Could Prof McHale help with outlining the process in producing this report.
Was the Department of Finance provided with a draft, and if so, when and does this final report incorporate amendments suggested by DoF?
Why did the Council circulate the report to selected media in advance of its publication this morning?
Jagdip,
Thanks as always for your interest (and thanks to Seamus for posting).
As required under the FRA, an advance copy was sent to the Minister within 10 days of publication. This copy was sent on Tuesday.
Some small sections were also sent to DoF officials in advance for fact checking. Limited sections were also sent to the CBI and NTMA for additional fact checking. However, none of these bodies is in anyway responsble for any errors or omissions in the report.
As you will see, it is quite a complex report with a good deal of analysis. The report was circulated earlier in the week to some journalists, after the report had been forwarded to the Minister, where a pre-existing relationship assured us that the embargo would be respected. The reason for doing this is allow for more considered coverage of the report. We had a media briefing yesterday that was open to all media, though the report was embargoed until midnight. A media notifcation was sent via our email distribution list late last week.
@ John McHale
You the council refer to the so-called patent cliff and then add:
In contrast, services exports (which now account for around half of total exports) are expected to remain robust. Over the forecast horizon, total exports should benefit from a strengthening in demand in Ireland’s major trading partners, domestic competitiveness improvements and the resilience of the services sector.”
The resilience is an illusion as is the official position that unit labour costs have improved by 21% compared with the European average.
Are the members aware that almost half the value of services exports relate to virtual accounting transactions that will vapourise if the OECD/G-20 agree on changes in international tax rules?
This is likely to happen during the period of the upcoming medium-term plan.
If the IFAC go along with the official line until there is a faux-shock for the insiders, it will be like the rerun of an old movie.
The FAC’s benchmark GDP forecast for 2014 is similar to that of the Department of Finance (2.2% versus 2%) but the composition is very different .The former is closeto the consensus in projecting a very modest rise in domestic demand with net exports the main driver of growth but the Finance forecast is an outlier as domestic demand accounts for most of the forecast rise in GDP. Consumer spending , in particular, is expected to rise strongly, by 1.8%, against 1.1% pre-Budget and as the FAC report notes, appears to be predicated in part on an upward revision to past data. They may be right, of course, but it is a more upbeat view than most on the household sector.
What % of total consumer spending is made up of car sales? The latest auto sector forecast I heard was that sales are expected to be up 10%-15% next year. Should help the GDP figures and tax take if it comes to pass.
Spending on personal transport equipment (presumably mainly cars) was €2.2bn in 2012, about 2.5% of total consumer spending.
From the FT:
Prof McHale told journalists that the council was forced to contact the government recently to ask ministers to stop dismissing its advice.
Asked if he felt the council could provide the necessary oversight role when Ireland exits its bailout next month, he said: “Whether we can have the level of influence the troika [EU, IMF and European Central Bank] had only time will tell . . . but we can raise the political costs by making recommendations in a public manner.”
Is that the role of the FAC? To ‘raise the political costs’ if its advice isn’t followed?
And what if its advice is incorrect, in the strict sense of being factually incorrect? Is there not a danger that what it raises is not a political cost at all, but an actual cost of borrowing, paid by Irish taxpayers?
Extract “The Sins of the Father” by Ronald Kessler
“There were boxes of Why England Slept in the warehouse in New York said Gertrude Ball,Joe’s former New York secretary.
After the book had been out a few weeks,Joe sent a copy to Harold Laski of the London School of Economics. Even though Laski had a reputation as a socialist.Joe had sent Joe Jnr., and later Jack,to study with him. On August 21,1940,Laski wrote to Joe that it would be easy to repeat the “eulogies” that Luce and Krock had showered on Jack’s book. But Laski had to tell Joe the truth. Even after the book had been worked over by Klemmer and Krock,Laski said,he regretted that Joe had let him publish it. “For while it is the book of a lad with brains,it is very immature,it has no real structure,and it dwells almost wholly on the surface of things,” Laski wrote.In a good university,he went on,”half a hundred seniors do books like this as part of their normal work”. But they don’t get them published. “I dont honestly think any publisher would have looked at that book of Jack’s if he had not been your son,and if you had not been ambassador. “Thinking” Laski said is a “hard business.” One had to pay the price of admission. By giving him his true thoughts,Laski said,he was engaging in an act of real friendship,in contrast to “yes men” like Krock. Joe never forgave Laski.”
The era of the Irish-American politician culminated in Kennedy. On the day he died, the President of the United States,the Speaker of the House of Representatives,the Majority Leader of the United States Senate,the Chairman of the National Committee were all Irish,all Catholic,all Democrats.
It will not come again.
For once, I am on the side of the government in the case of the PCCL. The government was right not to apply for a credit line, whose conditions would set in parliamentary circus performances throughout Europe. My principal reason, however, is that if another crisis blows up, as it probably will, then it will be time to regain our sovereignty, fiscal, monetary and psychological.
The FAC believes that Ireland should have applied, and clearly run the risk of the conditions being set at such a level, that the government would have had to return from Europe with its tail between its legs; having been told that its Frankfurt’s way, and not Labour’s way, or Fine Gaels way, again! Not good advice.
Also, why the big deal on the probability going from from 1 in 3 to 1 in 2.
I had to read the FT article, and not the reported media, to understand that this was not the probability of default. Instead it was the probability of going from 2.9% deficit to over 3% in 2015. What a calamity that would be!
Better to concentrate on the blank cheque that is being written up for defined benefit pension schemes, at the expense of other pension fund holders, no pension fund holders, and the State as backstop.
@Carson
Some CSO figures re cars / trucks in 2012, but numbers only not values.
However, imho, we would be far better off as a country if no new car was registered next year. It would mean more labour and more valued added to the country in making old cars sweat out worth.
I believe that the VRT rates should be set to discourage further the purchase of new cars, and to encourage the retention of older properly serviced vehicles. It would be better for employment and value added in the economy.
Let the ptb and their allies, that have decided to hock the country, learn to endure being transported in cars that are five, ten and fifteen years old, or even use bicycles or walk.
Joseph Ryan makes a point above about defined benefit pension schemes. I would strongly suggest pundits in general and IFAC start drawing attention to this subject.
In general terms these pension funds in Ireland are allowed to and are using unrealistic discount rates. This understates deficits. Younger members are in many schemes contributing to unrealistic pension ‘entitlements’ for older members. There is a ponzi scheme element to this.
The ‘entitlements’, once payment has begun are regarded as “property rights” (sound familiar?).
The discount rates are largely hiding this.
Is the state going to / going to be obliged to bail them out?
How would that affect the balance sheet?
(btw I am reliably informed that there were no dissenting voices to this premiss at a recent gathering of a hundred or so industry guys, so its not just me wondering about this)
Just read the ‘cautious’ summary. Growth projections and the odious trend of the proxy_sov debt GNP ratio now at ~140% remain largely unknown.
IFAC appear to be fairly timely and sharpish on the ol’ “corrections”. Well done!
Perhaps An Taoiseach’s ‘best boy in the EZ class’ influence … ‘She who must be obeyed’ (apologies Rumpole) will be pleased!
Grumpy ,
That would explain the possible pre Christmas ESB strike. It is an attempt by highly paid insiders to divert cash in their direction.
MB,
You raise an interesting question. Is it right that an unelected and unaccountable body should seek to exercise political influence. If the FG/Lab govt follow the IFAC advise and it is wrong, who loses office?
@ All
FYI
We live in changing times. Fiscal councils even get a mention.
In fairness it does seem to me that ESB management ‘pulled a fast one’ in this instance.
With 3 of the 5 members of the IFAC having long work experience in organisations (ESRI, OECD and IMF) that usually deliver criticism ‘sotto voce,’ it’s unlikely to get involved in political controversy.
IFAC could earn public credibility over time by focusing on public spending and tax effectiveness issues – which is rare in Ireland.
Eurostat published data this week which shows that Irish public social protection spending (welfare and health) as a ratio of economic output (GNP) was highest in Europe in 2011 compared with the leaders elsewhere: France and Denmark at 34% of GDP.
‘Old age & survivors benefits’ accounted for a 46% average of total EU social benefits in 2011 but this category was lowest in Ireland at 23% of GDP – thanks to the low occupational pension coverage in the Irish private sector. “Not a lot of people know that,” as Michael Caine might say, which of course tells its own story!
Irish public social protection spending (welfare and health) was 37% of GNP in 2011.
“IFAC could earn public credibility over time by focusing on public spending and tax effectiveness issues – which is rare in Ireland”
yeah, if only we had, i dunno, something like a Comptroller and Auditor General.
Is that their role? No. Its not. So if they were to stray beyind their remit they would be both smacked down and lose such political credibility as they have.
@ Brian Lucey
Through your prism of negativity, you appear to have missed the word “effectiveness.”
The C&AG is a Constitutional office responsible for auditing state accounts, public funds and non-commercial public bodies.
