Archive for January, 2009

What a great opportunity for public transport

By Richard Tol

Thursday, January 22nd, 2009

This will be a nice case study for future students of business administration. Consider a company that holds a near monopoly in a segment of a market that has been growing by 7.7% per year for a decade. What does such a company need to do to turn a loss?

Bus Eireann and Dublin Bus managed this feat (after subsidies). I will not speculate how and why. But with respect for the workers that are being laid off, I think this situation provides a great opportunity for public transport in Ireland.

Bus Eireann and Dublin Bus need to cut costs. They want to do this by reducing the number of busses on the road and the number of drivers on the payroll. That is their choice. The plan is to trim the schedule. That is wrong. Instead of reducing frequency at selected routes, they should give up some routes altogether. The regulator should then sell the concession on these routes to the highest bidder. (This would not save public finance.) Service levels would be maintained where commercially viable. Competition would lead to lower transport costs. (This would not restore competiveness.) Unemployment would fall (but the incoming operators may prefer to hire other drivers than the ones just let go).

Overall demand for transport is down in any recession, but the share of cheap (i.e., bus) transport is up, so I think there is a business case for bus routes in Dublin.

Over time, the state-owned, subsidised incumbents may get their act together, or they may be replaced by commercial operators altogether.

This post was written in Switzerland, where there is a train waiting at the airport to take you to the university’s doorstep. I landed at 2:30 pm in Zurich and was well in time for my 4 pm lecture in Bern. Zurich and Bern are as far apart as Dublin and Athlone.

Social Harmony and Fiscal Reform

By Philip Lane

Thursday, January 22nd, 2009

Social solidarity is clearly highly desirable during a period of severe economic and fiscal distress. Accordingly, it is important that the government works out a fiscal adjustment programme that is rigorous but still perceived by the general electorate as distributing the burden as fairly as possible.  Of course, fairness is in the eye of the beholder to some extent but a primary political objective should be to successfully achieve fiscal stabilisation while avoiding social disruption that is now evident in some other European countries. See this article in The Times (London) on the upheaval in Iceland and Greece.

So much for saving the world

By Kevin O’Rourke

Thursday, January 22nd, 2009

I find this unbelievable.

The cost of carbon targets

By Alan Matthews

Thursday, January 22nd, 2009

While the macroeconomic crisis is all-consuming, there are other important economic policy issues on the agenda. Let me add to Richard Tol’s earlier post on the implications of the EU‘s Climate Change and Energy package formally adopted in December 2008. This sets demanding targets for reductions in Irish greenhouse gas emissions by 2020, and particularly for the non-ETS sector of which Irish agriculture is a major part. How agriculture, and the non-ETS sector generally, is to meet these targets remains largely uncharted. The targets, and the policies implemented to meet them, will have major economic implications over the next decade. Like Richard, I agree that achieving the non-ETS targets for Ireland set out in the Effort Sharing Directive agreed in December 2008 now looks to be considerably less costly than earlier thought. (more…)

Let’s cede bank supervision to Europe

By Patrick Honohan

Wednesday, January 21st, 2009

I am glad to see that, albeit in his characteristically oblique way, J.-C. Trichet is pushing again for an ECB role in bank supervision.

I have long been an advocate of a euro-wide bank regulator. Isn’t it now obvious that we in Ireland should be cheerleaders for an early move in this direction. We urgently need all the help we can get in financial regulation — even for nationalized banks.

Nationalisation of Anglo-Irish Bank

By Frank Barry

Wednesday, January 21st, 2009

I had a long conversation last weekend with the MD of a Financial Services company to see how closely his private-sector non-economist perspective accorded with my own (which is probably the consensus among public-sector economists), that Anglo should have been allowed to collapse and the developers bankrupted if necessary. There was little difference in our perspectives!

