Monday, 30 July 2012

The Art of Tax Dodging and the Science of Economic Inequality

Nat O'Connor: The topic of economic inequality is (rightly) high on the news agenda in recent months. A recent report from the UK Tax Justice Network estimates that a minimum of $21 trillion has been hidden in tax havens by just 92,000 people.

Gene Kerrigan gives a particularly vivid description of $21 trillion as 250 Croke Parks, each with one million euro sitting on each seat. He might have added that there would only be 368 people in each stadium gathering up the cash.

And how is it done? Kerrigan points the finger at the banking sector for facilitating tax dodging on a massive scale.

Even the Conservative-led UK Government is also taking a new, hard look at aggressive tax avoidance.

More unusually, the theme of economic inequality is taken up in a nine-page special feature and editorial in the latest New Scientist (28 July 2012). They too focus on the richest one per cent, but they go beyond this to look at the scientific evidence underpinning how we got into this position.

The New Scientist report looks at the anthropological development of inequality, which only rose in the last 5,000 years after millenia of egalitarian human societies (from which and for which we have evolved). The report examines the impact of stress caused by inequality as a health factor. Societies with inequality above 30 measured by the Gini co-efficient (i.e. the standard measure of economic inequality) experience thousands of avoidable deaths. The UK with a Gini score of 33 had 12,000 avoidable deaths due to inequality.

The latest Gini score for Ireland is 33.2 (Eurostat 2010 data). TASC's Health Inequalities report gives more detail on the socioeconomic links to ill health and avoidable deaths in Ireland.

The New Scientist report also describes cognitive biases around money and other psychological aspects of inequality and acquisitiveness. They point to the inherent instability of unequal societies.

Conversely, one article makes the observation that environmental damage is partially lessened by inequality, as a more equal distribution of that money would lead to more consumption. However, they don't take into account the likelihood of inflation and the option of increased taxes to reduce this threat.

Overall, the feature suggests that economic inequality is being more widely acknowledged for the substantive social problem that it is. The editor writes: "...for much of the past 40 years, inequality has remained a topic of serious discussion for just a small cadre of academics."

However, increasingly, scientific analyses (such as The Spirit Level as well as the New Scientist feature) are reinforcing the normative arguments for creating more equal societies. As one of the New Scientist articles concludes:
"The policy implications seem obvious, if politically contentious: a more even distribution of wealth would improve health on national and global scales. ... a clearer picture is emerging of inequality and its relation to health, self-worth, the ability to participate in society and to take control of one's life."

A long ways to go

Michael Taft: It is difficult to come to a judgement on the NTMA bond sale. That we entered the bond market accessing new money is a plus, especially against a backdrop of yet another twist in the Eurozone crisis. That it builds up liquidity assets in anticipation of a large bond redemption in January 2014 is another plus. However, there are downsides and disappointments.

NamaWineLake compares the costs of the new bonds with borrowings from the EU-IMF bailout and finds that it will cost us nearly €1 billion more in interest payments up to 2020. However, this may not be the best comparator as it is the intention to exit the EU-IMF deal late next year. To test the water, so to speak, was always going to prove expensive at first.

There are two better comparisons. First, how do the interest rates compare with the secondary market? On the day of the bond sale, this is how the comparison stood using Bloomberg data.

For the 5-year bond (raising €3.9 billion):
• Bond sale: 6.1 percent
• Secondary market: 5.3

For the 8-year bond: (raising €1.3 billion):

• Bond Sale: 6.1 percent
• Secondary market: 6.2 percent

The majority of funds (from the 5-year bond sale) were borrowed at rates that compare badly with the secondary market. This is a disappointment. The 8-year sale just beat the interest rates on the secondary market.

Another comparison is with the beginning of 2010 – the year we started sliding into the bail-out with interest rates getting out of control. However, at the beginning of the year out interest rates were sustainable, though still high by comparison with most other EU-15 countries.

For the 5-year bond sale:

• Bond Sale: 5.9 percent
• January 2010: 3.3 percent

For the 8-year bond sale:

• Bond Sale: 6.1 percent
• January 2010: 4.5 percent

Again, the 5-year bond compares badly while the 8-year comparison shows a significant gap.

Can we close these gaps on a permanent basis by the end of next year? The only thing we can conclude from last week’s intervention is that we have a long, long way to go.

Monday, 23 July 2012

A Path out of the Euro Crisis?

Tom McDonnell: Eurozone level policy making has been nothing short of disastrous and there is little sign of any change. Spain is moving closer by the day to a full bailout and faces into a half decade of stagnation and high unemployment.

In this context, INET's Economic Council has released a timely policy document "Breaking the Deadlock: A Path out of the Crisis" intended to chart a way out of the Euro crisis. The council argues that unless decisive action is taken the euro will continue to drift toward a breakdown of incalculable cost. You can read the council's proposals here.

Friday, 20 July 2012

The effects of an investment stimulus

Rory O'Farrell: The idea of an investment stimulus got a boost this week. Though people may disagree over the extent to which this is 'new money', it shows that at the very least, the government want to be seen to be pro-investment stimulus.

Coincidentally, this week I presented a working paper which uses the HERMIN model (used by the EU to measure the effects of cohesion funding) to assess the effect of an investment stimulus.

Two interesting things stand out about the announced stimulus. First is the involvement of the European Investment Bank (EIB). Not only do they bring money to the table, but perhaps more importantly they bring their expertise in assessing projects and an independent pair of eyes. They won't be funding any vanity projects.