It also is responsible for checking that spending is in compliance with Dáil authorisations.
It’s role is not to determine effectiveness.
b>The following is an extract from the OECD’s Economic Survey of Ireland 2013:
“Focus limited fiscal resources on policies empirically-proven to improve employability; this will require systematic evaluation of labour-market programmes through consistent tracking and randomized trials, followed by decisions to closedown ineffective schemes while strengthening successful ones.
Reflecting significant uncertainties about the effectiveness of various innovation policy tools, independently and regularly evaluate all actions in this area, strengthen programmes with proven higher returns, and wind down the others. To promote effective evaluation, ensure all innovation and enterprise supports have sunset clauses.
To increase the effectiveness and cost-efficiency of the innovation and research policies, and make it easier for businesses to access support, consolidate innovation funding and actions into a smaller number of Government agencies.”
Being accused of negative thoughts by the cassandra of Kuala Lumpar…pot..meet mr kettle.
@ MH
Indeed! “Effectiveness” of reform, both fiscal and other,could be said to be the leitmotif of the approach to be adopted under the Two-pack arrangements.
If there was any doubt about the fact that the pattern of public expenditure in Ireland is in need of radical reform, the current controversies about medical cards and top-up payments to senior HSE staff should surely remove it. That, and the approaching express train of a major pensions crisis in which politicians blathering about fairness when they, with public servants, are currently unaffected, may rapidly give rise to a situation up with which the Irish people will not put.
P.S. The meeting of the Eurogroup – divorced from an associated meeting of ECOFIN at which all countries are represented, if I am not mistaken – highlights the increasingly semi-detached status of the most notable absentee, the UK.
In circumstances where Germany, with other creditor countries, notably the UK, were adamant that the EU 2014-2020 budget show, for the first time, a reduction in real terms, it is difficult to know how serious is Merkel’s position.
Figure 1.6, P.25, from the report.
Regional Wizard Coffey waited patiently in the slick new, virtual hall of the Fiscal Law Advisory Wizards (FLAW), Galway. Coffey, used to the sturdy comfort of his own little West Cork Mill, felt oddly out of sorts in the new architecture of dazzling, of ever shifting numbers, panes of transparency that one had to crane one’s neck to see through and all founded on a groundwork of laws, treaties and agreements that somehow, in spite of the slickness, seemed not to make an even floor.
The hall was so new that it was not complete yet, with sparks of figures streaming out in odd jets where the architecture had not yet been finished. And even where the final shape of the Fiscal Hall was apparent, Coffey found himself contemplating the notion that this was a virtual construct which had a faint tang of impermanence. The symbolic teeth of the main door, for example, had a decidedly plastic sheen.
Grand Fiscal Wizard McHale popped his head round a large door which conveniently vanished.
“Ah, sorry to to keep you waiting, Coffey, did you get a…”
“If he says ‘cuppa'”, thought Coffey, “There will be a wizard war. And I shall punch him.”
“…get a bite to eat?”
Coffey had forgotten that whatever about the ceremonial lash he kept tucked in his gown, McHale was one of the kindest of the Grand Wizards.
“You were looking for me?”
“Yes, yes. Perhaps it would be best if I showed you. This way”
In the room beyond on a row of benches a set of machines, very like Imperia pasta making machines were churning away. Junior wizards fed in strips of information of all kinds and the models were churning out tagliatelle-like swirls of forecasts. The models were neatly labelled, CBI, Dof, ECB, IMF and so on.
“We’ve had all the models reconstructed”, announced Wizard McHale happily.
A boom shook the room and smoke curled from under the nearby door. Coffey turned his solid head.
“Ah”, said McHale “We’ve had to put some other new, er, prototypes in a safe room.”
A scorched younger witch stumbled unhappily through.
“Why?”
Boom.
“Well, the new ones keep blowing up, you see.”
“What are you trying to do in there?”
“Umm… Add finance”
“Christ”, thought Coffey, “the whole building could go up at any moment.”
“Well”, he said, “so these are the forecasts.”
“Oh, no”, said McHale, “it is a lot more complex than that. We have a very sophisticated system. Grab some figures and I’ll show you.”
With a fistful of the twirling animated figures, Coffey followed McHale through to a nice little indoor courtyard at the centre of which was a tin bucket.
“Now”, said McHale, “I wet my finger in the bucket, like so, carefully.”
“Yes.”
“And I hold it up in the air like so, you see.”
“Yes.”
“And I get a sense of which way the wind is blowing.”
“Yes.”
“And the figures, adjust – you see.”
Maintaining his habitually bland features when in the presence of power, Coffey resisted the urge to groan. “I see. And then you have the forecasts.”
“Not at all, I told you, it is a very sophisticated process. That’s not the end of it. Come on.”
They passed on into a large room, heavy with whining and snarling. A group of wizards had large remote controls in their hands and go-karts – each marked with the sign of an institution – were racing, bashing and smashing around a track that looped back in on itself.
“We feed the figures into the remotes you see, and check them relative to each other.”
Coffey watched thoughtfully,
“But they’re not moving apart. They’re grouping together.”
It was true, where a kart went ahead, the controller seemed to bring it back and where another lagged it suddenly teleported forward.
“Yes, that’s it. All the karts are ‘aware’ of each other, so to speak, where one sticks out in any way, it changes itself to become more like the others. Impressive isn’t it? That way they all agree, but, er…”
“And you we’re looking for me, because why?”
“Well, I was going to show you how we make them into fans at the end, that is my favourite part, but well… look at this chart Coffey.” The normally cheerful face of the Grand Wizard fell. A giant chart appeared over the karting scoreboard and the other wizards pretended to look very busy elsewhere.
“They’re wrong. All the time, every time, in exactly the same way. Not randomly, you see, but in one direction. But”, said the wizard cheering up and falling gloomy again almost in an instant. “It might not be the same next time. I was wondering if you had any suggestions.”
“I can’t think for the life of me how that could be happening.”
“But how can we improve the system?”
“Do you have a washing room here?”
“Yes, if you…”
“Does it have a washing machine in it?”
“Ah, yes.”
“If I were you, I’d dispense with all this. I’d put last years figures in the washing machine. Then set them on rinse, wash repeat.”
“Oh.”
“And Grand Wizard McHale.”
“Yes, Coffey?”
“Something very nasty has just happened to the long term trend. It’s broken.”
“Dammit.”
@ DOCM
Growth forecasts are reliant on export growth but while job numbers in the exporting sectors fell, headline exports grew at current prices by 71% in the period 2000-2012 and at constant prices by 59%.
This month the Government claimed that unit labour costs will fall 21% compared with the Eurozone average in the period 2008-2015.
This is economy with the truth.
The earnings data also suggests that claims of victimhood are phoney and bubble costs remain in the system.
The CSO reported in August:
“Weekly earnings in the private sector increased by 1.0% in the year to Q2 2013 compared with an increase of 1.3% in the public sector (including semi-state sector) over the same period, bringing average weekly earnings in Q2 2013 to €623.17 and €928.76 respectively. In the four years to Q2 2013 public sector earnings have fallen by €17.30 (-1.8%), and this compares with an increase of €5.10 (+0.8%) in private sector average weekly earnings in the same period.”
“The European Central Bank’s chief economist said today that the euro zone faces deflationary pressures, and the bank’s president stressed that interest rates must remain low “because the economy is weak”.
With euro zone inflation running at 0.7%, well below its target of just under 2%, a raft of ECB speakers this week have said it is open to taking fresh measures to support the economy.
Vice-President Vitor Constancio said earlier this week that “everything is possible”.
Both he and Peter Praet have said asset buying – or quantitative easing – is an option after years in which the bank’s policymakers have ruled it out.”
Everything is possible other than the unmentionable. Fair play to Ireland the Guinea Pig for still being around to experience the next wave of never-tried-before-economic magic.
Slovenia is next in line for a banking related bailout…
@ All
FYI what might be characterised as a civilised and constructive discussion that will have reached a wide listening audience today.
Given the permanency of employment and the defined benefit nature of pension benefits, it is normal that public sector salaries should fall behind those in the private sector. Indeed, to balance the public accounts under what might be described as the current policy of “attrition”, it is essential that this happen. But there is, of course, a much better approach i.e. establishing (i) common minimum employment and pension conditions for ALL workers and (ii) fair market arrangements which decide what the appropriate level of pay is for particular jobs, whether in the public or the private sector.
The key to doing this, and abandoning the present blunt instrument of recruitment embargoes and pay caps, is clearly a draconian political and financial control of budgets – via parliament – such as has been established in the three Scandinavian countries that have had similar, if much smaller, banking cum budgetary crises; Sweden, Finland and Denmark in order of crisis occurrence.
I have, of course, made these points before. The criterion has to be fairness in the only sense in which it can be legitimately understood i.e. as applying to all society.
That we have a long way to go can be gauged from this exchange at leaders’ questions during the week.
