Michael O'Sullivan (author of Ireland and the Global Question) has written a lucid article on what's required for job creation in today's Irish Times.
While Ben Bernanke, head of the Federal Reserve, voiced “grave concern” over high unemployment for “the enormous suffering and waste of human talent it entails”, Michael O'Sullivan argues that we are failing to address the fundamental barriers to job growth here.
Wednesday, 17 October 2012
Tuesday, 16 October 2012
Exploring alternative pathways
Tom Healy: With my colleague Rory O'Farrell we have reviewed the evidence about the impact of 'Plan A' and 'Plan B' over the coming 6 years. The paper was recently given at the Dublin Economic Workshop and is available online here.
Monday, 8 October 2012
Revolt of the Rich
Nat O'Connor: A concern with the "predatory super-rich" as the new secessionists in the USA is very clearly articulated in this article ('Revolt of the Rich') in the The American Conservative.
It begins: It was 1993, during congressional debate over the North American Free Trade Agreement. I was having lunch with a staffer for one of the rare Republican congressmen who opposed the policy of so-called free trade. To this day, I remember something my colleague said: “The rich elites of this country have far more in common with their counterparts in London, Paris, and Tokyo than with their fellow American citizens.”
It begins: It was 1993, during congressional debate over the North American Free Trade Agreement. I was having lunch with a staffer for one of the rare Republican congressmen who opposed the policy of so-called free trade. To this day, I remember something my colleague said: “The rich elites of this country have far more in common with their counterparts in London, Paris, and Tokyo than with their fellow American citizens.”
Tuesday, 2 October 2012
Choices Around Cutting Child Benefit
Nat O'Connor: Despite the helpful reminder from Joseph Stiglitz that "Austerity has almost never worked", the Government has decided to cut further and deeper in the next Budget, with reports that Minister Noonan will again prefer two-thirds spending cuts combined with one third tax increases.
There are no easy choices left for the Government, as it seeks to close the deficit through €3.5 billion of measures. While it is necessary to close the deficit, there are a couple of significant questions to be asked that provide important context for any consideration of cutting Child Benefit.
First of all, what is the Government's end goal in terms of public versus private provision of vital matters like health and education, childcare and housing, pensions and income?
Secondly, if 'everything' (including Child Benefit) is on the table for discussion, what are the values and principles that will guide the decisions about what to cut and who to tax?
As this chart shows, the net result of budgets to date has been to 'flat line' Ireland's overall level of taxation while reducing public spending. Any talk of a 'balance' between tax measures and spending in the actual effect of recent budgets is simply not true.
The figures are based on the Government's plan (in Economic and Fiscal Outlook, Budget 2012, page D.19) to end up with total revenue of 34.6 per cent of GDP and total public expenditure of 37.5 percent of GDP by 2015. While these figures might be slightly different in Budget 2013's documentation, there is little evidence of a changed strategy by Minister Noonan.
What level of public services can be delivered through spending at around 37.5 per cent of GDP?
The answer is, not anything like as much as what was delivered at the height of the boom and not the same kind of 'welfare state' as most Western European countries. The long-term EU27 average level of spending is roughly ten percentage points higher than Ireland. As such, if the Government chooses such a low target level of public spending, it should come as no surprise that some core elements of the 'social contract' between Ireland's State and its citizens are now being questioned.
One of those core elements is Universal Child Benefit. There are three clear features of this payment, which indicate fundamental values and principles: (1) It goes to all children equally; (2) It is paid to all citizens with children regardless of their income, as part of the 'return on investment' of taxation and social insurance; and (3) It is a payment from everyone to Ireland's children, regardless of whether or not they have children of their own.
Universal Child Benefit should not be considered a 'sacred cow' any more than the 12.5 per cent corporate tax rate or the existence of the Senate. However, these are major building blocks of the Irish social contract and they should not be radically changed without serious discussion of the implications.
Instead of an open discussion on the issue, there is a risk that the guiding principles underpinning Universal Child Benefit are being discarded without adequate discussion of the changed nature of Ireland's welfare state and social contract that is implied by those changes.
For example, there are endless reports that wealthy people don't need Child Benefit and should not get it. Somehow it is taken as the 'obvious' and 'easy' solution to means test Child Benefit or tax it. However, this argument sweeps aside all three guiding principles. Universal Child Benefit is a social contract, not an individual contract between a person and the State. It is only from an individualistic perspective that it makes sense to say Person A is too rich, therefore tax or cut his/her Child Benefit.
In reality, the administrative burden involved in means testing, plus the highly contentious issue of deciding who needs it and who can't have it, is expensive and fraught with difficulties. A much simpler solution is to say that, if some wealthy people don't need Child Benefit, than simply increase general taxes on wealthy people. At the end of the day, we all benefit from Ireland's children who are the future tax payers, health workers and others that we will need when we are old (whether or not we have children ourselves).
However, if we decide that Universal Child Benefit in its current form is too expensive (because of the decision by Government to target public spending at 37.5 per cent of GDP) than it is possible to imagine alternative uses of public money that would uphold the values and principles of the welfare state.
For example, if we decided that the provision of municipal crèches and pre-school education was a pressing social need (which it is) then we could provide places free-of-charge, to all children equally, regardless of their parents' means and paid for by everyone; because we will all benefit from all children in Ireland having a better start in life and better educational development.
For example, the OECD advises on the benefits of spending early on children.
This chart from another OECD presentation shows that Ireland (in 2008) had the highest net childcare costs in the OECD. No wonder so many families rely on Child Benefit payments!
What is so rarely mentioned in Ireland is that when taxes are low, people end up paying privately out their own pockets. It can be cheaper to pay more tax or social insurance to purchase certain kinds of goods and services collectively. And of course, when we pay collectively, we all share the cost of our children from whose future contributions we will all benefit. When we pay privately, the burden of paying individually is placed squarely on the shoulders of young families, who are not the best placed to carry that burden.
If we see Universal Child Benefit being systematically dismantled in the next Budget (as is suggested in recent reports), while we retain tax breaks, such as those for private pensions that massively benefit people with the highest incomes, then the fundamental values underpinning Ireland's budgetary policy need to be questioned.
The next three or four Budgets are not just about closing the deficit, they are about the nature of the future relationship and social contract between citizens and the State in Ireland for decades to come.
There are no easy choices left for the Government, as it seeks to close the deficit through €3.5 billion of measures. While it is necessary to close the deficit, there are a couple of significant questions to be asked that provide important context for any consideration of cutting Child Benefit.
First of all, what is the Government's end goal in terms of public versus private provision of vital matters like health and education, childcare and housing, pensions and income?
Secondly, if 'everything' (including Child Benefit) is on the table for discussion, what are the values and principles that will guide the decisions about what to cut and who to tax?
As this chart shows, the net result of budgets to date has been to 'flat line' Ireland's overall level of taxation while reducing public spending. Any talk of a 'balance' between tax measures and spending in the actual effect of recent budgets is simply not true.
The figures are based on the Government's plan (in Economic and Fiscal Outlook, Budget 2012, page D.19) to end up with total revenue of 34.6 per cent of GDP and total public expenditure of 37.5 percent of GDP by 2015. While these figures might be slightly different in Budget 2013's documentation, there is little evidence of a changed strategy by Minister Noonan.
What level of public services can be delivered through spending at around 37.5 per cent of GDP?
The answer is, not anything like as much as what was delivered at the height of the boom and not the same kind of 'welfare state' as most Western European countries. The long-term EU27 average level of spending is roughly ten percentage points higher than Ireland. As such, if the Government chooses such a low target level of public spending, it should come as no surprise that some core elements of the 'social contract' between Ireland's State and its citizens are now being questioned.
One of those core elements is Universal Child Benefit. There are three clear features of this payment, which indicate fundamental values and principles: (1) It goes to all children equally; (2) It is paid to all citizens with children regardless of their income, as part of the 'return on investment' of taxation and social insurance; and (3) It is a payment from everyone to Ireland's children, regardless of whether or not they have children of their own.
Universal Child Benefit should not be considered a 'sacred cow' any more than the 12.5 per cent corporate tax rate or the existence of the Senate. However, these are major building blocks of the Irish social contract and they should not be radically changed without serious discussion of the implications.
Instead of an open discussion on the issue, there is a risk that the guiding principles underpinning Universal Child Benefit are being discarded without adequate discussion of the changed nature of Ireland's welfare state and social contract that is implied by those changes.
For example, there are endless reports that wealthy people don't need Child Benefit and should not get it. Somehow it is taken as the 'obvious' and 'easy' solution to means test Child Benefit or tax it. However, this argument sweeps aside all three guiding principles. Universal Child Benefit is a social contract, not an individual contract between a person and the State. It is only from an individualistic perspective that it makes sense to say Person A is too rich, therefore tax or cut his/her Child Benefit.
In reality, the administrative burden involved in means testing, plus the highly contentious issue of deciding who needs it and who can't have it, is expensive and fraught with difficulties. A much simpler solution is to say that, if some wealthy people don't need Child Benefit, than simply increase general taxes on wealthy people. At the end of the day, we all benefit from Ireland's children who are the future tax payers, health workers and others that we will need when we are old (whether or not we have children ourselves).
However, if we decide that Universal Child Benefit in its current form is too expensive (because of the decision by Government to target public spending at 37.5 per cent of GDP) than it is possible to imagine alternative uses of public money that would uphold the values and principles of the welfare state.
For example, if we decided that the provision of municipal crèches and pre-school education was a pressing social need (which it is) then we could provide places free-of-charge, to all children equally, regardless of their parents' means and paid for by everyone; because we will all benefit from all children in Ireland having a better start in life and better educational development.
For example, the OECD advises on the benefits of spending early on children.
This chart from another OECD presentation shows that Ireland (in 2008) had the highest net childcare costs in the OECD. No wonder so many families rely on Child Benefit payments!
What is so rarely mentioned in Ireland is that when taxes are low, people end up paying privately out their own pockets. It can be cheaper to pay more tax or social insurance to purchase certain kinds of goods and services collectively. And of course, when we pay collectively, we all share the cost of our children from whose future contributions we will all benefit. When we pay privately, the burden of paying individually is placed squarely on the shoulders of young families, who are not the best placed to carry that burden.
If we see Universal Child Benefit being systematically dismantled in the next Budget (as is suggested in recent reports), while we retain tax breaks, such as those for private pensions that massively benefit people with the highest incomes, then the fundamental values underpinning Ireland's budgetary policy need to be questioned.
