From the Statistics Offices

The CSO have published the Statistical Yearbook of Ireland 2013.  The 20 chapters provide a useful compilation of the broad range of measures produced by the CSO.  The naming of Chapter Nine suggests we have a way to go before we “break the vicious cycle”!

The CSO have also issued the October update of the Live Register which continues to show a decline.  In the SA series it can be seen that most of this drop has been among males.

Separately, Eurostat have published updates for unemployment and inflation.  In September, Euroarea unemployment remained at 12.2%, while the flash estimate of October HICP inflation shows a drop to 0.7%.

Responding to Regulatory Change – Financial Services Seminar

UCD Sutherland School of Law is hosting a morning seminar in the IFSC, 14th November, 8-10.30am, on opportunities and challenges for  Ireland’s financial services sector. Justin O’Brien, Visiting Professor at UCD Sutherland School of Law, will address key issues facing Ireland’s financial services sector including, regulatory engagement – problems and perspectives, regulating culture – the rationale for intervention and nurturing a world-class regulatory environment in Dublin. Justin O’Brien is a Professor and Director of the Centre for Law, Markets & Regulation in the University of New South Wales. He has written many books on the subject including his most recently published Integrity, Risk and Accountability in Capital Markets – Regulating Culture (Hart Publishing, Oxford, 2013), Engineering a Financial Bloodbath (London: Imperial College Press, 2009) and Redesigning Financial Regulation: The Politics of Enforcement (Chichester: Wiley, 2007). Details and bookings at http://www.ucd.ie/law/events/title,187039,en.html

The Political Economy of the European Periphery

UCD’s Dr Niamh Hardiman, funded by IRC, has organised a conference on The Political Economy of the European Periphery in Newman House, 85 St. Stephen’s Green, Dublin, on Tuesday 3 December 2013. Registration is free, but places are limited so please book by email to geary@ucd.ie, with the subject line ‘European Integration’, before Tuesday 26 November 2013.

The full programme is here (.pdf).

Economic policy: voters versus men in white coats

Eurointelligence’s news briefing this morning (the professional edition) had a really excellent comment regarding the news that Jeroen Dijsselbloem is proposing that the stability pact be reformed, so as to link flexibility on deficit correction to “economic reform”. The question is, of course, what constitutes “economic reform.” Says Eurointelligence:

We recall that the expression „economic reforms“ had the exact opposite meaning in the 1970s – a reduction in market liberalism, more regulation, more workers rights. Economic reforms is always a political process. Is Dijsselbloem saying that decision on labour market organisations, for example, should be done at central level, and if not, who decides what reforms are desirable, and what constitutes reform? Say, the Commission enters into a “contract” with a country on certain types of reforms, what would stop a newly elected parliament in that country from breaking such a contract? In German constitutional law, for example, the parliament’s sovereignty would always rank above such contracts. One of the lessons of the eurozone’s short history is that one should not put currently fashionable ideological positions into a treaty or a law.

It is one thing to say that monetary policy should be the preserve of technocrats. You can also make a case that the same should be true of governments’ overall fiscal stances (although as soon as you get into questions of taxation and expenditure, you are beginning to trespass on matters that should properly be dealt with by democratically elected parliaments; and there are also the questions of whether the beurocrats in charge know what they are doing, and whom they are listening to). But the balance between expenditure cuts and tax increases in a deficit reduction programme? The composition of taxes or expenditures in normal times? Microeconomic regulations influencing the balance of power between employers and workers? These are political matters, on which the right and the left have legitimate disagreements (and, besides, economists know a lot less about a lot of this stuff than they sometimes pretend). Sorting out these disagreements is a core function of any modern democracy.

If, as a technical matter, the Eurozone requires at least some degree of fiscal union, and if, as a political matter, a big obstacle to this is citizens’ distrust of “Europe”, then measures which can be seen as attempted power-grabs by the centre at the expense of voters would seem to be directly counter-productive. Not everything in the economic life of a nation is a purely technical matter; we should be trying to convince voters that the Euro, and the EU itself, are compatible with the principle that our votes count for something, and that we can change policies that we don’t like, no matter how “technically desirable” they are thought to be in 2013 by the OECD or IMF or EC or whoever it is. Make the electorate feel disenfranchised, and you play into the hands of the populists.

EC: Summer 2013 Programme Review

The Staff Report on the Commission’s latest review of Ireland’s EU/IMF programme is now available.  It does not contain much that is new.  There is this on page 20.

Ireland’s fiscal stance has not been overtly pro-cyclical since the beginning of the crisis. Using conventional metrics, discretionary fiscal policy has been clearly leaning against the wind in 2008 and 2009, and did not move openly or blatantly into the wind in 2010 and after, in spite of the significant budgetary adjustment efforts put in place by the Irish government (Graph 2.1) (14). Fiscal policy remained, and is expected to remain broadly in line with the stabilisation function of discretionary fiscal policy, or at least not to run counter that function. In the early years (2008-2009) when fiscal policy was incontrovertibly counter-cyclical, the fiscal policy strategy mainly consisted of correcting previous policy commitments built on optimistic growth projections accompanied by the fact that in a deflationary environment, nominal expenditure freezes implied increases in real terms. Since 2011, the improvement of the structural deficit has taken place in an environment of slightly improving economic conditions.

