Guest Post: National Accounts and Prostitution

Wendy Lyon writes on the requirement under new national accounting rules to include the value added from illegal activities where transactions are “mutually agreed”:

The Irish Examiner reports today that Ireland is to begin figuring revenue from prostitution into its gross domestic product. According to the Examiner, the Central Statistics Office is liaising with Gardaí to determine “how best to quantify the levels of activity” in this and other underground economies, such as the drugs trade.

This step has been taken because of a new requirement under the European System of Accounts, effective from September of this year, that “Illegal economic actions shall be considered as transactions when all units involved enter the actions by mutual agreement”.

Strictly speaking, prostitution does not actually fall into this category. There is no law against trading sex for money in Ireland, although there are laws against some of the activities associated with it. One of these is living on the earnings of another person’s prostitution and so income from pimping is illegal; but those who sell sex independently – an unknown percentage of the Irish sex trade – do not, for that reason alone, commit any crime.

More relevant, and contrary to the assumptions of Davy chief economist Conall MacCoille as quoted in the Examiner, is that some of this revenue is already being reported. Sex workers are not necessarily tax evaders: they can report their income in the same way as any other non-PAYE worker, and many do. (In the UK, where selling sex is also legal but unregulated, there is even an unofficial website providing information on how to go about it.) It may not be explicitly identified as income from prostitution, however, because of the stigma involved.

It is unclear whether the CSO will make any attempt to distinguish between reported and unreported prostitution income. If not, the new rules could lead to double-counting.

Also unclear is how the CSO will implement the ESA criterion that “all units involved enter[ed] the actions by mutual agreement”. Logically, this would require that revenue from voluntary prostitution be counted, while revenue from forced prostitution would not. The latter would fit the category of illegal income but, again, there is very little hard evidence as to the extent of it in Ireland. Again, the question arises as to whether or how the two will be distinguished.

Finally, there is no indication as to how the amount of revenue will be calculated once the “levels of activity” are determined. How is the CSO to get information on the quantity and cost of commercial sex transactions? Gardaí may be able to monitor the number of men entering certain premises known as prostitution sites, but in the absence of a wholly unrealistic degree of surveillance, they’re unlikely to have a clear picture of the amount of money changing hands afterward.

These difficulties can be partially attributed to the dearth of real research into the Irish sex industry – particularly since the advent of the internet, the medium through which most of it is believed to be conducted. Apart from a few unpublished academic dissertations, there is no independent research at all. The most widely quoted study – the Immigrant Council of Ireland’s 2009 report Globalisation, Sex Trafficking and Prostitution – was funded by the Religious Sisters of Charity in furtherance of what would become the Turn Off the Red Light campaign; its methodology consisted of interviews with 12 women and estimates drawn from reading advertisements and client reviews on the Escort Ireland website. This research was never robust enough to serve as a basis for calculating revenue, and in any case is almost six years out of date.

Of course, the lack of concrete evidence has never been a bar to estimations before. Anti-prostitution campaigners have long cited €250 million as the annual value of the Irish sex trade, although the source of this figure is unknown. (It is usually attributed to the Criminal Assets Bureau, but appears nowhere in CAB’s annual reports and CAB did not respond to my request for confirmation of it.) Nonetheless, it has dutifully appeared in newspaper headlines and even the text of a Seanad motion simply on the basis of unsupported NGO assertions of its veracity. There is a danger that those involved in the calculation may feel under pressure to produce estimates in line with the received wisdom.

The interest in the subject generated by the Turn Off the Red Light campaign would have been an ideal opportunity for the government to institute genuine independent research. In fact, this is what has happened north of the border: faced with the conflict between anti-prostitution campaigners’ claims of widespread forced prostitution, and the PSNI’s assertion that most of the northern sex trade is independent in nature, Stormont Justice Minister David Ford has commissioned researchers from Queens University Belfast and NUI Galway to interview sex workers and clients operating in the Six Counties. No such move was deemed necessary by former Minister for Justice Alan Shatter, nor is there any indication that Frances Fitzgerald intends to follow Minister Ford’s lead.

It is unfortunate enough that legislative changes would proceed in the face of such a knowledge gap, but the ESA obligation makes the need for adequate research all the more necessary. Without it, the estimation of “prostitution revenue” will be nothing but an exercise in smoke and mirrors – serving only to further distort our GDP and provide fodder for more lurid, unsubstantiated newspaper headlines.

