Peadar Kirby: When speaking to the NESC on Friday last, the Taoiseach Enda Kenny made a point that, if taken seriously, has the potential to address what has been a major weakness in Irish public policy. According to the report in The Irish Times, the Taoiseach said that council recommendations need not always be based on a consensus view. “It is better to have reports which reflect some variety of views, rather than self-censorship which excludes consideration of difficult questions,” he said.
The Taoiseach’s comments identify what has been a major problem with the policy advice given to successive governments by the NESC, a problem that to my knowledge has never before been identified. This is that NESC reports need to win agreement from the social partners and, as a result, they tend to fudge rather than highlight policy options, often ending up saying quite contradictory things in the same document. Because most of the reports are lengthy, these contradictions tend not to be noticed as different interest groups can find elements that suit their needs. Neither have academics, with a few notable exceptions, studied these reports with the attention they deserve so that they have rarely generated much public debate.
All of this has served to impoverish public debate on the making of policy as quite narrow and technical approaches have tended to dominate, usually limiting access to experts and failing to address the deeper values that inform policies and the goals to be achieved. Enda Kenny’s recommendation of the validity of a variety of views is therefore refreshing and of great significance. Equally, his advice to the council to consider producing more frequent, shorter and more timely reports, if these served to foster debate on the different options facing society, has the potential to make a major contribution to the kinds of debates we so badly need.
In this regard, the methodology followed in Costa Rica is worthy of study. There an annual state of the nation report is drawn up by a team of worthy citizens – usually former presidents and government ministers, retired senior academics and other senior figures, aided by a team of experts. All of this is done under the aegis of the rectors of the country’s public universities. What makes these different to the reports produced by NESC is that they explicitly seek to highlight the different options facing policy makers and the public on specific areas of public policy. Regularly the reports contain dissenting views, making clear the basis for the differences identified. All of this serves to nurture and inform a variety of approaches to public policy, greatly enriching the process of policy making and drawing into the discussion wider sectors of the population.
This may be one reason why Costa Rica stands out in Central America for the quality of its public policy, being a global leader in policies on climate change and avoiding the worst of the recent financial crisis through its regulation of the banking sector and its early stimulus package to maintain demand in the economy. As a result, credit kept flowing and economic recovery kicked in quickly. The main problem now facing policy makers is how to reduce a budget deficit that reached 3.3 per cent of GDP at the height of the crisis!
Monday, 20 June 2011
Saturday, 18 June 2011
The realm of forgetting
Michael Burke: I’m guessing that Dan O’Brien may not be every reader of this blog’s favourite economic commentator. Just a hunch. But reading a recent piece of his in the Irish Times, reminded me of some of the great works of magical realist literature. Seriously.
In Dan’s piece reviewing the new government’s first 100 days he had this very interesting passage, “There are also doubts about whether it [the government] has the technical capacity to conduct a truly comprehensive spending review. At a recent seminar co-hosted by that [Public Expenditure and Reform] department, a senior official said it was only now developing capacities to carry out cost/benefit analyses. Worse still, he noted this capacity had withered, having once existed at the insistence of the EU when it wanted its structural funds to be properly spent. When asked why the methods used in the past were not simply used again instead of trying to reinvent the wheel, he was silent.”
Now, it’s not altogether surprising that there is no cost/benefit analysis being conducted ahead of government policy decisions, or even as an evaluation once implemented. Clearly, many of the decisions taken would have been avoided had any evaluation of their likely impact taken place, or revered once the damage was clear. Some while ago I was asked to write an article for Public Affairs Ireland in which I argued that An Bord Snip Nua had made no attempt to evaluate the impact of its voluminous recommended cuts. You remember Colm McCarthy’s meisterwerk? The one that said its cuts would eliminate the deficit by 2011. Public Affairs Ireland must have liked the piece so much they held onto it. Never published it. Or made any contact with the author since receiving it.
It would clearly be a public good if the State had some mechanisms to evaluate the impact of its actions, preferably in advance, but ideally both before and after. It would also be helpful if there was analysis of where things went right and when they went wrong, just to try to increase the proportion of the latter.
There used be to evaluations of the National Development Plans coming out of our ears. But that was because the EU insisted on monitoring the impact of its money. The conclusion of the evaluations was extremely positive, estimating an enormous impact from an increase in public investment. Now, there is no plan, no assessment and no investment.
There has been a State-sponsored exercise in forgetting. Because the lessons learnt were that public investment works- generating €2.40 in activity for every €1 invested.
Instead, we have entered a mythical land where history no longer exists, even while a consensus about the past is manufactured. A Latin American terrain of viciously opposed parties who enact exactly the same policies. And where there is a daily barrage f propaganda justifying cuts, yet leading public servants have nothing to say when asked why the evaluation methods of the past were not simply used again. “He was silent”.
In Dan’s piece reviewing the new government’s first 100 days he had this very interesting passage, “There are also doubts about whether it [the government] has the technical capacity to conduct a truly comprehensive spending review. At a recent seminar co-hosted by that [Public Expenditure and Reform] department, a senior official said it was only now developing capacities to carry out cost/benefit analyses. Worse still, he noted this capacity had withered, having once existed at the insistence of the EU when it wanted its structural funds to be properly spent. When asked why the methods used in the past were not simply used again instead of trying to reinvent the wheel, he was silent.”
Now, it’s not altogether surprising that there is no cost/benefit analysis being conducted ahead of government policy decisions, or even as an evaluation once implemented. Clearly, many of the decisions taken would have been avoided had any evaluation of their likely impact taken place, or revered once the damage was clear. Some while ago I was asked to write an article for Public Affairs Ireland in which I argued that An Bord Snip Nua had made no attempt to evaluate the impact of its voluminous recommended cuts. You remember Colm McCarthy’s meisterwerk? The one that said its cuts would eliminate the deficit by 2011. Public Affairs Ireland must have liked the piece so much they held onto it. Never published it. Or made any contact with the author since receiving it.
