The Irish Economy

Former IDA chief executive Seán Dorgan has an interesting article on the Smart Economy in today’s Irish Times, partly rebutting some of the points made in Declan Jordan’s recent piece.  One of the arguments made by Dorgan that I found interesting was the following:

The Technology Foresight reviews were undertaken a decade ago with the realisation that a production model based on low costs and labour surpluses had run its course.

Instead, Ireland had to move to higher value activities and create a new dynamic for growth. The competitive power of knowledge and innovation was identified, for indigenous development and winning international investments.

One of the points I made when last discussing this issue was that the Smart Economy strategy seemed more appropriate for the later days of the Celtic Tiger, when the economy was at full employment after years of attracting FDI.  Dorgan’s article further enforces that impression: With unemployment already at almost 12% and going higher, should we really be talking about moving beyond industrial policy strategies based on the availability of labour surpluses?

Last week, the CSO released the latest results from the National Employment Survey, which reports detailed information on earnings across all sectors of the economy.  The data from the survey relate to October 2007.

The first media treatment of the story that I saw was the Sunday Independent’s lead story saying the public sector is “now earning 50 per cent more the private sector.”  My reaction was that while the headline might be true, this wasn’t a very useful way to think about the issue of public sector pay. 

The report also details a host of other well-known patterns: Those with more education earn more, older workers earn more, those in professional occupations earn more.  With the possible exception of Vincent Browne, I’m not sure there is anyone out there who would draw the implication from these figures that the government should intervene to eliminate all these gaps.

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One interesting aspect of the government’s current approach to promoting its NAMA plan for dealing with the banking crisis is their tendency to interpret everything said by authority figures as being in full support of their chosen approach.

As an example of this, on RTE’s The Week in Politics, Minister Eamon Ryan said the following (about 15.40 in):

The difficult and unpopular decisions that were excoriated by the Labour Party endlessly—you’re bailing out the banks, you’re bailing out the banks—have been described by the International Monetary Fund as the right way forward; has been described by the ESRI as the first time the government is getting it right, as they see it; has been described by the Swedish finance minister who was over last week, who got them through a similar crisis, as exactly the right thing to do.

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There has been much discussion in the press over the last few days over two issues affecting the universities: the issuing of an Employment Control Framework by the Higher Education Authority and the delivery of a report to the Minister for Education on the reintroduction of fees for undergraduate education. The two are linked because each has the potential to affect the autonomy of the universities in important ways. More broadly they raise questions of institutional design that apply also to other significant aspects of the machinery for governing the economy concerning the relative autonomy from government ministers of both state-owned enterprises and regulatory bodies. The current fiscal and financial crises are likely to put all of these relationships under pressure and beg the question whether exploiting the capacity for government to exert greater centralized control is simply opportunistic or offers a principled basis for addressing weaknesses. Let me declare at the outset that I am parti pris since, like many contributors to this blog,  I hold an academic appointment in a University.

Turning specifically to the universities the Employment Control Framework is reported by the Irish Times to impose restrictions on recruitment of new staff, promotion of existing staff and retention of temporary staff with a linkage between compliance and continuation of state funding. Although issued by the Higher Education Authority it is apparent that the Department of Education and the Department of Finance each had a significant role in shaping the document. The Framework has been widely interpreted as an attack on the autonomy of the Universities and in breach of the provisions of the Universities Act 1997. My learned friend  Steve Hedley offers his interpretation of the legal provisions here. There is discussion in the Sunday Tribune of the Irish Federation of University Teachers challenging the Framework in litigation, but in the medium term the legislation may not be important  since the government’s effective control of the Oireachtas means that legislation can be changed to give effect to the Government’s favoured position if a court rules against  it in judicial review proceedings. The more important question is the normative one whether it is advantageous to the capacities of the nation for ministers to assert more direct control over the universities through control over key staffing issues. Insofar as the position of the university heads may be ascertained it appears to be that such restrictions appear to undermine  their flexibility to determine the deployment of their resources to prioritise particular areas of research, to innovate and  to match teaching capacity to needs. Under the terms of the legislation the allocation of resources is the responsibility of the HEA, whilst prioritization is a matter for the Universities themselves. This principled separation of responsibilities has been considerably eroded in fact (but not in law) by the shift of resources away from formulaic block grant (based largely on student numbers) towards competitive awards of grants under such schemes as PRTLI, SIF and the programmes of Science Foundation Ireland and the Research Councils. Universities have been incentivised  by such competitions to shift resources into areas favoured by the government. Competition is not the only mechanism at play, since most schemes have a significant element of peer review and government deploys its hierarchical capacity to steer and approve decisions (with the potential for importing political priorities) within many of the schemes.

