State Investment Bank

Sean O Riain: Michael O’Sullivan and I have an article in today’s Irish Times arguing for a state investment bank. Some links to supporting materials are below.

Allocation of bank lending by sector and poor investment record is discussed here

Role of the state and the weakness of private sector in providing ‘productive investment’ from 2000-8 is documented by Rossa White of Davys here

Patrick Honohan's QEC article on the limited role of finance in Ireland’s economic success of the 1990s is here

Research on the effectiveness of grant aid:
Manufacturing in the 1980s:
O’Malley, E., K.A. Kennedy, and R. O’Donnell. 1992. Report to the Industrial Policy Review Group on the Impact of the Industrial Development Agencies Dublin, Stationery Office (not available online)

Software in the 1990s:
Ó Riain, S. 2004. The Politics of High Tech Growth: Developmental Network States in the Global Economy (Structural Analysis in the Social Sciences 23) New York/ Cambridge: Cambridge University Press. (this link to the most relevant parts vis google books may work)

Manufacturing in the 1990s:
Girma, S., H. Gorg, E. Strobl, F. Walsh, 2008. “Creating jobs through public subsidies: An empirical analysis” Labour Economics 15, 6, 1179-1199

Already noted above, this piece provides data on how state funding stimulated private investment funding in the late 1990s and after the dot.com bubble.

Towards a Second Republic

Peadar Kirby: Despite promises of the imminent announcement of a constitutional convention in the spring of next year and of plans for local government reform, the dynamic of reform has lost momentum since the last election. And, as the staunch defence of Ireland’s low corporation tax rate indicates, the reform agenda remains narrow and has entirely failed to address what needs to be done to move beyond the neoliberal development model that is centrally responsible for the present crisis. In other words, the reform debate needs to be broadened to examine the wider links between the political and administrative system, the nature of the Irish economy and its leading sectors, and the ways in which civil society acts either as an agent for change or for resisting change. We need a focus on Ireland’s political economy options as part of the move towards a second republic.

In our forthcoming book entitled ‘Towards a Second Republic: Irish Politics after the Celtic Tiger’ (Pluto Press), Mary Murphy and I offer an analysis of the ways in which the Irish collapse had its roots in the political and administrative system. Not only did these grossly mismanage the Celtic Tiger boom, but they have created a particular model of development, highly dependent on foreign investment and very resistant to taxing the huge profits made in Ireland so as to fund decent public infrastructure and services. For too long, civil society has acquiesced in this subservience to global capital, failing to put pressure on the state to respond more adequately to the needs of the many vulnerable in Irish society. As a result, we have created a society blighted by gross inequalities and based on a growth model that emitted high levels of greenhouse gases thus making it unsustainable. The book examines the challenges in an all-Ireland context, analysing whether the second republic will overcome partition and be an all-island state.

It identifies two alternative models being promoted by sectors of civil and political society. Foremost among these is a developmental social democratic model, espoused by organised sectors of civil society and by some among the political left while the ecological or Green movement seeks a model that can loosely be called an ethical or ecological socialism. While this latter seems less feasible now, the dramatic impacts of climate change and of peak oil over coming years may well create conditions that make such a model more realisable. Mary and I draw on developments in the European Union and elsewhere in the world to offer lessons for the challenges and possibilities now facing us in Ireland. The book’s final chapters examine what forces exist in today’s Irish politics and society to promote a new model and what the prospects are for its realisation.

A debate on the book takes place in the Oak Room of the Mansion House, Dawson Street, Dublin at 6:00 p.m. on Thursday, November 3rd. In addition to Mary and myself, contributors will include Professor Kathleen Lynch (UCD), Catherine Murphy TD, Fintan O’Toole (Irish Times), David Begg (ICTU). All are welcome. Copies of the book will be available at a special discounted price of €15.

Martin Wolf's open letter to Mario Draghi

"You must choose between two paths: the orthodox one leads towards failure; the unorthodox one should lead towards success.

