The Irish Economy

The first InterTradeIreland Economic Forum - Global Outlook took place in Dublin on the 18th June 2009. You can see the presentations here.

The Irish Academy of Engineering has released a report here which argues that enegy investment plans should be scaled back, and expresses scepticism about our high renewables targets.

Ashoka Mody leads the IMF’s work on Germany as well as on Ireland.  He writes in today’s FT in praise of the German fiscal law: you can read it here.

I’ve been looking into the AIB debt buyback program, details of which were announced on Monday (Irish Times story here.)  Why in God’s name would I be doing that during a rare sunny week in this country? Well, between the state guarantee and NAMA, pretty much everything the banks do these days has implications for the taxpayer, so it’s worth taking a look at.  That and the fact that I’m a nerd. Wonky corporate financey post below the fold.

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The transcript of the conference call with Ashoka Mody is here.

Brian weighs in on the IMF and the banking crisis in this article in today’s Irish Times.

The National Accounts suggest that the activity peak was about Q2 2007, so the last reading on pre-recession employment was about Q1 2007. The QNHS published yesterday gives Q1 data for 2007, 2008 and 2009 on the new basis. Figs in 000 are from the sa Table 3.

Sector                    Q1 07      Q1 08     Q1 09     % Chg 09/07

Agriculture              108.9       116.9     102.7           -5.7

Industry                 305.3       288.1     268.6          -12.0

Construction           270.7      256.6      184.0           -32.0

‘Public Sector’         453.2      463.7      480.7            +6.1

All Other                963.1     1013.6      945.3            -1.8

Tot Employment     2101.2    2138.9     1981.3            -5.3  

Unemployed             98.5       109.9     223.4          +126.8

Labour Force         2199.7     2247.6    2203.0            +0.2

‘Public Sector’ is the sum of NACE categories O, P, Q, Public Administration, Education and Health, and includes over 100K not formally public servants. Some commercial Semi State employees are in Industry. The most dramatic collapse is in Construction, down 32%, with Industry down 12%. The OPQ ‘Public Sector’ has grown 6%,  and is the only sector exempted from the downturn thus far. The quarterly peak was actually in Q4 08 and there are now recruitment curbs and budget cuts, so this sector may turn negative through 2009. But to date, the OPQ sector has added 27,500 since the downturn started (+6.1%) while the rest of the economy has shed 147,400 (-8.9%).

The propagation of the employment contraction out of construction in 07 into the rest of the private economy in 08 is clear. The QNHS unemployment rate grew from 4.5% to just 4.9% through 07, but soared to 10.2% in the four quarters to Q1 09. Since the most sharply-contracting sector has a mainly male workforce, an interesting effect is that 45.1% of the employed workforce is now female, an all-time record. Labour force growth has ceased and the participation rate has been dropping steadily for a year. In total employment terms, the fastest decline was in the most recent quarter, and with probably not a single sector now expanding, the Q2 figures will hardly bring much joy.

The National Competitiveness Council is a social partnership body set up in 1997. It “reports to the Taoiseach on key competitiveness issues facing the Irish economy and makes recommendations on policy actions to enhance Ireland’s competitive position.” As with all such bodies, the Council members are the usual smorgasbord of trade unionists, business and financial interests and civil servants, chaired by a safe pair of hands in the form of a former senior civil servant.

Today, the NCC released a report titled Getting Fit Again: The Short Term Priorities for Restoring Ireland’s Competitiveness. You can find it here.

The report makes various recommendations to the government. Some of them—like introducing a property tax, reforming the public sector and, uh, resolving the banking crisis—are generic and would be agreed with by the vast majority of economists and other bodies advising the government. A picky person like myself will find something to disagree with (such as the recommendation to prioritise capital spending) but most of it is fairly unobjectionable.

But that’s the problem. By and large, the report looks and reads like exactly what you’d expect from a body of this type. It’s a glossy and somewhat bland document that does not in any way challenge entrenched government positions (for instance, the document regularly pauses to praise the Smart Economy plan, which most informed economists that I’ve spoken with consider to be an excellent example of Emperor’s New Clothes).

There’s plenty of evidence to show that I’m not the world’s biggest fan of the Blueshirts. But on this issue, I was reminded of a passage from their Streamlining Government document. The FG document pointed out that social partnership

has given rise to the creation of new state agencies. For example, the desire of unions to show that they were using the social partnership system to assist their members who could not afford a home during the housing boom gave rise to the Affordable Housing Partnership (AHP). Unfortunately, it has not given rise to many affordable houses.

In a similar vein, business and corporate interests were given the National Competitiveness Council (NCC) so that they could tell their members that the social partnership process was being used to address Ireland’s loss of economic competitiveness. In reality, our competitiveness has continued to decline. When it comes to housing and competitiveness, we do not need more agencies, what we really need is the right policies and ministers who will to implement them.

The NCC believe the government should cut current expenditure. I reckon that eliminating their budget would be a good place to start.

One point I had meant to make in yesterday’s post about job subsidies but forgot to was the following.  Beyond the fact that these programs are expensive and known to be ineffective at reducing unemployment, it remains the case that, whatever agreement the government comes to with the unions, the fiscal situation remains the same (I am discounting arguments here that these schemes pay for themselves because we know they don’t.) I doubt if the government will change its plans for the budget deficit by one cent if it adopts this plan.

So if we spend €250 million (or a €1 billion) on these schemes we will undoubtedly have to find a corresponding €250 million in tax increases or, more likely, spending cuts to offset them.  These measures will themselves have a negative effect on aggregate demand and thus unemployment.

This comes back to the point I made in my post on stimulus. In the current environment, spending measures like this need to be evaluated according to balanced-budget multipliers (i.e. factoring in the negative effects of the taxes that need to be raised or other spending that needs to be cut to pay for them.)  With so many difficult cuts in public spending ahead of us, why put ourselves deeper in the hole by adding an extra €250 million (€60 for every man, woman and child in the country) just to pay for a program that doesn’t help much.

There is a consensus that the practitioners and discipline of economics have been key beneficiaries of the financial and fiscal crises.  The views of leading economists as to where we are and what we should do are widely sought across the media and within government. A conference organised at TCD earlier this week on the issue of political reform was part of a deliberate effort by political scientists to demonstrate the relevance of their discipline and the Irish Times has been publishing opinion pieces and articles drawing on the conference . Earlier in the week UCD’s John Coakley argued that informal institutions (in the form of political culture) have significantly shaped (and restricted) the state’s capacities. Today’s piece by Neil Collins of UCC argues that there has been a striking neglect of the potential of formal institutions in shaping effective governance. He concludes that ‘It is time for a rebalancing of academic attention from the economic to the political agenda.’

As an outsider to both disciplines it is striking that both have a good deal to say about the way that institutions matter in shaping both expectations and capacity for action. I am led to think that if a rebalancing is required then it might be towards thinking more about the way that formal and informal institutions limit what can be achieved (and deliver unintended consquences), but that a better understanding of those limits might support modest reform proposals which more effectively link the specification of desirable outcomes to the mechanisms through such outcomes might be reasonably be expected to be achieved.