Monthly Archives: August 2012

Should we cut longterm unemployment payments?

There is some comment today in the newspapers on an EU commission report which states, inter alia, that welfare rates should be cut in the forthcoming budget. They state in a draft report (which doesn’t seem to be publicly available)

“In part this may reflect the structure of the benefits system in Ireland, whereby activation does not increase with the spell of the unemployment duration nor does unemployment assistance generally decline over time.”

The logic here is that cutting the benefits paid to those in longterm unemployment will induce (aka force) them to work. At one level this is trivial – if we cut unemployment benefit to zero then people would starve, emigrate or work and thus there would be no longterm unemployed. At another level it is problematic as it implicitly assumes that there is a mismatch between a stock of longterm unemployed who are better off on the dole and a stock of jobs that they could take if only they were not better off on the dole.  There is a very nuanced EU report on benchmarking unemployment benefits etc here , which suggests that looking at EU Averages is not helpful, and countries that appear very generous or stringent with respect to same actually are generally in line with near and cultural neighbours. Although this report does note the lack of tapering off of UA in Ireland, it also notes that there are offsetting reasons for same.
This is nonsense. The structure of unemployed in Ireland by last occupation is given below. The largest part are craft and related, then personal services then clerical. The first are in large measure the construction related workers who were sucked into the industry at the height of the boom.While these are by no means unskilled, their skills are not those that are needed now or prospectively. The second and third groups are dependent on the domestic economy, when people will go for haircuts and take on office staff.

Unemployment traps tend to be discussed as too much dole. The reality is that since at least 1987 with the work of Tim Callan we have known that there are structural welfare traps. A good overview is given here. Report after report have suggested things such as tapering of benefits (whereby if one goes over a threshold of eligibility for a benefit one does not lose all the benefit immediately but instead the benefit is reduced by a (high) percentage of the amount by which you exceed the threshold) and so forth. These are dull technocratic measures which are unlikely to appease the “on yer bike” brigade but which might well just work… A combination of ensuring that domestic demand is somehow reflated, sensible structured welfare reform (perhaps indeed tapering both benefits and allowances as discussed) and some sensible retraining will result in slow erosion of longterm unemployment. Seeking quickfixes wont.

Does Marc Coleman know what the Fiscal Council DOES? Seems not….

Normally I don’t really worry too much about what right wing polmecists say but when its both full of errors and given a national platform then I think we all need to be concerned. The latest opinion piece by Marc Coleman (ex central banker, ex department of finance official, ex economic editor of the Irish times that bastion of iconoclastic outsiderdom) in the Sunday Independent is a classic. Its worth deconstructing (and indeed would have been worth proofreading for grammar and lexicon..)

Marc’s argument, in so far as it goes, is one that is reasonable to have : for whom and how is the state run. But there are some egregious errors in it and some massive errors or misconceptions of how things operate.

here are some of the howlers in the piece…

Meanwhile our President Michael D Higgins, and Dr Mary Corcoran of NUI Maynooth have been busy telling us how important “public intellectuals” are becoming in Irish life. The two are linked. Irish economic policy thinking is so strongly dominated by the “public intellectual” — “publicly funded intellectual” to be more accurate — mindset that it is time to ask of those driving economic policy: are they acting in their own interest, or in ours?

I’m not sure what constitutes a public intellectual. Nobody is really, but one definition is three levels which range from talking about your area to others to being symbolic of a genre. Luminaries like Edward Said and Emerson have struggled with the concept. People who influence the public economic debate in Ireland range from Marc himself through his radio show and his column, to myself, to Michael O’Leary, to Danny McCoy and IBEC and so on. We are lucky enough to live in a vibrant democratic free society and have a plethora of voices to listen to or not.

In theory, elections produce majorities and governments implement economic policy according to their wishes.

No, in practice elections produce governments. Marc to his credit ran for election and his failure showed that there is not a sufficient constituency for his views. Across the state in 2011 we were confronted by a range of options and we voted for the people we did.

