hospital-based specialists.

Is the China of today a socialist state? The central government and the CPC still have much control, and public ownership of enterprises is still widespread. But the example of health care shows how misleading appearances can be. Almost all Chinese hospitals are government-owned. But government subsidies were drastically reduced, and by the 1980s had fallen to 5% to 10% of hospital expenses. Hospitals had to rely primarily on their own revenues, and doctors relied on hospitals for their incomes. Doctors began to prescribe drugs, often medically inappropriate ones, in enormous quantities, and hospitals, rather than drug stores, sold them. Half to 60 percent of Chinese medical expenditures became allocated to drugs, as compared with about 10 percent in the USA and about 15 percent globally. Hospitals remained nominally public, but they had become effectively private – with decisions made by administrators and doctors in their own interests. And care became grotesquely distorted.

The fraction of Chinese health expenditures paid out-of-pocket by families is a telling statistic which graphically shows the astonishing twists and turns of Chinese health care in the last generation. That share was a laudable 20% in 1979, but it rose steeply to 32% in just four years, a change of a magnitude few countries have experienced, absent major war. But that was just prologue. Ten years later, in 1993, the proportion stood at 42%. The peak occurred in 2001 with 60 % of health care expenditures coming from individuals. The figure today stands at close to 40 percent. This figure can be misleading. Many Chinese families cannot afford to pay for treatment of major illnesses and injuries. The out-of-pocket share is depressed whenever care is not covered by any third party but patients and their families cannot afford the out-of-pocket payment.

Cutbacks in health care spending were part of general cutbacks in social welfare spending, and indeed in government spending in general, both absolutely and in relation to GDP.

China has attempted to navigate a middle course in recent years, pursuing a health insurance strategy. Leaders created the New Cooperative Medical Care (NCMC) system in 2003. The name harks back to the successful and popular CMC system of the Mao era, but the NCMC is an insurance system, not a health care delivery system. The ambitious new system had a number of flaws, chief of which was perhaps the fact that not enough money had been allocated. That is a problem which persists today, despite significant increases in government subsidies to insurance.

In 2009, Chinese leaders released a massive document, “Opinions of the CPC Central Committee and the State Council on Deepening the Health Care System Reform,” setting out plans for the future development of the health services. It is long and rambling, and hard to summarize, but some points may be noted:

• Health insurance was to be universal by 2010.
• Hospitals could reduce their dependence on drug sales only gradually.
• The government assured that everyone would have access to at least “basic” medical care.

What is basic care? That appears to be an important question, though the expression remains undefined. The document promises not only basic care, but also basic medical security or insurance, covering basic care to treat basic conditions, using “essential” medicines, all of which is backed up with basic public health. Whatever may be the exact meaning, the purpose and effect of assuring basic care is to limit public outlays on health care. And the government does not undertake to pay for even basic care.

The health insurance system is decentralized, with provinces establishing programme details. Thus it’s impossible to say whether the goal of universal coverage was achieved by the end of 2010. But because of inadequate funding, the drive for universal coverage comes at a very high price. Most provinces cover little or no outpatient care. High deductibles must be met annually before coverage kicks in. There are very high co-pays, with patients often paying half of the after-deductible bill. And perhaps worst of all, there are annual per-patient limits on insurance coverage. The result is that, while there very well may be universal coverage, it remains true that tens or hundreds of millions of Chinese would not be able to afford medical care if they became seriously ill or badly injured.

Chinese leaders seem sincere in their desires to ameliorate the terrible consequences of destroying the health security system, and much of the delivery system, in the late 1970s and throughout the 1980s. They are trying to build an insurance-based system consistent with the state capitalist system they have constructed. But the system they have developed is thus far still a mess. There are many economic incentives which will have perverse consequences. For example, insurance coverage of in-patient but not out-patient care will encourage doctors to hospitalize patients unnecessarily, when out-patient care would suffice, in order to make treatment eligible for insurance reimbursement.

