Globalization, Brexit and the prospect of European disintegration

Britain has voted to leave the European Union (EU), or more accurately, England has voted to leave. The majority in Scotland, Northern Ireland and Gibraltar voted to remain. The opinion polls, the bookies and the markets did not predict this outcome. The mood of the nation, it would seem, is becoming increasingly difficult to measure. Or is it?

There is a lot of data suggesting that ‘immigration’ was the dominant concern for those who voted to leave the EU. This should not be too surprising. In the latest Eurobarometer data, immigration was cited as the main concern of UK citizens, alongside Germany and Denmark.

According to YouGov data, which is more revealing, income was the best predictor as to whether someone intended to vote to leave or remain. Basically, the lower your income, the more inclined you were to vote leave. Some have referred to this category as ‘those with lower education’. But let’s be honest, it’s called social class.

Another predictor as to whether someone was more inclined to vote leave was age. Younger, more liberal voters, were much more supportive of remaining in the EU. The only problem with this category of voter, is that they failed to turn out en masse to vote. According to the data, electoral turnout among 18-25 year olds was fairly weak. Older conservative citizens were much more inclined to vote.

The precise data on how particular communities and constituencies across England voted is perhaps most revealing. The poorest twenty districts in England overwhelmingly voted to leave the EU. Or to get at it another way, according to this report, those areas with the most stagnant wages are the same communities with the most anti-EU attitudes.

What can we infer from all of this? What should EU policymakers infer from all of this?

The core inference is that England is a deeply class divided society, and that the poorest in England are increasingly venting their anger at immigrants and the EU. Further, and not captured in the Brexit data, right-wing political parties are now mobilising working class England.

Those same electoral constituencies most likely to vote leave, and with the most stagnant wages, are the same constituencies most likely to vote for the far-right populist UKIP party. In addition, they are the same people most likely to be discursively conscripted into the anti-immigrant lies of England’s infamous red-top tabloid press.

Class politics in England increasingly overlaps with enthno-nationalism, whereby identity and immigration, rather than economic self-interest takes precedence in shaping electoral behaviour.

In political science, there is a large literature on economic voting. One of the core findings of this literature is that in times of crisis and economic austerity, voters punish incumbent governments. This is partially what happened in the UK. Disenfranchised working class voters punished the Tories, liberal elites, the EU and the city of London.

However, the economic voting literature, whilst useful in describing why voters punish government, tells us very little about who these voters turn to, when expressing their social grievances.

In theory, those voters most affected by austerity, unemployment, underemployment and precarious work, would turn to parties on the left and those parties committed to reducing economic inequality. Most research, particularly within Europe, however, suggests, working class voters are turning to the ethno-nationalist right.

To put it simply, those affected by austerity and right-wing economic policies don’t necessarily vote in their class interest; they increasingly vote in their ethno-nationalist interest. UKIP’s economic policies are aggressively libertarian, not social democratic.

Economic liberalisation, rising inequality, and the complete free movement of peoples has social and electoral consequences. Societies will react to this disruption in different ways. Nationalism provides a sense of meaning, community and belonging, to those most affected by liberalisation. Far-right parties, such as UKIP, know this.

This realisation, however, does not seem to have seeped through to policymakers in the EU or  Germany, who, despite a near complete destabilisation of the parliamentary party system in Southern, Eastern and Central Europe, remain committed to their failed neoliberal economic adjustment of austerity induced cost competitiveness.

Most political science research in the aftermath of the great recession increasingly suggests that not only are electorates losing trust in the EU, but that the support for national democracy, in general, is in decline. When the politicians change, yet the policy remains the same, voters lose trust in the institutions of liberal democracy.

The question for national leaders in the European Council, and policymakers in the European Commission, is whether they need to wait for the election of Trump in the US, Le Penn in France, or the Five Star Movement in Italy, to realise that their economic policy response to the crisis has failed, and must fundamentally change?

