Economic war and profiteering

Michael Taft: There are some who contend that companies are taking advantage of the recession to cut wages, regardless of their need to do so. As a general rule, this could be dismissed as one more conspiracy theory, especially when looking at the headline rate of the recent Earnings and Labour Cost Survey.This shows that average hourly earnings in the industrial and financial sectors increased in the first quarter of this year, by 2.8 percent and 0.6 percent respectively (how the real devaluationists must be despairing). Yet, when one looks into the details of the tables produced by the CSO, one sees an interesting picture emerging. Maybe those conspiracy theorists might be on to something.

Let’s take the manufacturing sector – since this is a major export platform. Average hourly earnings increased by 2.7 percent in the 1st quarter of this year. However, these gross figures don’t tell the full story. The CSO helpfully breaks down hourly earnings by strata. What do we find then?

Management and professional staff, who make up less than 25 percent of all employees in the manufacturing sector, took a substantial increase – over €2 more per hour. All other employees took a hit – Clerical workers saw their hourly earnings decline by 48 cents while Production workers, who make up nearly 60 percent, fell by14 cents per hour. The average weekly earnings for the different strata are now:

Management / Professional: €1,245
Clerical / Sales / Service: €714
Production: €602

Let’s be clear about what is not going on. It’s not that firms are reducing their total hourly wage costs, which would explain why the majority of employees have seen their hourly earnings reduced. In total, hourly wage costs increased. What we are seeing is that reductions in the pay of lower paid employees are helping fund increases for those at the upper end of the enterprise structures.

And though the CSO doesn’t break down the data further within these, we shouldn’t be surprised to see those at the very top of the management structure receiving even higher pay increases than professionals and associate professionals.

Now I may be reading this wrong, but it certainly looks like many, many companies are using the recession, the general ‘share the pain’ rhetoric, to ensure that the majority of employees truly do get the pain, while a minority – those at the top – continue to amass pay increases.

One final thought. Real devaluationists claim we must cut our wage costs in order to become ‘competitive’ - a highly contestable position, rarely backed up by concrete data. Nevertheless, Jim O’Leary, articulating this view, suggested it might not be music to the ears of David Begg. Whatever about the tune, Mr. O’Leary is addressing the wrong group. Workers and trade unionists are already finding their earnings being cut. However, there is one group that seems oblivious to the concerns of the real devaluationists’. Might I suggest they contact this group directly: IBEC, Confederation House 84/86 Lower Baggot Street Dublin 2.

More data on this issue is available here.

Reaction to Jim O'Leary

Jim O'Leary's article in today's Irish Times, arguing that "given the enormous scale of the problem, it would be fanciful to suppose that it can be solved without at least some reductions in public spending, and anyone who doubts this cannot really be regarded as a serious participant in the public discourse on the matter", has generated quite a debate in the blogosphere. Michael Taft, of Notes on the Front and Progressive Economy, parses Mr. O'Leary's piece here, and it is also being debated on Irish Economy here.

Time to cap salaries?

Writing in today's Guardian, Andrew Simms - Policy Director of the New Economics Foundation - argues that the time has come to cap salaries, noting that:

One of the fathers of modern banking, JP Morgan, believed that to motivate people you didn't need a ratio of more than 10 between the highest and lowest paid. This is common knowledge in management school, but seemingly ignored in the workplace.

We know now all too well how destructive are the forces of seeking profit and pay maximisation for their own sake. Another benefit emerges of capping high pay or setting a maximum ratio between highest and lowest paid: beyond that level, an executive's performance has to be judged against achievements other than personal accumulation. So, instead of status derived from higher incomes, the desire to excel can instead be directed toward the social contribution and environmental performance of the bank or company involved.

You can read the rest of Andrew Simms' piece here.

STT bid for Eircom

Donal Palcic: The fifth change of ownership of Eircom now appears imminent with Singapore Technologies Telemedia (STT) very likely to make a deal to acquire the company in the coming days. While STT's latest offer price is not known, it is unlikely to be significantly higher than its original bid of just under €110 million given the scale of Eircom's debt that it would assume.

The STT bid was backed by Eircom's ESOT who favoured an industry player over other private equity investor bids. The hope is that an industry player will make a long-term commitment to the company and invest in Eircom's ageing network.

Since STT's bid for Eircom now appears inevitable, and a Government deal to acquire Eircom's network infrastructure which I argued for in a previous post is now wishful thinking, what will now happen to one of our country's most strategic assets is very much up in the air.

While the hope is that STT will make the required investment in Eircom's network infrastructure, STT is a commercial operation that will demand a return on its investment. It is also taking on an enormous amount of debt. It is therefore hard to see STT investing on the scale (and at the speed) required.

The Government still has an important role to play in the development of our national telecoms network assets. It needs to maximise the use of its current fragmented portfolio of assets by amalgamating their ownership/management and providing 'one-stop-shop' access to these assets on an open wholesale basis. Creating a State-owned telecoms network utility to manage these assets would seem like the best option to achieve this. The ownership of any newly built infrastructure (ducting laid down as part of road construction and other civil engineering projects) should also be transferred to this new network utility company. In addition, the company could itself invest in infrastructure in areas where it deemed it necessary, removing the need for the Government to foot the bill for projects such as the MANs.

