The Irish Economy

Aidan Kane is doing some amazing things with the dynamic presentation of economic data on his blog.

See here for a moving scatter plot of US inflation and unemployment (once downloaded, press play to start).   And here for an evolving population pyramid for Ireland based on CSO data.  Check out the blog itself for explanations of what you are seeing.

In yesterday’s speech the Taoiseach said:

Restructuring of Departments and agencies inevitably entails disruption and costs but I am satisfied that with the changes I am making, the benefits will outweigh the cost…

Costs, of course, include changes to name-plates, stationery, web-sites and so on, as well as the HR dimension of moving staff around. Benefits are more problematic. The UK National Audit Office has recently reported on Reorganising Central Government and concluded that the UK government has averaged £200M a year over the last few years on reorganisations of government departments and other units, but with scant evidence that such expenditures are justified. They state:

Central government bodies are weak at identifying and securing the benefits they hope to gain from reorganisation.

The NAO makes a number of proposals for more systematic evaluation before reorganisations take place, the establishment of a central team ‘with oversight and advance warning of all government reorganisations’ and better parliamentary scrutiny. There is, of course, a problem with such analysis in that reorganisations of the kind announced by the Irish Government yesterday are chiefly driven by political concerns. They are significant as much for what they symbolise as for what they may achieve by way of enhancing governmental capacity for action.

The Fine Gael “New Politics” document includes a number of proposals to re-shape the fiscal process.

Some extracts:

In Government, Fine Gael will implement a Responsible Budgeting Initiative that will make the budgeting process much more transparent and give the Dáil a clear and meaningful role. In particular, it will allow both the Opposition and the wider public to examine in detail the key underlying financial assumptions on which Government is basing its actions before the budget is published.

and

Fine Gael will overhaul radically the entire budget process. We recognise that these new fiscal processes cannot by themselves buy international credibility or fiscal stability. However, we believe that a different budget process, such as we areproposing, might have limited the worst excesses of the last few years and will help avoid any recurrence.
• We will establish a Parliamentary Budget Office (PBO), supported by an Independent Advisory Council (IAC) to provide members generally, and the proposed Dáil Budget Committee in particular, with expert input and advice into:
o The underlying structural state of the public finances
o The desirable borrowing / savings target for Government in the Budget, taking into account the economic cycle and longer-term fiscal pressures;
o The long-term implications of specific spending and taxation policies, taking into account likely demographic and other social and economic changes;
o Opportunities for rationalisation and prioritisation of public spending; and
o Performance evaluation of spending programmes.
• We will overhaul the annual Government Budget Documentation to include:
o Presentation of high-level service delivery and outcome targets alongside proposed spending allocations for public services;
o Quantification of the cost of all major “tax expenditures” and “tax shelters”;
o Assessment of the Government’s financial and non-financial assets and its financial and contingent liabilities, including public sector pension liabilities, future liabilities under Public Private Partnerships and possible liabilities resulting from the National Asset Management Agency (NAMA).
• A new Parliamentary Budget Cycle will be established:
o September – Publication by the new Budget Office of its recommendation for the fiscal stance (borrowing target) in the Budget

o October – Government presentation to the Dáil of its Pre-Budget Outlook, including macro targets for spending, taxation and borrowing (saving) in the year ahead. The Government would have a “comply or explain” obligation with regard to the target set by the Budget Office.
o November – Government presentation to the Dáil of its draft Budget.
o March – Government presentation to the Dáil of a new Public Service Delivery Report, audited by the C&AG, showing compliance in the previous year with the levels of spending authorised by the Dáil, as well as a comparison of service delivery and outcome targets promised and actual
results achieved
o March – Oireachtas Estimate Approval, following consideration of the Public Service Delivery Report.
o April, July, September, December – Government presentation to the Dáil of Quarterly Exchequer Reports (an expanded Exchequer Return), which would require the Minister to report on deviations from strategy and on the need for correction, at Departmental and macro-level
• Government will develop a new Medium Term Expenditure Framework which will
include:
o Presentation of aggregate envelopes for expenditure and tax based on the appropriate fiscal stance, recognising the different constraints that should apply to:
Capital
Demand-led spending
Stable programme spending
o An explicit cabinet “rationalisation and prioritisation” mechanism to drive restructuring and to divide up the spending envelopes among broad departments and agencies. Cabinet would also retain a “strategic reserve” which could be applied to cross cutting activities and to Government priorities