In reality the persistence of the Croke Park deal in the face of massive public opposition suggests a different system: the Taoiseach, Michael Noonan, Brendan Howlin and Eamon Gilmore — who make up the EMC — are all former public servants or trade union officials. Likewise most Cabinet members and the vast majority of “public intellectual” economists.

Well by definition all cabinet members are public servants. And the last IPSOS MRBI poll showed a whopping overwhelming 22% in favor of the scrapping of the Croke Park Deal.

Checks and balances to the system would actually be a good thing. But the only one that exists, the Senate, is contemporaneously elected by a limited franchise and is more a lapdog than a watchdog. It may soon also be a dead dog. As far as the EMC goes, a body composed of four Cabinet ministers and serviced by officials poses no threat to Cabinet whatsoever.

A subcommittee of the cabinet cannot by definition be other than subservient to the cabinet. Its worrying that an ex department of finance official would be so unaware of the basis of cabinet government. One wonders in the context of the last sentence what the alternative is to having officials service the EMC…is Marc proposing that IBEC and ICTU take alternate weeks to provide support to this? Or is it that he suggests that some beneficent multibillionaire second people from his media empire, purely pro bono of course?

No, the issues raised by the EMC are rather different. For a Government so concerned about the lack of women in politics and determined to push through gender quotas, the complacency over the chronic under-representation of another majority of voters is bizarre: despite making up 83 per cent of the workforce, the EMC’s make up — three former public servants and a former trade union official — denies any representation to private sector workers.


See Election 2011. We could have elected a Dail with zero teachers and public servants. We chose not to. We could even have elected Marc to the senate and we choose not to. This proposal veers close to the idea of technocratic government, whereby instead of democracy (boo, hiss) we get the great and the good to come back from their idills in warm climes to run the state. If we wanted private sector workers in the oireachtas we would have elected them.


 Instead, it replicates a bias toward big government thinking already evident in the NESC, the ESRI and a constellation of left-wing quangos funded by Government, all pushing an agenda of higher taxes and State dominance of our economy and lives. And where chronically we need balance in this debate — someone to row in on the side of the taxpayer — philanthropists like Chuck Feeney are doing the opposite by funding yet more left-of-centre economic think tanks such as Tasc and Public Policy. When the property tax bill comes through your letterbox next year, you can thank Chuck and his highly paid friends in academia for designing it and lobbying for it. The vast array of forces lined up against the taxpayer and in defence of the interests of public administration is not just awe inspiring; it challenges the very notion of democracy. “You can have it any colour you want, so long as it’s red” — or “fifty shades of red” — seems to be the mantra.

The notion of Chuck Feeney, who has made his billions on the most capitalistic way known to man, that of in effect operating outside the state tax control, as a lefty is odd. And of course, Marc has the opportunity if that is the case, to gain the ear of another billionaire to fund alternative ways forward. Its odd to see a fully trained economist railing against the broadening of the tax base but I guess that Marc’s analysis is that every other OECD country is in the grip of dastardly leftwing public servants pushing this agenda. Even the USA and Australia, those commie bastions…

To say Government is now a conspiracy against the private-sector taxpayer might be pushing it too far. But the idea that the EMC is going to see the economy through anything but a left-of-centre public sector lens is unrealistic.

Yes, Enda and Michael are well known as reds under the bed. Why one has to only look at their record to see this….

The group that is supposed to act as a check and balance is the Irish Fiscal Advisory Council (IFAC). Established to heed Dr Garret FitzGerald’s call for a council of advisers, the first mistake with IFAC was to follow one of the good doctor’s more dangerous fetishes. His fetish for PhD economists. He saw the lack of PhD economists in government as a cause of policy failure. He was wrong. The problem wasn’t the lack of PhD economists, but the lack of good economists full stop. The economists on IFAC are all of them good ones. But they are all also from the “usual suspects” background of permanent and pensionable highly paid public employ. Given that some of them benefit from how the Croke Park deal protects academic pay and pensions — currently the highest in Europe — it is extremely important that IFAC is seen to question the affordability of the Croke Park deal going forward.