The second is the off-the books nature of the funding. With traditional financing, the net cost to Government of an investment is considerably less than the headline cost, about 57%. This is as multiplier effects lead to increased tax revenue. Then over the medium term, the supply side effects of higher GDP and tax revenue more than offset interest payments on a project. However, as the projects are 'off the books' and the tax revenue is 'on the books' there will be an immediate decrease in the reported Government deficit. Though this is playing with accounting rules, it means that the government will about €400 million more room to manoeuvre and staying within Troika limits.

Overall, we can expect 17,000 jobs to be created per €1bn invested in a year, and there is a multiplier of 1.6. When designing a stimulus, it is important to front load the investment, and then phase it out. This allows the export cavalry enough time to come over the hill and save us from long term unemployment and stagnation.

Guest post by Arthur Doohan: Don't complain - start repairing LIBOR

Arthur Doohan:LIBOR ‘structurally flawed’ says the ‘Fed’....

Power corrupts...even a little power corrupts quite a we have seen, down the millennia and at home and abroad. Expressing disgust at traders attempting to manipulate (and I stress the ‘attempting’) rates in their favour is as false and vacuous as expressing surprise at a shark attack or a pitbull bite.

The moral vacuum of having profit as an only goal and a highly linear and transparent process for achieving that target would affect anyone, and as the ‘Zimbardo prison experiment’ has shown most people are pliable in the appropriate environment. That the environment was as biased and extreme as having a cohort of young males of a very particular class and education only exacerbated the risks and tendencies for extreme behaviour. I am not condoning their behaviour. I am saying that it is a completely predictable byproduct of the system as it was designed.

LIBOR didn’t break,the market did and blaming LIBOR is very much like shooting the messenger. And ‘shooting the messenger’ and indulging in ‘distracting defenestrations’ of flamboyant CEOs is very much what the authorities and regulators are entirely about these days. They very much want you to believe that it was individual greed and corruption that is to blame for the mess we are in. What they don’t want you doing is questioning their ability and integrity. And above all, they don’t want you questioning the utility and value of the system that provides their ‘raison d’etre’.

If you need any further evidence, I would ask to you to witness the embarrassment of Charles Goodhart, formerly of the Bank of England, on the ‘Today’ programme on BBC R4 on Tuesday 17th July, 2012 admitting that the market was still dysfunctional and that when the crisis broke 'LIBOR fell between the cracks’. The regulators weren’t even looking at LIBOR, the flagship of liquidity and transparency in their ‘light touch’ dreamscape.

If there was no market during the height of the crisis (and there wasn’t and still now it is a shadow of its former self) then the regulators are as guilty for accepting ‘lies’ they knew to be such as the banks are for trying to tell those ‘lies’. But, in the same way the Catholic Church sought to cover up child sex abuse to protect its reputation, the financial regulators preferred to sought to hide the scale of the dysfunction to preserve the myth of ‘market capitalism’ and thereby the need for regulation of it.

We are quickly learning how easily we can live without the ‘universal church of Rome’. I think it is time to understand that ‘universal banking’ is as much an entirely predictable perversion of capitalism as ‘child abuse’ was a predictable outcome of the structures and strictures of Catholicism. Neither are good for the people they claim to serve, both have been perverted to suit the ‘operators’.The ‘Fed’ is the Federal Reserve Bank, the central bank of the USA. It and the Securities Exchange Commission and their UK counterparts, the Bank of England and the Financial Services Authority are the authorities charged by their governments to oversee and develop their national financial and capital markets.

Since the end of the Bretton Woods agreement and the subsequent lifting of capital controls this work has taken on greater levels of international coordination and cooperation.

Arising from the rigour of American tax law enforcement, in the 1970s the newly dollar-enriched oil exporting states found it more expedient to place their dollars on deposit in the Cayman Islands but to transact their business in London, due to a far greater extent to their trust in English courts than their admiration for London bankers. Thus was borne the original ‘Eurodollar’ and ‘Eurobond’ markets.

LIBOR predated this accidental flowering into a second coming for a post-imperial City of London as a major financial center. It had existed for a few decades by this stage. The volumes dependent on LIBOR settings went on an exponential growth binge, which accelerated even harder with the advent of the personal computer which allowed for the rapid and accurate pricing of derivatives.

Yet, despite all of the computerisation and all of the enhanced communications facilities and capablities that followed this boom in volumes and profitablity, LIBOR continued in its accustomed fashion as an honour-based voice-reported system with no formal legal standing, other than that which contracting parties chose to endow it with, and with no mechanism for appeal or redress.

Once again, it must be stressed that LIBOR is a private convention entered into by contracting parties utilising an unpaid-for voluntary service provided by a lobbying organisation. It is to the credit of the British Bankers Association that they did develop the system with expanded panels, greater outlier discounting and some level of historic transparency.

But for over sixty years the two globally most important sets of regulators looked at this private piece of ‘plumbing’ and decided on a daily basis that it was a suitable vehicle for pricing the underpinnings of all of the derivatives and the majority of the wholesale lending that they were charged with regulating.

And, now, they have the cheek to say that it is a “flawed mechanism”.

That the authorities are seeking to distract us from their failures with individual tales of venality and spectacular defenestrations is the true measure of their moral and practical failure and further proof that have no long term interest in reforming themselves or their systems
Arthur Doohan blogs here

Thursday, 19 July 2012

Taking stock

Michael O'Sullivan: We are likely not yet even halfway through the euro-zone crisis. The latest episode in this soap opera brought a reasonably happy outcome for Ireland but there will be some many more drama’s and tragedies ahead. In this respect any resetting of our bank related national debt is going to be small beer compared to the greater costs that the crisis will inflict on our economy and society. In this respect we have to diligently and very single mindedly for more dramatic options. A comparison of the Iran hostage crisis with ‘Neptune Spear’ is a good way of illustrating the benefits to very careful planning. With Europe in mind, our end goal should be a sustainable debt balance, and sustainable growth after that. Below is the text of an opinion piece I wrote for the Sunday Business Post on this issue.