The eurozone confronts a set of complex longer-term challenges. But the members will not get the chance to make needed adjustments and implement required reforms if it does not survive. The immediate requirements include putting Greece on a sustainable path; avoiding a meltdown in public debt markets of several large countries; and preventing a collapse of banks. Of these, it is the last two that matter." You can read the rest of Martin Wolf's open letter to Mario Draghi here.

Profits and austerity

Michael Burke: In all the discussion of the economy and the crisis, one word is hardly ever mentioned - profits. This piece looks at the level of profits in one of the crisis-hit countries - Ireland. With domestic activity still contracting and a stubbornly high deficit, maybe the Dublin government remains the poster boy for austerity because profits have begun to recover.

Visualising the Contagion Machine

Tom McDonnell: The New York Times has put up a useful visualisation charting potential channels of contagion within the Euro zone.

For a nice visual time series of European debt and deficit levels see here. The blooming of debt post 2007 is very stark.

The Guardian has an interesting visualisation showing how a Greek restructuring compares to historical restructurings here. The button in the top right of the chart shows how countries have fared post restructuring.

Ireland: export boom or import bust?

Merijn Knibbe has an interesting post here on the Real World Economics Review blog - thanks to Michael Burke for the hat-tip.

Lender of Last Resort

Tom McDonnell: Bernard Delbecque proposes using the EFSF as a lender of last resort here. The ECB is the other plausible candidate. The lack of a lender of last resort for the Euro zone has been one of the most significant design flaws in the make-up of monetary union and has contributed greatly to the explosion in bond spreads in the last two years.

Abandon hope all ye who enter here

Tom McDonnell: Martin Wolf has an excellent and honest appraisal of the chances of the Euro crisis being successfully resolved in a way that is sustainable in the long term here.

Presentations to 2011 FEPS/TASC Autumn Conference

The 2011 FEPS/TASC Autumn Conference was held on Friday, October 14th, and Saturday October 15th. Videos of the event - including the closing keynote address delivered by Professor James K. Galbraith of the University of Texas at Austin - will be uploaded later in the week, but in the meantime we've uploaded some of the PowerPoint presentations (below the fold). Please note that other PowerPoint presentations will be available later in the week. The programme for the event is available here.

Click here to read Professor Stephany Griffith-Jones' opening keynote on Friday (Expert Round Table on Financial Regulation). On Friday afternoon, a session on 'Regulating for Stakeholders' looked at the impact of financial regulation (or its absence) on different stakeholders.  Click here for Dr Eleanor O'Higgins' introductory overview, and here to read Margaret Ward's take on the impacts on consumers. Damon Silvers of the AFL-CIO gave a presentation on the impact on workers (here), and Dr Jonathan Westrup of the Irish Management Institute looked at the effects on business.

Following the Stakeholders session, Prof Terrence McDonough of NUI Galway looked at Irish banks and asked whether the pillar banks are still fit for purpose. His slide on 'Saving Private Banking' provided one of the weekend's catchphrases. Friday ended with a presentation by Dr Jim Stewart of TCD on new forms of banking.

The Friday Expert Round Table concluded with a presentation on 'Changing the regulatory landscape' by Shane O'Neill, Head of Banking Supervison at the Central Bank.

Saturday morning started with a session on investment.  Click here to see Michael Taft's presentation, and here for Michael Burke's presentation, followed by a presentation from Kieran Rose of Dublin City Council, which will be uploaded during the comping days.

The session on investment was followed by a panel discussion on the European debt crisis.  Following a presentation on Ireland's Debt Audit by the project's lead researcher, Dr Sheila Killian of the University of Limerick (to be uploaded shortly), Professor Stuart Holland of Coimbra University in Portugal, Professor James Galbraith of the University of Texas at Austin and TASC's Tom McDonnell discussed ways of escaping the debt trap.  Professor Holland's presentation is available here, and Tom McDonnell presentation can be downloaded here.

Lunch on Saturday was followed by two breakout sessions: (1) A Job for the State? The new mixed economy, and (2) Good health is good for the economy.

Breakout (1) heard presentations from Professor Stuart Holland, TASC's Aoife Ni Lochlainn and Dr Helena Lenihan of the University of Limerick.
Breakout (2) heard presentations from Dr David Stuckler of the University of Cambridge, Professor Eamon O'Shea of NUI Galway, and health policy analyst and journalist Sara Burke.

