Archive for October, 2009

Ireland’s International Investment Position

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Friday, October 30th, 2009

The new release from the CSO shows some quite striking movements during 2008: you can read it here.

See also the survey of foreign portfolio assets here, even if these data are dominated by the positions of IFSC enterprises.

Reminder: Economics Conference on Monday

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Friday, October 30th, 2009
There remain a few spaces for this workshop if you can email emma.barron@ucd.ie
The third in the series of Dublin Economics Workshop meetings on the Irish economy will take place on November 2nd at the Radission SAS Hotel, Golden Lane, Dublin 2.   The programme details are as follows:
1300 Registration
Session 1
Chair and Discussant – John Fitzgerald (ESRI)
1330-1415 David Blanchflower (Dartmouth) - What Should Be Done About Rising Unemployment?
1415-1445 Colm Harmon (UCD) - Education and Innovation Strategies
1445-1515 Discussion and Q&A
1515-1530 Coffee Break
Session 2
Chair and Discussant – Colm McCarthy (UCD)
1530-1600 John McHale (NUIG) - The Other Crisis:  Whither Irish Pensions?
1600-1630 Philip Lane (TCD) - Fiscal Policy and Macroeconomic Adjustment in Ireland
1630-1700 DIscussion and Q&A
Please RSVP to emma.barron@ucd.ie (many thanks to those who have already done so!).  We are looking forward to a full house and a lively meeting.

Risk Sharing and Accounting Issues

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Thursday, October 29th, 2009

Not too long ago, the Green Party announced with great fanfare that they were getting the NAMA plan amended to feature “equal risk sharing” between the government and the banks (though not between the government and bank shareholders as proposed by Patrick Honohan). Even as it was announced, there were strong rumours that this risk sharing element would represent a tiny change to the original plan. This has now been confirmed.

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Sean Barrett on the transport bill

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Thursday, October 29th, 2009

In today’s Irish Times, Sean is underwhelmed by the transport bill.

In my understanding, the new National Transport Authority merges a number of state bodies and has at least the potential to cut costs and create synergies. I probably disagree with Sean on that point.

I agree with most of the rest. I would have argued, though, that privatising the state-owned transport companies and cutting their subsidies would be welcome news for the budget. Dismantling the transport monopolies would bring welcome cuts in costs for households and businesses.

Interaction Effects of the Bank Liability Guarantee and Asset Purchase Schemes

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Thursday, October 29th, 2009

Both the Irish bank liability guarantee (instituted in September 2008 and likely to be renewed) and the asset purchase scheme (likely in place soon via NAMA) have been controversial, and their strengths and weaknesses have been widely debated.  Less attention has been paid to the powerful interactions between these two schemes.   If both schemes go ahead, perhaps these powerful interactions could serve to improve overall cost-efficiency and policy effectiveness. (more…)

The debate on the EU budget after 2013 gets underway

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Wednesday, October 28th, 2009

A draft Commission communication on reform of the EU budget has been widely leaked yesterday. The full communication is expected to be published next month in response to the consultation exercise on the EU budget which was mandated as part of the Inter-Institutional Agreement in May 2006 on the EU medium-term financial framework (MFF) for the 2007-2013 period. It is not, in itself, a proposal for the next MFF to start in 2014 which will be the prerogative of the new Commission when it takes up office at the start of next year, and which will not be presented until the first half of 2011. Nonetheless, the forthcoming communication sets out the choices facing Member States as they prepare for these negotiations in a clear fashion.

I discussed some of these choices in my paper to the recent ESRI/FFS Annual Budget Perspectives conference. On the expenditure side, the make-up of EU budget expenditure in 2013 will be roughly one-third for CAP income and market support measures, one third for cohesion policy, and one-third for everything else – rural development, research and external actions being the most important.

There is broad support for shifting the composition of budget expenditure towards meeting some of the global challenges facing the EU, including addressing issues of energy security, climate change, competitiveness, migration and projecting a more ambitious global European presence. The key principle is that budget spending should only be undertaken where it can be shown that there is a clear European value added over national spending. (more…)

Carbon tax galore

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Wednesday, October 28th, 2009

The Dept Finance has reinfored the expectation that there will be carbon tax as of January 1st, according to the Irish Times.