He thought the idea ludicrous that Anglo-Irish could regain the trust necessary to get back to “business as usual”. Also, he tells me that a receiver will not necessarily dump all distressed assets onto the market at once (which some might think of as a possible rationale for what the government has done) but can hold off in order to maximise their sale value. Anglo Irish staff, furthermore, would not have the skills to act as a receiver or even as a “bad” or “collection” bank. The only (theoretical) logic for nationalisation that he could see, since we were in agreement that Anglo is not of systemic importance, is that there might possibly be spillover effects in terms of job losses etc. associated with widespread concurrent bankruptcies.

Since virtually the entire economics community is agreed that Anglo should have been let go, the question arises as to who is providing the advice that the government is listening to these days? Not Patrick Honohan obviously, though he’s right on their doorstep and has been dealing with financial crises for the last two decades. Is it the same PWC (as Martin Mansergh suggested on radio) who gave the banking system a clean bill of health as recently as last Autumn? I googled PWC yesterday and found them to be amongst the “soft landing” merchants of recent years. Why would the Finance and Central Bank economists’ perspectives differ so dramatically from the consensus reached by the rest of the public-sector economics community? 

A question that academics will ultimately have to revisit concerns the (few) academic analyses of recent years that found property prices to have been  largely driven by fundamentals. I remember commenting on one such paper to make the following point. The real interest rate used in the analysis was the nominal rate minus recent house price inflation. But if the latter were a bubble, the real interest rate would be underestimated and the fundamentals exaggerated. I didn’t find the explanation offered to be convincing.

Eichengreen on EMU

By Kevin O’Rourke

Wednesday, January 21st, 2009

Barry has a nice piece on Vox today. He is clearly right: we need the ECB to move to zero interest rates now, and match London and DC when it comes to quantitative easing. On the latter point: is this easy to do in the Eurozone context, or does it require institutional reform? Can a banking expert set me straight here?

Buiter again

By Kevin O’Rourke

Wednesday, January 21st, 2009

Buiter has a nice piece today comparing Iceland with the UK. It is implicitly a scathing criticism of Irish government policy to date.

Krugman: Nominal Wage Cuts Necessary but Difficult

By Philip Lane

Wednesday, January 21st, 2009

Paul Krugman discusses the problem facing those EMU member countries that are currently suffering from a lack of competitiveness (note, by the way, his use of the word competitive!) and accepts that nominal wage reductions are a necessary part of the adjustment: you can read his discussion here.

He also links to a posting by Edward Hugh that probes the difficulties involved in engineering nominal wage reductions: you can read it here.

Baseline Scenario on Nationalisation

By John McHale

Wednesday, January 21st, 2009

This post by Simon Johnson on the Baseline Scenario blog provides an interesting international perspective on bank nationalisation.   You can read it here:

http://baselinescenario.com/2009/01/20/nationalization-is-not-inevitable/#more-2085

 

Latvian precedents

By Cormac Ó Gráda

Tuesday, January 20th, 2009

Lots of readers will have seen this:

http://online.wsj.com/article/SB122809308553167889.html

INSIDER LENDING, INSIDER BORROWING

By Cormac Ó Gráda

Tuesday, January 20th, 2009

How much the collapse of Anglo-Irish Bank was due to insider borrowing remains unclear.  There seems to be much more to it than that, and perhaps in the end Seanie Fitz—and other insiders, yet unnamed—will repay with interest the millions they owe the rest of us.

 

However, in the (happily few) sensational failures like Anglo’s in Irish banking history, secretive insider borrowing has been a big part of the story. 

 

The potential conflict of interest for bankers short of capital has long been obvious.  For this reason, eighteenth-century Irish banking legislation banned merchants engaged in foreign trade from being bankers.  The restriction, alas, led to undercapitalized banks.

 

Joint-stock banking met that problem, and produced the relatively stable banking system that lasted from 1825 to 2008.  However, there were some failures along the way, and it may be worth recalling that the two most famous stemmed from the abuse of insider borrowing privileges.

 

In early 1856 the Tipperary Bank collapsed when it was discovered that its leading light, John Sadleir M.P., had committed suicide on Hampstead Heath.  It soon emerged that he owed his own bank nearly £300,000 (something like €30 million in today’s money).

