A Policy Offense

Over the past months, the challenges of stabilising the public finances and sustaining the banking system have dominated the macro policy debate.   Unavoidably, the depth of the crisis has put policy making in a defensive—indeed survival—mode.   The first-order issues have been maintaining the ability to borrow and ensuring a working credit system. 

In the months before the next budget, I hope the debate will broaden to focus more on a policy offense to counter the recession.   Even though it is getting harder to be shocked by ever-worsening economic forecasts, this week’s outlooks from the ESRI on growth and unemployment were truly depressing—all the more so since the burden will fall especially hard on young workers, as Liam Delaney has reminded us.   One message that comes through in the slides from Thursday’s ESRI conference is the importance of minimising inflows into unemployment.   It is worth noting that in his presentation at the conference Jaakko Kiander said Finnish fiscal policy was too restrictive in the midst of their “Great Depression;” it took years for employment to return to pre-recession levels.    We should be careful we do not look back later with the same regret. 

On fiscal policy, the government was under obvious time pressure in putting together its emergency budget.   There is no excuse for October’s budget.   A fully formulated—and preferably legislated—medium-term fiscal framework should provide room for shorter-term countercyclical measures.   We should take advantage of the time to have a vigorous debate about how to use whatever fiscal room there might be.     

(I do not mean to suggest that promising policies are not being debated every day on this blog.   A few that come immediately to mind: Paul Hunt’s eloquent arguments on tackling inefficiencies in the non-traded sector and for targeted infrastructural investments in growth sectors; Sean O’Riain’s proposals for development-oriented financing; and Liam Delaney’s emphasis on youth-oriented investments and opportunities.)

On credit policy, Karl Whelan has been the catalyst for an impressive debate on how to sustain the banking system in the face of apparent insolvency.   But I find it surprising that relatively little attention has been given to the customer side of the credit market—both in terms of the demand for credit and the impact of business/household balance sheets on the willingness to supply credit.  

In the international debate, there is a growing attention to the idea of a “balance sheet” recession.   The outstanding feature of such a recession is potential borrowers try desperately to repair balance sheets by curbing their spending.    In addition, the poor state of balance sheets harms the creditworthiness of many of the remaining willing borrowers.   This again suggests there is much to debate on the policy front, from the role of coordination failure in the credit collapse to the potential for targeted tax relief in sustaining investment and employment.   

22 replies on “A Policy Offense”

with c. 400bn plus on deposit here it tells me that the money to provide credit is there, it is just a case of figuring out how to get it from the person holding it to the person who wants it, in the past that job was done by banks, because frankly, most of us wouldn’t lend a stranger down the street money ourselves. are there any routes for doing this that are not present in ireland?

Peer to peer lending comes to mind instantly, many companies only need small amounts of credit in order to sustain their business and p2p credit could work in that and many other examples.

perhaps it is time to consider creating an enterprise level bond market, the reliance on bank debt in europe is pointless if it means that all operations ultimately rely on banks and fail when banks get into difficulty, and at credit rates currently offered there would be every reason for private investors to consider such an option, further down the line there could even be a secondary market in bonds, an easily accessible scheme with low par and above deposit coupon might work. downside: somebody would have to go out and try it first!

Much easier if the people with the €400bn took over the dormant sites, empty buildings, incomplete apartment blocks and bankrupt businesses from those who have been caught by getting into the market at the wrong time. We need some distressed selling of assets from those who don’t have the funds to those who do have the funds. But this will only happen when prices come down to a sensible level.

If the Jurys Doyle site sells at <50% of the original price the new developer can proceed with the development but with less height and they won’t need to sell the apartments at as high a price. Result – a little bit of activity.

The policy appears to be at the moment everybody must be allowed to survive. That is not the way the economic cycle works. Fiat is about to get a bargain in Chrysler; the same needs to hold true for businesses and property here.

Due to work commitments I couldn’t attend the ESRI seminar today but I was given detailed notes by colleagues and I have been looking through the slides. Examining the potential for welfare reform and active labour market programmes is a good start.