Now this is very odd and shows how disconnected Marc is from the economic reality of Ireland. First, the IFAC was not a fetish of Dr F, whose desire was to see a heightened and strengthened economic competence in the core civil service. I guess that is fetishistic but it seems to me to be rather sensible. The IFAC was in fact appointed as a consequence of divers EU and latterly troika requirements.

IFAC consists of an ex IMF person; an OECD official; a US professor and two Irish professors. Its hard to see these as the evil ones identified by  Marc. Finally, a read of any of the reports or even “obiter dicta” by members would show that they are deeply aware of the state of the public finances. Believe it or not, not everything is a cause or a consequence of a public pay deal…

And there’s another problem with IFAC. Some PhDs are essential in economic policy. But so are practical economists, forecasters and analysts. The dominance of the former over the latter is one reason why IFAC made a spectacular error of €4bn in measuring our national debt, a grievous error for a body charged with so weighty a responsibility. It has also failed to scrutinise the recent stimulus package and has said nothing about the cost to the university pension fund deficits — up to €2bn-worth — being charged to the taxpayer. We might fairly ask, if university PhDs are so smart, how did they run up — or allow others to run up — massive deficits in their own pensions (€300m for TCD alone)?

There are two economists employed by IFAC neither with a PhD (both however with significant private/financial sector experience).  IFAC has no role in measuring the national debt so how it can make such an error is beyond me. Maybe Marc is confusing the IFAC with the department of finance, which is pretty much a PhD free zone (correlation is not causation).

We might also ask how we can take Michael D Higgins’s advice seriously in trusting “public intellectuals” in IFAC, ESRI and NESC when they have pointedly failed to address the issue of the public sector pension liability, the Croke Park deal and the huge academic pension deficit. Colm McCarthy is, of course, an honourable exception here (there are some others).


Yes, nobody (Karl Whelan, myself, Morgan Kelly, Stephen Kinsella and others apart have addressed any of these. Ever. Anywhere. Ever. Really.


The Department of Public Expenditure and Reform has, to be fair, recently recruited a batch of new economists. And the head of that department was selected from outside it. But without a radical change in the make-up of economic policy design, it will be extremely difficult for new economists coming in at the bottom to avoid being ground down by byzantine hierarchy and dysfunctional cultures. And grossly unfair remuneration practices: that highly qualified staff are entering the civil service on much lower pay grades and scales and fewer pension entitlements than less qualified incumbents is totally at odds with the new, reformed public service we want to create.

Robert Watt was the head of the unit that in effect became the DPER. He spent some time outside the Civil Service in Indecon consulting and returned, with a more rounded understanding of public and private sector one imagines. He’s a good solid economic thinker and not a man who tolerates fools easily. Its also strange that someone who reviles the Croke Park Agreement would also revile its core longterm element: to restructure the pay and pension issue of the civil service and the larger public sector.

No, the EMC is not the problem. It — and the public sector dominance of policy thinking it represents — is merely a logical outcome of what we now have: a new economic apartheid with all-powerful insiders from the world of public administration and academia and disenfranchised outsiders from the private sector and front line of the public sector.


I know Marc is old enough to remember what apartheid was and was not. To blithely throw in that term here is to cheapen his argument and to demean the struggle against same. “all powerful” is a wonderful term but in Ireland at the present it refers to the IMF and Troika minders, not to any academic or administrator. Im sure the world would be a better place if I were all powerful, but alas the world is not so ordered.  And there are places in the world where people are in reality disenfranchised. Since the end of the 19th century there has been a widespread franchise – bleating that there is disenfranchisement serves nobody well.

