The Irish Academy of Engineering has released a new study of energy price competitiveness: you can read it here.
The Guardian reported this week on the opening of a fraud investigation in the UK into some of the activities of the UK component of the Icelandic bank Kaupthing: you can read the article here.
The new FSR from the Bank of England makes for fascinating reading: you can obtain it from this location.
I’d say this little piece by Paul Krugman, and the associated note, will end up on lots of undergraduate syllabi. Liquidity traps are boring to teach, until you find yourself in the middle of one. From an Irish point of view, however, the key section is the following:
if some subset of the work force accepts lower wages, it can gain jobs. If workers in the widget industry take a pay cut, this will lead to lower prices of widgets relative to other things, so people will buy more widgets, hence more employment.
The point is that the Irish are just a subset of the Eurozone workforce, and that our GDP is the equivalent of Krugman’s widgets, whose relative price can be reduced. Krugman makes the same point in a follow-up post here. Of course, devaluation would be preferable to wage (and price) cuts: it would avoid the debt deflation and rising real interest rates which Krugman talks about. But it is not an option.
The CSO today released the Quarterly National Accounts for 2009:Q3. Consistent with other indicators such as a stabilising unemployment rate, the release is consistent with a bottoming out of the economy. Though the year over year patterns still show sharp declines (7.4 percent for GDP and a whopping 11.4 for GNP) the best read we have on what happened during the latest quarter—seasonally adjusted quarter-over-quarter changes—point to stabilisation. GNP was down 1.4 percent on a seasonally adjusted basis over the quarter and GDP was up 0.3 percent. So technically, one could argue that this release confirms commenter John the Optimist’s call in September that Ireland was already out of recession.
There are, of course, caveats to this. The seasonal factors are based on limited data and so not particularly reliable. And the increase in GDP occurred despite declines in consumption, investment, government spending and exports (this was offset by the decline in imports). But still, one has to welcome anything that looks like good news.
How do these figures square up with the government’s projections in the budget? One point to note is that the bottoming out means that next year won’t have the same negative carry-over that this year did. In other words, if quarterly GDP remains flat at its 2009:Q3 level up to the end of 2010, then the year average for 2010 will be essentially the same as the year average for 2009. This assumption also implies a year-over-year projection for GDP in 2009 of minus 6.8 percent.
Against this background, one could argue that the budget’s projection of a 1.3 percent decline in GDP next year is perhaps too negative. Alternatively, with €4 billion of fiscal adjustment to be applied and a banking system that will still be restricting credit, perhaps the government have it about right.
Yesterday’s QNHS (Q3 2009) release provides a timely update on trends in the immigrant workforce. In the period from the third quarter of 2008 the number of non-Irish nationals in employment fell by 61,600. This is equals half the fall in the employment of Irish nationals (123,200), even though non-nationals represented only 13.6 percent of the workforce in Q3 2008.
It is also evident that many immigrants are returning home, with the total population of non-nationals (15 and over) falling by 41,000 over the year. This might be welcomed in the short run if it limits the rise in unemployment. But returnees also ease the downward pressure on wages. Over the medium term, it is not a bad rule of thumb to view a country’s equilibrium unemployment rate as independent of the size of its labour force.
Looking to the longer term, the return to net emigration is a worrying development. As is often observed, Ireland’s high degree of factor mobility makes the economy operate more like a regional than a typical national economy. An expanding skilled workforce gives the economy the scale, diversity and connections to support innovation-intensive growth. Indeed, the empirical regional/city growth literature points to initial human capital as a strong predictor of subsequent growth (see here). A truly smart “smart economy strategy” will recognise the value of getting–and keeping—talented people here.
For faithful members of the 46-ers*, the new government budget proposal creates cognitive dissonance. How could a government so wasteful in its bank-bailout policies produce a general government budget proposal that seems so carefully and sensibly crafted to address current fiscal and competitiveness problems? In contrast to bank-bailout policies, the new general budget seems reasonable, balanced and fair, but as stringent in difficult circumstances as could possibly be asked. Does the Department of Finance (DoF) suffer from bipolar syndrome? How can we understand its behaviour?
