Growing the Economy Post author By Philip Lane Post date June 16, 2009 The trade union UNITE has released its recommendations for economic recovery here. Categories In Economic Performance Tags Irish economy, UNITE 17 Comments on Growing the Economy ← The Returns to Financial Engineering → New Sectoral Financial Data for Ireland 17 replies on “Growing the Economy” There’s quite a Keynesian view presented in this paper (which is arguably fair enough). However, surely Keynesian stimulus money would very quickly leave our shores as we import so much of our consumer goods and productive goods? I.e. our multiplier is likely too small, no? And this is before we even think about our fiscal situation… From page 26: “We need alternative economic policies – policies founded on growth. … It is time to create a new alliance in Irish politics one that is rooted in the values and principles shared by the trade union movement and progressives throughout this island.” Well, make up your mind, folks. Growth or trade union principles – which is it to be? You’re not going to get both. Are the authors unaware that “No Child Left Behind” is a discredited idea, after the USA experience? I don’t see any mention of nuclear power under “infrastructure”, which tells me how “radical” these proposals really are. I haven’t read every word of this document, but the impression I’m getting is of a group that would like to implement openly, in Ireland, what President Obama’s worst Republican critics are accusing him of surreptitiously aiming for in the USA. The “Sample Macro-economic Calculation” on page 28 looks hairy to me. It seems to be based on the idea that spending money this year will boost not only this year’s GDP, but also that of at least each of the next three years by about the same amount. Which I would find surprising. Would any macroeconomists care to take a look and comment? I suppose we shouldn’t be surprised that the lobbyists for the insiders in the labour force who have received good incomes and captured economic rents should seek to gouge what they perceive as economic rents in every other area of the economy when their sources of income and rents are drying up. This is even worse than a zero-sum game, but it is probably no worse than the green economy fantasy that the Green Party is advancing. Since FF is relying totally on them to maintain the Dail arithmetic it’s hard to blame them. This green fantasy has become a key part of government and establishment propaganda. And it seems to have been swallowed hook, line and sinker by the economics editor of the UK Guardian: http://www.guardian.co.uk/business/2009/jun/14/ireland-green-new-deal I have no problems with efforts to reduce Ireland’s reliance on external energy sources or to de-carbonise the economy. I am fully supportive of an investment stimulus what would enhance productivity and economic growth, but the key issue is how are all these goodies going to be financed. The Guardian was sufficiently kind to publish my observations: http://www.guardian.co.uk/world/2009/jun/16/renewable-energy-investment-ireland Privatising the existing semi-states is the only effective means of generating government equity to kick-start the financing of these initiatives and to attract additional private and external finance. A fair observation, Marcus. The document emphasises the physical and social investments necessary o exploit eventual global recovery. That we entered the recession with a poor infrastructure (one of the worst in the OECD according to the WEF), and that other countries are ramping up infrastructural expenditure as part of their response packages, we are in danger of falling further behind in the competitiveness stakes. The challenge is to minimise leakages. It is worth noting that investments such as education, construction, waste and water, health, telecommunications, etc. have relatively small import content. Any package would have to be mindful of this and prioritise accordingly. And, yes, Government policy – fiscal contraction – is exacerbating an already desperate situation; the EU Commission predicts the deficit will spin out of control next year based on current policy. Even more reason to break from deflationist policies. Brian T, I’m not aware that early childhood education has become a ‘discredited’ idea. ICTU’s proposal to provide an education place to all 3-year olds chimes with Forfas’ analysis that we have the worst pre-primary system in the OECD (in terms of attendance and public funding). Taking knowledge-capital seriously (never mind social equity), means increasing investment in this neglected area. Con – If anything, permanent increases in Government investment and non-wage consumption could reach higher multipliers than that used in the document, and are certainly lower than that used by Fine Gael (http://www.finegael.org/upload/file/Rebuilding%20Ireland.pdf ). The short example did not differentiate between policy instruments – permanent/temporary Exchequer investment, off-balance sheet investments (ICTU’s State Industrial Holding Company which Fine Gael based their policy on). Of course, there is a legitimate argument over whether substantial increases could reach even conservative multipliers (never mind whether we have the necessary institutional levers); all