Recovery strategy needs to integrate investment focus

John McHale writes on the importance of public investment in assisting recovery in today’s Irish Times: you can read his article here.

22 replies on “Recovery strategy needs to integrate investment focus”

So, as I read it, John is suggesting that it would be better for the macroeconomy if teachers (and lecturers) took a further pay cut and the money was spent on up-grading our sub-standard schools.

I not sure if teachers – particularly those who happen to be working in new schools – would agree!

I agree with the basic premise of the article that neglecting infrastructure is not good for long term growth. This is however, going to be a smaller economy, with a smaller workforce, so infrastructural investment plans need to be smaller as well.

For example, I note the Dept. of Education website has a section listing places where there has been an increase in population and they have a forward planning department. They don’t seem to list places that are undergoing population declines or where population growth was overestimated (Adamstown) where schools could be closed or amalgamated.

The number of 3rd level students is due to grow by another 100,000, according to the speaker at the ‘Newman Lecture’ here in Maynooth the other evening – partially due to the increase in the birth-rate during the Celtic Tiger years coming to college age over the next 15 years, but also due to the large number in the 35-50 bracket without college degrees that are going to be encouraged into second chance education.

Thanks Philip for the link. I saw John McHale’s piece in the business section and I am looking forward to reading it later. John Bruton’s opinion piece from earlier this week, more or less, summed up a lot of mine on views on the situation in Ireland. His piece was called, Thinking outside box can do State some service. Comments like this one I made in response to Colm McCarthy’s ‘Economics of Something Must Be Done’ blog:

Where I tried to explain my position. We have produced a very high qualified workforce in Ireland, which seemed to become an end in itself. I could see this in the construction industry myself, where over 200,000 people are now on the dole. As a project manager, I quickly came to the conclusion, that people were all standing off, in their own isolated positions. There were all kinds of existing structures and obstacles, which prevented people from engaging productively with one another. A book I can recommend, which is Henrik Lund’s “Renewable Energy Systems – The Choice and Modeling of 100% Renewable Solutions” published by Academic Press/Elsevier in November 2009.

Denmark is a country which realised, you need to join up an awful lot of different segments of the economy, to become energy independent and not fall victim to shocks, external to the country. Not to mention, lack of competitiveness etc. In Ireland, we seem to have trouble doing integrated ticketing, not to mind anything else. We knew those were problems 10 years ago, but nothing has progressed for some reason. Cultures have to change – John Bruton in his piece, Thinking outside box can do State some service, got it on the nail I think. Funny, I would have expected a Green party member to have written that article. Not an Fine Gael ex. Taoiseach. But there you go. BOH.

We’ve been around the houses on this many times previously. For me, the biggest problem is that we would be trying to do things now when times are tough that we should have done when times were good. And I expect we’ll have the usual chorus that there aren’t enough “shovel-ready” projects and if there are any their import content is high and domestic content correspondingly low – as well as not being very labour intensive. Plus the fact that reduced GDP and reduced population will require less economic and social infrastructure.

And to top this off, the ownership, structural and financing arrangements in a number of the key infrastructure sectors are seriously dyfunctional and significant restructuring is required to facilitate any amount of investment that would generate meaningful economic and social benefits.

For example, Eircom is privately owned with a huge debt, some sort of competition, apparently, is being pursued to identify the party/technology that will roll-out broadband, the ESB has major network ambitions but relies on the regulator to extract a goodly chunk of financing from consumers (while keeping its debt percentage low), the water and waste water industry is totally fragmented, inefficient and inadequately funded and the less said about puiblic transport the better.

Establishing the ESB and BGE networks as separate businesses, upping the debt percentage and then selling them to pension or infrastructure funds would release €5-6 billion. This could be used to tackle deficiencies in the other infrastructure sectors without further cuts in current public expenditure.

However, this would require some vision, political will and the courage to face down vested interests. I haven’t seen much of these around recently.