The next three or four Budgets are not just about closing the deficit, they are about the nature of the future relationship and social contract between citizens and the State in Ireland for decades to come.
Guest post by Arthur Doohan: The EU's FTT - a good idea badly done
Arthur Doohan: Tax policy in this jurisdiction is a mess and has been so for a long time. This mess has been a significant contributor to the State’s fiscal deficit through the use of ‘pro-cyclical’ transaction taxes and through tax-breaks that exacerbated pre-existing construction dependencies and excesses in the domestic economy.
I welcome TASC’s effort to debate and suggest much needed development in this crucial aspect of fiscal reform, especially in light of the regressive aspects of the last budget.
However, I am very sad to see another transaction tax being proposed and in a manner at odds with the quality of the rest of the analysis. I refer here to the Financial Transaction Tax (FTT) which has the superficial qualities of a betting tax in that it seeks to punish a perceived vice while raising lots of money for the Exchequer and, at the same time, making life harder for everyone’s favourite “scapegoat du jour”, the bankers and hedgefunds.
I am not against an FTT in principal. In fact, I support the idea. But I am against badly designed public policy of any type and the FTT as proposed here falls into that impractical category.
The core of the FTT idea is that low transaction costs and excessive liquidity facilitates speculative trading in markets dominated by financial corporations which leads to price gyrations that hurt the ‘real economy’ while generating ‘excess profits’ for the ‘players’ in these markets. An FTT, it is supposed, would ‘calm’ these markets while at the same time raising money that could better be spent by Government on ‘widows and orphans’. Derivatives trading comes in for especial criticism in this regard as a ‘smoke and mirrors’ ‘work of the devil’ excessive extravagance of markets.
The TASC paper supports the draft EU Commission proposal for a transaction tax on bonds and shares at 0.10% and at 0.01% on derivatives. No mention is made of foreign exchange or commodities trading. The report includes a sentence “The proposal (the EU Commission one) was focused on open market activities and movements (i.e. trading) and excluded inter-bank transfers and trades which might occur in the normal course for business.”
After this prescription several reasons are advanced in the report to support the introduction of the FTT. Firstly, to ‘establish real-time monitoring mechanisms for the various flows of financial transactions happening each and every day’. Secondly, to raise lots of filthy lucre for the Exchequer. Thirdly, to stop speculative trading, the bullying of small nations and profiteering that damages the ‘real and useful’ economy.
I should like to point out, before critiquing this proposal, that the root cause of the OECD economies problems was the repeated and consistent overvaluation of property assets (residential and commercial) and, in Ireland’s case, the attendant excess supply of same over the decade after the repeal of the Glass-Steagall Act. What systemic failures there were happened in the areas of securities ratings and poor legal administration; neither of which are remedied by an FTT. I am in favour of massive reform of how we do banking but, again, I would rather we have effective and productive reform than mere public whippings of various “Aunt Sally’s”.
On a first point, the rates suggested, while seemingly trivial, are in fact massive proportions of the current quoted prices. It is not made clear whether these rates are the total or the individual counterparty rates but it is clear that both sides to any trade are to be taxed. Even if it is the total due, where derivatives are quoted in spreads of 4 or 5 basis points (0.01% is a basis point), then a tax rate of 1 basis point is a rate of 20 or 25%. Where bonds are quoted in spreads of less than 25 basis points this is a 40% tax rate. Further, if derivatives are the real ‘bogeyman’, why are they being charged the lesser rate?
There is no explanation of why foreign exchange trading is excluded which is most odd since, despite our obsession with the evolution and fate of the ‘Euro’, the EU is still a multi-currency construct. Nor is there a rationale given for the exclusion of commodities which means that fuel oils and foods are not covered yet these are indeed major components of the ‘real’ economy.
Excluding trades ‘which occur in the normal course of business’ is meaningless and would provide a get-out clause for all and any trades since these are all transacted out using the same processes and settlements.
A further major omission is that there is no mechanism suggested where transactions by non-financial corporations for practical hedging purposes of the financial risks of the ‘real economy’ can be excluded from the tax net. So the FTT as proposed will fall equally heavily on those with genuine need but less financial expertise.
The suggestion that the authorities are not aware of market prices and flows is fatuous in the extreme. The Central Bank is a Bank and has its own dealing room and it participates daily in a small but distinct manner in the principal markets. In addition, there is a large and comprehensive reporting mechanism for most forms of transactions. Lastly, the ‘need for real-time monitoring’ argument is further revealed as nonsense in light of the fact that ALL derivatives settle at some significant date point after they are entered into so the need for 'realtime' data is superfluous.
With respect to the notion that the yield would be significant several points arise. This forecast makes the same error that the DoF was excoriated for over its dreadful VAT return forecast of the last budget. It is undeniable that anyone one who accepts the existence of 'elasticities' must accept that there will be a reduction in trading volume, especially as suppression of volatility is a prime aim of the tax. There is no assessment of the likely volume impact provided here or referenced. It is also suggested that the FTT tax would come out of profits and not be passed on to consumers. I am not aware of a single instance where tax burdens are not passed on to consumers and no mechanism is suggested that could ensure this result.
In the case of profiteering and speculating at the expense of small nations, it is in the nature of human beings to describe profitable trades as ‘investments arising from one’s own insight and inspiration’ and to attribute loss making trades to the ‘speculative actions of others’. Every transaction requires a buyer and a seller and as such implies someone who believes an argument/opinion and one who disagrees. Shorting of bonds or shares is not a unilateral action. Further, where 'short selling' has been banned it normally creates more sellers unsettled by the change in rules and the whiff of panic and, consequently, usually worsens the situation.
In capital owning democracies, people are entitled to decide whether they believe a governments policies are credible/effective and to vote with their assets if they disagree. Manipulating market rules to suit Govt. preferences is a form of censorship and suffers from all of the hypocrisy and ineffectiveness that goes with censorship.
I note also that the report indulges in discussing “the best place to use the additional resources an FTT would generate." This section smacks of counting chickens before they are hatched. More importantly, hypothecation of tax receipts is generally regarded as poor practice for a whole host of reasons .
Lastly, I would like to point out the complete absence of complaint or comment by the banks themselves on this topic.
Partly, of course, it is because they know that any such pleading on their part would likely harden hearts and prejudices against them. The real reason is because it will cost them practically nothing to circumvent the tax. The FTT makes explicit the intention to tax trades in their ‘domicile’. So, in exactly the same way as every trade executed on Wall Street is booked through entities in the Grand Cayman Islands, every trade in Dublin, London, Paris and Berlin will be routed through entities in Gibralter, Jersey or Malta the day after the legislation is passed and, consequently, hardly any ‘transaction tax’ will be collected. And this will happen without moving a single trader or company. The EU proposes to tax on the basis of residence but if the US authorities have not managed to shut down the Cayman loophole, I do not see how the EU with its vastly more complex legal hinterland will be able to do the equvalent.
This FTT proposal is long on wishful thinking, short on concrete details and absent a working knowledge of the operation of the market and its systems. Proponents of it need to "up their game" somewhat in order to have it gain serious consideration.
I welcome TASC’s effort to debate and suggest much needed development in this crucial aspect of fiscal reform, especially in light of the regressive aspects of the last budget.
However, I am very sad to see another transaction tax being proposed and in a manner at odds with the quality of the rest of the analysis. I refer here to the Financial Transaction Tax (FTT) which has the superficial qualities of a betting tax in that it seeks to punish a perceived vice while raising lots of money for the Exchequer and, at the same time, making life harder for everyone’s favourite “scapegoat du jour”, the bankers and hedgefunds.
I am not against an FTT in principal. In fact, I support the idea. But I am against badly designed public policy of any type and the FTT as proposed here falls into that impractical category.
The core of the FTT idea is that low transaction costs and excessive liquidity facilitates speculative trading in markets dominated by financial corporations which leads to price gyrations that hurt the ‘real economy’ while generating ‘excess profits’ for the ‘players’ in these markets. An FTT, it is supposed, would ‘calm’ these markets while at the same time raising money that could better be spent by Government on ‘widows and orphans’. Derivatives trading comes in for especial criticism in this regard as a ‘smoke and mirrors’ ‘work of the devil’ excessive extravagance of markets.
The TASC paper supports the draft EU Commission proposal for a transaction tax on bonds and shares at 0.10% and at 0.01% on derivatives. No mention is made of foreign exchange or commodities trading. The report includes a sentence “The proposal (the EU Commission one) was focused on open market activities and movements (i.e. trading) and excluded inter-bank transfers and trades which might occur in the normal course for business.”
After this prescription several reasons are advanced in the report to support the introduction of the FTT. Firstly, to ‘establish real-time monitoring mechanisms for the various flows of financial transactions happening each and every day’. Secondly, to raise lots of filthy lucre for the Exchequer. Thirdly, to stop speculative trading, the bullying of small nations and profiteering that damages the ‘real and useful’ economy.
I should like to point out, before critiquing this proposal, that the root cause of the OECD economies problems was the repeated and consistent overvaluation of property assets (residential and commercial) and, in Ireland’s case, the attendant excess supply of same over the decade after the repeal of the Glass-Steagall Act. What systemic failures there were happened in the areas of securities ratings and poor legal administration; neither of which are remedied by an FTT. I am in favour of massive reform of how we do banking but, again, I would rather we have effective and productive reform than mere public whippings of various “Aunt Sally’s”.
On a first point, the rates suggested, while seemingly trivial, are in fact massive proportions of the current quoted prices. It is not made clear whether these rates are the total or the individual counterparty rates but it is clear that both sides to any trade are to be taxed. Even if it is the total due, where derivatives are quoted in spreads of 4 or 5 basis points (0.01% is a basis point), then a tax rate of 1 basis point is a rate of 20 or 25%. Where bonds are quoted in spreads of less than 25 basis points this is a 40% tax rate. Further, if derivatives are the real ‘bogeyman’, why are they being charged the lesser rate?
There is no explanation of why foreign exchange trading is excluded which is most odd since, despite our obsession with the evolution and fate of the ‘Euro’, the EU is still a multi-currency construct. Nor is there a rationale given for the exclusion of commodities which means that fuel oils and foods are not covered yet these are indeed major components of the ‘real’ economy.
Excluding trades ‘which occur in the normal course of business’ is meaningless and would provide a get-out clause for all and any trades since these are all transacted out using the same processes and settlements.
A further major omission is that there is no mechanism suggested where transactions by non-financial corporations for practical hedging purposes of the financial risks of the ‘real economy’ can be excluded from the tax net. So the FTT as proposed will fall equally heavily on those with genuine need but less financial expertise.