Following the breakouts, Dr Tom Healy, Director of the Economic Research Unit, spoke on Charting a New Course. This was followed by Professor James Galbraith's closing keynote address.

Second Republicans versus Banana Republicans

Tom McDonnell: The latest Dublin Review of Books is out and this time we have a contribution from the always cogent Michael O'Sullivan. It's well worth checking out and can be read here.

He asks two questions.
How do we deal with the acute social problems that arise from our economic depression?
and
How do we change our behaviour so that the next ten to twenty years are more stable and hopefully more prosperous?

Michael argues that we need to become more strategic in our thinking and in our policymaking in the context of 'global megatrends' and the global question. He laments our 'cognitive failures' to date in this regard and suggests learning from other small open economies like Switzerland, the Nordic countries, Chile, Israel, New Zealand and Singapore.

He also makes an excellent suggestion about the need to prepare strategically for the Greek write down:

"If it has not already been set up, a working group should be established between the EU, IMF, ECB technical staff (this group may even include contributions from the BIS and OECD) and Irish officials to plan for the implications of a Greek debt restructuring on Ireland. Moreover, the group should also work to manoeuvre Ireland away from the financial periphery by proposing ways by which to elongate the maturity and lower the yield on the promissory note debt tied to Anglo-Irish bank (a leveraged EFSF may be one avenue toward funding this). Ultimately this may involve a “hit” to the balance sheet of the ECB, though the long term cost to Europe of the Irish economy should be reduced as our debt burden becomes more sustainable."

Investment denial and the new road map

Michael Taft: Colm McCarthy’s post on Irish Economy takes a sceptical look at ‘productive investment’, or more precisely, the Government’s claim that the New ERA proposals – can create up to 100,000 jobs. This leads him to state that:

‘The spectre of politicians seeking to create 100,000 jobs through extra public spending is every economist’s nightmare.’

One could quip that not creating 100,000 jobs should be every economist’s nightmare. However, let’s examine what exactly a public investment-led recovery programme is intended to do. For the last thing we need in the debate is a series of assertions that sheds little light on means to kick-start recovery. You can read the rest of this post here.

Inequality and Budget 2012

Sinéad Pentony: In the run up to Budget 2012, the discourse is going to be dominated by the scale of the fiscal adjustment (€3.6 billion) and the breakdown of taxation and spending cuts. Currently, the position is that the adjustment will be made up of €2.5 billion in cuts (€2.1 billion in current and €0.4 billion in capital spending) and €1.1 billion in taxation measures. The adjustment is part of the agreement with ‘troika’ – EU/IMF/ECB. However, the breakdown of the adjustment is at the discretion of the government.

On the basis of the current breakdown of taxation measures and spending cuts, we are likely to see further cuts to social welfare as well as reductions in health and education services. If this comes to pass, the budgetary measures will have a disproportionate impact on low income groups – again. These measures are also likely to reduce aggregate demand even further, lengthen the dole queues and suck more money and confidence out of the Irish economy. So we will have growing inequality combined with a stagnant economy, with the exception of the export sector, which has the features of an ‘enclave economy’. And even the export sector is also under threat with the uncertainties that exists across the global economy.

Income inequality has been shown by the IMF to be one of the major contributing factors to the onset of the crisis. More recently, Stiglitz has said that “to understand what needs to be done, we have to understand the economy’s problems before the crisis hit”. He identifies a number of problems including the fact that “shifting income from those who would spend it, to those who won’t, lowers aggregate demand”. He also identifies the need for the “structural transformation of the advanced economies, implied by the need to move labour out of traditional manufacturing branches”, but notes that this is occurring too slowly. He goes on to say that “the prescription for what ails the global economy follows directly from the diagnosis: strong government expenditure, aimed at facilitating restructuring [of the economy], promoting energy conservation, and reducing inequality, and a reform of the global financial system...”.

