Monthly Archives: December 2013

My blogging year 2013 – Part 1

The WordPress.com stats helper monkeys prepared a 2013 annual report for this blog.

Here’s an excerpt:

The Louvre Museum has 8.5 million visitors per year. This blog was viewed about 150,000 times in 2013. If it were an exhibit at the Louvre Museum, it would take about 6 days for that many people to see it.

Click here to see the complete report.

Ten Thoughts on the Irish Economy for 2014

This is an extended version of my column in the Irish Examiner 30 December 2013.

So, what will 2014 bring on the economic front, for Ireland?  Will we continue to turn corners without ending up back where we started or will we slip back into the chilly embrace of the  Troika so recently departed? The government and the economy face a  number of challenges, all of which will have to be overcome to ensure that we move forward.

economyonbottomThe latter half of 2013 has seen the economy stabilize if not actually begin to show improvement. If we are to have any hope of regaining actual economic sovereignty then we need to see this continue and more especially deepen. A real sustained economic recovery will only become evident when we see a stabilization of domestic demand, and that demand being broad based. Right now there is stabilization but it is patchy and by no means broad based. The recent Q3 2013 data showed that personal consumption is essentially flat. There has been a pickup in domestic fixed capital formation and a reduction in the net outflow of profits as well as a fall in imports. Retail sales remain very depressed.

self employedThere has been a welcome uptick in jobs in the economy. Since the start of 2012 we have seen 74000 new persons in employment. Digging into these however we see that over 1/3 of that is made up of self-employed with no staff. While entrepreneurial setups are great, these will not , in any feasible amount of time, result in significant economic growth. These TINAEs (There is no alternative to entrepreneurs) are microbusinesses and not huge job creators.  Another 5k are assisting relatives – working on the farm or on the shop for low wages. We are an eyewatering 270k lower in terms of total workers now (1.899m Q3 2013) compared to the peak in Q3 2007. While a large part of that is down to the contraction of the overly large construction and related sectors, it also represents a loss of productive and retail posts. The government ambition of full employment will require that these and more are recreated.

lost-decades-bookWe have already seen that we will have a lost decade in employment. We are now back, and this is with an upswing as noted, at mid 2004 levels of jobs. The composition of the workforce however has changed . Comparing Q1 2008 to Q1 2013 we have fully 60k more persons in Health and Education, 90k less in construction, 35k more in residential and social care and what may surprise people, we have 20k more persons in financial services. Manufacturing areas have taken falls of between 20 and 60%. A careful eye on the structure of employment to ensure we do not become imbalanced is essential. We have never really focused on the creation and sustaining of a domestic manufacturing base – this does not have to mean big metal bashing but it should be possible to merge quality irish design sensibilities with niche products.

Quentin-Tarantinos-Reserv-007The banks are a long long way from fixed. The halting nature of the repair job, with the banks unwilling to write down residual SME and mortgage debts, the government unwilling to force this for fear of the blowback from repossessions and emergent capital holes, and the EU unwilling to countenance any form of retrospective funding, has left the economy like Mr Orange in the climactic scene of Reservoir Dogs – bleeding out on the floor while vested interests hold each other at gunpoint. .  Of gross new lending to SME’s in the first three quarters of 2013 only approx. 10% went to manufacturing and 10% to services. The largest single amount – 35% – went to agriculture. While a vital industry, this to my mind reflects the incapacity or unwillingness of Irish banks to lend absent ‘real’ security. Steps will have to be taken to ensure that credit flows to the areas that will create sustainable employment in the large numbers needed. And then of course there is the tracker mortgage loan book which while no longer making massive losses is not generating any net income flow for the banks.

shuttering-bank-europe_0Within Europe the debate on the banks continues. The present state of play enshrines the bail-in principle, where Cypriot style resolutions to failing banks may result in deposits being subject to writedown before taxpayers are involved.   The proposed rules, complex and circular, are subject to political agreement of public funds being invested and there is every likelihood that when a large bank gets into trouble first there will be calls from the markets (blessed be their name) that bondholders cannot be burned for fear of Lehmans and second there will be rigid teutonic unwillingness for community funds to be invested. Thus failing banks will continue to infect the sovereign and the doom loop remains intact. With Greece at the helm of the EU council in 2014 it would be nice if Ireland could play a part in breaking this doom loop, but given that the principle of depositor bailin was agreed and implemented under our presidency that is too much to hope for.