@ Paul Hunt,

And to top this off, the ownership, structural and financing arrangements in a number of the key infrastructure sectors are seriously dyfunctional and significant restructuring is required to facilitate any amount of investment that would generate meaningful economic and social benefits.

Excellent comments there as always Paul.

I have a new blog entry, on the slow burner at the moment.

But one of the lines I added in yesterday, was from the Pat Rabbitte, George Hook, Newstalk 106 interview yesterday evening.

It appears as though we have given away the basic communications infrastructure in this country, before we remember to hook up our Garda stations with e-mail.

Consider that for a second, a major component of the civil service, can only look at us here at the IE blog, with envy and awe. BOH.

What all of these economists, John McHale included seem to believe, is that investment spending is only a matter of amounts. It has much to do with organisation too. I think that emerged clearly in John Bruton’s IT piece I referred to above. I tried to nail home this point also, in my own Designcomment blog entry, The Shoe Box King, that really good stimulus doesn’t have to cost the earth. The amounts can be tiny, if aimed at the bulls eye. How else do you get companies like Intel or Hewlett Packard? Related to that point, in my comment on Colm McCarthy’s recent thread I wrote:

Companies are created or incentive-ised by government, and later on destroyed by the same government. Ryanair obviously had gone international by the stage of it’s development, when lack of Irish government support could damage it.

The relationship between government and entreprise in Ireland is an incestuous and complicated one. I was reading the report on energy conservation published by UCD ERG for the DOE not too long ago. It’s new European energy performance in buildings directives, was necessary, apart from anything else, to avoid creating a situation where Ireland’s energy regulations were lower than elsewhere in the EU, which would result in dumping of defective products and procedures into Ireland’s construction industry. On the other hand, because the DOE didn’t go far enough with raising their standards, it peeved another vested interest – those working in the ultra low energy construction segment, who felt there wasn’t enough as-built, post construction performance testing implicit in DOE’s new regulations. It is like, devil you do, and devil you don’t. Colm McCarthy I think should consider that complexity, involved with intervention – it is needed, but also guaranteed to offend certain quarters. BOH.

Recovery usually means we send out the ‘body-bag’ squad. I presume the term shoud be ‘rescue’! Whatever. The only real ‘benefit’ (if this is not a cruel way to describe it) of the current calamitous situation is that it – just maybe – may get the young Sheeple to start lobbing grenades in the direction of the legislators (all of them!) in Leinster House. If the legislators become sufficiently scared of the voters, we may get some action. Otherwise it will be years of the same political and economic trash – you always attempt to repeat your Successful Failures.

Rescue will come when we unplug the bung holes and allow the SS Debt to founder. Nasty for most, and we have to start with a clean slate. Not going to happen, is it? Then its inflation. Nasty for most. BO’H was on about Integrated Ticketing. Won’t be necessary Brian – we are performing a circular motion in a cul-de-sac! Happy days!

B Peter.

A timely contribution and refreshing to see an analysis of the costs associated with a deflationary approach in the Irish press. John is absolutely spot on when he states;

“We should not compound the mistakes of a history of pro-cyclical fiscal policy by cutting capital spending just when it makes most sense”

This is the most common sense argument in favour of cost-benefited investment.

See youtube for a classic Keynes V’ Monetarist rap;

“the Dept. of Education website has a section listing places where there has been an increase in population and they have a forward planning department. They don’t seem to list places that are undergoing population declines or where population growth was overestimated (Adamstown) where schools could be closed or amalgamated.”

What Ireland seems to need right now is a local version of the U.S. “Base Realignment and Closure”, also known as the Base Closing Commission except for schools. Closure of a school is a touchy issue (as it should be – most of them were funded by their locality as public assets rather than strictly the property of their religious or secular patrons) and a closure process should always entail other school types and patrons having first option on the lands rather than flogging them off – fortunately land prices will deter that these days.

I have written about public investment on this blog (and elsewhere) on lots of occasions so regular readers of this blog will think that I sound like a broken record.