The suggestion that the authorities are not aware of market prices and flows is fatuous in the extreme. The Central Bank is a Bank and has its own dealing room and it participates daily in a small but distinct manner in the principal markets. In addition, there is a large and comprehensive reporting mechanism for most forms of transactions. Lastly, the ‘need for real-time monitoring’ argument is further revealed as nonsense in light of the fact that ALL derivatives settle at some significant date point after they are entered into so the need for 'realtime' data is superfluous.
With respect to the notion that the yield would be significant several points arise. This forecast makes the same error that the DoF was excoriated for over its dreadful VAT return forecast of the last budget. It is undeniable that anyone one who accepts the existence of 'elasticities' must accept that there will be a reduction in trading volume, especially as suppression of volatility is a prime aim of the tax. There is no assessment of the likely volume impact provided here or referenced. It is also suggested that the FTT tax would come out of profits and not be passed on to consumers. I am not aware of a single instance where tax burdens are not passed on to consumers and no mechanism is suggested that could ensure this result.
In the case of profiteering and speculating at the expense of small nations, it is in the nature of human beings to describe profitable trades as ‘investments arising from one’s own insight and inspiration’ and to attribute loss making trades to the ‘speculative actions of others’. Every transaction requires a buyer and a seller and as such implies someone who believes an argument/opinion and one who disagrees. Shorting of bonds or shares is not a unilateral action. Further, where 'short selling' has been banned it normally creates more sellers unsettled by the change in rules and the whiff of panic and, consequently, usually worsens the situation.
In capital owning democracies, people are entitled to decide whether they believe a governments policies are credible/effective and to vote with their assets if they disagree. Manipulating market rules to suit Govt. preferences is a form of censorship and suffers from all of the hypocrisy and ineffectiveness that goes with censorship.
I note also that the report indulges in discussing “the best place to use the additional resources an FTT would generate." This section smacks of counting chickens before they are hatched. More importantly, hypothecation of tax receipts is generally regarded as poor practice for a whole host of reasons .
Lastly, I would like to point out the complete absence of complaint or comment by the banks themselves on this topic.
Partly, of course, it is because they know that any such pleading on their part would likely harden hearts and prejudices against them. The real reason is because it will cost them practically nothing to circumvent the tax. The FTT makes explicit the intention to tax trades in their ‘domicile’. So, in exactly the same way as every trade executed on Wall Street is booked through entities in the Grand Cayman Islands, every trade in Dublin, London, Paris and Berlin will be routed through entities in Gibralter, Jersey or Malta the day after the legislation is passed and, consequently, hardly any ‘transaction tax’ will be collected. And this will happen without moving a single trader or company. The EU proposes to tax on the basis of residence but if the US authorities have not managed to shut down the Cayman loophole, I do not see how the EU with its vastly more complex legal hinterland will be able to do the equvalent.
This FTT proposal is long on wishful thinking, short on concrete details and absent a working knowledge of the operation of the market and its systems. Proponents of it need to "up their game" somewhat in order to have it gain serious consideration.
Wednesday, 26 September 2012
Creating rather than destroying jobs
Tom Healy: The Nevin Economic Research Institute has published the Autumn Economic Observer here. The key messages are:
* We have choices
* A smaller fiscal consolidation (€2.7 bn) combined with an accelerated investment stimulus next year (of which €500m 'off the books') could create 21,000 additional jobs compared to 'Plan A'
* A Plan B would raise revenue starting with the highest income households (>€100K p.a.) and maintain front line services while re-investing any 'savings' into priority areas such as a Youth Guarantee for unemployed school and college leavers.
* Plan B envisages -7.5% government deficit in 2013.
We have used HERMIN to model the impacts. We have gone with Department of Finance projections and estimates and used the model to show how a reversal of planned cuts would be beneficial and just as efficient in reaching 'Troika' targets. A seminar will present the results today while my colleague Rory O'Farrell and I will present a paper on 'Alternative Fiscal Adjustment Pathways' at the Dublin Economics Workshop to be held this year in Galway next month.
* We have choices
* A smaller fiscal consolidation (€2.7 bn) combined with an accelerated investment stimulus next year (of which €500m 'off the books') could create 21,000 additional jobs compared to 'Plan A'
* A Plan B would raise revenue starting with the highest income households (>€100K p.a.) and maintain front line services while re-investing any 'savings' into priority areas such as a Youth Guarantee for unemployed school and college leavers.
* Plan B envisages -7.5% government deficit in 2013.
We have used HERMIN to model the impacts. We have gone with Department of Finance projections and estimates and used the model to show how a reversal of planned cuts would be beneficial and just as efficient in reaching 'Troika' targets. A seminar will present the results today while my colleague Rory O'Farrell and I will present a paper on 'Alternative Fiscal Adjustment Pathways' at the Dublin Economics Workshop to be held this year in Galway next month.
Tuesday, 25 September 2012
Event on tax justice
As part of the Dóchas EU Presidency Project, and to coincide with the visit of Christian Aid's 'Tax Justice Bus' to Irelnad, Christian Aid is organising an event on 'Tax Dodging Hurts us All' on Thursday, September 27th, from 6 pm to 8.30 pm in the European Parliament Buildings, Molesworth Street. It will be chaired by Senator Katherine Zappone, and speakers will include Ricardo Barrientos (senior economist at ICEFI, former Deputy Minister of Taxation Guatemala), journalist Justice McCarthy and Professor David Jacobson, well-known to readers of PE.
Sunday, 23 September 2012
Guest Post by Vic Duggan: Treading water beneath the surface
Vic Duggan: From its peak at the back end of 2007, the Irish economy sank like a stone for two solid years, seasonally-adjusted quarterly GDP falling 10.7% in real terms. Ever since, it has seemed alternately to be sinking more slowly or rising gradually. In reality, for two and a half years it has been treading water beneath the surface.
Between the first three months and the second three months of 2012, estimated GDP was within a rounding error of zero growth, avoiding a technical recession – two quarters of successive GDP contraction – by less than one euro for every person in the country. In the 10 quarters since end 2009, GDP has increased just 2.6%, barely keeping pace with population growth. The unemployment rate remains stranded at 14.8%.
The domestic economy is starved of the oxygen it needs to grow: consumers are overburdened with debt; businesses are either afraid to invest because of weak demand or unable to invest due to lack of credit; government is reinforcing the problem through ongoing, enforced austerity. The one bright light is Ireland’s continuing strong export performance, even in the face of a challenging external environment.
Those who until recently were writing Ireland off as an ‘export laggard’, in need of aggressive austerity to restore competitiveness, must now surely see that the opposite is in fact the case. Cost competitiveness has been largely and painfully restored, and exports remain robust, but austerity is undermining confidence at home and sapping domestic demand.
The CSO’s mid-September data dump tells us the following:
GDP was flat in the second quarter, but is half a percent lower than it was a year earlier.
GNP increased unexpectedly by 4.3% in the second quarter, clawing back some of its recent losses to reach almost exactly the same level it was at in Q3 2010.
The unemployment rate remained flat at 14.8%, but there were 13,700 fewer people employed than three months previously, and 33,400 fewer than a year ago.
Long-term unemployment surged to 8.8%, from 7.7% a year earlier, now accounting for 6 in 10 of all people unemployed and 1 in 11 members of the labour force.
The labour force – the number of people available for work – fell by 29,500, or 1.4%, due to a combination of increasing emigration and declining participation (i.e. people giving up on finding a job).
1 in 4 members of the labour force is now either unemployed or under-employed, working part-time because they can’t find a full-time job.
The Current Account hit a record surplus of EUR 3.2bn in Q2.
The Trade Balance for goods hit a record surplus of EUR 10bn.
The Trade Balance for services hit a record – and rare – surplus of EUR 1.3bn.
Quarterly national accounts are often an imperfect guide to the state of the economy. Quarterly numbers are volatile, and the latest data points are estimates subject to – sometimes substantial – revision. GNP figures, often labeled a convenient proxy for the domestic economy in Ireland, are notorious in this regard.
While the debate on whether GDP or GNP is the best measure of wealth, output etc. may never be settled – in most economies they are near identical, but the large multinational presence in Ireland means they differ by about a fifth – but at least quarterly GDP figures are not susceptible to the profit repatriation policies -and their execution – of the multinational sector.
One can argue the toss as to whether the economy is still sinking or slowly rising, but it’s crystal clear that the surface is still a long way off.Vic Duggan is a Consultant Economist with the World Bank, writing in a personal capacity.He blogs at vicduggan.wordpress.com
Friday, 21 September 2012
Local Government Fostering Job Creation
Nat O'Connor: The County and City Managers Association (CCMA), the umbrella group of the local authority head managers, has published a study showing 2,323 projects and initiatives where local authorities have helped boost job creation.
The press release and 30-page full report can be accessed on www.lgma.ie. There is also a spreadsheet list of the various initiatives.
Many of the initiatives are small scale (less than €10,000) although some major investments (€1m+) are included too.
It is an interesting exercise in both openness about spending plus showing where efforts are being made to foster employment. It would be worth detailed analysis at local level to see what initiatives are working well (or not), which ones are cost efficient and what different counties can learn from one another. Obviously, local authorities have been asked to play a role in the national Action Plan for Jobs. This report gives some indication of what might kinds of actions might be possible in that space.
The press release and 30-page full report can be accessed on www.lgma.ie. There is also a spreadsheet list of the various initiatives.
Many of the initiatives are small scale (less than €10,000) although some major investments (€1m+) are included too.
It is an interesting exercise in both openness about spending plus showing where efforts are being made to foster employment. It would be worth detailed analysis at local level to see what initiatives are working well (or not), which ones are cost efficient and what different counties can learn from one another. Obviously, local authorities have been asked to play a role in the national Action Plan for Jobs. This report gives some indication of what might kinds of actions might be possible in that space.
Thursday, 20 September 2012
Budget Transparency Reduced by Oireachtas Website Changes
Nat O'Connor: Public access to the official record of Oireachtas debates has been diminished by the bizarre decision of the Oireachtas website to cease publishing the record of debates using the universal standard format XML. This means that a popular website (KildareStreet.com) used for searching the official record no longer can be updated.
KildareStreet.com has issued an explanatory statement.
Whether by accident or design, this could not have come at a worse moment for anybody concerned with the upcoming budget, as well as the vital debate on matters of national importance (like Ireland's deal with the EU/IMF). Access to the offical record will be significantly hampered by the decision, as the Oireachtas website does not provide the same quality of search features as KildareStreet.com, which makes it easier to search for individual TDs and key phrases in the official record.