 

In 1885 it was the turn of the Munster Bank, laid low by the cronyism of a coterie of Cork merchants.  For an account of that episode see http://irserver.ucd.ie/dspace/bitstream/10197/441/3/ogradac_bookchap_pub_068.pdf. 

 

In the cases of the Tipperary and the Munster, unsuspecting but relatively well-heeled shareholders bore the brunt of the directors’ swindling.  Like Anglo shareholders last week, they protested loudly, but they certainly did not expect the government to bail them out.  In addition, the banks’ depositors were also badly burnt.

 

History says that insider lending may be work in highly unusual circumstances.  On this the classic work is Naomi Lamoureaux’s Insider Lending: Banks, Personal Connections, and Economic Development in Industrial New England (Cambridge, 1996).  But Lamoureaux’s yankee banks may be the exceptions that prove the rule.  In general insider lending is dangerous, and a bad deal for both customers and shareholders. 

 

 

Ireland and EMU

By Philip Lane

Monday, January 19th, 2009

The Daily Telegraph gives prominence today to the recommendation by David McWilliams (made on RTE radio over the weekend) that Ireland should consider leaving the euro area: you can read the article here. The notion that Ireland or some other member country might leave the euro area is now a factor in the government bond market.

However, the adverse economic consequences of leaving the euro area are so large that this option should not be taken seriously. Barry Eichengreen has written a comprehensive paper on this topic, which you can download here.

The benign scenario described in the comments attributed to McWilliams in the Telegraph article envisages Ireland being able to use monetary independence to achieve real exchange rate depreciation in a stabilising fashion. However, a new Irish currency would be emphatically not trusted by the markets (a government that is willing to take the steps to exit the euro area is not a government that can be counted upon to keep its promises), such that either the new central bank would have to offer high interest rates or the government would have to impose capital controls. Neither is a recipe for a growth recovery.

Holding our nerve

By Patrick Honohan

Monday, January 19th, 2009

At the time of writing, the Irish bank shares have fallen by about 50 per cent since last Friday’s closing price. The last time there was a one-day fall of comparable percentage size was at end-September, 2008 and it was immediately followed by the announcement of a blanket guarantee.

Let’s not have any knee-jerk reaction this time. The bank shares were already worth almost nothing, so there is scarcely any real impact of this price movement on the economy and on incentives.

Instead we need to have a process of confidence-building in the coherence and feasibility of the overall economic policy strategy for recovery. This must include a broad acceptance of the parameters of tax and spending policy, including on public sector pay. (Banking issues are only part of the equation and they will not be improved by sudden or half-baked initiatives.)

Previous posts have talked about public sector pay and restructuring the tax system. Getting a broad social consensus around an acceptable policy approach must surely be the priority. Here too, precipitate action will not be helpful. We need to know not only the government’s intentions; but that they will be seen as sufficiently effective and fair to elicit broad support rather than a general rejection and protest.

Thoughts at the Abbey

By Kevin O’Rourke

Monday, January 19th, 2009

We went to see Roddy Doyle’s Playboy at the Abbey this weekend. I recommend it to anyone who hasn’t yet been.

It sparked two thoughts. The first was: boy, do we do theatre well in this country. I often leave the Abbey or Gate feeling this way, and my wife tells me I am getting boring on the subject. But it is nice, amid all the ‘world class’ blather we are subjected to, to go to something in Dublin that really is world class.

The second was this. Doyle’s reworking of the Playboy is very Celtic Tiger, not just because of the Nigerian Christy Mahon, but because of its underlying cultural assumptions. Synge has Mahon enter a typical Irish peasant community, and because they are a typical Irish peasant community, they look up to someone who has broken the law to the extent of having killed his father. I guess Doyle didn’t think that he could plausibly carry this off in a play set in modern Ireland, and so he has Mahon show up on the doorstep of a Dublin gangland family. In the context of an Ireland which has had its own state for 80 years, in which there are no post-colonial hangups about the law, and in which we no longer look up to people who cheat the system in various ways, since we are a Republic now, and are all in this together, this was a very clever move.

