Wednesday, 29 June 2011

Car Scrappage Scheme: A Nice Little Stimulus...for Germany and Japan

Tom McDonnell: The much maligned car scrappage scheme comes to an end tomorrow. Unsurprisingly the car 'industry' proclaims it a success.

The scheme was a nice little stimulus for...Germany and Japan.

Another example of hairbrained policy making and wasted money. Ireland does not make cars and most of the money from these sales goes to overseas manufacturers in countries like Germany and Japan. It is hard to imagine a stimulus with a higher rate of leakage. Spending money on imports simply boosts jobs in other countries while channeling spending away from the domestic economy.

If the Government insists on handing out the gift of tax breaks (meaning money lost somewhere else in the economy) to specific types of retail businesses in the future it would be prudent to at least target those goods and services that are made in Ireland.

Paddy Logue over at the Irish Times has a good take on it:
"It used Government money to discount new cars for people who already have access to money or credit while getting them to junk a perfectly good car and then buy a new one whose production no doubt caused another small rise global warming."

And Friends of the Earth point out:
"each new car represents two to three years of pollution before it even hits the road"

Tuesday, 28 June 2011

Comparative prices for the EU

Rory O'Farrell: Eurostat has brought out an interesting publication today on comparative prices.

This index is based on consumer expenditure, so one should look at the detail. Ireland is still relatively expensive, the 5th most expensive in Europe for consumers.

There are some puzzling figures that often occur in these comparisons. Ireland imports clothing and electronics, but these are relatively cheaper in Ireland. We export food and non-alcoholic beverages, which are relatively more expensive. Its unclear quality is adjusted for, though they do their best. For example, I certainly consider Irish butter (and dairy products in general) to be of a higher quality to that available in Belgium. However, electronic goods can probably be easily compared across countries.

What I find most interesting is that restaurants and hotels are 29% above average (Italy is 7% above the average). This is interesting as in 2008 labour costs for Italy and Ireland were identical for this sector, and in Italy they have relatively increased. So the cause of higher prices must lie elsewhere (such as food prices, excise duty on alcohol, or rent).

Ireland is the most expensive for cigarettes and alcohol. But this needn't worry us to much from a structural competitiveness standpoint, as the high excise duty is part of our social policy which aims to curtail the consumption of such items.

Its also interesting to make a comparison to 'comparative price levels' which is an index based on the whole economy (including government and business expenditure). Here, in 2010 the Irish level is only 12.1% above the EU average, and 6.3% above the EU15 (the lowest for about 10 years). This shows that consumer prices are more out of line than prices faced by business and government.

Google and the case for broadband investment

Tom McDonnell: It is too easy in these days of high drama on the European stage to forget the fundamentals that will drive our eventual economic recovery. And we will recover provided we make the right strategic decisions.

It was welcome therefore to see this intervention by Google's executive chairman Eric Schmidt. He stated yesterday:
“The thing the Government can actually do that’s hard is [to] work with the telecommunications providers to get more broadband. It’s very difficult for small businesses to do,”

“There are very few things that are better use of your money than long-term infrastructure in information technology that serves the interests of the citizens of the country.”

My own doctoral research has focussed on the development of telecommunications infrastructure in Ireland and there is a wide body of theoretical literature and empirical evidence that backs up Schmidt's claim that 'broadband' matters for a country's growth prospects.

The rate of knowledge acquisition in an economy plays an important role in the long term growth rate of that economy. Broadband internet reduces the costs associated with learning and is a facilitator of knowledge acquisition and diffusion par excellence.

It is what is known as a General Purpose Technology. That is a transformative technology like the steam engine and electricity which affects the entire economy.

And Ireland is a broadband laggard.We are at the bottom of the class with Portugal and Greece.

Fixed (wired) broadband subscriptions per 100 inhabitants in the EU15 and Norway, Iceland and Switzerland (June 2010)
Rank Country Total
1 Netherlands 37.8
2 Denmark 37.3
3 Switzerland 37.1
4 Norway 34.2
5 Luxembourg 34.1
6 Iceland 33.3
7 Sweden 31.8
8 France 31.4
9 Germany 31.3
10 United Kingdom 30.5
11 Belgium 30.0
12 Finland 26.4
13 Austria 23.0
14 Spain 22.2
15 Italy 21.3
16 Ireland 20.3
17 Portugal 18.9
18 Greece 18.7
Source: OECD

A number of factors have hampered broadband development in Ireland, for example, low population density and a geographically dispersed population.

A lack of infrastructural investment by Eircom has also contributed negatively to broadband development in this country. One reason for the lack of investment is that the company was loaded with debt in the years after privatisation. Eircom now has debt levels approaching €4 billion. This was a legacy of Leveraged Buy Outs which the state had made itself powerless to stop.

Eircom's troubled finances will prevent it from investing sufficiently in the future. Although the Government's finances are perilous, the case for state investment in broadband is strong.

Lessons from Brazil

Paul Sweeney: While the recession shows no sign of ending here, it is good to look abroad at other counties which had hard times and are doing well today. Brazil's GDP grew 7.5 percent in 2010 and is expected to grow approximately 4 percent in 2011. Brazilians are benefiting from stable economic growth, low but rising inflation and improvements in social well-being.