It would clearly be a public good if the State had some mechanisms to evaluate the impact of its actions, preferably in advance, but ideally both before and after. It would also be helpful if there was analysis of where things went right and when they went wrong, just to try to increase the proportion of the latter.
There used be to evaluations of the National Development Plans coming out of our ears. But that was because the EU insisted on monitoring the impact of its money. The conclusion of the evaluations was extremely positive, estimating an enormous impact from an increase in public investment. Now, there is no plan, no assessment and no investment.
There has been a State-sponsored exercise in forgetting. Because the lessons learnt were that public investment works- generating €2.40 in activity for every €1 invested.
Instead, we have entered a mythical land where history no longer exists, even while a consensus about the past is manufactured. A Latin American terrain of viciously opposed parties who enact exactly the same policies. And where there is a daily barrage f propaganda justifying cuts, yet leading public servants have nothing to say when asked why the evaluation methods of the past were not simply used again. “He was silent”.
Thursday, 16 June 2011
A long, long, long way to go
Michael Taft: A good step; but a very small step: the Finance Minister’s announcement that the Government will seek a substantial write-down of the €3.8 billion in senior unguaranteed unsecured debt in Anglo-Irish and Irish Nationwide will be welcomed. Some will legitimately complain that this should have been done after the Anglo nationalisation, when that debt stood at approximately €16 billion. But that was the fault of the previous government. Most of the debt has been paid off and we are left with the bill – a €31 billion promissory note which will cost the Exchequer €43 billion with interest over the next 15 years. So this first step on senior bondholders is the new government’s initiative. But let’s put it in perspective – the impact will be very small and even if successful we will be left with a staggering bill for winding down, what the Minister has called, this ‘warehouse’.
Currently, the Government is committed to paying off a promissory note of €31 billion (€25.3 billion to Anglo, €5.4 billion to INBS and €0.35 billion to the Educational Building Society). This will entail a cost of €3.060 billion borrowed in each year up to 2023, with a further payment of approximately €2.8 billion in 2024 and 2025.
This is an intolerable burden – equalling 2 percent of 2011 GDP; a burden that would not be accepted in any other EU country; and for a bank that isn’t even a bank. So what difference would it make if the Minister gets his way? Some, but not very much.
In putting forward his suggestion for burden sharing, the Minister referred to the current discount. This, therefore, doesn’t suggest a complete liquidation. The Irish Times reports that Anglo’s November 2011 bonds (€750 million) fell to 70 cents following the Minister’s announcement.
The following calculation, therefore, assesses the impact of writing down the €3.8 billion in senior unguaranteed debt by 50 percent. This would mean a write-down of €1.9 debt, or 6 percent of the current promissory note. This would result in the following difference in annual payments:
• Current Annual Payment: €3.060 billion
• New Annual Payment after Write-down: €2.870 billion
While the new annual payment is my own calculation, any revisions would be trivial.
So after a 50 percent write-down of the senior unguaranteed debt, we would see the annual payments fall by €190 million per year. We would still be pay close to €2.9 billion. This is no less an intolerable burden.
However, we may be into a ‘running-to-stand-still’ situation. The Department of Finance’s projections of the overall cost of the promissory note, including interest, is premised on long-term borrowing costs of 4.7 percent – a technical assumption ‘based on the weighted average cost of funds raised by the NTMA in the bond market in 2010’.
That technical assumption no longer holds. With ESFS borrowing rates at 5.8 percent, we should expect the overall cost of the promissory note to increase. So if we apply that new interest rate and apply it to the promissory note minus the 50 percent write-down of senior unguaranteed debt – we will find the level of payments rise again over the lifetime of the note. In other words, there is little if any net gain.
The Minister for Finance should be supported – as a first step, as an opening of the door. But the fiscal impact will be minimal and the state will still be under an unacceptable and irrational burden.
It is now time for a more radical, thorough-going approach to write-down, if not entirely eliminate, the public exposure to the costs of winding down Anglo and INBS. A starting point comes from the TASC document on banking, ‘The Debt and Banking Crisis’:
‘Insolvent banks should not be further supported by public funds and should be allowed to fail. In Ireland this means that, at the very least, Anglo Irish Bank and INBS should be allowed to fail. No further payments for Anglo Irish Bank’s promissory notes should be made.'
That’s a good starting point.
Currently, the Government is committed to paying off a promissory note of €31 billion (€25.3 billion to Anglo, €5.4 billion to INBS and €0.35 billion to the Educational Building Society). This will entail a cost of €3.060 billion borrowed in each year up to 2023, with a further payment of approximately €2.8 billion in 2024 and 2025.
This is an intolerable burden – equalling 2 percent of 2011 GDP; a burden that would not be accepted in any other EU country; and for a bank that isn’t even a bank. So what difference would it make if the Minister gets his way? Some, but not very much.
In putting forward his suggestion for burden sharing, the Minister referred to the current discount. This, therefore, doesn’t suggest a complete liquidation. The Irish Times reports that Anglo’s November 2011 bonds (€750 million) fell to 70 cents following the Minister’s announcement.
The following calculation, therefore, assesses the impact of writing down the €3.8 billion in senior unguaranteed debt by 50 percent. This would mean a write-down of €1.9 debt, or 6 percent of the current promissory note. This would result in the following difference in annual payments:
• Current Annual Payment: €3.060 billion
• New Annual Payment after Write-down: €2.870 billion
While the new annual payment is my own calculation, any revisions would be trivial.