brexit6Across the water the increasingly less black swan of UK exit (Brexit) from the EU continues to lurch forward. Fanned on by a mouth foamingly xenophobic gutter press, the Tory right are ever more strident in their demands for  the return of the glory days of …well, some imagined period. Assuming, and it is still a big assumption even with an improving economy, that the  Tories win the next election, they are committed to a referendum on EU membership. It would be a calamity of the first water for them to vote out of the EU – but it would be an even worse one for us. Europe is not in a particularly forgiving mode at this juncture and it is highly improbable that a soft exit would emerge. An isolated UK (perhaps reduced to England and Wales, with an increasingly unwanted Northern Ireland ) would be poorer and thus less amenable to Irish exports. It would be  more closed, resulting in it becoming a less effective safety valve for Irish migrants. Soft power if it means anything should mean that the 400k Irish diaspora in the UK be reminded of how useful a UK in the EU is to them and to us.

inVISAbleThe Irish economic model remains one that in essence entices FDI into the country on the basis of a combination of tax incentives. We are not a tax haven per se, but do form a crucial link in the worldwide tax arbitrage chain. Willingly or no, this will have to change. We will have to ensure that stateless companies do not operate from our jurisdiction, but more importantly we need to face up to the fact that a large part of our services exports are based on tax arbitrage sand. Pretending that this is not the case is folly. Much real work is done and exported but this tends not to be sexy techy household name stuff.  We need to take heart from the success of Storyful for example and focus on growing more of these and less iBoxGoogleFace. The recent Italian decision on google should tell us the way that the wind is blowing.

6a00e54f8c25c988340147e08c8a3b970b-500wiA, if not, the key, to success in the modern world is a well educated society.  Government needs to bang business heads together and suggest that they cannot blather and bleat about the lack of skills in the graduate workforce without taking a lead in the debate on solutions. These will involve a refocusing away from level 7 and 8 Higher Education courses (great for massaging the aul dole queue numbers) and towards the reintroduction of proper business-education apprenticeship structures in all areas of the economy. It will also require the government to accept that there are levels, specializations and tiers in higher education. It will require the government accepting that educaition has a long payoff and telling business same. Most of all it will require a societal acceptance that education, from primary through higher, is as vital as power for the modern economy, organizing the sector thusly and with appropriate structures.

beyondbricsThere is throughout the Irish economy a focus on the glitz and glamour of exporting to the BRICS. Yet,  areas such as Latin America and Africa, sub Saharan Africa in particular, have shown remarkable resilience and growth in the last decade and forecasts are for this to continue. While small in aggregate terms there are deeper cultural links than to China. A wider more adventurous approach to our exports would pay dividends. These peripheral markets are growing rapidly and leapfrogging many technological bottlenecks.

download (4) Finally, as we run towards the election season, there will be a massive temptation in government to find sweeties for all and sundry. Even with all the work done there is still a massive hole in the budget ; we have a chronic lack of joined up thinking; insider elites scoff at the notion of change and wonder ‘what recession’ and the government shows worrying signs of reigniting a property bubble-een. A focus on reform and good governance would be nice to see. But we probably wont see it. Happy New Year

Universities, Business and the Public Good

This is a version of an opinion piece published in the Irish Independent 19 December, co-authored with Ronaldo Munck

“Clearly, the education system fulfils a vital role in society that extends well beyond the utilitarian one of satisfying enterprise’s needs for skills or research. Universities are obviously a vital public good, making a crucial contribution to the intellectual, cultural, social and economic well-being of the country…we should not view the requirement for workplace skills and the cultivation of the intellect as some zero sum game”.

