Haiti

Slí Eile: The terrible human tragedy unfolding in Haiti has shocked the world. The outpouring of help and practical civic action to do something - anything - to help the victims is a striking testimony to the human spirit. Still, even at this dark hour for the people of Haiti difficult and hard questions need to be asked of us and our Governments in the prosperous world. The story of Haiti is not only one of natural disasters and tyrannical regimes - it is also one of colonial exploitation and exploitative trade, political and aid relationships with the various super powers. We also have to face up to, and address, these issues in every part of the world. See Peter Hallward's piece in the Irish Times yesterday (Haitian tragedy compounded by long, ugly history of exploitation).

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Stuff happens ...

As the idea of a banking enquiry gains traction here in Ireland with both the Government and the Opposition, the Financial Crisis Enquiry Commission has started hearing testimony in the US. Click hear to read Paul Krugman's take on Wednesday's hearing - and in particular the excuse proffered by Jamie Dimon of JPMorgan Chase, who declared that a financial crisis is something that “happens every five to seven years. We shouldn’t be surprised.” As Krugman notes, "In short, stuff happens, and that’s just part of life".

Progressive Economy Review 2009 - out now!

A selection of posts written during 2009 has been published as Progressive-Economy@TASC 2009 Review.

The digital edition is available here:

New Statesman article on Irish fiscal policy

Slí Eile: This article by Ron Brown on Irish fiscal policy is worth a read.

A Progressive Plan for Dublin (and the Country)?

Nat O'Connor: Dublin City Council have launched the Draft Dublin City Development Plan 2011-2017 and are actively seeking "conversations with, and feedback from, citizens, thinkers, agencies and other stakeholders."

Many commentators have asked where is the Government's plan for economic recovery, jobs and sustainable development. In the absence of a national plan, the Dublin plan might be the nearest thing we've got. So, with the acknowledgement that not everything will be apt for those living and working outside of the greater Dublin area, I thought it was well worth asking whether the Dublin plan is progressive and a possible model for sustainable economic development nationally.

The plan's vision statement is premised with the following message:
"It would be folly to adopt projections from either the economic boom years or the recent downturn as the basis for a vision for the city. Instead, the city must, collectively through its citizens and civic leaders, develop a shared vision of what sort of city we aspire to, not in the six-year lifetime of a development plan, but over the next 25 to 30 years. It is only by developing a shared vision for Dublin that we can deliver the core strategies of each successive Development Plan as crucial stepping stones towards the long term vision. This Development Plan is not so much based on short-term forecasts, but on ‘backcasting’ from the 30-year vision. Without a vision which enjoys broad support, short-term, often competing interests will prevail, ultimately to the detriment of the city." You could insert Ireland for Dublin and country for city in the above, and you would have the kind of positive, forward-looking statement that has been missing on the national level.

The Vision for the City is:
"Within the next 25 to 30 years, Dublin will have an established international reputation as one of the most sustainable, dynamic and resourceful city regions in Europe. Dublin, through the shared vision of its citizens and civic leaders, will be a beautiful, compact city, with a
distinct character, a vibrant culture and a diverse, smart, green, innovation-based economy. It will be a socially inclusive city of urban neighbourhoods, all connected by an exemplary public transport, cycling and walking system and interwoven with a quality bio-diverse greenspace network. In short, the vision is for a capital city where people will seek to live, work and experience as matter of choice."

The plan covers six themes: Economic, Social, Cultural, Urban Form and Spatial, Movement, and Environmental.

Obviously, the plan in incomplete from a national perspective, as the city council cannot comment on health infrastructure, social welfare, criminal justice or many other policy areas. Nevertheless, the broad thrust of the plan is 'progressive economics', insofar as economic development is not just described in terms of 'growth' but it seen as built on sustainability and the provision of an attractive, well-run place where people would want to live and work, and which would both foster native creativity and attract highly-skilled mobile workers from around the globe. Those of you who are most interested in a strictly economic perspective might be interested in the proposals in Chapter 9 'Revitalising the City's Economy'.

The plan has long lists of policies and objectives; 313 policies and 214 objectives in total, across nine areas:
- Shaping the City
- Connecting and Sustaining the City's Infrastructure
- Greening the City
- Fostering Dublin’s Character and Culture
- Making Dublin the Heart of the Region
- Revitalising the City’s Economy
- Strengthening the City as the National Retail Destination
- Providing Quality Homes in a Compact City
- Creating Goods Neighbourhoods and Successful Communities
(For those interested in local government issues, the policies are also a useful list of the things that the council currently does.)

It is worth noting the verbs used in the plan, in order to get a feel for how aspirational it is. For example, a lage number of policies begin with verbs that indicate the city council's reliance on external actors (state or private): 85 policies begin with the verb "promote", 26 with "support", 12 with "encourage" and 10 with "facilitate". In contast, more active verbs are rarer. Only 20 policies begin with "ensure", 16 with "protect" and 8 with "require". The objectives have a more even balance between weak and strong verbs , with 10 "facilitate", 11 "support" and 13 "promote" versus 16 "implement", 10 "provide" and "6 ensure". This is only a crude analysis, but it is a reminder that this kind of plan requires a lot of public-private co-operation as well as joined-up-government.

I am particularly struck by the various means in which the city council is attracting feedback from Dubliners. The Irish Times reports that "the facilities at the Wood Quay Venue will allow the public to make video submissions on the plan or to use an interactive map to see how the plan will affect their neighbourhood". In addition, there is an online submissions form for comments and suggestion, and an online discussiuon forum for anyone who wants to discuss the plan in detail.

I am not going to start a critique of the plan right now. I really just wanted to open it up as a topic for discussion. If nothing else, I think it is good that they suggest "developing a shared vision" for the future. That's what all of Ireland needs right now.

"Ireland seems to have accepted such a future. Spain and Greece have not"

Slí Eile: So wrote Martin Wolf in the Financial Times last week. The context was as follows:

This leaves peripheral countries in a trap: they cannot readily generate an external surplus; they cannot easily restart private sector borrowing; and they cannot easily sustain present fiscal deficits. Mass emigration would be a possibility, but surely not a recommendation. Mass immigration of wealthy foreigners, to live in now-cheap properties, would be far better. Yet, at worst, a lengthy slump might be needed to grind out a reduction in nominal prices and wages. Ireland seems to have accepted such a future. Spain and Greece have not. Moreover, the affected country would also suffer debt deflation: with falling nominal prices and wages, the real burden of debt denominated in euros will rise. A wave of defaults - private and even public - threaten.

Wolf has been writing a lot about the interaction between trade deficits, private sector deficits and public sector deficits - especially in regard to countries such as Ireland, Spain and Greece. In the case of sick Tiger, Ireland has gone from a high level of private spending and borrowing to high savings coupled with high debt overhang (as % of GDP). The implosion in private spending has crippled fiscal revenue flow (but mainly because of the skewed nature of the revenue base, here). In the absence of currency devaluation the only other adjustments possible - according to the Consensus view is:

'price' reductions all round via wage and non-wage income cuts
'volume' adjustments through lower employment and outward migration.

Alas, As the spin machine moves into full swing – Government finances are beginning to stabilize line… CITI bank Chief Economist Willem Buiter is quoted in today’s Irish Times as praising the Government’s "necessarily tough and well-structured" budget package which managed to find political support while convincing international markets "that Ireland was for real".