Jeffrey Sachs has an interesting new essay on the priorities for macroeconomic research: you can read it here (requires registration but it is free).
Here‘s an opinion piece I wrote for the today’s Irish Times. I’d add three points. First, I’d note that back in February, prior to Peter Bacon delivering his report recommending a National Asset Management Agency, I wrote the following about the idea of a bad bank or NAMA as it became known:
In addition to being unfair, it is questionable whether the bad bank proposal could achieve its goal of properly re-capitalising private sector banks. There may be limits on the price the Government can pay for impaired property loans under EU state aid rules. Banks may still have to write down their assets. It is easy to imagine a scenario where banks struggled with weak capital bases even after a bad bank scheme has been put in place.
I am in no way happy to report that it looks like this scenario is exactly what appears to be coming to pass. Indeed, I wrote the article—my first ever for a newspaper—because I hoped that some solid arguments expressed in public may prevent it from happening.
Second. I’ll freely admit that the article comes across as somewhat angry in relation to the government’s misrepesentation of the role, if any, of the ECB in NAMA. What I find amazing looking back on the period during the Summer and early Autumn when NAMA was being heavily debated in the media is the fact that Irish business journalists happily accepted the “free money from ECB” line and peddled it regularly in their columns and in the broadcast media. The Irish public would have been better served if it had even a few journalists willing to research this issue a little bit further, perhaps via a few Google searches.
Third, it seems that there is little appetite out there among journalists for admitting the true state of the Irish banks or for preparing the Irish public for what may be necessary to stablise the situation in the coming months. This may be related to the second point above.
With three colleagues Seán Diffney, Seán Lyons and Laura Malaguzzi Valeri, we have recently published a series of papers on the economics of the electricity industry in Ireland. The conclusions are summarised in a Research Bulletin published today. There is also an article in today’s Irish Times.
The original papers are:
DIFFNEY, S., J. FITZ GERALD, S. LYONS and L. MALAGUZZI VALERI, 2009. “Investment in Electricity Infrastructure in a Small Isolated Market: the Case of Ireland,” Oxford Review of Economic Policy, Vol. 25, No. 3, pp. 469-487. Available here. We will release a working paper with additional results on this topic in the next few days.
MALAGUZZI VALERI, L., 2009. “Welfare and Competition Effects of Electricity Interconnection Between Great Britain and Ireland”, Energy Policy, Vol. 37, pp. 4679-4688. available here. An earlier version is available as a working paper.
I know the parallels are not exact but this story is a reminder that our current banking situation—involving banks that don’t want to lend, governments exhorting them to do so and banks focused heavily on attempting to escape government control—is not exactly unique. Some highlights:
Bank executives say they itch to make profitable loans, as many as possible, but are struggling to find qualified borrowers. They also say that the administration is asking for increased lending even as it pursues financial reforms that will limit the ability of banks to make loans.
And, of course,
“America’s banks received extraordinary assistance from American taxpayers to rebuild their industry,” the president said after the meeting. “And now that they’re back on their feet, we expect an extraordinary commitment from them to help rebuild our economy.
This is the second time the president has convened bank executives to urge increased lending. The first meeting, in March, did little to slow the slide. The president said Monday that he continues to get “too many letters from small businesses who explain that they are creditworthy and banks that they’ve had a long-term relationship with are still having problems giving them loans.” But the White House on Monday defended the value of the rhetoric.
“I think that the bully pulpit can be a powerful thing,” said press secretary Robert Gibbs.
We’ll see whether asking nicely a second time works well for them.
Governor Honohan’s opening statement is available here.