Interestingly, the Anglo-Irish Bank corporate logo was prominently displayed on the programme.

Simon Johnson doesn’t like the three letter word

By Kevin O’Rourke

Monday, January 19th, 2009

It is just as well that Simon Johnson didn’t read this Sunday’s Irish newspapers, since they would have spoiled his weekend.

He also calls for more coordination within the Eurozone. After what happened in September so should we all.

In Search of the Holy Grail

By John McHale

Sunday, January 18th, 2009

In case you haven’t come across it, there is a provocative (if sometimes repetitive) recent book on the Japanese slump by Richard Koo, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession (Wiley).   Koo places the blame squarely on balance sheet problems.    Interestingly, the balance sheet problems he emphasises are not in the financial sector but in the corporate (and broader) private sector.  

The following passages give a flavour of the argument:

If Japan’s fundamental problem was neither structural nor banking related, was it caused by monetary policy mistakes, as so many academics have claimed?  To answer this question, one must look at a peculiar monetary phenomenon of the Japanese economy that is not discussed in any economics textbook or business book.   Some readers may think this claim is exaggerated, but Japanese firms have spent the past dozen-odd years paying down debt when interest rates were at zero. (p. 11)

. . .

In summary, the private sector felt obliged to . . . to pay down debt . . ..  Disastrous consequences were avoided only because the government took the opposite course of action.   By administering fiscal stimulus . . . the government succeeded in preventing catastrophic decline in the nation’s standard of living despite the economic crisis.  (p. 25)

Of course, it would be a mistake to exaggerate the similarities between the Japanese and Irish economies.    For one thing, the Irish fiscal situation is already dire.   But, despite the appreciated efforts to put me straight, I continue to be surprised by how little attention is being given to domestic demand.   Improving competitiveness is critical and rightly the focus of much comment, but it will be a drawn out affair.   I fear many good enterprises will be destroyed along the way as expenditure switching is dominated by expenditure reduction.   How can we avoid an obscenely excessive property boom being followed by an obscenely excessive liquidation? 

Sunday Times Death Spiral Watch

By Karl Whelan

Sunday, January 18th, 2009

Reading my Sunday newspapers for insights on the economic crisis, I came across the following from Damien Kiberd in the Sunday Times: “Two hundred economists gathered at UCD last week and all we heard from them were suggestions for more taxes: the reintroduction of domestic rates and third-level fees, taxes on child benefit, carbon taxes, taxes on social welfare, sucking the low-paid back into the tax net and higher excise duties. This is exactly what we did in the 1980s, when Ireland nearly went bankrupt.”

What a pity I missed that conference. Now I did attend an event on Monday at the Royal College of Physicians (organised by UCD and the Dublin Economics Workshop) and funnily enough that event had about two hundred people at it also. But there the similarities end. Participants at the conference I went to focused heavily on the need to cut public sector pay and of the range of tax measures mentioned by Kiberd, only one (reintroducing rates) was discussed. It’s rather strange of UCD to organise two different conferences on the same topic in the same week, but then that’s economists for you.

Let’s hope our new State-owned bank is not for forbearance

By Patrick Honohan

Sunday, January 18th, 2009

Two contradictory ideas about the consequences of possible failure at Anglo Irish Bank were going the rounds in the last few weeks.

The first idea — a strange one — was that any attempt to foreclose or restructure non-performing corporate creditors of Anglo Irish Bank would have an unfavorable “ripple effect” on the other banks, who also have lent to the same firms. (What kind of ripple? If it causes the other banks to wake-up and help restructure weak firms, that can only be good for everyone — except perhaps the controlling shareholders of the borrowing firms, who are currently living on borrowed times).

The second idea — not quite so strange — was that a bank being wound down would obviously do worse in recovering on the bad loans it had made. (That sort of thing has happened to China’s AMCs, but mainly where the AMC has decided to sit back and not pursue the recovery courses open to it).