Sadly, I fear that the Government will keep following its 'do minimum' and 'let's wait and see what happens' approach, Eircom's new owners are unlikely to invest heavily in its network, and Ireland's telecoms infrastructure and broadband services will continue to fall further behind her European peers.

Deflationary Threat is Real and will lead us into deeper mire.

Paul Sweeney: The revenue shortfall in last night’s tax revenue figures to the end of July is a hefty €575 million greater than the Department of Finance had forecast only three months ago. If this deflationary tax revenue trend continues, the Government will not meet its projection of €34.4 billion in tax revenues this year. Even more cuts will then be proposed by most economists and the commentariat. Deflation will really take off then.

The exchequer deficit has now grown to a staggering €16.4 billion at the end of July, up from €14.7 billion at the end of June. The deficit is almost €10 billion higher than it was this time last year. It includes €6 billion in payments to bail out failed private sector banks, in borrowed funds which will ultimately be from our tax Euros.

Consumers are holding back on spending – with a fall in VAT the main reason for the fall in taxes, followed by the income tax take falling, as people lose their jobs or see their total incomes curbed, with less demand.

Capital gains tax revenues are less than a third of what they were this time in 2008, while the stamp duty yield has dropped 64 per cent since last July. It had already fallen then, with the collapse in the Government-tax-incentive-driven and bank-driven property boom. This is the result of the utter folly of the government’s shift from income taxes and corporation taxes to consumption and property related taxes from the late 1990s onwards. It should be remembered that this shift was cheered by economists arguing against progressive taxes, i.e. those advocating low taxes on incomes and corporations, and high taxes on consumption.

With the huge borrowing requirement for both day to day and investment spending, it is not possible for Ireland to borrow more for a “Stimulus Package” as some believe, as a wide open economy.

But, on the other hand, the government could make economic deflation worse by massive cuts in public spending, especially for the vulnerable and low-paid, combined with increased taxes. Many of McCarthy’s recommended cuts should be rejected, particularly those which are especially regressive and those which have a deflationary impact.

Overall, the resolution of Ireland’s economic crisis will be especially difficult. It will be particularly difficult if many policy wonks neglect deflation, which - as yesterday’s figures demonstrate - is already with us. Economists who are now openly advocating deflation as an economic strategy are seriously misguided. If they win out, further deflation will lead us in to even deeper crisis.

Financial exclusion - a lucrative business for some

Paula Clancy: Last December, TASC organised a seminar on financial exclusion. The day before, Sean Fitzpatrick resigned as chairman of Anglo Irish Bank following revelations that, over a period of eight years to 2007, he had temporarily transferred loans with Anglo Irish Bank to another bank. Earlier, it had emerged that Mr. Fitzpatrick and his fellow directors had been granted loans totalling €150 million by Anglo.

The banking crisis which erupted towards the end of last year not only highlighted the crucial role played by financial institutions, both as providers of credit and as investment vehicles. It also showcased the manner in which those at the top of Ireland’s money pyramid reaped rewards from the financial sector during the good times.

Yet while those at the top were enjoying easy access to credit, not to mention generous bonuses for those working in the financial sector, many of those at the bottom of Ireland’s money pyramid were struggling to survive without a transaction bank account, a savings product or access to revolving credit (such as a credit card or overdraft).

They are the ‘financially excluded’, dependent’ for credit on legal and illegal moneylenders (there are currently 52 licensed moneylenders in Ireland, 36 of whom operate ‘doorstep collection’ businesses) charging exorbitant rates of interest. Without access to a bank account, they may rely on cheque-cashing operations for access to cash – at a price. Typically, cheque-cashers charge a percentage of the cheque’s value in addition to a handling fee.

Financial exclusion is a highly lucrative business for some.

Even at the height of the Celtic Tiger, business was also booming for 21st century pawnbrokers. One such operation – a global business with franchise outlets in Ireland - advertises its business in the following terms:

“[...] we provide today’s consumers with a modern, clean, professional and convenient environment in which to sell used or unwanted goods for instant cash. We also offer a great place to shop for pre-owned bargains plus a range of financial services catering for all sectors of the population including [those] who do not have access to bank accounts or mainstream credit facilities.”

And there’s no shortage of customers who have no choice but to avail of their services.

According to the most recent figures, 12 per cent of the Irish population suffers from financial exclusion – the fourth highest level in the EU-15. Financial exclusion is defined by the European Commission as “a process whereby people encounter difficulties accessing and/or using financial services and products in the mainstream market that are appropriate to their needs”.

Estimates of the number of Irish adults who are ‘unbanked’ (without access to any form of bank account, whether transaction or deposit) range from 10 to 19 per cent. While the unbanked may not be financially excluded, since they may have access to non-bank financial products, those who are financially excluded are almost always unbanked.

As the recession bites further, Ireland’s levels of financial exclusion are set to rise.

Research carried out by the Combat Poverty Agency prior to its amalgamation into the Office of Social Inclusion at the end of June has shown that income inadequacy is one of the primary factors factor driving financial exclusion, while research carried out on behalf of the European Commission has found that labour market changes are among the key causes of financial exclusion.

So what can be done?