On the issue of inequality, FEPS has recently publish a paper on the relationship between inequality and wealth, and it finds that a comparison of the levels of wealth and inequality in different countries shows that countries with a high degree of inequality in general have lower levels of wealth. While this might sound counter-intuitive, the paper sets out the empirical evidence that supports the hypothesis. It finds that rising inequality results in a lower level of prosperity. In addition, higher inequality also results in a lower level of economic prosperity, lower levels of education and poor institutions that have more corruption, more political instability and lower levels of democracy.

The government is undoubtedly in an economic straightjacket – but there is always wriggle room. The government may not be Houdini, but there is most certainly sufficient wriggle room to make budgetary decisions that can reduce inequality and start the process of reversing economic decline.

Public = Bad, Private = Good

Donal Palcic: I couldn’t let this one go. Marie O’Halloran in the Irish Times reports on Michael Noonan’s defence of the planned sale of state assets in the Dail yesterday. The opening quote in the article caught my eye:

The Minister said the European authorities believed and were backed by “any economic theory you’d like to read” that “assets in private hands will be used more efficiently for the public good than assets in public hands in general terms”.

It is a major concern that someone as important as the Minister for Finance, who is likely to make crucial decisions in relation to privatisation, makes blatantly incorrect assertions such as this. Even a cursory glance at the theoretical literature on the impact of privatisation on performance would show that the grounds for making such a claim are extremely shaky. No less than Nobel Laureate Joseph Stiglitz has stated that “the theoretical case for privatization is, at best, weak or non-existent. It is strongest in areas in which there is by now a broad consensus – areas like steel or textiles, conventional commodities in which market failures may be more limited. But by the same token, these are precisely the sectors in which abuses can most easily be controlled, appropriate incentives can best be designed, and benchmarks can most easily be set.”

In other words, privatisation can lead to improved performance when firms that are sold operate in competitive markets. Where firms operate in imperfectly competitive markets, the case for privatisation is weak at best. The regulatory structure in place and the degree of competition faced by firms in such markets are far more important determinants of performance. Numerous empirical studies on the effects of privatisation on the financial and operating performance of divested firms have been carried out in recent years. My colleague Eoin Reeves and I review a large number of these studies in our recent book and argue that, overall, the empirical evidence with regard to the impact of privatisation on enterprise performance mirrors the thrust of relevant economic theories and is inconclusive. In general, the empirical literature can be divided into two main groups: broad-based international studies which by and large find that privatisation leads to improved performance, and more in-depth country-specific studies that find more ambiguous results, and suggest that privatisation does not automatically lead to an improvement in company performance. The general conclusion we can draw from the empirical (and theoretical) evidence is that privatisation leads to improved enterprise performance in some, but not all, cases.

The Minister therefore needs to be far more careful when making wild claims that any economic theory you’d like to read shows that assets in private hands will be used more efficiently for the public good than assets in public hands. It is interesting (and worrying) that the Minister makes such comments at a time when Fine Gael’s NewERA plan which was launched last week places public enterprise at the heart of efforts to lay the foundations for economic recovery.

The Future of Europe?

Nat O'Connor: What do the following people have in common? Tony Blair, Marek Belka, Jacques Delors, Felipe González, Jakob Kellenberger, Mario Monti, Gerhard Schröder, Matti Vanhanen, Guy Verhofstadt, Nicolas Berggruen, Juan Luis Cebrián, Mohamed El Erian, Niall Ferguson, Anthony Giddens, Alain Minc, Robert Mundell, Nouriel Roubini, Michael Spence and Joseph Stiglitz.

They are all members of the Council for the Future of Europe and they have signed up to a four-page statement titled: Europe is the Solution, Not the Problem.

They argue for:
1. A expanded European stabilisation fund to be established by 2012;
2. Appropriate bank recapitalisation;
3. Fiscal union in Europe - including eurobonds;
4. Orderly debt resolution - for private and public debt;
5. Macro-economic policy to avoid undermining short-term recovery while pursuing long-term reforms;
6. A growth strategy using EU funds to stimulate growth and job creation;
7. Preparation of social security systems to accommodate an aging population;
8. A vision for a Federal Europe with a mandate across common security, energy, climate, immigration and foreign policy;
9. Broad and deep engagement of the public in the process of further integration.