When Brazil elected the Workers Party leader Luiz Inácio Lula da Silva as President in 2003, many western commentators predicted that with left politics and even worse, equalitarian economics, the country would soon collapse again. A founding member of the Workers Party (PT – Partido dos Trabalhadores), Lula had run for President three times unsuccessfully, before the was finally elected in 2003.

In the late 1970s, when Brazil was under military rule, Lula helped organize union activities, including major strikes. The strikes were deemed to be illegal, and Lula was jailed for a month. He was a trade union activist and in 1975, he was elected president of the Steel Workers' Union, in the region where the major car makers’ plants are. In 1980, he and a group of academics, intellectuals and union leaders founded the Workers' Party, a progressive left party to struggle against Brazil's military government.

Less than 30 years later, in 2009, Newsweek called Lula “the Most Popular Politician on Earth” as he addressed the UN in New York. “With his leadership, Brazil has withstood the global crisis better than almost any other nation: not a single bank went under, inflation is low, and the economy is growing again. "People doubted it when I said we would be the last to fall into recession and the first out," Lula told Newsweek in an exclusive interview. “Brazil is looking pretty good compared with most places; it's outpacing Russia and joining India and China — the other big emerging powers tagged collectively BRICs — to lead the way back to global economic growth” Newsweek concluded

Even the right wing Economist magazine more recently confessed, in its 4th June edition “A decade of faster growth and progressive social policies has brought a prosperity that is ever more widely shared. The unemployment rate for April, at 6.4%, is the lowest on record. Credit is booming, particularly to the swelling numbers who have moved out of poverty and into the middle class. Income inequality, though still high, has fallen sharply. For most Brazilians life has never been so good.”

Lula’s successor is President Dilma Rousseff who took office on 1st January. Ms. Rousseff, the first woman President, has vowed to eradicate extreme poverty and keep the country on a sustainable development path. However, the economy does appear to be overheating. This is an important and difficult challenge for all politicians, because when Ireland economy was overheating in the 2000s, those of us who said taxes should be raised were ignored or at best ridiculed. In short, most politicians do not want to deal with pro-cyclical trends.

The tight labour market may push up prices and workers will seek higher wages as inflation takes off. Brazil’s minimum wage will rise by 7.5% in real terms next year, which is in stark contrast to the decision to cut our minimum wage by the Green / Fianna Fail parties, which has happily been reversed by this government. With the boom, foreign investors have poured in and the currency is overvalued, causing industrial production to dip a little.

The population is over 186 million and its fertility rate is below replacement, with an employment rate of 68%. Its GDP per head is €10,427 on a PPP basis in 2009. It is largely Roman Catholic (74%), and life expectancy is 69.4 years (men), 77 years (women). Brazil was one of the last to fall into recession in 2008 and among the first to resume growth in 2009.

Ms. Rousseff depends on a wide and fractious coalition. Her main partner is the populist Brazilian Democratic Movement which is squabbling on issues. The Government is tightening the booming economy with the rate of interest raised a little – three times this year to 12%. Booming tax revenue has improved the primary surplus, but the government has tightened up spending though, mainly on the capital side.

The Growth Acceleration Plan (PAC, in its acronym in Portuguese) launched in 2007 to increase investment in infrastructure and provide tax incentives for faster and more robust economic growth. It has worked and contributed to the country’s 5.1 percent growth in 2008 and its quick recovery from the crisis in 2009, when it had one of the smallest downturns among developed and emerging economies.

There are important infrastructure challenges. The country will host the World Cup in 2014 and the Olympic Games in 2016, demanding massive investments in areas such as urban and social development and transport infrastructure.

Brazil experiences extreme regional differences, especially in social indicators such as health, infant mortality and nutrition. The richer South and Southeast regions enjoy much better standards than the poorer North and Northeast.
Poverty (PPP US$2 per day) has fallen greatly, from 20 percent of the population in 2004 to 7 percent in 2009. Extreme poverty (PPP US$1.25 per day) has also dropped dramatically, from 10 percent in 2004 to 4 percent in 2009.

Between 2001 and 2009, the income growth rate of the poorest ten percent of the population was 7 percent per year, while that of the richest ten percent was 1.7 percent. This disparity on income rise helped decrease income inequality (measured by the Gini index) from 0.596 to 0.54 in the period. Key drivers of this have been low inflation, consistent economic growth, well-focused social programs, and a policy of real increases for the minimum wage. However, despite these achievements, inequality remains at relatively high levels for a middle income country.
Yet overall progress has been good. Who says you cannot have economic growth through egalitarian economics?

Monday, 27 June 2011

Cost/benefit analysis of complying with the ECB’s wishes

Tom McDonnell: Namawinelake has put up part of the transcript from Minister Noonan's interview yesterday on 'The Week' programme. Evidently the ECB doesn't threaten sovereign countries. Except when it does.

On the ECB stonewalling of burning bondholders Namawinelake makes the following reasonable statement:
"The point of this is we have serious economic considerations on the bonds but we also have serious considerations on what the cuts and austerity will do to our society. And it is logical, is it not, that there is some tipping point in the cost/benefit analysis of complying with the ECB’s wishes that we say “that’s not worth it”. If bondholders cost us €1tn then the decision might be black and white. If the cost was €1m, it would also be black-and-white at the other end. I tend to think that the costs are too much and when we consider the sort of society we’ll have with the cuts and taxes, the larger class sizes, the lower healthy life expectancy, the fear and fact of crime.