The discussion around the reintroduction of fees linked to a student loans scheme has the potential to affect the autonomy of the universities in the other direction, to the extent that the scheme permits the universities to grow their revenues directly through undergraduate student recruitment. The government has not yet committed to any of the variety of mechanisms which have been proposed (discussed in yesterday’s Sunday Business Post), suffice it to say that the separation of upfront fees from a loans scheme is likely to give the universities greater autonomy, whereas the linkage of additional revenue to a graduate tax is liable to give the government greater control.

The relationship between the two issues lies in the issue of funding dependence. Permitting universities to charge undergraduate fees, separate from a related loans scheme, reduces the capacity of the government to threaten funding sanctions to universities which breach government requirement s such as those set down in the Framework.

How does this all link to the Irish economy? It is widely held that the role of the universities in providing research, stimulating innovation (not only in science and technology, but also through translation of research into policy and creative domains) and in education at both undergraduate and graduate levels is relevant to Ireland’s future economic capacity (although there is disagreement on the extent of the universities’ significance). Comparative analysis demonstrates that there is no single model of university-government relations within the other OECD member states. The French government retains a high degree of central control over key aspects educational provision and academic appointments, whilst a mixed economy of public and private provision in the United States gives substantial autonomy to many higher education institutions. The UK balances substantial autonomy for the universities with a form of hyper-regulation over teaching and research quality which has never been seen in Ireland. The Irish regime under which universities are required to self-regulate explicitly (teaching) or implicitly (research) is a style which I refer to as meta-regulation. There is already a meta-regulatory alternative to the Employment Control Framework in the form of an Irish Universities Association document which caps employment numbers, but under which the control is exercised by the universities themselves.

A tangential issue arising from the Employment Control Framework is whether there is a continuing role for the Higher Education Authority if, in fact, ministers are determining conditions of grant for universities. A key aspect of the UK regime is the role of buffer organisations (such as the Higher Education Funding Council for England) which both funds and holds higher education institutions to account for their expenditure.  In a fairly similar regime of universities governance to that of the UK the Australian government abolished the buffer institution, the Australian Universities Commission, in 1976 and took its functions in funding and oversight into the education ministry. Given current strictures on public finances and controversies about the added value of quasi-autonomous non-governmental organisations (quangos) an agency that cannot demonstrate its distinctive role may be under threat.

Whilst these issues of institutional design can hardly be neutral in their effects in terms of the role of universities (and others such as state-owned enterprises and regulators) in sustaining and developing the Irish economy, we appear to have more questions than answers in the search for defensible (I would not dare suggest optimal) solutions.

Following up on last week’s story about Anglo suspending interest payments on certain bonds, the Sunday Tribune had a nice article by Emmet Oliver that sheds some light on the issues surrounding this decision.  Also in the Tribune, my old friend Jon Ihle reported the feel-good news story of the week about a certain bond investor who’s going to lose out as a result of this decision.

Price index numbers for June were published last Thursday. There are consistent seasonals in the Irish numbers, although CSO does not adjust, presumably because the seasonals are small, ranging only from 98.9 to 100.6 for the HICP. But the seasonals are big enough to affect month-to-month comparisons when inflation is around zero, and it is better to adjust. This note uses the 2008 seasonals computed on the data run up to Dec 08 by John Lawlor of DKM mentioned here in an earlier posting.

Seasonal effects are small through most of the year but bigger over year’s end. No statistically significant nit should be left unpicked.