Polities disintegrate when they begin to loose control of their external borders and their internal legitimacy. Or, as W.B Yeats poignantly wrote in 1919, “things fall apart; the centre cannot hold; mere anarchy is loosed upon the world“.  The UK and the EU are now faced with the potential for disorderly disintegration. Political scientists are accustomed to thinking that ‘more EU integration’ is inevitable. This is wrong.

Yeats wrote this after WW1, which coincided with the end of the first wave of free-market globalisation, when economic inequality peaked, much like today. In many ways Brexit can be interpreted as Europe’s Polanyi moment. It was a counter-reaction to a political economic system that is perceived to be designed in the interest of the comfortable elite.

It would be naive to assume that the popular reaction to rising inequality, precarious work, economic uncertainty, liberal elites and fear of immigration will lead to something politically progressive. The wave of anti-immigrant, nationalist sentiment, sweeping England, clearly shows that it won’t. France could be next. The EU should not wait to find out.

Britain and the EU

Though Ireland and the UK joined at the same time, the UK always remained semi-detached from the EU. Brussels affairs received barely a mention in the Blair-era diaries of British government ministers and advisors. That this was not even noticed by British reviewers is telling. London regarded itself as more significant on the world stage than Brussels. And, strange as this might sound to Irish ears, until German reunification it had perhaps good reason to do so.

The “supra-national” nature of the EU was designed by France to limit German post-war independence. As Ernest Bevin, Britain’s post-war Labour Foreign Secretary, commented: “when you open that Pandora’s box you’ll find it full of Trojan horses”. Britain felt neither the need nor the desire to have its independence limited in this way. For centuries it had stood secure in its island fortress, holding the balance of power between competing continental states. In the immediate post-war period it looked as much to the US and the Commonwealth as to Europe. The US was of much greater military importance. And as the world’s first industrial nation Britain had long pursued a ‘cheap food’ policy: the agricultural protectionism of the Common Market held little appeal.

Britain’s interest in Europe is as a free trade area. It viewed the creation of the single currency as a federalist step “far too far”, a position with which very many economists agreed.

Post-referendum Britain is not the only polity in existential crisis. The EU itself is clearly in the same position. The eurozone crisis side-lined the European Commission as member states looked to their own interests first. As a leading academic wrote recently, “supranational agents’ ability to take autonomous decisions can only be sustained in matters where the extent of disagreement among national governments over policy outcomes is relatively low”. The European elite thinks that the only way forward is through further integration: “more Europe”. But there is almost zero support across the European electorate for this.

The reaction to the referendum outcome has thrown a sharp light on clashing cultures. British political culture has always been suspicious of grandiose schemes and popular culture has always been irritated by layers upon layers of bureaucracy. (Ireland bears some responsibility for the latter, in that “a Commissioner from every member state” was given to us as a concession after one of our ‘no’ votes. Every commissioner views as their legacy the amount of legislation that they leave behind on the statute books.) The other side of the culture clash is reflected in the furious reaction of the European elite to the British vote, and the apparent desire to get the British out the door as quickly as possible. Twice the Irish voted no, and twice we were asked to vote again. Why did Europe react so differently to us, when there was so much less at stake?

The British vote is also clearly an inchoate reaction to globalisation, or perhaps more accurately to its “collateral damage”. In this it seems as one with the political support for the Trump campaign in the US.

Surely European leaders would be better advised to take a long hard look at how such widespread concerns might be addressed rather than rush to accept a British withdrawal? The latter may well lead to the break-up not just of the UK but to the withdrawal of other EU member states over time. It will entail years of negotiation on future relationships – at the bare minimum between the UK and Europe, and between the UK and Ireland. More worrying perhaps – given the class, age and geographic fault lines reflected in the referendum vote – is the legacy of bitterness and, quite possibly, civil strife that it will bequeath to Britain.