However, he warned that the ‘crisis is so big, and the hole in Ireland's public finances so deep, that these efforts will have to be sustained for several years, perhaps a decade, before the economy is restored ‘to where you thought you were’”

O the price that has to be paid for the folly of the few. Never before was so much owed by so many to so few for such little return

Some thinking from across the two waters

Michael Taft: Some robust progressive thinking from the US and the UK..As the UK debate is in danger of descending into which party can cut how much, Neal Lawson of Compass calls for a re-explanation of the Keynesian project and how it is better suited to address the economic and social fall-out from the recession. Across the other pond, addressing the spectre of rising unemloyment, Marshall Auerback of New Deal 2.0 proposes that the state become the 'employer of last resort'. Whatever the differences (in those countries they have money printing presses and large domestic markets to operate sustained demand management), there are still lessons to be drawn - not just on the particular ideas contained in the articles, but on the very idea of progressive politics becoming the primary engine of ideas in the national debate.

Lobbying and de-regulation: an IMF view

Paul Sweeney: The IMF – not known as a progressive organisation – recently published a research paper which showed that those US financial institutions which were involved in the risky loans triggering the global financial crisis in 2007 were the very ones which were most active in lobbying against stricter regulations on excessively risky financial activities.

The paper is called A Fistful of Dollars: Lobbying and the Financial Crisis. It was written by Deniz Igan, Prachi Mishra, and Thierry Tressel and has just been published (in December 2009). The authors claim that “to the best of our knowledge, this is the first study documenting how lobbying may have contributed to the accumulation of risks leading the way to the current financial crisis.” It’s a bit technical, so some readers may hop to the conclusion, on page 27.

The firms most engaged in lobbying against financial regulations also received a disproportionate amount of financial bailout cash from the Bush administration in late 2008, when the total collapse of the US finance sector threatened.

In Ireland, we know how strongly opposed Seanie Fitzpatrick (Anglo Irish Bank), AIB and all Irish banks were against regulation. Regrettably, those in positions of power in Government, in Finance and the Financial Regulator heard them and sat on their hands.

Personally, I was strongly opposed to the de-regulation frenzy in Ireland in the false boom between 2001-2008. For example, back in 2005, Peter McLoone (then President of Congress) and I were the only two members of the 16-member National Competitiveness Council to oppose the low direct tax and anti-regulation views of the other members of the Council in a Minority report on the Competitiveness Challenge in 2005 (p27). We said that we did not regard “the regulation of business and the labour market as ‘burdens’.”

The Council extolled the low regulation regime in Ireland. The report of the majority said “one of the strengths of the Irish business environment over the past decade has been the light administrative and regulatory requirements faced by firms particularly compared with other EU countries.” It went on to cite financial services as one of the most successful internationally trading sectors which was attracted here because “the level of regulation on Irish industry is perceived to be light relative to many of the other countries benchmarked". It also stated that “regulations are not perceived to significantly inhibit product market competition in Ireland.”

The main 2005 NCC report then warned of the danger of “rising regulatory compliance requirements” and of the need to check the “Growth of “Red Tape” (capitals!) and what it called the “Regulatory Compliance Burden” (again, capitals!). It also said Ireland’s rankings were deteriorating, due to increased “regulatory compliance requirements” and the “impact of recent corporate governance legislation in particular.”

In hindsight - these extracts shows how strong the anti-regulation (and anti-tax) environment was in Ireland! In a long introduction, Taoiseach Bertie Ahearn gave the report a strong endorsement, though he focused mainly on productivity, the low income tax regime and “managing our public finances responsibly.” He also boasted of our “enviable fiscal position!” No wonder the regulators took their cue and sat on their hands. And the Irish economy crashed to the ground.

If the IMF can examine part of the reason for the implosion of banking in the US, then here we do need a Commission to see why the whole Irish banking system collapsed and also to review the response to the crisis. It needs to examine how a whole ethos can develop and envelope an economy. It should examine why other voices were seldom heard against the development of such a dominating ideological perspective - one that was ultimately so destructive. Diversity of opinion can help to ensure that it can never happen again.

Rising tides, luxury yachts and leaky fishing boats

James Wickham: Everyone assumes that the aim of economic policy must be to return to "growth". But more than ever, we need to ask what sort of growth?

There is a growing awareness that conventional economic measures of growth are not necessarily related to quality-of-life and correlate with increased ecological damage. However, we also need to discuss the relationship or relationships between economic growth and inequality. The conventional wisdom is of course that "a rising tide lifts all boats". In the Celtic Tiger years everyone felt better off, even though income inequality remained constant or perhaps increased.

However, such discussions ignore the new role of the very rich in Ireland and the world. Traditionally, economists and sociologists have assumed that the very rich don't matter as individuals. Economists assume redistributing from the very rich will have negligible consequences overall, since the amounts of money involved are tiny once distributed across the rest of the population. Sociologists assume that what matters are social groups (e.g. "the service class"); they may recognise an elite but assume its members hold their positions as occupants of roles in a structure -- what matters is the role, not the person.

Today however individuals matter as individuals-- if they're very rich. The very rich are now economic agents in their own right. The wealth of somebody like Richard Branson or Michael O'Leary means that they have an impact as individuals, not as representatives of some larger corporation. This has also has implications, such as the importance of individuals of "high net worth" the banks, for economic policy and for philanthropy.

Since the 1970s in the USA and more recently elsewhere, the very rich have been pulling away from the rest of the society. In other words, they have been appropriating a greater share of the results of economic growth. In some cases indeed they have simply been appropriating or transferring resources to themselves. This appears to be the case for "salaries" at the top of the global financial services industry. According to the Financial Times (December 30, 2009) on Wall Street "About half of revenues are diverted to bonuses at many investment banks".
In economic history there have been periods and places where the rich have become richer simply by appropriating more resources: the palaces get bigger, the cottages get smaller. In Africa today the new palaces of the kleptocratic rulers go side by side with deteriorating living conditions of the masses. We are not there yet, but it's worth remembering that sometimes big yachts swamp little fishing boats...

Effective tax rates in Ireland

Proinnsias Breathnach: I sent the following letter to the Irish Times in early December, but like my article on competitiveness, it failed to make it onto the page:

In an article in The Irish Times on December 3, Danny McCoy, Director General of IBEC, wrote: “OECD data show that effective tax rates for high-income earners in Ireland are higher than those in many European countries, including Germany, France and the UK.” Mr McCoy suggests that this is undermining Ireland’s ability to attract or retain highly skilled workers.

A table from the OECD website (Table I.5, OECD Tax Database) shows that, for workers earning two thirds more than the national average wage, the proportion of income paid in income tax and employee’s social security in 2008 was as follows: France 33.3%, Germany 45.6% and the UK 30.3%. The comparable figure for Ireland was 26.9% - lower than any of the other 14 countries which made up (with Ireland) the European Union before its recent enlargement.

Of course, Mr McCoy may have had in mind people earning a lot more than two thirds above the average wage. According to the income tax calculator on the parmentier.de website, a single German worker earning €200,000 per year (perhaps typical for a high-flying executive or top scientist) would have expected to take home €105,660 last year after payment of income tax, social security and solidarity surcharge. An Irish worker in the same category would have taken home €5,000 more than this, according to the hookhead.com tax calculator. Again, the effective rate of tax is lower in Ireland.

It may be that the OECD data referred to by Mr McCoy give a different picture, but even if so, the data quoted here indicate that the picture is rather less clearcut than Mr McCoy would have us believe.

Reduced costs are not the route to export competitiveness

Proinnsias Breathnach: I sent the following to the Irish Times in early December but it wasn't published:

The ability to penetrate export markets is the crucial ingredient upon which Ireland’s recent economic success was built. Today, exports of goods and services are the equivalent of over 80% of gross domestic product compared with less than 30% in 1960. However, the basis of Ireland’s exporting success is very poorly understood by most Irish economic commentators and by the politicians who come under their influence.

There is an extraordinary unanimity among economists that Ireland has been losing international competitiveness and that this is attributable to rising wage levels relative to our main trading partners. This view of Ireland’s competitive position is not only simplistic and erroneous but could be profoundly damaging to this country’s economic future.