The Mirlees Review below (which involved James Poterba who speaks in Ireland soon) is a good example of a coherent response from the Economics Profession in the area of taxation. This blog is absolutely excellent but a blog can only go so far and should be for airing ideas rather than conclusively demonstrating their validity. The new policy section in the ESR offers one promise for a more widespread debate. Debates that haven’t even begun yet include the implications of all of the recent changes on the development of health and education services, and how declines in wealth interact with long-run structural factors such as patterns of aging and life expectancy. I am increasingly repulsed by the disproportionate coverage given to pay fluctuations among incumbents. Very few people have ever died from a pay cut.

George Lee seemed to have had a revelation this morning on the radio that the economy is actually about people. This is not a bad thought to bring through the next few months. The “dont waste a good crisis” phrase is a little cliched but there are many improvements that could be made in the Irish health and education systems that would not cost money and could improve welfare in ways that are important. Some of the biggest welfare gains in the 20th century in Ireland such as declines in infant mortality and increases in older-age life expectancy occurred obliviously to the short-run economic cycles prevalant at the time.


With the collapse of aggregate demand, and a govt. under severe pressure to reduce the deficit, the effectiveness of any micro, fiscal counter-cyclical measures is likely to be severely limited.
And the deflationary downward spiral is being aggravated as attempts are made to repair balance sheets. A Fisherian debt-deflation scenario looms.

How much money could the state raise through the privitisation of ESB, Bord Gais, the remaining shares that it owns in Aer Lingus etc.

Would this be sufficient for some sort of a fiscal stimulus? Or even to prevent NDP projects that pass cost benefit analysis tests from being postponed?

Of course lessons would have to be learnt from the privitisation of Eircom, but its the only way that I can think of that the government can increase expenditure while reducing the deficit.

A policy offensive would make a nice change from offensive policy.

Unfortunately our political class seem to have zero foresight and no capacity to act in a strategic fashion.

Just look at the bankng crisis. If they’d confronted the emerging problem a year earlier, or six months earlier, or even six weeks earlier, they could have aopted a more nuanced response (maybe letting Anglo go); instead they waited for the Governor of the CB to arrive at Government Buildings with an overnght ultimatum, at which point there was nothing anyone could do.

One practical measure I’d like to see – and this could happen quickly and at no cost to the state – is a suspension of the minimum wage, or a decent reduction.

It’s ludicrous in the midst of an economic emergency that someone working in a town like Dundalk must be paid, by law, 30-40% more than the same person doing the same job a few miles up the road in Newry.

@ Kar Deeter
Correct! Even a way of discounting trade bills, the cp market short term 3 month credit is very difficult. There has been no need for this the lender knowing the customer’s business as credit was as available as snuff t a wake. That expertise and the personnel who had it may no longer be in the main banks only. It just requires a person or two who has the time and the capital and can get a licence…… Seemingly, 95%+ of trade has failed recently, it is all so recent, due to the inability of a lender with a recognition in the other country, to write for shipments. With the demand dropping, the fees must rise and it may be some time before it all stabilizes, but if we cannot perform this function, then we will not be able to export or even import useful items required for export.

This is a fundamental point as the banks are dead and all the debate about the rites is a waste of time. They will all be buried. We must look to a depleted but energetic future and we need commercial paper for that.

@ Pat the plumber
Do you think that is likely? We need to increase productivity and ensure that we all share in the rewards and the misery for social cohesion.

One consequence, long term, would be that the 6 counties would be less likely to re-join, if they were not worse off. Once GB cuts payments to them they are meant to walk into our arms. God bless ’em!

Otherwise yes our government is stupid on wealth, and have never had any strategic awareness other than to cream off the international economy. Still a good aim, but we need more breadth and depth of thought. It is there, but people have been told not to rock the boat for decades, so that all warnings and sensitivity has withered. This is one of the fruits of a corrupt bunch that come to think they govern cos they are capable. Till now they have just bought off the dissenters. They will listen but it will be too late. Sclerosis of administration. Just look at that twit David Doyle. No one predicted it. Yes they did! Doyle et al just ignored it as that would have required a response.

@ Colm Fahey
When the going gets tough and asset values plummet we sell off the family silver? And then give it away as a stimulus? The only reason they still exist and are not bankrupt, is because the dead hand of public ownership kept them that way! Look at our dynamic banks!!!!!!

Liquidation is a stimulus!

Remember Iceland

@ Calan
Yes, indeed! Deflation is not to be feared! It was the boom that was the illness. Our economies are now shrinking, except in India and China.

