We are not good, in Ireland, at joined up thinking. This is particularly evident when one looks at government. It’s a pity, because some times a bit of joined up, and perhaps outside the box, thinking might provide solutions to a number of interlinked problems. Take Irish water …. yes, yes, we know the joke Continue reading
Ranking season is upon us with the QS rankings of subject areas (not, as is commonly though, Departments) now revealed. Again we find that despite the hype Irish universities are stronger in Arts and Humanities than in the STEM areas. This is in stark contrast to the financial flows to these areas and in even starker contrast to the government and regulatory thrust. Evidence of sustained internationally recognised quality in the AHSS (arts, humanities and social science) area does not translate into funding, support or recognition. Perhaps its time it did?
The madness, it seems, has returned. Perhaps like those insects that lay eggs that can survive drought and then swarm back, it never left, just lay dormant. Santayana’s maxim of the inevitability of repetition if one comes from a position of ignorance could be the warcry of Irish policy “ we repeat our mistakes, and we’re proud of it. Vote us” And we do. Continue reading
This is a version of my column published in the Irish Examiner 8 Feb 2014. It takes a long time to recover from a banking crisis. If we were unsure of that we need but look around and notice that we still are talking and fretting about ours.
Seven years ago Irish bank shares share prices were at or near all time highs. Lending for house purchases and deposits inflows to Irish banks were also at all time highs. So also were house prices. And then it all began to unravel. The children born at the bursting of the bubble, who will carry the cost most of their working life, are now in senior infants or first class in school. And still it isn’t fixed. Only this week do we see the first criminal trial arising from the banking shenanigans. This week also we saw a report by the EU which sharply criticized our lethargy in dealing with bringing criminal, especially white collar, trials to justice. The Cowen government moved neither swiftly nor decisively when the storm hit.
But things may be changing. At the annual meeting of the Allied Social Sciences, a sort of Woodstock for economists and likeminded folks, a paper was presented on banking crises. The link above is to the paper – there is a longer version but it is firewalled. Reinhart and Rogoff have previously come in for some (more or less justified) stick on account of a missed spreadsheet error in one of their papers. The paper in question was at the heart of the meme propagated that after 90% debt/GDP countries enter a death zone. However, to my mind their more important work by far is in economic history, where in a series of books and papers they have provided comparative data on banking crises and bubbles. Much of the problem with modern macroeconomics is a twin crisis of insufficient data and a lack of a historical perspective. There is no excuse for this in the area of banking crises as we have not only the work of RR but also a comprehensive database from the World Bank.
The RR work provides details of 100 banking crises. Its well worth reading. The main finding is that the effects of the crisis take a long time to peter out. In 50% of the cases real GDP per capita has not recovered to pre crisis levels even after 6 ½ years. On average it takes 7 years. Ireland has had a really severe banking crisis. RR create a measure of the crisis severity – the data are shown below. In terms of the post WW2 period it ranks in the top ten most severe crises as measured by declines in per capital GDP. What is however apparent is that we may, based on the real GDP per capita data available, be right on target to be an average recovery. Our GDP figures of course are somewhat distant from the reality of people on the ground, but the fact remains that GDP is what the rest of the world measures as being available for the state to distribute. That we have chosen to in effect shelter a large chunk (the fdi sector) is our own decision. Mind you, with the international moves to make tax arbitrage by MNCs less attractive, how long the GNP/GDP wedge will persist is debatable.
This does not mean we are out of the woods by any means. Entering the crisis with a healthy debt to GDP ratio of 25% in 2007 we are exiting it with one closer to 125%. Whether high debt causes slow growth, slow growth high debt or more likely both working together, this ratio needs to come down. And herein lies a problem. Europe, and Ireland, are teetering on the brink of deflation. We are used to inflation – rising prices. Deflation however is where prices fall. And while inflation can be bad at high levels deflation at even moderate levels is disastrous. With deflation there is little incentive to spend – prices will fall so why spend now. There is little incentive for firms to invest in new products –demand will be depressed until people consider that prices are likely to stabilize or rise. And for those with debts, that including states with high debt/gdp ratios and households with mortgages and personal debt, it is ruinous as the real level of debt increases over time.