The confusion of roles between public representatives and public servants in the minds of the former has now reached near farcical proportions. The only way to end it is to (i) break the formal link between the pay and conditions of politicians and those of public servants and (ii) end the system of relativities which governs the pay and conditions of the top ranks of the public service (especially for those who manage to have a foot in both the public and private sector and gain maximum advantage from both).
Think the FLAW was expanding recently, did the headhunters fail to secure the services of The Envelope, or was it all a bit: “”No one asked your opinion, you filthy Mudblood,” ?
Yuk. Oh FFS! It looks as though one of the Wizards is making a bid to get a “World” named after himself and a couple pals.
Perhaps I could have had one of the junior wizards hastily concealing a crumpled envelope as Coffey and McHale enter.
But that is a worrier from Krugman – it feels like shifting from iconoclast to just another subset of Very Serious People, without whom nothing can be considered, er, serious.
When does ‘loose monetary’ policy NOT lead to inflation? Sure when the ‘money’ (electronic kind, you understand) flows into virtual assets (or even, cough, cough – into Sth. Dublin housing!) – and not into wages and salaries – is what! Hence, no real commodity price increases. QED.
ZIRP interest rates are a sign of significant economic stress – but that is not what you hear. How do you ‘tighten’ when the base interest rate is 0.25%? You don’t! You stagnate, is what!
The signal that economic Dry Rot is spreading its rhibosome is the pre-tax price of liquid hydrocarbon fuel. This must be sufficient to ‘incentivize’ Big Oil to keep drilling (which has become a tad costly). The ‘break-even’ price is approx $ 100/bbl – and slowly creeping up. Eventually the situation would show up as a shortage in supply v demand. At the moment we have a somewhat precarious ‘balance’ between supply + demand. But if (and its a biggish if) western developed economies show any significant growth spurt – watch out! Energy prices would zoom! And we would be back in depression land PDQ.
@ Gavin
You never lost it.
On Krugman and secular stagnation:
‘It was policy! For more or less the entire period in question (call them “The Greenspan Years”), the growth of consumer spending, financed by increased consumer debt, was the main instrument of policy. I suppose I might be misremembering but I really don’t think I am, and I was there and I read a lot of FOMC minutes. The US authorities wanted to manage aggregate demand, but during the entire period, the fiscal authorities had either a deficit reduction target (Clinton) or a massive unfunded war (Bush), and so they made the goal of interest rate policy the management of consumer demand. This consumer demand was financed by debt, but nobody paid attention to this, in my opinion largely because the idea of stock/flow consistency didn’t really feature in the economic models they were using’
On the radio link, it was an interesting discussion and possibly only Mick Clifford and Padraig McLaughlin had a direct experience of economic adversity.
Charlie Flanagan’s excuse about the delay in getting the legal services bill through the Oireachtas was because Justice officials were busy with insolvency legislation, shows how difficult it is to get change – there is always an excuse.
Following Ms. Justice Elizabeth Dunne’s finding in 2011 of a flaw in a 2009 property conveyancing law, it took 2 years and a month to have a short amendment passed despite an economic emergency.
The American middle class burned out long before the economic ideology ever did . Larry Summers on Greenspan
“I found myself disappointed that the events of the past few years had not led Greenspan to any revision of his anti-Keynesian views on macroeconomic policy. Perhaps understandably, he sidesteps monetary policy issues in the post-crisis period. He is dismissive of the role of fiscal policy in helping the economy out of the 2009 trough and the role of fiscal policy contraction in perpetuating slow recovery. Even in retrospect, he regrets the decision to save hundreds of thousands of jobs by having the government provide financing in connection with the GM and Chrysler bankruptcies.
Greenspan regards raising the US saving rate as a central priority. At a time when output appears to be constrained by demand rather than by supply and when even long-term real interest rates are at near-record low levels, it is much less clear to me than Greenspan that raising savings rates is the right growth strategy.
And in an economy that is changing rapidly in ways that leave many behind, Greenspan seems much more concerned with the possibility that help for the victims will foster dependency – going so far as to raise questions about tax credits for the working poor put in place by Ronald Reagan – than he is about mitigating inequality, preventing suffering or maintaining demand.”
@ MH
What we are witnessing IMHO is a dawning public appreciation of the impossibility of continuing with the skewed pattern of public expenditure that has resulted from decades of clientilist politics. When we got to this point before, the state was saved from bankruptcy by draconian cuts in spending (remember Richie Ruin and Mac the Knife!) and floated off the rocks courtesy of a benign external economic environment and the traditional safety valve of emigration. Only the last applies in the current crisis and it is my conviction that the boats that deserved to stay on the rocks will not float off with the rest on this occasion.
As will be clear from the exchanges in the Dáil to which I linked above, there is absolutely no evidence that the penny has dropped with our elected representatives and I doubt that it will. What will bring about the change is the financial constraint with which the country will have to live for many years coupled with the realisation by voters that they cannot continue with the illusion that it is their elected representatives that came up with the money by getting it from somewhere other than through their taxes. The need to know how it is spent, and to what level of effectiveness, is becoming a political imperative.
@ DOCM
No bailouts, a dire situation, civil servants allowed to think and politicians willing to try new policies, did result in radical change in the late 1950s.
not just CS allowed to think but honoured instead of being cast as the villians of the piece.
Frank Barry (whom MH probably considers an overpaid don who has a pension goddam it) has written a fair bit on this issue. Its not quite as simple as the popular narrative has.
I was familiar with this issue long before I first heard of you and I don’t depend on popular narratives.
I have my own copy of ‘Economic Development.’
Frank Barry strikes me as a person of wisdom – possibly a rarer commodity than PhDs these days.
@ BL
By whom? Certainly not by me. However, I have made no secret of the fact that the near caste system of what I have termed the nomenklatura at senior level, must be dismantled and the link between the salaries of the elected representatives, and their coterie of “advisers”, abolished. The moral hazard involved is in large measure the cause of the of inflation in senior level expectations of the appropriate generalised level of salaries. The blunt instruments used to try and align expenditure with income is worse than the disease. One has no idea what the appropriate level of salary is for particular posts and one has currently no way of finding out.
Changing this situation is in the interest of the public service. Failure to do so will copper-fasten a future near desert with regard to the development of meaningful jobs and career structures.
Go on the rugbywallahs.
22-10 up against the All Blacks after 53 minutes
from Krugman link above:
H.L. Mencken definition of Puritanism: “The haunting fear that someone, somewhere, may be happy.”
A more than ample amount of its ordo_wing around … and then Krugman tosses in the flawed frenzies of Ayn Rand. Spose the puritans and the randites on the blog will be chuffed with the indirect mention!
MH, BL,
I wonder were any of these heroes of the 1960s asked to take a modest downward adjustment in their indexed linked pensions & if so how did they respond?
@ TMD
Your question reveals both the poverty of your reasoning and the prevailing unwillingness to face up to reality. Why should any individual be pilloried for the income that has been “authorised” by existing arrangements or asked to “volunteer” reductions in whatever pensions they may be in receipt of? Where would this process end?
The bottom line is making income match expenditure. This is a matter for the elected representatives of the taxpayer and the outcome must be divorced from consideration of individual cases, whether this relates to applicants for medical cards or hospital consultants.
Tull
These were the days of Taca. Guess what the result would have been?
DOCM
The bottom line is indeed making income match expenditure. But it is desirable that in so doing we extract some of the noses and front trotters from the trough as well.
@ TMD
My sentiments entirely! But it must be done as part of fully understood, objectively justified, and accepted, overall process of reform. Any other approach is counterproductive (which may intuitively be understood by those – present company excepted – deliberately indulging in it).
DOCM,
You really should get off the ditch and run for office. Your country needs you.
@ DOCM
‘I have made no secret of the fact that the near caste system of what I have termed the nomenklatura at senior level, must be dismantled and the link between the salaries of the elected representatives, and their coterie of “advisers”, abolished. The moral hazard involved is in large measure the cause of the of inflation in senior level expectations of the appropriate generalised level of salaries.’
That is an issue, but the most serious moral hazard is the operation of private vested interests within the public sector. As long as those private interests are permitted to fund the political party system, and offer revolving-door arrangements to key public officials, we will be subject to principal-agent problems and the modern version of clan politics. The trade unions have simply identified, and mirrored, the rent-seeking practices of the professions and other respected stakeholders.
Why is our ‘governmint’ borrowing money? For what? For whom? Oh, its for us – the taxpayers! And guess who has to pay it back – plus the rent? Why that’s us again. Gee, arn’t we just a wonderful bunch of idiots! Nicely deluded ones. How does this madness end?
@ Paul Quigley
I have no argument with you there other than I regard the salary link made in 2001 (Buckley report) between the pay of public representatives and public servants as the one fundamental error that must be corrected if the process of reform is to succeed.
On the involvement of vested interests to which you refer, many would view it as simply democracy in operation i.e. not very pretty but the best that has yet been invented.