So let’s have the debate, acknowledge the ECB funding of our banks (which is not costing the ECB a penny though there is risk), consider the savings, consider Plan B and its costs and benefits, set out the likely cuts and taxes and then decide for better or worse to accept this or not.."

Over at Economic Incentives
Seamus Coffey takes a look at default options and concludes:
"it does not seem that default could generate the required savings to make it a viable policy option.."

These are debates whose time has come. Of course events may overtake everything. Reuters (citing Markit) reported on friday that five-year credit default swaps on Greek government debt rose 138bp to 2025bp, implying a more than 80% default probability.

Sunday, 26 June 2011

The Eurozone crisis: in the trenches

Slí Eile: It never ends. One last deflationary-bail-out-shock the markets-slash the deficit push on the plains of Picardie and this will see us home for Christmas and recovery will return and we can get back to normality. Two pieces offer themselves for careful consideration this morning - Colm McCarthy in the Sunday Independent here and Michael Burke writing on Socialist Economic Bulletin here. The writing is on the wall. If domestic deflation is not impressing the angry gods why do we continue to sacrifice our children's future in the name of the modern day gold standard? Martyn Turner said it all in a picture cartoon in the Irish Times earlier this week.

Thursday, 23 June 2011

Headline growth

Michael Burke: Irish Economy Grows Fastest In Three Years, runs one headline on the Blooomberg news agency. It would be great to think that after all the sacrifices to date, their truly was a corner being turned at last.

But a closer inspection of the CSO report reveals a much less rosy picture. GDP rose by precisely €500mn in the Q1 (in real, seasonally-adjusted terms). Bu this was more than accounted by the rise in exports of €1,471mn. In addition, imports fell, as households are too impoverished and business too unwilling to invest. They fell by €106mn so that net exports rose by €1,577mn, or more than three times the recorded rise in GDP.

As we know, the export sector is an ‘enclave’ in this economy, employing relatively few workers and requiring even fewer inputs from the domestic sector of the economy. Indeed, some of the activity recorded as exports is not real economic activity undertaken here at all but simply foreign (usually US) Multi-National Corporations booking activity in Ireland t avail of the ultra-low taxes.
The domestic economy remains deeply in the mire. This is the sector that both employs the vast majority of workers and is responsible for nearly all the taxation revenues. GNP contracted by 4.3% in Q1 and is now 15.4% below its peak level.

Nearly all categories of the economy continue to contract. Household consumption and government expenditure both fell by 1.9% in Q1 and now stand 12% and 11.2% below their respective cyclical peaks. Inventories continued their decline.
The sole recorded rise was in investment (gross fixed capital formation), up €46mn in the quarter. That this now amounts to a 1.1% rise shows just how far investment has fallen. Even so the decline in investment still accounts for a total annualised loss of over €22.3bn in the course of the recession and is 59.2% below its peak. This is more than the entire recorded fall in GDP (because exports have risen) and 95% of the entire fall in GNP.

There can be no idea of a sustained recovery without a rise in investment. The latest tiny pick-up in investment makes barely a dent in that huge shortfall. If investment were to return to its pre-recession peak (which was a full one year before the recession began) then at this pace it would take 34 years to achieve it.
As this economy is gripped ever tighter in the ‘austerity’ vice it is perhaps worth recalling that the core countries of the Euro Area did not respond to their own economic and fiscal crises with the same medicine. Their strong growth at the beginning of this year is not the accounting tricks of US MNCs but real activity by their own producers, with the result that recorded growth has been accompanied by job-creation and a lower deficit.

Perhaps the Bloomberg headline should have read: US Accountants Create First Appearance of Irish Growth For Three Years.

Cut Rents not Wages to Save Jobs in Retail

Nat O'Connor: Retail Excellence Ireland (REI) has released a survey of their members, which they contend shows that abolition of the JLC system would lead to thousands of jobs being created in retail (Press Release, 15 June 2011). There are good reasons to believe that this is a mistaken point of view.

REI got responses from nearly half their members, 342 companies which operate 4,445 stores, who said that if the JLC system was abolished that they would save 2,896 vulnerable jobs and create another 2,888. Treating this as a representative sample, REI estimate the total number of jobs created would be four times this, as there are c. 25,000 stores in Ireland.

There are three problems.

Firstly, good business sense does not add up to good economics. Say one business cuts the wages of its staff - that business has saved money and, all things being equal, should become more profitable (although staff performance might also fall). However, one stores's employee is another store's customer. If the 200,000+ generally lower paid workers protected by the JLC system all suffer pay cuts, that is going to lower demand in the economy; i.e. they are all going to have less money to spend in the local economy. And people on low wages spend most or all of their money. (All of this is basic economics). Hence, the companies consulted by REI might believe today that they could save and create jobs - but if demand falls, as it surely must from cutting the JLC system, than the same stores will find that they cannot expand employment after all.

Secondly, we cannot be sure if the 342 companies that responded to REI are in fact a representative sample. These companies have an average of 13 stores each, but there are many one-off stores among Ireland's 25,000. We do not know if these stores would be in the same position to save or create jobs. So, REI's multiplication by four might be over-stating the probability of job retention/creation.