There is no need to rush Britain to withdraw, other than as a threat to other potential waverers. But this is hardly what the European project was supposed to be about. A year or two of uncertainty, particularly given the fragility of the global economy, is clearly undesirable. But the next general election in Britain is likely to offer the electorate an opportunity to visit the issue anew. Europe can use the hiatus to consider how the concerns of so many of its electorates can be addressed. A substantial electorate has spoken. Is Europe prepared to listen?

Ireland’s Negotiation Game Strategy for Brexit

Ireland needs to play its hand deftly and aggressively during the EU-wide Brexit negotiations. Irish interests in the Brexit process, post-vote, differ from those of other EU states. For EU enthusiasts in states with limited UK trade, a tempting strategy for preventing a NEXT-IT (Netherlands, Austria, Denmark, etc.) is to punish the UK via a spiteful exit deal. That would be a disaster for Ireland due to spillovers. Ireland needs to fight hard to let the UK be allowed a smooth and minimally-disruptive exit, not face a mini trade war. Ireland would be hit very badly in the crossfire.

This really is a slow train wreck

I see that everyone is now arguing that globalisation has distributional consequences, and that losers may eventually decide they have had enough. Which is something that I and others have been writing about since at least the 1990s.

I don’t expect anyone to take much notice of a bunch of academics, but how can we be surprised at the Brexit vote when we have had practical, political experience of the class divides surrounding European integration (viewed and experienced as a regional manifestation of globalisation) since at least 2005, when the French rejected the so-called Constitutional Treaty? And here is my very first ever Vox.Eu column, on the Irish Lisbon 1 vote.

And so my question is: when this has been so obvious for so long, how come nobody has done anything about it? Where are the enhanced safety nets, or the more elastic provision of public housing and other services that would surely have made a difference in the English debate? It really is quite extraordinary.

Some thoughts on Brexit

Although I was a member of the Centre for European Reform’s Commission on the UK and the Single Market, I declined to sign a resultant letter to the newspapers on what the UK ought to do, as well as similar subsequent efforts. There were two reasons for this. First, I’m not British, and I know how irritating it is to have foreigners tell you what to do at times like this. Second, it wasn’t at all clear to me that economists’ letters were particularly helpful. On that score at least, I think I was right.  But Thursday’s vote is going to have implications for all of us, and especially for Ireland, so we all need to start thinking about what happens next.

Oxford vote 70% to 30% in favour of remaining in the EU, and I have lots of colleague who are absolutely devastated this weekend. It’s hard for people outside Britain to understand just how sad so many people are at what has happened. This isn’t just about economics, or even mainly about economics: it’s about identity, and a great many English people feel, profoundly and sincerely, that they are both European and British. Both identities are under threat today.

Of course, a healthy majority of English people are happy with the outcome, including some friends of mine, and I’m pleased for them. And presumably we all wish England well. But it’s also true that the English voted without paying the slightest heed to what was in the interests of Ireland, including that part of the island which remains part of the United Kingdom.  It was ever thus, for perfectly understandable reasons having to do with the relative sizes of the two countries, which is why Irish independence was always both inevitable and desirable. But that is another matter.

One of the truly extraordinary features of the British political landscape today is that neither the Leave campaign, nor apparently the British government, knows what it wants to happen next. But it is perfectly obvious what we in Ireland should want to happen next. England and Wales have voted to leave the European Union, and hence the Single Market. The reality therefore is that, as things stand, the UK is headed out of the Single Market that it was always such a keen supporter of. And that would be bad for Ireland in a whole host of ways that are by now well understood.

Of course, the British may decide to reapply for Single Market membership, as part of the process of negotiation which now has to take place on the terms of their exit from the European Union. They are perfectly entitled to do so.  If they do reapply, they should be granted membership of the European Economic Area on the usual terms: Ireland, and Britain’s many other friends in the European Union, should insist on this, and indeed it would be in everyone’s best interests. But only the British can decide if this is what they want. Given that labour mobility will be part of the deal, I would have thought that such a decision would require another referendum on both moral and political grounds. I don’t view that as an insuperable obstacle, since I don’t see why such a referendum could not be won — especially since this may well be the key to avoiding a hard border with Scotland. And if the English don’t want to join the EEA, we need to know that too.