This Government is committed (in the Programme for Government) to the following: "We will open up the Budget process to the full glare of public scrutiny in a way that restores confidence and stability by exposing and cutting failing programmes and pork barrel politics." (page 23).
In fact, the Programme for Government is full of commitments to openness and transparency that are belied by this move (intentional or not):
"We will develop Ireland as a ‘digital island’ and first-mover when it comes to information technology by ensuring more progress on e-Government and moving Government services online, investing in ICT in schools, and investing in information technology in the healthcare sector." (page 9)
"Government is too centralised and unaccountable. We believe that there must also be a real shift in power from the State to the citizen. We will legislate on the issue of cabinet confidentiality. We will legislate to restore the Freedom of Information Act to what it was before it was underined by the outgoing Government, and we will extend its remit to other public bodies including the administrative side of the Garda SÃochána, subject to security exceptions. We will extend Freedom of Information, and the Ombudsman Act, to ensure that all statutory bodies, and all bodies significantly funded from the public purse, are covered."(page 20)
"Real reform of the public sector will require a commitment from the whole of government to become more transparent, accountable and efficient. It will require: ... • Citizens having a basic right to key information on the performance of key services." (page 28)
"Open Government: Where there is secrecy and unaccountability, there is waste and extravagance. We will pin down accountability for results at every level of the public service – from Ministers down – with clear consequences for success and failure. Ministers will be responsible for policy and procurement and public service managers for delivery." (pages 28-29)
"Government services websites, public offices, telephone services, and helplines will be reconfigured to facilitate access to a broad range of government services through a single point of contact." (page 31)
"We will complete ratification of Aarhus Convention on access to information, public participation in decision-making and access to justice in environmental matters." (page 61)
What now for open and transparent government, and an open budget process?
It is an entirely reasonable expectation for public information not only to be available, but to be made available in standard, easy to use formats, which allow citizens to avail of contemporary information technology to access and search that information.
KildareStreet.com has issued an explanatory statement.
Whether by accident or design, this could not have come at a worse moment for anybody concerned with the upcoming budget, as well as the vital debate on matters of national importance (like Ireland's deal with the EU/IMF). Access to the offical record will be significantly hampered by the decision, as the Oireachtas website does not provide the same quality of search features as KildareStreet.com, which makes it easier to search for individual TDs and key phrases in the official record.
This Government is committed (in the Programme for Government) to the following: "We will open up the Budget process to the full glare of public scrutiny in a way that restores confidence and stability by exposing and cutting failing programmes and pork barrel politics." (page 23).
In fact, the Programme for Government is full of commitments to openness and transparency that are belied by this move (intentional or not):
"We will develop Ireland as a ‘digital island’ and first-mover when it comes to information technology by ensuring more progress on e-Government and moving Government services online, investing in ICT in schools, and investing in information technology in the healthcare sector." (page 9)
"Government is too centralised and unaccountable. We believe that there must also be a real shift in power from the State to the citizen. We will legislate on the issue of cabinet confidentiality. We will legislate to restore the Freedom of Information Act to what it was before it was underined by the outgoing Government, and we will extend its remit to other public bodies including the administrative side of the Garda SÃochána, subject to security exceptions. We will extend Freedom of Information, and the Ombudsman Act, to ensure that all statutory bodies, and all bodies significantly funded from the public purse, are covered."(page 20)
"Real reform of the public sector will require a commitment from the whole of government to become more transparent, accountable and efficient. It will require: ... • Citizens having a basic right to key information on the performance of key services." (page 28)
"Open Government: Where there is secrecy and unaccountability, there is waste and extravagance. We will pin down accountability for results at every level of the public service – from Ministers down – with clear consequences for success and failure. Ministers will be responsible for policy and procurement and public service managers for delivery." (pages 28-29)
"Government services websites, public offices, telephone services, and helplines will be reconfigured to facilitate access to a broad range of government services through a single point of contact." (page 31)
"We will complete ratification of Aarhus Convention on access to information, public participation in decision-making and access to justice in environmental matters." (page 61)
What now for open and transparent government, and an open budget process?
It is an entirely reasonable expectation for public information not only to be available, but to be made available in standard, easy to use formats, which allow citizens to avail of contemporary information technology to access and search that information.
Tuesday, 18 September 2012
FEPS vacancy: economist
Nat O'Connor: FEPS (the Foundation for European Progressive Studies) is advertising the important post of Economic Policy Advisor. More details here: http://www.feps-europe.eu/en/vacancies.
Thursday, 6 September 2012
German Call for EU Programme of Investment
Nat O'Connor: The major German social democratic foundation (Friedrich Ebert Stiftung) has circulated a cogent 24-page analysis outlining the case for an EU-wide investment programme which, they argue, "must emulate the successful Marshall Plan after the Second World War" in order "to arrest the downward spiral" that the EU currently faces.
Wednesday, 5 September 2012
National Income and Expenditure 2011
Michael Burke: The argument in favour of ‘austerity’ measures is that the overriding objective of policy must be to reduce the government deficit, that this must be done by cutting spending and that there is no alternative to current policies. The release of the latest Irish National Income and Expenditure for 2011 should serve to dispel the several fallacies contained in that argument.
GDP has contracted by €30bn since 2007 in nominal terms, down 6.8 per cent in real terms (Tables 5 and 6). GNP, which excludes the distortions of multi-national corporations who book profits in Ireland to avail of its ultra-low corporate taxes, has fallen by €35bn since 2007 - a contraction of 11.1 per cent in real terms. If the overriding objective of policy were the optimum sustainable prosperity and well-being for all citizens then clearly the current measures would be a spectacular failure.
However, the objective to cut government borrowing on a sustainable basis is also not being met. ‘Austerity’ measures began towards the end of 2008 (unprompted by any international agency, but as a domestic policy choice). From 2008 to 2011 government current receipts have fallen by €6.3bn while current expenditure has risen by just €0.5bn, a total increase in the deficit of a little over €6.8bn despite all the fierce ‘austerity’ measures (Table 21). Worse, in relation to GDP this current deficit (excluding capital spending and receipts) has risen from 2.2 per cent of GDP to 6.7 per cent. Even if debt interest payments are excluded, the ‘primary deficit’ has risen by €4bn.
The only reason supporters of current policy can claim success in deficit-reduction is because the huge one-off payments to rescue the bank bondholders have come to a halt. These ‘grants to enterprises’ have amounted to over €43bn in the 4 years to 2011. But, even if they have now come to an end (which is at least questionable), they cannot be taken as evidence of any underlying improvement in the deficit arising from economic policy. That can only be gauged with reference to the government current income and expenditure, which is deteriorating.
What Is Policy For?
These data are of course well known in the Department of Finance, whose officials advise Ministers. It is improbable that both government and the Troika are unaware of the underlying state of government finances. If current policy even closely matched the success claimed for it, there would hardly be any need for the threatened further ‘austerity measures in the forthcoming Budget.
Yet current policy will be maintained and even deepened. This is because there has been some success, of a kind, for policy. In Fig.1 below data from Table1.1 of the NIE is shown (click to enlarge).
Source: CSO
Even though GDP has been contracting throughout the period, profits have risen in the last two years. At the same time employees’ remuneration has fallen sharply. In a recession the natural tendency is for profits to fall. This is because profits are the surplus after fixed costs and costs of labour and other input costs are deducted. Since fixed costs for firms are often unchanged, the fact the wages do not fall faster than sales means profits decline. This is what happened to profits in both 2008 and 2009. However, after ‘austerity’ measures were introduced in 2008, wages fell in 2009 and have continued to fall since. This has allowed the natural fall in profits to be reversed, at the expense of wages.
To put this in perspective, labour’s share of national income has fallen so far in 2 years that it could be increased by 8.7 per cent over 2011 levels and this would still only have the effect of returning its share of national income to the crisis levels of 2009.
It is argued that the policy measures which have the effect of lowering wages and increasing profits are necessary in order to generate recovery, often described as ‘restoring competitiveness’ even while there is incessant and misplaced boasting about the rise in Irish exports.
But it is impossible to engineer a sustained recovery without an increase in investment. The decline in Gross Fixed Capital Formation (GFCF) is greater than the total decline in GDP, €32bn versus €30bn (Table 5). Yet, from 2009 onwards, when profits rose by €8.6bn, GFCF fell by €9.5bn. The policy of transferring incomes for labour and the poor to capital and the rich, which is the real content of austerity, has been an utter failure in reviving growth.
Policy ought to be aimed at the optimum sustainable growth in prosperity for all citizens. The policy of transferring incomes to capital and the rich does not achieve that, nor does it foster investment, the determinant of all future prosperity. Meanwhile the bluster about an improving deficit position should be recognised for what it is, just bluster.
GDP has contracted by €30bn since 2007 in nominal terms, down 6.8 per cent in real terms (Tables 5 and 6). GNP, which excludes the distortions of multi-national corporations who book profits in Ireland to avail of its ultra-low corporate taxes, has fallen by €35bn since 2007 - a contraction of 11.1 per cent in real terms. If the overriding objective of policy were the optimum sustainable prosperity and well-being for all citizens then clearly the current measures would be a spectacular failure.
However, the objective to cut government borrowing on a sustainable basis is also not being met. ‘Austerity’ measures began towards the end of 2008 (unprompted by any international agency, but as a domestic policy choice). From 2008 to 2011 government current receipts have fallen by €6.3bn while current expenditure has risen by just €0.5bn, a total increase in the deficit of a little over €6.8bn despite all the fierce ‘austerity’ measures (Table 21). Worse, in relation to GDP this current deficit (excluding capital spending and receipts) has risen from 2.2 per cent of GDP to 6.7 per cent. Even if debt interest payments are excluded, the ‘primary deficit’ has risen by €4bn.
The only reason supporters of current policy can claim success in deficit-reduction is because the huge one-off payments to rescue the bank bondholders have come to a halt. These ‘grants to enterprises’ have amounted to over €43bn in the 4 years to 2011. But, even if they have now come to an end (which is at least questionable), they cannot be taken as evidence of any underlying improvement in the deficit arising from economic policy. That can only be gauged with reference to the government current income and expenditure, which is deteriorating.
What Is Policy For?
These data are of course well known in the Department of Finance, whose officials advise Ministers. It is improbable that both government and the Troika are unaware of the underlying state of government finances. If current policy even closely matched the success claimed for it, there would hardly be any need for the threatened further ‘austerity measures in the forthcoming Budget.
