The Irish Economy

The new scheme is described in this document.

Wolfgang Munchau has an interesting piece on the Greek fiscal situation in Monday’s FT: you can read it here. Against the backdrop of events in Dubai, there is increasing concern that risk aversion in the sovereign debt market may be on the increase.

To get a sense of the perceived influence of economics on global thinking, it is worth looking at Foreign Policy magazine’s list of 100 most influential thinkers. An economist beats Obama to first place. Other economists who rank highly include Thaler and Sunstein at number 7, Robert Shiller at number 22, William Easterly at 39, Paul Collier at 36 and Esther Duflo at 41. Others on the list include Stiglitz, Ostrom (we claim her now!), Stern, Roubini, Sachs, Krugman, Posner, Sen, Buiter, Oster.

link here

Here is the paper by Colm McCarthy from last night’s SSISI fiscal workshop

McCarthySSISInov26th2009

Richard Baldwin has just put together a new VoxEU Ebook on the great world trade collapse of 2008. It contains 23 short, user-friendly essays that give a great overview of what we have learned so far about the causes of this dramatic event.

Here’s a paper on “Containing Systemic Risk” which I submitted to the European Parliament’s Monetary and Economic Affairs Committee in relation to its Monetary Dialogue with ECB President Trichet.

I’m one of a panel of “experts” that briefs the committee. Here’s a link to the page that contains all the expert papers for this year. Click on 7.12.09 and you’ll see papers by other economists on the topic of systemic risk as well as some interesting papers on the Monetary Exit Strategies.

Writing in today’s Irish Times about the upcoming budget, Pat McArdle states

the first thing to do is to try to disentangle the two crises that confront us, namely, the bailout of the banking system and the budget. The two are inextricably but incorrectly linked in the public mind.

He is highly critical of people who suggest there is any such link and the piece includes the now-standard McArdle swipe at academics who “should know better.”

McArdle’s principle objection is to those who see any link between the €4 billion injected into Anglo Irish Bank this year (and perhaps a similar amount next year) and the €4 billion in tax and spending adjustments scheduled for the upcoming budget.

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The FT carries interesting articles on:

Greece (and a broader discussion of  the euro area)

UK

Reminder: the SSISI event is tomorrow evening, details are here.  Contributors: Dr Niamh Hardiman (UCD), Mr Blair Horan (CPSU), Mr Colm McCarthy (UCD) and Mr David Croughan (IBEC).

The paper by Niamh Hardiman is already online here.

We heard on RTE radio yesterday that the shopping centre in Bandon which is now under flood was build in an area known to locals as “the swamp”.   Other councils and planners were also known to have allowed buildings to be erected in the flood plains of rivers over the boom period.  How can they be held to account?  

Consultants also face inefficient incentive structures.  Will PWC lose any future contracts for failing to highlight the importance, in their report to the Minister for Finance, of the €7 billion deposit that ILAP had placed in Anglo-Irish Bank?  This was damaging to the credibility of the Minister for Finance and his department when it emerged into the public domain several months later (Irish Times, February 12, 2009). 

A correspondent recently drew my attention to a statement from the same Minister on November 28, 2008.  Referring to a report he had received on the Bank Guarantee Scheme, the Minister noted that:

 “The report confirmed that the capital position of each of the institutions reviewed is in excess of regulatory requirements as at 30 September 2008. The report also concludes that even in certain stress scenarios the capital levels in the financial institutions will remain within regulatory requirements in the period to 2011.” 

Since the report remains confidential, the extent to which the Minister’s interpretation and explication may have been politically motivated remains unclear; i.e. how broad a range of the stress scenarios does his statement refer to?  If the report’s authors got it completely wrong, then surely they should have consequences to face?  

The powers and remit of the Comptroller and Auditor General need to be extended to cover such matters.

I’m almost reluctant to write about this topic because of the level of hysteria that it provokes. Still, we cannot deny that a national public sector strike is an important topic worthy of debate on this blog.

My overall reaction is that the debate about public sector pay is descending, perhaps predictably, into a damaging battle between vested interests. There is much to dislike on both sides of the debate.

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The Climate Research Unit (CRU) of the University of East Anglia is a leading research centre on climate change. They are known for the data that they provide, particularly their estimate of the annual, global mean surface air temperature since 1850 or so. One of their servers was hacked and some 1000 emails and 3000 documents were stolen, most of them 10 years old. These emails were posted on the web, and are now being scrutinised by every one who has a grudge against climate change or climate policy, and against people who harbour such grudges.

What has emerged? There is a lot of chit-chat, and bitching about colleagues (with perhaps ground for a defamation suit or two). There are attempts at blocking other people’s careers, but no signs of success. There are hints of data manipulation. None of this surprised me. There are also indications of a systematic obstruction of freedom of information requests.