Now is the time for infrastructure and education spending. But the executive has not built up surpluses buying power at the cost of the public purse when they should have strongly applied brakes. The Investment fund was an attempt to put money aside but it is now revealed to be far too small. So we must go into deficit which, fortunately for the inflationists, will help to soften matters and price out those on fixed incomes. We have all seen this before, a failure to appreciate the known consequences of such booms. If we waste money on stimulus packages, then it gets worse. Matters will right themselves when the executive tell the population just where we are headed and get them behind it. Leaders? So it won’t happen for some time. Misery may last decades, if liquidations do not proceed. Look around you at all the mal-investments. We had a trial run in 2000 after the dot.com bust. But we decided to inflate into housing all over the world. Feel better now? What else can we inflate? Deficit spending……….
We need new management!

@ Liam Delaney
We need questions about our structures as they will reveal those, that expect an economy of a certain sort like the one we just lost, and that will invite reconstruction. Reconstruction is psychologically vital as it shows that we are moving in step with our new needs. The christian religion is not a death cult alone, but a movement that can stress rebirth. Let that be our sermon! Some institutions are, whisper it, no longer needed! I question the need for schools and schooling. We have wandered into this crisis as the consumer was strapped into a strait jacket and the economy designed around them. Errrrr….. no longer valid? So mass consumption is a questionable concept. Provided minimum needs are met, the consumer may welcome more time to enjoy their fast depreciating toys as they will have less money to buy new ones.

Are you looking for a forum, on this blog, where we can throw out our ideas? This might be a good idea.

@Colm Fahey
Valuation is difficult in these times, but the value of the companies owned by the government that should not be owned by a government (ESB (grid excepted), Bord Gais, Bord na Mona, CIE, An Post, RTE, Dublin Airport, Dublin Port, Aer Lingus, …) is surely above 3 billion and probably below 10 billion euro.

Besides bringing cash, such privatisation (if done properly) would also stimulate competition and reduce costs for households and businesses.

There are also government agencies that serve particular private interests rather than the public (Teagasc, Bord Bia, Failte, …). Such agencies get a total subsidy of about 1 billion a year.

And then there are subsidies that are just bad regulation (fuel allowances and so on). I did not add these up. In the area of energy and environment alone, you could cut 1 billion a year and have better regulation as a result.

@ Richard Tol
Without sounding too smug, how nice would it be if we had sold the Aer Lingus shares to Ryanair? Hell, combine that with a privatisation of Dublin Airport and we’d be billions up… alas, apparently the govt needs to have an airline and some airports…

I found Jakko Kiander’s presentation at the conference particularly interesting. He said the key to the Finnish fix was a steep devaluation in the markka (initially 40%), which occured when Finland ran out of money to defend its exchange rate. At the end of his presentation, reflecting on Ireland’s position, he said that a deflationary policy, similar to that adopted initially by the Finns, looks like the only viable alternative for us as a member of the euro zone.

My gut feel is that, in essence, he is right, ‘though measures to boost competitiveness through improving capability will also be important. While members of the Government and many economists have talked about the need for pay levels to fall, I have the feeling (to mix some metaphors) that we are still pussyfooting around on the scale of the problem, avoiding grasping what will be a very painful nettle for everyone.


Thank you for grabbing the steering wheel. We can’t ignore the vital role of financial intermediation, but it has to be time to focus on the real economy. Despite the excellent work of Karl and colleagues on bank solvency and nationalisation I think the Government has been successful in shunting this issue onto a siding. In the guise of providing liquidity on a continuing basis it appears that the ECB will continue to shore up the Government’s efforts to restore the banks to some measure of solvency.

However, now that the “Washington Consensus” has been declared dead, it is necessary to revisit the theoretical and empirical underpinnings of future policy prescriptions. Liam Delaney has made a strong case regarding the relevance of behavioural economics, but, while reading Akerloff and Shiller’s impressive “Animal Spirits”, I was frankly amazed that Darwin was not cited once. I was left with the feeling that a coherent theoretical basis was absent. In response I dug out the following:


from The Economist at the end of last year. By integrating the insights of both “Animal Spirits” and The Economist’s offering on Darwin I began to glimpse the basis for more effective policy formulation and implementation.