Yet current policy will be maintained and even deepened. This is because there has been some success, of a kind, for policy. In Fig.1 below data from Table1.1 of the NIE is shown (click to enlarge).
Source: CSO
Even though GDP has been contracting throughout the period, profits have risen in the last two years. At the same time employees’ remuneration has fallen sharply. In a recession the natural tendency is for profits to fall. This is because profits are the surplus after fixed costs and costs of labour and other input costs are deducted. Since fixed costs for firms are often unchanged, the fact the wages do not fall faster than sales means profits decline. This is what happened to profits in both 2008 and 2009. However, after ‘austerity’ measures were introduced in 2008, wages fell in 2009 and have continued to fall since. This has allowed the natural fall in profits to be reversed, at the expense of wages.
To put this in perspective, labour’s share of national income has fallen so far in 2 years that it could be increased by 8.7 per cent over 2011 levels and this would still only have the effect of returning its share of national income to the crisis levels of 2009.
It is argued that the policy measures which have the effect of lowering wages and increasing profits are necessary in order to generate recovery, often described as ‘restoring competitiveness’ even while there is incessant and misplaced boasting about the rise in Irish exports.
But it is impossible to engineer a sustained recovery without an increase in investment. The decline in Gross Fixed Capital Formation (GFCF) is greater than the total decline in GDP, €32bn versus €30bn (Table 5). Yet, from 2009 onwards, when profits rose by €8.6bn, GFCF fell by €9.5bn. The policy of transferring incomes for labour and the poor to capital and the rich, which is the real content of austerity, has been an utter failure in reviving growth.
Policy ought to be aimed at the optimum sustainable growth in prosperity for all citizens. The policy of transferring incomes to capital and the rich does not achieve that, nor does it foster investment, the determinant of all future prosperity. Meanwhile the bluster about an improving deficit position should be recognised for what it is, just bluster.
Wednesday, 29 August 2012
Unequal societies do encourage criminality
Colm O'Doherty: According to Dan O'Brien there is no relationship between inequality and law breaking (Irish Times 24/08/12). This bogus statement is grounded in the same kind of statistical modelling which economists relied upon to predict ‘soft landings’ for economies with sound ‘fundamentals’ . The predictive capability of economics here is based on a positivism which seeks generalizations which are independent of culture. For Dan O’Brien and other neo-liberal commentators the hubris of positivism is manifested as a fetishism of numbers, an illusion of precision and the donning of the status shield of science. As we now know the so called pragmatism of economics as trumpeted by a large technocratic mainstream was nothing more than a policy driven skate on the thin ice of casino capitalism.
There is more than a whiff of this neo-liberal policy agenda in Dan O'Brien’s promotion of a mechanistic relationship between objective conditions and human behaviour. There is no natural science of society, and of crime in particular. The perspective on social order which is espoused in this article is well known to us all : it is the ‘orthodox’, the ‘conventional’ the ‘taken for granted ‘ world carried by mass media and the establishment. Namely that society is a fundamentally rational and consensual arrangement where deviance and crime is seen as a marginal and minority category. The deviants and criminals are seen as different from the ‘ normal’ population and there is generalised agreement on what constitutes criminal behaviour.
However, in reality, during the boom years, when inequality between the bankers, speculators and property developers and the rest of the population spiralled, particular types of criminal behaviour flourished. Consider anti-social behaviour. The concept of anti-social behaviour which has been disseminated by the media and the establishment in recent years is focused on a whole range of behaviours such as begging, neighbourhood disturbance/nuisance, public drunkenness etc. It is fair to say that poor and socially excluded populations are portrayed as the culprits here and that cracking down on anti-social behaviours is viewed as an exercise in the creation of social order in such neighbourhoods. If we examine anti-social behaviour using an interpretative rather than a mechanistic and positivistic orthodoxy lens we will see that the fallout from the anti-social behaviour of the bankers, speculators and developers has major repercussions for everybody. Our health services are in crisis, our education system is under stress and the vulnerable are abandoned. So the figures and statistics used to advance the arguments in the piece are concealing the reality that as inequality has increased in the US, the UK here and in other highly marketised economies so has the incidence of serious white collar crime. During the boom years poverty decreased but the crimes of the wealthy – as we are now discovering- increased. Crime statistics do not reflect this increase.
Apart from the conceptual limitations of his arguments Dan O’Brien also takes some liberties with the available statistics. There is a large body of evidence showing a clear relationship between greater inequality and higher homicide rates –see Heisch and Pugh’s (1993) review and Wilkinson and Pickett’s (2006) review.
There is more than a whiff of this neo-liberal policy agenda in Dan O'Brien’s promotion of a mechanistic relationship between objective conditions and human behaviour. There is no natural science of society, and of crime in particular. The perspective on social order which is espoused in this article is well known to us all : it is the ‘orthodox’, the ‘conventional’ the ‘taken for granted ‘ world carried by mass media and the establishment. Namely that society is a fundamentally rational and consensual arrangement where deviance and crime is seen as a marginal and minority category. The deviants and criminals are seen as different from the ‘ normal’ population and there is generalised agreement on what constitutes criminal behaviour.
However, in reality, during the boom years, when inequality between the bankers, speculators and property developers and the rest of the population spiralled, particular types of criminal behaviour flourished. Consider anti-social behaviour. The concept of anti-social behaviour which has been disseminated by the media and the establishment in recent years is focused on a whole range of behaviours such as begging, neighbourhood disturbance/nuisance, public drunkenness etc. It is fair to say that poor and socially excluded populations are portrayed as the culprits here and that cracking down on anti-social behaviours is viewed as an exercise in the creation of social order in such neighbourhoods. If we examine anti-social behaviour using an interpretative rather than a mechanistic and positivistic orthodoxy lens we will see that the fallout from the anti-social behaviour of the bankers, speculators and developers has major repercussions for everybody. Our health services are in crisis, our education system is under stress and the vulnerable are abandoned. So the figures and statistics used to advance the arguments in the piece are concealing the reality that as inequality has increased in the US, the UK here and in other highly marketised economies so has the incidence of serious white collar crime. During the boom years poverty decreased but the crimes of the wealthy – as we are now discovering- increased. Crime statistics do not reflect this increase.
Apart from the conceptual limitations of his arguments Dan O’Brien also takes some liberties with the available statistics. There is a large body of evidence showing a clear relationship between greater inequality and higher homicide rates –see Heisch and Pugh’s (1993) review and Wilkinson and Pickett’s (2006) review.
Wednesday, 22 August 2012
The MOU, Big Box economics and shopping centres
Paul Sweeney: The Rule Book by which Ireland is presently run, “The Memorandum of Understanding” (MOU) between the Troika and the Government, is forcing the government to impose a high level of austerity and some welcome reforms, like the belated regulation of the rotten banking system; reform of the legal system which is run by lawyers for lawyers; and then some other “reforms”.
One such other “reform” in the MOU which has actually been implemented is to allow more Big Box supermarkets on the edges of towns, with vast car parks, hollowing out urban centres.
Right wing economic ideologues love Big Box economics. Some little ideologue slipped this “reform” into the MOU and now it is being enacted. They hope that it will bring down prices. It may for a while, till the competition has been eliminated and urban centres destroyed.
Too many economists are indifferent to the non-economic impacts of economic decisions. The destruction of urban centres and replacement by Big Boxes is outside “pure economics”, they will argue. They may however, concede that once competition has been wiped out, prices may rise again, but console us with their belief that the market will operate and it will eventually bring in other Big Boxes in competition with Big Box No 1.
Dundrum Shopping Centre, while less of a Big Ugly Box than many others, has sucked much of the heart out of Rathmines, Dun Laoire, Bray and other south Dublin urban town centres.
Supermarket sizes had been regulated by the state under retail planning laws in Ireland. They were “relaxed” to allow IKEA to drop its vast box into Finglas. IKEA threatened to hover up all the business from Northern Ireland and not to pay any VAT here. The government caved in.
Now more big boxes are to be allowed to be built all over Ireland thanks to the section on retail size inserted into the MOU.
In the light of the news that Ireland has the highest number of shopping centres per head of population in Europe, this will not happen too soon. This information on the flood of shopping centres is revealed in a survey of 24 countries by the commercial property consultancy, Jones Lang Lasalle. I do not think we needed a survey to find out that we had lots of empty shops, but nonetheless such empirical evidence is very useful to inform future decisions.
The survey found that Ireland had almost 500sqm of shopping centre space per 1,000 people - more than twice the average European of 179sqm per thousand. Most of our shopping centres had being constructed during the boom. Too many are located in regional locations which cannot now sustain all of their units.
It is therefore no surprise that even when the bust ends, Jones Lang Lasalle predicts that even a return to a healthy retail trade will not be enough to provide tenants for all of the retail space that has resulted since the boom.
State regulation has its faults, limits and errors are made, but the superiority of the market as the alternative has been found deeply wanting in Ireland, even before this relaxation of the retail planning laws. The inane property boom has cost us all muchos dineros, but will leave also a horrible physical blight on our cities and towns for decades to come.
Perhaps after we say goodbye to the Troika, if it happens, in 2014, the government will reassert itself as a government for the people and will reinstate the retail planning laws to protect our urban heritage from this clause in the MOU which enshrines suburban retail Big Box Blight all over Ireland.
One such other “reform” in the MOU which has actually been implemented is to allow more Big Box supermarkets on the edges of towns, with vast car parks, hollowing out urban centres.
Right wing economic ideologues love Big Box economics. Some little ideologue slipped this “reform” into the MOU and now it is being enacted. They hope that it will bring down prices. It may for a while, till the competition has been eliminated and urban centres destroyed.
Too many economists are indifferent to the non-economic impacts of economic decisions. The destruction of urban centres and replacement by Big Boxes is outside “pure economics”, they will argue. They may however, concede that once competition has been wiped out, prices may rise again, but console us with their belief that the market will operate and it will eventually bring in other Big Boxes in competition with Big Box No 1.
Dundrum Shopping Centre, while less of a Big Ugly Box than many others, has sucked much of the heart out of Rathmines, Dun Laoire, Bray and other south Dublin urban town centres.
Supermarket sizes had been regulated by the state under retail planning laws in Ireland. They were “relaxed” to allow IKEA to drop its vast box into Finglas. IKEA threatened to hover up all the business from Northern Ireland and not to pay any VAT here. The government caved in.
Now more big boxes are to be allowed to be built all over Ireland thanks to the section on retail size inserted into the MOU.