In a recent speech to a conference on “Transforming Public Services”, I argued that official policy-advice and decision-making processes are overly secretive and cartelised and that increased transparency and contestability would yield superior outcomes. Good ideas would have a greater chance of driving out bad ones and the possibilities for interest-group and regulatory capture would be reduced. The paper argues for:
– clearer lines of demarcation between expert policy advice and political decision making
– a US-style Council of Economic Advisors, to allow a greater diversity of competing voices and an increased likelihood of resignations if political decisions went grossly against expert advice
– a further loosening of the traditional doctrine of “the corporation sole”, which obfuscates the assignment of responsibility
– a radically reformed and better resourced Oireachtas committee system to enhance oversight of the executive
– a relaxation of the libel laws along the lines of the 1991 Report of the Law Reform Commission (e.g. “that the prosecution should be required to show that the matter was false as well as defamatory”)
– a constitutional rebalancing from rigid protection of the “right to one’s good name” in favour of greater freedom of speech
– extending the powers of the Comptroller and Auditor General to “name and shame”
– mandating the public-sector Top Level Appointments Committee to identify and penalise blame-avoidance motivations
– reconstitution of the Special Group on Public Service Numbers and Expenditure Programmes (“An Bord Snip”) at ten-yearly intervals to check the empire-building instincts of the bureaucracy and reduce agency proliferation, which diffuses blame and helps to avoid difficult decisions.
The full paper is here.
The Financial Times continues its alliterative series on Ireland by publishing my letter responding to last Friday’s “Debtors in Dublin” editorial.
I found this story interesting. Clearly, the underlying story is just that Ireland is being used a political stick to beat Mister Salmond with. Beyond that, though, the exchange raises some interesting questions. Why are Scottish opposition politicians so sure that an independent Scotland would pursue policies that would lead it towards fiscal troubles of the Irish variety? How could Mr. Salmond assure them that this wouldn’t occur? Do the Scottish opposition believe that the Republic would be better off economically rejoining the United Kingdom?
And what about the banks? Would those two disastrous banks with the phrase “Scotland” in their names have been defined as Scottish banks to be bailed out by the Scottish taxpayer? Presumably not but this raises the question of how one defines the fiscal responsibility for banking measures as one negotiates one’s way out of a united country.
This article from Spiegel Online is interesting on the Greek situation, including the role of unpaid invoices as a way to understate the level of debt.
Greg Mankiw provides a useful overview of recent research on fiscal policy.
See the details in this FT article.
Following a recommendation from some colleagues who lived through the last fiscal crisis, I went looking for this. Thankfully, someone has placed a classic address from the Minister on Youtube.
The career of the late Paul Samuelson is well described in this obituary.
Colm McCarthy writes on this topic in today’s Sunday Business Post: you can read it here.
The budget introduced a carbon tax, with immediate effect on transport fuels, after the winter on some heating fuels, and after due deliberation on other heating fuels. I’ve long argued for a carbon tax. I would have set the carbon tax 67 cents lower at €14.33/tCO2. Like the government, I would have ignored the advice of the Commission on Taxation and levy the tax at the point of retail.
I would not have exempted coal and peat. I do not think that direct imports from the North would be substantial. Coal and peat emit more carbon dioxide, per unit of heat, than any other fuel. Coal and peat should be taxed most, not least.
At the same time, the government has increased the budget of its energy programmes by 13% to €105 mln. The SEI has yet to release its long-finished evaluation of the performance of these programmes in the past. With a carbon tax in place, there now is double regulation. The carbon tax induces people to invest in emission reduction, and they will get a government subsidy on top if they use the government-favoured technology. The Climate Bill is rumoured to put a domestic cap-and-trade system on top.
People who have had their homes insulated at the taxpayers’ expense will continue to be entitled to a fuel allowance (which may well go up).
The carbon budget had some bad news. According to the provisional estimates of the EPA, emissions in 2008 fell by 1% compared to 2007. The ESRI forecast for 2008 is -4%. The EPA has not released their estimates, so I am not sure what is going on. If emissions do not fall in the middle of a recession, that must mean that energy use is sticky downwards (unlike wages). This will make emission reduction even harder than we thought.