In the modern global economy the recipe for competitiveness is a complex mixture of a wide range of ingredients. Up to now Ireland has managed to produce a good blend of these ingredients and, while the unsustainable boom conditions of the 1990s are now well behind us, the export sector has, for the most part, continued to perform quite solidly. Contrary to what appears to be a common view, Ireland’s exports grew in real terms (i.e. allowing for price changes) in each year between 2000-2007. Export volumes did fall by one per cent in 2008, and have fallen further in the first six months of 2009. However, the rate of export decline has been much lower than for the EU and OECD countries at large, which means that Ireland’s share of export volumes in both these regions has actually been growing.
Between 2000-2008 Irish exports grew by a total of 47% in real terms. While Ireland’s share of total world exports (in current value terms) did fall slightly in this period, this was due mainly to contraction in the electronics sector arising from growing competition from Asia, and particularly China. By contrast, Ireland has increased its share of global exports in six key sectors which, between them, now account for one half of our total exports: computer services (mainly software), insurance, financial services, other business services, odourifous mixtures (mainly drink concentrates) and heterocyclic compounds. Ireland’s share of global exports in some of these sectors is extraordinarily high, ranging from 18% (insurance services) through 21% (computer services/software) and 28% (heterocylic compounds) to 40% (odouriferous mixtures).

Strong growth in these sectors clearly has not been inhibited by rising labour costs. It could be that, unlike elsewhere in the economy, productivity is rising more quickly than wage costs in these particular sectors. However, in order to properly understand why Ireland might have a competitive advantage in sectors such as these requires a somewhat more sophisticated analysis of the nature of competitiveness than has generally been offered to the Irish public by our politicians and economic commentators.

The National Competitiveness Council (NCC) was established in precisely to provide such analysis, which it does in its annual Competitiveness Report. Unfortunately, the fruits of the NCC’s labours appear to have never troubled the gaze of those who seek to influence or formulate Irish economic policy. In its Competitiveness Reports, the NCC uses 18 different indicators (just one of which relates to productivity and labour costs) to assess Ireland’s competiveness. These include, inter alia, business environment and performance, physical and knowledge infrastructure, prices and costs, productivity and innovation. However, the NCC does not quantify these indicators in a way which would allow them to be compared with each other, or combined together to create a composite competitiveness index which would allow Ireland’s overall competitiveness to be monitored over time.
However, such an index is produced in the Global Competitiveness Report published annually by the World Economic Forum (WEF), the Swiss-based independent think-tank organisation. The WEF’s Global Competitiveness Index (GCI) was devised by, and is compiled under the supervision of, Michael Porter of Harvard University, one of the world’s foremost authorities on international competitiveness and author of the path-breaking book The competitive advantage of nations (1990).

The GCI is compiled from no less than 113 different indicators, divided into twelve “pillars” of competitiveness (education, efficiency of labour and product markets, business sophistication, innovation, etc.).. The relative weights given to these indicators vary depending on each country’s level of development. In the WEF’s view, competition based on cost is only appropriate for countries at a low level of development, for whom cheap labour or resources are frequently their only source of competitive advantage.

For countries at an intermediate level of development, the keys to competitiveness are production efficiency and product quality, while for countries at the highest development levels, the key factor is the ability to produce new and different products employing cutting-edge production processes. In the system of weightings applied to this group of countries (in which the WEF places Ireland), labour cost factors account for just 1.7% of the total value of the competitiveness index.
What is more, while Irish economists have been decrying Ireland’s declining competitiveness, the WEF have been moving Ireland up its competitiveness league table, from 30th position in 2002 to 22nd in 2009. From their point of view, Ireland’s key competitiveness weakness lies in infrastructure, along with small market size and the country’s current macroeconomic stability problems. Labour costs are not mentioned.

Evidence from other sources vindicates the WEF’s relatively sanguine view of the direction in which the Irish economy is moving. According to the IDA, the rate of return on US investment in Ireland rose from 19% to 22.5% between 2000-2007. This is over twice the EU15 average and is only surpassed by China, India and Singapore. In 2008 Ireland was the most successful country in the world in attracting foreign investment, up from tenth place the previous year. These are hardly the signs of a country in competitive decline.

Ireland’s economic future lies in maintaining and enhancing the country’s attractions for high-end inward investment. Inward investors repeatedly highlight the skillsets of Irish workers in this context. Spokespersons for the foreign sector have regularly emphasised the importance of continued and expanded investment in education – at all levels – and technological know-how. This was the key message in an article by Jim O’Hara, General Manager of Intel, published in the Irish Times on November 13 last.

Yet the Government appears to have swallowed, hook, line and sinker, the argument that reduced costs are the key to enhanced export competitiveness. This argument is being routinely used to help justify the current programme of spending cutbacks. While there is an obvious need to contain costs, it would be misguided to do so on the basis of false premises. The way to strengthen Ireland’s competitiveness is through expanded spending in education. Spending cuts in this area in order to balance the books in the short term could have very negative long-term consequences.

Mirror, mirror on the wall: who is the most deflationary of them all?

Slí Eile: The ESRI authors of their latest Quarterly Economic Commentary make the following two claims:
‘In spite of popular perceptions, analysis contained in the Commentary shows that Budget 2010 was not the most contractionary of modern times..’
‘while Budget 2010 was clearly regressive, the combination of Budgets 2009 and
2010 placed most of the burden of fiscal adjustment on higher earners’
Predictably, the media picked up these claims and they have entered the lexicon of canonical and uncontested truths along with all the others with regard to pay, social welfare, debt … In this blog I survey the first claim. Next week, I will explore the second of the two claims.
As pointed out in a previous blog, it is difficult to assess these claims without access to the full and complete publication of the Quarterly Economic Commentary (QEC). However, having seen the same I am struck just how thin the evidence is. The Winter 2009 QEC is 76 pages in length. The claim with regard to the scale of contractionary impact is discussed in Box 1 on three pages only: 21-23. Three figures are contained in this Box (A, B and C). ‘Own Estimates’ is mentioned at the foot of each Figure (A, B an C) in Box 1. There is no citation of working papers or other published research apart from a paper written in 2000 (Assessing the Stance of Irish Fiscal Policy)

In the decomposition of fiscal stance (Figures A and B) no precise figures are shown. Visually, Figure A suggests a combined contractionary effect of around 2.8% of GNP (and not GDP) in the 2009 Budget (presumably October 2008 and April 2009 Budgets combined?). The hit in 2010 is in the order of 1.5% of GDP. These estimates are hard to accept on first sight. The scale of adjustment, to date, in combination with the negative multiplier impact of lost jobs and income on household consumption is likely to be greater. The ESRI estimate – however it was derived and whatever assumptions were made in its generation via the Hermes model is uncanningly the same as the Department of Finance (DOF) estimate of the contractionary impact of last month’s budget.
In the background documentation, DOF (The document can be downloaded here) has estimated that the combined fiscal adjustment in Budget 2010 was €4bn = 2.5% of GDP (section 3.1). The document states that: 'Table 8 below sets out the estimated loss in tax revenue of €897 million associated with the introduction of the budgetary package in 2010.' Adding these two elements together gives an estimate closer to 3% of GDP and not 2.5%. Once again, the full set of assumptions behind these estimates is not provided. Going by the collapse in consumer spending in 2009, one suspects that this is not unrelated in a significant way to cuts in public spending (plus a host of other factors including fear about what lies around the corner by way of further income cuts or redundancy).
A significant (majority) component of the fiscal adjustment in 2009 and, again, in 2010 was on the capital side. In that regard, it is worth referring to earlier empirical work by the ESRI in April measuring the impact on GDP – in the long-term – from cuts in public spending. For example:

…we consider the impact of a €1 billion reduction in expenditure on public investment under the National Development Plan. These results only take account of the demand side impact of the change in investment. They take no account of the longer-term supply side impact reducing national output and productivity as a result of the reduced stock of infrastructure.