Both HICP and CPI sa fell again in June. HICP has fallen for seven straight months, CPI for eight. The last twelve sa HICP and CPI numbers are, in mom % changes,

sa % Chg   HICP     CPI

Jul 08       +0.1     +0.1    

Aug 08     -0.2     +0.2   

Sep 08     +0.2     +0.2

Oct 08       0.0     +0.1

Nov 08       0.0     -0.8

Dec 08     -0.5      -1.1

Jan 09       0.0      -0.9

Feb 09     -0.6      -1.1

Mar 09     -0.4      -0.3

Apr 09     -0.1       -1.0 

May 09    -0.6       -0.7

Jun 09    -0.1        -0.3 

The HICP peaked in July 08, since which point it is down 2.2% sa. The CPI peaked in October last, and has fallen 6% sa from that point. The HICP is a subset of CPI - about 9.5% of CPI by weight is excluded from HICP, and 6.7% of this is mortgage interest. So the difference between the two is almost entirely mortgage interest.

I have argued elsewhere that mortgage interest (the price of credit, not of a good or service) does not belong in a general index of consumer prices, and I prefer HICP, which has recently been falling more slowly. It was the other way round a couple of years back, when interest rates were rising. There will be another switchback when the ECB gets round to raising rates again. (Don’t ask!).

The June Euro-area figs will be out in the next few days. I expect that they will show that Irish HICP inflation over the last twelve months has run about 2% below the Eurozone average. This is not much of a real-exchange-rate adjustment and it is fair to ask whether it has further to run.

The Govt increased Social Welfare rates of payment by a little over 3% in the October budget, with the increases effective from January 09. Jobseekers’ Allowance, for example, rose 3.3%.

In the October budget documentation, Finance stated that they expected HICP inflation, year 09 versus year 08, to be about +2.2%. At this stage, it looks as if the actual fig could be more like -2.2%, and the real value of the main payment rates (using HICP) is about 5% ahead of where it was last Summer.  

CSO have set up a committee to review price index numbers and it is to advise the DG of CSO before year’s end. I prefer HICP to CPI, and the UK, whose RPI has the same mortgage interest problem as our CPI, has begun to place more stress on the HICP. There are of course other options. If you have any views on the best way to measure consumer prices, this is a good time to let CSO know.

An Taoiseach appeared today before the biennial conference of the Irish Congress of Trade Unions (incidentally, the highlight of their last conference was Mr. Cowen’s predecessor wondering aloud why those who criticised his economic policies didn’t go off and commit suicide.)  The Taoiseach’s remarks suggest that, despite David Begg’s disavowal of it, the €250 million job subsidy proposal is going ahead:

Drawing on detailed discussions with Congress, we are introducing a new initiative to safeguard vulnerable jobs through a Temporary Employment Subsidy Scheme. This will provide a subsidy to support jobs in exporting companies in the manufacturing or internationally-traded services sector.

Perhaps these detailed discussions with ICTU have changed the proposed scheme from the one criticised by me, Sarah Carey, and of course, David Begg.  However, there is no information in the official announcement to suggest so as of yet.  Indeed, it directs us to the document containing the original announcement of the scheme for “more information.”

As an aside, I’d note that the name of the scheme is a bit confusing.  I thought when I read it first that it was a scheme to promote temporary employment via a subsidy.  However, it appears instead to be a scheme that temporarily promotes employment via a subsidy.

Nobel Laureate in Economics Amartya Sen spoke to a capacity audience at TCD yesterday.  His theme was “On Global Confusion” and he ranged from credit default swaps to Adam Smith’s views on selfishness. Podcast is available here.

He also gave an interview to Cathal Mac Coille of Morning Ireland: the full podcast of that is here.

Thanks to Karl D. for the tip-off on this story.  Anglo Irish has announced that it will not be paying coupons on its Tier 1 subordinated bonds and that this decision was required by “The European Commission, as a condition of its approval of the Government’s capitalisation of the Bank of up to €4bn.”  In a related story, the International Swaps and Derivatives Association has decided that a similar non-payment by Bradford and Bingley represents a “credit event” which will trigger CDS insurance.  (Bloomberg story here, official announcement here.)