So after a 50 percent write-down of the senior unguaranteed debt, we would see the annual payments fall by €190 million per year. We would still be pay close to €2.9 billion. This is no less an intolerable burden.
However, we may be into a ‘running-to-stand-still’ situation. The Department of Finance’s projections of the overall cost of the promissory note, including interest, is premised on long-term borrowing costs of 4.7 percent – a technical assumption ‘based on the weighted average cost of funds raised by the NTMA in the bond market in 2010’.
That technical assumption no longer holds. With ESFS borrowing rates at 5.8 percent, we should expect the overall cost of the promissory note to increase. So if we apply that new interest rate and apply it to the promissory note minus the 50 percent write-down of senior unguaranteed debt – we will find the level of payments rise again over the lifetime of the note. In other words, there is little if any net gain.
The Minister for Finance should be supported – as a first step, as an opening of the door. But the fiscal impact will be minimal and the state will still be under an unacceptable and irrational burden.
It is now time for a more radical, thorough-going approach to write-down, if not entirely eliminate, the public exposure to the costs of winding down Anglo and INBS. A starting point comes from the TASC document on banking, ‘The Debt and Banking Crisis’:
‘Insolvent banks should not be further supported by public funds and should be allowed to fail. In Ireland this means that, at the very least, Anglo Irish Bank and INBS should be allowed to fail. No further payments for Anglo Irish Bank’s promissory notes should be made.'
That’s a good starting point.
Wednesday, 15 June 2011
Sharing burdens
Slí Eile: excellent piece recently here. The message still holds even in light of today's very partial announcement about seeking remission on the senior bondholder debt.
Unnatural selection
Paul Sweeney: In Tuesday's Financial Times there was a really provocative book reivew by Joshua Kurlantzick on a book by Mara Hvistendahl on the unnatural selection of boys over girls. He and she explore the implications for certain countries if this really develops much further. Whatever ones views on demography, on abortion, on ultrasounds,on boys and girls, on equality or whatever, this is very thought provoking.
Tuesday, 14 June 2011
TASC launches new report on health inequalities
Cutting Human Rights
Tom McDonnell: It was good to see the Council of Europe's Human Rights Commissioner Thomas Hammerberg wade into the austerity debate (See Here).
He talks about his recent visit to Ireland and about Governmental decisions to erode funding and structures used to support human rights and protect the most vulnerable.
His last paragraphs are important:
"In a longer perspective there is no contradiction between measures to ensure economic growth and stability and to protect and care for the most vulnerable. Austerity measures which exacerbate inequalities will only postpone problems and in some fields make it even more costly to resolve them at a later stage.
At stake are essential values of basic justice and social cohesion. Those already disadvantaged have no belts to tighten and must not be asked to make sacrifices for a crisis which was not of their doing."
He talks about his recent visit to Ireland and about Governmental decisions to erode funding and structures used to support human rights and protect the most vulnerable.
His last paragraphs are important:
"In a longer perspective there is no contradiction between measures to ensure economic growth and stability and to protect and care for the most vulnerable. Austerity measures which exacerbate inequalities will only postpone problems and in some fields make it even more costly to resolve them at a later stage.
At stake are essential values of basic justice and social cohesion. Those already disadvantaged have no belts to tighten and must not be asked to make sacrifices for a crisis which was not of their doing."
Monday, 13 June 2011
Guest post by Martin O'Dea: Economics for technological acceleration
Martin O'Dea lectures in Management and Human Resource Management at the Dublin Business School: The internet was a revolution that saw massive investment followed by the seemingly inevitable crash and the eventual rebalancing in monetary value of a central technology that can greatly benefit our lives, keeping us informed, connected and allowing us to see the world as our market.
The fact that technologies don’t forget what they learn or, indeed, don’t need anything other than the smallest amount of time to download what another piece of hardware has acquired, added to the fact that scientists in their lab coats keep finding ways to push the speed and efficiency of how they can compute to levels of unimaginable speed and accuracy mean that technology does not just grow its impact and potential; it accelerates.
What economic impact of 3D printing, cloud computing, nanotechnology and simulated realities? What impact of the fact that these developments may be surpassed within months of actualisation, what impact of the fact that that very process may speed up? Perhaps more relevant again, what impact of appropriately functioning robots in the workplaces? Robotics was like many arenas of technology, unrealistically thought to change the world in the 1980s – the vast complexity in the simple things that humans do and would need to be replicated (like sidestepping an opening door) were not accounted for; and many people assumed that robots were a thing that was not quite a thing of the past.
There are many companies in Japan and elsewhere that are over 30 years into development and would beg to differ, again it is important to bear in mind – if you teach one robot to do something, you, effectively and instantaneously, teach them all. Do you believe that when a point is reached (and all evidence now sees this as within reach inside a decade) that robots can carry out the work involved in a fast food restaurant that McDonalds will continue to pay people instead of buying robots? It is said that you can only approach the future with the psychology of the past; but should we add the economics of the past to that as well. Certainly this means unemployment to those currently employed in McDonalds, but, it is really missing the picture if we do not see the continuous societal benefit of developing technologies, and we cannot find economics that will stop us hurting from our progress.
There is a debate as to whether there will ever be a post-scarcity society. The idea of standing before a Star Trek ‘Replicator’ type device has often been the root of young jokes as teenagers imagined conjuring up cigarettes and alcohol from these manipulators of matter; however can I suggest that people look at 3D printing via the recent announcement to begin to grapple with the concept of a future of post-scarcity. I am inclined to align myself with the argument that the value will be acquired by the desirability in the future, and so like oxygen (abundant and free) there will be many things that are now monetised that will not be so soon – and this, of course will greatly help humanity; however, I feel that whether it is leisure/physical space/certain resources/information there will be future monetised objects and perhaps while we could all print some clothing only leading designers of 3D printed items will charge money for theirs etc.