IBEC does not like a carbon tax (Irish Times), but the Royal Irish Academy does (Irish Times).

Frank McDonald writes about the impact of a carbon tax on the upcoming climate negotiations in Copenhagen. As things stand now, the carbon tax will be announced on the second day of international negotiations. The opening shots will have been fired on the first day, and nothing much will be happening on day 2 with thousands of journalists hanging around Copenhagen itching to write about a success in climate policy. Ireland’s carbon tax will thus attract worldwide media attention.

The economic rationale for a carbon tax in Ireland was first set out in a paper from 1992.

Bob Holton lecture on globalisation

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Wednesday, October 28th, 2009

Professor Robert Holton, Emeritus Professor of Sociology at Trinity College Dublin will give a lecture at 7 pm in Trinity College tonight which may be of interest to readers of this blog entitled “Is globalisation reversible?” as part of the Institute for International Integration Studies Public Lecture series. Details can be found here.

NAMA SPV Opportunity for Private Investors: Form an Orderly Queue

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Tuesday, October 27th, 2009

Via RTE, we find out about the dividends to be paid to the NAMA Master SPV’s private investors

The private investors, along with NAMA, will receive an annual dividend linked to the performance of the Master SPV. According to a briefing note issued to TDs today, this will be capped at the 10-year Irish Government bond yield at the time the dividend is declared.

When the SPV is wound up, the investors will be re-paid their capital only if the Master SPV has the resources. They will receive a further bonus of 10% if the Master SPV makes a profit.

So, if NAMA loses money, the private investors will lose all of their €51 million, while if NAMA makes money, they will receive a maximum of Irish government bond yields plus 10% over ten years.

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Child Benefit

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Tuesday, October 27th, 2009

Tim Callan and Brian Nolan argue here that taxing child benefit has superior distributive properties to a cut in the level of child benefit payment.

Economics and Psychology Event November 6th

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Monday, October 26th, 2009

On November 6th, we will hold a one-day session on the interaction of Economics and Psychology. Full details of this are here. All are welcome. There is no registration process but perhaps email emma.barron@ucd.ie to confirm attendance.

The current literatures in areas such as intertemporal choice, well-being, emotional decision making, experimental economics, identity, risky choice, neuroeconomics, and related areas are changing modern economics entirely and increasingly behavioural economics is being debated in core policy discussions, particularly in areas such as taxation and pensions. This session and previous sessions have attempted to gather people working in this area in Ireland and are complementary to the wider international conference on economics and psychology that takes place every year.

Speakers for the day include Professor Arie Kapteyn, who is a pioneer in the use of subjective measures in economics and, among many other things in a very distinguished career, founded CentER in Tilburg and is currently head of the Labour and Population Division at RAND. The current head of CentER, Professor Marcel Das will also present on the MESS and LISS projects, two of the largest social science projects in the world that are bringing economics and psychology together in a way that is dramatically expanding the data and measures available for researchers to look at complex economic questions.

There will also be a number of speakers from UCD, ESRI, Maynooth, UL and from other national institutions. While the day is focused around the talks, we hope that there will be a lot of discussion about the implications of behavioural economics for public policy and for regulation. I have posted previously on the topic of whether policy-makers should care about behavioural economics. Hopefully we can talk further about that on the day.

Some of the speakers may be wondering why there are 60,000 people outside the venue protesting. I have told them that behavioural economics is controversial in Ireland and to expect trouble.

Subramanian and Williamson on capital flows

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Monday, October 26th, 2009

International capital flows have had a destabilising effect in several countries in recent years, including Ireland. Arvind Subramanian and John Williamson have an interesting piece on the new Brazilian tax on capital inflows, here.

NAMA and competitiveness

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Monday, October 26th, 2009

John McManus has an article today in which he points out that NAMA has the potential to raise the prices of legal and other professional fees by boosting demand for the providers of those services. He also points out that this will be bad for competitiveness. (And, one might add, for the fraying social fabric of this country.)

I would be interested to know how big such an effect might be: in other words, how many professionals in various categories will NAMA hire, relative to market supply?

I agree with McManus when he says that the state should limit the damage, by capping the fees it pays to such people. But it is hard to see how it could actually succeed in ‘driving down professional fees via NAMA’ through such a strategy, since according to McManus NAMA is adding to total demand in the sector.