Then they spell this out:

Thus the longer-term impact of this cut on output and employment would be substantially greater than shown here.

What is striking about the comparisons between the peak fiscal constractions of 1976, 1983, 1989 and 2009 (refer to Figure B) is the following:
The 1976 and 1983 contractions are estimated by the ESRI at 6% and 3.5% of GNP, respectively, (and not GDP);
The 2009 contraction impact, the lowest of the four peaks, is about 3.3% (going by the naked eye and no precise figures in the article) of GNP; and

The composition of contractionary effects differs as follows:
The bulk of adjustment in 1976, 1983 and 2009 was by way of the Public Capital Programme (schools, hospitals, transport) while the bulk of the adjustment in 1989 was via current expenditure (and with an estimated expansionary impact from lower taxes at the same time in the 1989 Budget).
Peering into the past may be deemed a purely academic pursuit. However, it has implications for informing political economy debate in 2010. Recall that politics is about who gets what and economics is also about who gets what – in the midst of a depression it is comforting to be told that:
The whole world is in recession
We must devalue across the board (well for most groups..)
Things aren’t as bad as they were in the 1970s and 1980s on a particular measure of ‘fiscal stance’
Prices are falling so the apparent cut in wages and living standards is not as much as it seems (if at all…); and
There is no alternative anyway (refer to the una voce media in Ireland)

It should not escape our attention that:
All the major fiscal contractions of the past (the 1923 cut in the OAP, the 1930’s cuts in public sector pay, the 1950s cuts in capital expenditure, the 1976 cuts in capital spending, the 1989 cuts in health spending and the 2009/10 cuts in Social Welfare, public sector pay, capital funding and other programmes were all PRO-CYCLICAL. In other words, the country under successive Governments of tweedledum and tweedledee have been following the McCreevey school of economics: when I have the money, I spend it; when I don't, I don't. Either they never heard of Keynes or Keynes doesn’t apply here (small open economy, unique position vis-à-vis the international financial markets, national sovereignty as risk blah blah)

However, the key to the ESRI claim that Budget 2009 or 2010 were not as contractionary as the 1983, 19988 or 1989 budgets is the impact of price inflation. With consumer prices falling, the cuts in public spending are not as deflationary as they appear. With prices increasing in the 1980s, restraints in public spending implied real cuts.
However, its seems to me that a stronger contradiction emerges in Figure C on page 23. The graph (Measure of Fiscal Stance and GDP Growth Rate) shows, on two axis, (i) GBRR (Government Borrowing Requirement) as a % of GDP and (ii) GDP growth. The impact on GDP – as distinct from the General Borrowing Requirement is much more severe in 2009-2010 than it was in the 1970s or 1980s 94% in 2009-10 compared to 2.5% in 1987-89. How can this be reconciled with the information provided in Figures A and B (which are in turn difficult to reconcile with each other)? Has there been a mistake somewhere? No explanation or elaboration is given in the QEC.

Caution is struck on Page 21 ‘There is, however, no universally accepted indicator or methodology for assessing fiscal stance.’
The ESRI work is based on modelling using the ESRI Hermes Model and long historical time series. It is just impossible to know exactly how the results were derived and what particular assumptions were used in running the simulation.

In a telling comment in the 2000 paper referred to here the following is provided in the summary:
Fiscal stance is a measure of the discretionary changes in budgetary policy, though there is no universal acceptance on its measurement.
And
The appropriate stance of budgetary policy needs to take account of a number of factors such as the state of the public finances, the stage of the economic cycle and the growth prospects for the economy reflecting its stage of development. These three intertwined considerations are crucial in interpreting what fiscal stance should be.

In the QEC, the ESRI authors acknowledge that ‘there are a number of difficulties in interpreting the structural budget balance as an indicator of fiscal stance’. These refer to the measure of ‘capacity output’ which, in turn, drives the estimate of ‘structural’ and ‘cyclical’ components of the overall fiscal deficit and – by deduction – the net impact on GDP. The QEC authors state that: ‘Such difficulties can be avoided by basing the measure of fiscal stance on the change in discretionary policy relative to the previous year’s budget.’
I suggest that:
The inner workings of the HERMES be made public and available to other researchers to explore different scenarios and possible model specifications;
A full set of working papers be provided on the ESRI website including the work underlying pages 21-26 of the Winter 2009 QEC.
More caution be adopted in regard to any big claims about the scale of fiscal stance and its estimated impact on GDP, unemployment and borrowing.

Lets say that forecasting in any domain of macroeconomics has taken a severe battering at home and abroad in the last decade.
In one very telling comments (footnote 16 on page 23) the ESRI authors state:
‘However, this is not a fully valid comparison since 2011 is also expected to include a
contractionary budget which is not included here.’
This follows their comment:
Figure C shows that between 1999 and 2002 there was a cumulative
giveaway equivalent to far more than the “spendthrift years” of the late 1970s. It also suggests that the current period of retrenchment is less severe in impact than in the period 1987-1989.
Which, as I have pointed out, does not match the story in Figure C.

Aside from the above, it is worth noting that, in Table B in the Summary, some stark figures for the likely drop in income in 2009 are provided. It shows, for example, that:
Income in Agriculture will drop by about 25% in 2009 compared to 2008 (on top of a fall of 11% in 2008 on the previous year) signalling a cumulative fall of 36% of very roughly 30% over two years in volume terms (adjusting for price falls). This is a mighty fall in income spread unevenly across a diverse sector.
GNP is estimated to have dropped by 14% in 2009 (or 10% in volume terms when the impact of price deflation is factored in)
A fall of around 9% in wage income in 2009 (and 6% in 2010) – signalling somewhat smaller per capita real falls when numbers in employment and price deflation are taken into account.
A projected (rather than forecasted) hike in interest rates including real mortgage rates in Ireland (page 8)
‘This means that we expect a modest increase in private consumption spending in the final quarter of 2009. However, we do expect a further fall in consumption in 2010, in response to the contractionary budget’ (p11)
‘We expect the General Government Deficit in 2010 to remain essentially unchanged in, at 11½ per cent’ (p12)
A continuing sharp fall in capital investment (down by almost a third in 2009 and forecasted to fall by one sixth in 2010).

Fiscal policy is fuelling the depression. The main difference between now and 1976 or 1988 is that the world is in a much bigger recession now than it was then - which only reinforces the impact of fiscal contraction.

A long time in the hole

Michael Taft: I’ve touched on this subject before but given the New Year and the apparent ‘green shoots’ that are emerging (or the alleged sightings of green shoots), it seems timely to return to this theme; namely, how long will we be in recession?

The economy, barring something unforeseen, will trough sometime this year. This will be given statistical spin (‘we’re out of recession and back on the growth path’). This will also be given a political spin (‘due to the tough, courageous decisions of the Government, the economy is starting to recover’ – or something like that), There will be so much spinning we will be in danger of getting dizzy, stumbling around drunken-like at the post-recession party.

So let’s ground ourselves. Measured in terms of GDP this recession will, on the Government’s own optimistic growth figures, last until 2013. Measured in terms of GNP this recession will last until 2015. The post-recession party will have to be put on hold.

The issue is very simple. The economy will be ‘recessed’ until it reaches the level at which it entered the recession. In 2007 the economy peaked at €189.8 billion. Such was the severity of the decline, the economy will not return to that level until sometime in 2013.

But strip out the multi-national element, and the time-scale for the GNP will be even longer. In 2007, GNP peaked at €161.2 billion. GNP, in percentage terms, collapsed even more. Therefore, we won’t return to pre-recession levels until much later.