Ed Walsh has an excellent article in the SBP on the operation of the Swedish health service where the market mechanism, also the best hitherto invented for the efficient allocation of resources, has resulted in the distinction between public and private being made redundant. The “money follows the patient” policy now proposed for our own health service should result in the same outcome. The doubts as to whether or not it will ever be introduced are being overtaken by the fact of the near collapse of the private health insurance sector. The “service plan” of the HSE for 2014 which should help convince the public that is no longer a question of if but when.
Incidentally, plugging the funding gap for 2013 has also seen the de facto introduction of what might be termed the “offset principle” i.e. more spending in one area must be compensated by less in another, a basic plank in the Swedish reformed budgetary process. Expenditure is broken down into a dozen or so policy areas, more or less in line with the responsibilities of individual ministers. The examination by the Health Committee of the Dáil of the “service plan” also mimics the Swedish system but not in any substantive way. There, the committees cover all areas of expenditure in an organised legislative process. Our political leaders are, nevertheless, being pushed by overwhelming financial constraints slowly but steadily in the right direction.
Page 5. “Economic policy reforms towards competitiveness, growth and jobs are in the interest of Member States, individually and collectively. They bring long-term gains, but often these gains are hard to measure and frequently only accrue in the medium term, most of the time beyond the usual electoral cycle. Moreover, they are typically resisted by vested interests who capture economic rents, rents they would lose after the reform. Reforms are thus associated with short-term economic and political costs and the provision of financial support may help overcome them.”
And the preference for loans (page 6);
“Loans would imply only limited fiscal transfers across countries. Indeed, the transfer element would be limited to a lower interest rate than the market rate of most beneficiary Member States, capturing the positive externality of the reforms for the EU as a whole.”
Lucid article from Aidan Regan.
‘The Imbalance of Capitalisms in the Eurozone. Can a One Size Fits All Adjustment Work?’
“This assumption of convergence, however, is not possible if we accept the core research finding of comparative political economy over the past thirty years, namely that there are different varieties of capitalism in Europe, with qualitatively distinct domestic institutions that cannot converge. The core empirical finding in this research is that what governments do is conditioned by the structure of the domestic economy. Within the Eurozone there are seventeen countries with qualitatively distinct national welfare states, fiscal policy regimes, wage-setting institutions and labour markets. In this perspective, imposing a one size fits all adjustment aimed at fiscal consolidation and structural reforms of the labour market will perpetuate rather than resolve the economic divergences in the north and south of Europe.”
“Euro zone mulls cheap loans as incentive for economic reforms -document”
Van Rompuy has gone from haiku to mulling cheap loans. What next? For all the say he has, he might as well try mulling some wine.
Schaeuble picked his man right in Dieselboom. The other finance ministers must has been mulling a little too much wine, the evening they agreed to that appointment.
One gets a feeling that many countries are ready to thrown in the towel on solutions that have clearly failed.
The EZ has lost the fans and the dressing room has taken to mulling, only the directors box thinks the game can still be saved; and even some there are wavering.
Still one finds that those in the directors box usually land on their feet, even if the whole club ends up in the toilet.
@ JR
Interesting mix of metaphors! My own view is that it is impossible to comment sensibly on the game without following what is going on on the pitch.
The leaked document is well worth studying as it reflects IMHO a series of interesting compromise positions, notably the reference to a “limited fiscal transfer” which would have been very contentious prior to the German elections. (The German constitutional court did not rule out transfers – it would have been a nonsense to do so given that Germany is the largest net contributor to the EU budget – but only open-ended commitments. In either event, the budgetary powers of the Bundestag cannot be ignored.)
Countries are faced with an interesting choice if the arrangements proposed are agreed. They can stand on their dignity or take the money.
The Dutch do not want to pay. No surprise there!
As to whether or not radical reform is still required in Ireland, only a very obtuse observer would contend that it was not. The fact that it is also required in Germany does not, unfortunately, change the choice to be made. In a nutshell, the Northern economies can cope with the disciplines of being in a monetary union with their existing structures. It is up to the others to make up their minds; change their structures or continue with the Hobson’s choice of staying or leaving the euro.
@DOCM
“Countries are faced with an interesting choice if the arrangements proposed are agreed. They can stand on their dignity or take the money.”
The leaked document’s proposals have already been shot down by Dijsselbloem, whose main role seems to be that of point man for Schaeuble.
The slight shift in German attitudes is merely reflective of a belated recognition that the situation is slipping out of control. The denominator in the Debt/GDP equation is making a jumble of best laid paper plans.
The banks, consequent to zero growth, will have deteriorated rapidly in the past 12 months. Zero growth does not mean all borrowers stay at an equilibrium. It means that more businesses and people on the wrong side of the line, who will not be able to service debts. The people on the right side of the line just hoard the gains. Taken together that means more bad debts and less investment. I have witnessed at first hand since 2008 how well run companies, that banks would have classified as Triple A borrowers, have deteriorated to the point of extension. Zero growth, where finance is part of the capital structure of businesses and households ( as it is in almost all cases), has and will continue to decimate the economies of Ireland and Europe.
‘Structural’ reforms, by which most people means lowering private sector wages, so that businesses export more, was never going to provide the turnaround necessary to correct the trade imbalances that had built up.
These trade imbalances are a result of perhaps 30 years of groundwork in getting ahead in key sectors, and the another ten years of cost containment to enhance and improve those advantaged positions.
A 7% trade surplus cannot be turned into a 0% in a matter of years, except by the deficit countries ceasing to purchase of their own volition or through lack of resources.
To others, structural reform means cutting PS payroll costs either in numbers of money, ignoring that the people cut will add to exchequer cost, like all other unemployed. Such ‘structural’ reform may have worked in the past, when neighbouring markets were booming. In today’s environment, such reforms achieve very little, except distress at the margins (and bleating at the pampered end)
Either way the medicine being prescribed for the imbalances, are as aspirin to an outbreak of cholera.
Stopping the blatant excesses in both public and private sector, the latest of which is the State underwriting of DB pension schemes for better off pensioners and employees, is vitally important, not principally to save money, but to get some degree of collegiality in confronting the crisis.
But that is clearly a lost cause.
You are correct in one particular point, that is the necessity to delink politicians and the higher level PS, from their self interest in decisions on pay, pensions, expenses, and job opportunities being taken everywhere in the PS.
So, I could not agree with your conclusion;
“It is up to the others to make up their minds; change their structures or continue with the Hobson’s choice of staying or leaving the euro.”
King Canute had a better chance of success in his endeavours, than simply implementing structural reforms, although necessary, will have on the imbalances that gave rise to the current crisis.
The imbalances will have to corrected through the age old mechanism of devaluation. It is as inevitable as the tide that faced King Canute.
@ JR
Let’s wait and see how the game develops!
I have expressed scepticism about the idea but for one with so little going for it, it is demonstrating remarkable resilience.
Very clear, ‘head up, see things early, keep it simple stuff’ from Aidan Regan. Maestro.
‘My approach to European policymaking stems from the historic-empirical and institutionalist tradition, especially the classical work of Marx, Schumpeter, Weber, Polanyi, Kalecki, C Wright Mills and contemporary authors such as Peter Hall and Wolfgang Streeck. Rather than seeking generalised laws to explain the dynamics of European decision-making this tradition seeks empirical knowledge of the causal processes through which institutions and politics interact to produce variation in policy outcomes’
@Aidan Regan
“… there are different varieties of capitalism in Europe, with qualitatively distinct domestic institutions that cannot converge .”
It follows, systems theory, that the institutions at a higher level have to be a bit more flexible to allow local institutions to either decline or grow. Good ways from this at the mo ….
Labour markets, in particular, have distinct historical or ‘societal effects’ which make it not only impossible at times to compare them let alone align them a la Sarkozy’s ill thought out idea of following the German system.
@ All
FYI
Draft of the German coalition agreement (courtesy the blog of a Green).
65 replies on “Fiscal Assessment Report”
Could Prof McHale help with outlining the process in producing this report.
Was the Department of Finance provided with a draft, and if so, when and does this final report incorporate amendments suggested by DoF?
Why did the Council circulate the report to selected media in advance of its publication this morning?
Jagdip,
Thanks as always for your interest (and thanks to Seamus for posting).
As required under the FRA, an advance copy was sent to the Minister within 10 days of publication. This copy was sent on Tuesday.
Some small sections were also sent to DoF officials in advance for fact checking. Limited sections were also sent to the CBI and NTMA for additional fact checking. However, none of these bodies is in anyway responsble for any errors or omissions in the report.
As you will see, it is quite a complex report with a good deal of analysis. The report was circulated earlier in the week to some journalists, after the report had been forwarded to the Minister, where a pre-existing relationship assured us that the embargo would be respected. The reason for doing this is allow for more considered coverage of the report. We had a media briefing yesterday that was open to all media, though the report was embargoed until midnight. A media notifcation was sent via our email distribution list late last week.
