The Irish Economy

In yesterday’s Prime Time, Paul Cunningham revealed that there is a break clause in the contract between DCC and Covanta. The write-up is here, and it is about as informative as the broadcast.

Under certain, unspecified conditions, either party is free to walk away tomorrow. Not having seen the contract, I can only guess that a ministerial campaign against government policy is not among those conditions.

Does this change the calculus of the desirability of incineration of Poolbeg? Two arguments have not changed. We’re still in breach of the landfill directive, and the alternatives to incineration are expensive and will take a long time to plan and build. Two other arguments would change their importance. We may need to pay less compensation to Covanta, but the signal “Ireland: Closed for business” would be louder.

It may of course be that both parties have invested so much already that they have no desire to walk away.

Cue the green trolls.

Brian Lucey makes the case for senior bond holders to bear a share of the Anglo losses post-September.   You can access his Irish Times opinion piece here.

The FT’s Lex column gives its pithy assessment of Nama.

A flavour:

Nama is an odd creature: part debt collection agency, part property developer. As well as toxic loans, it may end up with a portfolio of property which was collateral for the banks’ lending binge. It was meant to fix the broken banks, convince taxpayers they might be repaid and reassure the markets the banks’ liabilities would be met in full. Facing in three directions, it has not appeared convincing in any: slow, bureaucratic, initially indecisive, almost excessively transparent (every toxic loan is assessed individually).

It concludes a bit more hopefully.

The IMF has released three major studies on the fiscal situation in advanced economies.

The summary is here, while the papers are available at:

• Long-Term Trends in Public Finances in the G-7 Economies

• Default in Today’s Advanced Economies: Unnecessary, Undesirable, and Unlikely

• Fiscal Space

The apparently newly branded Central Bank of Ireland has released the latest summary data on mortgage arrears here.  

A total of 36,438 mortgage accounts were in arrears over 90 days in June 2010, up from 32,321 in March. This meant that 4.6 percent of mortgages were in arrears, up from 4.1 percent in March and 3.3 percent in September 2009.  However, mortgages in arrears have a higher average balance (€190,000 compared to an average of €149,000 for the full sample) so the 4.6 percent of mortgages in arrears accounted for 5.9 percent of the total outstanding mortgage balance.

The arrears on the overdue loans totalled €559 million in June. Those in arrears over 180 days are, on average, behind on 10 percent of their total balance.

Last month, Philip noted the new Central Bank release on Money and Banking. Philip pointed out the new presentation of the data in a more useful format, with figures presented for what is essentially an IFSC and non-IFSC breakdown.  I had meant at the time to chip in to note some other useful improvements but didn’t get around to it.

So, with this month’s release now available (with figures through July), let me first point out that the Bank are now making historical time series available (not sure a direct link works, so click on Statistics on the — newly rebranded! — webpage and then on Data under Credit, Money and Banking Statistics along the left hand side.)

The Bank are also now releasing figures that make the underlying credit situation easier to understand. Detailed figures on lending to households and non-financial corporations, including a breakdown by duration, are now available. The charts on year-over-year lending to firms and households in the press release are based on levels series that are cleaned for factors such as NAMA or exchange rate adjustments that affect the figures for total loans on the reported aggregate bank balance sheets.

Most useful of all, to my mind, is that the Bank now publishes figures for net amounts of new lending (i.e. new lending minus loans paid off) for both firms and households. For example, go to spreadsheet A.5 and click on the tab labelled Transactions and you’ll see these figures broken down by sector and maturity.

These figures are quite volatile from month to month. However, I ran up a chart (see below) of the three month moving average of net new lending to firms and households and it makes it pretty clear that there was a step down in credit availability in late 2008 and that net new lending has been negative for most of the past two years.

This time last year we were inundated with government politicians telling us that NAMA was going to get credit flowing. Well, there’s very little evidence of this occurring yet.

Simon Carswell reports on an interview with Anglo’s Mike Aynsley  and Maarten van Eden in this morning’s Irish Times.  The number that jumps out is the extra €20 billion Mr. Aynsley claims it would cost to wind down the bank.  

Winding down the whole bank would cost €20 billion – on top of the cost of the split, which stands at about €25 billion – he said.

Maarten van Eden, Anglo’s chief financial officer, added that the split option would also retain €47 billion of the bank’s funding, which would otherwise have to be provided by the Government.