Taxes, Land and Wealth

This is an expanded version of a column published in the Irish Examiner 25 August 2012. One of the defining characteristics of Irish governance is the inability to make decision based on evidence. All to often we substitute evidence-based policy, where a careful weighing of the consequences and analyses of different positions leads to a debate on alternatives and eventually to a rational decision, for political based policy. While democracy is, as Churchill stated, the worst form of government apart from all the others, it would be nice if once and a while political expedience could be put aside in favour of rational decision making. The emergent discord on land is one area where, as so often and to so much detriment, we see again that rational debate is being cast aside in favour of political point scoring.

Two examples in recent weeks show how strong the hold of the land remains, 120 years after the land war. We seem to be hurtling backwards in relation to household tax and to be ignoring evidence and history in relation to student grants. Both of these reflect an ongoing conflict between evidence and politics. The evidence of the past is that when these come into conflict politics wins. As we know, this time is never different.So it seems that there might not now be a site value tax, due, we are told (by Deglan De Breadun in the Irish Times and Fionnan Sheehan in the Irish Independent) to “anomalies” in the tax.

These anomalies seem to boil down to the fact that if I have a tumbledown shack and you a spiffy neat dwelling , next to each other, then we will pay the same tax. De Breadun states this explicitly ” Property tax is the new rates and, if it is not to incite serious public ill-feeling, must be seen to be fair. Although it’s still early days, the notion of a higher rate for owners of larger homes is being floated. That’s the way it is already with income tax: the more you earn, the higher the percentage deduction.How you assess the value of a house in the current uncertain market is another issue. Using the site as a basis for valuation doesn’t always make sense: you can have a mansion or a shack at a similar location” while Sheehan states ” The Government is moving away from a site-value tax because it would throw up anomalies. For example, two houses — one rundown and one modern — on the same-sized site would have the same property tax bill.In urban areas, houses on the same road tend to be more uniform — with the site and the house being, more or less, the same size and value.But in rural areas there are often houses of different sizes and values built side-by-side.”

Far from being an anomaly, defined as a deviation from the normal rule, this is in fact one of the points of such a tax. There are many issues which we would like to see in a tax, but theoretical arguments aside the reality is that tax can be and is used by governments to incentivize or discourage particular activity. Thus we had property based tax breaks in the boom period to encourage living over the shop, building in particular areas and so on, and we have carbon taxes that are at least in principle to act as a dampener on the use of particular fuels. The beauty of a site as opposed to what-is-on-the-site tax is that it will, all things being equal, encourage people to make maximum use of the site. In and of itself it will not be a silver bullet but it will encourage. If you have a site and have poor quality use made of it then the incentive is to make better use – build a house, improve the one that is on it, or sell the site to someone that is willing to make better use (as they see fit) of the site.

Instead, apparently the intention is to instead use a self reported market value of the property, to rely on the good citizenship of a society where over 40% are still avoiding paying a self reported tax (the household charge). This in an environment where a) there is as yet no public database of sales values, b) where the only data available are disjointed asking prices across various agencies, c) where the market for residential property can hardly be noted as being whatever might pass as “normal” and d) where there is no clarity on what the situation will be if one disagrees with the revenue. And the sad thing is that we have had exactly this tax before from 1983 to 1997. It was a massive failure, widely evaded and avoided and proven to be unworkable.

Leaving aside the advantages of site value taxes, repeatedly and lucidly explained by Ronan Lyons and Constantin Gurdgiev, for example the fact property value based taxes are prone to procyclicality (stamp duty anyone? ) while site value taxes are not, and the fact that the site tax captures to the state some value from increased infrastructure, the reality is that the political pressure is to avoid the perception of penalizing urban dwellers whose sites are inherently more valuable than those of rural dwellers.