I would like to pose a simple concept for economists' comment in light of the above. If there will be, and in many ways already are, essential and desirable and abundant free products could we not realign our monetisation system to represent that with more social benefit. Could we not use two separate currencies? One currency would be used for a wide range of product/services that are seen as necessities.
Every household would have access to a large purchasing power within these categories, including much of welfares payments etc. and have a large universal wage that would allow each person sufficient funds to be adequately supplied with these items. Those that earn more may take some of their payment in the second –non-essential – currency. Most likely the ‘luxury’ items will take a mixture of currencies as one could buy non-essential currency with the essential currency. However, certain products/services being made widely available while maintaining the competitive motivations of the market economy and competitive labour markets could be achieved in this model – while we ease towards a society where perhaps the house with the beach will remain sought after but very many things become universally available.
The fact that technologies don’t forget what they learn or, indeed, don’t need anything other than the smallest amount of time to download what another piece of hardware has acquired, added to the fact that scientists in their lab coats keep finding ways to push the speed and efficiency of how they can compute to levels of unimaginable speed and accuracy mean that technology does not just grow its impact and potential; it accelerates.
What economic impact of 3D printing, cloud computing, nanotechnology and simulated realities? What impact of the fact that these developments may be surpassed within months of actualisation, what impact of the fact that that very process may speed up? Perhaps more relevant again, what impact of appropriately functioning robots in the workplaces? Robotics was like many arenas of technology, unrealistically thought to change the world in the 1980s – the vast complexity in the simple things that humans do and would need to be replicated (like sidestepping an opening door) were not accounted for; and many people assumed that robots were a thing that was not quite a thing of the past.
There are many companies in Japan and elsewhere that are over 30 years into development and would beg to differ, again it is important to bear in mind – if you teach one robot to do something, you, effectively and instantaneously, teach them all. Do you believe that when a point is reached (and all evidence now sees this as within reach inside a decade) that robots can carry out the work involved in a fast food restaurant that McDonalds will continue to pay people instead of buying robots? It is said that you can only approach the future with the psychology of the past; but should we add the economics of the past to that as well. Certainly this means unemployment to those currently employed in McDonalds, but, it is really missing the picture if we do not see the continuous societal benefit of developing technologies, and we cannot find economics that will stop us hurting from our progress.
There is a debate as to whether there will ever be a post-scarcity society. The idea of standing before a Star Trek ‘Replicator’ type device has often been the root of young jokes as teenagers imagined conjuring up cigarettes and alcohol from these manipulators of matter; however can I suggest that people look at 3D printing via the recent announcement to begin to grapple with the concept of a future of post-scarcity. I am inclined to align myself with the argument that the value will be acquired by the desirability in the future, and so like oxygen (abundant and free) there will be many things that are now monetised that will not be so soon – and this, of course will greatly help humanity; however, I feel that whether it is leisure/physical space/certain resources/information there will be future monetised objects and perhaps while we could all print some clothing only leading designers of 3D printed items will charge money for theirs etc.
I would like to pose a simple concept for economists' comment in light of the above. If there will be, and in many ways already are, essential and desirable and abundant free products could we not realign our monetisation system to represent that with more social benefit. Could we not use two separate currencies? One currency would be used for a wide range of product/services that are seen as necessities.
Every household would have access to a large purchasing power within these categories, including much of welfares payments etc. and have a large universal wage that would allow each person sufficient funds to be adequately supplied with these items. Those that earn more may take some of their payment in the second –non-essential – currency. Most likely the ‘luxury’ items will take a mixture of currencies as one could buy non-essential currency with the essential currency. However, certain products/services being made widely available while maintaining the competitive motivations of the market economy and competitive labour markets could be achieved in this model – while we ease towards a society where perhaps the house with the beach will remain sought after but very many things become universally available.
Friday, 10 June 2011
Executive directors, other employees and pension inequality
Gerry Hughes: In 2007 employer contributions to occupational pension schemes on behalf of employees amounted to €1.4 billion and the estimated cost of tax relief and the exemption from benefit in kind taxation were €150 million and €540 million respectively. The tax reliefs were concentrated on the top 20 per cent of earners. As neither the pensions industry or the pension regulator publish any information on the distribution of pension contributions or pensions in payment we know very little about who benefits from employer contributions or how the pension entitlements of high earners compare with those of other employees. However, publicly quoted companies are obliged to publish in their annual accounts information about the pension arrangements for each of their executive directors. Using information for 2009 for 147 executive directors in 48, mainly publicly quoted, companies in conjunction with national data on pension arrangements for other employees makes it possible to compare (see here) how pension arrangements for executive directors differ from those of other employees. The comparison shows that:
• The average annual employer pension contribution in 2009 for executive directors in large publicly quoted Irish companies is nearly 36 times more than for other covered employees (€100,000 versus €2,700).
• The average employer pension contribution rate for executive directors is almost 26 per cent of salary whereas the average employer rate for other private sector employees is around 7 per cent;
• On average an executive director would have been entitled to a pension of almost €200,000 if he or she had retired in 2009, or nearly 17 times more than the State pension on which the great majority of pensioners are dependent for most of their income in retirement;
• The average value of an executive director’s pension fund amounts to €4.1 million or 34 times more than the average value of the pension fund of €120,000 for other employees:
Pension inequality is much greater in the private sector than in the public sector. Research by Jim Stewart (see here, behind paywall) shows that top civil servants received an average pension of €125,000 in 2009 or about six times more than the average pension payment for retired civil servants.
