Tuesday, 27 March 2012

There is an alternative and we have choices

Tom Healy: Today the Nevin Economic Research Institute is being launched. The website www.NERInstitute.net contains information about the new Institute as well as download copies of the Quarterly Economic Observer and the Quarterly Economic Facts. Our key message and conclusion based on research to date is that:

* fiscal austerity is killing the domestic economy

* unemployment - especially youth - is the main social problem confronting the EU

* Ireland is still deficient in key areas of infrastructure - energy, water, retrofitting, broadband and provision of early childhood care and education.

* An investment stimulus of €15bn over 5 years would begin to reverse some of the negative impacts of fiscal austerity to date.

* Such a stimulus could be sourced from public, private and EU (EIB) sources in such a way as to avoid adding to General Government Debt. It could also lower the public sector deficit as a result of tax buoyancy and lower unemployment costs.


Paul Hunt said...

Having just read the QEO, it struck me that it's been a long, long time since I've read such well-intentioned - and beautifully produced - economic nonsense.

The ability to glide over the endemic policy and regulatory dysfunction in the sectors in to which it ia argued buckets of new investment should be pumped is simply breath-taking.

In the normal course of events it would matter beacuse no one with a smidgin of economic sense in the policy-making area would take a blind bit of notice. But these are not normal times and with this NEWEra beast having been established as a non-statutory body, without any real possibility of scrutiny or accounability, behind the walls of the NTMA, all citizens should be very worried.

Regulation, whether economic or technical or both, in all these sectors has been 'doubly captured'. While maintaining this fiction of 'independent regulation' it has been captured by governing politicians and policy-makers to do their bidding while insulating them from any political or popular flak that might arise from the implementation of these policies.

And it has been captured almost totally by the semi-states and firms it is empowered to regulate. Despite enormous investment by many of the semi-states during the last decade or more, the state, as the majority owner, did not invest one red cent directly (and very rarely, under duress, modified dividend extraction, but generally extracted as much in dividends as it could). Investment was financed, and constunues to be financed, by a combination of direct customer capital contribution, limited borrowing, the normal return on and of the book value of the asset base and a signifcient regressive financing tax on all final consumers.

Until this fundamental policy and regulatory dysfunction is addressed it is simply madness to consider pumpling additional investment in to these sectors.

There are numerous other off-the-wall suggestions in this document, but this is probably more than enough to be going on with.

Paul Hunt said...

Apologies for the typos in the above. I won't attempt to correct them. I'll just try to be more careful. Just one further observation that the authors might ponder:

I find it remarkable that for one small economy - and for two key sectors, telecoms and energy - Ireland, with Eircom at one end of the spectrum, has the extreme of economy and consumer-damaging, unrestrained private equity capitalism and with the ESB and BGE at the other end of the spectrum has the extreme of economy and consumer-damaging state ownership.

There really should be an award for such an enormous range of policy and regulatory dysfunction.

Anonymous said...

in additon to the typos, maybe you can delete your pet word "nonesense" from your vocabulary.

Paul Hunt said...


Congratulations! You have raised the standard and quality of engagement on this blog to new heights.

Tom Healy said...

From here on it would help to develop analysis around the impact of different types of capital investment on employment, output and capacity. Our research confirms that the employment gains in the long-term are not negligible but less than in the short-term. An investment stimulus can act as a type of jump lead to a flat battery - the domestic economy. The real challenge is to develop over the long-term alternative sources of energy and to change existing patterns of consumption and production. No better time for private, public and European investment in green technology. Never waste a crisis.

Paul Hunt said...

@Tom Healy,

The frightening thing is that you and your colleagues actually seem to believe this economic nonsense. I just find it astounding. Do you seriously believe that this model of 'RPI-X' - or 'incentive' - regulation', spawned by an academic, Stephen Littlechild, applied with gusto by Margaret Thatcher and her acolytes, when she was most dominant, to all utility industries and which, subsequently, has been copied throughout - and has infected most of - the EU is genuinely 'fit-for-purpose' and is in the interests of consumers and the economy?

Cab you not see that the reason this model of regulation took off and is so widely applied is that regulated firms - whether public or private - and new private sector entrants - not to mind politicians and policy-makers seeking an 'easy life' - saw how easy it was to exploit it in their own interests and to the detriment of the interests of consumers and economies? It appears amazing that the so-called 'progressive-left' has swallowed, hook, line and sinker, this model of utility policy and regulation spawned and advanced by the Neocons. But one doen't have to be very cycnical to see why.

It, quite simply, is madness, advocating pumping billions of investment in to these sectors - whether in Ireland or anywhere else in the EU - while this dysfunctional model of policy and regulation remains in place.

The really frightening thing is that Fine Gael, Labour and the trades unions seem to be of one mind on this. It is almost identical to the 'groupthink' that fuelled the 'double bubble' up to Sep 2008.

Before one single Euro is spent on these sectors there is an immediate requirement to recast policy and regulation and to re-structure and re-finance the businesses.

This 'collusion of lunacy' across the poltical spectrum looks set fair to triumph, but there is a very strong possibility in the near future that the wheels might start to come off this model of utility policy and regulation. If or when that happens, things could get very interesting.

Martin O'Dea said...

I am going to give my annual airing to a concept for fiscal stimulus and debt reduction, and stimulus that by design runs over extended period. I guess my hope is that (bar seeing something wrong with it in the interim) keep trying and at some point it will be thought about further by policy makers.