At a wholesale level, the price that companies get, deflation is already a reality. Across a wide swathe of the Irish economy prices have been falling for 6 months or more. This is particularly evident in manufacturing and related areas. Indeed, surprising as it may seem to the consumer, it is also the case in most food areas, save dairy. At the consumer price level of the 12 main categories of goods and services 6 have shown deflation in the last two months. Indeed since 2010 deflation has been the norm in clothing, furniture, communication and recreation. At a European level overall inflation is now close to zero. What is needed is moderate, 3-6% inflation.
The ECB, again, is in the firing line, as it controls the money supply. However facing broken banks and close to the zero interest rate bound there is a limit to what monetary policy can do. Eurozone governments cannot pump inflation by fiscal means as they are constrained by the various macroeconomic treaties. We are heading for a decade or more of stagnation unless the ECB can both clean the banks and prime the pumps. What chance that ? Draghi has dismissed deflation as a risk – in his press conference he noted that while there was some deflation (but he didn’t call it that) in the program countries (Ireland, Greece, Spain and Portugal) this simply didn’t matter for the core. We have left the woods of austerity for the darker woods of deflation. And nobody who matters cares.
Dublin Economics Workshop
35th Annual Economic Policy Conference
Castletroy Park Hotel, Limerick, October 18-20 2013.
The Dublin Economics Workshop is kindly sponsored this year by Dublin Chamber of Commerce
Friday October 18th
14.30 Session 1 – Callaghan Suite – The Mortgage Market I
Conall Mac Coille and David McNamara (Davy): Ireland’s Deteriorating Mortgage Arrears Crisis
Gregory Connor and Thomas Flavin (Maynooth): Financial Characteristics of Irish Mortgage Defaulters
Brendan Burgess (Askaboutmoney): Measuring the Sustainability of Mortgages
14.30 Session 2 – Pery Room – The Labour Market
Rory O’Farrell (NERI): Did wage changes affect Ireland’s economic competitiveness?
Gerard Brady (IBEC): Network Social Capital and Labour Market Outcomes: Evidence for Ireland
Breda O’Sullivan (IDA): Swings and Roundabouts – how FDI Employment is Faring
16.15 Session 3 – Callaghan Suite – Sectoral Policy
Pat O’Keeffe (Farmers Journal): Is the Dairy Industry Ready for Take-Off?
Tony O Reilly (Providence Resources): Ireland’s Offshore Oil and Gas Sector – Realising its True Potential
Jerome Casey and Felim O’Rourke (Bahrain Polytechnic): Tourism Policy in Ireland – Time for Structural Change?
Jim Deegan (University of Limerick): Key Issues for the Tourism Policy Review
16.30 Session 4 – Pery Room – Micro Policy I
Charles Larkin (Cardiff Metropolitan University): Higher education finance and the accountability framework in the UK and Ireland: a comparison of unsustainable systems
Cathal Guiomard (Commission for Aviation Regulation): Why Don’t Departments Regulate Agencies the Way Agencies Regulate Companies?
Paul Ferguson, Tony Weekes (Sensible Money): An Electronic Penny for Your Thoughts: How the Rise of Digital Money has Affected Ireland’s Recent Past.
18.30 – Plenary – O’Brien Suite
Karl Whelan (UCD): Resolving Europe’s Banking Crisis
followed by a panel discussion with Karl Whelan, Gary O’Callaghan and Alan Ahearne.