Presumably, Anglo’s actions will at some point trigger the same decision from the ISDA.  This will mean that those Anglo bondholders holding CDS insurance will receive full payment.  Anglo’s announcement also discusses its “liability management” exercise, in which it is planning to buy back outstanding debt at below par.  Presumably, however, those insured by CDS will no longer be interested in a deal of this sort.  It also makes it likely that much of the debt that Anglo is planning to buy back at a discount will be owned by CDS issuers.

Update: My presumablys were perhaps a bit presumptious.  Commenter Eoin notes below that this is not (yet) a credit event.  I have checked this elsewhere and am informed that the “reference” obligation that defines a credit event for Anglo is indeed a failure to meet Tier 2 obligations.

The latest ECB Monthly Bulletin carries an interesting special article on the impact of banking-sector rescue policies on public finances across the euro area: you can read it here.

Scott Rankin and Rossa White at Davy Research have a new quantitative analysis on what the banking crisis may cost in terms of (i) total system losses and (ii) re-cap costs (taking into account operating profits, capital ratios desired by govt etc.) and (iii) the % of that re-cap cost that may come from the government. They also look at how much of our long-term funding has been successfully done ytd and estimate the trajectory for government debt.

The paper is available here.

Kevin O’Rourke has written a wide-ranging opinion piece in today’s Irish Times: you can read it here.

I have written before about the incisive and articulate contributions of Bo Lundgren, the Swedish Finance Minister in charge during their banking crisis of the early 1990s.  Lundgren was in Dublin on Tuesday, giving a talk at the Institute of International and European Affairs and testifying before the Oireachtas Committee on Finance and the Public Service.  A productive guy, he also appeared on Morning Ireland.  Here’s a link to his interview on that show (scroll down to find it) which has lots of interesting material. I will post a link to the transcript of his Oireachtas appearance when it is put up.

I think there are statements in Lundgren’s Morning Ireland interview which could be probably be latched on to by all sides of the debate on banking being played out on this blog.  Rather than attempt to score points on this, I will only note that Lungren argues that a political consensus greatly helps when dealing with a banking crisis (about 7 minutes in).

In the Irish context, perhaps the key issue causing political controversy is the price that NAMA will pay for the assets.  In Sweden this was set by an independent Valuation Committee overseen by a cross-party board. The emerging details suggest that the price that NAMA pays will come from a complex valuation process recommended to the NAMA officials by HSBC (the IT today reported that 370 categories of information must be provided by banks on each developer on the loan books so that HSBC can use this information to develop a valuation mechanism.)

In relation to this, let me put forward a suggestion that could potentially lead to all-party support for the government’s approach, which Lundgren viewed as crucial: Appoint a cross-party board to approve NAMA’s pricing of assets being transferred. I think it might be hard for opposition politicians to turn down an offer like this and it could be a way to address well-founded opposition concerns about potential losses to the taxpayer as well as less well-founded concerns such as the idea that NAMA is a bailout for developers.

If the only solid support for NAMA’s pricing mechanism comes from representatives of an unpopular government, then it’s hard to see how this process will be successfully sold to a public that is already highly concerned (not to mention angry) about the potential costs to the taxpayer of solving the banking crisis.

Readers of this blog might recall my support for the establishment of something modelled on the UK Government Economic Service.   I was sad to hear of the passing last week of a great Irish economist though perhaps one of the least known - Norman Glass - who was in many ways one of the architects of the GES.

The Guardian obituary is at http://www.guardian.co.uk/politics/2009/jun/29/obituary-norman-glass

Norman was a pioneer in economics within policy circles.   He was the first economist in the UK Department of Health for example in the early 1970s.   But it was his time at the Treasury where he really made his impact, becoming in effect the Chief Microeconomist and the driver of the microeconomic revival at the Treasury during the early days of Blair and Brown particularly in the aftermath of the Bank of England independence move.  The development of the working families tax credit, the innovations in linking labour supply policy and welfare strategies, major initiatives in education and health - Norman was central to all of these moves and to the early success of the ‘New Labour’ era.   Norman also developed an interest in the early skills formation agenda, designing SureStart (and later became a vocal critic of what the UK Government did with that programme in letting it become bloated and without direction).   On retirement from the Treasury he went on to lead NatCen, perhaps the largest and best social research company in Europe.