We need to ensure that the current debate surrounding the role played by our banks also focuses on the banking needs of people living in poverty. In a welcome move, the bank recapitalisation scheme announced by the Government last December included a clause obliging banks to promote basic bank accounts to low-income groups. However, little progress has been made since and, apart from the fact that they will include cash cards free of stamp duty, the minimum features which will be offered by these accounts have yet to be defined, made public and debated.

In accordance with European best practice, the key features of a basic bank account should, in addition to a cash card, include the following: no minimum opening or monthly balance; free transactions, and flexible account opening requirements.

The obligation to provide a basic bank account should apply to all retail banks operating in Ireland, rather than only to those banks being recapitalised – which, in effect, will mean that the financially excluded will be limited in their choice of service provider.

In the short term, there is also an urgent need to ensure that measures taken address the economic crisis do not further exclude those at the bottom of the money pyramid. In this regard, the Government decision not to pay the Christmas Social Welfare bonus this year, which will increase the financial pressures on low income households, is likely to force families to resort to moneylenders in order to meet seasonal expenses during what is generally a bumper month for the moneylending industry. Likewise, the social welfare cuts recommended by An Bord Snip Nua, if implemented, will increase the risk of financial exclusion for many social welfare recipients.

In the longer term, the challenge is to ensure that reducing economic inequality in all its manifestations becomes a cornerstone of public policy.
Originally published as an opinion piece in the Irish Examiner, August 3rd

Exchequer Returns confirm impact of Government deflationary strategy

Slí Eile: Predictably, the collapse in retail sales, among other things, is taking its toll on Exchequer returns as signalled in today's latest figures. The Irish Times reports Fergal O'Brien, IBEC economist, as saying:
“While deflation will help the economy restore some competitiveness it appears that it is also going to be a significant drag on taxation revenues.”

"Markets can be wrong and the price is not always right"

Slí Eile: Of relevance in NAMA-land, writing in yesterday's Financial Times Richard Thaler reports that the 'Efficient Market Hypothesis' is under strain. EMH rests on two pillars:
* The Price is Right
* No Free lunch
Comments?

Social welfare cuts and NAMA

Peter Connell: Brian Lenihan is quoted in Saturday’s Irish Times as insisting that the banking crisis is ‘entirely separate’ to the financial crisis. This is patently untrue. It represents an attempt to decouple the two issues as the government realises that the simultaneous cuts in public spending that will form a large part of the December budget, and the bailing out of the banks via the NAMA gamble, will be politically toxic.

What links the financial and banking crises (Lenihan omitted to mention the crises in unemployment, growing poverty and plummeting GNP and domestic demand) is the fiscal deficit and the national debt. The government, with the support of the Dublin Consensus, regard these as setting the framework for all policy discussion relating to how the country can emerge from the crisis. Colm McCarty has helpfully provided the media with a shorthand for describing this with his pithy ‘€400 million a week’ catchphrase. David Murphy, RTE’s Business Correspondent, simplified things even further for us by stating that the government is ‘losing €400 million a week’. On the same Morning Ireland programme, he suggested we’re in the same position as a spendthrift teenager blowing his pocket money. The bond markets (our parents!) look on and are not impressed. Add in the wheeze of publishing ‘Ireland’s Debt Clock’, where ‘you can see Ireland’s debt mount before your own eyes’, and the case for slashing public spending seems irrefutable.

One of the saner voices in the national media over the past few weeks has been Dr. Michael Somers, director of the NTMA. The NTMA’s annual report for 2008 makes for very interesting reading and, in some respects, is a useful antidote to the wilder outpourings of the dismal scientists. The report doesn’t underestimate the scale of the rapid growth in the state’s indebtedness. What it does do, though, is set this financial crisis in context. Here are a few snippets from the report that are worth airing:
• the National Debt increased from €37.6 billion at end 2007 to €50.4 billion at end 2008. The National Debt/GNP ratio increased from 23.3 per cent at end 2007 to 32.2 per cent at end 2008.
• the General Government Debt/GDP ratio stood at 43.2 per cent at end 2008, up from 25 per cent at end 2007. This was well below the euro area average of 69.3 per cent. The General Government Debt measure does not allow the €21.4 billion in Exchequer cash balances (more than 10 per cent of GDP) to be offset against the gross position.
• deducting the value of the National Pensions Reserve Fund and other funds managed by the NTMA from the gross debt would give a Debt/GDP ratio of around 33 per cent at end 2008. Subtracting Exchequer cash balances reduces the ratio further to 23 per cent. (None of this is reflected in our debt clock).
• forecast debt ratios for 2009–2013, accepting for the moment the figures set by the Department of Finance in the April budget, would see the Gross Debt/GDP ratio rise to 77% (or 73% allowing for cash balances). Both of these figures would be well below the EU average.
• interest payments on the debt were 3.8 per cent of tax revenue in 2008; the equivalent figure was 26.7 per cent when the NTMA was established in 1990. In 2009 the forecast is for 9.4 per cent of tax revenue, reflecting higher interest costs on a larger debt and lower tax revenues. While the interest burden will increase substantially over the period 2009–13, it will be no greater than the levels experienced in the mid-1990s.