This is Graph 2.1. Click here to enlarge.

Maybe footnote 14 is important:

(14) The structural changes of the economy during the economic crisis are beyond normal business cycle fluctuations. Therefore, potential growth and structural government balance estimates need to be treated with caution.

Corporate Tax Collection

Representatives of the UK’s Revenue and Customs appeared yesterday before the Public Accounts Committee of the Houses of Parliament.  The exchanges were interesting though the evidence from the HMRC officials was sometimes confusing.  Following on from previous work done by the committee much of the focus was on corporation tax with issues relating to tax residency, tax compliance, the tax gap and permanent establishment among those referred to.

The questioning from the committee chair, Margaret Hodge, was forthright but at times slipped into grandstanding, primarily a suggestion that the Revenue show take “a few show cases”.  Ms Hodge also wanted the Revenue to estimate how much the tax gap would be if it was calculated “between the money that you collect and the money if everyone paid their fair share”.  Of course, “fair share” is an alien concept to tax collectors; their job is to collect what the tax code prescribes. Unless something illegal is being undertaken the answer to such a question in relation to MNCs will be close to zero.   If the UK wishes to collect more corporation tax Parliament changing the tax laws would be more effective than the Revenue undertaking some show cases.

An investigation into Google’s activities was alluded to through an exploration of documents provided by a former employee but it is not clear that it will lead to a change in the judgement that Google does not have a permanent establishment in the UK.

I don’t know if the Houses of Parliament make transcripts of the committee sessions available.  The transcript of a recent appearance by our Revenue Commissioners at a sub-committee of the Oireachtas Finance Committee is available here.

A Bloomberg feature on some elements of the Irish corporation tax regime was also published yesterday.

UPDATE: A transcript of yesterday’s Commons PAC hearing is here (H/T Gavin).

The Anti-Confidence Fairy?

Paul Krugman has provided a new paper and post on the effects of a “sudden stop” of capital inflows in a country with a floating exchange rate and constrained by the zero lower bound on the short-term interest rate.  In previous posts (see here and here), Paul made two claims: (i) that a government operating an independent monetary policy should be able prevent a loss of creditworthiness; and (ii) that even if that loss did occur its effect would be expansionary through a depreciation of the exchange rate. 

He sets out the two issues in the introduction to the new paper:

What I want to talk about instead is a question that some of us have been asking with growing frequency over the last couple of years: Are Greek-type crises likely or even possible for countries that, unlike Greece and other European debtors, retain their own currencies, borrow in those currencies, and let their exchange rates float? 

What I will argue is that the answer is “no” – in fact, no on two levels. First, countries that retain their own currencies are less vulnerable to sudden losses of confidence than members of a monetary union – a point effectively made by Paul De Grauwe (2011). Beyond that, however, even if a sudden loss of confidence does take place, countries that have their own currencies and borrow in those currencies are simply not vulnerable to the kind of crisis so widely envisaged. Remarkably, nobody seems to have laid out exactly how a Greek-style crisis is supposed to happen in a country like Britain, the United States, or Japan – and I don’t believe that there is any plausible mechanism for such a crisis.

I think a lot of people, for differing reasons, found the second claim too good to be true (although I don’t think anyone has in mind quite a Greek-style crisis).  In a couple of earlier posts (here and here) I suggested one contractionary force: a loss of government creditworthiness could impair balance sheets in the banking system.  

In the new paper, which contains some really nice new modelling, Paul attempts to dispose of various objections to the claim that a creditworthiness shock would be expansionary.   (And for the record I am a big Krugman fan.) Here is what writes on the banking channel:

Several commentators – for example, Rogoff (2013) — have suggested that a sudden stop of capital inflows provoked by concerns over sovereign debt would inevitably lead to a banking crisis, and that this crisis would dominate any positive effects from currency depreciation. If correct, this would certainly undermine the optimism I have expressed about how such a scenario would play out.

The question we need to ask here is why, exactly, we should believe that a sudden stop leads to a banking crisis. The argument seems to be that banks would take large losses on their holdings of government bonds. But why, exactly? A country that borrows in its own currency can’t be forced into default, and we’ve just seen that it can’t even be forced to raise interest rates. So there is no reason the domestic-currency value of the country’s bonds should plunge.

But this response essentially just invokes point (i) – that the government with an independent monetary policy won’t lose creditworthiness.   As far as I can see, it does not deal with the second part of claim that the loss of creditworthiness would actually be expansionary even with adverse effects on the financial system at all.   The problem actually comes out more clearly in the original formulation of Paul’s model, where it is explicitly assumed there is a rise in the risk premium – and presumably a reduction in the market value of outstanding government bonds – and it is shown that the effect is expansionary.  

It still seems to me that to dispense with the banking-related objection Paul needs to argue either theoretically or empirically that this particular contractionary force is not relevant.   On the empirical side, the interesting case studies that he looks at do not isolate an answer to the second claim.  

Finally, it is worth considering a simple thought experiment.   Imagine that in the recent imbroglio over the debt ceiling, a solution wasn’t reached and the US government was forced to (temporarily?) default on its debt.   Thinking back to the post-Lehman experience, I don’t think it is hard to imagine that this would be extremely disruptive to the US financial system, notwithstanding a depreciation of the dollar, in ways that would be difficult for the Fed to fully counter in both the banking and shadow-banking systems.