This statement comes not from any starry-eyed academic in an ivory tower, nor even from the recently formed campaign to defend the Irish University from ‘commercialisation’ (http://defendtheuniversity.ie). Rather, this stirring call comes from IBEC, specifically Tony Donoghue IBEC’S Head of Education and Innovation Policy at a conference held at DCU a couple of years ago.  Yet the dominant discourse in the media, business circles and most university administrations is for the need for universities to orient more or less exclusively to ‘business needs’. This elides into the need for a more ‘enterprising’ university. Both demonstrate an (wilful?) ignorance of what it is a university does and can do. It is reductionist in the extreme, seeing the sector as having only one role – to provide training for the de jure demands of the business sector that shouts loudest.

What lies behind this new orthodoxy which no longer sees the university as a public good?  In what ways can and should universities be responsive to business needs? We must first distinguish between diverse domains; such as applied research in advanced technologies, upskilling, student placements and so on as they are all very different.

Universities and businesses occupy particular spaces within society. Both, we suggest, would be seen in a positive light were they to be seen as working for the betterment of society at large. Few working at universities would have a problem with a whole range of interactions with business.  It is a well-established practice to have placements in ‘industry’ whether for business studies students, or those in engineering or computing. Research collaboration with industry, for example, in the biomedical area might make sense so long as full economic costing was applied. Engagement in these direct senses with industry in the arts and humanities may be more distant, but that does not make these areas of study are less valuable to society. Recent UK research suggests that three years out more Social Science and Humanities graduates are in paid employment than their STEM compatriots.

Most people at universities would like to be seen as ‘enterprising’ but that does not mean we are all budding entrepreneurs.  Innovation and entrepreneurship is something we are, or are supposed to be, all in favour of fostering.  But there is a lamentable lack of clarity on what this means in practice. Universities are expected to foster and support innovation and enterprise with time, money and materials, diverting these from existing teaching activities already under funding and staffing pressure.  It is as though through a sleight of hand research became innovation, then innovation became entrepreneurship, and now entrepreneurship becomes working for the private sector.

Universities are complex organizations. Aiming them at the demands of the market alone suggests a misconception that they are, in essence, aimed at private gains by individual graduates and companies. But the reality is that university education creates both a public and a private good. University education is complex. It has boundaries on how many can be admitted at any given time and thus the provision of education services is excludable. Within these boundaries, however, it is mostly non-rivalrous, in that each student can obtain their education without detriment to others gaining theirs. However, the outcomes of a university education, such as a more skilled workforce, and a more literate and critically engaged population are closer to public goods. Until we have a public debate on how to deal with these two elements at the same time we will continue to flail around. One thing we know from decades of economics is that it is not possible to regulate, manage and evaluate goods which are of different types as though they were the same. That is what some are trying to do in higher education and it is bound to fail if it does recognise the complexity of the business we are in.

There are, thus, clear limits to what universities can, or should, offer the business world.  Educators not entrepreneurs have to write the syllabus. Business persons have a role, via their membership of society, but no more and no less than artists or the socially excluded.  Universities cannot offer cheap intellectual labour paid by public funding to build private profit margins.  They cannot just create entrepreneurs even though they might, of course, provide skills and techniques for successfully driving a business. Indeed the skills needed to manage businesses are those that a well-funded, well- managed, well- structured university would provide to all students – perseverance, analytical capacity, resilience and inquisitiveness. Students in modern universities develop these and more, such as skills on knowledge acquisition, in information processing and interpersonal skills.  It is up to business to provide the specialist training it requires after that.  In the public or voluntary sectors other specific skills will be learnt on the job as well as building on some basics gained in education.

Universities must serve society as a whole and not a particular sector.  Chasing what may be myopic sector specific skill shortages in private enterprise with public money is not education  Nor is engaging in what may be a Faustian pact whereby universities, producing public goods, become dominated by private interests through funding lines emergent from private enterprise due to a fall-off in public investment. A long term view would lead us to more structured engagement between universities and the business world which also acknowledges, celebrates and respects the different purposes of both.