In addition, I believe the work of Mancur Olson (which I’ve referenced previously) on collective action is also relevant. There has been a continuing thread in media coverage of this crisis that we are somehow all to blame for this mess. This is a quasi-religious response which absolves the requirement for reflection and analysis.

The modern business model of large entities providing goods and services to final consumers disenfranchises and atomises these consumers both as consumers and citizens. This applies right across the board from banking and financial services, through utility services (with full retail competition) to fast-moving consumer goods (FMCGs). Consumers have little or no access to “collective wisdom” – the wisdom of crowds – or genuinely objective information that is not crafted, filtered, focused or manipulated by the providers of goods and services.

The consumer may be king, but, if the empire fails to deliver, he has no army to engage the forces ranged against him. In most cases he will not be able to expend the time, effort and resources required to recruit the mercenaries required to fight his case. The dominant providers of goods and services to final consumers have progressively broken down, undermined or neutered any form of personal engagement, of local bond, of service provision by competing collective action or of counter-vailing market information or market power. The media are held in thrall by product and service freebies and advertising revenues. The internet reveals a cacophony of voices whose impact is generally too diffuse in practice.

If this isn’t market failure, I don’t know what is.

Maybe this is too daunting a challenge, but I’ve come to the conclusion that this is the appropriate point of departure.


I couldn’t agree more with the thrust of your post. I might quibble with your valuations, but I wouldn’t argue with your estimate of cost reductions. A recent piece in the Indo (http://www.independent.ie/business/irish/economy-will-pay-high-price-as-esb-turns-to-wind-power-1724033.html) is pretty damning about the dysfunctional and damaging nature of energy policy and regulation. (Not sure who wrote this – no by-line on web version).

At the beginning of April the CER kicked off a consultation (http://www.cer.ie/en/electricity-transmission-network-current–consultations.aspx?article=be681738-7096-4510-903a-e24b78113d4b) on the methodology it will apply to set electricity transmission and distribution network revenues and tariffs for the period 2011-2015. I have sought, but without success, to extract from the CER data that demonstrates its application of network asset valuation, how it derives annual capital charges and how these may be reconciled with the Summary Regulatory Accounts published by the ESB. The CER knows that this would reveal the sustained inefficient financing of network investment and the resulting over-charging. They have simply ignored my requests – and the deadline for submission is next Friday!

Perhaps you (and other interested economists) might be prepared to get involved. Pompous declarations by the CER of high levels of prefessionalism and integrity are empty without independent scrutiny.

I may be contacted at paulthunt@btinternet.com.

Paul – happy to debate this offline in another setting, but useful economic knowledge to address current problems does not require in my view a full theoretical model grounded in something like evolutionary theory. Some of the evolutionary work is interesting and I look forward to seeing how people like Gintnis and others develop this line (see link below). We should take insights from this literature but at present the types of structures implied in these models do not immediately map to direct questions of policy (however would be happy to be proved wrong on this).


What is required right now is a clear focus on the type of questions that economists should address and how much knowledge we need about economic structure before we can make statements about the best ways of developing robust economic policy. Angus Deaton’s (the renowned economist as opposed to the host of Have I Got News For You) masterful Keynes lecture is linked below, and this gives a very stimulating discussion about how economists should directly influence development. He is writing mostly about the development economics literature but his insights apply equally here.


I attended a lecture by Professor Heckman the other day where he spoke (during the course of three mesmerising hours) about the 1953 Cowles Commission paper by Jacob Marshak which asks the simple question of what is economically relevant information and proceeds to answer this with a lucid account of the relationship between the economic structure and the observations that the economic scientist must work with. Marshak and the people surrounding them were geniuses and were highly driven to get to the essence of the relation between economic structure, economic analysis and economic policy. Economics that is relevant to policy must be at this interface, asking hard questions about the direct applicability of economic results.

I could not agree more with the original post of this thread. We have all gotten a little lost in the detail and have failed to keep the core objective in mind. Our national economic objective is very simple, we need to maintain a critical mass of reasonably paid employment at the level of about 2.1 million and we will continue to struggle for the foreseeable future until we close the gap.

To close this gap we need to deal with the core philosophy of our approach and key assumptions and focus on 5 domains of action. We need to be able to do this simultaneously and understand that the various areas of action are also interrelated.