the more reason for further research and debate. Paul – the document devotes a substantial section to financing. Were overall borrowing Increased, over the next two years, by 10% of GDP it would still leave us below the Eurozone average (based on increasingly suspect Government projections). This could provide the investment to lower the annual deficit – as unemployment and falling income are the driving forces behind the growing cyclical deficit. In addition, new tax measures on wealth (which IBEC, by implication, accepted in the Framework Document), reduction of regressive tax expenditures, the issuing of Economic Recovery Bonds to exploit our growing savings ratio – all these could be employed to drive growth and employment up and the deficit down. As to privatisation – if we still had ICC/ACC we would have the institutions at hand to immediately extend credit to SME’s. As to Eircom – that tells its own story about investment, debt and infrastructural quality. It’s interesting that even Fine Gael wants to renationalise Eircom and establish new public enterprises to direct infrastructural investment and job creation. And if the commercial and pricing restrictions were lifted from the ESB, it could become the driving force behind an epochal shift in energy production. They do, after all, have form. One worries when there seems to be a clamour to bring Eircom back into Public ownership ! How short are peoples memories! When EIRCOM was in Government ownership (though managed and controlled by Unions) in the 70s and 80s we were really lagging behind the world in Telecomms capability. It was common to wait for more than 6 months to get a standard telephone connection , and as for a leased data line the lead time was anything up to 2 years depending on location. In terms of maintenance callouts a week would be a good response —-but forget about any service on monday mornings or friday afternoons.!! Yes , in theory, if EIRCOM was State owned there could be straegic initiatives in terms of building infrastructure but BEWARE that we dont go “Back to the Future” Michael, thank you for the response. I’m happy to accept that 0.75 could be conservative as a one year fiscal multiplier, for a well-chosen programme of spending. The point on which I am sceptical is that it might also be plausible as a two, three and four year multiplier, which seems to be the basis for the model. I would have guessed that our relatively high marginal propensity to import would make the multiplier trend rapidly towards zero over time. Michael, I have no problem with all these good intentions. It’s just that I detect a strain of economic nationalism and an aversion to any effective engagement with the “evil” international capital market. We should not damn the entire system because of the uncontrolled greed and excessive risk-taking of relatively few players responding perfectly rationally to the incentives provided. Sorting out the banks and moving towards some semblance of fiscal balance will strain the funding resources of the State – which will include some of the initiatives you highlight. An investment stimulus is a necessary and desirable add-on, but there is a strong case for sourcing finance additional to that required for the previous two tasks. It may prove hard to stomach, but privatisation combined with clear policy guidelines and effective regulation can generate significant benefits. Tony Benn has frequently quipped that the electricity and gas regulator in Britain has more control over these privatised industries than he ever had when he was Secretary of State for Energy in the late ’60s and they were fully publicly owned. The international glut of liquidity has not disappeared and there are funds seeking low-risk (and correspondingly low) rates of return. The current regulatory regime would require some reform to ensure the interests of consumers were better protected. (Part of the problem with the current regime is that it is modelled on an approach more appropriate for the regulation of private sector businesses rather than public sector ones and there is a clear policy/regulatory conflict in the energy sector which the ESB and BGE have won at the expense of consumers.) And I suppose it would be too much to ask that Eircom be left go as a stick to beat the concept of privatisation. It should be used as a stick to beat an inept privatisation that lacked policy and regulatory enforcement of service and investment levels. And an IPO is merely one of many means of introducing private sector investment in a sector – and would be inappropriate for the existing semi-states. The Government needs some additional funds to kick-start an investment stimulus. External investors will require the promoter to have some “skin in the game”. And your faith in the ESB is touching when the current excessively high prices it is forced to accept by the regulator partly compensate for its loss of market share in Ireland and help to finance its empire-building overseas. Tadgh, I’d have to disagree with your point on Eircom’s poor performance when it was under government ownership. While the telecoms service was indeed poor when run by the Department of Post and Telegraphs up until the early 1980s, once the service was corporatised from the civil service