@ John McHale
You the council refer to the so-called patent cliff and then add:
The resilience is an illusion as is the official position that unit labour costs have improved by 21% compared with the European average.
Are the members aware that almost half the value of services exports relate to virtual accounting transactions that will vapourise if the OECD/G-20 agree on changes in international tax rules?
This is likely to happen during the period of the upcoming medium-term plan.
If the IFAC go along with the official line until there is a faux-shock for the insiders, it will be like the rerun of an old movie.
The FAC’s benchmark GDP forecast for 2014 is similar to that of the Department of Finance (2.2% versus 2%) but the composition is very different .The former is closeto the consensus in projecting a very modest rise in domestic demand with net exports the main driver of growth but the Finance forecast is an outlier as domestic demand accounts for most of the forecast rise in GDP. Consumer spending , in particular, is expected to rise strongly, by 1.8%, against 1.1% pre-Budget and as the FAC report notes, appears to be predicated in part on an upward revision to past data. They may be right, of course, but it is a more upbeat view than most on the household sector.
What % of total consumer spending is made up of car sales? The latest auto sector forecast I heard was that sales are expected to be up 10%-15% next year. Should help the GDP figures and tax take if it comes to pass.
Spending on personal transport equipment (presumably mainly cars) was €2.2bn in 2012, about 2.5% of total consumer spending.
From the FT:
Prof McHale told journalists that the council was forced to contact the government recently to ask ministers to stop dismissing its advice.
Asked if he felt the council could provide the necessary oversight role when Ireland exits its bailout next month, he said: “Whether we can have the level of influence the troika [EU, IMF and European Central Bank] had only time will tell . . . but we can raise the political costs by making recommendations in a public manner.”
http://www.ft.com/cms/s/0/03d01266-52c7-11e3-8586-00144feabdc0.html
Is that the role of the FAC? To ‘raise the political costs’ if its advice isn’t followed?
And what if its advice is incorrect, in the strict sense of being factually incorrect? Is there not a danger that what it raises is not a political cost at all, but an actual cost of borrowing, paid by Irish taxpayers?
Extract “The Sins of the Father” by Ronald Kessler
“There were boxes of Why England Slept in the warehouse in New York said Gertrude Ball,Joe’s former New York secretary.
After the book had been out a few weeks,Joe sent a copy to Harold Laski of the London School of Economics. Even though Laski had a reputation as a socialist.Joe had sent Joe Jnr., and later Jack,to study with him. On August 21,1940,Laski wrote to Joe that it would be easy to repeat the “eulogies” that Luce and Krock had showered on Jack’s book. But Laski had to tell Joe the truth. Even after the book had been worked over by Klemmer and Krock,Laski said,he regretted that Joe had let him publish it. “For while it is the book of a lad with brains,it is very immature,it has no real structure,and it dwells almost wholly on the surface of things,” Laski wrote.In a good university,he went on,”half a hundred seniors do books like this as part of their normal work”. But they don’t get them published. “I dont honestly think any publisher would have looked at that book of Jack’s if he had not been your son,and if you had not been ambassador. “Thinking” Laski said is a “hard business.” One had to pay the price of admission. By giving him his true thoughts,Laski said,he was engaging in an act of real friendship,in contrast to “yes men” like Krock. Joe never forgave Laski.”
The era of the Irish-American politician culminated in Kennedy. On the day he died, the President of the United States,the Speaker of the House of Representatives,the Majority Leader of the United States Senate,the Chairman of the National Committee were all Irish,all Catholic,all Democrats.
It will not come again.
For once, I am on the side of the government in the case of the PCCL. The government was right not to apply for a credit line, whose conditions would set in parliamentary circus performances throughout Europe. My principal reason, however, is that if another crisis blows up, as it probably will, then it will be time to regain our sovereignty, fiscal, monetary and psychological.
The FAC believes that Ireland should have applied, and clearly run the risk of the conditions being set at such a level, that the government would have had to return from Europe with its tail between its legs; having been told that its Frankfurt’s way, and not Labour’s way, or Fine Gaels way, again! Not good advice.
Also, why the big deal on the probability going from from 1 in 3 to 1 in 2.
I had to read the FT article, and not the reported media, to understand that this was not the probability of default. Instead it was the probability of going from 2.9% deficit to over 3% in 2015. What a calamity that would be!
Better to concentrate on the blank cheque that is being written up for defined benefit pension schemes, at the expense of other pension fund holders, no pension fund holders, and the State as backstop.
@Carson
Some CSO figures re cars / trucks in 2012, but numbers only not values.
However, imho, we would be far better off as a country if no new car was registered next year. It would mean more labour and more valued added to the country in making old cars sweat out worth.
I believe that the VRT rates should be set to discourage further the purchase of new cars, and to encourage the retention of older properly serviced vehicles. It would be better for employment and value added in the economy.
Let the ptb and their allies, that have decided to hock the country, learn to endure being transported in cars that are five, ten and fifteen years old, or even use bicycles or walk.
http://www.cso.ie/px/pxeirestat/Statire/SelectVarVal/saveselections.asp
Joseph Ryan makes a point above about defined benefit pension schemes. I would strongly suggest pundits in general and IFAC start drawing attention to this subject.
In general terms these pension funds in Ireland are allowed to and are using unrealistic discount rates. This understates deficits. Younger members are in many schemes contributing to unrealistic pension ‘entitlements’ for older members. There is a ponzi scheme element to this.
The ‘entitlements’, once payment has begun are regarded as “property rights” (sound familiar?).
The discount rates are largely hiding this.
Is the state going to / going to be obliged to bail them out?
How would that affect the balance sheet?
(btw I am reliably informed that there were no dissenting voices to this premiss at a recent gathering of a hundred or so industry guys, so its not just me wondering about this)
Just read the ‘cautious’ summary. Growth projections and the odious trend of the proxy_sov debt GNP ratio now at ~140% remain largely unknown.
IFAC appear to be fairly timely and sharpish on the ol’ “corrections”. Well done!
Perhaps An Taoiseach’s ‘best boy in the EZ class’ influence … ‘She who must be obeyed’ (apologies Rumpole) will be pleased!
Grumpy ,
That would explain the possible pre Christmas ESB strike. It is an attempt by highly paid insiders to divert cash in their direction.
MB,
You raise an interesting question. Is it right that an unelected and unaccountable body should seek to exercise political influence. If the FG/Lab govt follow the IFAC advise and it is wrong, who loses office?
@ All
FYI
We live in changing times. Fiscal councils even get a mention.
http://video.consilium.europa.eu/webcast.aspx?ticket=775-983-13691
@ Tull
In fairness it does seem to me that ESB management ‘pulled a fast one’ in this instance.
With 3 of the 5 members of the IFAC having long work experience in organisations (ESRI, OECD and IMF) that usually deliver criticism ‘sotto voce,’ it’s unlikely to get involved in political controversy.
IFAC could earn public credibility over time by focusing on public spending and tax effectiveness issues – which is rare in Ireland.
Eurostat published data this week which shows that Irish public social protection spending (welfare and health) as a ratio of economic output (GNP) was highest in Europe in 2011 compared with the leaders elsewhere: France and Denmark at 34% of GDP.
‘Old age & survivors benefits’ accounted for a 46% average of total EU social benefits in 2011 but this category was lowest in Ireland at 23% of GDP – thanks to the low occupational pension coverage in the Irish private sector. “Not a lot of people know that,” as Michael Caine might say, which of course tells its own story!
Irish public social protection spending (welfare and health) was 37% of GNP in 2011.
“IFAC could earn public credibility over time by focusing on public spending and tax effectiveness issues – which is rare in Ireland”
yeah, if only we had, i dunno, something like a Comptroller and Auditor General.
Is that their role? No. Its not. So if they were to stray beyind their remit they would be both smacked down and lose such political credibility as they have.
@ Brian Lucey
Through your prism of negativity, you appear to have missed the word “effectiveness.”
The C&AG is a Constitutional office responsible for auditing state accounts, public funds and non-commercial public bodies.
It also is responsible for checking that spending is in compliance with Dáil authorisations.
It’s role is not to determine effectiveness.
b>The following is an extract from the OECD’s Economic Survey of Ireland 2013:
Being accused of negative thoughts by the cassandra of Kuala Lumpar…pot..meet mr kettle.
@ MH
Indeed! “Effectiveness” of reform, both fiscal and other,could be said to be the leitmotif of the approach to be adopted under the Two-pack arrangements.
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/139704.pdf
cf paragraph at the top of page 3.
If there was any doubt about the fact that the pattern of public expenditure in Ireland is in need of radical reform, the current controversies about medical cards and top-up payments to senior HSE staff should surely remove it. That, and the approaching express train of a major pensions crisis in which politicians blathering about fairness when they, with public servants, are currently unaffected, may rapidly give rise to a situation up with which the Irish people will not put.
P.S. The meeting of the Eurogroup – divorced from an associated meeting of ECOFIN at which all countries are represented, if I am not mistaken – highlights the increasingly semi-detached status of the most notable absentee, the UK.