Government projections only go up to 2014 – the new target date for Maastricht compliance. Even so, we will not have returned to pre-recession levels. It won’t be until 2015 that the domestic economy emerges from recession.

We shouldn’t confuse growth with ‘the end of the recession’. Two examples will illustrate this. First, starting in 1933 the US economy grew every quarter for the next three to four years. Yet no one would say that in 1935 the US – after two years of positive growth - was ‘out of the depression’. Indeed, officials at the time made the mistake of thinking the economy was and took their foot off the monetary and fiscal pedal in 1937. The result was a ‘recession in a depression’ – as Paul Krugman warns may be happening today.

On a more everyday level, if you fall into a hole you will eventually hit the bottom. Just because you start climbing back up doesn’t mean you are out of the hole. You’re out of the hole when you return back to ground level – the point at which you fell into the hole.

So – 2013 or 2015, depending on which measure you use: there is one caveat. These ‘out of the recession’ dates are dependent upon the Government’s growth figures which could come true or may not. The Government is projecting a return to GDP growth in 2011 of 3.3 percent, peaking in the following year at 4.5 percent before settling back to 4 percent by 2014 (GNP growth is slightly less as the domestic economy trails further behind the multi-national sector). However, if these figures are even 1 percentage point off, the recession will last another year – well into 2014 by GDP measurement.

Even if the Government projections hold – unemployment and poverty will be hanging around for a while. In 2014, just as the economy is returning to 2007 levels, unemployment is still estimated to be 9.5 percent. That’s after emigration has hollowed out significant sections of our skill and knowledge labour base. Yet, that will still be more than twice the level as of 2007.

We are in a hole – a deep hole. Hopefully, we’ll start to climb out sometime this year. But it will be a slow climb. We won’t get back to ground level for a few years yet. And all the while, the economy will be carrying a heavy burden – the effects of the government’s deflationary measures.

The climb may be longer than we think.

Exchequer figures: turning a corner or heading into a cul-de-sac?

An Saoi: Well, the end of year Exchequer Figures have arrived and are far better, or should I say are less worse, than was expected. The figures are well below those projected in April, yet curiously €500M above the projection made much more recently in the pre-budget White Paper. The total is above my own projections, which leaves me with a degree of egg on my face.

As I pointed out in my commentary on the November figures, VAT remains particularly weak, some 6.6% below the April target. Income Tax also continues to weaken further. As this weakness has continued into December, I presume that the PAYE returns must be particularly poor, reflecting the continued trend in falling employment numbers and pay reductions. It is hard to see any improvement from either source in 2010, despite suggestions of a pick-up in sentiment towards the middle of the year. My own figures, while slightly below the outturn, were respectable.

Holding two Budgets annually clearly is good for Excise returns, and it is here my I met my Waterloo. Premature withdrawal of product from bond by wholesalers presuming budget increases backfired on them and on me, but artificially increased payments to the State. There is likely to be a reversal in the first few months of 2010, unless of course there is a boom in car sales as VRT is accounted for under this heading.

The last minute flurry of Capital Gains Tax took me, and the Deptartment of Finance, by surprise. The final outcome is nearly 40% over their White Paper figure. I am as surprised as they are, and have been wracking my brains for the disposal(s) which could explain the yield.

Corporation Tax figures are also respectable, and as I noted in last month’s commentary all the more so considering the number and amounts of repayments. I hesitate to use the term fairy godmothers again - however there is someone out there with a US twang looking after the Department of Finance.

In relation to CAT, I slightly over-estimated the yield but was considerably below the Stamp Duty outturn, but then again so did the Department of Finance in the White Paper. It has come in almost at the original April estimate. Could the forthcoming introduction of E-Stamping by the Revenue Commissioners perhaps have forced many solicitors to bring their affairs up to date? Customs Duties are 9% below the April target, and continue to reflect weak consumer spending and a lack of investment in capital goods sourced from outside the EU.

Conclusion: The tax figures and other recent reports from the CSO confirm our total dependence on multi-nationals and the Public Sector, both commercial and otherwise, for employment and taxes. The private indigenous sector continues to perform poorly. The need to repair personal balance sheets, and in particular to clear at least some of their personal debts, is going to leave the public circumspect in their spending habits. Public Servants in particular are receiving their first payslips of the year this week, and are unlikely to be rushing out to spend, knowing that further pay cuts are likely. The only road-sign visible indicates a cul-de-sac rather than a corner.

Lessons from Detroit's decline

Paul Sweeney: Progress is not linear. If NAMA goes wrong and if the Deflationary School of Economics (most mainstream economists) wins on policy, Ireland could decline - much further. We have already made a Great Leap Backwards to 2003 national income levels. Lessons can be learned from the remarkable decline of Detroit. Economic geographers can learn a lot from this city’s fall and industrial economists from the US auto industry’s mighty fall, too.

Henry Ford offered his famous $5 a day to work in his car plant in Hamtramck, Detroit from 1914. Black people fled northwards to Detroit for work and better rights. Motown the music city was a by-product. Today Motown, or Motor City, has fallen mightily. It fell as GM, Ford and the other US car makers have fallen. GM was indisputably the world’s greatest company for most of the 20th century. It was the biggest company in the world and the most profitable for many years. It set the standards for management and production for multinationals. Today, GM, Ford and Chrysler - the US auto industry - are on government welfare.

US manufacturing, so dominant since 1890, has shifted offshore. Auto manufacturing had many spin-offs. It was killed because GM, Ford and Chrysler did not make cars people wanted to buy.

In 1955, four out of every five cars in the world were made in the US, half of them by GM. GM's main US rival, Ford, was half its size. The largest foreign carmaker, VW, was only slightly bigger than GM's own German subsidiary, Opel, and it had only had one model - the VW Beetle.

In the 1960s, US firms did not innovate in the design of cars. They made money by increasing the size and weight of their vehicles. They did this by adding extras, like air conditioning, power steering, and new sound systems. It was the European manufacturers who developed disc brakes, rack-and-pinion steering, air-cooled and diesel engines. And Toyota was changing its production system to become leaner and more efficient. It was the oil crisis in the 1970s that first illuminated the problems of US automakers.

After the 1970s Oil Crisis, smaller cars became popular, and US consumers found that cars like the Toyota Corolla were an attractive alternative to big American cars. When oil prices fell in the 1980s, there was a new false dawn for US carmakers – the SUV. Helped by a 25% tariff, and allowed to bypass US fuel efficiency laws, this proved to be a temporary, state-backed respite (like Ireland’s low corporation tax is still believed by most policymakers – especially free marketers – to be a real, rather than a temporary, competitive advantage!).

The tens of thousand of union workers did not just build Cadillacs, some bought them for themselves. Since the 1970s, Japanese carmakers gained market share. By the 1990s, all big Japanese carmakers had transplanted car factories in the South of the US – automated, utilising better production methods, often non-union, and most importantly making cars people wanted to buy.

Detroit’s unemployment is 17%, the highest of large US cities and well ahead of the national figure of 9.8%. It population peaked n the 1950s at over 2 million, but today it is barely 900,000. These are scattered over 138 square miles - “a quarter of which is not just uninhabited, but is utterly empty. No people, no structures – just tall grass bending in the summer breeze, mixed with nodding blue cornflower and Queen Anne’s lace,” according to Fortune (12 October 2009).

But Motown did not just decline because of the decline of the motor industry. It is truly Motor City, where the car is the only way around, dictated by the industry. You won’t find a metro, tramline or commuter train in Motor City. The vast prairie-like wastelands would not have blossomed in the heart of the city and suburbs if they had been linked by public transport systems. The auto industry saw to it that they were never built. Today, even LA and Washington have metros. Dublin does not. And we never had an auto industry.