Allowing for the fact that the government’s projections for economic growth and tax revenue are almost certainly optimistic, it’s quite clear that the scale of the debt, while serious, is manageable in the medium term. And this is according to Michael Somers.

On the other hand, the Dublin Consensus and the ‘€400 million a week brigade’ insist that our international credit rating is slipping and point to reports issued over the summer by Standard & Poor’s, Moody’s and others, using this as a rationale for swingeing cuts in public spending. What’s interesting in these reports is the focus on the banking crisis and NAMA. Standard & Poor’s very explicitly links the downgrading of Ireland’s rating from AA+ to AA to the enormous risks associated with NAMA – ‘We consider that NAMA's ability to meet its financial objectives is uncertain because of the risk that cash flows from its assets could fall below its funding costs if their underlying performance worsens compared with NAMA's expectations at the time of purchase. At the same time, we believe the recently announced losses (for the six months to the end of March 2009) at nationalized Anglo Irish Bank Corp. Ltd. (A-/Watch Neg/A-1) highlight both the continued fragility of the Irish banking sector and its reliance on the government for ongoing financial support.’

As the government formulates the December budget during the autumn, and we’re repeatedly told that the country can no longer afford current levels of welfare spending, ministers will desperately seek to disguise the fundamental link between our fiscal and banking crises. And if the budget does implement those cuts then a bright light needs to shine on that grubby transaction that will see money taken from the unemployed to prop up our profligate banks.

Let them eat Cake

Slí Eile: Economics is a neutral science - don't you know. ESRI authors Anne Jennings, Seán Lyons and Richard Tol have just completed a working paper 'Price Deflation and Income Distribution'. Writing, today, on irisheconomy.ie Richard Tol sayings that declares that:

A 3% cut in nominal benefits would therefore mean that the poorest people in Ireland would see a rise in their real income.

They argue that:

Therefore if one wishes to justify a reduction in social welfare rates by falling prices, a 3% reduction might be more appropriate.

Just - if one wishes - here is our best advice like. No doubt we will hear about 'research by the ESRI shows...' for the coming months as the ground is prepared for a cut in welfare payments in December (by 3% mind you instead of 5%).

They acknowledge, however, that price deflation has been less for lower income groups than for higher income groups but the extent of price deflation in the 12-month period ending June 2009 is such that a cut of 3% in nominal benefits allied to income-related adjustments to public authority rent would leave welfare recipients better off - just a tiny bit but enough to exceed 0% by a few decimal places when the adjustment is factored in. charming.
How many readers of this site and irisheconomy are in the bottom income decile? Could we hear from such persons about what it is like to live on something like €200 to €500 per week?
A major deficiency in the timely approach by the ESRI authors is that nobody knows for sure how incomes have evolved over the last 12 months. We have a measure of price inflation (or deflation) across 13 household spending categories but we don't have up to date measures of income - wage and other sources - over the last 12 months. Another major deficiency is that no account is taken of the existing distribution of income. Is it just, acceptable, workable? And who is to say that a 3% reduction for the bottom decile is the same as a 3% cut for the higher top income decile?
I regard any suggestion of a cut in social welfare payments to be an immoral 'haircut' - especially coming from sections of society who haven't got a clue what it is like to live in income poverty already.

More on NAMA ...

On the eve of publication of the draft NAMA legislation, Mike Allen of Focus Ireland wrote a guest post for PE arguing that NAMA must generate a social dividend. Today, in a guest post on Irish Economy, Odran Reid and David O'Connor point to NAMA's potential as a catalyst for better planning. Meanwhile, over at Notes on the Front, Michael Taft puts the Nirvana of Nama into context.

A wry take on NAMA and other links

"All citizens shall extemporise pompous and reactionary views on dole scroungers, trade unions, pampered schoolchildren and other social parasites who, unlike themselves, are a “burden on the nation”. Read the rest of Fintan O'Toole's wry take on the draft NAMA legislation here. And - also in the Irish Times - Tom Geraghty of the PSEU throws some light on public sector pay. Finally, John Keane has an interesting piece in yesterday's Guardian, arguing that a failure of democracy gave rise to a failure of markets.

Sara Burke on McCarthy cuts ... and some alternatives

Health policy analyst Sara Burke - who's post for PE on the health cuts proposed in the Bord Snip Nua report is available here - has an excellent op-ed piece in today's Irish Times.

She concludes that:

There are ways to stop waste and inefficiencies and to generate new money without hitting patient care. These are political choices that just have not been chosen. Unfortunately McCarthy’s shopping list of health cuts does not bring us much closer to them.

Read the full article here.

Homo Economicus Dublinius

Slí Eile: Commenting on this website, anonymous said

...as a private sector worker married to a nurse I can assure you that the reality of life for us is very different to the majority of people who post to this site.

Fair point, although one cannot presume the background of all who contribute, comment or read any site on the internet.

Lets assume Home Economicus Dublinius is a 50 year old male, professor of economics in the Free University of Dublin who earns €120,000 a year, plus external research consultancy fees permitted by his institution of 25%, plus an unknown income stream from investments in property, bonds and equity (being a smart connoisseur of the markets, you know).

OK, Homo Economicus Dublinius has had to take a hardship hit this year of 10% in ‘pension’ levy on his base salary of €120,000. That translates into a nominal wage income cut of, say, 8% (on €150K).