The best way of creating greater pension equality between high, middle and low earners would be to give the tax relief at the standard rate of tax as is now done in the case of mortgage interest relief and health insurance relief. While the EU-IMF programme contains a commitment to standardise pension tax reliefs the pensions industry is opposed to this and the Fine Gael/Labour government prefers to continue giving the tax relief at the marginal rate of tax. In these circumstances an alternative which could raise as much revenue as standard rating would be to reduce the earnings cap on pension contributions and the lifetime size of pension funds.
In Budget 2011 the government reduced the cap on the annual earnings contribution eligible for pension tax relief from €150,000 to €115,000 and it reduced the lifetime cap on the size of an individual pension fund from €5.418 million to €2.3 million. While these reductions create greater equity in the pension system, neither of the caps is consistent with recommendations by the TCD Pension Policy Research Group, TASC, Social Justice Ireland, the OECD and other commentators that tax relief on pensions should be concentrated on middle and lower income earners. Much greater equity in the pension system could be achieved by targeting pension tax reliefs at these earners. This could be done by reducing the annual earnings limit for pension contributions from €115,000 to €75,000 and by reducing the cap on the size of a pension fund for an individual from €2.3 million to around €0.6 million.
• The average annual employer pension contribution in 2009 for executive directors in large publicly quoted Irish companies is nearly 36 times more than for other covered employees (€100,000 versus €2,700).
• The average employer pension contribution rate for executive directors is almost 26 per cent of salary whereas the average employer rate for other private sector employees is around 7 per cent;
• On average an executive director would have been entitled to a pension of almost €200,000 if he or she had retired in 2009, or nearly 17 times more than the State pension on which the great majority of pensioners are dependent for most of their income in retirement;
• The average value of an executive director’s pension fund amounts to €4.1 million or 34 times more than the average value of the pension fund of €120,000 for other employees:
Pension inequality is much greater in the private sector than in the public sector. Research by Jim Stewart (see here, behind paywall) shows that top civil servants received an average pension of €125,000 in 2009 or about six times more than the average pension payment for retired civil servants.
The best way of creating greater pension equality between high, middle and low earners would be to give the tax relief at the standard rate of tax as is now done in the case of mortgage interest relief and health insurance relief. While the EU-IMF programme contains a commitment to standardise pension tax reliefs the pensions industry is opposed to this and the Fine Gael/Labour government prefers to continue giving the tax relief at the marginal rate of tax. In these circumstances an alternative which could raise as much revenue as standard rating would be to reduce the earnings cap on pension contributions and the lifetime size of pension funds.
In Budget 2011 the government reduced the cap on the annual earnings contribution eligible for pension tax relief from €150,000 to €115,000 and it reduced the lifetime cap on the size of an individual pension fund from €5.418 million to €2.3 million. While these reductions create greater equity in the pension system, neither of the caps is consistent with recommendations by the TCD Pension Policy Research Group, TASC, Social Justice Ireland, the OECD and other commentators that tax relief on pensions should be concentrated on middle and lower income earners. Much greater equity in the pension system could be achieved by targeting pension tax reliefs at these earners. This could be done by reducing the annual earnings limit for pension contributions from €115,000 to €75,000 and by reducing the cap on the size of a pension fund for an individual from €2.3 million to around €0.6 million.
Thursday, 9 June 2011
Negotiating truth
Tom McDonnell: The FT makes an important point about the supposed independent country assessments produced by bodies like the IMF and the OECD.
These are 'negotiated' documents and consequently are not independent.
Worth bearing in mind the next time you hear a journalist reporting, or Government minister boasting, about a positive forecast or review.
Or indeed claiming that a 'programme' is on track...
These are 'negotiated' documents and consequently are not independent.
Worth bearing in mind the next time you hear a journalist reporting, or Government minister boasting, about a positive forecast or review.
Or indeed claiming that a 'programme' is on track...
Tuesday, 7 June 2011
A picture paints a thousand essays
Michael Taft: After all the arguments, tables, charts and footnotes, sometimes it takes just a picture to tell it as it really is. Courtesy of Mark Thoma - the logic of austerity.
Sunday, 5 June 2011
Believing in fairies
Slí Eile: While columnist Breda O'Brien may not be everyone's cuppa tea I suspect that contributors to this board will give at least 9 out of 10 for her piece, yesterday, here in the Irish Times: 'Children paying price for economic confidence trick'. The Mawkets don't seem to believe in fairies either. Not a budge on the spreads after the controversy about not entering the bond arena next year. They're not too dumb - the risk is already factored in.
Saturday, 4 June 2011
May is a wicked month
An Saoi: The tax figures were released with a range of different views expressed. Read Dan O'Brien as an example of the general tenor of comment.
Thursday, 2 June 2011
Guest post by Arthur Doohan: The burning of the bondholders
Arthur Doohan: There is something of a scramble to jump onto the bandwagon of those seeking to attend the 'burning of the bondholders'.
What could possibly have prompted the rush to this 'auto-da-fé'?
Could it be that the institutions are afraid that the recently enacted powers under which these orders hope be enforced might be struck down in the High Court challenge brought by Messrs Abadi and Aurelius, due to be heard next week?
It could be that the banks want to make sure the schemes have some chance being allowed to stand by reason of being extant before the ruling in the event of the ruling going against the State.
That would indicate a severe lack of confidence on the part of 'our learned friends' in the strength of the primary legislation with respect to other laws and precedents.
But it could just be that the market trends and ever rising bond-yields mean that they hope the bondholders are entirely ready to throw in the towel.