This comprises €23 billion of customer deposits, €16.5 billion of wholesale funding and €7 billion provided by other banks, he said.

A few observations: First, the €47 billion does not include funding from the ECB and Irish central bank, which I presume would be available (subject to liquidity programmes in place) in the wind-down scenario.  Second, surely Anglo’s “deposit franchise” is dependent on the government’s liability guarantees, and again it is not obvious that these it would not be available in a wind down – after all, the bank is presently not engaging in any new business either.  Finally, even in the worse case scenario where the deposit funding disappears, would it really be that much more costly if the government had to borrow to pay off the funders directly?   As it is, the markets are well able to see through the consolidated balance sheet of the government and the nationalised (and semi-nationalised) banking system.  And even with the guarantee, Anglo must offer premium rates (e.g. 3.5 percent on one-year deposits).

It would be good to get commenters’ views on the €20 billion premium cost estimate.

With almost two years having passed since the Irish banks reached crisis point, it’s worth reflecting on how effective the government’s policies have been.  Here’s a piece I wrote for this month’s Business and Finance on this subject. I gave the government A for effort and D- for execution. Written prior to yesterday’s Anglo figure, the D- might have been generous.

The report is here. The press statement is here. The loss for the first half of the year is reported at €8.2 billion. And “The Minister for Finance has recapitalised the Bank with a further €8.58bn effective 30 June 2010, bringing total capital support to €22.88bn.”

As the Apres Match version of the Minister might say, that’s a lot of noughts.

I’m constantly surprised by the naivety of opponents of Ricardian Equivalence.  There are indeed many reasons why it may not hold. Some of these have already been mentioned in a previous post.  I can add another to the list: hyperbolic discounting. 

In addition, the difficulties associated with econometrically testing the proposition are almost intractable, mainly because of endogeneity considerations.  What is certain is the near impossibility of isolating a particular policy episode and conclusively asserting that it does or does not amount to an expansionary fiscal contraction.

Nevertheless, none of the arguments against Ricardian Equivalence are sufficient to enable us to conclude that there is no tax discounting whatsoever.  Such a view cannot provide “a valuable theoretical baseline”.   The same remark applies to policy.   Otherwise, the sort of spiralling sovereign debt burden, which Ireland is currently experiencing because of the bank bailout, would have no welfare implications because it would not affect private behaviour.

Cardoso and co have another interesting paper. Here’s the abstract:

Given the recent efforts in several countries to reorganize the research institutional setting to improve research productivity, our analysis addresses the following questions: To which extent has the recent awareness over international quality standards in economics around the world been reflected in research performance? How have individual countries fared? Do research quantity and quality indicators tell us the same story? We concentrate on trends taking place since the beginning of the 1990s and rely on a very comprehensive database of scientific journals, to provide a cross-country comparison of the evolution of research in economics. Our findings indicate that Europe is catching up with the US but, in terms of
influential research, the US maintains a dominant position. The main continental European countries, Germany, France, Italy and Spain, experienced some of the largest growth rates in economic scientific output. Other European countries, namely the UK, Norway, the Netherlands, Denmark, and Sweden, have shown remarkable progress in per capita output. Collaborative research seems to be a key factor explaining the relative success of some European countries, in particular when it comes to publishing in top journals, attained predominantly through international collaborations.

Unfortunately, they did not include Ireland.

Jean Claude Trichet’s Jackson Hole speech is here. This bit caught my eye:

The economy, it is sometimes argued, is at present too fragile and thus consolidation efforts should be postponed or even new fiscal stimulus measures added. As I pointed out recently, I am sceptical about this line of argument. Indeed, the strict Ricardian view may provide a more reasonable central estimate of the likely effects of consolidation. For a given expenditure, a shift from borrowing to taxation should have no real demand effects as it simply replaces future tax burden with current one.

The written version of the speech cites two papers by Robert Barro as supporting evidence for this position.

I think it’s worth noting that the Ricardian equivalence idea put forward by Barro—that consumers see deficits and taxes as basically the same thing—has been tested many many times. And the general consensus on this, as I understand it, is that there is very little evidence to support the idea.

Moreover, though the idea works in one very simplified model set up, there are lots of reasons why the proposition does not hold in reality (liquidity constraints, people having finite lives, people not having rational expectations, uncertainty about the path of government spending—see this extract from David Romer’s textbook.)  Very few economists emerge from graduate schools believing in the Ricardian equivalence idea.