@ All
I posted this relevant link in another thread.
http://www.lesechos.fr/economie-politique/monde/actu/0203142562599-jeroen-dijsselbloem-eurogroupe-je-ne-souhaite-pas-que-la-zone-euro-ait-un-budget-propre-631482.php
In circumstances where Germany, with other creditor countries, notably the UK, were adamant that the EU 2014-2020 budget show, for the first time, a reduction in real terms, it is difficult to know how serious is Merkel’s position.
Figure 1.6, P.25, from the report.
Regional Wizard Coffey waited patiently in the slick new, virtual hall of the Fiscal Law Advisory Wizards (FLAW), Galway. Coffey, used to the sturdy comfort of his own little West Cork Mill, felt oddly out of sorts in the new architecture of dazzling, of ever shifting numbers, panes of transparency that one had to crane one’s neck to see through and all founded on a groundwork of laws, treaties and agreements that somehow, in spite of the slickness, seemed not to make an even floor.
The hall was so new that it was not complete yet, with sparks of figures streaming out in odd jets where the architecture had not yet been finished. And even where the final shape of the Fiscal Hall was apparent, Coffey found himself contemplating the notion that this was a virtual construct which had a faint tang of impermanence. The symbolic teeth of the main door, for example, had a decidedly plastic sheen.
Grand Fiscal Wizard McHale popped his head round a large door which conveniently vanished.
“Ah, sorry to to keep you waiting, Coffey, did you get a…”
“If he says ‘cuppa'”, thought Coffey, “There will be a wizard war. And I shall punch him.”
“…get a bite to eat?”
Coffey had forgotten that whatever about the ceremonial lash he kept tucked in his gown, McHale was one of the kindest of the Grand Wizards.
“You were looking for me?”
“Yes, yes. Perhaps it would be best if I showed you. This way”
In the room beyond on a row of benches a set of machines, very like Imperia pasta making machines were churning away. Junior wizards fed in strips of information of all kinds and the models were churning out tagliatelle-like swirls of forecasts. The models were neatly labelled, CBI, Dof, ECB, IMF and so on.
“We’ve had all the models reconstructed”, announced Wizard McHale happily.
A boom shook the room and smoke curled from under the nearby door. Coffey turned his solid head.
“Ah”, said McHale “We’ve had to put some other new, er, prototypes in a safe room.”
A scorched younger witch stumbled unhappily through.
“Why?”
Boom.
“Well, the new ones keep blowing up, you see.”
“What are you trying to do in there?”
“Umm… Add finance”
“Christ”, thought Coffey, “the whole building could go up at any moment.”
“Well”, he said, “so these are the forecasts.”
“Oh, no”, said McHale, “it is a lot more complex than that. We have a very sophisticated system. Grab some figures and I’ll show you.”
With a fistful of the twirling animated figures, Coffey followed McHale through to a nice little indoor courtyard at the centre of which was a tin bucket.
“Now”, said McHale, “I wet my finger in the bucket, like so, carefully.”
“Yes.”
“And I hold it up in the air like so, you see.”
“Yes.”
“And I get a sense of which way the wind is blowing.”
“Yes.”
“And the figures, adjust – you see.”
Maintaining his habitually bland features when in the presence of power, Coffey resisted the urge to groan. “I see. And then you have the forecasts.”
“Not at all, I told you, it is a very sophisticated process. That’s not the end of it. Come on.”
They passed on into a large room, heavy with whining and snarling. A group of wizards had large remote controls in their hands and go-karts – each marked with the sign of an institution – were racing, bashing and smashing around a track that looped back in on itself.
“We feed the figures into the remotes you see, and check them relative to each other.”
Coffey watched thoughtfully,
“But they’re not moving apart. They’re grouping together.”
It was true, where a kart went ahead, the controller seemed to bring it back and where another lagged it suddenly teleported forward.
“Yes, that’s it. All the karts are ‘aware’ of each other, so to speak, where one sticks out in any way, it changes itself to become more like the others. Impressive isn’t it? That way they all agree, but, er…”
“And you we’re looking for me, because why?”
“Well, I was going to show you how we make them into fans at the end, that is my favourite part, but well… look at this chart Coffey.” The normally cheerful face of the Grand Wizard fell. A giant chart appeared over the karting scoreboard and the other wizards pretended to look very busy elsewhere.
“They’re wrong. All the time, every time, in exactly the same way. Not randomly, you see, but in one direction. But”, said the wizard cheering up and falling gloomy again almost in an instant. “It might not be the same next time. I was wondering if you had any suggestions.”
“I can’t think for the life of me how that could be happening.”
“But how can we improve the system?”
“Do you have a washing room here?”
“Yes, if you…”
“Does it have a washing machine in it?”
“Ah, yes.”
“If I were you, I’d dispense with all this. I’d put last years figures in the washing machine. Then set them on rinse, wash repeat.”
“Oh.”
“And Grand Wizard McHale.”
“Yes, Coffey?”
“Something very nasty has just happened to the long term trend. It’s broken.”
“Dammit.”
@ DOCM
Growth forecasts are reliant on export growth but while job numbers in the exporting sectors fell, headline exports grew at current prices by 71% in the period 2000-2012 and at constant prices by 59%.
This month the Government claimed that unit labour costs will fall 21% compared with the Eurozone average in the period 2008-2015.
This is economy with the truth.
The earnings data also suggests that claims of victimhood are phoney and bubble costs remain in the system.
The CSO reported in August:
http://www.rte.ie/news/business/2013/1122/488456-ecb-deflation/
“The European Central Bank’s chief economist said today that the euro zone faces deflationary pressures, and the bank’s president stressed that interest rates must remain low “because the economy is weak”.
With euro zone inflation running at 0.7%, well below its target of just under 2%, a raft of ECB speakers this week have said it is open to taking fresh measures to support the economy.
Vice-President Vitor Constancio said earlier this week that “everything is possible”.
Both he and Peter Praet have said asset buying – or quantitative easing – is an option after years in which the bank’s policymakers have ruled it out.”
Everything is possible other than the unmentionable. Fair play to Ireland the Guinea Pig for still being around to experience the next wave of never-tried-before-economic magic.
Slovenia is next in line for a banking related bailout…
@ All
FYI what might be characterised as a civilised and constructive discussion that will have reached a wide listening audience today.
http://www.rte.ie/radio/radioplayer/rteradioweb.html#!rii=9%3A10223849%3A11988%3A23%2D11%2D2013%3A
@ MH
Given the permanency of employment and the defined benefit nature of pension benefits, it is normal that public sector salaries should fall behind those in the private sector. Indeed, to balance the public accounts under what might be described as the current policy of “attrition”, it is essential that this happen. But there is, of course, a much better approach i.e. establishing (i) common minimum employment and pension conditions for ALL workers and (ii) fair market arrangements which decide what the appropriate level of pay is for particular jobs, whether in the public or the private sector.
The key to doing this, and abandoning the present blunt instrument of recruitment embargoes and pay caps, is clearly a draconian political and financial control of budgets – via parliament – such as has been established in the three Scandinavian countries that have had similar, if much smaller, banking cum budgetary crises; Sweden, Finland and Denmark in order of crisis occurrence.
I have, of course, made these points before. The criterion has to be fairness in the only sense in which it can be legitimately understood i.e. as applying to all society.
That we have a long way to go can be gauged from this exchange at leaders’ questions during the week.
http://oireachtasdebates.oireachtas.ie/debates%20authoring/debateswebpack.nsf/takes/dail2013112000018?opendocument#Q00200
The confusion of roles between public representatives and public servants in the minds of the former has now reached near farcical proportions. The only way to end it is to (i) break the formal link between the pay and conditions of politicians and those of public servants and (ii) end the system of relativities which governs the pay and conditions of the top ranks of the public service (especially for those who manage to have a foot in both the public and private sector and gain maximum advantage from both).
@ All
Sorry! Correct link. First item.
http://www.rte.ie/radio1/podcast/podcast_saturdaywithclairebyrne.xml
@Gavin
Think the FLAW was expanding recently, did the headhunters fail to secure the services of The Envelope, or was it all a bit: “”No one asked your opinion, you filthy Mudblood,” ?
Yuk. Oh FFS! It looks as though one of the Wizards is making a bid to get a “World” named after himself and a couple pals.
http://krugman.blogs.nytimes.com/2013/11/23/bubblephobia-and-monetary-policy/
Nobody had ever thought of this stuff before…
@ grumpy
Perhaps I could have had one of the junior wizards hastily concealing a crumpled envelope as Coffey and McHale enter.
But that is a worrier from Krugman – it feels like shifting from iconoclast to just another subset of Very Serious People, without whom nothing can be considered, er, serious.
When does ‘loose monetary’ policy NOT lead to inflation? Sure when the ‘money’ (electronic kind, you understand) flows into virtual assets (or even, cough, cough – into Sth. Dublin housing!) – and not into wages and salaries – is what! Hence, no real commodity price increases. QED.