In the light of the news that Ireland has the highest number of shopping centres per head of population in Europe, this will not happen too soon. This information on the flood of shopping centres is revealed in a survey of 24 countries by the commercial property consultancy, Jones Lang Lasalle. I do not think we needed a survey to find out that we had lots of empty shops, but nonetheless such empirical evidence is very useful to inform future decisions.
The survey found that Ireland had almost 500sqm of shopping centre space per 1,000 people - more than twice the average European of 179sqm per thousand. Most of our shopping centres had being constructed during the boom. Too many are located in regional locations which cannot now sustain all of their units.
It is therefore no surprise that even when the bust ends, Jones Lang Lasalle predicts that even a return to a healthy retail trade will not be enough to provide tenants for all of the retail space that has resulted since the boom.
State regulation has its faults, limits and errors are made, but the superiority of the market as the alternative has been found deeply wanting in Ireland, even before this relaxation of the retail planning laws. The inane property boom has cost us all muchos dineros, but will leave also a horrible physical blight on our cities and towns for decades to come.
Perhaps after we say goodbye to the Troika, if it happens, in 2014, the government will reassert itself as a government for the people and will reinstate the retail planning laws to protect our urban heritage from this clause in the MOU which enshrines suburban retail Big Box Blight all over Ireland.
Tuesday, 14 August 2012
Invoking Luther
Tom Healy: Writing in today's Irish Times Steven Ozment claims that German Lutheranism explains and justifies the stance of the current German administration. 'According to polls', writes Steven Ozment, Germans 'hold tight to their belief, born of staunch Lutheran teachings, that human life cannot thrive in deadbeat towns and profligate lands'. I am not convinced and while not an expert in Lutheranism I am not convinced, either, that Brother Martin of Erfurt would see justification for what is sometimes inappropriately referred to as the 'German view' on Europe and the 'German approach' to European integration and co-responsibility.
Nat O'Connor has already posted about a statement by Peter Bofinger, Juergen Habermas and Julian Nida-Ruemelin. In truth there is no one German view or solution anymore than there is an Irish one. If the current European crisis has exposed deep inter-country tensions and rivalries it has also shown up the underlying social tensions within countries and across the entire continent. There are many incidents of 'profligate lands' and 'deadbeat towns' (One hopes that this is not a reference to NAMA land only!).
The diagnosis of the European political-economic crisis and the appropriates solutions depends to some extent on how one sees the problem. If you see it as the cartoon image of the irresponsible Irish or Greeks living off the hard-working Germans then the solution is one involving pain and redemption for the indolent and misbehaving. We all know where that mind-set and thinking in the 1840s led the official response to the famine in Ireland (the age of self-reliance, market freedom and work ethic etc).
If, alternatively, you see the problem as one of systemic failure in the private sector aided by systemic failure in public regulation and governance then the problem shifts from one of national or sectoral blame-shifting to one of how we overcome the neo-liberal world order. If you want to put it in biblical terms - the wages of neo-liberalism is death - death of social cohesion, death of social justice and in the end death of civilisation. Yes, individuals are responsible - but systems and structures are also part of the problem I suggest.
The problem and challenge is now to create a stronger European dynamic and solidarity while retaining the principle of subsidiarity so beloved by the early pioneers of the European project. We must avoid lazy stereotyping of national groups (the profligate peripherals versus the disciplined core etc) as well as enlisting the backing of this or that figure from the rich and diverse cultural tapestry of Europe. Scandinavian Lutheranism could arguably have some connection to the civic values and practices of our Nordic neighbours at least in terms of cultural history and economic conditions.
I will conclude with a quote from one of the greatest thinkers and heroes of the last century, Dietrich Bonhoeffer - a German and Lutheran who was martyred in 1945: '“We are not to simply bandage the wounds of victims beneath the wheels of injustice, we are to drive a spoke into the wheel itself.”
Nat O'Connor has already posted about a statement by Peter Bofinger, Juergen Habermas and Julian Nida-Ruemelin. In truth there is no one German view or solution anymore than there is an Irish one. If the current European crisis has exposed deep inter-country tensions and rivalries it has also shown up the underlying social tensions within countries and across the entire continent. There are many incidents of 'profligate lands' and 'deadbeat towns' (One hopes that this is not a reference to NAMA land only!).
The diagnosis of the European political-economic crisis and the appropriates solutions depends to some extent on how one sees the problem. If you see it as the cartoon image of the irresponsible Irish or Greeks living off the hard-working Germans then the solution is one involving pain and redemption for the indolent and misbehaving. We all know where that mind-set and thinking in the 1840s led the official response to the famine in Ireland (the age of self-reliance, market freedom and work ethic etc).
If, alternatively, you see the problem as one of systemic failure in the private sector aided by systemic failure in public regulation and governance then the problem shifts from one of national or sectoral blame-shifting to one of how we overcome the neo-liberal world order. If you want to put it in biblical terms - the wages of neo-liberalism is death - death of social cohesion, death of social justice and in the end death of civilisation. Yes, individuals are responsible - but systems and structures are also part of the problem I suggest.
The problem and challenge is now to create a stronger European dynamic and solidarity while retaining the principle of subsidiarity so beloved by the early pioneers of the European project. We must avoid lazy stereotyping of national groups (the profligate peripherals versus the disciplined core etc) as well as enlisting the backing of this or that figure from the rich and diverse cultural tapestry of Europe. Scandinavian Lutheranism could arguably have some connection to the civic values and practices of our Nordic neighbours at least in terms of cultural history and economic conditions.
I will conclude with a quote from one of the greatest thinkers and heroes of the last century, Dietrich Bonhoeffer - a German and Lutheran who was martyred in 1945: '“We are not to simply bandage the wounds of victims beneath the wheels of injustice, we are to drive a spoke into the wheel itself.”
Monday, 13 August 2012
Nat O'Connor: Three German economists and philosophers (Peter Bofinger, Juergen Habermas and Julian Nida-Ruemelin) have released a major statement to pursuade Germans (and Europeans) to consider the case for closer European political and economic integration. They call for a German constitutional convention to have an open public debate on the future of Europe and of Germany's place in it.
Given that Ireland is President of the EU next year and also having our own Constitutional Convention, it would be apt for us to have a similar national debate here on our vision for the EU and Ireland's place in Europe.
Thursday, 9 August 2012
Scale of inequality now a drag on our economy and well-being
Colm O'Doherty: The results from the Central Statistics Office Survey of Income and living Conditions 2010, released earlier this year, confirmed what most Irish people are acutely aware of – the gap between the top and bottom 20% of income earners is increasing. The well-off are getting richer compared to the rest of the population and are suffering little or no repercussions from the economic crash. Average income of the top 20% of earners was 5.5 greater than those in the lowest 20 per cent. This inequality ratio is up from 4.3 a year earlier.
Persistent and increasing inequality is a serious threat to both our economic prospects and our well-being. A new wave of research on the effects of inequality, growth and financial crisis all see inequality as a driver behind the unsustainable surge in household indebtedness which triggered the crash.
On the level of individuals, Joseph Stiglitz suggests that in the US people on lower incomes over-borrowed in order to maintain a rising standard of living in the face of stagnating real incomes. This borrowing, over time, became unsustainable and led to default and pressure on over-extended financial institutions such as Fanny Mae, precipitating the wider financial crash. A second set of theorists (Rajan, Fitoussi and Saraceno) argue that on the societal-level inequality is the driving force for policy choices which, in turn, lead to unsustainable household and governmental debt levels. In this scenario, neo-liberal economic policies use regulatory tools to facilitate low income households’ access to credit , particularly mortgages.
These policies encouraged low interest rates and financial deregulation to compensate for inadequate incomes. They also aided and abetted financial liberalisation and raising top incomes, seen as progressive policies by neo-liberals, through regressive taxation strategies. Policies such as these permeated the thinking of successive Fianna Fail coalition governments and, many people were convinced that that they represented a natural economic order. It appears that the current Government is also in thrall to these doctrines. While there is some overlap between these theoretical standpoints, they all clearly make valid links between inequality and the financial crash.
The consequences of inequality are also becoming clearer. Economic hardship, manifested as unemployment, wage reductions and income support cuts, is affecting all tiers of Irish society except those at the top who are becoming more and more adept at looking after themselves and their own. A recent report from the Irish League of Credit Unions found that 1.82 million adults, say they have less than 100 Euro a month spend after bills are paid. Poverty rates are on the rise with yearly increases in consistent poverty and at-risk–of-poverty rates being recorded by the CSO. Reductions in essential public services such as health and education, are weakening the social contract between citizens and the State.
The State is pursuing policies which openly discriminate in favour of the wealthy and against all other citizens. This policy direction is the road to economic and social ruin. While the left here appear not to have woken up to this reality – blaming the EU, the IMF and global capitalism for everything - world leaders in the US and France accept that government policy needs to be framed around re-distribution of wealth in order to balance the fiscal books and fulfil the social contract obligations of the State.
On the academic front, Robert Putnam, the author of Bowling Alone, who is recognised as an authoritative academic but not a firebrand, has pinpointed inequality, the closure of social mobility and diminishing social trust as threatening America’s economic future. The tax burden in Ireland, at 28% of GDP, is one of the lowest and most regressive in the EU. Sweden and Denmark and other Scandanavian countries have tax burdens of the order of 45.8 % and 48.2% respectively, and are not in the same economic disaster zone as us. Despite going against the economic orthodoxy we have been in thrall to for the past twenty years the Nordic region's tax policies have protected their social models, encouraging and realising more equal societies and avoiding the financial crash which is now inflicting terrible damage on the most vulnerable and weakest sections of our society.
The big question facing our Government now as it begins to frame its second budget is: will it continue to progress inequality and ramp up social and economic decline in the pursuit of measures which are widely discredited or will it put in place fair and equitable taxation measures which share the burden of economic and social renewal?
Persistent and increasing inequality is a serious threat to both our economic prospects and our well-being. A new wave of research on the effects of inequality, growth and financial crisis all see inequality as a driver behind the unsustainable surge in household indebtedness which triggered the crash.
On the level of individuals, Joseph Stiglitz suggests that in the US people on lower incomes over-borrowed in order to maintain a rising standard of living in the face of stagnating real incomes. This borrowing, over time, became unsustainable and led to default and pressure on over-extended financial institutions such as Fanny Mae, precipitating the wider financial crash. A second set of theorists (Rajan, Fitoussi and Saraceno) argue that on the societal-level inequality is the driving force for policy choices which, in turn, lead to unsustainable household and governmental debt levels. In this scenario, neo-liberal economic policies use regulatory tools to facilitate low income households’ access to credit , particularly mortgages.