During Operation Neptune Spear - the US mission to kill Osama bin Laden - its mission leader, vice-admiral Bill McRaven, compiled a thick dossier of the attack options, and nearly all possible responses to scenarios where "something goes wrong".

In the eurozone, something has been going very wrong which is unlikely to be put right by the recent EU summit and the series of meetings that will follow it.

On the plus side, the summit showed that the fallout from the first attempt to fund Spain's banks has been digested, and that the urgency of the situation in the eurozone is forcing the likes of Mario Monti to the fore. However, many pitfalls lie ahead.

The summit has crystallised a north-south political divide. The ESM, the proposed new rescue fund, is simply not big enough to do all of the things that the periphery countries now expect of it. In addition, the creeping mutualisation of periphery debt will soon run into political (German) opposition, and brings few of the benefits - such as market confidence - that formal mutualisation (ie, euro bills) might bring.

The ongoing risk is that, having muddled themselves into a quicksand of unambitiously low growth and near-permanent financial market stress, Europe's politicians may not find an escape from the crisis.

Many economic indicators demonstrate how Europe is being surpassed by Asia, and how, within the eurozone, the core has split from the periphery.

More importantly, global growth is slowing to such an extent that it recently forced unexpected interest rate cuts from central banks in countries as diverse as South Korea, Denmark, Brazil and China.

The realities of low growth and financial market stress continue to lie in the way of Ireland's path to economic recovery and solvency. In effect, we are locked in the eurozone, conscious of the damage its constraints inflict our economy and society but unable to manoeuvre out of it.

The necessary response to the deepening of the eurozone crisis is to adopt a more strategic, independent approach, and one that mirrors McRaven's level of preparedness. This kind of preparedness served Ireland well during the EU summit. However, it must be taken to a radically different level, and be broadened to a range of scenarios.

We must now think through the consequences and limits of a potential review of Ireland's bailout. In the past, there has been a blind willingness to accept the gifts of outsiders as a means of supporting our economy, with little thought of the consequences, Accepting the wisdom and apparent benevolence of others may help us in the short term, but it limits our independence.

The latest promise to 'look again' at Ireland is not the end of our problems, but a narrow opening to a long march back to recovery.

Even if we get a deal on our banking debt, disentangling the financial elements of our sovereign bailout will be extremely difficult. What we now know about the proposed Spanish bailout - and the outline of a possible Irish deal - carries serious timing and implementation risks.

For Ireland, the danger is that the debt write-down associated with a 'look again' option would be too small, and all that the core countries would be prepared to grant us. If we are very lucky, we may be able to reduce our debt burden by 15-20 per cent of GDP.

If so, then a resulting reworking of the bailout may still leave Ireland perilously close to insolvency territory, especially in the face of private sector deleveraging.

A number of policy-makers and commentators have expressed the view that a debt-to-GDP level of close to 90-100 per cent is workable for Ireland. But this will not happen.

For a small, weak, constrained economy in a low-growth, indebted world, a sustainable debt to GDP level would likely be closer to 70 per cent or even less. That is why we need to prepare for scenarios beyond the 'look again' option offered by the EU.

Our policy-makers should analyse and prepare for a range of events that many consider 'unthinkable'. Chief among these is the need to assess the ways in which a restructuring of our sovereign debt could be undertaken. This is a task of multi-layered complexity.

For example, could a restructuring be unilateral or multilateral? What are the consequences for our banking system of these approaches? How would a restructuring affect our relationship with the ECB? What knock-on effects could there be for Italy? Confronting and assessing these issues will bring home the truth of our situation to policy-makers, and will prepare the state for a deepening of the eurozone crisis.

The ensnaring of Spain into a full sovereign bailout, a deeper breakdown in trust between European governments and a very likely Greek exit are other scenarios that require careful consideration by the likes of Portugal and Ireland.

We must also develop our own view of the future of Europe, if only to use it as a roadmap of where not to tread. Eurostat surveys regularly highlight the Irish as being the continent's most pro-European citizens, though there is a temptation to read a certain blindness into this optimism.

Europe, as we consider it, will change dramatically in the next five years. Ultimately, the most positive and necessary outcome of the crisis is a full acceleration towards fiscal, financial and political union. But, under this scenario, the components of our world view of Brussels would be torn apart.

For example, the role of 'our' EU Commissioner would have to change significantly. More invasive fiscal surveillance, a European Parliament with legislative initiative and more concerted moves toward a better coordinated and more active common defence policy are just some other components of our 'world view' that may change.

Viewed in this respect, the result of the last summit is not only a chance for the eurogroup to re-examine Ireland, but for Ireland to re-examine every aspect of its relationship with the eurozone.
Michael O'Sullivan is author of Ireland and the Global Question (Cork University Press)

Monday, 16 July 2012

Are worker directors good for business?

Aoife NĂ­ Lochlainn: TASC has today published a report on Worker Directors in Ireland, Good for Business? Worker Participation on Boards. This project, supported by the National Worker Director Group, aimed to examine the role and contribution of the worker director to the board and to corporate governance.

Employee participation on boards is common is many European countries. Some countries, such as Germany provide for worker directors in both the public and the private sector. In Ireland, employee participation at board level is underpinned by the Worker Participation Acts 1977 and 1988. This allowed for worker directors in a limited number of state-owned enterprises and government agencies.

The architects of this legislation had a vision of the company as a ‘social institution’. They believed that as the activities of a company had a wider social impact than that of the financial bottom line that boards should governed by the stakeholder approach rather than the shareholder approach.

