Gavin Kostick: Tiny Plays for Ireland

This guest post is by Gavin Kostick

When I started reading The Irish Economy it was partly because I had in mind to write a play about the night of the bank guarantee and particularly the inclusion of Anglo. I had a title: ‘The Best Bank in the World’, but not enough inside knowledge. I still think there’s a great play to come about that night.

As I went on though, I became more interested in the range of thoughts, insights and viewpoints and, indeed, characters, all jostling through the threads. The thought came to me that if the job for drama is to talk
about where we are now in Ireland – including how we got here and where we might be going – then perhaps instead of one big play, what was required was loads of tiny plays from loads of writers, which put
together might move, inform, challenge, provide space for debate – all the things the theatre is good at.

So Jim Culleton, Fishamble’s artistic director, and I developed things abit and went to the ‘Irish Times’ and I’m pleased to say, ‘Tiny Plays for Ireland’ was launched in the Saturday, 24th edition, and can be read here.

I won’t rehash too much what is in the article, but will emphasise thatwhat we’re looking for really is a variety of short works from writers who have something they feel passionate about saying and that they think
the public needs to hear.

As this blog is one of the starting points for the idea, it would be great to see you entering. Selected submissions will get printed in the ‘Irish Times’, a production in Project Arts Centre, March 2012, and
about as much money as PR Guy could blow in a mini-bar in one evening.

I was thinking about it, and we will accept pseudonymous entries, as long as you don’t mind your modest cheque being made out to: ‘Mr Grumpy of Grumpington Villas’.

I won’t comment on submitted entries, but if people would like tips or further info., I will answer as well as I can in comments.

You might also want to have a look at the Fishamble website

Krugman on internal devaluations

To Paul Krugman’s recent posts on Ireland and the Baltics, I would add two points.

1. Ireland’s quarterly GDP data are notoriously volatile.

2. Ireland is a small, open economy, and it is by common consent a relatively flexible economy. It is also an economy in which labour is both inwardly and outwardly mobile. And yet unemployment here is now running at 14.5%. So do we really think that the Irish experience can be used to argue that the austerity/internal devaluation medicine is appropriate for countries like Greece or Italy?

CBA of the Home Energy Saving scheme

The SEAI has released its cost-benefit analysis of the Home Energy Saving scheme, which concludes that for every euro invested, five euros were earned. More money to the SEAI so, and the economic crisis will soon be over.

Intriguingly, the results for the HES are in sharp contrast to the evaluation of the Warmer Homes Scheme — which found that the subsidies had no statistically significant impact on behaviour — and the evaluation of the Green Homes Scheme — which found net losses.

The evaluation of the HES leaves some things to be desired. For optical reasons, it may be better to commission an independent outsider to do the evaluation. Instead, SEAI staff evaluated an SEAI programme.

The cost is assumed to equal the sum of the public and private expenditure. The HES is a price subsidy. It increases the consumer surplus, by less than the total subsidy. The net cost is the difference. Private expenditure does not enter that calculation.

The study ignores changes in producer surplus. These are probably small, if we assume that investment is displaced.

Benefits are the energy savings and the avoided carbon dioxide, . The study assumes that only 18% of the investment in energy saving would have been made without the subsidy. This is in contrast to the Greener Homes evaluation, which finds that roughly half of the investment would have been made anyway, and the Warmer Homes evaluation, which finds that almost all of the investment would have been made without the subsidy.

Energy saved and CO2 avoided are discounted at 4%. If only that were the opportunity cost of public investment.

The study accounts for the VAT paid on energy. Surprisingly, the carbon tax is omitted from the analysis. The HES subsidy is double regulation: Carbon dioxide emissions are taxed, and emission reductions are subsidized. In other sectors of the economy, there is single regulation (carbon tax, or ETS permit price). The HES subsidy thus introduces a distortion in Ireland’s CO2 abatement policy: We abate too much in home energy use and too little elsewhere. This distortion is not quantified in the study.

In sum, this CBA of the HES does not tell us much that is useful. Its conclusions are not supported.

One can assess the HES based on first principles. It is a second-best intervention: Carbon dioxide emission are regulated already. It is an inefficient intervention: It is a fixed subsidy on investment, unrelated to the emissions avoided. It may well be that the HES addresses some imperfection in the market for home improvement (e.g., constrained access to borrowing) but, if so, it is a second-best intervention in that problem too.

If the SEAI had concluded that there was a benefit of 80 cents for every euro invested, I probably would have believed them.

Industrial Revolution Roundtable and Bob Allen keynote

I did my bit for Irish service exports the other week, organising the 9th conference of the European Historical Economics Society in the fabulous Guinness Storehouse. There were a couple of plenary sessions, one of which was a roundtable on the causes of the Industrial Revolution, featuring Bob Allen, Nick Crafts, Deirdre McCloskey, and Joel Mokyr. There was also a keynote speech by Bob Allen on the causes of wealth and poverty. Karl Deeter very kindly came along and filmed the two events, and you can find the videos here and here. My sincere thanks to Karl.

Dan O’Brien on Burning Bondholders

Dan argues the ECB case for not burning Anglo bondholders in today’s Irish Times. I’ll quote the main argument at length

Apart from Ireland, nobody else in the euro zone has sought to make seniors take their losses so there are no cases to which one can point as evidence. But an immediate neighbour’s experience has been watched very closely. Denmark last year introduced the toughest bank resolution laws in Europe. These laws, which govern the winding-down of bust banks, are more similar to those in the United States than those across the rest of Europe. In the US, senior bank bondholders have traditionally got their just desserts if the institutions they invest in fail.

When two Danish banks failed earlier this year, their seniors were burned. This raised funding costs for the entire Danish banking system.

From the euro zone perspective, the ECB is obliged to consider that if a default precedent were to be set in the senior bond market, then at the very least funding costs for all banks in the zone would rise. The savings for Ireland of a few billion euro would be offset many times over by the generalised increase in funding costs for the already-teetering euro zone banking system.

That there is good reason – in the collective European interest – not to burn seniors does not lessen the injustice of having Irish citizens pay for European bankers’ losses (although the hugely subsidised bailout loan is a partial de facto spreading of the burden).

The point that burning senior bondholders may raise the cost of funding for banks is a fair one. But the relatively lower cost of bank funding obtained from a policy of supporting all senior bondholders is hardly a free lunch. The additional risk that the market would perceive as being attached to bank bondholders would have been transferred away from sovereigns.

Now one could argue that some sovereigns in the Euro area are in a position to take on this kind of risk in order to protect their banking systems. But others clearly are not.

My position on this is that there is no need for the question of burning senior bondholders to be a simple black or white proposition. As I discussed in this paper, the EU could adopt a policy that sees senior bondholders only incur haircuts if equity and subordinated bonds have been wiped out, the bank has been nationalised, and the state has incurred costs of x% of GDP to bring the bank back to solvency.

What x is could be a matter for policy discussions, and could evolve over time. But a policy that set x=5% would mean that the EU is only ruling out bailouts that would place enormous burdens on the state. Indeed, given the state of Euro area public finances, there simply isn’t room for another round of expensive bank bailouts so an approach of this sort may help to reduce the perceived riskiness of much of Europe’s sovereign debt.

This policy could see the remaining Anglo senior bondholders receive severe haircuts without implying a contagion effect for other institutions apart from those the market suspect to be severely insolvent and to which states should probably be reluctant to offer blanket liability guarantees.

But, of course, such a policy would tradeoff state and private sector interests in a balanced way and, as I argue in this paper, M. Trichet’s approach to the question of debt defaults has consistently been characterised by dogma rather than balance.