These policies encouraged low interest rates and financial deregulation to compensate for inadequate incomes. They also aided and abetted financial liberalisation and raising top incomes, seen as progressive policies by neo-liberals, through regressive taxation strategies. Policies such as these permeated the thinking of successive Fianna Fail coalition governments and, many people were convinced that that they represented a natural economic order. It appears that the current Government is also in thrall to these doctrines. While there is some overlap between these theoretical standpoints, they all clearly make valid links between inequality and the financial crash.
The consequences of inequality are also becoming clearer. Economic hardship, manifested as unemployment, wage reductions and income support cuts, is affecting all tiers of Irish society except those at the top who are becoming more and more adept at looking after themselves and their own. A recent report from the Irish League of Credit Unions found that 1.82 million adults, say they have less than 100 Euro a month spend after bills are paid. Poverty rates are on the rise with yearly increases in consistent poverty and at-risk–of-poverty rates being recorded by the CSO. Reductions in essential public services such as health and education, are weakening the social contract between citizens and the State.
The State is pursuing policies which openly discriminate in favour of the wealthy and against all other citizens. This policy direction is the road to economic and social ruin. While the left here appear not to have woken up to this reality – blaming the EU, the IMF and global capitalism for everything - world leaders in the US and France accept that government policy needs to be framed around re-distribution of wealth in order to balance the fiscal books and fulfil the social contract obligations of the State.
On the academic front, Robert Putnam, the author of Bowling Alone, who is recognised as an authoritative academic but not a firebrand, has pinpointed inequality, the closure of social mobility and diminishing social trust as threatening America’s economic future. The tax burden in Ireland, at 28% of GDP, is one of the lowest and most regressive in the EU. Sweden and Denmark and other Scandanavian countries have tax burdens of the order of 45.8 % and 48.2% respectively, and are not in the same economic disaster zone as us. Despite going against the economic orthodoxy we have been in thrall to for the past twenty years the Nordic region's tax policies have protected their social models, encouraging and realising more equal societies and avoiding the financial crash which is now inflicting terrible damage on the most vulnerable and weakest sections of our society.
The big question facing our Government now as it begins to frame its second budget is: will it continue to progress inequality and ramp up social and economic decline in the pursuit of measures which are widely discredited or will it put in place fair and equitable taxation measures which share the burden of economic and social renewal?
Internal devaluation in the Eurozone
Tom McDonnell: Ronald Janssen explores the impact of falling wage costs in the Eurozone periphery here. He argues that export revival has not been enough to prevent the collapse in domestic demand that accompanies the cuts in public budgets and real wages and that the net outcome has been recessionary.
Tuesday, 7 August 2012
Guest post by Arthur Doohan: A perp walk for banks
Arthur Doohan: We all had a pleasantly salacious time some days ago watching various white-collar villains being hauled before the courts and given "good talking to's" by our esteemed judiciary. In the vernacular I believe this is referred to as the 'perp walk', where the fourth estate gets to harmlessly indulge our ancient tendencies to 'hue and cry' and 'witchhunt'.
All of which amounts to slamming the stable door on a horse whose cantering about the farmyard is still damaging this economy. Bad bankers and banking has caused huge current problems for everyone in the state. The same problems are afflicting most of the developed economies concurrently and concertedly.
Banking has seldom been an asset to the state or the economy in Ireland. It has had just as poor a history of labour disputes as other sectors and it has been sufficiently unfriendly to enterprise and innovation that the state has had to set up its own banks and to establish the global model for government agencies to stimulate investment, both foreign and domestic. And all this while the banks demanded the same privileges that obtained elsewhere such as depositor guarantees and light touch regulation.
So, if we are to avoid more of the same from our banks and to help us get out of this morass, I would ask you to consider a " 'purp' walk" for banking, that is, let us take out for a stroll the notion of the 'purpose' of banking. Specifically, what are banks for, what have they actually been doing, what are they doing now and what should they be doing in the future.
What we have
We, currently, have what are called 'universal banks', that is, they do 'everything' with respect to money and quite a few other things beside. Our banks borrow money, lend money, move money, convert money, 'invest' money and advise on all of the foregoing. For all of these services they charge fees as well as potentially profiting from 'exposures' or risk taking we inadvertently allow them to enter into with our money. About the only thing they don't do is print the damn stuff, despite what some 'theorists' will tell you.
This concentration of business models into a single conglomerate is a historic accident rather than a strategic decision. It is an accident waiting to happen which it does, repeatedly, as the history of banking shows. Further, it is an 'accident' that disregards the prudential structures that exist in all other financial markets.
Nowhere else are the risk takers allowed operate the risk transfer mechanism. In plain English, in every other financial market in the entire planet either there is an 'Exchange' which is an independent entity that carries no risk or risk transfer is done multilaterally from each to each other. Only in banking are the handful of big players, who carry the most risk, allowed to operate the 'clearing system'.
Out of this strategic oversight grows the risk that allows politicians to frighten us with threats of ATM shut downs and failures to pay wages and the like. The recent systemic problems at RBS/NatWest/Ulster have shown us that the 'clearing banks' are prone to failings in this.
There is, also, an embedded conflict of interest in the fact that banks are allowed to charge 'advice fees' for selling products that they will make profits on. Is there any legislation or regulation that forces bank officials to advise clients of their competitors products or services? If there is, I assume, it is 'enforced' to the usual standard of the Irish fiduciary authorities, says he pulling his lower eyelid to the floor….
A further issue is that its 'risk management tools' (derivatives principally) and risk transfer methodology (securitisation mainly) have proven to be ineffective and actually dangerous in many cases.
Added to all of this is a star system of employment leading overpayment for what amounts rewarding people for lucky gambling outcomes and encouraging doubling up of both good and bad bets.
Lastly, our banks insist on being given a Government guarantee for their 'raw material' (our deposits) so that they don't have to take responsibility for their profligacy. This exposes us to their 'moral hazard' and gives them a free embedded option, known, on Wall St., as the "trader's put" (the trader can 'put' you into trouble but walk away untouched himself). It has been amusing to watch them turn the notion of 'moral hazard' on its head in refusing to allow borrowers some relief from the bankers mistakes while they refuse to deal with their own moral bankruptcy; amusing in a very frustrating way, that is.
So, clearly, banking is a mess but our Government is in thrall to it even if the people no longer are. Clearly, also, it has been a mess for a very long time.
It is structurally unsound, overly complicated, morally deficient, professionally conflicted, technically overreaching and given to self-indulgent excess. In parenting terms, it's a spoilt child with a cocaine habit driving the family car.….with the family on board.
What we need
Anybody can lend money to anyone else and they can charge interest for it? So, why do we lend our money to bankers rather than directly to businesses or housebuyers? On the continent people do that, they buy bonds of (lend money to) businesses and housing associations they know. Yes, they have banks as well but 1) "not so much" and 2) "not so big".
In the 'Anglo-Saxon' world of business practice that we Irish have adopted by default (a word we must judiciously use), we do have a share buying culture but not a bond buying one. We use our banks as risk diversification mechanisms for our prudential investment strategy. That is, we let the bank manager invest our money in a pool of loans and we take a reduced return in exchange for a heretofore presumed safe one.
We need to preserve this function in banking and that is the only thing we need to keep.
Getting from here to there
Domestically, we have been witnesses to Lenihan's and Noonan's 'Frankenstein-ian' misadventures in attempting to create a viable banking system by assembling bits of dead institutions into facsimiles of living ones. Even the nomenclature of 'pillar banks' has been unfortunate in that instead of being strong and supportive they are seen as immobile, hard and old-fashioned.
Contrary to the assertions of those 'on the take' from the system, neither the Guarantee, the recapitalisations, NAMA or any other of the fudged reforms has created any institution capable of advancing new credit; as the closures, redundancies and shrinking debt levels attest.
Internationally, we have only seen the Vicker's Commission in the UK consider any changes to the structure and nature of banking. The concept of 'ringfencing' has a pleasant and well-meaning 'ring' to it but it has not been shown to be either 'organic' or concretely implementable. Further, the seven year implementation timetable seems unnecessarily long for such minor reforms and seems designed to allow for a sustained lobbying process to water down the provisions which has already got under way and already has the support of the Chancellor. Fortunately, the latest wave of scandals seems likely to consign Vickers to the dustbin of inadequacy and irrelevancy.
So, having dispensed with the current situation without reference to the classic Kerryman's 'directions' joke, we have to ask what road do we take to get to a stable safe banking system.
The prescription
There was nothing wrong with 'Glass-Steagall' apart from bankers not liking it which in itself seems a sufficient reason for bringing it back. The implied principle of having separate and single 'business lines' for operations with fiduciary duties would seem a sensible one and should be extended to the fullest degree. It would make real the concept of 'ringfencing'.
This would imply the creation of a utility clearing mechanism divested from the banks. If it was good enough for the gas and electricity networks here and abroad I don't see why it doesn't apply to the banks.
It would also imply the divestiture of the banks credit card businesses. Again, there is no reason why not to and there is no good reason why we should be tolerating financial 'conglomerates'. People already hold multiple cards from multiple operators, some of which are not bank affiliates and the banks already pool credit data into separate agencies to determine credit ratings. A further advantage to separating these 'business lines' is that the credit card system is in itself a form of clearing system and if completely independent of the banks would give a strength in depth through redundancy to the economy's need for payment clearing mechanisms.
Lastly, the banks should not be allowed to dispense advice for which they charge fees which puts them into conflicts of interest. This is the same objection in principle as saying that 'audit' and 'consultancy' should not be provided to businesses by the same firms.
For those who wish to cavil about the expense implied in these reforms, I can only point to the expense we are all being put to by not having these reforms and ask which you would rather go through again.
This leaves us with the problem of morally hazardous bankers. The operational difficulty is that we 'guarantee' the deposits but the problems come from the loans. How can one guarantee the loans? You can't in practice. What you can do in practice is constrain the guaranteed banks from lending offshore.
A particular problem with the Irish banking crisis was that German and British fundmanagers seeking higher yields lent money into Irish banks who lent it to their pet developers to overpay for German shopping malls and British hotels. It has not been explained why it is the moral duty of the Irish taxpayer to compensate these 'professionals' for their greedy mistakes. I understand why the Irish must pay for the hotels and shopping malls built in Ireland but I do not see why we are liable for those bought elsewhere.
I am not suggesting that banks should not be free to lend overseas…only that they should do it via distinct legal entities and that these should not be guaranteed by the State. If the bankers complain that the won't be able to do business overseas that is their problem not that of the State or its taxpayers.