ZIRP interest rates are a sign of significant economic stress – but that is not what you hear. How do you ‘tighten’ when the base interest rate is 0.25%? You don’t! You stagnate, is what!
The signal that economic Dry Rot is spreading its rhibosome is the pre-tax price of liquid hydrocarbon fuel. This must be sufficient to ‘incentivize’ Big Oil to keep drilling (which has become a tad costly). The ‘break-even’ price is approx $ 100/bbl – and slowly creeping up. Eventually the situation would show up as a shortage in supply v demand. At the moment we have a somewhat precarious ‘balance’ between supply + demand. But if (and its a biggish if) western developed economies show any significant growth spurt – watch out! Energy prices would zoom! And we would be back in depression land PDQ.
@ Gavin
You never lost it.
On Krugman and secular stagnation:
‘It was policy! For more or less the entire period in question (call them “The Greenspan Years”), the growth of consumer spending, financed by increased consumer debt, was the main instrument of policy. I suppose I might be misremembering but I really don’t think I am, and I was there and I read a lot of FOMC minutes. The US authorities wanted to manage aggregate demand, but during the entire period, the fiscal authorities had either a deficit reduction target (Clinton) or a massive unfunded war (Bush), and so they made the goal of interest rate policy the management of consumer demand. This consumer demand was financed by debt, but nobody paid attention to this, in my opinion largely because the idea of stock/flow consistency didn’t really feature in the economic models they were using’
http://crookedtimber.org/2013/11/21/if-this-is-secular-stagnation-i-want-my-old-job-back/
How it all woiks
http://www.ipc-undp.org/publications/srp/TOWARDS%20A%20RECONSTRUCTION%20OF%20MACROECONOMICS.pdf
@ DOCM
On the radio link, it was an interesting discussion and possibly only Mick Clifford and Padraig McLaughlin had a direct experience of economic adversity.
Charlie Flanagan’s excuse about the delay in getting the legal services bill through the Oireachtas was because Justice officials were busy with insolvency legislation, shows how difficult it is to get change – there is always an excuse.
Following Ms. Justice Elizabeth Dunne’s finding in 2011 of a flaw in a 2009 property conveyancing law, it took 2 years and a month to have a short amendment passed despite an economic emergency.
The American middle class burned out long before the economic ideology ever did . Larry Summers on Greenspan
http://www.ft.com/cms/s/2/18a0a6d8-3724-11e3-9603-00144feab7de.html
“I found myself disappointed that the events of the past few years had not led Greenspan to any revision of his anti-Keynesian views on macroeconomic policy. Perhaps understandably, he sidesteps monetary policy issues in the post-crisis period. He is dismissive of the role of fiscal policy in helping the economy out of the 2009 trough and the role of fiscal policy contraction in perpetuating slow recovery. Even in retrospect, he regrets the decision to save hundreds of thousands of jobs by having the government provide financing in connection with the GM and Chrysler bankruptcies.
Greenspan regards raising the US saving rate as a central priority. At a time when output appears to be constrained by demand rather than by supply and when even long-term real interest rates are at near-record low levels, it is much less clear to me than Greenspan that raising savings rates is the right growth strategy.
And in an economy that is changing rapidly in ways that leave many behind, Greenspan seems much more concerned with the possibility that help for the victims will foster dependency – going so far as to raise questions about tax credits for the working poor put in place by Ronald Reagan – than he is about mitigating inequality, preventing suffering or maintaining demand.”
@ MH
What we are witnessing IMHO is a dawning public appreciation of the impossibility of continuing with the skewed pattern of public expenditure that has resulted from decades of clientilist politics. When we got to this point before, the state was saved from bankruptcy by draconian cuts in spending (remember Richie Ruin and Mac the Knife!) and floated off the rocks courtesy of a benign external economic environment and the traditional safety valve of emigration. Only the last applies in the current crisis and it is my conviction that the boats that deserved to stay on the rocks will not float off with the rest on this occasion.
As will be clear from the exchanges in the Dáil to which I linked above, there is absolutely no evidence that the penny has dropped with our elected representatives and I doubt that it will. What will bring about the change is the financial constraint with which the country will have to live for many years coupled with the realisation by voters that they cannot continue with the illusion that it is their elected representatives that came up with the money by getting it from somewhere other than through their taxes. The need to know how it is spent, and to what level of effectiveness, is becoming a political imperative.
@ DOCM
No bailouts, a dire situation, civil servants allowed to think and politicians willing to try new policies, did result in radical change in the late 1950s.
not just CS allowed to think but honoured instead of being cast as the villians of the piece.
Frank Barry (whom MH probably considers an overpaid don who has a pension goddam it) has written a fair bit on this issue. Its not quite as simple as the popular narrative has.
I was familiar with this issue long before I first heard of you and I don’t depend on popular narratives.
I have my own copy of ‘Economic Development.’
Frank Barry strikes me as a person of wisdom – possibly a rarer commodity than PhDs these days.
@ BL
By whom? Certainly not by me. However, I have made no secret of the fact that the near caste system of what I have termed the nomenklatura at senior level, must be dismantled and the link between the salaries of the elected representatives, and their coterie of “advisers”, abolished. The moral hazard involved is in large measure the cause of the of inflation in senior level expectations of the appropriate generalised level of salaries. The blunt instruments used to try and align expenditure with income is worse than the disease. One has no idea what the appropriate level of salary is for particular posts and one has currently no way of finding out.
Changing this situation is in the interest of the public service. Failure to do so will copper-fasten a future near desert with regard to the development of meaningful jobs and career structures.
Go on the rugbywallahs.
22-10 up against the All Blacks after 53 minutes
from Krugman link above:
H.L. Mencken definition of Puritanism: “The haunting fear that someone, somewhere, may be happy.”
A more than ample amount of its ordo_wing around … and then Krugman tosses in the flawed frenzies of Ayn Rand. Spose the puritans and the randites on the blog will be chuffed with the indirect mention!
MH, BL,
I wonder were any of these heroes of the 1960s asked to take a modest downward adjustment in their indexed linked pensions & if so how did they respond?
@ TMD
Your question reveals both the poverty of your reasoning and the prevailing unwillingness to face up to reality. Why should any individual be pilloried for the income that has been “authorised” by existing arrangements or asked to “volunteer” reductions in whatever pensions they may be in receipt of? Where would this process end?
The bottom line is making income match expenditure. This is a matter for the elected representatives of the taxpayer and the outcome must be divorced from consideration of individual cases, whether this relates to applicants for medical cards or hospital consultants.
@ All
FYI
How not to run iarnród Eireann!
http://www.rte.ie/news/2013/1123/488590-gp-shortage/
Tull
These were the days of Taca. Guess what the result would have been?
DOCM
The bottom line is indeed making income match expenditure. But it is desirable that in so doing we extract some of the noses and front trotters from the trough as well.
@ TMD
My sentiments entirely! But it must be done as part of fully understood, objectively justified, and accepted, overall process of reform. Any other approach is counterproductive (which may intuitively be understood by those – present company excepted – deliberately indulging in it).
DOCM,
You really should get off the ditch and run for office. Your country needs you.
@ DOCM
‘I have made no secret of the fact that the near caste system of what I have termed the nomenklatura at senior level, must be dismantled and the link between the salaries of the elected representatives, and their coterie of “advisers”, abolished. The moral hazard involved is in large measure the cause of the of inflation in senior level expectations of the appropriate generalised level of salaries.’
That is an issue, but the most serious moral hazard is the operation of private vested interests within the public sector. As long as those private interests are permitted to fund the political party system, and offer revolving-door arrangements to key public officials, we will be subject to principal-agent problems and the modern version of clan politics. The trade unions have simply identified, and mirrored, the rent-seeking practices of the professions and other respected stakeholders.
Why is our ‘governmint’ borrowing money? For what? For whom? Oh, its for us – the taxpayers! And guess who has to pay it back – plus the rent? Why that’s us again. Gee, arn’t we just a wonderful bunch of idiots! Nicely deluded ones. How does this madness end?
@ Paul Quigley
I have no argument with you there other than I regard the salary link made in 2001 (Buckley report) between the pay of public representatives and public servants as the one fundamental error that must be corrected if the process of reform is to succeed.
On the involvement of vested interests to which you refer, many would view it as simply democracy in operation i.e. not very pretty but the best that has yet been invented.
Ed Walsh has an excellent article in the SBP on the operation of the Swedish health service where the market mechanism, also the best hitherto invented for the efficient allocation of resources, has resulted in the distinction between public and private being made redundant. The “money follows the patient” policy now proposed for our own health service should result in the same outcome. The doubts as to whether or not it will ever be introduced are being overtaken by the fact of the near collapse of the private health insurance sector. The “service plan” of the HSE for 2014 which should help convince the public that is no longer a question of if but when.