What does this mean? Not much really, although some people may end up in jail for stealing data and others may lose their jobs for breaking legal and academic rules on transparency.

Doubt has been cast over the CRU data. Insiders never really trusted their data, and it is actually little used as an input to other climate research. The global mean temperature record is used for communication rather than research. Most of the temperature graphs you have seen in the newspaper are from the CRU, but independent research has corroborated their main findings. Statistical analyses similarly have used alternative data series, and the results are broadly the same.

Some people have portrayed the climate debate as noble scientists versus savage businessmen. That image is now shattered, but it was pretty naive anyway. There are bad apples on both sides of the debate.

So? Objectively, nothing has changed. Climate change is still real, and still a real problem. A carbon tax is still the right policy. Subjectively, things are different. It is harder to argue that wise scientists of impeccable standing recommend action. Proponents of climate policy have to make a real case. I do that here.

UPDATE (26 Nov)

This story keeps growing. The latest person to get entangled is John Holdren, the science and technology advisor of President Obama. While Holdren’s email contains nothing untoward (in fact, he’s remarkably patient and polite), it does demonstrate a closeness between Holdren and people who are tainted.

Another new development: One of the CRU emails has language that may be read as financial irregularity.

UPDATE (30 Nov)

CRU has belatedly agreed to open its data bases.

It appears that it deleted duplicate records. While that is fine for archiving reasons, combined with the poor documentation of CRU’s algorithms, it does imply that the CRU’s homogenized data cannot be reconstructed.

UPDATE (2 Dec)

Penn State U had already announced an internal inquiry into the conduct of Michael Mann, citing the results of an earlier inquiry (but omitting the results of another) in its press release.

U East Anglia has now also announced an internal investigation, and Phil Jones (whose mailbox was hacked) has temporarily stepped down as director.

My prediction that the mainstream media of Ireland will soon report on this matter, is unfounded.

The government caps the pay of bank Chief Executives but not of their more junior colleagues, leading to AIB’s creation of a new post of “Managing Director”, presumably in an attempt to exploit the loophole.  The comedy of errors continues.

Patrick Honohan warns that banks need to be able to offer competitive remuneration packages.  But don’t Irish banks need to return to the much more staid banking practices of decades ago, and will have the regulators looking over their shoulders to ensure they do so?  It is not clear to me that these institutions will require Goldman Sachs-type globetrotters as CEOs; I suspect there must be many people capable of performing these functions, whose opportunity costs would be well below the level of the cap.

On a tangentially related point, I see from yesterday’s Sunday Tribune that Maurice Manning, as President of the Irish Human Rights Commission, earns a higher salary than the Taoiseach.  Much less responsibility, and this salary has to be well above Manning’s opportunity cost (as a former middle-ranking academic and senator).   No global competition arguments apply to such political appointments.  Definitely something wrong here.

Bruegel has published a new briefing note on the role for policy in encouraging ‘green’ innovation: you can read it here.

William Easterly reports on a plan to help a small but symbolically important part of the Irish economy. I particularly liked the fourth suggestion.

Here is an uplifting story from the Bundesliga, of all places. First the Germans play attractive football in 2006, and now this. It is all very unsettling.

Right, back to the Cup Final.

When addressing the issue of raising income taxes, two objections tend to come up. The first is that the combined marginal tax rate (including PRSI and levies) is already up to 54%  (see page 161 of the Commission on Taxation Report) and this marginal tax rate kicks in at fairly low incomes. Further increases in this marginal tax rate are likely to trigger increased tax avoidance and can also have negative side effects in terms of work incentives.

The second objection is that we don’t want to raise taxes on low earners because they already don’t make much money and we have to be careful about not creating poverty traps in which people are better off earning unemployment benefit than working (Suzanne Kelly’s Irish Times article on this presented some interesting calculations.)

One way to address these objections is to introduce a flax tax with a large exemption limit. This would keep the lower paid out of the tax net and keep marginal tax rates from reaching dangerously high levels. But this approach could raise additional revenue, essentially because it would abolish the 20% tax band.

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I’ve written about the Green New Deal before. Here’s my main points in a nutshell:

1. Stimulating renewable energy creates jobs in the renewable energy sector.
2. Stimulating renewable energy destroys jobs in the non-renewable energy sector.
3. Renewable energy is more expensive than non-renewable energy. Stimulating renewable energy therefore reduces competitiveness. This slows down economic growth and job creation.
4. 2+3>1, so stimulating renewable energy destroys more jobs than it creates.
5. The jobs created depend on subsidies and other forms of government protection.
6. There is little chance that Ireland will ever become a net exporter of energy at a significant scale. Anything we can do with wave and wind, the Scots can do too, and they will always be closer to the market.
7. There is little change that Ireland will ever become a net exporter of intellectual property on the renewable energy generation. Our current strenghts in R&D do not match the required skills, and countries that do have the required skills already are developing new energy technologies as well.