o Within the broad allocations set by cabinet; units within Departments would be required to bid publicly for resources and offer a set of quantifiable service delivery and outcome commitments that they would deliver in return.  New evaluation mechanisms within Departments would be established to judge whether commitments are being hit and to create an accountability framework.

The details of the Taoiseach’s reshuffle will hardly be news to anyone by now (speech here).   

Some noteworthy changes from an economics point of view: Batt O’Keeffe replaces Mary Coughlan at Trade, Enterprise and Innovation (previously Trade, Enterprise and Employment); Ms. Coughlan replaces Mr. O’Keeffe at Education and Skills (previously Education and Science); labour market activation measures  moved to Social Protection (previously Social and Family Affairs); a Minister for State and a “Public Service Board” to oversee public sector reform; no new department of economic planning. 

Does it matter?

The heads of UCD and Trinity reflect on the findings of the Innovation Taskforce is today’s Irish Times.   I think they provide a timely clarification on the rationale for supporting university research.   The idea that the purpose of research is to generate discrete technologies that can be commercialised by Irish firms has gained surprising currency.   While this idea does get some empirical support from the literature on localised knowledge spillovers, it is too weak a foundation to support a costly investment programme.   A more encompassing rationale includes the role of research—and particularly the integration of teaching and research—in ensuring the broad innovation capabilities of Irish graduates.   Brady and Hegarty sum up this broader human capital rationale well: (more…)

This new IMF working paper provides interesting analytical insights into the determinants of fiscal multipliers.  Also striking is the set of co-authors: it represents a joint collaborative effort across the IMF, ECB, European Commission, Federal Reserve, OECD and Bank of Canada.

Last week Karl Whelan was elected as a member of the Royal irish Academy.  This is one of the highest honours which can be conferred on an Irish academic and I think all readers of this blog will agree that it is richly deserved.  Well done, Karl.

Today’s Sunday Times carries an important story from Sarah McInerney and Stephen O’Brien. Many people had been thinking that the market valuations applied to loans being transferred to NAMA would be less than had been assumed a few months ago because property prices are still falling.

However, it turns out that this isn’t necessarily the case. In an answer to a Dail question from Fine Gael TD Deirdre Clune on March 10, Minister Lenihan said the following:

Section 73 of the NAMA Act sets out that NAMA may set a date by reference to which the market value of a bank asset or property is to be determined. NAMA have set this date as 30 November 2009. It follows that any property decreases or increases after 30 November 2009 will not be reflected in the NAMA market valuations.

So, NAMA no longer cares about the current value of the assets it is acquiring. Even though no assets have yet being transferred and the transfers will take place in a drip-drip fashion over the next year or so, NAMA will not bother calculating the actual market valuations for these assets. Instead, NAMA is adopting a Marty McFly approach to asset pricing: Let’s just go back to November 2009, when things weren’t quite as bad as they are now.

This decision raises a number of questions:

1. Who made this decision? The Sunday Times indicates that Minister Lenihan has made this decision. The Minister’s Dail answer suggests that “NAMA have set this date.”  So was this a political decision or one made by a NAMA official? Since the figures for asset transfers are so huge, even relatively modest changes in property prices since November 2009 would result in a reduction of billions in the amount of taxpayer money being used to acquire these loans. When a decision of this magnitude is made, the public deserves to know who made it and to have the rationale explained.
2. When was this decision made and why was it announced in such a low-key fashion that it wasn’t reported in the national media until eleven days later? NAMA’s webpage contains plenty of material. Why wasn’t this decision explained?