The rest of Europe should resist the temptation of a “fuite en avant”, attempting to move full speed ahead towards a fiscal and political union that nobody wants. (Yes, that has implications for the survival of the euro, at least in the long run. So what? The single currency was always a terrible idea.) Far better to accept the reality of a multispeed Europe, which better reflects the diverse opinions of its many citizens.  If the United Kingdom, or England and Wales, were to become firmly embedded in the European Economic Area, while remaining outside the European Union, not only would economic disruption be kept to a minimum, and Ireland’s best interests be protected; this would be an important move towards a looser and more shock-resistant economic architecture for Europe as a whole. And there would actually be a certain upside to that.  Too much rigidity, and the entire European project risks implosion. This is not so much a case of “reculer pour mieux avancer”. It is a case of “reculer pour survivre.”

 

Latest edition of the Economic and Social Review

It is available here:
http://www.esr.ie/issue/view/28

Contents:

Articles

Analysing Residential Energy Demand: An Error Correction Demand System
Approach for Ireland
John Curtis, Brian Stanley  185-211

Analysing the Drivers of Services Firm Performance: Evidence for Ireland
Olubunmi Ipinnaiye, Declan Dineen, Helena Lenihan  213-245

Quantifying the Importance of Nationality in Determining International
Protection Outcomes in Ireland
Gerard Keogh 247-270

Policy Section Articles

The Introduction of Macroprudential Measures for the Irish Mortgage Market
Mark Cassidy, Niamh Hallissey  271-297

An Analysis of Local Public Finances and the 2014 Local Government Reforms
Gerard Turley, Stephen McNena 299-326

Central Bank of Ireland Macro Financial Review 2016:1

The Bank’s most recent Macro Financial Review (MFR) was released recently. As well as providing an in-depth view of financial developments and risks in all key sectors of the economy, the MFR also contains a number of interesting analytical boxes on topics such as the components of NFC debt, SME actions after a credit rejection, household financial vulnerability estimates, residential property price expectations, new indicators of systemic stress and financial conditions, CoCo bonds and reciprocity in macroprudential policy.

The key messages from this most recent MFR can be summarised as follows:

  • Risks to the economic outlook are weighted to the downside and relate mostly to uncertainty in the external financial environment.
  • While economic conditions are improving, public and private sector indebtedness remain high.
  • Workout of impaired loans and disposal of non-performing loans in banking sector ongoing, domestic bank profitability remains weak.
  • Mortgage regulations: Call for evidence which will inform review opens from 15 June to 10 August.

The full report can be downloaded here.

Housing-related taxation receipts

In recent years, the summer period has become a boom time for those with an interest in the public finances. The past few weeks have seen a number of releases in the area including the Government’s Summer Economic Statement and IFAC’s Fiscal Assessment Report. The upcoming National Economic Dialogue will also spur debate in advance of Budget 2017.

With this in mind, readers might be interested in recent work published by myself and Kieran McQuinn (ESRI) in the Journal of European Real Estate Research examining the sustainable nature of housing related taxes in Ireland. Using a 3 pronged modelling approach we quantify the extent of housing related tax windfall gains and losses over a 30 year period as a result of disequilibrium in the housing market. We find that the fiscal position compatible with equilibrium in the housing market has at times diverged greatly from actual outturns both during the boom, the collapse and in the subsequent recovery.

The paper highlights the role played by the housing market in influencing the tax take and above all points to the need for a more granular approach to be taken in tax forecasting within Ireland. A link to the paper can be found here: http://www.emeraldinsight.com/doi/pdfplus/10.1108/JERER-01-2016-0004 with an older working paper version available here: http://www.esri.ie/publications/assessing-the-sustainable-nature-of-housing-related-taxation-receipts-the-case-of-ireland/.