The ultimate logic of the site tax would be that it would extend to all forms of land, residential, commercial and agricultural. And in dealing with land tax it is the principle that is important. At present there is a rift in cabinet on the issue of the inclusion of the capital value of farmland in the determination of third level student grants. For decades it has been clear that farmers and self employed persons can have significant levels of wealth but low (declared) income, and evidentially gain disproportional access to such grants. But again, in the face of evidence we have done nothing. If we are to move to the logic of land taxes we will begin to further incentivize farming to move activities to higher value uses of existing land. The underlying idea is that land assets convey an “imputed rent” and one should be incentivized to make best and most productive use of them. But there is a logical end point that leads to wealth tax. If a farmer has land valued at €500,000 and is to be assessed on this then we must for equity also assess the self employed person with a shop or business worth €500,000 the same. and what of people with non-capital asset wealth? It’s a good job logic is not a strong point in Irish political discourse…. A wealth tax will not bring in tens of billions, the dreams of the ULA notwithstanding. But it would bring in some, and would crucially show that while the rich are different (richer for one) they are not in fact running the show. Coupled with a proposal I have made before to link citizenship with tax status, and we could see the bitter pill of increased taxation being sugared by a recognition that we are in fact all in it together.

A journal editor seeks your views…

So, I today signed off on the agreement to be the new editor of another Elsevier journal, International Review. Of Financial Analysis (IRFA). It's a pretty decent journal, ranked in the top 40 by a recent study; it was ranked as “internationally excellent” in the 2008 Aston rankings; as “highly regarded” in the 2010 Association of Business Schools journal ranking ; as “top international” in thr 2010 Cranfield School of Management list; for mere details see with the usual caveat that rankings are not the only or even the most desirable indicator of the quality and impact of a journal.

Now, I am aware that elsevier raises the hackles of many with regard to the debate on open access versus pay walls, but that's a debate that I'd like to avoid at the present. What I am interested in is the views of people on how we might make the articles forthcoming in IRFA more accessible and interesting. elsevier have their views on the article of the future- which of these would you be interested in seeing rolled out? For example, should video abstracts be available freely viewable? Would people be interested in a twitter feed of articles? Whst about an editorial,video, of each issue? Your ideas are sought!


Ireland is not in Europe..

This is an expanded and updated version of an opinion piece published in the Irish Examiner on Saturday 4 August 2011.

National Culture is a funny fuzzy concept. Anyone who has ever dealt across different societies knows that cultures and how things are reflected in them differ widely. It can be thought of in this context not as the “high culture” so derided by Goering and the other Nazis who declared, “When I hear the word culture I reach for my gun”, but as the complex interwebbing of how we operate as a society. If we have learned nothing else form this crisis it is that economics is, and must be treated as a social analysis. Culture in this context then includes religion, the way we formulate laws, the holistic way in which society works. A widely cited definition of culture is “is that complex whole which includes knowledge, belief, art, morals, law, custom, and any other capabilities and habits acquired by man as a member of society”. We are familiar with this in Ireland. There is a culturally accepted norm that we do not, generally, evict people. There is a cultural norm that we do not generally either whistleblower or reward those that do so (we are indeed only now getting round to protecting same). We might as economic analysts decry the effects of these, but that they are cultural norms is something we cannot deny. And culture is very slow to change.

Its a funny feeling to be on the (kinda) same side as Mitt Romney, who caused uproar when in Israel he suggested that the culture of a country powerfully influences its economic prosperity, pointing favourably to Israel in contrast to the palestinians. This did not go down well in many quarters. On parsing this in the National Review he seems to equate culture with freedom and no doubt there is a linkage but the relative lack of freedom of the average palestinian is as much a reflection of their being a geopolitical chewtoy as some form of inate cultural preference. And the massive aid channeled to the Israelis by the USA over the decades has had some influence one might imagine on their economic development. But Romney is right in one sense, that culture, defined broadly, does matter for economic outcomes.