Incidentally, plugging the funding gap for 2013 has also seen the de facto introduction of what might be termed the “offset principle” i.e. more spending in one area must be compensated by less in another, a basic plank in the Swedish reformed budgetary process. Expenditure is broken down into a dozen or so policy areas, more or less in line with the responsibilities of individual ministers. The examination by the Health Committee of the Dáil of the “service plan” also mimics the Swedish system but not in any substantive way. There, the committees cover all areas of expenditure in an organised legislative process. Our political leaders are, nevertheless, being pushed by overwhelming financial constraints slowly but steadily in the right direction.
@ All
FYI (H/t Euro Intelligence)
http://www.reuters.com/article/2013/11/22/us-eurozone-reforms-idUSBRE9AL0OB20131122
@ All
FYI
http://pdf.reuters.com/pdfnews/pdfnews.asp?i=43059c3bf0e37541&u=2013_11_22_03_00_8759da10050446cf925117385075d7b9_PRIMARY.pdf
The bits that appear to matter most.
Page 5. “Economic policy reforms towards competitiveness, growth and jobs are in the interest of Member States, individually and collectively. They bring long-term gains, but often these gains are hard to measure and frequently only accrue in the medium term, most of the time beyond the usual electoral cycle. Moreover, they are typically resisted by vested interests who capture economic rents, rents they would lose after the reform. Reforms are thus associated with short-term economic and political costs and the provision of financial support may help overcome them.”
And the preference for loans (page 6);
“Loans would imply only limited fiscal transfers across countries. Indeed, the transfer element would be limited to a lower interest rate than the market rate of most beneficiary Member States, capturing the positive externality of the reforms for the EU as a whole.”
Lucid article from Aidan Regan.
‘The Imbalance of Capitalisms in the Eurozone. Can a One Size Fits All Adjustment Work?’
“This assumption of convergence, however, is not possible if we accept the core research finding of comparative political economy over the past thirty years, namely that there are different varieties of capitalism in Europe, with qualitatively distinct domestic institutions that cannot converge. The core empirical finding in this research is that what governments do is conditioned by the structure of the domestic economy. Within the Eurozone there are seventeen countries with qualitatively distinct national welfare states, fiscal policy regimes, wage-setting institutions and labour markets. In this perspective, imposing a one size fits all adjustment aimed at fiscal consolidation and structural reforms of the labour market will perpetuate rather than resolve the economic divergences in the north and south of Europe.”
http://aregan.wordpress.com/2013/11/25/the-imbalance-of-capitalisms-in-the-eurozone-can-a-one-size-fits-all-adjustment-work/
Very interesting article from Stephen King on stagnation.
http://blogs.ft.com/the-a-list/2013/11/25/there-is-no-easy-escape-from-secular-stagnation
@DOCM
re: Link
http://www.reuters.com/article/2013/11/22/us-eurozone-reforms-idUSBRE9AL0OB20131122
“Euro zone mulls cheap loans as incentive for economic reforms -document”
Van Rompuy has gone from haiku to mulling cheap loans. What next? For all the say he has, he might as well try mulling some wine.
Schaeuble picked his man right in Dieselboom. The other finance ministers must has been mulling a little too much wine, the evening they agreed to that appointment.
One gets a feeling that many countries are ready to thrown in the towel on solutions that have clearly failed.
The EZ has lost the fans and the dressing room has taken to mulling, only the directors box thinks the game can still be saved; and even some there are wavering.
Still one finds that those in the directors box usually land on their feet, even if the whole club ends up in the toilet.
@ JR
Interesting mix of metaphors! My own view is that it is impossible to comment sensibly on the game without following what is going on on the pitch.
The leaked document is well worth studying as it reflects IMHO a series of interesting compromise positions, notably the reference to a “limited fiscal transfer” which would have been very contentious prior to the German elections. (The German constitutional court did not rule out transfers – it would have been a nonsense to do so given that Germany is the largest net contributor to the EU budget – but only open-ended commitments. In either event, the budgetary powers of the Bundestag cannot be ignored.)
Countries are faced with an interesting choice if the arrangements proposed are agreed. They can stand on their dignity or take the money.
The Dutch do not want to pay. No surprise there!
As to whether or not radical reform is still required in Ireland, only a very obtuse observer would contend that it was not. The fact that it is also required in Germany does not, unfortunately, change the choice to be made. In a nutshell, the Northern economies can cope with the disciplines of being in a monetary union with their existing structures. It is up to the others to make up their minds; change their structures or continue with the Hobson’s choice of staying or leaving the euro.
@DOCM
“Countries are faced with an interesting choice if the arrangements proposed are agreed. They can stand on their dignity or take the money.”
The leaked document’s proposals have already been shot down by Dijsselbloem, whose main role seems to be that of point man for Schaeuble.
The slight shift in German attitudes is merely reflective of a belated recognition that the situation is slipping out of control. The denominator in the Debt/GDP equation is making a jumble of best laid paper plans.
The banks, consequent to zero growth, will have deteriorated rapidly in the past 12 months. Zero growth does not mean all borrowers stay at an equilibrium. It means that more businesses and people on the wrong side of the line, who will not be able to service debts. The people on the right side of the line just hoard the gains. Taken together that means more bad debts and less investment. I have witnessed at first hand since 2008 how well run companies, that banks would have classified as Triple A borrowers, have deteriorated to the point of extension. Zero growth, where finance is part of the capital structure of businesses and households ( as it is in almost all cases), has and will continue to decimate the economies of Ireland and Europe.
‘Structural’ reforms, by which most people means lowering private sector wages, so that businesses export more, was never going to provide the turnaround necessary to correct the trade imbalances that had built up.
These trade imbalances are a result of perhaps 30 years of groundwork in getting ahead in key sectors, and the another ten years of cost containment to enhance and improve those advantaged positions.
A 7% trade surplus cannot be turned into a 0% in a matter of years, except by the deficit countries ceasing to purchase of their own volition or through lack of resources.
To others, structural reform means cutting PS payroll costs either in numbers of money, ignoring that the people cut will add to exchequer cost, like all other unemployed. Such ‘structural’ reform may have worked in the past, when neighbouring markets were booming. In today’s environment, such reforms achieve very little, except distress at the margins (and bleating at the pampered end)
Either way the medicine being prescribed for the imbalances, are as aspirin to an outbreak of cholera.
Stopping the blatant excesses in both public and private sector, the latest of which is the State underwriting of DB pension schemes for better off pensioners and employees, is vitally important, not principally to save money, but to get some degree of collegiality in confronting the crisis.
But that is clearly a lost cause.
You are correct in one particular point, that is the necessity to delink politicians and the higher level PS, from their self interest in decisions on pay, pensions, expenses, and job opportunities being taken everywhere in the PS.
So, I could not agree with your conclusion;
“It is up to the others to make up their minds; change their structures or continue with the Hobson’s choice of staying or leaving the euro.”
King Canute had a better chance of success in his endeavours, than simply implementing structural reforms, although necessary, will have on the imbalances that gave rise to the current crisis.
The imbalances will have to corrected through the age old mechanism of devaluation. It is as inevitable as the tide that faced King Canute.
@ JR
Let’s wait and see how the game develops!
I have expressed scepticism about the idea but for one with so little going for it, it is demonstrating remarkable resilience.
cf. Peter Spiegel’s blog post.
http://blogs.ft.com/brusselsblog/2013/11/cheap-loans-for-fiscal-reforms-sound-familiar/
@ Gavin
Thanks 🙂
Very clear, ‘head up, see things early, keep it simple stuff’ from Aidan Regan. Maestro.
‘My approach to European policymaking stems from the historic-empirical and institutionalist tradition, especially the classical work of Marx, Schumpeter, Weber, Polanyi, Kalecki, C Wright Mills and contemporary authors such as Peter Hall and Wolfgang Streeck. Rather than seeking generalised laws to explain the dynamics of European decision-making this tradition seeks empirical knowledge of the causal processes through which institutions and politics interact to produce variation in policy outcomes’
@Aidan Regan
“… there are different varieties of capitalism in Europe, with qualitatively distinct domestic institutions that cannot converge .”
It follows, systems theory, that the institutions at a higher level have to be a bit more flexible to allow local institutions to either decline or grow. Good ways from this at the mo ….
Labour markets, in particular, have distinct historical or ‘societal effects’ which make it not only impossible at times to compare them let alone align them a la Sarkozy’s ill thought out idea of following the German system.
@ All
FYI
Draft of the German coalition agreement (courtesy the blog of a Green).
http://gruen-digital.de/wp-content/uploads/2013/11/KoaV_2013-11-24-20-00_Gesamtentwurf.pdf
@ All
This recent commentary by LBS is also pertinent.
http://blogs.ft.com/the-a-list/2013/11/20/italys-fragile-government-should-learn-from-the-germans/#axzz2lfz6XQgs
@DOCM
“This recent commentary by LBS is also pertinent.
:LOL:
Yer pal mus be lookin for a ‘job’ …