Add to that, Government steals another 5% in various stealth charges and taxes. So the additional burden is over 10%. But, hold on, given sauce for the welfare goose we must factor in the impact of price deflation for the gander. So, his real cut in take-home pay is not as much as 10%. Still, it's hard – some adjustments to the property portfolio....

Now, someone on, say, €25,000 a year (cleaning attendant at the Free University of Dublin) needs to take a nominal pay cut of 20% to help the national war effort to make Ireland competitive again, and get the bloated public sector off the backs of hard-pressed taxpayers in the ‘real economy’ (read: private sector minus banking, property and estate). Or, more effective still, let's see the attendant’s job phased out altogether since she is on a contract and does not have to be replaced (the softest target surely in the public sector).

Where does that leave us?

This is not idle speculation.

Have a read of Kathy Sheridan’s piece in the Irish Times a couple of weeks ago (Taking Stock of the Newly Destitute):

Or, take a real couple this time:

A couple in their mid-40s who had worked hard since their teens, each running a small business, had bought an old house and were slowly doing it up, but failed to sell their first home before the slump. Now they can’t sell either. Both businesses have come to a stand-still, but for welfare purposes they are regarded as asset-rich so are entitled to no benefits. They are currently surviving on hand-outs from family members and the Vincent de Paul, as well as food parcels left on the doorstep by concerned friends.

And some economists are calling for cuts in welfare spending as well as reductions in the minimum wage. Well, let's say it again: it is one thing for someone in the top income decile in relatively secure employment to take a 10% cut in income; its quite another matter for someone in the middle income bracket to lose practically all income all at once (such as in the example above), and yet another matter for someone who is already among the ‘working poor’ (i.e. close the statutory minimum wage) to take a cut of 5, 10 or more percent.

Voluntary activity and active citizenship: latest CSO figures

Colm O'Doherty: The 'message' that Irish Times Social Affairs Correspondent Carl O’Brien has taken from the recent CSO Report on Community Involvement and Social Networks 2006 – “community spirit is alive and well” (Saturday 1st August, 2009) – is overly simplistic. While the CSO Report does provide us with some useful statistics, we should be careful not to read too much into them. Indeed, it can be argued that the CSO Report reveals that in Ireland, as in the UK and Australia (Home Office, 2001; Australian Bureau of Statistics, 2006), voluntary activity is largely the preserve of well-educated, middle aged, middle class men and women. What we can therefore take from this Report is that some form of 'community spirit' appears to exist within specific demographic sections of Irish society.

Three major limitations of the Report are that it does not contextualize its data:

• It does not provide us with a social policy context or compass within which we can situate these statistics.
• There is no “quality context” within which the quality of people’s social networks or their social value is analysed.
• The “motivation context” is absent.

It is misleading. without an appropriate social policy analysis setting out the unique trajectory of Irish voluntary activity. to draw any conclusions from these statistics. Voluntary activity is an important social asset in Ireland , the UK and Australia. In all three countries, it is increasingly viewed as a mechanism for social inclusion, civic engagement and the promotion of social cohesion. In the UK and Australi,a voluntary and mutual aid societies developed in the context of social need triggered by urbanization and industrialization and the associated breakdown of traditional local forms of welfare provision. Voluntary structures and endeavours were unevenly distributed, and services were often restricted to certain identified populations.

While nation states such as Australia and the UK were prepared to guarantee citizen welfare through the development of state welfare services, the Irish state – a weak state – continued to rely on the voluntary sector to provide such services. The weakness of the Irish state – a consequence of the Catholic theory of subsidiarity and civil war politics – led to the growth of voluntary action based on charity. Within Ireland’s uneven welfare pluralist society, the voluntary and community sector has, in many instances, been the sole provider of care.

Under this policy arrangement, volunteers are more focused on fundraising for basic equipment for primary schools and hospitals, and are less engaged in initiating and supporting activities which generate positive social change. Despite the rhetoric of “active citizenship” contained in the Taskforce on Active Citizenship Report (2007) and a succession of policy documents committing the state to supporting a vibrant community and voluntary sector, a great deal of voluntary effort has been expended on a “finger in the dyke” effort to plug the gaps in the state’s social protection frameworks.

The quality of voluntary effort is glossed over in the CSO Report and the Irish Times article.

Respondents to the QNHS (Quarterly National Household Survey) were asked if they had been actively involved in voluntary or community groups in the previous twelve months. Active involvement was defined as attending meetings, being a committee member, or taking responsibility for some activity, but it specifically excluded attendance at mass or church services.

Overall active involvement in voluntary and community groups was reported by 28% of persons aged 15 years and over. Sports groups were most frequently reported (11%), while the least frequently reported form of group involvement was involvement in a political group (1%). (CSO Report, 2009:8)

We should be perturbed about the very low level of active citizenship which this headline statistic reveals, and we should also recognise that there are qualitative differences between voluntary effort focused on hard-to-reach groups ( marginalized young people, immigrants, socially excluded communities, the disabled) and voluntary work with large scale mainstream semi-commercialised bodies (sporting bodies, artistic and cultural organizations). Participation in mainstream cultural/recreational voluntary activities is attractive because it boosts credentialed human capital levels (thereby enhancing career prospects) through social and leisure networks. This type of volunteering, as O’Brien points out, is growing as unemployment levels increase and is associated with the “project of the self”. This trend in volunteering is reflected in, and perhaps related to, an increase in individualism in countries with some shared cultural characteristics such as Australia, the UK and Ireland. An individualism framed around personal values, lifestyles and a self-interested engagement with volunteering – a “polishing of your CV” opportunity. In this regard volunteering becomes less of a social contract creating social capital, and more of a consumer choice underpinning the formation of human capital.