The core philosophy of our approach centres around our national estimate of when the global economy will start to bounce back, the likely cost to the state of restoring the banking sector, the maximum which we would be prepared to borrow, the broad policy position of the state in relation to the economic stimulus issue and the extent to which the state is prepared to redirect existing resource to economic stimulus measures. A clear and coherent answer to these questions, communicated in a manner that could be understood by the reasonable layman, would be a good start.

Once we have agreed the essence of our approach, we then need to identify the main areas that require action and determine at what pace and in what order we need to tackle the problems. From a layman’s perspective it appears to me that we need to be working in 5 main domains:

1) Managing the Public finances within reasonable borrowing limits

2) Restoring the Banking Sector to normality

3) The people side of things i.e. confidence, awareness, clarity, goals, route, fairness – this is normally called leadership.

4) Initiating Economic Stimulus measures and initiatives to mitigate against some of the harder impacts of capitalism by creating State led demand.

5) Longer term positioning of both our indigenous and internationally trading companies to build a sustainable and reasonable level of national employment.

At the moment we are making very slow and limited progress on the first two and none at all on the other three. I do not know whether we have adopted our current strategy either by circumstance, accident or design. Either way I agree the subject should be given far more air and we need to be working on all the primary domains.

Given the high-cost, high-wage nature of Ireland’s economy, and the fact that we don’t have a currency to devalue, it looks like the best path to stimulate the economy would be for the government to aggressively pursue short-term deflationary policies. While we have good reason to fear a repeat of Japan’s long-term deflation, a short, sharp spell of deflation followed by low, stable inflation could jolt our economy into a more competitive state.

One obvious option to help this along would be to cut the higher rate of VAT right down to 15%, followed by a gradual increase back up to ~20% (say half a point increase every six months). The UK’s decision to bring the rate right back up in one go towards the end of this year could do as much harm as the original drop did good, and a gradual increase would help counteract any long-term deflationary pressures. Of course, a cut of 6.5% in VAT would cause a massive drop in tax receipts even in the best of circumstances, and would probably be outside the realm of affordability for the government right now.

Accepting that a straight-out scrapping (or even reduction) of the minimum wage is politically infeasible (and would need to be paired with a similarly infeasible reduction in welfare payments to have the needed effect), I think it’s worth considering getting rid of the minimum wage and brining in a system of negative income tax for low-earners. I wrote a blog article about it here: http://tinyurl.com/dn69g4 (warning: lack of economic training apparent inside)

Potentially a negative income tax could have budgetary as well as economic benefits, by encouraging people off the dole, and it would contribute to both wage and cost deflation (compared to the current system). There may be flaws that would only be visible to more trained eyes than mine, but I would think that we’re in exactly the sort of situation where it would be worth trying out.

A big increase in inheritance taxes would also be a worthwhile measure. As well as bringing in tax revenue, it would help to push down property prices, which are still far from the end of their downward slide, as illustrated by the current ratio of average earnings to property prices.

Specific attempts to better regulate uncompetitive industries would also go a long way. For instance, we have the highest fixed-line phone costs in the world, of which our very high line rental plays a large part. Comreg have the power to set this line rental, so why aren’t they being pressured to cut it? Paul points out similar failings in our energy market, and it’s actually a shockingly familiar situation across quite a number of industries.


Congratulations on the Barrington Prize and thanks for the references. This a fertile area.

However, we seem to be operating on two twin tracks. You, justifiably, may disagree, but I see your focus on the effective formulation and implementation of policy in areas such as health, education, social welfare, defence and the justice system where the State has to take primary responsibility in terms of policy and outcomes. My focus, in contrast, is on the regulated sectors (primarily utilities) and on competition and consumer protection policies in these and other sectors where the State has a major policy role, but is not, and should not be, primarily responsible in terms of investment, delivery and outcomes.

Similarly to the “Paint the red post boxes green” routine, Ireland has adopted key features of the UK’s regulatory and competition model – and applied them in ways that severely penalise finalise consumers. This model is progressively infecting other EU member-states, primarily in the utility sectors. The US approach to regulation and markets for pipelines and natural gas is extemely successful – less so for electricity. I, and some others, are seeking to turn back this UK infection at the EU level and to promote more rational and effective approaches to regulation and competition – but it is hard-won.