Yes, I am all in favour of countercyclical fiscal policy, but infrastructure is a long-term investment, and so it has to be analysed in that context – what is the real need, where are the capacity constraints? Those are the sort of questions we need to answer.

Infrastructure is important but this has to be seen in the context of the current circumstance, and they are very different from 2007, although some (particularly the construction lobby) would like to continue at the over ambitious NDP levels. Compared to the planned NDP spending the public capital programme is about 50% down in nominal terms, but once prices are taken into account the reduction is about 25%. This is a large drop, but the original plan was overly ambitous as we pointed out in 2006, so relative to the more modest recommended levels, the current level is actually in proportional with the reduction in GDP.

Of course a smaller capital budget should mean that more careful targetting is needed. Unfortunately, as I pointed out earlyer in the week, we are still wasting money (no doubt I will bore you all with more examples in the future).

@Margaret and @Mark Dowling are onto an important point. It is not sufficient to have lots of good infrastructure but we also need it in the right places.

@ Edgar,

I attended a lecture given by Nick Tyler at Trinity week last year.

Nick Tyler is Chadwick Professor of Civil Engineering, and set up the Accessibility Research Group within the Centre for Transport Studies, with a team of researchers investigating many aspects of accessibility and public transport.

Spell binding stuff – I highly recommend getting to hear Nick’s talk on transportation planning, if you ever are lucky enough. BOH.

Dave Wetzel comes and goes to Ireland also. I met him a couple of weeks back. He is such a common sense guy – talk about on-the-ground experience in dealing with policy and such – for years in London city. Incredible. Sharp as a razor intellect.

Nick and Dave, have worked on bus services and so on, on and off, down through the years. Both of those guys, are the best, I have come across. BOH.

Thanks to all for the comments.

I agree with Margaret, Edgar and others that there needs to be a rethink of capital spending needs. The recession has brought breaks in the paths of industrial and demographic change, so we shouldn’t slavishly follow through on existing plans.

Edgar, I am strugglingly a bit to understand your position on capital spending. You say you believe in countercyclical fiscal policy. And then rightly add that capital spending should be based long-term considerations–i.e. based on long-term cost-benefit calculations. But surely the fact that the economy is operating with a significant negative output gap has a large impact on the long-run calculations. Usually, when doing cost-benefit calculations, we assume the economy is operating at full employment. Thus increased resources for investment mean resources are being taken from somewhere else. Another way to put this is that the demand multiplier is zero. But even small multipliers could have a dramatic impact on the cost-benefit numbers. Suppose for the sake of argument the short-term capital spending multiplier is 0.5 and that the goal of policy is to maximise the present discounted value of GNP. An extra euro of investment is crowding out other activity, but this effect is swamped by the boost to activity.

Even the path of Ireland’s optimal capital stock has been shifted down in the post-bubble world, we do clearly have clear long-term capital needs (possibly different from before as noted in the comments). Edgar has written insightfully elsewhere on what these are. To me it is a question of timing. Good long-term planning suggests doing these investments when the opportunity cost is low (where the overall opportunity is affected by any multiplier effects). Colm McCarthy has made the important point before that the recession has pushed back the need for certain capital stock enhancements. But this strikes me as distinctly second order compared to the first order importance of low opportunity cost.

Of course, much of this hinges on the multiplier actually being positive. It is frustrating that we have such a poor handle on this. But not knowing is very different from it being zero, which seems to be the default people revert to. I think even a very conservative approach to the multiplier suggests the advantages sustaining a reprioritised captial programme. Moreover, if managed properly, and combined with a demonstrated ability to control current spending, building future productive potential could enhance overall creditworthiness. A positive growth strategy need not be at odds with sound principles of financial recitude.

@ John McHale,

“The recession has brought breaks in the paths of industrial and demographic change, so we shouldn’t slavishly follow through on existing plans.”