In order to square the circle of competition and robustness and redundancy, I would want to see the 'mutual' sector restored to a position of health and strength. This could be done in many ways but perhaps the simplest would be to merge the EBS and PTSB and perhaps IL&P to give a fourth 'player' in the credit advance/banking sector.
As a final flourish to wrap up everything in a neat bow tie of robust redundancy, the PostBank should be reconstituted so as to provide a third clearing mechanism.
Conclusions
These reforms would leave us with a GDP appropriate banking industry robust to shocks with enhanced transparency and competition.
If the bankers say that they will be 'hamstrung', I say that they have 'hamstrung' the whole economy and that they should get used to suffering like the rest of us.
The Irish economy and the Irish people need working banks much more than it needs Irish owned banks and we need banks that won't get too big for our boots.
There is a quiet discussion being held right now in the Dept of Finance about the future shape of banking in Ireland. In that 'discussion' the civil servants are responding 'how high?' when the banks talk, in exactly the same way they did when the banks rewrote our bankruptcy legislation. We need to tell our politicians to get involved in that discussion and if they won't then we should get involved in it directly.
Recap
Those reforms in bullet form are;
- Create a utility clearing function to separate credit risk from payment transmission.
- Create single business line banks by divesting credit card businesses
- Forbid advice fees
- Remove the 'deposit guarantee' from funds lent overseas
- Reconstitute a fourth major lender from the old 'mutual' entities
- Reconstitute the PostBank
This is an edited version of a post which originally appeared on Arthur Doohan's blog
All of which amounts to slamming the stable door on a horse whose cantering about the farmyard is still damaging this economy. Bad bankers and banking has caused huge current problems for everyone in the state. The same problems are afflicting most of the developed economies concurrently and concertedly.
Banking has seldom been an asset to the state or the economy in Ireland. It has had just as poor a history of labour disputes as other sectors and it has been sufficiently unfriendly to enterprise and innovation that the state has had to set up its own banks and to establish the global model for government agencies to stimulate investment, both foreign and domestic. And all this while the banks demanded the same privileges that obtained elsewhere such as depositor guarantees and light touch regulation.
So, if we are to avoid more of the same from our banks and to help us get out of this morass, I would ask you to consider a " 'purp' walk" for banking, that is, let us take out for a stroll the notion of the 'purpose' of banking. Specifically, what are banks for, what have they actually been doing, what are they doing now and what should they be doing in the future.
What we have
We, currently, have what are called 'universal banks', that is, they do 'everything' with respect to money and quite a few other things beside. Our banks borrow money, lend money, move money, convert money, 'invest' money and advise on all of the foregoing. For all of these services they charge fees as well as potentially profiting from 'exposures' or risk taking we inadvertently allow them to enter into with our money. About the only thing they don't do is print the damn stuff, despite what some 'theorists' will tell you.
This concentration of business models into a single conglomerate is a historic accident rather than a strategic decision. It is an accident waiting to happen which it does, repeatedly, as the history of banking shows. Further, it is an 'accident' that disregards the prudential structures that exist in all other financial markets.
Nowhere else are the risk takers allowed operate the risk transfer mechanism. In plain English, in every other financial market in the entire planet either there is an 'Exchange' which is an independent entity that carries no risk or risk transfer is done multilaterally from each to each other. Only in banking are the handful of big players, who carry the most risk, allowed to operate the 'clearing system'.
Out of this strategic oversight grows the risk that allows politicians to frighten us with threats of ATM shut downs and failures to pay wages and the like. The recent systemic problems at RBS/NatWest/Ulster have shown us that the 'clearing banks' are prone to failings in this.
There is, also, an embedded conflict of interest in the fact that banks are allowed to charge 'advice fees' for selling products that they will make profits on. Is there any legislation or regulation that forces bank officials to advise clients of their competitors products or services? If there is, I assume, it is 'enforced' to the usual standard of the Irish fiduciary authorities, says he pulling his lower eyelid to the floor….
A further issue is that its 'risk management tools' (derivatives principally) and risk transfer methodology (securitisation mainly) have proven to be ineffective and actually dangerous in many cases.
Added to all of this is a star system of employment leading overpayment for what amounts rewarding people for lucky gambling outcomes and encouraging doubling up of both good and bad bets.
Lastly, our banks insist on being given a Government guarantee for their 'raw material' (our deposits) so that they don't have to take responsibility for their profligacy. This exposes us to their 'moral hazard' and gives them a free embedded option, known, on Wall St., as the "trader's put" (the trader can 'put' you into trouble but walk away untouched himself). It has been amusing to watch them turn the notion of 'moral hazard' on its head in refusing to allow borrowers some relief from the bankers mistakes while they refuse to deal with their own moral bankruptcy; amusing in a very frustrating way, that is.
So, clearly, banking is a mess but our Government is in thrall to it even if the people no longer are. Clearly, also, it has been a mess for a very long time.
It is structurally unsound, overly complicated, morally deficient, professionally conflicted, technically overreaching and given to self-indulgent excess. In parenting terms, it's a spoilt child with a cocaine habit driving the family car.….with the family on board.
What we need
Anybody can lend money to anyone else and they can charge interest for it? So, why do we lend our money to bankers rather than directly to businesses or housebuyers? On the continent people do that, they buy bonds of (lend money to) businesses and housing associations they know. Yes, they have banks as well but 1) "not so much" and 2) "not so big".
In the 'Anglo-Saxon' world of business practice that we Irish have adopted by default (a word we must judiciously use), we do have a share buying culture but not a bond buying one. We use our banks as risk diversification mechanisms for our prudential investment strategy. That is, we let the bank manager invest our money in a pool of loans and we take a reduced return in exchange for a heretofore presumed safe one.
We need to preserve this function in banking and that is the only thing we need to keep.
Getting from here to there
Domestically, we have been witnesses to Lenihan's and Noonan's 'Frankenstein-ian' misadventures in attempting to create a viable banking system by assembling bits of dead institutions into facsimiles of living ones. Even the nomenclature of 'pillar banks' has been unfortunate in that instead of being strong and supportive they are seen as immobile, hard and old-fashioned.
Contrary to the assertions of those 'on the take' from the system, neither the Guarantee, the recapitalisations, NAMA or any other of the fudged reforms has created any institution capable of advancing new credit; as the closures, redundancies and shrinking debt levels attest.
Internationally, we have only seen the Vicker's Commission in the UK consider any changes to the structure and nature of banking. The concept of 'ringfencing' has a pleasant and well-meaning 'ring' to it but it has not been shown to be either 'organic' or concretely implementable. Further, the seven year implementation timetable seems unnecessarily long for such minor reforms and seems designed to allow for a sustained lobbying process to water down the provisions which has already got under way and already has the support of the Chancellor. Fortunately, the latest wave of scandals seems likely to consign Vickers to the dustbin of inadequacy and irrelevancy.
So, having dispensed with the current situation without reference to the classic Kerryman's 'directions' joke, we have to ask what road do we take to get to a stable safe banking system.
The prescription
There was nothing wrong with 'Glass-Steagall' apart from bankers not liking it which in itself seems a sufficient reason for bringing it back. The implied principle of having separate and single 'business lines' for operations with fiduciary duties would seem a sensible one and should be extended to the fullest degree. It would make real the concept of 'ringfencing'.
This would imply the creation of a utility clearing mechanism divested from the banks. If it was good enough for the gas and electricity networks here and abroad I don't see why it doesn't apply to the banks.
It would also imply the divestiture of the banks credit card businesses. Again, there is no reason why not to and there is no good reason why we should be tolerating financial 'conglomerates'. People already hold multiple cards from multiple operators, some of which are not bank affiliates and the banks already pool credit data into separate agencies to determine credit ratings. A further advantage to separating these 'business lines' is that the credit card system is in itself a form of clearing system and if completely independent of the banks would give a strength in depth through redundancy to the economy's need for payment clearing mechanisms.
Lastly, the banks should not be allowed to dispense advice for which they charge fees which puts them into conflicts of interest. This is the same objection in principle as saying that 'audit' and 'consultancy' should not be provided to businesses by the same firms.
For those who wish to cavil about the expense implied in these reforms, I can only point to the expense we are all being put to by not having these reforms and ask which you would rather go through again.
This leaves us with the problem of morally hazardous bankers. The operational difficulty is that we 'guarantee' the deposits but the problems come from the loans. How can one guarantee the loans? You can't in practice. What you can do in practice is constrain the guaranteed banks from lending offshore.
A particular problem with the Irish banking crisis was that German and British fundmanagers seeking higher yields lent money into Irish banks who lent it to their pet developers to overpay for German shopping malls and British hotels. It has not been explained why it is the moral duty of the Irish taxpayer to compensate these 'professionals' for their greedy mistakes. I understand why the Irish must pay for the hotels and shopping malls built in Ireland but I do not see why we are liable for those bought elsewhere.
I am not suggesting that banks should not be free to lend overseas…only that they should do it via distinct legal entities and that these should not be guaranteed by the State. If the bankers complain that the won't be able to do business overseas that is their problem not that of the State or its taxpayers.
In order to square the circle of competition and robustness and redundancy, I would want to see the 'mutual' sector restored to a position of health and strength. This could be done in many ways but perhaps the simplest would be to merge the EBS and PTSB and perhaps IL&P to give a fourth 'player' in the credit advance/banking sector.
As a final flourish to wrap up everything in a neat bow tie of robust redundancy, the PostBank should be reconstituted so as to provide a third clearing mechanism.
Conclusions
These reforms would leave us with a GDP appropriate banking industry robust to shocks with enhanced transparency and competition.
If the bankers say that they will be 'hamstrung', I say that they have 'hamstrung' the whole economy and that they should get used to suffering like the rest of us.
The Irish economy and the Irish people need working banks much more than it needs Irish owned banks and we need banks that won't get too big for our boots.
There is a quiet discussion being held right now in the Dept of Finance about the future shape of banking in Ireland. In that 'discussion' the civil servants are responding 'how high?' when the banks talk, in exactly the same way they did when the banks rewrote our bankruptcy legislation. We need to tell our politicians to get involved in that discussion and if they won't then we should get involved in it directly.
Recap
Those reforms in bullet form are;
- Create a utility clearing function to separate credit risk from payment transmission.
- Create single business line banks by divesting credit card businesses
- Forbid advice fees
- Remove the 'deposit guarantee' from funds lent overseas
- Reconstitute a fourth major lender from the old 'mutual' entities
- Reconstitute the PostBank
This is an edited version of a post which originally appeared on Arthur Doohan's blog
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