Thirdly, the international evidence is broadly against any strong relationship between cutting wage levels and job creation. The strongest studies are of US States, and even counties within those states. These studies compare two areas side-by-side (with similar workforces, similar industries, etc) where one of them cuts wage protection and the other does not. Over time, no great difference in job creation is shown. This evidence strengthens TASC's confidence in the theory that while individual businesses may benefit from lower wage costs, they equally suffer from the economic effects of reduced demand. (See references below)

Therefore, it is fairly safe to assume that cutting the JLCs will neither save nor create jobs in retail.

There is hope however.

REI also found that the companies surveryed would save 7,791 vulnerable jobs and create 5,072 new jobs if the Upward Only Rent Review (UORR) was abolished. Unlike the JLC system, which affects demand that retail so badly needs, there is no such effect with rents. Most commercial landlords are higher income individuals or companies that save rather than spend most of their incomes. Therefore, cutting those incomes will not greatly affect retail demand as they are likely to cut their saving rate before they will drop their lifestyles (spending habits).

However, we still don't know if the multiplier of four would apply or to what extent these 4,445 stores experience of UORR is representative of others. In fact, city centres (where rents are highest) tend to be dominated by chain stores. So, it is possible that many one-off local stores are less affected by UORRs; although excessively high rents can be a problem for any business.

We could be more conservative than the REI and suggest merely doubling the survey findings to estimate the likely employment effects. That would mean abolition of UORRs could lead to c. 15,000 vulnerable jobs being saved and c. 10,000 new jobs being created.

On REI's website, there is a banner headline stating: "High Rents Are Killing Retail Jobs". In a similar vein, Declan Ronayne, MD of DSG Ireland (Currys, PC World, etc) spoke on RTÉ's Morning Ireland programme (23 June 2011, c. 8am) that the focus on JLCs was a mistake, and that rent levels was a much more pressing issue.

Economic theory and evidence concurs with this perspective. Cutting rents, not wages, is indeed likely to save and create jobs in retail.

Thanks to Tom McDonnell for these.

Card D. and A. Krueger (1994). Minimum Wages and Employment: A Case Study of the New Jersey and Pennsylvania Fast Food Industries. American Economic Review. 84(4), 772-793. Available here.

Dube, A, L, T. William, & Reich, M. (2010). Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties. UC Berkeley: Institute for Research on Labor and Employment. Available here.

The preface to this book puts the results into plainer English.

Note: the economy is a dynamic, complex system. Establishing causality is notoriously difficult in the social sciences. Just because a study argues there are ‘no employment effects’ or ‘substantial employment effects’ should never be grasped as proof about an underlying economic relationship. All we can ever have is estimated probabilities.

The Duffy/Walsh report made the point that there was evidence of publication bias in wage-floor research. Evidently ‘employment effect’ results were more likely to get published than ‘no employment effect’ results. They referenced this: Doucouliagos, H. and T. D. Stanley (2008). Publication Bias in Minimum-Wage Research? A Meta-Regression Analysis, British Journal of Industrial Relations.

Monday, 20 June 2011

Progressive growth, rather than regressive austerity

Tom McDonnell: Michael O'Sullivan has a very thoughtful piece over at the Sunday Business Post. He argues that a full restructuring of the Greek debt will occur later rather than sooner - and that it will happen when the ECB, rather than Athens, is ready for it.

He makes the point that a restructuring of Irish debt could be the beginning or catalyst to a process of renewal provided the restructuring encompasses deeper institutional change than has been contemplated so far, a radical strengthening of accountability and corporate governance in public and business life, and a meaningful recovery plan.

He also argues that "Ireland should insist that progressive growth, rather than regressive austerity, is the way for the eurozone to solve its economic problems" and that "we must show leadership by proposing serious structural changes to the eurozone financial system that take account of the lessons of Ireland’s economic collapse."

The article goes on to make a series of excellent reform suggestions including the idea of a ‘super’ social affairs ministry, that deals holistically with the symptoms and causes of our social problems.

The need for diversity in policy advice

Peadar Kirby: When speaking to the NESC on Friday last, the Taoiseach Enda Kenny made a point that, if taken seriously, has the potential to address what has been a major weakness in Irish public policy. According to the report in The Irish Times, the Taoiseach said that council recommendations need not always be based on a consensus view. “It is better to have reports which reflect some variety of views, rather than self-censorship which excludes consideration of difficult questions,” he said.

The Taoiseach’s comments identify what has been a major problem with the policy advice given to successive governments by the NESC, a problem that to my knowledge has never before been identified. This is that NESC reports need to win agreement from the social partners and, as a result, they tend to fudge rather than highlight policy options, often ending up saying quite contradictory things in the same document. Because most of the reports are lengthy, these contradictions tend not to be noticed as different interest groups can find elements that suit their needs. Neither have academics, with a few notable exceptions, studied these reports with the attention they deserve so that they have rarely generated much public debate.

All of this has served to impoverish public debate on the making of policy as quite narrow and technical approaches have tended to dominate, usually limiting access to experts and failing to address the deeper values that inform policies and the goals to be achieved. Enda Kenny’s recommendation of the validity of a variety of views is therefore refreshing and of great significance. Equally, his advice to the council to consider producing more frequent, shorter and more timely reports, if these served to foster debate on the different options facing society, has the potential to make a major contribution to the kinds of debates we so badly need.