The most serious problem, however, the one which is the source of most of the other problems, is under-funding. Chinese medical care expenditures hover around 5% of GDP (about half of European proportions). Until Chinese leaders are ready to increase significantly government funding for medical care, it will be difficult if not impossible to create a medical care system which is adequate, efficient, and fair.
Dale Tussing is Emeritus Professor of Economics at Syracuse University, in Syracuse, New York. His publications on the Irish health care system date back to the early 1980s. Together with Maev-Ann Wren, he was commissioned by the Irish Congress of Trade Unions in 2005 to conduct a broad study of Irish health care policy, to inform Congress's positions on health care. A version of the report was published in 2006 by New Island Press as How Ireland Cares

Ireland and Greece – A tale of the good twin and the bad twin and their common fate

Terry McDonough and CJ Polychroniou: The Celtic Tiger was one of the most famous economic success stories of recent times. Ireland was the poster boy of the globalised, low tax, business friendly economy. Foreign direct investment poured in at least in the early years. Recorded exports rose to close to 100 percent of GDP. The economy achieved full employment while at the same time profit shares rose. The government deficit was paid down. Ministers and economic pundits travelled the world dispensing advice on how others could emulate ‘the Irish Model.” On the opposite pole, Greece had one of the worst economic reputations in the EU. The public sector, while not especially large by European standards, was notoriously corrupt and fragmented, catering to the needs and demands of an industrial and financial elite and their political collaborators.

At the same time, a swiss cheese of loopholes and tax evasion meant that tax revenues had no hope of catching up with expenditures. The deficit grew to unsustainable levels. Greek exports could not expand fast enough to cover the rising demand for imports. Employment was stagnant and a proper welfare state was never really achieved despite the deficits.

Now the good boy and bad boy of Europe sit side by side like frogs in a pan of water, closed in by IMF-style stabilization programmes, while their European “allies” turn up the heat with unsustainable interest rates. Both economies entered crisis and collapsed. How could this have happened? What did two such disparate actors have in common?

Both economies emerged from the stagflationary crisis of the 1970s and early 80s trying to successfully navigate in the context of the emerging global neoliberal order. Both countries' politics were governed by populist parties throughout much of this period. In Greece the socialists dominated the political scene, while in Ireland Fianna Fail was known for a conservative variety of populist nationalism. Both countries pursued an international model characterised by globalization, neoliberal policies, the financialisation of the economy and a weakened labour movement. This is the fundamental thing they had in common. Each country implemented this programme in its own way with initially differing results. While Ireland caught the neoliberal tide and Greece wallowed in the global shallows, both countries eventually foundered.

Both nations opened their economies to the international markets. EU membership and the adoption of the Euro were central to this strategy. Ireland attracted investment in information and communications technology, pharmaceuticals, and international services. For Greece, it was tourism, shipping and services. While Ireland often ran a trade surplus, Greece was chronically in deficit. Both Ireland and Greece would come to regret, for different reasons, their involvement in international financial markets. A pro-business globalization strategy led both nations to institute a low tax regime. In Greece income tax rates were low and indirect taxation was relied on. Widespread tax evasion was openly tolerated. The Greek government ran a continual deficit building up an impressive stock of national debt consistently well over 100% of GDP.

By contrast the Irish state often ran surpluses, but it did so by heavily relying on property related taxes. This revenue rose as international financial markets and domestic banks pumped funds into the Irish property market and blew up a bubble of monumental proportions.

A weakening labour movement in both countries failed to translate growth into social progress. Inequality increased in both countries. In Greece this resulted in pressure on an inadequate and fragmented welfare state. Coupled with low tax take, this added stimulus to the national debt. In Ireland, people compensated by going into debt. Irish household debt rose from around 40% of disposable income to 180%.

In both countries developments were justified by the aggressive importation of neoliberal ideology. In Ireland, market fundamentalism justified an over-reliance on foreign direct investment, low taxes, privatisation, labour market flexibility, and light touch financial regulation. The Irish deputy prime minister famously claimed that, spiritually, Ireland was closer to neoliberal Boston than supposedly social-democratic Berlin. In the past ten years or so, Greece has been selectively implementing neoliberal policies, engaging in asset stripping of its most profitable public enterprises and the liberalization of the financial landscape, It has been rolling back labour rights, social programmes and entitlements. It has also sought to entice foreign direct investment and to compete at the low end of the index against nations like Estonia and Bulgaria.