Universities are not business incubators and they are not beacons of innovation.  They simply do not have the capacity to deliver an either front.  But then we need to ask what it is that universities provide if they do not simply exist to fulfil business needs.  Put simply, for a business the much talked about bottom-line is profit.  Yet today it is widely accepted that there is a triple bottom line: economic, social and environmental.  Universities necessarily take the long view (they have been around for quite a while) and need to think in terms of social sustainability and not just the annual balance sheet.  Business needs are part of that calculation but there are other interests at play.  Civil society embraces not just business but also a whole range of community, cultural and social interest groups.  For example universities could engage in a debate around Ireland’s national development prospects in which business would play a key role but other social interests would also need to be involved.  Universities best serve their purpose- and also business needs- if they have a strong sense of independent thinking and promote healthy debate on key issues of the day.

Famine Memories

Image

We think of the Great Irish Famine as “ago” as in long long ago. And it was, of course. The Famine took place between 1845-1848 and had a shattering, transformative effect on Irish society and economic life. 

And yet… yesterday I had lunch with a retired colleague, a man in his later sixties. His grandfather was born in 1839, and thus lived through this. His father recounted stories to him passed from his father in turn, of the micro tragedies in the area – what familes lived and died where, who lived and how. Its as close to a living witness to this event as we can get. 

Irish Banks - Knee deep in the brown stuff and all alone

This is a really interesting chart from the European Banking Association Transparency exercise report published yesterday

RWA are risk weighted assets (loans) and Capital Effect is the trend in the core capital of the banks
From the report (my emphasis and comments in brackets)

13. An analysis has been carried out to further investigate the driver of the Core Tier 1 capital ratio  evolution and to decompose its variation into capital and RWA components. Chart 5 illustrates the  relative importance of the Core Tier 1 (numerator) and RWA (denominator) effects on the EBA  Core Tier 1 ratio by jurisdiction, which helps to explain whether capital increases have been driven  by injections of new capital or by de-risking and deleveraging. The main results of this analysis are:
a. The improvement of 170 bp (from 10.0 to 11.7%) recorded over the 18 months ending in June 2013 has been the result of both an increase in the EBA Core Tier 1 capital (80 bp)  and a reduction of RWAs (90 bp). [overall banks are healing]
b. In one country (IE, area Q4-b) there has been a reduction of EBA Core Tier 1 capital ratio, due to a decrease of capital, partially offset by a reduction of RWAs. [irish banks shrinking but capital shrinking faster than assets. this is not good…]
c. In eight countries (Q4-a and Q1-a – AT, BE, DE, DK, GB, IT, NL, SI), whose banks account for around 56% of the total, the improvement in the EBA Core Tier 1 ratio has been mainly  driven by a reduction of RWAs. [in the main the improvement comes from deleveraging – smaller banks]
d. In six countries (Q1-b – CY, ES, FR, HU, NO, PT, 35% of the total) the impact of higher  EBA Core Tier 1 capital has been larger than the impact of the decline in RWAs. [these are in effect recapitalising]
e. In six countries (GR, FI, MT, PL, SE and LU – area Q2-a, 7% of the total) the increase in the EBA Core Tier 1 capital has been partially offset by an increase of RWAs.

What will Irish Banks lose on residential mortgages?

A small amount say Fitch. But thats based on tales from the banks.

The agency expects loan arrears to peak in 2014, and that 40 per cent of loans that are more than 90 days in arrears will begin to “reperform”. Another 40 per cent will be the subject of some type of writedown, with 50 per cent of the debt in this category being written off. The final 20 per cent of loans will see the associated properties being repossessed.

Overall, the agency believes 4.8 per cent of outstanding mortgage balances (ie, €2.2 billion) could be lost by the banks.

via Repossessions for one in five mortgages in arrears, says Fitch – Financial Services News | Business News | The Irish Times – Tue, Dec 17, 2013.

hang on…

As of September 2013 we had 99189 cases over 90 days, with 18.8b in mortgage loans outstanding.  40% of that is 7.5b and if they lose 50% of that book its already 3.75b. Then if we repossess 20% of the cases and presumably sell they will also lose at least 50% . Thats another 1.8b. So we are at 5.6b losses. Then we have the remaining 40% which will re perform..fully it seems.