The average house price in Detroit was $98,000 in 2003. Today it is $15,000. In some areas, like Hamtramck, houses are on sale for $100. One-third of the population is below the US poverty line, and the city lost one quarter of its population since 1990. Some are talking of putting farms into blighted city areas - both agricultural and wind farms.

This and other photos of Detroit’ fall, by Yves Marchand and Romain Meffre, are available here.

Today all US car companies are on corporate welfare. The great hope for Detroit is the hybrid Volt, again well-subsided by Uncle Sam. Indeed, 30 years ago the mayor of Detroit even bulldozed 465 acres of housing businesses to make room for a new automated Cadillac factory at Hamtramck. 4,200 Polish and African Americans were kicked out of their homes to make way for this new, gleaming factory.

Two other plants, employing 18,000, were closed down for the new automated plant. The 6,000 jobs never materialised – 4,000 did but the figures is well below 3,000 today. Now the hope is to make the hybrid, the Volt, in the plant. Taxpayers invested $50bn into GM and now still own 60% of it. $945m in grants and tax breaks are being given to develop alternative vehicles in Detroit.

We can learn from Detroit’s failure. We must learn from the abject failure of the once extraordinary success of the US auto industry which paved the way for all industry in the 20th century. The decline and near collapse (the apex of “free” enterprise - GM, Ford and Chrysler – would be dead and buried had they not been rescued by the reviled state).

Progress is not linear. Visits to great Roman sites should remind us of this. Ireland can quickly revert back to the 1950s standard of living. We are already back at 2003 levels now, thanks to the “success” of the tax-cutting and de-regulation policies of McCreevy and Cowan in a boom. Our policymakers, economists and government failed to take advantage of the great strengths of the real Celtic Tiger period to cut direct taxes less, not to cut indirect taxes at all, to regulate the banks and to use the exploding tax revenues to invest more and better and to save more for this wet, rainy day. The policies currently being pursued are leading us, not to Boston, but to Detroit, to decline.

1,406 reasons to change course

Michael Burke: The number of corporate insolvencies in Ireland has soared to 1,406 in 2009, according to InsovencyJournal.ie. This exceeds the level of insolvencies in 2007 and 2008 combined, which totalled 1,136, with an increase of 82% on 2008 alone. The highest number of monthly insolvencies was in December, at 156, indicating that the decline is on an accelerating trend. This represents a significant deterioration in the outlook for businesses.

The composition of insolvencies is revealing. The problems of the construction sector are well-known, but these now form a minority of the failed business in 2009, approximately one-third of the total. The next 3 largest categories for insolvency are directly related to the slump in consumer demand; services, retail and hospitality, and together these represent 45% of the total. Of the remainder, manufacturing, the motor sector, IT, and transport comprise 18%. There is no employment breakdown of the data, but a reasonable assumption would be that job losses in these latter sectors would account for a greater proportion of the total, owing to greater average enterprise size.

The data are an indictment of government policy and those of the business lobbyists, such as IBEC and their supporters in academia. The nature of the economic crisis in Ireland is a combined property and banking crisis, which has precipitated a slump in activity led by investment. It was not, at the outset, a crisis of falling consumer demand. Banking write-downs of residential mortgage lending are testament to that; running at one-tenth the level of writedowns to failed property speculators. At the end of 2008, personal consumption was declining by 3.6% from the previous year, less than half the decine in the GDP/GNP measures which were down between 7% and 8%. The driving force behind the aggregate decline was an enromous 26.1% fall in investment (gross fixed capital formation), led by but not confined to construction investment.

However, since that time there have been a series of austerity measures totaling 6.4% of GDP, with threats of more to come. This has had a direct contractionary effect on economic activity. Worse, the measures have been concentrated on the lowest paid and welfare recipients, precisely those who are obliged to consume a greater portion of their incomes. As a result, the latest data show private consumption had almost caught up with the rate of decline in GDP, -6.8% compared to -7.4% in Q3 2009. At the same time, the absence of any stimulus measures and against a backdrop of falling demand, investment continues to plunge, down 35% year-on-year in Q3 and is now back to a level last seen in Q3 1998.

Of course, all these insolvent companies will no longer be paying corporate taxes. Neither will their redundant workers be paying income taxes, and many will be obliged to seek welfare benefits. Yet the policy enacted was in the name of fiscal rectitude. The complete failure of that policy, even in its own terms, can be gauged from the fact (as shown in the latest Budget Report) the government's own forecasts for the deficit keep rising.

A rational economic policy would begin with measures to stimulate the economy and staunch the flow of insolvencies, (as has happened all across Europe and in other leading economies), an end to cuts and a major increase in government investment. The government is about to embark on a programme of €54bn borrowing to hand over to bank share and bondholders. The idea that, say, one quarter of that amount could not be borrowed to fund investment is a nonsense. This paper from Lane and Benetrix shows that, even in ordinary circumstances, the multiplier effects of government investment are enormous. The stimulative effects of investment plus the taxes they generate means it is a reckless policy of malign neglect that is currently being pursued.

IBEC's stance is that of the small shopkeeper who hopes to stay in business by cutting staff wages. When replicated economy-wide, this is a policy of contraction. It has already been pursued with disastrous consequences. There are now a further 1,406 reasons why it should be abandoned.

Personal debt levels

An Saoi: The Central Bank published its preliminary statistics for November a day early, they are available here. The figures continue to make awful reading with no sign that Irish borrowers are getting their personal debts under any form of control. Though you would not get that view from the mainstream media, for example RTÉ’s coverage or Colm Keena’s article in Thursday’s Irish Times where he suggests “Irish people are significantly reducing their personal debt by paying down items such as credit card bills, mortgages and other loans, according to the latest figures from the Central Bank”. Though to give him his due, he does provide a more balanced view as one reads down. Indeed debt as a proportion of GDP/GNP has increased not decreased significantly in the last 12 months.

The Central Bank makes clear that most of the marginal decline in nominal indebtedness was down “…to valuation effects (exchange rate movements, write-downs of loans and increased provisions for bad debts).” and “When valuation effects are accounted for, the underlying stock of PSC was approximately 1.7 per cent lower in November 2009 compared with November 2008.”

Credit Cards are a very clear bell weather of consumer behaviour. They are a very immediate source of credit and have accurately reflected the state of the Irish economy on its downward trajectory. Spending is 5.7% below the level of November 2008, which was itself 16.8% below the November 2007 spending level. Indebtedness has fallen by less than 1% in the past year. The number of business cards remains exactly the same, but the number of personal cards has declined by 46,000 or 2% since the start of 2009. We are now into a second year of declining expenditure on credit cards and the cumulative decline in personal expenditure (on credit cards) of 22.6% in two years, yet personal debt has increased by nearly 8.5% in the same time.

The significance of the levels of personal debt must be seen in the context of declining prices and a shrinking economy. Prices declined by 5.7% to November and GDP is estimated by the Dept. of Finance to be declining by 7.5% and the ESRI suggesting (perhaps conservatively) that house prices in Dublin have declined by 19.1% in the year to October.

Dr. Morgan Kelly’s most recent broadside in Tuesday’s Irish Times and his more detailed paper linked to on this site and on www.irisheconomy.ie , gives us a picture of the type of zombie future we face because of the lack of a proper functioning banking system and unbearable levels of personal debt. Yet the Government continues to spin the myth that NAMA will free up lending. As Dr. Kelly points out our citizens are already the most indebted in the EU. The Central Bank used to publish a quarterly comparison but stopped doing so in June 2008. The last Table published is set out below.

This table of course would look much worse now, when the declines in prices and GNP/GDP are factored in.

Personal cash savings are likely to continue increasing slowly, and the lack of new personal credit will continue to inhibit new spending, let alone the obligations to pay off existing debt. On that basis, it is very hard to see tax yields dependent on personal spending, such as VAT & Excise increasing during 2010 or 2011. However I shall write further on this issue after the publication of the end of the year figures, which are rumoured to be far better than many were expecting. So good in fact they could not help leaking the news to the Sunday Business Post.