In this regard, the methodology followed in Costa Rica is worthy of study. There an annual state of the nation report is drawn up by a team of worthy citizens – usually former presidents and government ministers, retired senior academics and other senior figures, aided by a team of experts. All of this is done under the aegis of the rectors of the country’s public universities. What makes these different to the reports produced by NESC is that they explicitly seek to highlight the different options facing policy makers and the public on specific areas of public policy. Regularly the reports contain dissenting views, making clear the basis for the differences identified. All of this serves to nurture and inform a variety of approaches to public policy, greatly enriching the process of policy making and drawing into the discussion wider sectors of the population.

This may be one reason why Costa Rica stands out in Central America for the quality of its public policy, being a global leader in policies on climate change and avoiding the worst of the recent financial crisis through its regulation of the banking sector and its early stimulus package to maintain demand in the economy. As a result, credit kept flowing and economic recovery kicked in quickly. The main problem now facing policy makers is how to reduce a budget deficit that reached 3.3 per cent of GDP at the height of the crisis!

Saturday, 18 June 2011

The realm of forgetting

Michael Burke: I’m guessing that Dan O’Brien may not be every reader of this blog’s favourite economic commentator. Just a hunch. But reading a recent piece of his in the Irish Times, reminded me of some of the great works of magical realist literature. Seriously.

In Dan’s piece reviewing the new government’s first 100 days he had this very interesting passage, “There are also doubts about whether it [the government] has the technical capacity to conduct a truly comprehensive spending review. At a recent seminar co-hosted by that [Public Expenditure and Reform] department, a senior official said it was only now developing capacities to carry out cost/benefit analyses. Worse still, he noted this capacity had withered, having once existed at the insistence of the EU when it wanted its structural funds to be properly spent. When asked why the methods used in the past were not simply used again instead of trying to reinvent the wheel, he was silent.”

Now, it’s not altogether surprising that there is no cost/benefit analysis being conducted ahead of government policy decisions, or even as an evaluation once implemented. Clearly, many of the decisions taken would have been avoided had any evaluation of their likely impact taken place, or revered once the damage was clear. Some while ago I was asked to write an article for Public Affairs Ireland in which I argued that An Bord Snip Nua had made no attempt to evaluate the impact of its voluminous recommended cuts. You remember Colm McCarthy’s meisterwerk? The one that said its cuts would eliminate the deficit by 2011. Public Affairs Ireland must have liked the piece so much they held onto it. Never published it. Or made any contact with the author since receiving it.

It would clearly be a public good if the State had some mechanisms to evaluate the impact of its actions, preferably in advance, but ideally both before and after. It would also be helpful if there was analysis of where things went right and when they went wrong, just to try to increase the proportion of the latter.

There used be to evaluations of the National Development Plans coming out of our ears. But that was because the EU insisted on monitoring the impact of its money. The conclusion of the evaluations was extremely positive, estimating an enormous impact from an increase in public investment. Now, there is no plan, no assessment and no investment.

There has been a State-sponsored exercise in forgetting. Because the lessons learnt were that public investment works- generating €2.40 in activity for every €1 invested.

Instead, we have entered a mythical land where history no longer exists, even while a consensus about the past is manufactured. A Latin American terrain of viciously opposed parties who enact exactly the same policies. And where there is a daily barrage f propaganda justifying cuts, yet leading public servants have nothing to say when asked why the evaluation methods of the past were not simply used again. “He was silent”.

Thursday, 16 June 2011

A long, long, long way to go

Michael Taft: A good step; but a very small step: the Finance Minister’s announcement that the Government will seek a substantial write-down of the €3.8 billion in senior unguaranteed unsecured debt in Anglo-Irish and Irish Nationwide will be welcomed. Some will legitimately complain that this should have been done after the Anglo nationalisation, when that debt stood at approximately €16 billion. But that was the fault of the previous government. Most of the debt has been paid off and we are left with the bill – a €31 billion promissory note which will cost the Exchequer €43 billion with interest over the next 15 years. So this first step on senior bondholders is the new government’s initiative. But let’s put it in perspective – the impact will be very small and even if successful we will be left with a staggering bill for winding down, what the Minister has called, this ‘warehouse’.

Currently, the Government is committed to paying off a promissory note of €31 billion (€25.3 billion to Anglo, €5.4 billion to INBS and €0.35 billion to the Educational Building Society). This will entail a cost of €3.060 billion borrowed in each year up to 2023, with a further payment of approximately €2.8 billion in 2024 and 2025.

This is an intolerable burden – equalling 2 percent of 2011 GDP; a burden that would not be accepted in any other EU country; and for a bank that isn’t even a bank. So what difference would it make if the Minister gets his way? Some, but not very much.

In putting forward his suggestion for burden sharing, the Minister referred to the current discount. This, therefore, doesn’t suggest a complete liquidation. The Irish Times reports that Anglo’s November 2011 bonds (€750 million) fell to 70 cents following the Minister’s announcement.