and Telecom Éireann was established, significant gains in quality and performance were recorded. These improvements were achieved despite the fact that Telecom Éireann was forced to take on debt of over €1 billion when established (incurred by the Department of Post & Telegraphs in the preceding decades). As I have already mentioned in a comment made previously on the Tasc blog, as a commercial state-owned enterprise, Telecom Éireann transformed the national telecoms service from a chronic loss‐maker to a profitable company and invested heavily in its network so that by the mid‐1990s Ireland enjoyed world class telecoms services. At the same time, Telecom Éireann managed to reduce the company’s debt considerably, all without any assistance whatsoever from the Exchequer. Given the debt burden placed on the company from inception and the poor state of the network it inherited in 1984, these achievements were simply remarkable. In terms of the current debate over the nationalisation of Eircom, while I believe there is absolutely no need for the Government to return to the business of telecoms service provision, there is an urgent need for Eircom’s network to be taken back under public ownership in order to regain control of the critical ‘last mile’ infrastructure. Eircom’s network can then be integrated with all of the existing state-owned telecom assets (MANs, ESB Telecoms etc.) as part of a new state-owned telecoms network company. This new network company can then be tasked with ensuring adequate (and an equitable distribution of) investment in infrastructure and the provision of a fully open access next generation network in all parts of Ireland. Such actions are critical if we are ever to deliver the first-class infrastructure necessary to build a ‘smart economy’. Tadgh – you are right to point out how bad things were when everything was in monopolistic control of the Department of Posts and Telegraphs. However, this changed fundamentally when telecommunications was transferred to a public enterprise in the early 1980s – Telecom Eireann. Donal has made strong points in this regard. I would just add that in a comparative study in the European Business Review, TE had one of the highest levels of productivity and profitability among all European telecoms in the period of 1983-1997. Minister Seamus Brennan stated TE was the most valuable and successful public enterprise companies – an unnerving compliment since it only sized up the company for privatisation. So when doing historical comparisons, we should be sensitive to the three periods: civil service operation, public enterprise, and privatised enterprise. During the public enterprise period, we saw investment and accessibility increase, our infrastructure modernised and charges fall (as opposed to the ‘1970s’, which you referred to). That’s an interesting comparison with the post- privatisation period of falling investment, high charges and a failure to modernise the system. And, by the way, trade union density remained the same in the transfer from the civil service to public enterprise. Con, you are right when questioning the ability to maintain a high domestic multiplier over an extended period in a small, open economy. The problem is the lack of data or modelling for an economy such as ours (most work is done in larger, more closed economies). If I’m reading Philip Lane correctly – and I’m certainly open to correction – he seems to suggest that high multipliers can be maintained, if confined to investment/non-wage consumption (http://www.esr.ie/Vol40_2/Vol%2040-2-Lane.pdf). This is an area, as I said, that needs further exploration. Depending on the results, and I suspect you’d get different results depending on the various methods employed, one would have to adjust proposals accordingly. But clearly, if we are not to enter a ‘lost decade’ or tolerate extended mass unemployment (and, so, a ‘lost generation’, if we are to increase our competitiveness through modernising our physical and social infrastructure, we have to look further afield than current government policy. Philip, I think the point of the document is that unemployment is, now, the biggest driver in the spiralling deficit. In order to address the deficit, you have to address unemployment, incomes and economic activity. To detach the two – as Government policy has done – is to fail to get to grips with the deficit itself. Witness what is happening now and what many forecasters are projecting for 2010/11. Therefore, to tackle the deficit means tackling the underlying causes. Given that we are still – and will be even at the end of the next year based on the most pessimistic forecasts – a relatively low-debt economy, we should play to this fiscal strength. It’s the only one we have. As for the ESB – it is losing market share. It is required to lose market share by government policy. It is being forced to lost market share by the Regulator. It is forced to charge above-market tariffs and precluded, accept on the strictest of terms (namely, to shed market share) from investment and expansion. In this respect, would you support the ATGWU’s (now part of UNITE) call for letting the market to set the price and to remove anti-competitive practices in the market, with the regulator’s only role to ensure there is no