As regular readers will know, I have always been sceptical of the NAMA pricing process. We have known from the start of this process that transfer prices close to what these assets are really worth will result in the banks being insolvent and probably being nationalised, an outcome that the government has consistently stated that it does not want. So, even before the details of the bill was released, there were clear signals that the process was unlikely to ever really be about finding the true value of these assets and more likely to be about paying a high enough price to prevent insolvency.

However, the strictures of the European Commission have required a formal approach based on paying market value plus a potential LTEV adjustment. And falling market prices have had the potential to drive the banks into insolvency, even under LTEV pricing.

This appears to be where the November 2009 decision comes in. At one stroke, falling prices in the current market don’t matter. With one leap into the silver DeLorean (an Irish car!) we no longer need to worry about trivialities like what the assets we’re acquiring are actually worth. And sure nobody will notice if we barely tell them.

Finally, I note from the Sunday Independent that part of the reason for the delay in the transfer of assets is that “At least two institutions are said to be digging in their heels on the valuations.”

So here we are, an asset sale with only one buyer, acquiring assets from sellers who are insolvent if the assets are sold for their market value. However, the buyer has committed to paying the sellers more than market value. And rather than being grateful, the sellers are “digging in their heels” on valuations. You couldn’t make it up.

Adele Begin and I have just issued a working paper (available here) on the performance of foreign-owned industry and services over the recession, and prospects for the future.

The non-technical summary reads as follows:

The current global downturn has been accompanied by a collapse in international foreign direct investment (FDI) flows.  Having reached an all-time high in 2007, worldwide flows fell by 14 per cent in 2008 and by a further 30 percent in 2009.  Given the FDI intensity of the Irish economy, this collapse might be thought to have particularly adverse implications for Ireland.  FDI inflow data however are the outcome of complex MNC financial decisions and bear only a very weak relationship to MNC employment, investment and export activities in FDI destination economies.

The analysis presented here of the recent performance of Ireland’s inward FDI sectors shows them to have played an important role in helping to stabilise the economy in the face of severe downturns in both export and domestic markets. A critical factor in this has been the particular sectors in which foreign-owned MNCs in Ireland operate.  Export demand for pharmaceutical products and medical devices in particular has remained relatively buoyant.  Employment in Irish-owned exportables (i.e. in Enterprise Ireland-assisted firms), on the other hand, fell more over the course of the downturn than did employment in the entire private sector, which is largely ascribable to the weakness of sterling

The paper also explores the country’s medium-term prospects in key foreign-dominated sectors such as ICT, pharmaceuticals and international financial services, which are experiencing substantial structural change.  The consequences of ongoing developments in the global FDI market – such as the growth of China – and in the international regulatory and corporation-tax environments – including recent and prospective policy changes on the part of the new US administration – are also assessed.

The Irish Independent carries this story.

Alan Greenspan is presenting a paper at the BPEA conference today – his draft is here.

[The full programme is here.]

Brian Lucey argues for a different approach to solving the banking crisis in this IT article.

The influential Peter Boone and Simon Johnson have written a critique of the Irish approach to rescuing the banking sector: you can read it here.

This new Eurostat release shows the distribution of labour cost dynamics during 2009 for many EU countries (Ireland not included due to data availability issues).

This FT story reports that Ireland may issues inflation-indexed bonds.  I have advocated such a move in  this paper;  an interesting dimension is whether such bonds would be indexed to euro area inflation or domestic inflation.

On St Patrick’s Day, the European Commission issued its opinion on Ireland’s multi-year fiscal plan: you can download it here.

As suggested by one of the readers,  this is an interesting article on UK fiscal policy by the well-known development economist Paul Collier: you can read it here.

The latest edition of the Economic and Social Review has been published. The edition contains two policy papers by staff from the ESRI, one by Tim Callan, Claire Keane and John Walsh on property taxes and the other by David Duffy on negative equity. The Irish Independent have “seen Duffy’s report” presumably because they have access to the Internet. Now you can read it too.