The globalization, the neoliberalism, the international financial markets and the rising inequality so central to the growth strategies of both nations would ultimately also prove to be their undoing. Ireland’s financially driven property bubble stalled in 2007 and the international financial crisis in 2008 accelerated the decline. This collapsed property-related revenues and the much lauded low tax regime triggered the fiscal crisis of the Irish state. The collapse of the construction industry, the drying up of credit, radical reductions in state expenditure and tax increases added to consumers lumbered with debt have decimated Ireland’s domestic economy.

Similarly, the Greek crisis was violently brought to surface when the global crisis reached Europe. Inequality in the private economy had driven a halting and uneven expansion in the public sector. A neoliberal commitment to low taxes and “competitiveness” in the global economy had dictated that revenues would lag behind. A massive national debt built up. The government had no reservations in relying on a bloated and lightly regulated Goldman Sachs in order to quietly borrow billions in order to join the euro in 2001 and later on to mask sovereign debt from public eyes through the use of fake statistics. The revelation of these deceptions hastened the EU/IMF intervention.

It is part of the Celtic Tiger myth to believe that the Irish economy was motoring along just fine until Lehman Brothers collapsed. Both Ireland and Greece collapsed very much in the context of the failure of the global neoliberal model.of which they were local variations. This should not obscure the fact that domestic institutions and local policies, supported enthusiastically by local elites, played important roles in both cases. Thus, the Irish and Greek crises are both international and local.

Now both economies are trying to escape their crises by “doubling down” on the very neoliberal policies that brought them to this pass. In both countries inequality is being pursued through cuts affecting the most vulnerable. The wealthy are being sheltered from the tax increases loaded onto the rest of the population. Greece and Ireland have become an early testing ground for the effort of the ECB (and its collaborators) to save the banks and the euro. In Ireland the banks have swallowed tens of billions of taxpayer money. Both governments surrendered sovereignty with no resistance, as if there were no alternatives, and are now trying to convince their citizens that it their “patriotic” duty to offer support to ruthless anti-labor, anti-popular measures of the kind that the IMF, was imposing in Third World dictatorships in the ‘60s, ’70s and ‘80s, under the threat of guns. Ironically, in this regard, the EU appears more ruthless than the IMF.

Further financial turmoil has demonstrated that even “the markets” know that these “bailouts” will only intensify the problem. For both the good frog and the bad frog the choices are stark. They can poach when the crisis reaches the boiling point. They can take a leap in the dark, gambling on an abandonment of the Euro. Or Europe can turn off the heat. This would first involve allowing the radical restructuring of both bank and sovereign debt. Secondly, the EU as a whole should reflate its economy led by trade surplus nations like Germany. The peripheral countries alone cannot, and ultimately will not, bear the cost of addressing a crisis affecting the whole of the Eurozone.
Terry McDonough is Professor of Economics at the National University of Ireland; CJ Polychroniou has taught in universities in the US and Greece and is an Associate in the Freire International Program for Critical Pedagogy at McGill University.

Wednesday, 2 February 2011

When Irish Eyes Are Crying

Paul Sweeney: Financial journalist Michael Lewis will have an article in Vanity Fair magazine next month, “When Irish Eyes are Crying”. You can read it here.

He wrote the now famous pieces on Greece and on Iceland in the same magazine. I am reading his book “The Big Short” and it is excellent – so well written.

He says that the Irish enjoy suffering! “They will take it and take it and then one day they will go Snappo!”

That will be on the 25th!

He argues strongly against Fianna Fail’s line that we must slavishly pay up every penny that Fitzpatrick, Sheehy and all ran up (for the FF builders and speculators). He says the Irish will have no choice but to default on the private debt (i.e. it is not sovereign debt).