Thinking about productivity

A recent OECD report “The Future of Productivity” (pdf) presents a new perspective on what drives national productivity growth. The OECD explains that in every world economy there are some ‘frontier firms’ which are internationally competitive and match global high standards in productivity. However, the majority of firms – up to 80 per cent – are not in this category. These firms may have a more domestic market orientation, and much lower average productivity and the OECD calls them ‘non-frontier firms’. The OECD illustrate the productivity gap between frontier firms and non-frontier firms over the last decade for OECD countries.  Productivity growth in frontier firms has been around 3.5-5.0% per annum compared to -0.1 to 0.5% per annum in non-frontier firms (see graph below).

Figure 11

Source: ‘The Future of Productivity’, OECD, 2015, Figure 11

The OECD explains that the ‘productivity slowdown is not so much a slowing of innovation by the world’s most globally advanced firms, but rather a slowing of the pace at which innovations spread through the economy: a breakdown of the diffusion machine … the gap between those high productivity firms and the rest has risen’.

What should policy-makers take from these findings? The frontier firms have a competitive advantage from their investments in knowledge-based capital, but also how they tacitly combine computerised information, innovative property and economic competencies in the production process. These firms are leaders in new-to-the-market innovations. But it is not only new-to-the-market innovation which matters for productivity. Policy-makers must focus on improving the take up of new innovations by the vast number of non-frontier firms which are more likely to find success with ‘me-too’ or ‘new-to-the-firm’ innovations. To maximise productivity gains we must aid the acceleration of the diffusion of innovations to non-frontier firms. The diffusion of innovations is good for growth, and the OECD argue that more effective diffusion may also promote inclusiveness. A recent study by Card et al. (2013) suggests that the observed rise in wage inequality appears to at least reflect the increasing dispersion in average wages paid across firms. Thus, raising the productivity of laggard (late adopter) firms could also contain increases in wage inequality, while reducing costs and improving the quality and variety of goods and services.

Progressing at Euro 2016

Before Euro 2016 started, John Eakins and I discussed the probability of qualification from the group stages of the tournament given the conditions of the four team round-robin structure. We had previously examined this for Euro 2012. Euro 2016 is more complicated as four of the six third place teams will qualify for the last sixteen. John proceeded to present all possible group outcomes (there are 729 in total) and the probability of qualification associated with each number of points. For example, nine points obviously results in 100% chance of qualification, while one point will see a country occupy 4th spot almost 90% of the time.

Given Ireland’s results to date, we now know the team can achieve a maximum of 4 points from Group E. Assuming (probably naively) Ireland beat Italy, and given the team’s head-to-head record with Belgium, it will be impossible for the Irish to finish ahead of the Red Devils if they manage at least a draw with Sweden. Should Sweden win, Ireland can only finish ahead of the Swedes if they can outscore Zlatan and co. by three goals or more. While the chance of a second place finish is still possible, it’s highly improbable. Scoring goals hasn’t been Ireland’s forte. Wales have now scored twice as many goals at Euro Finals (in the past ten days) than Ireland have (since 1988!).

Much depends on the outcome of the other group games. Group A is finished, with Albania sitting 3rd on three points. Ireland can better this and must hope another group ends with a third place team on 3 points or less. Had England beaten Slovakia, Ireland would now know that a win against Italy would be enough to progress.

Two more chances are presented tonight. A German victory over Northern Ireland or a draw in the Turkey Czech Republic game, will ensure four points guarantees a place in the last sixteen. Are either of these outcomes likely? The econometricians might be able to help us here. In early June Goldman Sachs published The Econometrician’s Take on Euro 2016. Exhibit 2 presents their model’s predicted results in each group game. Germany are predicted to win 2-1 against Northern Ireland tonight. The Turkey Czech Republic game is predicted to finish 1-1. Either will suffice for Ireland.