Either way, an awful lot is riding on next weeks hearing.
What could possibly have prompted the rush to this 'auto-da-fé'?
Could it be that the institutions are afraid that the recently enacted powers under which these orders hope be enforced might be struck down in the High Court challenge brought by Messrs Abadi and Aurelius, due to be heard next week?
It could be that the banks want to make sure the schemes have some chance being allowed to stand by reason of being extant before the ruling in the event of the ruling going against the State.
That would indicate a severe lack of confidence on the part of 'our learned friends' in the strength of the primary legislation with respect to other laws and precedents.
But it could just be that the market trends and ever rising bond-yields mean that they hope the bondholders are entirely ready to throw in the towel.
Either way, an awful lot is riding on next weeks hearing.
Martin Wolf's Intolerable Choices for the Eurozone
Martin Wolf provides a timely analysis of the Eurozone's options. Wolf argues that ultimately the Eurozone faces a choice between default and partial dissolution or open-ended official support.
Wednesday, 1 June 2011
A Marie Antoinette moment
"Marie Antoinette's infamous response to the news of bread riots prior to the French Revolution, "Let them eat cake", may be apocryphal but it contains an essential truth about the unwillingness of the powerful to accept responsibility for a crisis. Neither is there any attempt to offer a solution that might involve some change to the privileges of the mighty". Click here to read the rest of Michael Burke's piece for the Guardian's Comment is Free site, in which he notes that "Belying any notion of "austerity", which implies all sectors of society must reduce their standards of living in a common cause, the lrish employers' organisation Ibec is pressing for lower wages among some of the lowest-paid workers in sectors such as fast food and hospitality. It is attempting to override the decisions of the joint labour committees and, emboldened by the favourable response it is getting from the new Fine Gael/Labour coalition government, Ibec is now also arguing for the abolition of the JLCs altogether. These proposals follow the policies of both the current and previous Dublin governments in implementing cuts in the pay of public sector workers and imposing a pensions levy, in effect a tax increase". Michael also references the statement by 36 economists, economic analysts and social scientists released by TASC yesterday, of which he was one of the signatories.
Why are businesses going out of business?
Michael Taft: To listen to employers’ groups and Minister Bruton, you’d think that businesses are going out of business because the lowest paid workers in the economy are too highly paid. This argument has to ignore the EU Commission’s data showing that labour costs in the Irish hospitality and wholesale/retail sector are below the EU-15 average. This also ignores the fact that labour costs in these two sectors have already fallen by between 4 and 5 percent; if cutting labour costs will result in job retention and business survival why hasn’t it already?
So, if it’s not labour costs or high wages in the low-paid sectors, what is the problem? The answer is rather straight-forward: fewer customers spending less money.
We fail to appreciate the scale of the economic collapse in Ireland in comparison with other Eurozone countries: GDP, investment, etc. In particular, we fail to appreciate the collapse in consumer spending. In the three year period of our recession 2007-2010, Irish consumer spending has fallen in real terms by -10.2 percent. In the Eurozone, consumer spending has actually increased marginally by 0.1 percent.
In 2010, we spent €12 billion less than in 2007 – a fall in nominal terms of -13 percent. That is one heck of a hit for business reliant upon domestic demand to absorb – and many of them couldn’t.
The collapse in Irish consumer spending in unprecedented among the original Eurozone countries; there is nothing to compare to our experience – though Greece, a latecomer to the recession, looks set to see consumer spending fall by -13 percent in real terms up to 2011
The next couple of years aren’t going to provide much relief for domestic businesses. Up to 2012, the EU projects Irish consumer spending to fall a further -3 percent. The Eurozone, on the other hand, is expected to grow by 2 percent. Europe goes forward; Ireland lags further behind.
The demands for more pay cuts and Minister Bruton’s proposals are likely to exacerbate this situation. With more taxes coming down the line (the household/utilities charge) combined with rising interest rates and inflation are going to squeeze consumer spending even further. And then there is the precautionary saving arising out of concerns over pension funds, children’s education costs, nursing home costs and rising health insurance premium – a lot of social uncertainty compounding economic uncertainty.
Put simply, businesses are going out of business because there are fewer customers spending less money – whether that’s due to unemployment, emigration, falling disposable income (through tax increases), savings due to fear, etc. If you don’t fix that problem, that problem will persist.
But let’s not be seduced by the argument that if only we could ‘create’ certainty, then all those household savings could be unleashed into the market and growth would be restored. Consumer spending falls are as much a result of the economic collapse as a cause.
Sustainable recovery will occur when we drive up investment (whose collapse puts the fall in consumer spending in the shade). This will drive employment and productivity. More importantly, this will drive sustainable wage-led consumption, rather than credit-led consumption.
We need a different mind-set to the crisis than the one we’re being treated to. In short, when you deflate the economy and wages, you will crash consumption which will feed into further collapse.
In this context, if you believe cutting wages is a means to increase employment is not an exercise in economics. It is an exercise in alchemy.
So, if it’s not labour costs or high wages in the low-paid sectors, what is the problem? The answer is rather straight-forward: fewer customers spending less money.
We fail to appreciate the scale of the economic collapse in Ireland in comparison with other Eurozone countries: GDP, investment, etc. In particular, we fail to appreciate the collapse in consumer spending. In the three year period of our recession 2007-2010, Irish consumer spending has fallen in real terms by -10.2 percent. In the Eurozone, consumer spending has actually increased marginally by 0.1 percent.
In 2010, we spent €12 billion less than in 2007 – a fall in nominal terms of -13 percent. That is one heck of a hit for business reliant upon domestic demand to absorb – and many of them couldn’t.
