That 26% growth rate: two weeks on

The recent publication by the CSO of the 2015 National Income and Expenditure Accounts generated a lot of reaction.  There is no doubt that a 26.3 per cent real GDP growth is bizarre but it was not farcical, false or based on fairy tales.

Many commentators went out of their way to highlight that the figures did not characterise what was happening “on the ground” in the Irish economy.  But this seems like a bit of a strawman.  Instead of being told what the figures were we were been scolded over what they weren’t.  No one said the economy was growing at 26 per cent.  Arguments against using GDP in an Irish context have made for the past quarter of a century.  Even as recently as March, when the first growth estimates for 2015 were provided, there were plenty of people who pointed that the underlying growth rate of the economy was probably around half of the 7.8 per cent growth rate in real GDP shown at that time.

But a 26.3 per cent real GDP growth rate is very very unusual.  And one that deserves understanding rather than dismissal.  However, the discussion of the figures has generated more heat than light.  At the briefing it seems three items were identified as having oversized effects on the national accounts’ aggregates. These were:

  • aircraft leasing
  • inversions and corporate restructurings, and
  • asset transfers to Ireland

Continue reading “That 26% growth rate: two weeks on”

New Release: The Central Bank Quarterly Bulletin 2016

The central bank have just released their 2016 quarterly bulletin. Box A on Page 11 discusses the farce of the 26.5 per cent growth.

Quote:

“These developments reflect the statistical ‘on-shoring’ of economic activity associated with a level shift in the size of the Irish capital stock arising from corporate restructuring and balancing sheet reclassification in the multinational sector and also growth in aircraft leasing activity”.

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This is no time to go wobbly, EEA edition

There is a depressing amount of wishful thinking going on in the UK right now: for a recent example see here. When Iceland’s banking system collapsed, that was a real emergency requiring capital controls: the sort of eventuality envisaged by the now-famous Article 112 of the Agreement on the European Economic Area. It isn’t at all clear to me that the rest of the EEA will view the argument that “there are too many of your lot in our country, so let us keep them out” in the same light. There is also a big difference between triggering an emergency clause in a contract, when an emergency arises which was unexpected when the agreement was signed, and saying from day one that you want to opt out of a key part of an agreement. And the have-your-cake-and-eat-it brigade also fail to mention that, in addition to Article 112, there is Article 114, which states that

If a safeguard measure taken by a Contracting Party creates an imbalance between the rights and obligations under this Agreement, any other Contracting Party may towards that Contracting Party take such proportionate rebalancing measures as are strictly necessary to remedy the imbalance. Priority shall be given to such measures as will least disturb the functioning of the EEA.

It seems to me that England cannot afford wishful thinking right now, and that those who wish her well need to be crystal clear about the choice it faces, so that there is no mis-understanding on the English side.

I recently published an article on the subject, aimed above all at former Remainers, here. That was a heavily-edited-for-newspapers version of something I originally wrote for this site. Since I use this blog in part as a reminder to myself of what I have written, I reproduce the original blog post below the fold, links and all.

An astonishing dereliction of responsibility

Continue reading “This is no time to go wobbly, EEA edition”

Reformed central bank regulators criticised for being, uh, ‘awake at the wheel’

Three people bid for a house, each using a mix of savings and borrowings; the highest bidder wins. Now suppose each had been prepared to spend more, and each bidder’s bank had extended an additional €100,000 of credit. Nothing changes in the aggregate – one house is bought and sold – except that the buyer has an additional €100,000 of debt (and the seller an additional €100,000 of cash.)

How is that a better overall outcome?

When supply is constrained, credit limits are needed (from a central bank, or internally to the banks themselves) to prevent lending driving up house prices and household debt as borrowers compete against one another for a fixed supply of accommodation. Under boom-time conditions, prices rise to levels Ireland saw ten years ago. Any sensible regulator would seek to put a stop to such a spiral, and should expect to receive the support of politicians, the media and a responsible industry.

But the Irish Central Bank’s mortgage lending controls seem to leave it standing almost alone, criticised by the building industry, the banks, politicians and journalists for being – what? – ‘awake at the wheel’? These controls protect buyers from over-paying. Yet the Central Bank is pictured as punishing the consumers it is protecting. (‘Only the rich can now afford housing’ says the newspaper headlines, but without credit limits only the over-indebted could.)

This is remarkable on many counts.

The Crash is not over, but already many seem to have tired of financial regulation. Denounced for failing to act in the boom, the Bank is now denounced for limiting wasteful bidding wars. Meanwhile, largely uncriticised and indeed not much commented on, local authorities construct elaborate and costly planning rules that increase housing costs. That’s without considering what Colm McCarthy calls (in today’s Sunday Indo) the ‘elephant in the room’: the planning and zoning restrictions that create an artificial housing shortage in the first place. Curiously, we criticise regulations that protect us and not the regulations that harm us.

The media present the lending rules as adjustable but house prices as fixed. The opposite should be the goal of policy. If today’s prices and lending limits require a level of savings impossible for most intending house-buyers to achieve, this means house prices are too high not that regulatory rules are too tough. Do we want everything else to be cheap but the most substantial purchase – housing – to be dear? Perhaps we do; Aidan Regan has recently argued on this blog broadly along these lines. When the number of house owners dwarfs the number of marginal buyers, the intergenerational political economy gets very ugly.

To tackle the housing shortage we should leave bank regulators to do their job, and deal with the policy obstacles that cause so few houses to be built. Don’t tackle one problem by creating a second. And don’t fuss over bank regulation to avoid looking at underlying planning, zoning, intergenerational and NIMBY problems.

A scarcity of accommodation is not solved by lending limits. But house prices are lower, mortgages smaller, banks safer, and taxpayers sleep more peacefully; admittedly miscellaneous middlemen may earn lower fees and journalists have to search elsewhere for a story.

Credit limits protect house buyers when there are more buyers than the kinds of houses they want to buy.