The following calculation, therefore, assesses the impact of writing down the €3.8 billion in senior unguaranteed debt by 50 percent. This would mean a write-down of €1.9 debt, or 6 percent of the current promissory note. This would result in the following difference in annual payments:

• Current Annual Payment: €3.060 billion
• New Annual Payment after Write-down: €2.870 billion

While the new annual payment is my own calculation, any revisions would be trivial.

So after a 50 percent write-down of the senior unguaranteed debt, we would see the annual payments fall by €190 million per year. We would still be pay close to €2.9 billion. This is no less an intolerable burden.

However, we may be into a ‘running-to-stand-still’ situation. The Department of Finance’s projections of the overall cost of the promissory note, including interest, is premised on long-term borrowing costs of 4.7 percent – a technical assumption ‘based on the weighted average cost of funds raised by the NTMA in the bond market in 2010’.

That technical assumption no longer holds. With ESFS borrowing rates at 5.8 percent, we should expect the overall cost of the promissory note to increase. So if we apply that new interest rate and apply it to the promissory note minus the 50 percent write-down of senior unguaranteed debt – we will find the level of payments rise again over the lifetime of the note. In other words, there is little if any net gain.

The Minister for Finance should be supported – as a first step, as an opening of the door. But the fiscal impact will be minimal and the state will still be under an unacceptable and irrational burden.

It is now time for a more radical, thorough-going approach to write-down, if not entirely eliminate, the public exposure to the costs of winding down Anglo and INBS. A starting point comes from the TASC document on banking, ‘The Debt and Banking Crisis’:

‘Insolvent banks should not be further supported by public funds and should be allowed to fail. In Ireland this means that, at the very least, Anglo Irish Bank and INBS should be allowed to fail. No further payments for Anglo Irish Bank’s promissory notes should be made.'

That’s a good starting point.

Wednesday, 15 June 2011

Sharing burdens

Slí Eile: excellent piece recently here. The message still holds even in light of today's very partial announcement about seeking remission on the senior bondholder debt.

Unnatural selection

Paul Sweeney: In Tuesday's Financial Times there was a really provocative book reivew by Joshua Kurlantzick on a book by Mara Hvistendahl on the unnatural selection of boys over girls. He and she explore the implications for certain countries if this really develops much further. Whatever ones views on demography, on abortion, on ultrasounds,on boys and girls, on equality or whatever, this is very thought provoking.

Tuesday, 14 June 2011

TASC launches new report on health inequalities

Click here to download TASC's new report, Eliminating Health Inequalities - A Matter of Life and Death. A digital version is available here. Comments welcome.

Cutting Human Rights

Tom McDonnell: It was good to see the Council of Europe's Human Rights Commissioner Thomas Hammerberg wade into the austerity debate (See Here).

He talks about his recent visit to Ireland and about Governmental decisions to erode funding and structures used to support human rights and protect the most vulnerable.

His last paragraphs are important:
"In a longer perspective there is no contradiction between measures to ensure economic growth and stability and to protect and care for the most vulnerable. Austerity measures which exacerbate inequalities will only postpone problems and in some fields make it even more costly to resolve them at a later stage.

At stake are essential values of basic justice and social cohesion. Those already disadvantaged have no belts to tighten and must not be asked to make sacrifices for a crisis which was not of their doing."

Monday, 13 June 2011

Guest post by Martin O'Dea: Economics for technological acceleration

Martin O'Dea lectures in Management and Human Resource Management at the Dublin Business School: The internet was a revolution that saw massive investment followed by the seemingly inevitable crash and the eventual rebalancing in monetary value of a central technology that can greatly benefit our lives, keeping us informed, connected and allowing us to see the world as our market.

The fact that technologies don’t forget what they learn or, indeed, don’t need anything other than the smallest amount of time to download what another piece of hardware has acquired, added to the fact that scientists in their lab coats keep finding ways to push the speed and efficiency of how they can compute to levels of unimaginable speed and accuracy mean that technology does not just grow its impact and potential; it accelerates.

What economic impact of 3D printing, cloud computing, nanotechnology and simulated realities? What impact of the fact that these developments may be surpassed within months of actualisation, what impact of the fact that that very process may speed up? Perhaps more relevant again, what impact of appropriately functioning robots in the workplaces? Robotics was like many arenas of technology, unrealistically thought to change the world in the 1980s – the vast complexity in the simple things that humans do and would need to be replicated (like sidestepping an opening door) were not accounted for; and many people assumed that robots were a thing that was not quite a thing of the past.

There are many companies in Japan and elsewhere that are over 30 years into development and would beg to differ, again it is important to bear in mind – if you teach one robot to do something, you, effectively and instantaneously, teach them all. Do you believe that when a point is reached (and all evidence now sees this as within reach inside a decade) that robots can carry out the work involved in a fast food restaurant that McDonalds will continue to pay people instead of buying robots? It is said that you can only approach the future with the psychology of the past; but should we add the economics of the past to that as well. Certainly this means unemployment to those currently employed in McDonalds, but, it is really missing the picture if we do not see the continuous societal benefit of developing technologies, and we cannot find economics that will stop us hurting from our progress.