abuse of market power? Michael, I don’t see any Philips on this thread, so, perhaps, you have re-christened me! In any event, I take your point about Ireland’s debt/GDP ratio when compared to that of Portugal, Italy, Greece and Spain, but it would be unwise in the extreme to test the limits of external lenders’ willingness to advance funds. Existing and prospective providers of funds are not unaware that the State has valuable equity tied up in semi-state businesses where its share of ownership is far higher than that of other EU member-states in similar businesses. Releasing this equity and using the proceeds to kick-start the financing of an investment stimulus should be a no-brainer, but most politicans and representatives of the labour movement seem to have dug themselves into an ideological hole and can’t keep themselves from digging deeper. It all the more quaint when left of centre parties throughout the EU (whether in government or opposition) have come to terms with significant private sector ownership of these businesses under well-structured policy and regulatory arrangements. And, in the case of the ESB (and BGE) – the semi-states that could release substantial Government equity most readily, it’s not that majority State ownership has served consumers, businesses and the economy in general very well. The regulatory model applied to the energy sector since 1999 closely resembles that developed earlier in Britain, but it is more suited to the regulation of private sector businesses rather than state-owned ones. In other countries, it attempts to strike a balance between the interests of investors and those of final consumers, but its application in Ireland has revealed both internal policy conflicts and policy/regulatory conflicts. You are correct to point out that, in terms of generation, the policy of successive governments is to strip the ESB of its previous monopoly progressively so that it has no more than a 40% share of the generation market on the island of Ireland. And this policy has been implemented by the regulator. However, it has also been government policy (1) to maintain the ESB and BGE as viable, integrated businesses (despite primary EU legislation requiring the greatest possible extent of separation of the supply and network businesses), (2) to retain these businesses in majority State ownership, (3) to avoid to the greatest extent possible direct Exchequer financing of the huge investment undertaken by these businesses in the last 10 years and (4) to compensate the ESB and BGE for any loss of market share in Ireland and to enhance their financial capability to expand their operations in other areas both in Ireland and overseas. In every respect these policy objectives conflict with the underlying reationale for the regulatory model applied, so effective regulation that would protect the interest of final consumers had to be subverted to implement these policies. That is why the CER has the statutory power to set prices, revenues and tariffs and not the maximum prices, revenues and tariffs one sees in other countries that apply this regulatory model. In addition, the CER set prices and tariffs at levels that ensure that final consumers are paying up-front to finance a share of the investment that should be financed directly by the Government. For example, between 2001 and 2006 the ESB invested €3.5 billion in its networks. Almost 75% of the financing was extracted from final consumers via capital contributions and the cash flow from consumer revenues set by the CER. Government direct financing was zero (even though it extracted dividends of €334 million during the period). The remaining financing came from borrowings and cash flow generated in other activites. These are the facts and are extracted from the Summary Regulatory Accounts published by the ESB. This extra cash extracted from consumers allows the ESB to maintain a low debt percentage which provides it with the capacity to finance other activities that will compensate for its loss of market share in Ireland. The situation is similar for BGE and, in some respects, even worse for consumers. The LNG import option was dismissed very quickly in the late 1990s as BGE didn’t favour it and wished to build a second interconnector (IC2) from Scotland to Ireland. There was a competing proposal to reinforce the interconnector between Scotland and Northern Ireland, but BGE got its way. We will now have Corrib gas and Shannon LNG cocuming on stream and IC2 will be little used (and there may even be reduced use of the first interconnector). However, despite some tinkering wth the profile of revenues, the CER has set revenues so that the full costs of these interconnectors will be recovered. The logical approach, as pointed out at the time, was to import LNG, then reinforce the Scotland-Northern Ireland interconnector, and then, if required, build IC2. This is why Irish electricity and gas prices are among the highest in the EU. The flannel produced by the SEI (and by the ESB) that costs are high because of our peripheral position in the EU, a fossil-fuel dependent generation mix and the higher network costs of connecting a low density and dispersed population contains some tiny germs of truth, but it is still largely flannel. And the comparisons produced