Saturday October 19th
10.00 Session 5 – Pery Room – Taxation
Pat McCloughan (PMCA): ‘New Evidence on Income and Tax Inequalities in Ireland’
Michael Collins (NERI): ‘Estimating the Direct and Indirect Tax Contributions of Households in Ireland
Tom McDonnell (TASC): Wealth Tax – Options for Implementation in Ireland
10.00 Session 6 – O’Brien Suite – Fiscal Policy I
Tom Healy (NERI): Ireland’s Fiscal Stance in the 2020s: Changes, options and possible solutions
Joseph Durkan (UCD) and Moore McDowell (ECU Ltd): Structural Adjustment and the Bail-Out Programme
Derek Nolan TD: Troika Exit must lead to Values-Based Economy
12.00 Session 7 – O’Brien Suite – The Mortgage Market II
Ronan Lyons (TCD): Explaining the Bubble: Credit Conditions, User Cost & House Prices in Ireland, 1980-2012
Seamus Coffey (UCC): Understanding Mortgage Arrears Statistics: What Can They Really Tell Us?
Karl Deeter (Irish Mortgage Brokers): Advising the Modern Mortgage Defaulter
12.00 Session 8 – Pery Room – Micro Policy II
Jasmina Behan (FAS): Labour Market Transitions
Marc Coleman (Broadcaster and Economist): Proposal for a Centralised Economic Service for Government
Joseph Wheatley (Biospherica-Risk): Quantifying CO2 Savings from Wind Power
14.30 Session 9 – O’Brien Suite – The Eurozone Crisis
Peter Breuer (IMF): The European Crisis: Unfinished Business
Cormac Lucey : Plan B: Debt Restructuring and Eurozone Exit – Ireland’s Escape from Permanent Financial Crisis
Alan Ahearne (NUIG): Bailout Entry and Exit and the Myth of Economic Sovereignty
14.30 Session 10 – Pery Room – Fiscal Policy II
Mark Blyth (Brown University) and Stephen Kinsella (University of Limerick): Towards an Operational Definition of Austerity
Brendan O’Connor (Department of Finance): The Structure of Ireland’s Tax System and Options for Growth-Enhancing Reform.
Gary O Callaghan (DIU): The Political Economy of European Union
16.00 Plenary O’Brien Suite
The Budgetary Outlook – Presentation and Q + A with Michael Noonan TD, Minister for Finance.
17.45 Plenary – O’Brien Suite
Sebastian Barnes and Diarmaid Smyth (Fiscal Council): The Government’s Balance Sheet after the Crisis: A Comprehensive Perspective
followed by a panel discussion with Pat Rabbitte TD, Minister for Energy, John McHale, Stephen Kinsella, Seamus Coffey
This is a expanded version of my column in the Irish Examiner 18 May 2013.
Hardly a week goes by now without a minister or backbencher reminding us, usually in stern , schoolmasterly tones, that “we are borrowing a billion euro a month to pay for <insert public sector spending head> ”. So we borrow for nurses salaries, for public sector pay, for teachers, for all sorts. Sometimes this is couched in terms of borrowing for social welfare, but usually it is attached to public sector pay. So we borrow a billion for nurses pay, for teachers pay, for all sorts of pay. We never borrow it seems for the running of the two ringed circus of kildare street.
Regardless of where it is attached it is a useful encapsulation of bias and special interest pleading from those doing so. First, it is as clear a demonstration as can be of what is called mental accounting; second it demonstrates an unconscious or conscious demand for cuts to be made, and third there is a concomitant sotto voce element usually that suggests that the money if it has to be borrowed would be best directed elsewhere. All three are challengeable if not demonstrably fallacious.
Take mental accounting. This has nothing to do with how Bertie dealt with shopping bags of money, but instead is a well-known psychological bias. Its about compartmentalizing monies that are in reality all the same. This bias leads people to have money on deposit earning small amounts of interest while simultaneously having large debts costing a lot. The most sensible thing would be to use the deposit to pay off the debt. At present we have over 30b in cash balances earning 1% or less while also having 190b plus in debt costing nearly 5% per annum. Government money is fungible. There is no special bond issued or troika drawdown for paying nurses alone, or for the dole. Its all in one pot. In this regard we might treat with some considerable scepticisim the notion that in the long term the monies from the local property tax will be devoted to things local. No more than the road tax is devoted to traffic and road expenditure will this hold, in the long term.