In the words of the then Minister for Labour Michael O’Leary,
“Ownership of its physical assets [the company] is no longer regarded as conferring an absolute right to exercise control without taking into account other interests such as those of employees or society generally.”

Worker participation in decision-making was regarded as a right; a form of industrial democracy. It was also seen as providing other benefits to the company, including improved decision-making and a greater appreciation for the contribution of the worker.

While worker directors have been widespread in Europe for over thirty years, there is relatively little evidence on the impact that this has had on company performance and what evidence exists is equivocal. A 2011 European Trade Union Institute review of relevant studies found that the evidence was inconclusive. Ten studies found some positive effects of board level representation, while eleven studies found no significant effects, positive or negative. Seven studies found negative effects.

The TASC study seeks to examine the role and contribution of the worker director, and possible conflicts inherent in that position. A focus group comprising nine worker directors from six different companies and organisations was held. Thirteen interviews were also held in order to ascertain the opinions of non-worker director board members, company executives and independent experts. The issues discussed included the following:

  • To what extent do worker directors have conflicting loyalties between their board obligations and obligations to their electorate? 
  • What are the implications for industrial relations?
  • What is the nature of the relationship between worker directors and other board members? Is it one of mutual respect or is it characterised by distrust and conflict 
  • Are worker directors treated equally to other non-worker director board members? Are there any restrictions on their participation in board committees for example? 
  • Do worker directors make a unique contribution to corporate governance and the operations of the board, and if so is this contribution positive or negative? 

Overall, it was found that worker directors were felt to be loyal, trustworthy and diligent in their duties. The contribution of worker directors to corporate governance was felt to be unique and positive by over three quarters of interviewees.

The intimate and operational knowledge of the organisation was seen as a positive contribution to the board. The role of the worker director in providing a contrary voice which could help avoid groupthink was highlighted by many interviewees.

Worker directors are generally treated as equal by their board colleagues and almost all respondents stated that they had never heard of a breach of confidentiality or conflict of interest in relation to worker directors. However, almost all worker directors interviewed felt excluded from the audit and remuneration committees, and in particular felt that CEOs would not welcome a worker director on a remuneration committee. This perception was borne out by non-worker-director interviewees, over half of whom felt that worker directors should not sit on remuneration committees due to a potential conflict of interest.

The contribution of the worker director to the area of industrial relations was seen as extremely positive, primarily as they can act as a two-way conduit for information in times of conflict.

However, it was felt by many interviewees that employees should be better educated as to the role and obligations of the worker director, to avoid any false expectations on those who are elected.

 Most non-worker director interviewees felt that the model should be extended across the public sector. This was the hope of the original architects of the legislation. However, worker directors are not without their critics. In a 2003 article in the Irish Times, Niamh Brennan wrote:

“in the case of worker directors elected by staff, their central interest would in many cases be that of the employees who elected them, which would not necessarily be consistent with the legal requirement of directors owing their fiduciary duty to the company.”

A clear finding of this report is that the worker directors understood that worker directors are under the same legal obligations to the company as all other directors. Equally, the non-worker director interviewees believed that the worker directors act in the best interests of the company.

Thursday, 12 July 2012

Guest post by Vic Duggan: 'Baltic Miracle' no model for Ireland and peripheral Europe

Vic Duggan: Europe’s policy response to the ongoing sovereign debt and banking crises on the continent’s periphery appears to be in suspended animation. There is a conflict between short-term expediency and long-term strategy, as was clear from the most recent European Council summit.

Spain, Italy and those debtor countries locked out of the bond markets are pushing for a speedy resolution that brings their financing costs down to sustainable levels. Among their desired outcomes are a mutualization of sovereign debt at a Eurozone level and / or unlimited ECB bond purchases on the secondary market.

The German-led creditor bloc is understandably reticent. It is they who feel they will foot the bill, after all. Their concern is ‘moral hazard’: if they give in to debtors’ demands, they fear all impetus for discipline and reform will be lost. One way of putting it might be that they are as yet unwilling to buy the first round of drinks, in case others fail to do their duty.

What we are left with is a half-way house that falls between two stools: limited capacity for ESM purchases of sovereign bonds in return for ceded sovereignty and direct bank bailouts that break the bank-sovereign link in return for a banking union… some time in the future. Markets are not convinced, as evidenced by Spain’s still precipitous sovereign yields. By failing to sufficiently address this short-term challenge, the long-term strategy may well be undermined.

Meanwhile, Spain has been given more time to bring down its budget deficit while Greece labours under its current commitments. Cyprus has joined the ranks of the bailed out, and speculation mounts that others will follow.

Ultimately, this crisis is not so much about sovereign debt as about growth and competitiveness. Even a large sovereign debt is manageable – if painful – so long as the economy has the capacity to grow faster than the debt burden. Constrained in their ability to stimulate either public or private sector domestic demand, over-indebted countries seek export-led recovery.

With a dynamic, robust export sector, Ireland is better placed than most to achieve the holy grail of export-led recovery, even if domestic demand will lag far behind given the massive private sector debt overhang.

To date, the policy recommendation of choice for those who want to remain in or pegged to the euro has been ‘internal devaluation’. The Baltic countries are held up as exemplars of success. By dampening or forcing down nominal wages and prices, one can theoretically simulate a currency depreciation, make exports more competitive and grow your economy.

It has been argued that Ireland is an exporting laggard, that we should look to the recent Baltic experience for lessons on how to really get exports going: if only Ireland could accelerate austerity, they imply, we could bring back the boom. According to this logic, savaging public sector wages would both accelerate deficit reduction and drive down wages in the tradeable sector, thereby boosting export competitiveness. This is ‘internal devaluation max’. The 'Baltic Fallacy', and what it means for Ireland, is discussed in greater detail in this pamphlet I prepared for ICTU.