But what was the existing plan? The existing plan is summarised in my comment in the ‘Empty Houses’ thread,

Make no mistake about it John, the young people, the new arrivals from all over the EU region, who came to Ireland during the second phase of the Celtic Tiger, have seen us for what we are, and they have sized us up proper. We, the Irish, got some great press all across Europe and all across the world, for how forward thinking, modern and innovative we are. I recall listening to one young lady who came to work in Dublin a couple of years ago – she said, in Italy we have nothing like the Spire monument in O’Connell street. I wish, she said, that in Italy we could be that forward thinking. In Italy we are always looking to the past. The strange thing is, having benefitted from this fantastic workforce that wanted to come to Ireland – what did Ireland suddenly do? We converted over into house building mode, rather than try to work. Because we had loads of waves of new arrivals coming in, we wouldn’t bother to innovate any more – we will simply supply the demand for property. That is what wwe did, that was the plan. Horrifying stuff. We tried to milk the new arrivals for rent, and we all became ‘investors’ in multiple properties. We were assured there would be huge demand for property, and we all became landlords. Now the ECB has to bail us out, as landlords, who have no tenants anymore. Worse, than that, all of those waves of new arrivals have sized us up proper, and gone home, and said, the Irish don’t pose much of a competitive threat – they are simply greedy opportunists.

The way I see it John, we either face up to the cold facts or we don’t. Read the various pieces in today’s Irish Times newspaper, which refer to Niall Fitzgerald.

Mr Fitzgerald expresses concerns about the ability of those in positions of power to take responsibility for what has happened. “If the leaders of a society are not prepared to hold themselves accountable or there are not the institutions which are sufficiently independent to hold them accountable, then I think you have a very serious problem on your hands.”


@ John McHale, Edgar Morgenroth,

I wrote a blog entry, Liar’s Poker, a while ago, to try and deal with some of these issues in my own head. It is great as Mr. McHale has pointed out, to identify opportunities where capital investment could be wise, and welcome. But we have to realise our track record in Ireland, with the 400 no. state agencies tasked with managing our nation’s assets, has been hit and miss.

Concerning investment and the future. For some time I have been involved with a ginger group trying to get fibre optics infrastructure included in regional planning documents. Rather in vain…

In my researches I came across this –

A scenario for 2040, where they assume that developed economies will have made the necessary invesments and talk only of the results….. I hope they don’t look our way….

@John McHale – perhaps I need to clarify what I mean.
Firstly, the capital budget is still higher than in other countries (in real terms as a share of GDP).

Secondly, given the kind of deficits we have run, increasing public investment must imply reducing other expenditure. Would you want to cut social welfare rates or public servants pay to increase investment? In the context of my first point I would not rush to increase investment.

Thirdly, especially in the context of our fiscal position the cost/benefit analysis also needs to be much more thorough. A common failing in our system is that the comparator in any cost-benefit anlaysis is the do little or nothing scenario. I (and others) have argued for a long time that it must include the do something else scenario.
By the way it is straightforward to incorporate the fact that we are operating below capacity into cost-benefit analysis via the shadow wage – as I pointed out a long time ago on this blog, the parameters for cost-benefit analysis and in particular the shadow wage to be used need to be revisited.

There are some additional points:
1. In the rush to stimulate the economy via investment, some serious mistakes can be made. There are some notable example. We have all heard about the problems in the hotels sector. Hotel numbers were excessively increased via tax relief even though it had been recommended (in the 1999 ESRI Investment Priorities report) that this ought to be abolished.
2. We need to rethink the investment priorities completely. Are our population projections still correct? The CSO projections were made at the height of the boom and incorporate significant immigration. Is the sectoral landscape going to change – what are the implications? Where is investment needed – clearly the recession is having a spatial impact, but even beyond policy regarding spatial issues has not tackled the hard issues (e.g. closing schools). What are the current expenditure implications of investments – no point building hospitals if we can’t staff them. Ideally investment would improve services and/or reduce costs of providing services.
3. In the context of the tight budget we need to think about how we finance projects and indeed if there are things we can privatise (bus services come to mind).
4. We need ongoing research to deal with these questions but there is little demand for critical and independent research in this area.
5. We need to be careful not to ask the poachers to advise on game keeping – we have been there recently and any thinking person can see where this got us.