Unless only really really good houses with high LTV remaining are going to be repossessed im not sure where the Fitch figures are coming from.   Add into the mix the catastrophic figures on Buy to Let (7.7b over 90 days , presumably most should be repossessed and sold at a 50% plus loss, another 3.35b.

Rather than 2.2b in mortgage related losses, which seems low, we could (but hopefully wont) see closer to 10b in mortgage related losses yet to be seen by the Irish banks. No wonder Mario Draghi is concerned
but dont worry… tis but a scratch

flesh-wound

Teachers, Parliamentarians and Pay for Performance

Two interesting papers which I noted recently

First, Mike Jones looks at what really happens when we introduce performance pay in the teachers salary mix. He looks at a longitudinal study of US data. Whats the outcome?

Over the last decade many districts implemented performance pay incentives to reward teachers for improving student achievement. Economic theory suggests that these programs could alter teacher work effort, cooperation, and retention. Because teachers can choose to work in a performance pay district that has characteristics correlated with teacher behavior, I use the distance between a teacher’s undergraduate institution and the nearest performance pay district as an instrumental variable. Using data from the 2003 and 2007 waves of the Schools and Staffing Survey, I find that teachers respond to performance pay incentives by working fewer hours per week. Performance pay also decreases participation in unpaid cooperative school activities, while there is suggestive evidence that teacher turnover decreases. The treatment effects are heterogeneous; male teachers respond more positively than female teachers. In Florida, which restricts state performance pay funding to individual teachers, I find that work effort and teacher turnover increase.

 

So : if your going to introduce this, then it has to be at the individual level. That raises the question of course of how you measure individual teacher performance. In the USA its done almost totally by standardized tests.  We are here trying to get away from these. The cognitive dissonance – of not wanting to go to the student and system pressure of measuring that which is needed for identification of individual teacher performance – will not stop people calling for less pressure on students and teacher merit pay. Folks, you cant have it both ways.

A second paper is Moltan and Altindag who look at how european parliamentarian work effort is related to pay levels.

Before July 2009, salaries of the Members of the European Parliament (MEPs) were paid by their home country, and there were substantial salary differences between MEPs representing different countries. Starting in July 2009, salaries are pegged to 38.5% of a European Court judge’s salary, paid by the European Union. This created an exogenous change in salaries, the magnitude and direction of which varied substantially. Using information on each MEP between 2004 and 2011, we show that an increase in salaries decreases attendance at plenary sessions and reduces the number of questions asked but it has no impact on other job-related activities.

the other job related activities include a wide variety of activities such as report involvement, rapporteur on a committee etc. They find that these other activities are not affected.

 

 

Michael D. Jones, Teacher behavior under performance pay incentives, Economics of Education Review, Volume 37, December 2013, Pages 148-164, ISSN 0272-7757, http://dx.doi.org/10.1016/j.econedurev.2013.09.005.

Mocan, N., Altindag, D.T.
Salaries and Work Effort: An Analysis of the European Union Parliamentarians
(2013) Economic Journal, . Article in Press.

The Troika couldn’t reform us…why do we think we can?

This is an expanded version of a column published in the Irish Examiner on 14 December 2013. A couple of news items this week caught my eye. One was that we seem to have an excellent civil service; only 99% of those evaluated by their managers were deemed to be performing at the lowest level, unsatisfactory. The second was the leaked (gosh, what a surprise that is now, not) draft report of the troika as they head out the door ; a lot done, more to do as Digout Bertie told us. But will what is needed get done? Or will we the people get done?

Together these spell problems.  We have, despite the significant reforms and changes, and despite the bringing of the state finances into broad structural balance, failed to use this crisis for significant reform of how we run the country. Speaking on Prime Time this week Megan Greene noted that from her outsider perspective she found it hard to point to any significant reforms.