The CSO Report tells us that certain sections of society (older people on their own, insecure tenants, rural dwellers, the unemployed, non-Irish nationals, the less educated, people with disabilities, individuals with a poor health status) have low levels of participation in civic activities, and consequently low levels of social capital. The Government is responsible for developing policy and practice frameworks which ensure that volunteering is not primarily a project of the self, with little benefit for others, and that it is a real force for social inclusion and social cohesion. In the face of the McCarthy Report’s recommendations that we scrap the Family Support Agency, the Community Development Programme and the Active Citizenship Office, the future development of volunteers, as collective citizens who are contributing to the development of social capital through contact and trust-making in their different neighbourhood and community structures, looks bleak.

My final point is that we need to fund and engage in ongoing medium-term, fine-grained, qualitative research into social network and community activities, and their contribution to social capital formation, if we are to increase our understanding of voluntary activity in a meaningful fashion.

We deserve it

Michael Taft: Just to ensure that everyone knows why we must all share the pain coming down the line, Cathal O’Loughlin (writing in today's Sunday Business Post) reminds us: it’s because we are all responsible for the economic meltdown. Every one of us is implicated in the economic crimes of the past decade. Therefore, we must all do our appropriate ‘hard-time’. For instance, Cathal writes:

‘Willingness to pay house prices grossly out of line with Irish incomes . . . motivated developers to keep acquiring lands at inflated costs, and to keep building.’

Now we know. If only we had all said no, stayed in our parents’ house, stayed in those bedsits and one-room flats (even if we had children); it was because we wanted to live in a house that we owned (rather than pay high rents to landlords with no equity in return) – it was we who gave the wrong market signals to developers and land owners and bankers and Ministers. Serves us right.

On the way to making to making us feel guilty, Cathal makes other points about our over-indulgence. One fact he pulls out is that between 2001 and 2007 we doubled our expenditure on foreign holidays. This sounds pretty indictable until we look behind the numbers to see what it really means.

Using the CSO’s National Accounts, we find that ‘expenditure outside the state’ (which is not the same as holidays; it includes business and other purposes) increased from 4.8 percent of total consumer spending to 6.3 percent in the seven years that Cathal surveys. Okay, an increase – but 1.5 percentage points.

But, of course, there would be an increase in foreign holidays – the advent of low-fare airlines, the discovery of low-price destinations, competitive tour packages. For hundreds of thousands of people, this opened up new ‘luxuries’ that in years previous they couldn’t have availed of. But another reason for the increase is the fact that the population increased – by half a million in those six years. That’s likely to raise expenditure on all items, not just foreign holidays.

What did that increase amount to annually over six years on a per capita basis? €116 per person per year. That could not, for huge swathes of the population, be called extravagant.

However, it’s when we break down the expenditure on foreign holidays that we get an interesting picture. Though this data comes from the 2005 Household Budget Survey, the decile breakdown shows the distribution of income. Obviously, the wealthiest 10 percent spend more on foreign holidays – more than twice as much as households in the middle deciles, and nearly six times as much as those on the lowest decile.

Seventy percent of households (amounting to nearly two-thirds of all adults) spent less than the national average on foreign holidays – which shows the extent to which such expenditure is concentrated among the top earners.

This is of a piece. Take global numbers and assign a political value to them, without reference to the concentration of income, wealth or expenditure (on non-essentials, anyway). That political value then becomes a stick to beat ‘everyone’ with, even if ‘everyone’ only gets a small slice of the action.

But Cathal needn’t worry. Spending on overseas trips fell by 28 percent in the first quarter of this year. Fewer people are going abroad. Unemployment, wage freezes, fear over the future will do that. And if that spending decline disproportionately hits low and middle income groups – well, according to Cathal, we deserve it.

NAMA: And then there are the unknown unknowns

Slí Eile: In the immortal words of Donald Rumsfeld: "There are the known knowns and the unknown knowns. And then there are the known unknowns. And then there are the unknown unknowns". Rumsie may have been referring to Iraq but it could have been NAMA.We urgently need a debate now - on what sort of public ownership and control is required.

A curious feature of the debate on NAMA is the extent to which uncertainty, risk and flexibility apply. Notions of 'paying over the true value', 'writing down', flexible bond-equity swaps to free up cash, discretion to impose levies or not. Fintan O'Toole has already pointed to the odd fact that payments into the National Pension Reserve Fund have been fast-forwarded to cover this year and next.

What is odd about this is that we are borrowing to pay into a Fund out of which, already, money is being re-directed temporarily from long-term pension liabilities to recapitlisation of the Banks. What about the fuss over borrowing and the need to bring it down to 3% of GDP quickly and the impossibility of extra borrowing and the risk associated with same (whether off-balance sheet or on). It is all very odd. One rule for bankers (and developers) and another for welfare recipients and users of public services.