There are, of course, lots of arguments in favour of European governments setting out their long-term plans for the restoration of fiscal stability. However, it is a pity to see economic theories that are known to have little support regularly rolled out as arguments for fiscal austerity.

Trichet follows up on his Ricardian equivalence comments by arguing that expansionary fiscal contractions “are not just a theoretical curiosity” with the footnotes citing the old Giavazzi and Pagno paper with its two examples: Denmark in the mid-1980s and, of course, Ireland in the late 1980s. I’ve already said my bit about this, so I won’t repeat it. Suffice to say, this is pretty weak evidence that Trichet is serving up.

Cardoso and colleagues have a new paper in Scientometrics, comparing the performance of PhDs in labour economics graduating from Europe and the USA. They find that European PhDs publish more, but US PhDs publish more in high-quality journals (according to Kalaitzidakis).

UPDATE: Freely accessible working paper version.

One of the pledges in the October 2009 Revised Programme for Government is to declare Ireland a GM-free zone. The Programme promises to “declare the Republic of Ireland a GM-Free Zone, free from the cultivation of all GM plants”, and states “To optimise Ireland’s competitive advantage as a GM-Free country, we will introduce a voluntary GM-Free logo for use in all relevant product labelling and advertising, similar to a scheme recently introduced in Germany.” This followed the commitment in the 2007 Programme for Government that “the Government will seek to negotiate the establishment of an all-Ireland GMO-free [crop] zone.”

The issue has become topical because of a proposed change in EU legislation which would allow individual Member States to permit the cultivation of  GM crops or not. The idea is to combine a European Union authorisation system for GMOs, based on science, with freedom for Member States to decide whether or not they wish to cultivate GM crops on their territory. Any such prohibitions or restrictions would have to be based on grounds other than those covered by the environmental and health risk assessment under the EU authorisation system. It is expected that the new legislation will enter into force by the end of this year.

Yesterday’s Irish Times reported that the Irish Organic Farmers and Growers Association has called on the government to immediately implement the Programme for Government pledge. Would it make sense to do so? Read the rest of this entry »

In this Jackson Hole paper,  Carmen Reinhart and Vincent Reinhart find that the negative impact of severe financial crises on macroeconomic performance is long lasting, with real house prices remaining below the previous peak a decade after the crash, unemployment remaining at an elevated level and a cumulatively-large decline in GDP growth.

The Irish Times reports:

For example, the latest official breakdown on the 423 highest earners in the State showed that for 189 individuals who earned €500,000 or more in 2008, the average tax rate was 19.86 per cent.

I’m afraid this isn’t true. This report does not relate to the 423 highest earners in the State, as I’ve written about here, here and here. It only relates to a subset of the highest earners who would have paid less than 20 percent because of tax loopholes but who are not doing so now because of the introduction of a minimum rate.

To be fair, I don’t blame the journalists because the relevant document is so poorly written.  At this point, however, I really think the folks in the Department of Finance responsible for this report should consider issuing an official clarification.

Update: In comments, Joseph O’Toole reckons I’m being mean to the Department of Finance because this is a Revenue Commissioners report. Well, I found the report here on the Department’s website, which suggests that they are responsible for its release. But, yes, the report is put together by Revenue Commissioners staff.  So let me rephrase my point: Whoever is responsible for this report might think about issuing a clarification.

The international media are gradually noticing that our plethora of banking sector policies have not worked to restore the Irish banking sector to health but are threatening the health of the public finances. An editorial piece from the Financial Times is highly critical. It concludes:

It is time to staunch the bleeding. As Irish state guarantees near their expiry date, some banks will not be able to refinance their balances. The government should prepare insolvent banks for forced debt-for-equity swaps, which would instantly recapitalise the banks in question and cap the government’s exposure. This cannot be done frivolously; European institutions are exposed and EU partners must be consulted. But someone must put an end to the practice of handing banks blank cheques. Some Irish pluckiness would benefit us all.

I take it the FT will now be dropped from the long list of august international institutions that the government rolls out to claim support its banking policies.

Sarah Carey is not impressed with the PSO levy. See the earlier discussion here and here.

De Volkskrant has a piece on Ireland, transgoogled here.

They start by saying that Ireland was a role model for austerity at the start of the year, but is now a reason for concern. They give two reasons, the first of which is the unknown but large cost of saving the banks. Secondly, they do not believe that the government will deliver in the next budget.