include some EU member-states that set much higher taxes on electricity and gas for specific policy reasons. Once the taxes are stripped out the stark reality of Ireland’s prices is revealed. In addition prices are high in some countries not only due to higher taxes, but due to higher forward-looking investments. For example, Italy has rolled out a programme of smart meters for all consumers, but the initial higher costs will lead to lower costs in the future from improved load management and reduced investment in generation capacity. Even though oil prices were falling (up to recently) from their highs last July and international gas prices continue to fall, the CER, dutifully obeying Government instructions to keep buckets of money flowing into the ESB’s coffers, would not have passed these falls through to final consumers until much late in the year. The penny finally dropped with the Taoiseach that the CER was being too zealous and instructed Minister Ryan to get on its case. After performing various contortions the CER delivered price reductions from 1 May. However, prices are falling in all other countries and Irish consumers are probably relatively worse off. Probably the reductio ad absurdum of this dysfunctional and demaging policy and regulatory approach is BGE competing with the ESB in the supply of electricity. Gas consumers are paying over the odds for network services so that BGE can finance (both directly and via increased borrowing) electricity generation and supply. Since there is no effective ring-fencing of network revenues – there is one corporate treasury pot in both the ESB and BGE – there is cross-subsidisation from regulated to non-regulated activities and external competitors are seriously disadvantaged. And all to present the optical illusion of competition and to reduce the cost of supply for a relatively small number of consumers. Brendan Ogle, whom I sure you know, has previously come close to describing the full extent of the lunacy in this “looking glass world”, but he has failed to follow the argument through to its logical conclusion. Letting the market set the price and removing anti-competitive practices (as you present the UNITE/ATGWU stance) may sound attractive, but it ignores the extent of market power and the restrictions on the emergence of genuine competition. Regonal markets for gas and electricity are beginning to emerge throughout Europe and are being actively promoted by the European Commission and by the European Regulators Group for Electricity and Gas (ERGEG). Ireland is part of a regional electricity market that includes Britain and France and it part of a wider gas market that takes in the countries North West Europe (NWE). Ireland’s full integration in this reional electricity market has been delayed by the delay in constructing an East-West electricity interconnector. There are many reasons for this delay. The government was hoping that a private sector investor would emerge to construct this interconnector on a merchant basis. The government was unwilling to invest directly and the ESB and the CER realised that there was a limit to which additional financing could be extracted from consumers via even higher prices. Cheaper electricity from Britain would expose the inefficiency of some of the ESB’s plants. Some atavistic Anglophobia entered the mix as well as concerns about importing “evil” nuclear-generated electricity to this sainted isle. Eventually, Eirgrid and the ESB have been given the go-ahead, but it will probably be 2012 before electricity flows. However, the gas interconnectors have fully integrated the Irish gas market with the much larger British market and prices in Ireland are determined by the wholesale prices at the UK’s National Balancing Point (NBP). In this context, restructuring the ESB and BGE into separate network and supply business units and privatising them serves two important pruposes. It would release equity to kick-start the financing of an investment stimulus but it would also allow the policy and regulatory arrangements to be re-configured in a way that would benefit consumers and the economy. Privatising the networks would reveal an appropriate market value which the regulator could then use to set appropriate network revenues (as opposed to the current overvaluation of assets). This would reduce network charges and final prices immediately by up to 10%. The legisaltion enabling privatisation would impose binding policy and regulatory invsetmnt and service obligations on the new owners. It would also provide an opportunity to integrate the gas trasnsmission networks on both island initially, and the electricity transmission networks eventually. This would impose competitive pressures to bring final prices on both islands down to the same levels as it would remove the cost-plus interconnector wedge that increases irish prices. All competitve restraints on the privatised ESB generation and supply bsuiness would be removed as it would now be operating in the integrated market on both island. There is a case for merging the generation and supply business of the ESB with the supply business of BGE to operate as a single in the integrated electricity and gas markets on both island. I accept that the workers in both the ESB and BGE are totally