Norman was a complete gentleman, quietly interested in what went on in Irish economics, hugely supportive of students and researchers who made contact with him.   He is also perhaps amongst the most influential Irishmen of the late 20th century, albeit also one of the most modest and ‘backroom’, completely anonymous in his homeland.

I thought it might be interesting to readers to learn about Norman, but in passing I can’t help but think that as we face up to the consequences of terrible decisionmaking in economic policy over the past 15 years or so, and how little evidence there is of clever thinking in economics within the Irish civil service, one of the most important figures in policy decision making and in creating the infrastructure for economics in Government in the UK system, was an Irish economist.   Knowing Norman, I suspect he would have found that funny too!

Over the past couple of months, I’ve been surprised at how little real debate there has been about the government’s Smart Economy strategy.  Monday’s Irish Times Innovation supplement had a useful article discussing the economist-free Innovation Task Force that I mentioned last week.

As one might expect, the article contains some enthusiastic comments from some members of the Task Force—industrial policy experts will recognise the idea of the strategy succeeding by “picking winners.” In addition, however, the article also quotes some less enthusiastic economists—me and UCC’s Declan Jordan.  The Times also carried another article from Declan, which together with his earlier article from April, represent important contributions to the debate on these crucial issues.

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Just a short addition to the discussion on job subsidies addressed by Karl Whelan on this blog.  Ireland had an extensive program of Employment Schemes during the 1980s. The following schemes accounted for 95 per cent of all participants on these kinds of interventions; Work Experience Programme, Employment Incentive Scheme, Enterprise Allowance Scheme, Teamwork and Social Employment Scheme.

Hartmut Lehmann and I outlined the details of these programmes and evaluated them in terms of their ability to get the unemployed back to work in 1990. 

Hartmut Lehmann and Patrick Paul Walsh, CEP and London School of Economics, ”Employment Schemes in Ireland: An Evaluation” The Economic and Social Review“, Vol.22, No.1, October 1990, pp43-56

http://www.scribd.com/doc/17129901/Employment-Schemes-PP-Walsh

Karl is right to be nervous about their reintroduction. It is hard to prevent unintended displacement and substitution effects in these interventions,  employees taking on subsidised workers and letting go unsubsidised workers or taking on subsidised workers instead of intended unsubsidised workers.  

We have a history in dealing with mass unemployment and we should not ingore lessons from the research done from that time. 

Other notable papers at the time where

Breen, R. (1991), ‘Education, Employment, and Training in the Youth Labour Market’, General Research Series Number 152. Dublin: ESRI.

Breen, R. and B. Halpin (1989), ‘Subsidising Jobs: An Evaluation of the Employment Incentive Scheme’, General Research Series Number 144. Dublin: ESRI.

As previously recommended in the comments, here is Loudon Wainwright III singing “The Krugman Blues”:

In today’s Irish Times, Harry McGee reports the substance of Alan Ahearne’s recent presentation on the state of the Irish economy here.

One of the elements of the recent IMF Article IV report that I found a bit strange were the claims that the Fund had warned the government about its fiscal policy prior to the current meltdown. For instance, the first page of the report states

Various commentators and the IMF in its Article IV consultations did warn that the seemingly-unstoppable growth masked serious imbalances, including the fragility of public finances.

In his Irish Times article on Friday, however, Jim O’Leary correctly points out that the IMF are engaging in some pretty serious revisionist history and makes some very good points about the flaws underlying estimates of structural budget deficits (weaknesses that I discussed in my recent TCD-DEW talk about potential output.)

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Many have remarked on the negative effects of Ireland’s high price level on our economy. Intrepid Irish Times reporter Orna Mulcahy notes a new and hitherto unreported effect of our lack of price competitiveness and issues a call to economic patriotism:

At the hairdressers they’ve spotted a new trend – customers with homes abroad who have decided to decamp there for most of the summer, rather than the usual two or three weeks.