Standard and Poor’s have downgraded Irish sovereign debt from AA to AA- and their outlook for the rating (not the economy) is negative. S&P cite the rising cost of the banking bailout as in their statement and project a debt-GDP ratio of 113% in 2012.

On the banking costs, they state

We have increased our estimate of the cumulative total cost to the government of providing support to the banking sector from about €80 billion (50% of GDP; see “Ireland Rating Lowered To ‘AA’ On Potential Fiscal Cost Of Weakening Banking Sector Asset Quality; Outlook Negative,” published June 8, 2009, on RatingsDirect), to €90 billion (58% of GDP) …

We have increased our estimate of the cost to the Irish government of recapitalizing financial institutions to €45 billion-€50 billion (29%-32% of GDP) from €30 billion-€35 billion (19%-22% of GDP). 

Our estimate includes two main components: the upper end of our estimate of the capital we expect to be provided by the Irish government to improve the solvency of financial institutions, and the liabilities we expect the government to incur in exchange for impaired loans acquired from the banks.

Irish ten year bond yields have risen above 5.5 percent this morning and the spread against their German equivalent, at about 340 basis points, is the highest it has been in recent years. The NTMA have objected to the downgrade, arguing that S&P were using an “extreme estimate” of the cost of the banking bailout.

An interesting little scrap has broken out between An Taisce and the NRA. As reported in the Irish Times yesterday, An Taisce has accused the NRA of using false data, while the Irish Independent reports that the NRA dismisses the criticism.

The criticism by An Taisce refers to traffic projections which are now seven years old, and the fact that traffic volumes have been falling. The NRA counters that roads are build with a longer time horizon in mind. While I agree with the NRA that roads are build with a longer time horizon in mind, it is nevertheless true that the projections are seriously out of date and that the starting position has changed significantly. Furthermore, there are at least some schemes, which are grossly over designed. An Taisce points to  a refusal for planning permission for a dual carriageway between Bohola and Ballina, because the NRA apparently failed to support the project on traffic grounds.

Unfortunately gold-plating of projects is not unusual. In the ESRI Mid-Term Evaluation of NDP 2000-2006 we pointed out that “roads with capacity of 55,500 AADT, or anywhere near it, appear to be a significant overdesign for the numerous lightly-trafficked sections of the N8 and N9″. Such schemes cannot pass a reasonable cost-benefit analysis when compared to more appropriately sized schemes. Unfortunately, the lesson does not seem to have been learned and the tax payer is expected to pay for overdesign again (the fact that some of the schemes are PPPs is irrelevant here as these also have to be paid for by tax payers).

Take the example of the N2, for which there are two proposed schemes in the system. I have already referred to the idiotic scheme to by-pass Slane where the key issue could be simply dealt with via a HGV ban.

The second scheme is in North Monaghan, where a by-pass of Monaghan and Emyvale to dual carriageway standard is being pursued. Interestingly Monaghan has already been by-passed and anyone who knows the road also knows that there is no danger of congestion except through Emyvale (for which a by-pass is likely to be supported by some analysis). Traffic counts bear this out - average total volumes (north and southbound) for 2010 amount to 5,413 AADT. Why then are we building for 35,000 AADT - almost seven times the current volume? Further south, the section between Castleblaney and Clontibret has been upgraded to 2+1, and further south still between the M1 and Castleblaney a wide 2 lane road is perfectly sufficient to achieve the target level of service (80km/h) - both of these sections of road carry a higher level of traffic than that, which is supposed to be upgraded to dual-carriageway standard. 

The construction costs of a dual carriageway are 82% higher (according to the NRA Road Needs Study) than for a wide 2 lane road - can we really afford such goldplated schemes?

In this guest post, Frank Convery responds to the various comments made on this blog over the past few days and the initial post by Richard Tol:

Holbrooke Shields and others re Censorship

‘Is Comhar SDC practicing a form of censorship by not publishing Richard Tol’s comment

Response

Tol’s comment was received on Friday 20th at 11:47, and it was posted Monday 23 at 09:59, as were the comments by Holbrooke and Lucey which were submitted on Saturday 21st . The delay was a product of the fact all comments have to go through an administrator because a huge amount of spam comes through, and the office is not staffed over the week end.

Conclusion

Discussion is appreciated and welcome. Keep paranoia at bay if there is a delay in posting. We’ll check out the management of Irisheconomy.ie to see if turnaround can be improved.