If this isn't the biggest reverse bank robbery in history what is it?

Gambling with a total annual budget of around €60billion Euro and a total national (Government) debt of the same amount and more, we are now taking on a cocktail of toxic assets whose book value is €90billion and real value is unknown and purchase value (for you and me) is somewhere in between. It is Rumsfeld's 'unknown unknowns' that scare me. 'What has posterity ever done for us" is one way of dealing with the matter (i.e. transfer the risk and the tax burden to the next generation). But, that is not moral.

Quite clearly, the whole business is an immoral mess. In fairness to those tasked with legislating and dealing with the current mess (for which of course they cannot avoid significant responsibility) it is not so clear exactly what should be done. Nobody is saying that doing nothing is an option. Delaying action is not an option, either (although the NAMA process is extroardinarily long considering the pace of economic events and the credit crunch on businesses). Roughly there are the following options (readers may wish to add a few more or re-phrase these):

Proceed as the Government is doing now through the draft NAMA legislation with all the risks involved;

Change NAMA (e.g. version 2.0 per Patrick Honohan);

Let the banks go to the wall post-guarantee or get taken over by some foreign bank, merge, clean up etc etc;

Set up a new State Bank (and leave the existing banks under guarantee until 2010 without fresh capitalisation);

Nationalise (or take majority interest in) the remaining Irish banks - either temporarily or long-term;

Writing on 22 May, Jim Stewart said (NAMA or nationalisation unlikely to work)

But there is one area in which it is vital that immediate action is taken, and that is to ensure that credit and loans flow to small and medium sized enterprises, and not just those involved in exporting. Large corporate entities and the multinational corporate sector have other sources of finance. Some large firms have no need for additional borrowing. What is needed is a new entity designed to lend funds to the SME sector. Such an entity cannot be “for profit”. It cannot be run on strictly commercial lines, because in the current crisis lending to SMEs is certain to result in losses. This new entity could be funded on the basis that 20% of loans would fail. Lending is thus made with the knowledge that there is an explicit subsidy. The return to the State (and the economy) is indirect in terms of job preservation, so that when the economy recovers there is an existing base which is a potential source of growth and job creation. Such a policy could also act as a certification device to other banks. It would reduce risk to other banks provided claims on collateral were ranked below that of additional funding from other banks

Well, Fine Gael, at least, concur on the need for a new State Bank. Richard Bruton commented, today:

Furthermore, there is no guarantee that this huge gamble will result in a resumption of normal credit flows to struggling Irish businesses. Irish banks will remain poorly capitalised and concern will turn to new categories of non-performing loans. If restoring credit flows is the prime objective of banking policy, taxpayer investment in a new, State-owned bank with a clean balance sheet and an appetite to lend, such as Fine Gael’s proposed National Recovery Bank, would be far more likely to succeed at a fraction of the risk.

My view is that, given the absolutely critical nature of banking and finance to the economy and society and the complete failure of the Irish financial system to fulfil its social role, there is no just alternative to nationalisation at this point. As I argued, previously:

An extremely low level of share prices provides the best of all opportunities to nationalise now. Allied to a National Recovery Bank credit needs to be put on a new footing driven by social need and not profit. What you don't own you cannot control - at least properly. Banking is too important to be left - ever again - in the hands of those who have wrecked the Irish economy and forfeited our children's future.

Draft NAMA legislation

Click here to download the proposed legislation, and here to download the explanatory memorandum. The Minister's accompanying statement is available here.

In case you missed it first time around, click here to read Jim Stewart's post on NAMA, published in May.

Update:

Simon Carswell has a useful piece on the draft legislation in today's Irish Times, and Brendan Keenan's take in the Independent in available here. For political reaction, click here to read the statement by Labour's Ruari Quinn (Joan Burton is on holliers), and here to read the reaction from Sinn Fein's Finance Spokesperson Arthur Morgan. The Green Party's Dan Boyle has tweeted that it is the 'least worst of a number of bad options'. A statement by Fine Gael's Finance Spokesperson Richard Bruton is available here. Finally, SIPTU's Jack O'Connor's reaction is available here.

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Guest post by Donal Palcic: Next Generation Broadband and the Smart Economy

Donal Palcic: I read with interest the recent first report of the DCENR’s Knowledge Society Strategy process (entitled Technology Actions to Support the Smart Economy). The report claims that Ireland is now one of the “most advanced countries in the world for wireless and mobile broadband technologies” and that a “competitive market is delivering broadband speeds for Irish consumers from a range of broadband providers”. The report goes on to detail a number of action areas that will deliver the critical next generation network (NGN) infrastructure necessary for the development of a smart economy. The majority of the report then devotes most of its space to describing initiatives such as the recently announced Exemplar network.

Nowhere in this report are any of the key issues surrounding the development of a true NGN mentioned or discussed. The report’s claim that we have a competitive broadband market is also highly questionable given Eircom’s dominance of the fixed-line market and Ireland’s perennial position towards the lower end of most EU/OECD broadband scorecards. The Forfás response to last year’s NGN consultation paper shows that Ireland is currently not well placed to take advantage of future trends in broadband. Although the number of broadband subscribers has increased significantly since 2005, Ireland’s relative position has not improved as other countries are moving ahead at an even faster rate. The fastest speeds available in Ireland currently lag those of our European counterparts while the cost of our fastest broadband services is relatively higher.