Finding facts in Fantasy Land

Michael Taft: One of my New Year’s resolutions was to spend less time on countering the arguments of the orthodoxy and develop positive analysis and proposals from a progressive perspective. For if you tried to even counter a fraction of the economic misinformation spread about, you’d never have time to work on alternatives. That was my resolution. But then I read Stephen O’Byrne’s piece in the Irish Times. My resolution went the way of stopping smoking, exercising more, and other noble aspirations.

Stephen exhorts the trade union movement specifically to live in the land of facts, not the land of fantasy. Always wise counsel. Too bad Stephen didn’t take it to heart before he penned his latest opinion piece. In it he argues:

‘Querying the affordability of the second highest (minimum wage) rate in Europe evokes howls from trade unions, but are we not are entitled to wonder how, say, our tourism industry can compete with the UK when our minimum wage is €2-plus per hour higher?’

Oh, of course, we are entitled to wonder (and if we stop, there’s always the Small Firms Association to do all the wondering we need). Let’s take a look at the hospitality sector and see how Irish costs compare with the rest of Europe, based on Eurostat data from 2006, a year in which our minimum wage was also the second highest in the EU.

First thing we notice is that average personnel costs in the Irish hotel and restaurant sector are below the EU-15 average: 3 percent below average. And this includes very poor countries such as Greece and Portugal. When we compare ourselves to our own peer group – the non-Mediterranean countries – we find that Irish labour costs in the hospitality sector are 6 percent below the average of other EU countries.

Another way of looking at this issue is to measure labour costs as a proportion of turnover. Again, in comparing ourselves with our peer group we find that labour costs make up less of turnover – 28.6 percent - than the average of other EU countries – 29.7 percent.

Yet, Stephen is concerned. How can we compete with UK tourism? Well, we’re competing ok. In the first quarter of 2000, Ireland had less than 5 percent of the UK’s level of tourist traffic (measured by Eurostat as all tourist nights). In the first quarter of this year that proportion increased to 8 percent, with more tourist nights per capita than the UK. If anything, tourist traffic is increasing, not decreasing, when compared with the UK.

Stephen finishes his article with this:

‘We need critical analysis, not hackneyed class rhetoric.’

Too bad he didn’t start with it.

IFSRA: The financial regulator which failed

Anon: On January 1st 2010, we saw how the basic philosophy of IFSRA, and the key people, seemed to be informed by the philosophy of “free” markets and the need to keep state interference or regulation to a minimum. Yet the government established an agency with 350 staff and a big budget to “regulate” financial markets. This was hardly just to follow European Central Bank rules?

On the establishment of IFSRA in May 2003, the first chairman Mr Brian Patterson said: "Good regulation is good for consumers and it's good for the industry." He said the authority would be a "passionate proponent" of the public interest.

He defended the composition of the authority's board, which had been criticised in certain quarters as lacking a consumer champion. "This is not meant to be a representative board but a public interest board," he said.

IFSRA was to be responsible for regulating more than 4,000 entities and had a budget in excess of €20 million per annum back then. It rose to €50m by 2006, the apex of the frenzied bank lending, and it is €63m today.

An interim board of IFSRA had been set up by Finance Minister, Charlie McCreevy, in April 2002.

IFSRA had a limited degree of independence from the restructured Central Bank, which was re-named the Central Bank of Ireland and Financial Services Authority (CBIFSA). The restructured Central Bank continued to be headed by the governor, “Mr John Hurley, who had the over-arching role with the IFSRA, and Mr Patterson and the board will be accountable to him.”

Mr Hurley, the former Dept Finance Secretary General, was also influential in creating the regulatory system and system of regulation.

The members of the Authority are as follows, entering 2010:

Thus it can be seen that there are nine members of the board of IFSRA today. Two-thirds, or six members, are original/founder members and are still on the board. There had been ten members of the original board. New members were Alan Gray and Tony Grimes, appointed in December 2006 and May 2008 respectively. The three who left were Patterson (Chair), Danz, and O’Reilly (CEO).

Contrary to good governance, none of the directors’ other interests, ages, or main occupations are even listed in the IFSRA Annual Reports (which are not available before 2005).

Jim Farrell, now Chairman, was an original member from 2003. He was appointed chair in May 2008, when Patterson stood down. He was a senior executive with the National Treasury Management Agency and was first chief executive of the state’s National Development Finance Agency and has “extensive experience of international banking.”

Alan Ashe, original member from 2003, is former managing director at Standard Life Assurance and chairman of the Rotunda Hospital. Shane Ross wrote, in his usual style, that “Alan Ashe pretended to retire in 2000 when he left the top job in Standard Life (Ireland) at the tender age of 58. His 12 years there had been preceded by another dozen in the TSB and a long period in manufacturing industry. To serve on IFSRA's board, he felt obliged to give up as a director of two promising companies, Stella Life Assurance and Business Solutions Ltd. The possible conflict of interest forced him to make a choice between service to the State or to the private sector,” Ross concluded.

John Dunne was formerly Director General of IBEC, the employers organisation, until 2000, and is Chairman of the IDA today.

Gerard Danaher is a barrister, closely linked to Fianna Fail. He is also chairman of the National Library. He was counsel for Ray Burke at the Flood tribunal.

Alan Gray is an economic consultant. Appointed at the peak of the lending frenzy in late 2006, he is head of Indecon International Economic Consulting Group, Chairman of London Economics and has previously served on the Boards of a number of commercial companies including the Irish and European Boards of Canada Life. Indecon does a lot of work for government, public bodies and internationally. Paddy Mullarkey, the Secretary General of the Department of Finance 1994-2000 is chair of Indecon and Donal O'Donoghue, “Indecon Advisor on Local Government”, was previously Galway County manager.

Deirdre Purcell, original member from 2003, is a novelist and a former member of the Council of the Credit Institutions' Ombudsman.

Tony Grimes, appointed in May 2008, is Director General of the Central Bank and Financial Services Authority where he has worked for most of his life. He also worked in the ESRI and with Davy Stockbrokers, once a subsidiary of Bank of Ireland.

Dermot Quigley, original member from 2003, was 42 years in the public service including 26 years in the Department of Finance where he was an assistant secretary. He became a Revenue Commissioner in 1990, before assuming the chair in 1998, and was on the board of FAS as one of the Dept of Finance’s two “watchdogs.” He also led a group reporting into public procurement in 2005.

Mary O’Dea is an executive director, Consumer Director, and has been on the board from the beginning. She briefly acted as CEO until the board was amalgamated into the Central Bank.

In addition, it should be noted that Matthew Elderfield, the new Head of Financial Supervision, was appointed recently. He takes up his position with the Central Bank in January, as IFSRA is re-merged with that Bank.
Back in 2005, the IFSRA board comprised Brian Patterson chairman, Patrick Neary CEO, Mary O’Dea Consumer Director, Alan Ashe, former Standard Life CEO, Friedhelm Danz; former meat processor, Dermot Quigley, former Revenue commissioner; novelist Deirdre Purcell; former boss of IBEC, John Dunne; FF linked barrister, Gerry Danaher, and Jim Farrell of the NTMA.

The three former IFSRA board members were:

Brian Patterson who was the Chairman of the Interim Authority. He was former Waterford Wedgwood chief executive, was also chief executive of the management training body IMI, and is a former chair of the Irish Times Trust. He was also appointed chair of Vodafone Ireland in 2007.