opposed to any form of privatisation, but they have little to fear as BGE is probably one of the most efficient businesses (in terms of operations) in Ireland and the ESB has made huge strides in this direction as well as having a top quality international reputation in the electricity industry. Contrary to public perceptions there is considerable evidence that all successful private sector owners value highly competent, skilled and cohesive workforces. In addition, there is no reason why the current ESOTs would not be protected or, possibly, expanded. I have no argument with the workers of the ESB or BGE; my focus is on the structure and financing of these businesses. However, the ESB did itself no favours by awarding pay increases and management bonuses last year (even though it was legally obliged to) when many of the consumers and businesses it was supply were facing pay cuts, unemployment and bankruptcy. It appears, though, that the ESB has a better handle on popular sentiment than the Government and the speed with which it offered to forgo its carbon emission allowance windfall so that prices could be reduced was a master-stroke. Of course, the CER had to grab the initiative as it, and it alone, has the power to set prices. There is a limit though to the number of strokes that may be pulled to divert consumer anger. The case for restructuring the ESB and BGE, reconfiguring the policy and regulatory arrangements, privatising the restructured business units and releasing government equity is compelling. However, I am beginning to depair that any rational progress is possible. Do trade unions now run the country? Rebels increase in supply as the economy founders. Economics has validity only if it enables better policy decisions. When the brunt of the downturn is likely to fall disproportionately on the poorest, all inhabitants lose. While efficiency is good, it only is worthwhile when the global economy is functioning. The Depression is capable of threatening that, so taking on board what Trades Unions say is wise and necessary. Jaw-jaw, not war war! The only way to increase productivity is to have the workers, they are the productive people, working as hard as practicable. When they are thinking of privation, they are not functioning at 100%. Slave drivers become vulnerable when slaves die or rebel….. http://globaleconomydoesmatter.blogspot.com/2009/06/banking-problems-in-southern-europe.html Pat, Thank you for your wise and measured words. There is a palpable shift in the Irish electorate to a position that would previously be described as “left-of-centre” but is now more usually labelled “progressive”. Prof Fred Kahn, the guru of the economics of regulation, helpfully distinguishes the “progressive” from the genuinely liberal mindset: http://www.aei-brookings.org/admin/authorpdfs/redirect-safely.php?fname=../pdffiles/WP08-03_topostv1.pdf Prof. Kahn focuses on the US experience, but it should resonate more widely. The progressive mindset, particularly in times of economic hardship, looks to government to act and intervene extensively, is suspicious of free markets and their functioning and is prone to favour centralised and excessive bureaucratic control. At times it appears that this blog is a conversation among liberals, neoliberals and disciples of the Austrian School. I am greatly encouraged that opinion formers in the progressive constituency are prepared to engage in debate. There is a widespread view that Trades Unions have an excessive and democratically unaccountable impact on economic policy and that this is not subject to scrutiny by the Oireachtas. This is due in large measure to the almost absolute power of the executive (government) and the inability of the legislature (the Dail) to hold it to account. Until there is significant reform of the Oireachtas via electoral reform and other institutional changes that separate the powers of the executive and the legislature (and enhance the power of the legislature) this charge lacks substance. In the meantime, jaw-jaw is the most effective means of hammering out sensible policies. Paul – first apologies for getting the name wrong. And I hope you won´t thínk i´m avoiding your comments but I`m currently away and unable to respond in the depth your comments deserve. Suffice it to say that your description of why the electricity market works the way it does is not something I recognise. You fail to consider the incentivising private investment and its impact on prices and the enforced cutrailment of public investment. However, I´m sure we will meet up again on this issue and hopefully more. Well, I think this looks smashing and think that, if anything, this proposal sells itself short. Peak GDP in Ireland was around €188bn in 2006, but it has fallen since then. All we need to do is increase public spending to €220 billion in 2010. That would be a healthy 4% per annum increase from 2006 and put us back on a healthy growth path. We can keep doing same in 2011, 2012 etc. This economics lark is a doddle. Michael, Thanks for responding. You raise relevant issues, but it is possible to resolve them and I would be pleased to address them. Perhaps, to avoid boring other readers to distraction, we should take this off-line. I’m at email@example.com. Comments are closed.