There is a debate as to whether there will ever be a post-scarcity society. The idea of standing before a Star Trek ‘Replicator’ type device has often been the root of young jokes as teenagers imagined conjuring up cigarettes and alcohol from these manipulators of matter; however can I suggest that people look at 3D printing via the recent announcement to begin to grapple with the concept of a future of post-scarcity. I am inclined to align myself with the argument that the value will be acquired by the desirability in the future, and so like oxygen (abundant and free) there will be many things that are now monetised that will not be so soon – and this, of course will greatly help humanity; however, I feel that whether it is leisure/physical space/certain resources/information there will be future monetised objects and perhaps while we could all print some clothing only leading designers of 3D printed items will charge money for theirs etc.

I would like to pose a simple concept for economists' comment in light of the above. If there will be, and in many ways already are, essential and desirable and abundant free products could we not realign our monetisation system to represent that with more social benefit. Could we not use two separate currencies? One currency would be used for a wide range of product/services that are seen as necessities.

Every household would have access to a large purchasing power within these categories, including much of welfares payments etc. and have a large universal wage that would allow each person sufficient funds to be adequately supplied with these items. Those that earn more may take some of their payment in the second –non-essential – currency. Most likely the ‘luxury’ items will take a mixture of currencies as one could buy non-essential currency with the essential currency. However, certain products/services being made widely available while maintaining the competitive motivations of the market economy and competitive labour markets could be achieved in this model – while we ease towards a society where perhaps the house with the beach will remain sought after but very many things become universally available.

Friday, 10 June 2011

Executive directors, other employees and pension inequality

Gerry Hughes: In 2007 employer contributions to occupational pension schemes on behalf of employees amounted to €1.4 billion and the estimated cost of tax relief and the exemption from benefit in kind taxation were €150 million and €540 million respectively. The tax reliefs were concentrated on the top 20 per cent of earners. As neither the pensions industry or the pension regulator publish any information on the distribution of pension contributions or pensions in payment we know very little about who benefits from employer contributions or how the pension entitlements of high earners compare with those of other employees. However, publicly quoted companies are obliged to publish in their annual accounts information about the pension arrangements for each of their executive directors. Using information for 2009 for 147 executive directors in 48, mainly publicly quoted, companies in conjunction with national data on pension arrangements for other employees makes it possible to compare (see here) how pension arrangements for executive directors differ from those of other employees. The comparison shows that:

• The average annual employer pension contribution in 2009 for executive directors in large publicly quoted Irish companies is nearly 36 times more than for other covered employees (€100,000 versus €2,700).
• The average employer pension contribution rate for executive directors is almost 26 per cent of salary whereas the average employer rate for other private sector employees is around 7 per cent;
• On average an executive director would have been entitled to a pension of almost €200,000 if he or she had retired in 2009, or nearly 17 times more than the State pension on which the great majority of pensioners are dependent for most of their income in retirement;
• The average value of an executive director’s pension fund amounts to €4.1 million or 34 times more than the average value of the pension fund of €120,000 for other employees:

Pension inequality is much greater in the private sector than in the public sector. Research by Jim Stewart (see here, behind paywall) shows that top civil servants received an average pension of €125,000 in 2009 or about six times more than the average pension payment for retired civil servants.

The best way of creating greater pension equality between high, middle and low earners would be to give the tax relief at the standard rate of tax as is now done in the case of mortgage interest relief and health insurance relief. While the EU-IMF programme contains a commitment to standardise pension tax reliefs the pensions industry is opposed to this and the Fine Gael/Labour government prefers to continue giving the tax relief at the marginal rate of tax. In these circumstances an alternative which could raise as much revenue as standard rating would be to reduce the earnings cap on pension contributions and the lifetime size of pension funds.

In Budget 2011 the government reduced the cap on the annual earnings contribution eligible for pension tax relief from €150,000 to €115,000 and it reduced the lifetime cap on the size of an individual pension fund from €5.418 million to €2.3 million. While these reductions create greater equity in the pension system, neither of the caps is consistent with recommendations by the TCD Pension Policy Research Group, TASC, Social Justice Ireland, the OECD and other commentators that tax relief on pensions should be concentrated on middle and lower income earners. Much greater equity in the pension system could be achieved by targeting pension tax reliefs at these earners. This could be done by reducing the annual earnings limit for pension contributions from €115,000 to €75,000 and by reducing the cap on the size of a pension fund for an individual from €2.3 million to around €0.6 million.

Thursday, 9 June 2011

Negotiating truth

Tom McDonnell: The FT makes an important point about the supposed independent country assessments produced by bodies like the IMF and the OECD.

These are 'negotiated' documents and consequently are not independent.

Worth bearing in mind the next time you hear a journalist reporting, or Government minister boasting, about a positive forecast or review.

Or indeed claiming that a 'programme' is on track...

Tuesday, 7 June 2011

A picture paints a thousand essays

Michael Taft: After all the arguments, tables, charts and footnotes, sometimes it takes just a picture to tell it as it really is.  Courtesy of Mark Thoma - the logic of austerity.

Sunday, 5 June 2011

Believing in fairies

Slí Eile: While columnist Breda O'Brien may not be everyone's cuppa tea I suspect that contributors to this board will give at least 9 out of 10 for her piece, yesterday, here in the Irish Times: 'Children paying price for economic confidence trick'. The Mawkets don't seem to believe in fairies either. Not a budge on the spreads after the controversy about not entering the bond arena next year. They're not too dumb - the risk is already factored in.