Reform is overdue in Ireland, but I am finding it extremely difficult to generate the interest or attention that is required. We’ve had “better regulation” and the “promotion of competition”. It has benefitted the few and penalised the many. The public’s faith in free markets is being destroyed. The corporatist and collectivist alternatives have been tried and failed, but we should not understimate the latent public disaffection with the current system. It is far better to promote sensible reform than to wait for evidence of economic and social breakdown.

I agree partly with your distinction Paul. Certainly, the focus of my posts has been on areas like health and education. However, this is partly a personal issue in the sense that I have been more engaged in my career in education and health as issues rather than an essential distinction about the types of policies that are needed. There is a nice paper below on the new regulation work that tries to incorporate what we are learning about how people actually make decisions. “Nudge” is a popular discussion and, if you can avoid being distracted by some of the examples, gives the essence of the behavioural viewpoint on regulation and policy. One of its authors, Cass Sunnstein, now has a major role in regulation in Obama’s administration so the importance of these ideas is likely to rise.


I will post more coherently at a later date but until we can understand issues like home bias, low rates of switching and so on, then there is a big part of the regulation story missing. Paternalism in any guise will make the blood of many readers boil but this work is an important part of the debate.


I don’t think there is any fundamental disagreement between us and, perhaps as you suggest, we should take this exchange off-line, but I suspect there are aspects that should interest other readers. Valuable an all as this corner of the blogosphere is, there are still large chunks of the real economy that are not receiving the attention they deserve.

You’re right. The paternalism implicit in the “nudge” approach is bound to raise hackles. As a result I believe it should be focused, at least initially, on areas such as health, education and social welfare.

And, following on from this, I believe that more attention should be paid to scrutiny of regulation and the boosting of consumer protection. The difficulties I’ve being having trying to persuade the CER to allow scrutiny of the calculations behind its pricing decisions is just one example, but the problem is more widespread.

Most large businesses may be seen to “compete”, but this “competition” imposes on consumers what Prof. Alfed Kahn, the US doyen of economic regulation, describes as “the tyranny of small choices”. Technically “competitive” offers are slickly presented, consumers are hooked – and frequently just “churned”. However, any attempt to modify the terms of an offer, to rectify the errors in the transaction that inevitably arise or to terminate the existing agreement and transfer to another service provider will tie the consumer up in hours dealing with a remote call centre with little prospect of a satisfactory outcome.

For me, making markets and regulation work for the ultimate benefit of final consumers is a key task. It is not unique to Ireland, but the requirement is even more pressing than in other jurisdictions.

Policy offensives require political will. The core problem in Ireland is that public discussions of the economy have been hollowed out over the past 2 decades. Politicians are no longer able to engage or inspire sections of society to any vision other than getting by without big ideas, economists and bankers have become used to be able to pontificate about tinkering with economic policy without a broader intellectual framework outside textbook economics and the media have developed an attitude of cynicism and despair about everything from swine flu to housebuilding. Effective policy only comes from confidence gained in the ring of public opinion. This is sorely missing.

Economists have a lot to offer in informing debate with hard facts and figures, but I think it is telling when economists present manipulative and marginal mechanisms such as “nudging” instead of open debate.

One of the key barriers to advancing out of this slump will be how offensive we can be to challenge entrenched ideas about the economy. For instance, on Sunday night I was chatting to a successful businessman in my local town and excessive regulation of SMEs came up in the discussion. No doubt bureaucracy and regulation are hampering businesses around Ireland, this deserves discussion but only from a wider perspective where old business plans are interrogated also. The reality is that too much of the boom in business activity did not create value but merely transferred wealth between generations and firms on the back of a “phantom wealth effect” (banks, estate agents, retail, financial services and tourism) and also from firms to the state (stamp duty, VAT). We now know the extent to which this business model for the Irish economy was based on foreign borrowings.

What is the lesson? The economy needs a policy offense that will kick against the pricks. Businessmen, politicians and economists need to stop indulging in wishful nostalgia for the Celtic Tiger and need to start a new debate about what kind of economy we want. Nudges won’t solve the root and branch problems that Ireland needs to face in the future. I know there are many who think we tried to expand the Irish economy too fast. I do not think they are right, but neither are the old business leaders and economists who still think you can borrow your way to prosperity. Are there any takers?


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