A word of caution. The model fails to predict a single clean sheet for any country in any group game. Past results shows that roughly one-third of games end with at least one team failing to score. So far, the model has predicted 9 correct match outcomes from the 28 games. Just 5 games have finished in the predicted score line.

It shouldn’t be overly concerning that Ireland’s game with Italy is forecast to finish 1-1. Let’s hope the econometricians are off the mark again.

Managing the Budget with High Debt and No Currency

A sovereign state with low debt can access liquidity through the markets. There are limits and they will be reached when the debt ratio begins to send out distress calls. Until that (unknown) point, there are, in effect, un-borrowed foreign exchange reserves. With an independent currency liquidity can be created for government or banks without external conditionality. There are limits here too and creating excess liquidity brings inflation risk and exchange rate pressure.
With high debt and hence uncertain access to bond markets a short-term expansion cannot safely be financed through debt sales without constraining capacity to repeat the procedure. Without a currency either, the creation of liquidity is conditional on the cooperation of the foreign central bank. If its conditions include constraints on fiscal action there can be no stabilisation policy – no exchange rate, no monetary or fiscal discretion.
Most Eurozone governments can borrow in the markets at low rates, courtesy of QE, despite historically high debt ratios. In the absence of QE the perception of capacity to borrow could diminish rapidly. Availability of QE is in any event not automatic – there is none for Greece, for example. There are also unclear conditions on ELA creation by national CBs. Consent from the ECB can be withdrawn arbitrarily or may be permitted only on penal conditions, such as pay-offs to unguaranteed creditors of bust banks.
The Eurozone governments with high debt face an illusion of policy space in current circumstances, with apparently easy access to debt markets. The constraint appears to be the EU rules about budgetary limits, as long as QE lasts.
But QE will end at some stage and the constraint becomes the market demand for sovereign debt. The design problem for fiscal policy (the only stabilisation tool available) is to manage the trade-off between using it now and having less to use later. Since the election Irish politicians have found agreement on two policies: (i) that the European Commission should be lobbied to relax the budget rules and (ii) that government should borrow ‘off balance sheet’.
Policy (i), lobbying the Commission, sacrifices future budget flexibility explicitly. The inverse demand curve for sovereign debt is r = f(D) where D is the debt ratio. Unless f(D) is flat the sacrifice is real. Moreover f(D) is unknown, although known not to be flat. Unless sovereign bond buyers are unable to count (ii), hiding sovereign liabilities, is just gaming the Eurostat debt definition. This definition (gross general government debt to gross output) is not a serious measure of debt servicing capability and, after QE, a sovereign could easily be inside some EU limit and unable to borrow. Eurostat does not lend money.
There are arguments for battling to borrow: interest costs are low and it is an article of faith that high-value public investment projects are plentiful. The trade-off (looser policy now versus the risk of ill-timed tightening later) would look better if the economy was becalmed, multipliers high, debt ratios modest, macro-volatility historically low and the foreign central bank known to be benign. None of these conditions applies currently in Ireland.
There is a case for using the QE respite to borrow reserves, accepting the negative carry, as NTMA appears to be doing. The case for deferring the attainment of budget balance is harder to see.

“No recovery here”

One of the really interesting outcomes of the last election was the rejection by voters of the Fine Gael strap line: let’s keep the recovery going. As measured by GDP growth, Ireland was rebounding from its period of austerity very strongly, with the fastest GDP growth in Europe.

A household sector which had just received an income tax cut, child benefit increases, pension increases, social welfare increases, public sector pay increases (or restorations, whatever), threw the main party’s ‘recovery’ line back in its face at the doorsteps–what recovery, they asked. No recovery here.