Saturday, 4 June 2011

May is a wicked month

An Saoi: The tax figures were released with a range of different views expressed. Read Dan O'Brien as an example of the general tenor of comment.

Thursday, 2 June 2011

Guest post by Arthur Doohan: The burning of the bondholders

Arthur Doohan: There is something of a scramble to jump onto the bandwagon of those seeking to attend the 'burning of the bondholders'.

What could possibly have prompted the rush to this 'auto-da-fé'?

Could it be that the institutions are afraid that the recently enacted powers under which these orders hope be enforced might be struck down in the High Court challenge brought by Messrs Abadi and Aurelius, due to be heard next week?

It could be that the banks want to make sure the schemes have some chance being allowed to stand by reason of being extant before the ruling in the event of the ruling going against the State.

That would indicate a severe lack of confidence on the part of 'our learned friends' in the strength of the primary legislation with respect to other laws and precedents.

But it could just be that the market trends and ever rising bond-yields mean that they hope the bondholders are entirely ready to throw in the towel.

Either way, an awful lot is riding on next weeks hearing.

Martin Wolf's Intolerable Choices for the Eurozone

Martin Wolf provides a timely analysis of the Eurozone's options. Wolf argues that ultimately the Eurozone faces a choice between default and partial dissolution or open-ended official support.

Wednesday, 1 June 2011

A Marie Antoinette moment

"Marie Antoinette's infamous response to the news of bread riots prior to the French Revolution, "Let them eat cake", may be apocryphal but it contains an essential truth about the unwillingness of the powerful to accept responsibility for a crisis. Neither is there any attempt to offer a solution that might involve some change to the privileges of the mighty". Click here to read the rest of Michael Burke's piece for the Guardian's Comment is Free site, in which he notes that "Belying any notion of "austerity", which implies all sectors of society must reduce their standards of living in a common cause, the lrish employers' organisation Ibec is pressing for lower wages among some of the lowest-paid workers in sectors such as fast food and hospitality. It is attempting to override the decisions of the joint labour committees and, emboldened by the favourable response it is getting from the new Fine Gael/Labour coalition government, Ibec is now also arguing for the abolition of the JLCs altogether. These proposals follow the policies of both the current and previous Dublin governments in implementing cuts in the pay of public sector workers and imposing a pensions levy, in effect a tax increase". Michael also references the statement by 36 economists, economic analysts and social scientists released by TASC yesterday, of which he was one of the signatories.

Why are businesses going out of business?

Michael Taft: To listen to employers’ groups and Minister Bruton, you’d think that businesses are going out of business because the lowest paid workers in the economy are too highly paid. This argument has to ignore the EU Commission’s data showing that labour costs in the Irish hospitality and wholesale/retail sector are below the EU-15 average. This also ignores the fact that labour costs in these two sectors have already fallen by between 4 and 5 percent; if cutting labour costs will result in job retention and business survival why hasn’t it already?

So, if it’s not labour costs or high wages in the low-paid sectors, what is the problem? The answer is rather straight-forward: fewer customers spending less money.

We fail to appreciate the scale of the economic collapse in Ireland in comparison with other Eurozone countries: GDP, investment, etc. In particular, we fail to appreciate the collapse in consumer spending. In the three year period of our recession 2007-2010, Irish consumer spending has fallen in real terms by -10.2 percent. In the Eurozone, consumer spending has actually increased marginally by 0.1 percent.

In 2010, we spent €12 billion less than in 2007 – a fall in nominal terms of -13 percent. That is one heck of a hit for business reliant upon domestic demand to absorb – and many of them couldn’t.

The collapse in Irish consumer spending in unprecedented among the original Eurozone countries; there is nothing to compare to our experience – though Greece, a latecomer to the recession, looks set to see consumer spending fall by -13 percent in real terms up to 2011

The next couple of years aren’t going to provide much relief for domestic businesses. Up to 2012, the EU projects Irish consumer spending to fall a further -3 percent. The Eurozone, on the other hand, is expected to grow by 2 percent. Europe goes forward; Ireland lags further behind.

The demands for more pay cuts and Minister Bruton’s proposals are likely to exacerbate this situation. With more taxes coming down the line (the household/utilities charge) combined with rising interest rates and inflation are going to squeeze consumer spending even further. And then there is the precautionary saving arising out of concerns over pension funds, children’s education costs, nursing home costs and rising health insurance premium – a lot of social uncertainty compounding economic uncertainty.

Put simply, businesses are going out of business because there are fewer customers spending less money – whether that’s due to unemployment, emigration, falling disposable income (through tax increases), savings due to fear, etc. If you don’t fix that problem, that problem will persist.

But let’s not be seduced by the argument that if only we could ‘create’ certainty, then all those household savings could be unleashed into the market and growth would be restored. Consumer spending falls are as much a result of the economic collapse as a cause.

Sustainable recovery will occur when we drive up investment (whose collapse puts the fall in consumer spending in the shade). This will drive employment and productivity. More importantly, this will drive sustainable wage-led consumption, rather than credit-led consumption.

We need a different mind-set to the crisis than the one we’re being treated to. In short, when you deflate the economy and wages, you will crash consumption which will feed into further collapse.

In this context, if you believe cutting wages is a means to increase employment is not an exercise in economics. It is an exercise in alchemy.