Despite their doubtful validity, both arguments are now likely to be used to try to prevent the soon-to-be state-owned Anglo from pursuing delinquent debtors with vigour.

That would be a bad mistake both for the bank’s own recoveries, and for the economy as a whole.

State-owned banks around the world have tended to fall into the pattern of ending-up as lenders of last resort to large but barely viable companies with good political connections.

May I be permitted to repeat a paragraph from my conference paper of last week:

“Distressed firms need to be decisively restructured, and not kept alive on a drip-feed. The dangers here apply especially to property-based companies, but also to others. In other words, parallel to the financial restructuring of banks, there needs to be work ensuring that surviving non-financial firms are financially solid. This can be done largely by the market; the barriers to prompt action here are likely to come from banks that are in denial about the true financial condition of their biggest borrowers, and from political pressure.”

If nationalization means that previously cossetted Anglo borrowers are now going to be pursued energetically, it may prove to have been a good thing.

More on Fiscal Adjustment

By Philip Lane

Sunday, January 18th, 2009

I have written an article for today’s Sunday Business Post on the economics of public sector pay cuts: you can read it here.   Although Karl is correct in saying that public sector pay cannot be the sole factor in the fiscal adjustment, it is clearly the most contentious issue in terms of the range of views that are being expressed.

Bad Bank Bafflement

By Karl Whelan

Saturday, January 17th, 2009

A number of comments on Kevin’s link to Buiter’s discussion of bank nationalisation have brought up the idea of a “bad bank” that can be used to take over non-performing assets.   I think this issue is important enough to hoist out of the comments and onto the front page!   It should be noted that Buiter is discussing this idea in the context of a fully nationalised British banking system.  The “bad bank” idea has an “economies of scale” advantage in that case. so that all bad loans can be grouped together and dealt with by a team specialising in getting the best long-run return for the government from working out bad loans.

Outside the context of full nationalisation, I’m not sure I understand the “bad bank” idea or why it has caught on in the Irish media over the last day or two.   I’ve been puzzling over this the last few days and then found a post by Paul Krugman that expressed my puzzlement far better than I could.  In a post entitled bad bank bafflement (good post title!), Krugman says: “The idea of setting up a “bad bank” or “aggregator bank” to take over the financial system’s troubled assets seems to be gaining steam.  So let me go on record as saying that I don’t understand the proposal.  It comes back to the original questions about the TARP. Financial institutions that want to “get bad assets off their balance sheets” can do that any time they like, by writing those assets down to zero — or by selling them at whatever price they can. If we create a new institution to take over those assets, the $700 billion question is, at what price? And I still haven’t seen anything that explains how the price will be determined.”

In the Irish case, perhaps someone could explain to me how the bad bank proposal gets at this question.  What price would the Irish government pay to struggling banks for their underperforming loan portfolios?  Why should the government pay a price above current market value rather than, for instance, provide additional capital to cover the implicit losses and thus increase the government’s equity share?

As Krugman notes, in the US case, the answer to these questions appears to be that Bernanke believes the market is systematically underpricing a wide range of mortgage-backed securities and that the US government may break even (or perhaps profit) from buying them at above market rates and selling them later or holding to maturity.  Whether Bernanke is right or not is open to question.  But is there any reason to think a similar logic applies to Irish commercial property loans?

Where is Ireland’s Tax Burden Heading?

By Karl Whelan

Saturday, January 17th, 2009

In my discussion at Monday’s conference (slides here), I raised the question of where Ireland’s tax burden was going to settle down once the public finances have been stabilized. The Addendum to the Stability Report published last week by the Department of Finance shows how the Gross Budget Balance can be brought back to a deficit of 2.5% by 2013 through an adjustment process in which the revenue share of GDP stays roughly stable so that almost all of the adjustment occurs on the Revenue side. The document itself does not comment on the composition of the adjustment described in this table, so perhaps this isn’t an actual plan but instead an illustrative example. Still, it’s worth starting with as a baseline for discussing where we are heading.