The collapse in Irish consumer spending in unprecedented among the original Eurozone countries; there is nothing to compare to our experience – though Greece, a latecomer to the recession, looks set to see consumer spending fall by -13 percent in real terms up to 2011
The next couple of years aren’t going to provide much relief for domestic businesses. Up to 2012, the EU projects Irish consumer spending to fall a further -3 percent. The Eurozone, on the other hand, is expected to grow by 2 percent. Europe goes forward; Ireland lags further behind.
The demands for more pay cuts and Minister Bruton’s proposals are likely to exacerbate this situation. With more taxes coming down the line (the household/utilities charge) combined with rising interest rates and inflation are going to squeeze consumer spending even further. And then there is the precautionary saving arising out of concerns over pension funds, children’s education costs, nursing home costs and rising health insurance premium – a lot of social uncertainty compounding economic uncertainty.
Put simply, businesses are going out of business because there are fewer customers spending less money – whether that’s due to unemployment, emigration, falling disposable income (through tax increases), savings due to fear, etc. If you don’t fix that problem, that problem will persist.
But let’s not be seduced by the argument that if only we could ‘create’ certainty, then all those household savings could be unleashed into the market and growth would be restored. Consumer spending falls are as much a result of the economic collapse as a cause.
Sustainable recovery will occur when we drive up investment (whose collapse puts the fall in consumer spending in the shade). This will drive employment and productivity. More importantly, this will drive sustainable wage-led consumption, rather than credit-led consumption.
We need a different mind-set to the crisis than the one we’re being treated to. In short, when you deflate the economy and wages, you will crash consumption which will feed into further collapse.
In this context, if you believe cutting wages is a means to increase employment is not an exercise in economics. It is an exercise in alchemy.
Tuesday, 31 May 2011
Wage-setting mechanisms: statement by 36 economists, analysts and social scientists
“We broadly welcome the Report of the Independent Review of Employment Regulation Orders and Registered Employment Agreement Wage-Setting Mechanisms. In particular, the recommendation that the basic JLC framework should be retained is good news for many thousands of low-paid workers. We also endorse the conclusion reached by Kevin Duffy and Frank Walsh that reducing JLC rates to the minimum wage level would have important distributional consequences without having any substantial effect on employment.
“We are concerned that recent proposals reportedly made by Enterprise Minister Richard Bruton are not in line with the Duffy-Walsh report [...]"
Click here to read the rest of the statement issued today by 36 economists, economic analysts and social scientists, all members of the TASC Economists' Network.
“We are concerned that recent proposals reportedly made by Enterprise Minister Richard Bruton are not in line with the Duffy-Walsh report [...]"
Click here to read the rest of the statement issued today by 36 economists, economic analysts and social scientists, all members of the TASC Economists' Network.
Monday, 30 May 2011
Economics or politics? The longer game
Tom McDonnell: The reported decision to go well beyond the recommendations of the Duffy-Walsh report, coupled with the tax cutting emphasis of the recent 'jobs initiative', provide clear signals of the Government's vision for restructuring the economy.
As the Independent Duffy-Walsh report makes clear, the employment effects of cutting the wages of low-income groups are not significant. What this implies is that the impact on the public finances will be negative overall (as well as the direct taxation effects, there will also be increased Family Income Supplement payments and reduced VAT receipts). The real effect will be that the exchequer will be subsidising employers.
So why might a Government target low-paid workers? Although the economics of the move are shaky, it does make sense politically. Any Government facing into years of unpopular measures which are sure to alienate and anger various groups requires a 'narrative' to justify its actions. If such a Government can point to its 'resolve' on this issue and to its success in reducing wages, then it becomes very difficult for other groups to credibly argue about the 'inequity' of a measure or the hardship caused by future taxes or pay cuts.
If the Government is coming under pressure to shy away from a particular tax increase or spending cut it can simply play its new 'we're all in this together' card. It will point to the wage reductions it has engineered in the low-pay sectors and then tell the specific group hit that everyone has to 'contribute'.
Thus, while the economics may not make sense, in political terms the policy of going after low paid workers in the short-term can be seen as a strategy for softening the resistance to particularly controversial austerity measures in the medium-term.
As the Independent Duffy-Walsh report makes clear, the employment effects of cutting the wages of low-income groups are not significant. What this implies is that the impact on the public finances will be negative overall (as well as the direct taxation effects, there will also be increased Family Income Supplement payments and reduced VAT receipts). The real effect will be that the exchequer will be subsidising employers.
So why might a Government target low-paid workers? Although the economics of the move are shaky, it does make sense politically. Any Government facing into years of unpopular measures which are sure to alienate and anger various groups requires a 'narrative' to justify its actions. If such a Government can point to its 'resolve' on this issue and to its success in reducing wages, then it becomes very difficult for other groups to credibly argue about the 'inequity' of a measure or the hardship caused by future taxes or pay cuts.
If the Government is coming under pressure to shy away from a particular tax increase or spending cut it can simply play its new 'we're all in this together' card. It will point to the wage reductions it has engineered in the low-pay sectors and then tell the specific group hit that everyone has to 'contribute'.
Thus, while the economics may not make sense, in political terms the policy of going after low paid workers in the short-term can be seen as a strategy for softening the resistance to particularly controversial austerity measures in the medium-term.
The madness of the drive to lower wages
Michael Burke: IBEC’s attack on the JLC wage setting mechanisms in order to drive pay lower is not simply morally indefensible. It is economically illiterate.
The attack on the JLC is simply the latest round in the battle to lower real disposable wages which has already seen pay cuts and ‘levies’ in the public sector, as well as increases in indirect taxes, which, because they are based on consumption, adversely hurt and disproportionately hurt the poor.