David Begg on Fiscal Policy and Deflation

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Monday, October 26th, 2009

In the Monday edition of the Irish Times, David Begg lays out his analysis: you can read it here. It is in line with the interpretation put forward by ICTU in its recent “There is Still a Better, Fairer Way” report.

Below I make some comments on specific points articulated in the article; I will return to the broader analysis in the near future.

Comment 1:  Mr Begg has persistently made the analogy to Japan, arguing that overly-aggressive fiscal retrenchment could “impart a severe deflationary shock to the economy which could precipitate a prolonged slump.”  As has been persistently pointed out,  this analagy is not appropriate:  Japanese-style deflation is not possible for an individual member of a monetary union, since declines in the price level are ultimately self-correcting through a competitiveness gain from cumulative real depreciation.

Comment 2:  Mr Begg suggests that a 50 percent tax rate on high earners (as has been announced in the UK) could be copied here.   Putting together the various levies on top of the statutory income tax rate means that a top rate of effective tax in excess of 50 percent already applies and kicks in at a relatively modest income level.  (See the graph in my note here.)

Comment 3:  Mr Begg notes that there may be €1.8 billion in outstanding uncollected taxes.  I am not familiar with the source of this number – I wonder how much of it may be explained by business enterprises that have failed (with little chance of recovery of the outstanding taxes), rather than by tax evaders.

Overview on Fiscal Situation

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Sunday, October 25th, 2009

My TCD colleague John O’Hagan provides a wide-ranging analysis of the fiscal and economic situation in today’s Sunday Business Post: you can read it here.

DEW Conference – November 2nd

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Friday, October 23rd, 2009
The third in the series of Dublin Economics Workshop meetings on the Irish economy will take place on November 2nd at the Radission SAS Hotel, Golden Lane, Dublin 2.   The programme details are as follows:
1300 Registration
Session 1
Chair and Discussant – John Fitzgerald (ESRI)
1330-1415 David Blanchflower (Dartmouth) - What Should Be Done About Rising Unemployment?
1415-1445 Colm Harmon (UCD) - Education and Innovation Strategies
1445-1515 Discussion and Q&A
1515-1530 Coffee Break
Session 2
Chair and Discussant – Colm McCarthy (UCD)
1530-1600 John McHale (NUIG) - The Other Crisis:  Whither Irish Pensions?
1600-1630 Philip Lane (TCD) - Fiscal Policy and Macroeconomic Adjustment in Ireland
1630-1700 DIscussion and Q&A
Please RSVP to emma.barron@ucd.ie (many thanks to those who have already done so!).  We are looking forward to a full house and a lively meeting.

Update on Site Activity

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Thursday, October 22nd, 2009

As of today, this site has received 500,000 visits since it began in December 2008, an average of 3,095 per day.  These visits have involved 1.39 million page views.  In terms of geography, 68 percent are resident in Ireland and 32 percent view the site from the rest of the world.

ECB and Nationalised Banks, Again

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Thursday, October 22nd, 2009

My former colleague, Mike Casey, wrote the following in this article in today’s Irish Times:

When Nama is up and running, the banks will be able to borrow far greater amounts from the ECB. Some of this money may be lent to the private sector (one hopes), but it is likely that substantial funds will be made available to the Government to finance the budget deficit.

This may be the main reason why the Irish banks were not nationalised. If they had been nationalised this transfer of funds could not occur, since the ECB cannot lend directly to government.

I’m afraid I have to disagree with this argument for why Irish banks cannot be nationalised.

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Academic Cassandras: Iceland and Ireland

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Thursday, October 22nd, 2009

Timely warnings were issued by academic commentators in both Iceland and Ireland long before the collapse.   On Iceland’s sidelining of its most internationally-prominent economist, see my recent book review for the Irish Times.  The Sunday Independent afforded me the chance, a few weeks ago, to review the policy concerns that I had been expressing over the last decade (see here).  I was not in any way a lone voice, but the space allotted allowed me examine only my own record.  I was particularly disappointed to see Minister Eamon Ryan coming out with as ignorant a reaction to academic economists’ interventions as Denis O’Brien’s.