Treating public sector pay or welfare as separate elements and attributing to them the excess of spending over income is a further classic case of mental accounting. It may also demonstrate a blindness, willful or otherwise, on the part of the speaker about what exactly constitutes the structure of government spending and revenue. If we examine (data taken from eurostat) the government expenditure and revenue over the last 18 years we find that by far the typical pattern is for the sum of public sector wages and pensions plus social welfare to be be vastly exceeded by the total tax plus social insurance take. Only in 2009 and 2010 was this not the case. Now, one might well argue that we do not want to spend money on these issues but that is a separate issue. Below is a summary (go to http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=gov_a_main&lang=en and play around yourself…) income and expenditure account for the General Government sector in Ireland
What is clear is that if we want to play the mental accounting game we need to accept that depending on the categories we use the result will differ. This is of course another psychological bias, that of framing..But from a purely cash basis we raise enough to pay our teachers and doctors and to pay the welfare. We might not want to pay these sums, and thats a separate argument, but to state that we do not as a state raise enough money for them is fallacious.
Where then does the money go? See below…The large blip in the “other” category represents our cash bailout..
We as a state incur other costs ; capital goods and equipment depreciates and that accounts for a couple of billion per annum. Even factoring in this we still about break even. We have to pay for goods and services, we subsidize private enterprise and these plus the interest on the national debt are for what, at least as arguably as the wages of nurses or the dole, we borrow a billion a month. In fact this year the total deficit is pretty much the sum of what we spend on private sector provided goods and services plus interest. Anyone who has any experience of public sector procurement knows that there is vast waste. Private sector companies have done as least as well out of the public purse as have the public sector workers over the years. There was in relation to private sector professional services a Golconda of expenditure that rained forth. No public sector manager will yet get fired for seeking additional vastly expensive legal advice from large law firms or seeking accounting or consulting advice. They might for hiring a new staffer…. The interest bill also requires some thought. That which has tipped us over the edge is the cost of the bank bailout. And we bailed out non Irish bondholders and Irish based depositors. The ongoing cost of this are part of the borrowing also.
Hidden here is the assumption, or sometimes as recently by IBEC the overt suggestion that we should further cut expenditure on current government spending and divert it to capital. Apart from this being a naked play for resources, it also is questionable in the circumstances in which we find ourselves. It assumes three things – that capital spending is more beneficial than current, that there is no economic gain from current spending and that the economy would be better off if this rebalancing took place. Lets leave aside the remarkable argument that there is no economic benefit from public services. People who think this assume that the public sector consumes alone and is never investment. They then however will demand more public money be devoted to investment, as somehow spending on a bridge or road will magically create as least as much social and economic wealth as spending the same equivalent on health or education.
The ESRI benchmarking analysis in 2010 suggests that there are remarkably similar dynamics in terms of their effect on the economy of cutting public sector wages and cutting capital expenditure. There is no guarantee whatsoever that increased capital expenditure will offset the falls in employment and consumption from cutting current expenditure. In any case, it is not clear what capital spending is needed – hospitals and schools may be built but are useless without staff.
We borrow to spend on all government expenditure. Some of this benefits the private sector, some the public sector. Some arises as a result of bailouts, some from the unbalanced tax base we created. All is part of the overall economy. To finger point and attribute this borrowing as being uniquely directed at one sector or another is neither economically sensible nor coherent, no matter how politically pleasing it may sound.
So Richie Boucher, the CEO of Bank of Ireland, is on a salary and benefits package of over 800k. The BoI AGM is on today, and the Irish taxpayer owns 15% of BoI. The minister for finance has declined to vote to reduce this package (and that of the part time chairman…). At the same time the other minister for finance Brendan Howlin, has more or less decided to ignore the vote of public sector and will (despite having said he will get the labour relations commission to investigate how to ) impose or assume the pay cuts voted down.
This softly softly approach to Bank of Ireland contrasts massively with the hectoring bullying approach being taken to the public sector. While BoI has done ok over the last year and Boucher’s tenure it is up the reality is it is still in the intensive care ward. If it finds itself needing billions more it wont go to the markets but to us. So, what applies to me should apply to Richie. But, it wont. So, why is it ok to treat Richie different? Are the richies that different