Liam O’Reilly was the first Chief Executive of the new financial services regulator, the interim Irish Financial Services Regulatory Authority, on 18 November 2002. Mr O’Reilly was Assistant Director General of the Central Bank of Ireland since 1998, and had been responsible for all of the Central Bank’s financial supervision functions. He was a Central Bank insider. Liam O'Reilly was subsequently appointed as a director of Merrill Lynch International Bank in 2007. This sparked some controversy due to what some perceived as potential for conflict of interest in his working for one of the companies he so recently acted as financial watchdog over. He also chairs the Chartered Accountants Regulatory Board in Ireland.

Friedhelm Danz was first put on the board of the Central Bank on February 1 1996, and then reappointed by Charlie McCreevey, in whose constituency he resides, until 2005. He had been a major beef processor and was a competitor of Larry Goodman's.

It was the IFSRA board that Patrick Neary reported to. It was the IFSRA board that Liam O’Reilly reported to until January 2006. It was this board that implemented the regulation of the Irish banks. It was this board that oversaw the “principles based” regulation system that allowed the banks to collapse and means that the taxpayer has had to pay out billions to the same banks.

In addition to the board, others who were indirectly responsible for the lack of regulation (influencing board appointments and attitudes to governance) were listed by the former Chairman Mr Brian Patterson, in the 2005 Annual report, as follows:

“Thanks are due to all those who work tirelessly to support our mandate:

• Ministers and civil servants, particularly in the Department of Finance.
• Members of the Authority who give of themselves tirelessly and often beyond the call of duty.
• Our management team under our newly appointed Chief Executive, Patrick Neary.
• A special word of thanks to our Chief Executive, Liam O'Reilly, who retired earlier this year and to whom we owe much.
• Our dedicated and professional staff.
• The Governor and staff of our sister organisation, the Central Bank - without whose support our task would be considerably more difficult".

He then said “Our role is to serve the public interest. It is that principle which guides all of our work and which motivates all of our people.”

But he also tellingly said the following –

“Ireland needs an efficient and competitive financial services industry - because it oils the wheels of the whole economy and is the repository of the country's savings. The industry needs to be competitive and profitable in order to underpin its stability - something we can easily take for granted.”

It was this thinking that impaired the Authority’s views of the prudent public interest. Unless corporate governance in Ireland is radically reformed, we are bound to repeat these mistakes.

Re-arranging the deck-chairs – the structure of the IFSRA within the Central Bank, with largely the same board in place, the same blinkered thinking in the Dept of Finance, in the same Government, will not help Ireland.

To date, the taxpayer has given €11,000 million to the Irish banks. The last Budget was a row about whether a mere €1,300 million was to be in cuts or taxes.

Paying the price of poor regulation in Banking

Anon:  Morgan Kelly’s UCD paper on the Irish Bubble reproduced here on 29th December is a chilling view of the kind of policies which nearly brought this economy down, and a warning that worse may yet come – much of it due to poor regulation. It is worth the effort to read it.

He found that it was “the increased supply of credit rather than improved fundamentals drove lending.” “All of these factors were present for Irish banks, and their impact was magnified by failures of regulation by the Central Bank and government. The rapid expansion of credit in the Irish economy and the consequent rise in property prices and construction activity represent systematic failures of control at all levels of the Irish economy.”

Kelly said that “In summary, the activities of the Irish banks remained extremely simple by international standards and could easily have been regulated, had the will to do so been present.”

He concluded that “Given the weak independence of the Irish Central Bank, (IFSRA, in fact) the will to control banks derived ultimately from government.”

The claims on systemic failure; at all levels of power in the economy; and the lack of will to regulate are correct. He does not say that all of these failures stemmed from the strong ideological economic hostility to regulation by the state.

It is worth exploring the governance and composition of IFSRA in this and a subsequent Blog. As Kelly pointed out, the government ultimately controlled the banks – all the appointments to these boards are made – carefully and politically - by government. The advice of the deeply conservative (albeit in this instance, not conservative at all) Department of Finance dominates too. It is clear that while some of the directors had a considerable knowledge of economics and/or finance, others had no such knowledge or skill and some may have been hostile to regulation.
The cost of the collapse of the Irish banking system is still unknown. The ultimate buck stopped, not with Patrick Neary, the CEO of the Irish Financial Services Regulator, nor his predecessor, Liam O’ Reilly, to 31 January 2006, but with the board to which he reported.
Much has been made of Patrick Neary, the inadequate and overpaid CEO of IFSRA, but the board he reported to remains largely in place. What links did they have to Fianna Fail/PDs? What influences were there on Mr McCreevy, Ms Harney and Mr Cowen in the selection of the board, in additional to the political?

At the time of IFSRA’s establishment in 2002, Siobhan Creaton, of the Irish Times commented very pertinently, that “The restructuring of the Central Bank has been a lengthy and controversial process and was finally agreed in a compromise between the Department of Finance and the Department of Enterprise, Trade and Employment.”

Creaton said, “The degree of complexity involved in tinkering with an organisation as fundamentally important to the Irish economy as the Central Bank has resulted in the creation of a complicated structure”.

But interestingly, she also said that “It has been described as unwieldy and unworkable by observers in the financial services industry and politicians, with Fine Gael finance spokesman, Mr Jim Mitchell, pledging to seek a more streamlined organisation if his party gets into Government in the months ahead.”

What if the late Mr Mitchell’s Fine Gael/Labour had attained power in that general election? Would a new government have meant real change as IFSRA, in the system of regulation, in attitudes to enforcement, in the state’s attitudes and dealings with builders, speculators and other creditors? Would Ireland today not be facing such gigantic financial problems and almost facing bankruptcy if NAMA does not deliver, as Morgan and others believe that it wont/cant?

Why did all the key people in and around financial regulation fail Ireland so badly?

The reason was because of the over-riding philosophy by so many people in powerful positions who really, sincerely believed in the workings of markets. Many of these people were not very tolerant of differing views. Most in the media promoted the view that markets worked best when left largely un-regulated and were totally “free” - of interference.

There has been much questioning and debate on the profound ill-effects of this economic ideology in the UK, France Germany and even in the US. But little here in Ireland – even now. The view that this is a recession, a temporary downturn and it will be back to business as usual soon, may cost us, yet.

IFSRA set out its philosophy clearly in its annual report in 2006:
“We adopt a principles led approach to supervision.”

What this means is that “the Board of Directors of a financial service provider are responsible for setting their tolerance for risk and for ensuring that management establishes a framework for assessing the various risks.” [The banks - Not IFSRA]

“Financial service providers are also required to develop a system to relate risk to their level of capital and establish a method for monitoring compliance with internal policies.” [The banks - Not IFSRA]

“Our role [only] involves oversight of the quality of the institution's corporate governance including risk management and internal control systems, the focus being on structures and methodologies used.”
In December 2005, Brian Patterson, chairman of the financial regulator, announced the appointment of Patrick Neary as CEO of the regulator. Patterson claimed that “Mr Neary had played a central role in the shape and direction of the financial regulator since its establishment. "Pat is ideally suited to take the financial regulator through the next phase of its development.”.
Mr Neary was the unanimous choice of the selection panel, which was made up of non-executive members of the authority and an international regulatory expert from Finland.
It is of interest that the Irish Times reported that Mr Neary's appointment was welcomed by Financial Services Ireland, a trade association for the financial services sector, affiliated to the Irish Business Employers Confederation, which said “tackling the cost of regulation should be top of Mr Neary's agenda.”
IBEC did not want better regulation – it wanted lower cost of regulation…………! Ironically they had a case. Its members were paying most of the cost - for no effective regulation of finance.
In 2006, the staff was 350 and the cost including consultancies etc., was €49m. There is now 400 staff. The cost today is €63.6m of which €34.4m is raised from the industry plus a subsidy of €29.2m, given by the Central Bank, which makes up for the shortfall from the credit union sector and some other areas.
The composition of the IFSRA board will be examined in a second part of this Blog.