In fact, the only part of the Irish economy that has been growing in any meaningful sense is our record-breaking trade surplus. Ireland is no slouch on the export front, the sector proving remarkably resilient even in 2009 when global trade collapsed. Overall, our economy will only grow, however, if export growth is enough to offset the opposing contractionary forces of fiscal austerity and inconspicuous consumption.

If one examines the evolution of Irish Unit Labour Costs, one sees that not only did exports continue surging even as ULCs were increasing through the middle of the last decade, but since 2008, Ireland has seen a re-adjustment greater than our European neighbours, the Baltics included. Even on the current fiscal trajectory, Eurostat estimates that this trend is likely to continue in the years to come.
There are, moreover, some critical distinctions that render meaningless the comparison of Ireland with the Baltics. The Irish economy of today is neither comparable to the Irish economy of the late 1980s nor to the Baltic economies of today.

Estonia, the most developed of the Baltics, is today only half as wealthy as Ireland, measured by GDP per capita. Just as Irish living standards converged rapidly to, then surpassed, the European average in the 1990s, so one would expect the Baltics to now grow faster than Ireland, all else being equal. This is borne out by the OECD estimates of potential GDP growth, which is 2.5% higher in Estonia than in Ireland for both 2012 and 2013.

Incidentally, this is also the reason why Ireland will not again sustainably see the convergence rates of growth of the 1990s, and why bringing down our Debt-to-GDP ratio will be far more challenging this time around.

Even if the Baltics were not on a convergence path, they would still be expected to grow faster than their EU neighbours, simply because they were so badly hit by the financial crisis and pro-cyclical fiscal policy, far worse even than Ireland. Ireland, Lithuania, Estonia, and Latvia suffered peak-to-trough falls in GDP of 10.1%, 14.8%, 17.4% and 20.7% respectively.

The further they fall, the faster they climb because there is so much more slack in their economies, and because they have lost so much of their potential GDP. In part, the Baltics are making up for lost growth as they regain the convergence path.

Evidence from the Baltics demonstrates how the bulk of the burden of internal devaluation is forced on the labour market. Unemployment tripled across the board with non-tradable sectors, like construction, particularly badly hit. As the economy reorients towards tradable sectors, many of these jobs will not be coming back, and long-term structural unemployment is thus likely to remain elevated.

Nominal wages in the Baltics had fallen by 10-15% by early 2010. Public sector wages were slashed by as much as 30% in Latvia. In Lithuania, by comparison, more of the burden fell directly on private sector wages.

It is clear that internal devaluation has been hurting, but is it ‘working’?

Three years on, unemployment rates are still more than double pre-crisis rates across the Baltics, and emigration has reached epidemic proportions. While GDP is growing, it has yet to reach pre-crisis levels. Having fallen so far in 2008 and 2009, it is hardly surprising that there was a rebound effect in 2011. Growth is expected to slow to 2% across the region as this effect dissipates, and much of neighboring continental Europe remains mired in recession. Exports have recovered from the 2009 collapse in global trade, but are expected to slow significantly in 2012, even turning negative in Estonia.

Internal devaluation is no silver bullet, and may prove politically unsustainable if pursued over the long term. Indeed, it may prove to be socially, economically and financially unsustainable in the presence of a large public and private sector debt overhang, as in Ireland.

There is a school of thought that argues that beatings should continue until morale improves, that Ireland should up the dose of austerity just to be on the safe side. The truth is that economists are at a loss to predict the effect of ever-more more austerity when the output gap – a measure of how actual economic output compares to potential – is as wide as it is in Ireland today.

If one accepts the definition of insanity as doing the same thing over and over again, and expecting different results, then surely re-doubling belt-tightening austerity, and expecting growth, is economic lunacy?

We are dealing with known unknowns, and staying on the safe side probably means sticking to the IMF’s advice and not accelerating austerity. Our belt has no more holes, and tightening above and beyond what is absolutely necessary could turn a crash diet into a futile hunger strike.
Vic Duggan is currently working with the World Bank in Jakarta, having completed an MPA in Economic Policy Management at Columbia University. Vic has previously worked with the European Commission and the European Investment Fund, and served as an economic adviser to Joan Burton TD from 2008-2011. His blog can be read here.

Is the Irish Economy At a Turning-Point?

Michael Burke: There are a number of curious features of the latest quarterly national accounts data. Statisticians frequently warn that these are preliminary data and subject to revision. It may simply be that these data are likely to be subject to more revision than most. Therefore, identifying long-term trends in the economy may be more useful.

On the data discrepancies, in real terms (Table 6 of the CSO release):

• Net exports surprisingly fell in the quarter by nearly €1.8bn
• Equally, investment (Gross Fixed Capital Formation) rose in the quarter despite virtually unchanged government spending and falling personal consumption
• The price deflators are positive for consumption and government spending, but negative for investment (GFCF) implying renewed deflation in this sector and contributing to the real terms increase in reported investment
• As reported in today’s Irish Times, total domestic demand rose for the first time in 2 years in Q1- except that the totals given by CSO (in Appendix 3A & 3B) do not add up.