I am on about reducing individual mortgages (up to a value 0f €1,000,000 perhaps) and one property only per person - by 20%.

I have written, as I say about this a number of times, and have argued about the moral hazard and other possible concerns and the beggar my neighbour allowances that might be offered to non-property owners; anyway I think the figures are approximately €16 billion (taken as a hit by Irish banks (bearing in mind there's is a balance sheet and not a cahsflow difficulty) - leveraged against Irish Government future stakes in those banks and European bank support etc.

I will not rerun those arguments but feel very strongly that there is NO moral argument against this reduction and that there are many economic ones for it - including the psychological impact (of 'finding' an average of €240 extra per month) on domestic demand and the benefit of having something that for some would run to a thirty year stimulus.

Can I applaud the beginning of NERI and the documents it published today also and suggest the above as a €1 billion a year stimulus running for about fifteen years (average term in remaining mortgages) in addition to the 3 per year they suggest in their investment plan

Paul Hunt said...

Oops. It looks like I went in too hard and the folks here are as thin-skinned and as easily upset as those over on Irish Economy. It's just that I fully agree with the intentions - and I believe austerity counter-acting efforts should have been started more than 3 years ago - but I'm horrified by the mechanism being advanced.

We've had 30 years of Neo-connery in the advanced economies (with a particularly weird variation in Ireland). You know, big state for those well above the median income and small state for those around and below the median income. The previous transmission mechanisms for conventional fiscal and monetary policy do not exist in the same way. Some have been lost, others have changed and new ones have emerged. That was precisely the intent of the Neoconnery - to destroy the potential for and effectiveness of Keynesian demand management.

We can't turn the clock back - and some good things were achieved - but we need to recognise how much the Neo-cons have changed and move on from there to make progress. And the other factor is that many of those nominally on the left are well above the median income and are conflicted.

Paul Hunt said...

Hmmm...it's interesting that you can find time to respond to comments over on Irish Economy, but can't, apparently, find time to do so here.

John Berkowitz said...

Insightful article and interesting discussion. I generally agree with Paul Hunt and his points.
I would add that the main problem lies in the inability of governments to regulate anything. I can see it on example of the Canada, where the housing bubble continues to thread the economy - because of the household debt, sky-high housing prices and free-for-all banking institutions (More Regulation in the Mortgage Market.
I can see that there are the same problems all around the world and the people are generally complaining about the inability of politicians to do anything against it. It does´t surprise me since politicians are short-term strategists. This produces a series of the same errors over and over again.

Paul Hunt said...

@John Berkowitz,

Thank you for the kind words. But I don't think there's been any meaningful discussion here. Tom Healy and his colleagues claimed in their QEO that they wanted 'debate', but there's little evidence of that here. There seems to be this desire to focus on Keynesian demand management as if we were still back during the full swell of the post-war settlement. That world has gone.

We need to recognise and engage with the structures of political and economic power that have replaced it. But this is difficult for many on the left because they have developed a reasonably comfortable working arrangement with these new structures. Ergo this unwillingness to engage in any meaningful debate.

Your observation on Canada is disappointing, but not surprising. For a country that conveys the impression of stability and of being well-ordered it does deliver some seismic politcial shocks - from the obliteration of the Conservatives in 1994 to the near obliteration of the Liberals last year. I was wondering how long it would take Stephen Harper and his Albertan shocktroops before they started appplying the economic nuttiness from below the 49th.

Paul Hunt said...

I know it was foolish and silly, but I genuinely expected some engagement here. I happen to believe that Tom Healy and his NERI team are well equipped to make a major contribution to public policy debate - and to the formulation of public policy. I wish them well.

But it appears that the only 'debate' that counts in this polity is the engagement between politcians and policy-makers, on one side, and the representatives of the various narrow sectional economic interest behind the closed doors of government or its agencies. This goes on everywhere, but it appears to be tighter and more exclusive in Ireland. Some of these interest groups require a measure of popular support among, in most cases, a defined occupational segment of the population. And this is where an outfit like NERI comes in. It helps to keep the troops on the ground informed (in a narrow way), energised and supportive of whatever line has been decided at the top levels. It provides promotional material to feed the media and it issues 'research' to undermine the case being advanced by competing interest groups - and it may be supportive of the case being advanced behind the closed doors of Government.

It is just not the trades unions; all business, commercial or professional bodies or associations employ this approach. But there is no real engagement - just a 'dialogue of the deaf', because there is no proper forum where such an engagement might be conducted. This is the huge gap where a functioning parliament would operate.

In addition, there is no effective advocacy or representation of the collective interests of consumers to counter-act the excessive representation and influence of 'producer' - in the broadest meaning of the word - interests.

While these two huge gaps persist in the public policy sphere Ireland's economic recovery will be a lot longer drawn out and harder - and more economic and social hardship will be suffered - than need be.

But most of those who could address this, in particular on the left, have secured a relatively comfortable modus operandi with the current power arrangements and have every incentive not to upset the applecart.

May it continue to stay so fine for them, but I can't see it lasting. The Irish ability to attempt to suspend disbelief indefinitely is remarkable, but eventually it may not be sustained any longer. This point was reached at the end of September 2008. Since then new optical illusion was cobbled together and huge effort is being put in to project it. But despite the best efforts reality has an unfortunate habit of intruding and shattering these optical illusions. Some of the defences against the intrusion of reality are coming under increase strain. It won't be long before they are breached.