Cutting spending is not reform. It might lead to reform or it might lead to retrenchment and resentment.  Reform is changing how we do things as well as the things we do. As a country we are a serial economic delinquent – so why would we imagine that an essentially unreformed governance structure would result in us avoiding another mess in a decade or so? The government will say that there must be no going back to the way things were. Government say lots of things, usually failing to implement them. The history of Irish governance is weighed down with reports, memoranda, agendae for change that remain unimplemented. Think of the crying need for electorate of the Seanad- it has taken decades for that to become a real political issue,  decades since the people voted for reform, and there is still no certainty that we will have a reformed electorate for the 2016 election.

Insanity, they say, is doing the same thing again and again expecting a different result. Perhaps doing things in the same way again and again is also insanity. We have not fundamentally reformed how we as a state manage.

Take the 99% issue. This arises from a creature called the Performance Management Development System, where people are evaluated for their work.  There are massive problems with this. First and foremost, it is pointless in the present system. Designed to allow managers to determine who should or should not get promotion or increments, it is a creature of a radically different economic era. Where there are no promotions, and where the crude embargos on recruitment have resulted in people topping out at the top of a scale, there is neither sanction nor reward from the outcome of the evaluations. The system is meaningless, serving only to consume paper and excrete facile headlines. It is therefore treated with the contempt that it deserves.  The reality is that until we provide public sector managers with both the power and the responsibility to run their organizations such meaningless paperwork will proliferate. Power would imply the ability to reward and sanction ; responsibility would imply that at a senior level your on a contract and subject to defined output and quality standards, persistent failure to meet which will, if it is your fault, result in removal. To do this would however be anathema to powerful players.

The most powerful players who would object to this may not be the public sector unions. They would be the loudest but their teeth are mostly drawn. When looking at changing something in the public sector we need to ask not Cui bono but Cui plagalis – not who gains but who loses. Who loses when power is delegated – the central civil service, the micromanagerial mandarins of Merrion street, clustered in the two halves of the department of finance. We may talk about the power of the lawyers lobby but these grey men, let us not forget, showed how powerful they were when they simply refused to allow themselves to be part of the first round of pay cuts, way back when. They rule – not the passing parade of ministers and advisors. They rule but do not manage. We see time and again how ministers enter into office with ideas and ideals, to run into the sands of Sir Humpheryism. Ground down by the endless machinations they eventually get housetrained and become agents of inertia. Mandarins decide in the long term what gets done. Ministers tweak and mouth these decisions. The days of a minister being brave enough to do a Donagh O’Malley and go right against advice to do what they genuinely think is right and proper are long gone.

The simplest, but least effective, way to reduce government spending is how the mandarins have elected to do it – to introduce blanket cuts and blanket embargos. It is much easier to say “everybody (apart from us) down 10%, do the same” than it is to manage. Management means measurement and it means decision-making. Mandarining by contrast means blanket cuts and avoiding the hard, grinding, intellectually challenging issues of devising with staff the appropriate metrics of performance while at the same time keeping things going.  We need ministers who will force mandarins to manage, rather than what we seem to have had, mandarins molding ministers to malleable mediocrities.

This plays to the second issue –the draft troika report. Throughout their hegemony they have stated time and again that a number of key areas remain untackled. Chief amongst these are the power of the medical and legal professions that remain essentially unreformed. Cui bono is clear – cui plagais is also clear, the taxpayer and the  citizen.  Meaningful reform of these areas would cost little in terms of either political or financial cost but would and has run into the sands of mates rates and the complex toxic network of micropolitics. Even the Financial Times, which has generally cheered on this government, has looked askance at this lack of reform, blaming it simply on

It is not just in these areas that we have failed to reform. We suffer daily from a profound lack of joined up thinking. We have vastly overcomplicated delivery of emergency services; we have a patchwork of state, voluntary and charitable health services where people die in the cracks; we have no clarity as to where the third level system is going; we have no evidence of joined up thinking regarding our dearth of language skills; we have decided to run a national water authority alongside existing patchwork county based delivery for 12 years rather than 12 months; we have no clear view on how to deal with the banks beyond hoping that they will go away; we have not learned the lessons of our fixation with credit led real property with this government increasingly seeming to pin its hopes for the future on another boom therein; we have a capital city where quite literally the trams dont join up and so on .  The troika could not reform us ; it is beyond credibility that we will reform ourselves.