The word is that it’s cheaper and cheerier to be there – in Portugal, Spain, France, Italy or wherever, than it is to be at home, even if the husband has to commute. Some will only return the day before school begins again, which means that a good chunk of the salon’s cut and colour business is gone for the summer.

This flight of the earners means that their considerable spending power will be exercised abroad rather than at home – a place that’s increasingly seen as downbeat and depressing. This week’s disastrous unemployment figures, and comments that the economy is “banjaxed” (David Begg) and “brutal” (Ibec) may have speeded them on their way.

Paying for a blow-dry and booking another makes me feel positively patriotic.

Moving beyond the economic difficulties of those with second homes in Portugal and Spain, Orna also reports the disturbing problem of a reduction in the selection of Tea Time Express cakes at the Merrion Centre near Ballsbridge.  On a more positive note, in today’s feel-good news story, the Spice burger has been saved.

The Irish Times reports that in today’s Dail debate on the IMF Article 4 report, the Taoiseach said the following

The Opposition has claimed many times that no independent economist supports the Government’s approach to the banks. The IMF is independent, and more expert in advising on banking problems than most commentators, and it supports our approach.

So how out of line is the IMF’s position on banking with other economists who the government has consistently criticised, such as the signatories of the 20 guys Irish Times piece?

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The ECB has released a useful description of the measures taken by each country in rescuing its banking system: you can download it here.

Morgan makes a new contribution in today’s Irish Times: you can read it here.

David Begg of ICTU has responded to Sarah Carey’s article on job subsidies.  The essence of his reply is twofold.  First, he also thinks it’s a bad plan. He writes that

Carey is correct to point out that a “jobs subsidy scheme” of the nature she outlined would be disastrous. It would be a waste of vital taxpayers’ funds, it would do nothing to ease the jobs crisis and, of course, it would be wide open to corruption and abuse.

Second, the plan wasn’t his idea:

Unfortunately, where she went wrong was in attributing such an initiative to congress. The truth is that precisely this approach has been repeatedly proposed by employer and business groups. We have opposed such feckless initiatives from the outset.

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I have previously discussed on this blog whether groups disadvantaged by fiscal policy cutbacks might seek to protect their position by means of a legal challenge using the concept of ‘legitimate expectations’ (see also a revised version of this post in the Irish Times). It looks like we may get further clarification of this issue in a High Court case which is being taken by four secondary school teachers who are challenging the government’s suspension of an early retirement scheme.

Apparently, the scheme was due to run until the end of this year and counsel for the teachers, Gerard Hogan SC, is claiming that they were legitimately entitled to expect to avail of it.

The court’s decision will clarify whether other groups adversely affected by a policy cutback might seek to go the legal route to attempt to reverse it.

Pete Lunn of the ESRI has an interesting article in today’s Times about public sector reform.  Pete is sceptical aout the effectiveness of rigorously enforced targets for public service organisations and performance management for individuals.  I think these arguments are worth discussing further.  (Certainly, Tony Blair’s attempt to impose performance targets on the NHS didn’t seem to be very effective.)

I would guess, however, that whatever the merits of explicit targets and serious performance monitoring, the govenment will probably do well to get the public sector unions to agree to what Pete notes are the “straightforwardly sensible” reforms such as “developing more online services, sharing resources across public organisations, allowing freer movement of staff and, perhaps especially, basing promotion solely on merit.”

One example of this type of rigidity that prevails in the public sector is that there is little room for well qualified economists to join the civil service in the middle-ranking jobs that would be appropriate for them.  More generally, the “generalist” philosophy of the civil service often doesn’t sit well with the employment of staff who want a career as a specialist in a particular technical area.

Sarah Carey has an article in today’s Irish Times which follows up on the discussions on this site about job subsidies.

The June Live Register figures have been released today. While no doubt the journalists will mainly focus on the new peak in the numbers “signing on”, I think it is worth drawing attention to the rate at which the increase in the seasonally adjusted numbers (both males and females) is falling.
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