I noted on Monday that the plan projects a government revenue share of GDP of 34% in 2013 and that this is well below the equivalent share for EU15 countries, which has been stable at about 45% for a number of years. A number of observers at the conference questioned this calculation on the grounds that the calculation should be done relative to GNP. In particular, since GDP has been about 17% higher than GNP in recent years, one might want to adjust the tax share upwards by this amount. Doing so would give a figure for 2013 of about 41.5%. This is still a reasonable amount lower than the EU15 average but not nearly as much as the figures I quoted

However, I do not view this higher GNP-based figure as a useful one, for two reasons.

First, I believe that GDP rather than GNP should be viewed as the correct tax base when making calculations of this sort. GDP represents all the income generated in this country and, technically, all of it is available to be taxed by the Irish government at whatever rate it chooses. Of course, profit income generated by multinational corporations is likely to move elsewhere if we tax it at a sufficiently high rate but this is an issue faced by all governments, not just our own.

Second, if one is going to exclude the substantial factor income repatriated abroad (€28 billion in 2007) from the tax base it is not consistent to then include the taxes earned on this income in the measure of the tax burden. Assuming that the €28 billion figure represents corporate profits repatriated after paying the 12.5% corporate tax rate, one comes up with a figure of €4.1 billion in taxes paid by multinationals on repatriated profits. Excluding tax payments of this magnitude would give a 2013 (adjusted) tax share of GNP of 39%. So, even if one agreed with the idea of GNP as the tax base, an internally-consistent calculation of the Irish tax burden would still leave it well below the European average.

The broader and more important point here is that we need a wider debate about the shape of future fiscal adjustment than the one currently taking place, which focuses almost without exception on the need to reduce public sector pay.

Buiter on nationalisation

By Kevin O’Rourke

Saturday, January 17th, 2009

Willem Buiter has a thought-provoking piece arguing for full nationalisation of all banks here. What do those of you who understand banking think about his arguments in (a) the British context, and (b) the Irish one?

How fast is Irish inflation falling?

By Colm McCarthy

Friday, January 16th, 2009

The twelve-month CPI and HICP rose 1.1% and 1.3% to December, and these numbers were duly headlined. But both indices have been falling in recent months, and it beats me why people use 12-month numbers in the middle of a big macroeconomic correction. Karl Whelan made a similar point here recently in the context of the quarterly national accounts.

There are small but significant seasonals in the CPI and HICP. The CSO does not adjust, but the following is based on up-to-date factors (an Excel file with the data and factors is available from john.lawlor@dkm.ie). Unadjusted, HICP showed small monthly changes in Sept, Oct, Nov, then fell 0.73% in Dec. The adjusted pattern was similar, but the fall in December lower, at 0.46%.

For unadjusted CPI, Sept and Oct showed only small changes, but then big falls of 0.93 and 1.21 in Nov and Dec. The adjusted falls were again smaller at 0.84 and 1.09 (but these are still very large month-on-month numbers).

Thus for the last two months, and seasonally adjusted, the CPI has dropped almost 1% per month. The HICP has been falling only for a month, and more slowly. The difference between the two is mostly about mortgage interest (see my paper in ESRI QEC for September 2007), and I think the HICP is a better index. When I expressed this view in 2007, the CPI was rising faster than the HICP, and my argument was described as academic (ie wrong) by ‘certain parties’ keen on compensation for inflation. A change of horse by these parties is confidently predicted (difficult manoeuvre at speed unless you are a Cossack).

Recent forecasts of FY 2009 CPI inflation are minus 2% (ESRI) and minus 2.5% (Pat McArdle of Ulster Bank). These numbers look well within range, but HICP could show a smaller fall than CPI if mortgage interest rates continue to drop. Either way, we are a long way away from mid-September, when the pay deal was negotiated. At that time, inflation looked set in a band around plus 4%. 

There is a big shift in the price index seasonals from December to January - if the adjusted trend is zero, the unadjusted shows a significant drop. If anyone quotes the unadjusted drop next month, they incur four faults.