Why does this bear repeating? Well, Labour just promised 80,000 jobs while Commins et al. just reconfirmed the negative impact of energy taxes on employment.

Previous posts on the Green New Deal are here and here.

Minister Gormley just released a 1232 page review of waste policy. The press release is short and vague, but it does announce an increase of the landfill levy to €75 per tonne in 2012. It’s €15/t now, so that’s a 400% increase. The average price at the landfill gate is about €140/t. This will go up to €200/t, a 43% increase. Curtis et al. show that the effect on the volume of waste is small.

The press release also announces an incineration levy of €20-38/t. I do not know the details of the contract between Dublin City Council and Coventa/Dong, so I do not know whether its Dublin taxpayers or C/D shareholders who will be paying the annual €12-24 mln.

The summary report has a number of recommendations:

1. More waste separation at source (7 bins for you), and improved collection of recyclables from homes
2. Nonlinear waste charges applied at the county level (i.e., you will pay if your neighbours have too much waste)
3. Stringent targets for recycling (we won’t be soccer champions, but we’ll beat the world on this)
4. A ban on inter-county waste trade (this complies with WTO rules)

And this will of course cut emissions, create jobs, and save money.

A more detailed assessment will follow shortly.

Question for the readership:  has Thierry Henry provided a boost to the Irish economy, by ensuring that the Irish football team (and the travelling band of supporters) will not be in South Africa next summer?

Those of you without the time or inclination to read the paper can read a summary of the argument here.

Fine Gael’s PRSI reduction proposal is linked here

“As part of their ongoing commitment to focus on job protection and creation Fine Gael have announced plans to reduce the upper rate of employer’s PRSI by 20% and the lower rate of employer’s PRSI by 50% as part of a €900m pro jobs tax cut for December’s budget. The proposal, which will benefit 175,000 employers and their 1.7m employees, was announced in the Dáil today by the Fine Gael Deputy Leader and Spokesman on Finance Richard Bruton T.D. The €900m tax cut for jobs plan will be financed by the broadening of the tax base to include a carbon tax (480m), a windfall levy on power generators (200m) and the abolition of the PRSI allowance and the ceiling on employees PRSI (470m) while contributing €250m to deficit reduction.”

Also, a simplified explanation of the job sharing incentive scheme referenced by Krugman is available from the author Dean Baker of CEPR in Washington here

Last Saturday, I gave a short presentation to a meeting of Labour Party members on the subject of The Banks After NAMA. Here are the slides from the presentation.

I presume that this story is not true. To set a salary cap for Irish bank officials that was binding enough to deter outside candidates, and then ignore the salary cap when it came to inside candidates, would make the Government look pretty silly.

It can’t be right, can it?

Alberto Alesina and Silvia Ardagna have a new research paper on this topic: you can download it here.

The German Council of Economic Experts - an academic body which advises the German Government and the Parliament on economic policy issues has published last week its Annual Report 2009/2010. The related Press Release can be downloaded from here.

As an on-the-record sceptic about job subsidy policies, I found this piece by Paul Krugman interesting. In addition to being in favour of employment subsidy schemes, Krugman also discusses the benefits of employment protection legislation, which I would admit to being even more sceptical of (memories of the phrase Eurosclerosis come to mind). At this point, I’d stick to me original opinions on this issue but I’ll happily admit that Krugman is umpteeen times smarter than me.

Of course, when dealing with these issues in an Irish context, there are practical implementation issues to be dealt with. What I’ve heard so far about the employment subsidy scheme suggests that it’s exactly the kind of bureacratic mess that I expected it would be when it was announced.

Last week the US Treasury invited a number of economics bloggers to meet senior officials. See here, here and here. I note this partially to pass on some interesting accounts of these meetings and partially to point out that, in my humble opinion, pigs would be observed circling Dublin airport before such a meeting would occur at our Department of Finance.

Many observers believe that global imbalances have a lot to do with the economic crisis the world has been experiencing. The non-academics among you may have come across the argument on David McWilliams’ recent TV show, for example. So, the fact that these imbalances have been shrinking rapidly over the past year ought to be good news.

Richard Baldwin and Daria Taglioni have a very nice piece pointing out that these declining imbalances can be mechanically explained by the global trade collapse, and are likely to reemerge as world trade recovers. They also do an excellent job of surveying the reasons why trade fell so rapidly during 2008-9.

The NAMA Bill has passed all stages of the Dail and is on its way to the President. Worth marking with a thread, I think.

What do you think of the final bill? The draft bill was released in August to allow for debate and suggested improvements. Did this process work well? Is the final bill much better than the original draft bill? Will the passage of the bill stabilise the banking system? Will it get credit flowing?