As a result the quarterly data may not be very robust. But the longer term trends cannot be invalidated by one quarter’s data. And these remain both stark and grim (all data seasonally adjusted in real terms, from Table 6):

• GDP has been contracting since the 1st quarter of 2007- a 5 year long slump and is now 8.2% below its peak
• GNP, which excludes the profit-booking activities of multi-national firms notionally based in Ireland, shows the Irish economy in a Depression - down 14.2% from its peak 1 year later in the 1st quarter of 2008
• The component of growth which led the slump is investment (Gross Fixed Capital Formation). It peaked in the 1st quarter of 2007 while all other components of the national accounts; personal consumption, government consumption, exports and imports all continued to grow into 2008
• Investment has also driven the slump. From peak, GDP has fallen at an annualised rate of €14.1bn and GNP by €20.7bn. GFCF has fallen by €21.7bn and thus accounts for the entirety of the economic collapse (even including the latest reported quarterly rebound in investment)
• By contrast personal consumption has fallen by €9bn and government spending by €4.6bn (and net exports have risen)
• The increasingly widespread notion that the rise in household savings is the cause of the economic crisis is false. The separate National Income and Expenditure accounts for 2011 (released alongside the quarterly National Accounts) shows that since 2008 profits have risen by 2.5% while wages and salaries have fallen by 16.4%. Profits are rising in an accelerating fashion, up 6.6% in 2011.

Despite all the earlier caveats, what if the data is accurate? It is always unwise simply to dismiss data out of hand. And surely the reported rise in investment is very welcome for those of us who have argued that this is the key to the crisis?

The question of who pays for the crisis bears on how it may be resolved. No-one believes that the economic crisis will last in perpetuity. Ultimately, there is no crisis of capital which cannot be resolved by reducing labour’s share of national income. At a certain point, when profits have recovered then investment may increase. Tentatively, this may be what has already begun to occur in the Irish economy, although the data discrepancies make that proposition doubtful.

Taking the data at face value, there is one reported quarter where investment increased by €1.5bn in nominal terms. This apparently required a rise in profits of €6.3bn over the preceding two years, facilitated by a decline of €5.7bn in the remuneration of employees. The rise in profits is achieved by reducing pay and only a fraction of the profits’ increase has been invested. It is easy to see that any recovery based on this model will at best be very sluggish and require the immiseration of the mass of the population.

The alternative remains state-led investment deploying the growing profits and large savings of the corporate sector. Only state-led investment can ensure a robust recovery which creates jobs and improves living standards, which ought to be the goal of economic policy.

Wednesday, 11 July 2012

MOU for Spain

Tom McDonnell: The Spanish Memorandum of understanding is here. EL Pais has distilled it down to 32 key points here. Eurointelligence helpfully translates these points here. The average maturity of loans will be 12.5 years.

Spain is required to introduce legislation to apportion losses to several classes of shareholders and subordinated bondholders by late August 2012 and to legislate for a bad bank before the end of Autumn.

Bad news for Ireland as it looks like all the risks will remain with the Spanish sovereign. Spanish 10 year bonds were at the unsustainable rate of 6.91% as of this morning.

Tuesday, 10 July 2012

Bathing the rich

Michael Taft: Okay, so you’re not one of those who believe in soaking the rich. But what about bathing? A good bath is healthy for the body and the mind. And the economy. There are a number of arguments for increasing taxation on high incomes: that low-average income earners can’t afford to pay more; that there’ s a lot money to be gained; that it is less damaging to domestic demand; and that it is part of a general egalitarian and solidarity strategy. All these work – though there is always a debate over degrees.

What is not debatable is that inequality is accelerating in Ireland. In the run-up to Budget 2013 there are political choices to make. Let’s be clear: our rich are richer than the rich in other European countries. And we’re in recession. And we’re in bail-out.

Let’s take a tour through some data on high-income groups, how much they make, how much tax they pay. Let’s see if there is an argument for Budget 2013 to disproportionately impact on the highest earners.

1. Share of Income

How much share of the income pie do high income groups take? And how does it compare to other EU countries? All figures are taken from Eurostat. Statistical note: this refers to ‘equivalised income’. This is an artificial measurement that factors in the number of people in a household. For example: you might have two households with the same amount of income. However, there are more people in the second household which means that individually they have less income. ‘Equivalised income’ takes account of this.

As seen, high income groups in Ireland take a larger share of equivalised income than in other EU countries. The top Irish 1 percent takes over 6 percent of total income here. Throughout Europe, the top 1 percent take less – 4.6 percent; while in more egalitarian Sweden, the elite 1 percent takes only 3.7 percent of total income there.

The story is similar for the top Irish 5 percent and 10 percent. Our high income groups take up more of the national income pie than their counterparts throughout the EU-15.

To put this in perspective, the top 10 percent in Ireland take in almost as much income as the lowest half of the entire population. The lowest half takes in less than 28 percent, while the top 10 percent takes in 26.6 percent.

In short, our high income groups take more from the economy than high income groups of any other EU-15 country.

2. Levels of Income

What does this mean in income terms? Eurostat provides some insight but, again, here are some stat notes. First, it only provides the minimum and maximum income per decile. For instance, in Ireland the middle 5th decile household averages €31,565 in Disposable income. The range of Gross income in this 5th decile goes from €30,361 to €37,467. So an income of €30,361 is the starting income for the 5th decile.

Second, the following figures, again, refer to the artificial equivalised income.

So let’s look at the starting income for high income groups. What is the minimum income you need to get into this exclusive company?

In Ireland, the minimum equivalised income needed to get into the elite 1 percent is €98,000. In other EU-15 countries it is €67,000 while in Sweden, it is nearly half that of Ireland - €50,200. In other words, our elite 1 percent pull receive a lot more money than their elite EU counterparts.
Again, the story is similar for the top 5 percent and top 10 percent. In Ireland, these income groups not only take a larger share of the national income pie, they take in more Euros than similar high-income groups in the EU-15.