Read the rest of this entry »

Joe McCarthy and Valerie Jennings, regular contributors to the discussion on municipal waste management on this blog, write in the Irish Times. It’s a classic protest, with complaints about the status quo but no serious consideration of the alternatives.

Yesterday’s Sindo had a sensationalist piece on electricity prices. It misrepresents the PSO levy as an ad valorem levy on electricity (it is a connection charge). It confuses a 3% increase in the transmission tariff with a 3% increase in the price of electricity — the former is a small part of the latter. And it omitted that the distribution tariff will fall by 6.5%. See the CER newsletter of August.

Lucey and Larkin offer some thoughts on higher education reform. I either agree (evaluation, performance-related pay, fees) or do not know enough to have an opinion (curriculum*).

UPDATE: The Irish Times (2) has seen the report of the National Strategy Group for Higher Education. Strikes me as less radical than Lucey and Larkin.

* Clarification: I know a few anecdotes about a few courses at a few Irish universities.

The speech by Minister Lenihan is available here.

Patrick Honohan’s Tokyo speech is a wide-ranging essay on different varieties of economic growth and the transition between fundamentals-based growth and unsustainable growth: you can read it here.

Frank Convery dreams of a Silicon Valley of Emerald Green over at Comhar. To get to Silicon Valley, you need to pass through that other valley, where bad ideas face a certain death.

Rigour and scrutiny, however, are not part of Convery’s vision. He claims that Palo Alto “will be submerged if sea levels rise significantly” — ignoring that Palo Alto is 9 metres above sea level (projected sea level rise by 2100 is less than one-tenth of that); that people there know how to build dikes and can pay for it too; and that Palo Alto is special because of its people rather than because of its physical characteristics.

I left a comment to that effect on his blog, but discussion is not appreciated in sustainablalaland.

UPDATE: Comments are up now at Comhar.

UPDATE: Frank Convery responds. I close the discussion here.

Dan O’Brien has an optimistic piece in today’s IT on why the political effects of the crisis have not been as noxious as the impact of the Great Depression. He lists three reasons: incomes have declined, but from a much higher base; there are no credible political alternatives, such as were offered by communism and fascism in the 1930s; and we are more tolerant and less nationalistic today.

I am surprised that he doesn’t mention a rather obvious fourth candidate: the size of the economic collapse has been much less this time around (except in a few unimportant countries such as our own). The duration has been shorter, also, and I think that is very important: after 1929 some economies continued to contract until 1932 or 1933. And this crucial difference is due to different policy responses:  much more aggressive monetary policies, fiscal stimuli, and much more important automatic stabilisers.

The extent to which Europeans have become more tolerant can be exaggerated. In 1928, the Nazis only got 2.6% of the German vote. Contrast this to the 13.9% received by the anti-immigration Dansk Folkeparti in 2007, before our crisis started, or the 5.9% achieved by Geert Wilders’ revolting party in 2006. Since 2008, the political extremes have benefitted, just as Hitler did (the Nazis’ share of the vote jumped to 18.3% in 1930).  Wilders’ party received 15.5% of the vote in 2010, while the terrifying Jobbik got 16.7% of the vote in the first round in Hungary. Sarkozy has been actively courting the xenophobic vote in France this summer. There are probably a few other examples around which people could point to.

Severe recessions can still bring out the worst in people, it seeems.

When I was a junior economist in short trousers, the first research I ever did was inspired by Ireland’s successful 1987-89 fiscal adjustment.  Many international researchers looked at Ireland and decided that our successful adjustment stemmed from consumers stepping into the breach filled by the government spending cuts. The story was that increased consumer confidence, fueled by expectations of lower future taxes, was the key to the recovery.

From the research I did on this topic (both on my own and with John Bradley) I came away fairly convinced that this was not what had happened. Rather, the 1987 boom seemed to be fueled more by strong exports to the UK thanks to Nigel Lawson’s tax cutting exercise.

However, Ireland’s 1987 experience continues to pop up in discussions of fiscal austerity. I have to admit that I’ve not been too impressed by Alberto Alesina’s work (here and here) on how fiscal adjustment can be expansionary—work that has had a lot of influence this year. Well, sure enough, Paul Krugman now cites work from Arjun Jayadev and Mike Konczal showing that the only country that ever cut its way to growth in a slump was, you guessed it, Ireland in 1987. The power of this datapoint endures.