One day conference on Economics and Psychology

The seventh annual one day conference on Economics and Psychology, co-organised by researchers from UCD, ESRI and NUIM, will be held on October 31st in the UCD Geary Institute. The purpose of these sessions is to develop the link between Economics, Psychology and cognate disciplines in Ireland. A special theme of these events is the implications of behavioural economics for public policy though we welcome submissions across all areas of intersection of Economics and Psychology. We welcome submissions from PhD students as well as faculty and also welcome suggestions for sessions on policy and industry relevance of behavioural economics. Programmes from the previous six events are here. Abstracts (200-500 words) should be submitted before September 30th. Suggestions or questions please send to Liam.Delaney@stir.ac.uk

Betting Odds and Election Outcomes

My colleague David Bell has a short paper on how opinion polls and gambling odds are predicting the outcome of the Scottish Referendum. He notes there are a number of potential limitations in using odds as unbiased predictors of outcomes particularly if markets are very thin. There is also obviously a good literature on prediction markets more generally and their relation to the Efficient Markets Hypothesis (see, for example, Robin Hanson’s excellent blogposts on this). With all that in mind, it was tempting to see what odds are available for the next general election in Ireland. One prominent alliteratively named firm has odds for the next general election as being (as of 5pm 29th May): FF/FG coalition 5/6; FG/Lab coalition 7/2; FF/SF coalition 6/1 and so on. This seems pretty consistent with other firms. Would be interested in hearing what people make of this.

The possibility of renegotiating Ireland’s approach to fiscal policy in the short term

The country is all a-buzz with speculation that, having listened to the voters for the last few weeks, and having applied Sudocrem to all affected areas from the experience of the election itself, the political class will suddenly be able to reverse the process of austerity begun under the previous government.  (The process obviously continued, in lock step, by the current one).

The Taoiseach’s call for a review of European policies around bank debt, combined with talk of renewal by Labour following the start of their leadership race, is fuelling this speculation.

The latest ESRI quarterly commentary makes the point that the government’s finances are improving at a slightly faster than expected pace, meaning we may hit the Troika-mandated 3% deficit target without serious adjustments required in the forthcoming budget simply by relying on existing forward momentum and the action of automatic stabilisers. Of course they hedge their bets a bit, but given the importance of the issue I thought I’d quote a bit of the commentary:

The public finances are improving more rapidly than envisaged in the government’s plan. If the forecast in this Commentary proves to be correct, government borrowing in 2015 is likely to come in below the target (3 per cent of GDP) once again, even without the substantial further cuts envisaged for the 2015 Budget. However, in formulating fiscal policy it is best to err on the side of caution to ensure that budgetary targets are met in 2015. Nonetheless, these developments suggest that, after a long period of attrition, we are approaching the end of the very painful period of fiscal adjustment. However, there still remains the possibility of new shocks to the economy.

So does that mean the government can run out and renegotiate, renew, de-re-up on their promises to the Troika? I think the ESRI are saying the promises can be met without additional austerity, with a fair wind.

This may not spell the end of the consolidation period, however.

(Updated, thanks to Rossa White for this clarification) The NTMA’s investor presentation has the best graph of what’s supposed to happen in 2015’s budget. In budget 2014 the government agreed about 0.9 billion in revenue cuts and 1.6 billion in expenditure cuts, but the composition of the 2015 adjustment of around 2 billion (as per the recent SPU) hasn’t been outlined yet.

So while it isn’t clear that this last bit of austerity can be avoided just yet, it is pretty clear that (however constituted) the government will try hard not to implement the last few billion of cuts, especially if the 2014 August and September returns are looking good.

I think the question is, given the need to respect the 3% constraint–and please let’s not give any credence to headbangers talking about renegotiating the MoUs, etc., at this stage–what exactly the government will try to do to signal to the public the austerity period is effectively over.

The answer will define the legacy of this government. As Kevin notes this morning, at the last general election, the public voted for change, they got none. They are asking for it again, and much more clearly this time.

Michael Noonan has signalled since the last budget that altering tax bands is on the cards, saying.

If I have the money that is where I will go. I would like to reduce the threshold at which people hit the higher rate.

Fair enough, and this widening of tax bands does make sense as long as funds allow, and perhaps a tweaking of the USC, but the question politicians are asking I’m sure is will this be enough to appease the public?