Vanity Fair says “Lewis interviewed Lenihan in an attempt to uncover the man’s reasoning for his actions. Lenihan asserted that he had no choice in the matter. “Under English law,” he explained to Lewis, “bondholders enjoy the same status as ordinary depositors. ” As Lewis points out, this is legalistic—“narrowly true, but generally false. The Irish government always had the power to impose losses on even the senior bondholders, if it wanted to.” When he made the decision in 2008, Lenihan said it was done to prevent contagion. But, as Lewis points out, this wasn’t true either. A year and a half later, Lenihan offered a different reasoning, claiming that the bonds were owned by Irishmen. “The Irish, in other words,” Lewis writes, “were simply saving the Irish. This wasn’t true.” The bondholders were mostly foreigners.

Here is a link to Michael Lewis on CNBC talking about his meeting with Brian Lenihan, Irish Bankers and others and the role of Merrill Lynch in Ireland’s downfall.

Merrill Lynch fired an employee who wrote a report that the Irish banks were over-lending dangerously. Yet Lenihan’s Dept Finance hired ML at big bucks to help shovel the cr*p generated by low / no regulation, low interest rates and shifting taxes from income to consumption and overall low direct taxes which created the financial crisis.

Where did it all go wrong?

Michael Burke: The Central Bank’s latest Quarterly Bulletin contains a sharp reduction in its growth forecasts.

It is now forecasting 1.0% GDP in 2011 and -0.3% GNP. Previous forecasts were 2.4% GDP and 1.7% GNP. The media coverage of the downward revision almost completely neglected the reason for the increased pessimism, and over at the Irish Economy blog there has also been a discussion of the Bulletin without ever referring to the cause of the lower forecasts.

So, here is the Central Bank’s own rationale for lowering its forecasts:
"These projections represent a significant downward revision to those published in the last Quarterly Bulletin, which were compiled on the basis of a much smaller €3bn fiscal consolidation in 2011 than the one currently budgeted, and on the basis of continued market access to funding on reasonable terms.”

The point on reasonable funding terms seems misplaced. The average interest rate on the EU/IMF debt to bail out Europe’s banks is no greater than market rates that obtained when he prior Bulletin was published. On 1 October 2010 Irish 10yr yields were 6.6% and 4yr yields were 5.25%.

Therefore, the real change in circumstances is the much larger ‘fiscal consolidation’ in 2011; €6bn in spending cuts and tax increases rather than the anticipated €3bn. This is a rare explicit official admission that the cuts’ policy has a depressing effect on activity, with obvious implications for the entire logic of the policy. If an extra €3bn in fiscal measures can depress GDP by 1.4% and GNP by 2%, what will be the impact of a €15.8bn ‘fiscal consolidation’? In reality, as the central bank points out €700mn of the 2011 measures are non-recurring asset sales and similar (p.29) - which will not affect growth.

Therefore the additional measures affecting growth amount to €2.3bn. And the impact on the economy? GNP will be €2.6bn lower than previously forecast (Table 1).
Now, of course this doesn’t mean that the central bank has joined the investment, not cuts camp. The intellectual contortions required to accept that cuts are necessary even while identifying the damage arising from them is not confined to the central bank.

But what is the fiscal impact?It is commonplace to assert that lower growth will lower taxes by 30%, as that is the proportion of tax revenues relative to GDP. This nonsense is recycled by many who should know better. First, total government revenues (including social security and other items not in the Exchequer Statements) are overwhelmingly derived from GNP and in 2010 were 43.8% of it. Secondly, the sensitivity of taxation revenues is greater still. Sensitivity is not taxation/output but the change in taxation revenues/change in output.

Some leading commentators – advocates of ‘fiscal consolidation’ – seem wholly unaware of this sensitivity of taxation, which the DoF puts at 0.6. Thirdly, the sensitivity of government finances also includes outlays, ie of output falls and unemployment rises social welfare outlays will rise even if welfare entitlements are cut. Usually, these are neglected in the debate but they are about half the size of the tax impact.