@ Edgar,

I made a comment over in Gregory Connor’s thread, Finding Foreign Capital for Irish Domestic Banks.

What I submit to you is, perhaps a lot of the small Irish shareholders of both BOI and AIB believed they were funding ‘infrastructure’ for bank-ing in Ireland. I know AIB and BOI bank shareholders myself. They are not people who invest for the short term. Like Dermot Desmond buying up at rock bottom prices in early 2009 and selling out again, by summer ’09. Many of what are known as ‘small’ Irish banking sharedholders, had their money in banking, because they believed it was something that would always be there – no matter what, BOI and AIB weren’t going away. It was basic banking infrastructure they put their money into. Not risk capital they were offering, as has been suggested by many economists on this blog site.

I know shareholders of BOI and AIB who were involved since my grandfathers time. Since the foundation of the Irish state. For Shane Ross and others to label them as providers of ‘risk capital’ or ‘small’ shareholders, or something is not fair. They are ‘small’ relative to what? I mean, the shareholders I know, their investments are by no means ‘small’ in their world. Even if they are small relative to Dermot Desmond or institutional standards.

The reason, I mention this, I looked at your blog entry, Financing Infrastructure. You speak about the Irish pension fund and such things. I don’t know if it was on Irish Economy blog or someplace else I read, a good few months back, about schemes being used in some parts of the world, whereby private capital is offered to build public works projects. Essential infrastructure in towns and cities. I think it is done through the urban taxation channels or something. It offers people in a community a safe return on their money over a long period. Are you aware of such schemes? Could it be linked to pension funds or taxation etc?

The point of my comment on Gregory Connor’s thread, Finding Foreign Capital for Irish Domestic Banks, really was to ask – to what extent should some components of banking in Ireland be termed basic infrastructure? To what extent, could we source capital within the state, to build and maintain a basic bank-ing infrastructure? The best resolution for many long serving ‘small’ shareholders of BOI and AIB in my view, is to transfer their stake to some new scheme, whereby they become investors in a new banking infrastructure for Ireland. I think it would be fairer. Do you have any opinions? BOH.

@ All,

Re: Edgar’s recent thread on Financing Infrastructure, etc.

I think it is important for Irish economists to learn to crack open and expose some of the general-isation(s) thrown around, by our political representatives who speak on matters of finance and the economy. I offered some point-er(s), in the most sincere way I can, to Irish economist(s) in my comment on the Gregory Connor thread. BOH.

I am really tired of another meaningless phrase the government uses at will, Anglo should be subject to the same regulation as everyone else.

@ Edgar

Concerning projections, I tend to agree, did I see/hear the engineers suggesting recently that we need to plan for 8m people in Ireland?

The CSO needs to move up a bit. No doubt they worry about inaccuracy, but they could provide quicker turnaround. OTOH, they’d need to be able to get their hands on the data. I recall an interesting interaction by Fintan O’Toole with them about the estimates for the cost of the over 70s medical card. The gist, Finance asked the (then) regional health boards for the numbers of over 70s, which they didn’t have. Up the corridor in Merrion St. sit the CSO, who could have done some stat maths on the last census…..

@barry – I have to hold my hands up and say (admit/confess) that I have sat on the expert advisory group that advises the CSO on population projections for the last 10 years or so. That said I also have my own projections at the county level (something the CSO does not have) and my colleagues at the ESRI have a national model (my county model aggregates to the national model). It is straightforward to change the migration assumptions in these models.

The CSO have little resources to do research so this should be done elsewhere.

I would argue, having worked on public investment planning for 12 years, that an ongoing programme of research is needed to identify where the bottlenecks are, what new technologies we need to think about (e.g. the implications of wind energy on transmission network needs etc.), where we need different things, how we finance all this, what the impact on services will be and what the return will be. We have very few answers to these questions and few of our decision makers ever raise these questions.

Comments are closed.