Complementarities in Innovation Strategy and the Link to Science

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Wednesday, October 21st, 2009

This CREI report by Bruno Cassiman is an accessible overview of this link between scientific research and innovation.

Peter Mathews Talk Tonight

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Wednesday, October 21st, 2009

I linked a few weeks ago to a video of Peter Mathews discussing NAMA. Peter is a former banker with ICC and currently an independent banking and property consultant (here‘s a link to a full profile). He is giving a public talk tonight at the RDS Concert Hall at 8PM titled “NAMA Will Lose €12 billion: There’s a Sounder Alternative.”  I have spoken with Peter on a number of occasions and have found him to be highly informative on the subject of Irish banking so I recommend attending his talk if you can.

NAMA SPV Plan Versus NAMA Draft Business Plan?

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Wednesday, October 21st, 2009

Last week NAMA published a draft business plan. It contained a detailed description of how NAMA was supposed to operate. It told us, for instance, that the loans of the largest 100 to 150 borrowers “will be managed directly by NAMA.” (page 28) and explained a timeline for how NAMA intended to recover funds from the loans it was acquiring.

NAMA’s draft business plan did not mention a Special Purpose Vehicle.

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Pre Funding Future Bank Crises

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Wednesday, October 21st, 2009

Eurointelligence today carries an interesting news report

Sweden proposes stability tax

The Swedish finance minister Anders Borgh has written to his EU colleagues in favour a stability tax levied on banks who proceeds could be used for future bail-outs. Sweden has already imposed a tax of 0.0036% of bank liabilities. FT Deutschland points out that this is not a Tobin tax on bank transactions. Sweden has introduced this tax this year, and expects the revenue from this tax to grow to 2.5% of GDP in fifteen years.

Such a ‘rainy day’ fund would have been helpful during the current crisis (although there is a classic moral hazard counter-argument).  Indeed, I had previously suggested the establishment of such a fund as part of Ireland’s preparations for EMU membership, given the fiscal costs that accrue in the event of banking crisis. My contribution can be downloaded here.  The difference is that the Swedish fund is financed by a tax on the banking sector, whereas I had in mind a fund to be accumulated from general tax revenues.

“Like two drunks leaning against each other to stay upright . . .”

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Tuesday, October 20th, 2009

That’s how Buttonwood describes the relationship between the banks and government in Britain and America in his/her latest column in The Economist.
The piece goes on to predict:

. . . this leads to an odd symbiotic relationship in which governments have stepped in to rescue the banks, only for the banks in turn to finance the government. In the long run the danger is that this cosy relationship means lending is diverted away from productive private-sector projects and into government spending. Economic growth will be slower as a result.

It seems very relevant to the debate on the Irish banking crisis.

Eurostat Opinion on NAMA

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Tuesday, October 20th, 2009

Eurostat has determined that NAMA falls outside the general government sector: see the materials here.

Update: The SIV framework is puzzling some readers, especially the role of private equity investors.  A handy primer is provided here and this report highlights that payouts from SIVs are typically skewed towards debt and management fees, with only a limited allocation to equity investors.

Proposed NAMA Amendments

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Tuesday, October 20th, 2009

A list of proposed amendments to the NAMA bill is available here.

Fixing Finance: IIEA Series

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Tuesday, October 20th, 2009

The IIEA is hosting some excellent speakers in the coming weeks: David Wright, Deputy Director General of DG MARKET at the European Commission; Stefan Ingves, Governor of the Sveriges Riksbank; and Justin O’ Brien, Centre for Applied Philosophy and Public Ethics at the Australian National University.

Full details are available here.

Reminder: Keep It Civil!

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Monday, October 19th, 2009

The intended purpose of this blog plus some operational guidelines are available here.

I would ask all those making contributions to maintain a civil tone. While it is sometimes tempting, it distracts from the usefulness of the site if commenters are sidetracked into ‘playing the man, not the ball’  (even if provoked!).  Also, any posts using unparliamentary language will be deleted.

Thanks, Philip.

Fiscal Consolidation II – Lessons from the Last Time

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Monday, October 19th, 2009

Colm McCarthy’s Kenmare paper is now available as Irish Economy Note No.8.

Special Pleading from Yet Another Interest Group

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Monday, October 19th, 2009

A reader has noticed this call from the nation’s astrologers for extra public funding.