Just to remove any confusion – these income figures refer to ‘equivalised income’ and only to the minimum income in each decile. For instance, the the chart above shows that the minimum equivalised income to get into the top 10 percent to be €41,200. However, the actual average income for the top 10 percent is over €123,000. The difference is down to factoring in the number of people in the household.

The main point here is that Irish high-income groups compare very favourably to high income groups in other countries.

3. Implications for Budget 2013

Let’s play a game. Let’s say that the Government wanted to increase taxation on high-income groups but didn’t want to ‘soak’ them. Let’s say that they would only increase taxation to the extent that it reduces the disposable income of high income groups to EU averages. How much revenue could they expect to take in? This is based on the disposable income figures provided by the ESRI in their recent Economic Commentary.

If the Government fashioned a set of tax measures – rates, reduction of tax expenditures, new taxes, etc. – to bring the disposable income of the top 10 percent to EU averages, it would take in between €3 billion and €3.5 billion, enough to reach their Budget 2013 deficit target. If the Government went Nordic, it would be enough for the next two budgets.

Would this be too onerous on high income groups? No. It would mean they would be ‘earning’ the same as their EU counterparts. But let’s not forget: we are in recession, we are in a bail-out. If there is a time to ask people who can afford it to make a sacrifice, now is that time.

None of the above should be taken as an argument that we can tax-the-rich out of this crisis. For that, we need to increase growth, employment and wages. However, increasing tax on high-incomes can supplant cuts in public services, public investment and social protection, and would minimise damage to domestic demand. One does not need to be some wild-eyed, paid up member of the local ‘eat-the-rich’ chapter to see the pragmatic benefits of this approach.

Others have. As Cedar Lounge Revolution points out – in one country a party and presidential candidate actually kept their campaign promise to increase taxation on high income groups; up to 75 percent on the richest in the economy. Vive la France!
So let’s apply a little common sense. Let’s pursue a rational fiscal approach. Let’s bring a little equity into policy.

Let’s turn on the bath water.

Thanks to Dara Turnball for alerting me to this Eurostat database.

Can the Eurozone be saved?

Tom McDonnell: Spanish 10-year bonds are now over 7.1%. It looks like there will be a Spanish National Asset Management Agency (SNAMA) set up as a bad bank to deal with the bank losses. Those who dont learn from history...

Meanwhile Henning Mayer has a sobering but well worth reading post on the future of the Eurozone here.

Monday, 9 July 2012

Guest post by Arthur Doohan: The facts about LIBOR

Arthur Doohan: Personally, I love a good conspiracy theory even though most of them can’t take a rinse let alone a serious ‘spin-cycle’. But matters take on a different colour when the conspiracy theory feeds a hysteria that turns people into a lynch mob.

Much of the nonsense currently in the air about ‘LIBOR’ and attempts to manipulate it for personal gain is destructive, dangerous and will leave everyone feeling foolish and looking incompetent, which, no doubt, many are but it does neither them nor us much good to have the mask of dispassionate professionalism slip so far and reveal so much.

Let us start with a few facts and inconvenient truths.

The British Bankers Association which runs the ‘LIBOR fixings’ system is a private trade representation or lobby group. ‘LIBOR’ is not part of any legislatively enacted or governmentally sponsored program. ‘LIBOR’ is a bankers convention, created by bankers for their own and their counterparties convenience. ‘EurIBOR’ is the same thing but run by the European Bankers Federation. Both systems are operated by the so far un-impeached agency of Thomson-Reuters on behalf the sponsors. If someone created a better one (and several have tried) the world and its market-makers are free to move to it. It is a banker’s shorthand that for decades was a core component of the transparency and efficiency that made London such a global financial centre. It predates derivatives all types apart from options....

I do not seek to defend bankers or their practices. I personally left investment bank trading because I found it to be morally corrosive and no longer wished to be a ‘professional gambler with other people’s money’. But we are not going understand the mess we are in with ‘universal banking’ and hyper-liquid trading of assets, real or imaginary (sorry, that should be ‘derived’...) unless we ascertain the facts. As a former ‘LIBOR submitter’ and derivatives trader there are a few facts that need emphasising. Otherwise, the authorities and politicians will once again be in error as to the real problem and, as usual, with mis-diagnoses end up prescribing the wrong treatments.

Here’s another inconvenient truth.

It has not been proven that any submissions by Barclays to the BBA LIBOR panel have materially influenced the setting of a single rate on a single day to the demonstrable cost of any borrower or derivative counterparty.

Read that again.

It has not been proven that any submissions by Barclays to the BBA LIBOR panel have materially influenced the setting of a single rate on a single day to the demonstrable cost of any borrower or derivative counterparty.

Yes. That is the truth. I do not doubt that if they could have, the traders would have manipulated LIBOR for gain but it has not been shown that they did.

Here’s some others.

The FSA ‘final notice' to Barclays admits only that there was a ‘risk’ that the integrity of the ‘LIBOR’ settings would be compromised.

The fine is a number plucked from thin air and has no material basis of calculation against any putative gain arising from malfeasance on Barclay’s part because it would not be possible establish such a figure.

Some of the evidence is inconsistent, such as asking for submissions that were so skewed that they would not be included in the calculation. What evidence there is shows that submissions were ‘manipulated’ by the startling amount of 1 one-hundreth of a per cent. In one paragraph there is a request for a ‘low submission’ when the trader states that they are ‘long’ the asset class in question, which is nonsensical in that they are asking to have a lower return on something they have a lot of.

Some further facts to bear in mind.

These rates are for borrowings and derivatives only. They have no direct impact on deposit rates. Further, they have no direct impact on borrowing for mortgages, personal finance and small businesses which are set under different criteria and adjusted less frequently.