Despite the high profile of the group's membership, I can only find two references in Irish online media (at the bottom of this RTÉ business news article, and on the online Hibernia Times).

Apart from at least one Guardian article, there seems to be a lack of UK media coverage either.

Greek economist, Yanis Varoufakis, offers a critical review of the nine proposals on his blog.

Meanwhile, the BBC reports another possible breakthrough in the EU crisis involving something similar to three of the proposals made above: "quadrupling...Europe's main bailout fund, the European Financial Stability Facility (EFSF)", "strengthening of big eurozone banks" and debt write-down of 50 per cent for Greece.

The BBC's Paul Mason reported a couple of weeks previously on the 'war games' conducted by another think tank, Brueghel, which involved 100+ policy experts in running simulations of different possible solutions for the eurozone crisis. This was apparently influential in Washington DC (where the IMF is based).

What all these proposals for solving the eurozone crisis illustrate is the need for more public discussion and engagement with the question of Europe's future. There is little doubt that some major changes are coming at EU level, whatever the exact nature of the economic arrangements that are made to address the eurozone crisis. It seems highly likely that any such arrangements could quickly result in new political institutions that have not gained public trust, much less a democratic mandate. This suggests that any solution will have to be both political and economic in combination; including credible ways of strengthening democratic control of decision-making at the heart of Europe.

Sailing rudderless into the Anglo storm

Tom McDonnell: The Greek tragedy that is the eurozone debt crisis may soon enter its fourth act. A hard write-down of Greek debt is necessary and there is now a significant probability that Greece will be allowed to default around December. Martin Wolf argues here that:

“the bare minimum the eurozone needs to cope with its crisis is an effective mechanism for writing down the debts of evidently insolvent private and sovereign borrowers, such as Greece; funds large enough to manage the illiquid bond markets of potentially solvent governments; and ways to make the financial system credibly solvent immediately.”

He suggests the sums required will be several times larger than the €440bn of the existing EFSF.

The Dexia crisis is finally forcing the core countries to acknowledge that their banking systems are in serious trouble and this creates an opportunity for Ireland. While the original intent was for the EFSF to be a sovereign bailout fund it is becoming increasingly clear that its future role will likely involve the recapitalisation of failing banks.

If and when Greece is allowed to default the EFSF will be standing by to preserve the solvency of the European banking system through large-scale recapitalization. It is at this point that the Irish Government should request the Anglo/INBS promissory note liabilities be transferred to the EFSF with Ireland then agreeing a negotiated repayment schedule at a low interest rate.

Renegotiating the promissory notes is of huge consequence to Ireland’s future prosperity. Michael Noonan hints here that he has begun the process of renegotiation. We can extrapolate from these new figures that the total cost between 2011 and 2031 will be in the region of €85 billion (assumes a 4.7% interest rate from 2013 onwards). That is €4 billion a year. The infinite spiral of cumulative interest costs is the reason why the figure is larger than the commonly cited €47 billion i.e., we have to pay interest on the €47 billion in borrowings and then pay the interest on the borrowings required for those interest payments and so on and so forth (click on table to enlarge).

Seamus Coffey explains the issues here. Turning the notes into a long-term bullet bond owed to the EFSF may offer one plausible solution. Our institutions were unforgivably unprepared for the 2008 earthquake. It would be feckless to sail in to the current storm without a worked out strategy to deal with the promissory note question.

'Understanding what controls us'

Peter Connell: Writing in last Saturday’s Guardian, Ian Jack, bemoaning the irrelevance of the current party conference season in the UK, argued that the media, rather than providing publicity for stage managed political rallies, would better serve society and its citizens by focusing on the powerful institutions and corporations whose decisions shape our society, our economy and our lives. In his piece Jack laments the fact of high levels of economic and financial illiteracy and argues that ‘we don’t understand what controls us’. How can we address what is essentially a democratic deficit? How do we control what we don’t understand?