A quick perusal of the latest ComReg quarterly market data (for Q1 2009) shows that there are now over 1.27 million broadband subscribers in Ireland. An examination of the breakdown of broadband subscriber numbers by subscription type presents some interesting facts:

DSL subscribers make up approximately 53% of overall broadband subscribers in Ireland, while the mobile broadband market, which has recorded explosive growth in recent years (over 90% increase in subscribers over the past year alone), accounts for some 28% of subscribers. Eircom dominates the DSL market where it provides 96.6% of DSL access either directly (Eircom retail) or indirectly (wholesale bitstream). Only 3.4% of DSL access is from unbundled local loops (LLU), which is significantly behind the EU average where LLU constitutes 44% of all lines supplied by competitors (ECTA Broadband Scorecard Q3 2008). The lack of local loop unbundling and the high price of line rental charged by Eircom is arguably a significant factor behind the considerable growth in mobile broadband subscribers (particularly in the residential market) and further evidence of Eircom’s dominance in the fixed-line market.

So where do we actually stand in terms of developing a next generation network? The Knowledge Society Strategy report ignores the most important obstacle to developing a NGN in Ireland, namely Eircom’s fixed-line network and the critical local loop (last mile) infrastructure. The last mile is a key area of concern given the lack of investment by Eircom in this area. The current local loop infrastructure, which is largely twisted pair copper, is fast becoming incapable of delivering currently available bandwidth-intensive services. The services of the future (3D TV etc.) will require even higher levels of bandwidth. While cable operators such as UPC are investing in infrastructure capable of providing speeds of up to 100Mbps, such services are only available to a relatively small (mainly urban) portion of society. In order to develop a true NGN, the deeper rollout of fibre across the national network (i.e. to the kerb (cabinet), to the home etc.) is necessary. Eircom’s local loop infrastructure thus constitutes the most significant bottleneck in the future development of next generation broadband services.

Two possible options available to the Government are:

1) Take Eircom’s network infrastructure back under public ownership (or if a deal on obtaining the network alone cannot be reached, take Eircom as a whole back under public ownership, separate the network element from the remaining business elements which can then be sold off while retaining the network). Eircom’s fixed line network should then be amalgamated with the entire portfolio of State telecoms assets (MANs, NBS, and the telecoms networks of the ESB, Bord Gáis, Irish Rail etc.) and managed by a new State-owned telecoms network company. The new company can then provide network services to private operators on an open-access basis across every level of infrastructure (first, middle and last mile).

2) Amalgamate all of the existing State telecoms assets under a new public network utility as above and construct a new national NGN in a greenfield approach.

Option 1 need not cost the Exchequer significant sums of money. A new State-owned telecoms network utility will be able to finance investment through revenues generated and its own borrowings. Eircom is currently up for grabs for approximately €100 million. While there are obvious issues surrounding the level of Eircom’s approximate €4 billion debt, the strategic importance of Eircom’s network is simply too large for the Government not to take radical action now and bring Eircom’s network back under public ownership. A failure to do so will simply ensure that Ireland falls further behind her European and international counterparts. Even if the Government has to take on some part of Eircom’s debt in order to obtain the network, this does not have to add to our ever increasing national debt and can be managed by the new State-owned network. When Telecom Éireann was corporatised from the Civil Service back in 1984 it inherited a loss-making business, approximately IRP£1 billion in debt and a network in dire need of investment. As a commercial public enterprise, it returned the company to profitability within four years, spent significant sums of money upgrading the network and managed to deleverage its balance sheet, all without any assistance from the Exchequer.

While Option 2 does not involve taking Eircom’s network back under public ownership (and therefore taking on some/all of Eircom’s considerable debt), the problem of access to, and investment in, the local loop infrastructure remains. Given that the local loop is currently one of the key barriers to the development of high speed broadband services, Option 1 is arguably superior to Option 2.

Provision of access to a fully integrated national telecoms network on an open wholesale basis would facilitate increased customer choice without any requirement for the Government to re-enter the business of telecoms service provision. It would also facilitate improved competition amongst service providers and equitable investment in infrastructure, whereby a State-owned network company can be mandated to invest in rural areas, preventing the deepening ‘digital divide’ which is already occurring as private operators only invest in more economically attractive, densely populated urban areas.

Given the rapid pace of technological development and the constantly increasing information needs of business and society, our telecoms infrastructure is as important, if not more important, than other strategically important infrastructure such as our road and rail networks. Simply put, high-speed broadband is now a necessity for everything from economic growth to social inclusion. While the initiatives outlined in the DCENR’s latest Smart Economy report are to be welcomed, the issue with the local loop infrastructure is far more important. If the Government acts now it can create a realistic physical platform for a truly competitive telecoms market and the basis for growth towards a smart economy, and in doing so facilitate Ireland’s future economic growth once it emerges from the current crisis.
Dr. Donal Palcic lectures in economics at the University of Limerick