Lastly, given the commonly complained of reality that most derivative trading is a ‘casino’ indulged in by banks exclusively then for every ‘big boy’ with a ‘long position’ there must be another ‘big boy’ with the equivalent ‘short’ whose preference will be for the submissions and consequent settings to be the opposite way round.

This is why the system discounts the extremes and takes an average of the remainder.

There is a further long section of the ‘final notice’ that is concerned with Barclay’s behaviour during the ‘liquidity crunch’, the intense phase of the crisis when there was, in the FSA’s own words, ‘ a virtual standstill’ in the money markets, ie there was no market.

At a time when the markets were dysfunctional arising from over a decade’s worth of ‘light touch regulation’ the regulator now fines Barclays over the ‘truthiness’ of its quotes at a time when other regulators and authorities were in dialogue with Barclays for a percieved excess of ‘truthiness’ in those same quotes, which ‘truthiness’ was embarassing the authorities who wished to pretend to the electorate and populace that the crisis was less severe than it actually was.

The FSA did fine Barclays for breaches of FSA rules with respect to Barclays internal procedures in the conduct of FSA regulated business and it is entitled to do so. I don’t approve of trader’s trying to ‘game’ the system but that’s akin to complaining about cats catching mice.

Barclays suffered less trauma and imposed no burden on the taxpayer arising from the crisis and made an effort to be honest at a time when others were actively promoting fictions.

In simple English, you were being lied to by a bunch of banks about the seriousness of the crisis and the authorities are now seeking to punish them for a ‘story’ the authorities took an active hand in promoting and managing and they have started this ‘show trial’ with the bank that told the smallest lies.

There have been misjudgements aplenty by all concerned; Barclays, BoE, FSA, other banks, media and lots of people wanting to blame bankers for all our problems.

I don’t understand why Barclays did not resist this penalty more vigourously. I suspect that they wanted the annoying pompous gnat of the FSA to go away, that they wanted to subscribe to and support the fiction that FSA and other regulators are ‘in charge’ and that the cost would be less to them than to the other more guilty parties, whose fines and ‘final notices’ will be made public shortly.

I don’t think they or the authorities anticipated the degree of public reaction to this story. The fact that Barclays admitted the facts and collaborated with authorities meant that their story came out first and made them the public focus. Getting a ‘rebate’ on the fine only incensed the public further as opposed to the probable intent of rewarding Barclays and promoting them for ‘good citizenship’.

True to form, once the politicians saw the ‘mob’ forming, they egged them on rather than trying to stand up for generality, due process and principle.

The eggs are still flying....there’s going to be a hell of a mess, especially on the politicians faces.

Just remember this.

No one has shown that any class of citizen or consumer has suffered a material loss from the least egregious attempts at manipulating a purely private ‘contraption’ that forms a part of the ‘plumbing’ of the financial ‘casino’ at a time when the ‘casino’ was broken and all the ‘players’ were doing the same thing.

Finally, ‘LIBOR’ is a child of an information poor age. In a time before computers and when global communications were expensive and when banking and finance were a less central and fascinating business, a ‘shorthand’ was required in order to ‘benchmark’ loans. That the system was trusted for so long is a testament to its simple elegance. But in an age of ‘big data’ and cheap communications and financial crisis organising a robust, verifiable and real LIBOR should be a trivial exercise.

I suggest we focus on making the system work for the equal benefit of all rather fixing the blame, of which there is plenty to go around.

Arthur Doohan is a former banker currently promoting a public policy debate on alternative solutions to the debt crisis in Ireland and to bank restructuring.

Friday, 6 July 2012

Europe's crisis: market competition instead of social bonds

TASC today issued a new discussion paper by James Wickham in which he argues that the elites dominating Europe have abandoned any commitment to 'Social Europe' and have instead turned European institutions in what he terms 'market-making' mechanisms. A PDF of Europe's Crisis: Market Competition instead of Social Bonds is available for download here, and a digital version is available here.

Thursday, 5 July 2012

Youth Unemployment in Europe

Nat O'Connor: The Friedrich Ebert Stiftung have just published a useful paper on youth employment in Europe (available here). Unfortunately, the conclusion seems to be that despite a lot of data and analysis, we are not close to any easy solutions that will be easy to implement. Nonetheless, successfully tackling youth employment is vital to European and Irish future prosperity.

Stiglitz on the Euro deal

Paul Sweeney: We need vision and leadership in Europe. The lack of this leadership among the Europe elite/authorities, of which its citizens are fully aware (and will punish them for it), finally appears to have forced this “leadership” to realise that there was a threat unless it acted decisively. It appears that some major decisions may have, at long last, been made at the 20th summit last Thursday which could get Europe moving again and may give hope to Ireland – if executed.

However, as the Irish government leaders have admitted a lot more needs to be done, around the opportunities provided in the deal for this country. Ireland did get a leg up, but as Joe Stiglitz says here, the deal will not stabilise the euro. Much more needs to be done, overall. I think we are in an era where the role of the state and states acting together makes markets. This is an era of real political economy at work. At present, markets, in crisis due to governments’ continuing indecision on the rules governing them, are causing chaos. This is understandable.

I don’t blame “Germany” but I blame those conservatives who are in power in Germany. They are wedded to 1930s economics.

Investment strategies and economic recovery

TASC hosted its third lunchtime seminar yesterday. Tom Healy, Director of the Nevin Economic Research Institute, gave an interesting presentation on 'Investment Strategies and Economic Recovery', which is available for download here. Comments?

Tuesday, 3 July 2012

Euro Crisis, Causes and Solutions

Tom McDonnell: Despite the developments at last week's EU summit we remain a long, long way from a successful resolution of the Euro crisis. My own thoughts on what should be done are in this TASC discussion paper.

I welcome any comments or feedback.