Given the high level of complexity of the financial system that is an integral part of modern capitalism it is, perhaps, unreasonable to expect that the average citizen will have a good handle on credit default swaps, contracts for difference and ten year bond yields. But that’s not really the problem. The real issue is how is a citizen in a democracy to assess the efficacy of their government’s economic management without some grasp of the context in which decisions are made? The government, naturally enough, have claimed credit, for renegotiating the terms of the EU/IMF bailout that will see a significant reduction in the country’s debt burden on the back of a 2% cut in the interest rate. It’s fair to say that most reasonably well-informed citizens will assess this claim in the context of the Minister for Finance indicating in early June that a 0.6% rate cut might be the best that could be hoped for. Very often, though, it’s much more difficult to make a judgement call.

A good example is the infamous promissory note which, under current arrangements, will cost the Irish taxpayer €65 billion over the next 14 years. Michael Burke, Tom McDonnell and Michael Taft performed a valuable public service when posting on PE on the promissory note and arguing that it should become a major political issue. The nature of the promissory note, the institutions and entities that are party to it and the implications of defaulting on or restructuring it are complex issues on which even professional economists differ. Prompted by the PE posting, a lot of these issues were teased out on irisheconomy.ie. The debate, though, remains one largely between ‘insiders’ when it deserves and demands the widest public audience. Given that the cost of Anglo-Irish/Irish Nationwide debt over the next few years completely dwarfs the gains that will be accrued from the reduced interest rate on the State’s EU/IMF bailout funds, it is an indictment of our mainstream media that it has largely failed to facilitate an informed public debate on this issue.

In assessing how the government deals with the promissory note in the coming weeks the bar needs to be set high. A complete restructuring of the debt, with a rescheduling of payments over a 30 or 50 year period, seems the least we should expect. And the least we should expect from our media is that is that it addresses the democratic deficit and helps us ‘understand what controls us’.

The case for a Financial Transaction Tax is compelling

Jim Stewart: The reaction to the proposal from the European Commission, France and Germany, for a financial transaction tax (FTT) has produced a predictably hostile reaction from the financial sector and its apologists. This is disappointing, but not wholly unexpected. It reflects an inability or unwillingness to learn from the Global Financial Crisis (GFC). The FTT concept is not new: as pointed out by Philippe Doustte-Blazy, there are over 40 such taxes already in place. What is new is that such taxes would be imposed on all financial transactions rather than, as in the current position, on a small number, such as the cash market for equities.

There are compelling reasons for the introduction of an FTT, regardless of the revenue generating potential of such a tax. We know from the GFC that those jurisdictions with a bloated financial sector suffered greatly in comparison to those with more balanced and hence more sustainable economies. Insofar as FTT would serve to restrict and reduce the size of the financial sector and the associated ‘crowding out’ of the productive wealth generating sectors, economic growth is more likely to resume and to be more stable through time.

We also know that those jurisdictions in which short-termism does not have primacy do better than those in which short-termism is the prevailing strategy. Insofar as an FTT would serve to act as a disincentive to short-termism, economic growth prospects would improve. Economies would be on a sounder footing for long-term sustainable progress.

Despite having large cash balances, global firms are not investing. The volatility that prevails in current financial markets helps create an environment of massive uncertainty for managers. Furthermore modern financial strategies, for example by hedge funds, thrive and depend on the creation of uncertainty. Thus managerial decisions dedicated to wealth generating activities are restricted, and indeed made to appear irrational. Insofar as an FTT would serve to curb volatility, uncertainty would be reduced and investment would be more likely in the wealth generating sectors.

Finally there are those who incredibly claim that an FTT would impair the operation of “efficient” markets. The belief that markets were “efficient”, held especially by regulators, was a key part of the development of the GFC (see Turner Report pp. 39-40). It is generally agreed that an FTT would reduce volumes traded in financial markets. While the relationship between volume traded and volatility in financial markets is mixed, there is much stronger evidence for a positive relationship between speculative bubbles and volumes. Recent financial history has shown that the growth in volumes and values of derivatives was a central part of the GFC (see Fig. 3.1 Financial Crisis Inquiry Report). Thus, irrespective of revenues raised, the introduction of a FTT would have beneficial effects on the stability of financial markets.

It is time financial markets returned to becoming the servant of wealth creators rather than their inhibitors.