Despite that, the Climate Bill is rumoured to extent the target of a 3% annual emission reduction from 2012 to 2020, and to have an 80% emission reduction by 2050. A future government can of course pick a new target.
Returning to the budget, energy research will see its funding increase by 176%.
The new issue of Finance & Development carries several articles on this topical issue: you can find the articles here.
His remarks at this week’s Vienna conference are available here
Last week, I wrote a post about the appearance of AIB and Bank of Ireland executives before the Oireachtas Committee on Finance and the Public Service. A transcript of the appearance is available here. They refer to submissions that the banks gave to the committee but which are not on the Oireachtas website.
The Committee’s staff have kindly made these submissions available to me on request. Here is the AIB submission and here is the Bank of Ireland submission. The AIB submission is particularly interesting because of its focus on funding costs and margins. Somewhat depressingly it states that “Our pricing guidelines could lead to a customer being charged 4% to 5% over Euribor.”
I hadn’t seen anyone else on the blog link to this CSO publication from last week on cross-border shopping (based on a special module of the QNHS for 2009:Q2) which was brought to my attention yesterday. The results are interesting and the microdata associated with the module could be used for a nice research project.
Based on a quick read, the survey results suggest that the cross-border shopping issue has been substantially over-hyped by the media. A couple of highlights:
Based on the estimates in the survey, total household expenditure on shopping in Northern Ireland between 2008:Q2 and 2009:Q2 was €435 million. This figure seems low relative to others that have been reported—for example, here.
Outside of the border region, there are only very modest levels of cross-border shopping with average numbers of shopping trips less than or equal to one per year for all other regions. There is almost no cross-border shopping in the Mid-West, South-West and South-East regions.
The average amount spent on alcohol per shopping trip was €32.
Only 9 percent of respondents reported that they had shopped more in the North during the year up to 2009:Q2, while 1 percent reported that they had shopped less.
Seven percent of respondents reported that they intended to shop regularly in the North in the coming twelve months.
The FT has a provocative editorial on Ireland in today’s edition. While making some valid points, it continues to treat Ireland as an ultra-open freak to which completely different rules apply. I think it would be news to most Irish businesses that “domestic demand is unimportant.”
One of the things that Philip has been emphasising since the start of the year is that if wages are cut to the point where workers feel confident that they won’t be cut further, they will then start spending again. On the other hand, workers who fear their wages will be cut in the future will, quite rationally, save for the rainy days ahead. The worst of all possible worlds, from the point of maintaining domestic consumption, would be a situation where wages fell, predictably, in slow motion, over a number of years.
So it is a matter of concern to read articles like this.
A further note: public sector wage cuts are required to reduce the possibility of a ‘sudden stop’ in lending to the Irish government. Private sector wage and price cuts are required to prevent unemployment from rising further: Ireland is still an unacceptably expensive place in which to live and do business. It is a matter of deep regret that these are not happening in an across the board manner, and that wages in significant sectors of the economy have actually been rising. Allowing the focus to be on public sector wage reductions alone misses this essential point, and represents a serious political failure on the part of the government.
We are seeing just how difficult it is to achieve nominal wage and price reductions in a modern economy, and just how useful it is to have a currency to devalue. But we don’t have one, and can’t leave EMU. Given that wages are proving to be sticky, and that there is no central Eurozone fiscal authority to help maintain demand here, emigration is the most likely margin of adjustment for our economy in the short run. These are the constraints that we signed up for under Maastricht, as Neary and Thom pointed out in the 1990s, and it is too late to start complaining about it now.
When it passed the TARP Bill authorising the Treasury Department to spend €700 billion to stabilise the US financial sector, Congress set up a Congressional Oversight Panel (COP) to oversee how the TARP money was spent. The COP is chaired by Elizabeth Warren, a law professsor from Harvard and has held regular hearings and issued monthly reports. This month’s report is “Taking Stock: What Has The Troubled Asset Relief Program Achieved?”