Culture, or proxies for same, has only recently been accepted as a valid part of modern economic analysis. While cognate disciplines, in particular international management and latterly international finance scholars have adopted many measures that proxy for aspects of culture mainstream economics has been to date slowly to take these on board. This is despite the fact that the most cited social scientist by some measures is a Dutch scholar, Hofstede, who’s work on culture from the 1980s has been of profound importance to how international business scholarship has progressed. I had the experience dealing with Irish economists on presenting work ( see here and here )involving this scholar’s concepts to be told by such things as “what we cant measure is not amenable to being modeled and as such is not useful” and “sure that’s not economics so why would we read or cite it”. If economics is to move forward it needs to escape from the blind alleys of needless formalism and the conflation of assumptions made for modeling purposes as being actual representations of reality. At the leading edge this is already the case but we know from studies of the philosophy of science that the body of knowledge rarely moves until a crisis. Perhaps this is the crisis.

Hofstede proxies culture as being on four (latterly five) dimensions. He suggested from his work with managers and later extended that societies could be ranked along how masculine they were, how great a proclivity they had for individualism, the extent to which people were and were accepting of being distant from power, whether the society is long or short term orientated, and the extent to which they would avoid uncertainty. Over the years other scholars, in particular those associated with the world values survey have amended and extended this basic insight but the work and measures of hofstede still dominate.A vast literature in international business has found that these cultural dimensions are associated with many economic phenomena. Thus we find that even when we account for other issues (different accounting standards, different legal systems, different ways of dealing with creditors) relative cultural distance is associated with lower foreign direct investment, lower degrees of mergers and acquisitions, and lower portfolio investment. That’s perhaps not very surprising – all things being equal people feel more comfortable doing business with people “like themselves”.What is perhaps more interesting is how the individual elements of culture impact.

In hofstede metrics Ireland is low on power distance (information flow and management tends to be informal and not hierarchical), highly individualistic and masculine (encouraging of risk taking and focused on winning for personal gain), and low on uncertainty avoidance (risk is rewarded and technicalities tend to be ignored) and on long-term orientation (we tend to not pass up short-term gain even if that may have long-term deleterious consequences). These traits are associated in recent research with for example earnings management in companies, and to more inefficient banks. Lower uncertainty and shorter term orientation is associated with low levels of cash buffers and thus an inability to ride out shocks. This analysis can be carried further : countries (such as Greece) with low individuality, low masculinity and high uncertainty avoidance are more prone to tax evasion ; higher uncertainty avoidance is associated with more severe impacts from crises. Low power distance and high individuality (as is the case in Ireland or Germany but not Greece) are associated with easier adoption of new work practices. The list can be extended greatly. The reality is that there is a growing body of literature, mostly outside economics but increasingly seeping into it that shows that we ignore national culture at our peril.







One of the things that the Eurozone crisis has exposed is the divide in Europe. There are many divides: Germanic neomercantilism versus communitarian economic policies, countries with zombie banks and those that have banks in the process of zombification, the UK versus everyone else. But one that in many senses may underlie this is the cultural divide. An increasing amount of culture studies use the framework of the world values survey. This is a complex instrument but it in essence can be reduced to two scales : how traditional/open is a society and how collective/individual is it. What is remarkable is when one plots these measures we find groupings of countries fall in place in accordance with our preconceptions : latin American countries fall mostly in one area, east Asian in another and so on.What is striking when we examine this is how non-homogenous the EU appears. The other issue is how much of an outlier Ireland appears when viewed through this cultural lens. Culturally we are much more similar to latin American countries than we are to northern European or even Mediterranean countries. The prevailing approach in Europe at present is to make us all good germans it seems. That wont happen. An approach that recognizes that there are deep cultural divisions, that these reflect in different economic outcomes and approaches, and that a union which wishes to thrive must acknowledge, accept and manage with these is one that will be much more likely to stand the test of time. Rather than becoming poor imitations of germans this approach would urge us to become better Irish, greek or Italians.