The ICTU Plan

By Philip Lane

Friday, January 16th, 2009

ICTU has made a set of proposals for economic recovery.  You can read the document here.

Things Fall Apart: FT on the Irish Economy

By Philip Lane

Friday, January 16th, 2009

The FT devotes its Analysis page today to a profile of the Irish economy. Overall, it is a fair and balanced overview of the current situation. You can read it here.

The Political Economy of the Current Crisis

By Frank Barry

Friday, January 16th, 2009

There is widespread agreement as to the policy errors that have compounded the current crisis. These include a pro-cyclical and politically driven fiscal stance, the failure to reform the tax system and tackle the house-price bubble, the first round of public-sector benchmarking and the weakness of financial sector regulation. There has been less analysis of the institutional and political economy factors that led us into these errors. I think a number of them can be seen to be interconnected. Thinking about these dimensions is necessary if we are to be saved from future crises.

Philip Lane (1998) and Colin Hunt (2005) have shown that some components of Irish fiscal policy at least have been pro-cyclical since at least the 1960s, and we stand out in this in comparison with much of the rest of Europe. I don’t think the political economy reasons have been fully identified, but McCreevy’s dismissal of ECOFIN’s 2001 criticism of Ireland’s fiscal stance represented a tragically missed opportunity to exploit external fiscal commitments to help overcome the political pressures that drive pro-cyclicality. McCreevy famously announced that “when I have the money, I spend it; when I don’t, I don’t.” He even used the occasion of the 1999 launch of “Understanding Ireland’s Economic Growth” to jeer at the economic perspective!

Instead of retrenchment, 2001 saw the introduction of the profligate SSIA scheme and continued income tax reductions. While such reductions had expanded the supply side in the earlier years of partnership by helping keep the lid on wage demands, their impact fell increasingly on the demand side as labour supply became increasingly inelastic (Barry and Fitzgerald, 2001).

Partnership, as Patrick Honohan has pointed out, contributed to a shifting of the tax burden away from income tax. We ended up excessively reliant on transactions-sensitive and property-sensitive forms of taxation (stamp duty, capital gains tax and VAT). Instead of tax reform we got further tax breaks for property investment, even as house price inflation soared. Areas like Achill and Clifden now look like Dublin suburbs.

The Bacon reports, which were supposed to take the steam out of the housing market, were conservative in the extreme. (One insider suggests they were ghost-written by the Department of Finance, which, if true, is shockingly indicative of the extent of regulatory and insider capture). I have previously cited research suggesting that the proportion of the price of a house that is accounted for by the site cost rose from around 15 per cent – which is apparently the norm by international standards – to some 40-50 per cent at the height of the property boom. The Kenny report of the early 1970s was asked to consider ways in which increases in the value of development land attributable to the decisions or operations of public bodies could be secured for the benefit of the community rather than of the property developers concerned. Nothing has been done about this over the last three decades. The rezoning decisions of public officials can still create massive overnight profits for private individuals. (I suggested this as a perfect example of what our penny catechisms used to call “an occasion of sin”!).

The problem lies, of course, in Fianna Fáil’s continuing entanglement with property developer interests. The only way I can see out of this is through wholesale reform of how political parties are funded, though Blair, Mitterrand, Kohl and many others all found ways of sidestepping such legislation. It remains a crucial area of policy design.

The housing boom was compounded by the failure of the Financial Regulator to hold bank lending to traditional standards of 2.5 times income and so forth. Many of us have long felt that the regulator’s office should not have been staffed from within the same institution (the Central Bank) that had purposely turned a blind eye to the Ansbacher and DIRT scandals.

The final connection I want to draw between the various policy errors concerns the excessively generous awards made under public-sector benchmarking Mark 1. This was arguably driven by the fact that traditional house-owning groups like the Gardaí, teachers and nurses found themselves increasingly excluded from the housing market. Under tighter credit conditions, the generosity of public-sector pension provisions and the permanency of public-sector employment would have ensured their housing market status. This was no longer the case. Hence the house-price boom can be seen as directly responsible for the generosity of these much-criticised awards.