Jeffrey Sachs joins forces with George Osborne to make the case for a frugal fiscal policy in this FT article.

It is not surprising that economists raise a cynical eyebrow at corporate-speak-filled innovation reports.   Last week we had the IDA’s Horizon 2020; this week it was the turn of the Innovation Taskforce with its Innovation Ireland.   But it would be a mistake for Irish economists to disengage from the debate given the impressive body of literature on the economics of innovation we have to draw on.  (more…)

From Wolfgang Schäuble, in the FT:

Should a eurozone member ultimately find itself unable to consolidate its budgets or restore its competitiveness, this country should, as a last resort, exit the monetary union while being able to remain a member of the EU.

If you wanted to set up a system which maximised the probability of self-fulfilling market panics and speculative attacks, this sounds like a good way to go about it.

The new issue of FInance&Development looks at the impact of sporting events on economic activity – the link is here.

I return to the case for a new fiscal framework in today’s Irish Times: you can read the column here.

The Central Bank’s new Head of Financial Regulation, Matthew Elderfield, delivered his first public speech today at the Leinster Society of Chartered Accountants (text here.). The speech is an impressive statement of intent and forms a very clear break from the past. I was particularly pleased to read this passage:

High impact firms and those with a poor track record should not expect to receive the benefit of the doubt from me or my staff when the best approach to addressing a risk is a point of contention between us. We will have an open and engaged dialogue with a firm’s senior management. But if we remain unconvinced by management’s plans we will be prepared to substitute our prudential judgement for their commercial one and say: Just do it.

This Nike approach to financial regulation could come as something of a shock to our banks.

The Taoiseach has launched the report of the report of the Taskforce on Innovation (here‘s a link to a page featuring the report, a summary and a video featuring lots of people telling us how cool innovation is).

I was critical of the composition of the taskforce when it was appointed but, rather than fire off knee-jerk criticisms, I’d like to take some time to read it before commenting further. However, as always, cogent opinions from our commenters are very welcome.

Ronan has updated his analysis on property yields and its implications for NAMA and long-term economic value. It doesn’t make for comfortable reading. I wonder does Ronan understand the mystery of the standard discount rate …

In the past couple of weeks, the Oireachtas Committe on Finance and the Public Sector met with the authors of the two forthcoming preliminary banking inquiry reports, Klaus Regling and Governor Honohan (Regling was accompanied by his assistant Max Watson). The transcripts of these meetings are now available online here and here.

Last week, the IDA launched its new strategy document “Horizon 2020.”  Michael Hennigan has a critical article on the strategy in today’s Irish Times.

The Department of Foreign Affairs recently released a report on the progress toward meeting some of the goals set out in last year’s Farmleigh summit. I have to confess to a degree of unease about a process that doesn’t permit people to debate and scrutinise ideas in full open view. I am pretty sure that the vast majority of the people who attended and spoke are big enough and bold enough to have withstood an IrishEconomy type treatment for their ideas and I don’t see why it wasn’t simply podcast. As it was, the event was mostly held in private for a group of selected invitees. The progress report for what was discussed is linked below. Some of the ideas include a National Diaspora bond and an overseas graduate programme. Other paragraphs suggest that Farmleigh may have been influential in shaping budgetary policy, which is something that doesn’t sound very plausible. In general, I can’t disguise a degree of scepticism about such approaches but, having said that, some very influential and succesful people attended and gave their views so debating this document seems a good use of a thread.

link here

Bundesbank president Axel Weber gave a speech on “The Reform of Financial Supervision and Regulation in Europe” today at the Institute for International and European Affairs. The Institute has provided the text of Weber’s speech and an audio podcast here.

Update: Thanks to Michael Hennigan for noting that the impressive Mr. Weber also gave a completely different speech to Financial Services Ireland on the same day, titled “Making the Financial System more Resilient – The Role of Capital Requirements.”  Link here.