In any normally-functioning market economy the financial functions of the three main sectors are as follows:
*Households save some proportion of their net incomes
*Corporations borrow that savings for the purposes of investment (mainly via the mediation of the banks)
*Governments can run either a deficit or surplus, depending on the fiscal policy mix
(For the sake of clarity we’ll leave aside the role of borrowing from/lending to the rest of the world)
However, as the chart below shows, this economy has not been a normally-functioning one for some time.
Source: CSO
*Over a prolonged period (2002-2008) the household sector has been a net borrower
* For the entire period the corporate sector has not been a borrower but has been a net saver, and has significantly increased its savings in the economic slump
* Therefore, the government is obliged to become a net borrower, since all sectors cannot simultaneously be net savers.
At the sectoral level the source of the deficit is simply this fact- now that both the household sector and corporate sectors are net savers government is obliged to become a net borrower.
How to correct this imbalance? Policy has been to reduce the government borrowing by seizing a greater proportion of the household sector’s income (via taxes, pay cuts and reducing the government ‘s own investment).
But it has failed for two reasons. The household sector becomes more fearful (not more confident, as some of the wilder supporters of this policy have claimed) and so becomes even more inclined to save, not spend. At the same, the corporate sector seeing its two main customers (households and government) reining in their own spending has no need to increase its investment and instead increases its savings. The economy goes into a tail-spin and the government borrowing remains stubbornly high.
Alternative
What is the alternative? The household sector is supposed to be a net saver in a normally-functioning market economy. Now it is- even if the brutal manner in which that has been achieved has been highly damaging. But the corporate sector remains a large net lender, when it should be a borrower for investment. The slump in investment arithmetically accounts for the entire slump in the GDP of this economy. It is the corporate refusal to invest which both accounts for the slump and will prove hugely damaging to the economy over the long run- if it is not corrected.
At the same time, the existence of this corporate net lending belies entirely the notion that the economy is “broke”. The household sector may feel like it is broke. The government may be in danger of becoming broke, primarily because it insists on handing over money it doesn’t have to one part of the corporate sector; finance. But in 2009 the net income of the corporate sector was €38.8bn.
This is much reduced by the slump, but it is sitting idle – the corporate sector continues to be a net lender. Therefore to end the crisis the government should consider temporary measures to access these huge cash balances for investment purposes – taxes, levies, windfall payments and so on. These should be directed to key sectors of the economy which suffer a chronic investment deficit, infrastructure, rail, ports, broadband, health and education and so on.
The opposite course advocated by IBEC has already failed repeatedly. This is because it runs counter to the most basic tenets of economics. The investment of savings, primarily from households, is the key to future prosperity. Reducing those savings and reducing investment is to repeat the failed nostrums that caused this crisis.
The attack on the JLC is simply the latest round in the battle to lower real disposable wages which has already seen pay cuts and ‘levies’ in the public sector, as well as increases in indirect taxes, which, because they are based on consumption, adversely hurt and disproportionately hurt the poor.
In any normally-functioning market economy the financial functions of the three main sectors are as follows:
*Households save some proportion of their net incomes
*Corporations borrow that savings for the purposes of investment (mainly via the mediation of the banks)
*Governments can run either a deficit or surplus, depending on the fiscal policy mix
(For the sake of clarity we’ll leave aside the role of borrowing from/lending to the rest of the world)
However, as the chart below shows, this economy has not been a normally-functioning one for some time.
Source: CSO
*Over a prolonged period (2002-2008) the household sector has been a net borrower
* For the entire period the corporate sector has not been a borrower but has been a net saver, and has significantly increased its savings in the economic slump
* Therefore, the government is obliged to become a net borrower, since all sectors cannot simultaneously be net savers.
At the sectoral level the source of the deficit is simply this fact- now that both the household sector and corporate sectors are net savers government is obliged to become a net borrower.
How to correct this imbalance? Policy has been to reduce the government borrowing by seizing a greater proportion of the household sector’s income (via taxes, pay cuts and reducing the government ‘s own investment).
But it has failed for two reasons. The household sector becomes more fearful (not more confident, as some of the wilder supporters of this policy have claimed) and so becomes even more inclined to save, not spend. At the same, the corporate sector seeing its two main customers (households and government) reining in their own spending has no need to increase its investment and instead increases its savings. The economy goes into a tail-spin and the government borrowing remains stubbornly high.
Alternative
What is the alternative? The household sector is supposed to be a net saver in a normally-functioning market economy. Now it is- even if the brutal manner in which that has been achieved has been highly damaging. But the corporate sector remains a large net lender, when it should be a borrower for investment. The slump in investment arithmetically accounts for the entire slump in the GDP of this economy. It is the corporate refusal to invest which both accounts for the slump and will prove hugely damaging to the economy over the long run- if it is not corrected.
At the same time, the existence of this corporate net lending belies entirely the notion that the economy is “broke”. The household sector may feel like it is broke. The government may be in danger of becoming broke, primarily because it insists on handing over money it doesn’t have to one part of the corporate sector; finance. But in 2009 the net income of the corporate sector was €38.8bn.
This is much reduced by the slump, but it is sitting idle – the corporate sector continues to be a net lender. Therefore to end the crisis the government should consider temporary measures to access these huge cash balances for investment purposes – taxes, levies, windfall payments and so on. These should be directed to key sectors of the economy which suffer a chronic investment deficit, infrastructure, rail, ports, broadband, health and education and so on.
The opposite course advocated by IBEC has already failed repeatedly. This is because it runs counter to the most basic tenets of economics. The investment of savings, primarily from households, is the key to future prosperity. Reducing those savings and reducing investment is to repeat the failed nostrums that caused this crisis.
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