The most recent research shows that public service salaries are some 20 percent higher than private sector salaries when comparing like-with-like in terms of education, experience etc. The real benefits or otherwise of social partnership will become apparent in the near future when this issue comes to be addressed. Supporters such as Paddy Teahon, secretary general of the Department of the Taoiseach when the process was established, argue that partnership has promoted a shared understanding among unions, employers and the government of the key mechanisms and relationships that drive the economy. (This was not apparent, though, in the debate preceding the devaluation of 1993). Other analysts viewed it as successful – in the early stages at least – by providing a mechanism to deliver wage moderation in exchange for income tax cuts. The Teahon view will be seen to be of validity if some agreement can be reached to reduce public-sector pay until the current crisis is overcome. The only politically viable option that could deliver this, many of us feel, would require that other more advantaged groups such as hospital consultants and the legal profession that receive much of their remuneration from the public purse are also faced with similar or larger reductions.

The issue of public sector reform has also come up for discussion. An underlying problem that is reflected in Irish unions’ choice of tax cuts in contrast to economic historian Barry Eichengreen’s (1996) characterisation of the Continental post-war “social contract” (which purchased wage moderation by guaranteeing construction of an efficient welfare state and maintaining high private-sector investment) is that the Irish electorate and Irish workers do not trust the state to be able to deliver on such a deal. Kingston (2007) argues (pretty convincingly, to my mind) that a Whistleblowers’ Charter could have prevented some of the major public-service failures of recent times, such as the lethal blood transfusions, illegal charges for long-stay institutional care, police criminality in Donegal, the PPARS health-service payroll system, the electronic voting machine fiasco, the failure of the Revenue Service to stand up to then-Taoiseach C.J. Haughey, and the corruption of the system by Justice Minister Sean Doherty. A more effective public service and a shift away from the crony capitalism that has characterised Irish politics would leave us on a much stronger institutional footing.

References

Barry, F., and J. FitzGerald (2001) “Irish Fiscal Policy in EMU and the Brussels-Dublin Controversy”, in Fiscal Policy in EMU: Report of the Swedish Committee on Stabilization Policy in EMU, Stockholm: Statens Offentliga Utredningar, 2001

Hunt, C. (2005) “Discretion and Cyclicality in Irish Budgetary Management 1969-2003”, Economic and Social Review, 36, 3, pp. 295-321

Eichengreen, B. (1996) “Institutions and Economic Growth: Europe after World War II”, in N. Crafts and G. Toniolo (eds.) European Economic Growth, Cambridge: Cambridge University Press.

Kingston, W. (2007) Interrogating Irish Policies, Dublin University Press (reviewed in the current issue of Economic and Social Review).

Lane, P. (1998) “On the Cyclicality of Irish Fiscal Policy”, Economic and Social Review, 29, 1, 1-16.

RGE monitor

By Kevin O’Rourke

Friday, January 16th, 2009

Today’s RGE monitor has a feature, or whatever you’d call it, bringing together recent articles on yesterday’s IMF rumours, on intra-EMU government bond spreads, and on the possibility of exits from the Eurozone. The fact that these topics are being linked tells you something about how people are thinking. However, the Buiter and Eichengreen articles linked to by RGE are helpful in stating the case as to why Eurozone membership is so helpful now for countries like us: the counterfactual is pretty scary. The implication of EMU membership however, as many of you have pointed out, is that nominal wage cuts are badly needed (so what on earth are the ESB thinking of?).

Why the UK Should Join the Euro

By Philip Lane

Friday, January 16th, 2009

As reported by Eurointelligence,  a new publication collects the views of 31 contributors that advocate the entry of the UK to the euro area. (This initiative was convened by Peter Sutherland.)  An executive summary of “10 years of the Euro – New perspectives for Britain” can be download here. The full report is available here.

Morgan Kelly’s slides from the conference

By Philip Lane

Thursday, January 15th, 2009

You can download the PDF from here.