So, we reach a situation where, according to Central Bank analysis, a €2.3bn fiscal tightening leads to a fall of €2.6bn in output. According to DoF analysis this will lead to a €1.56bn in fall in tax revenues. Standard assessments of the impact on government outlays would suggest a rise of €780mn, for a total deterioration in government finances (combining falling taxes and rising outlays) of €2.34mn. That’s €4mn more than the ‘fiscal consolidation’.

So, the deficit is being entrenched and consolidated, along with Depression and unemployment. That’s how we got here. Getting somewhere else still requires a different path.

Tuesday, 1 February 2011

Cometh the hour...

Slí Eile: If the experience of the past 30 months has shown us anything it is how unstable, unpredictable and volatile the domestic economy is and, along with it, domestic politics. The range in GDP or GNP forecasts is one such indicator. It is easy (and convenient for some) to forget about 'turning the corner' and 'green shoots' around this time 12 months ago. Times move on. In terms of GNP the latest forecasts from the IMF indicate continuing contaction all the way up to early 2012 where they forecast an extremely modest growth of 0.8%. The Central Bank is more upbeat projecting 1.5% growth in GNP in 2012 following more contraction this year. Behind this headline figure are three significant underliers:

* Falling consumer demand up to the end of 2011 followed by scarcely any volume growth in 2012 (+0.2%).
* According to the Central Bank investment (Gross Fixed Capital Formation) will slump in 2011 and decline modestly in 2012 and
* government consumption will continue to decline in 2011 and 2012. All of this is according to the Great Four Year Plan.
You have guessed where the leap comes from - exports. They are set to grow by around 5-6% per annum this year and next following a big spurt in 2010 at 8%. This is very much driven by a recovery in world trade - at least for now.

Economic policy has become a one-hand-clapping strategy = WAGE CUTS = COMPETITIVENESS = EXPORTS = ECONOMIC RECOVERY. That's the message plain and simple. Sorry about unemployment, poverty and emigration. There is no alternative. And silly any politician who tries to negotiate on the overall size of the deflationary strategy (as distinct from the composition and timing of this) - the received wisdom is that beggars cannot be choosers and we have no cards left to play. We just have to take it on the chin and keep driving wages and public spending down until market confidence is restored. But, you can fool some of the markets all the time and all the markets some of the time. But, you can't fool all the markets all of the time. Hello Eurozone crisis II.

If the IMF and Central Bank (and ESRI) happen to be right then the prospects for employment and consumer spending and infrastructual investment look very bleak indeed - and these along with exports are vital to recovery and debt-reduction in the long-run. In political terms the authorities have chosen to 'default' on the home labour market with high numbers out of work and emigrating rather than 'default' on private debt now transferred to citizens' debt.

To argue, as some do, that deposits and bonds are on an equal footing in Irish law is outrageous, If this stands up in any court then change the law. People as in children, the sick, the young unemployed as well as everyone else come before man-made laws.

In relation to forecasts, it would be more accurate to describe these as technical working scenarios based on a particular set of assumptions (which are not always spelt out in public). In other words, the foreseen future is based on past relationships and future extrapolations based on particular chosen assumptions. Nothing fundamentally wrong with that - but lets not imagine that anything in this world quite behaves and reacts like the way macro-economic forecasting says it must. Markets, Governments (and the weather!) have a mind of their own. And so do voters later this month.

What is so desperately needed now, today is a coherent set of agreed policies on a wide range of key issues that can command a progressive consensus. Such a consensus needs to spell out the 'non-negotiables' - the red line issues beyond which no party to the agreement will go into Government or support a Taoiseach. One may not transform Ireland in four years and achieve well-being, prosperity and fairness all at once - but it is the direction of movement that matters and the soundness of any strategy to address the twin scourges of unemployment and debt (all types of debt and not just governmental and corporate-banking).

Calling it right

Over at Notes on the Front, Michael Taft looks back to early 2010 and the TASC Open letter to discover who called it right and who called it wrong.