This was taken to mean that there was no recovery outside of Dublin. Dan O’Brien’s series of columns have dispelled that myth. There is a recovery in rural Ireland, it’s just not happening as quickly as in the capital, where employment levels are now 96% of their 2008 peak. In the Mid-West employment levels are at 88% of their peak.

Source: CSO.ie
Source: CSO.ie

Then a long and rambling discussion on the corporate tax element of Ireland’s apparent rebound took place, largely on twitter. The volatility of the corporate tax take in Ireland is exceptional.

Yet another strand of the argument is given by thinking about Ireland in relation to Europe. Philip Connolly of the times in Ireland showed me these data of GDP per capita in purchasing power parity adjusted euros compare it with an actual income for consumption measure. The graph below is from Eurostat and shows the difference in the two measures  with Ireland and Luxemburg showing a very large difference between these two measures of household welfare. Using the AIC measure, Irish households are closer to Italian than Danish levels of welfare.

Source: Eurostat
Source: Eurostat

This may give a clue as to why we see such large differences between official rhetoric and the popular reaction to that rhetoric.

 

 

 

Report of the Fiscal Council

Is here (.pdf). A few days late to this, so apologies, but just one thought:

Think how far our budgetary institutions have evolved. From Charlie McCreevy getting up on Budget Day in the early 2000s and announcing measures his own cabinet hadn’t heard of, to today’s fiscal council reports, Spring Statements, National Economic Dialogues, to the design of new structures like the Budget Oversight Committee, reviews of the process of national budgeting (.pdf), a Parliamentary Budget Office to cost the figures independently, and an agreed spending envelope by the public, a lot has changed in 15 years.

Despite the annoyance it generated during the election, the ‘fiscal space’ is a well recognized academic idea dating back to the 1990s, and the fact that the entire debate took place using broad parameters everyone serious agreed upon is a very good thing. We actually had a debate in Ireland, messy and all as it was, on whether to spend more on services, or give back more in tax cuts. Thus informed, the public chose the former in large numbers. They want a recovery in services.

Geographic inequalities in higher education accessibility

Update: Now open for comments. (Novice error!)

As Leaving Certificate students take their seats this morning to start their final examinations, it is timely to consider how where they live (and often where they were born) can impact on a range of higher education decisions and outcomes and why these might matter for their futures. According to previous research, Ireland has reasonably good overall geographic accessibility to higher education institutions (HEIs) in terms of travel distance, though there are large areas from which an individual would have to travel, say, 75kms or more to their nearest HEI. These areas tend to be more rural with relatively low population densities and with a finite number of HEIs some inequality in access is of course inevitable.

But not all HEIs are the same. If we distinguish by type of HEI, then the pattern of geographic inequality is very different. In particular, if we consider distance to nearest university as another measure of accessibility, then geographic accessibility inequalities are much more pronounced, with relatively poor access in much of the south-east, south-west, west, north-west and along the border.

Such inequalities matter for a number of reasons, particularly in terms of the impact of geographic accessibility on whether school leavers progress to higher education and, if they do so, where and what they choose to study. Indeed, this is the focus of an on-going programme of research I am conducting jointly with Darragh Flannery (UL) and Sharon Walsh (NUI Galway). For example, this paper showed that greater travel distances were associated with lower participation rates for school leavers from lower social classes, all else equal. It also highlighted how these distance effects resulted in differential higher education participation rates across social classes and that the effects of distance were most pronounced for lower-ability students from poorer backgrounds.

Importantly, distance also matters for where and what students study, suggesting possible inefficiencies in matching students to courses. For example, a separate piece of work found that geographic accessibility plays an important role in determining outcomes relating to HEI type, degree level and field of study, with students living further from a university much more likely to study at an institute of technology (IT), all else equal. The paper argues that these decisions are important in terms of future labour market outcomes such as employment rates and earnings for school leavers.

The pursuit of equity in access to higher education is claimed to be central to education policy in Ireland. Although much of the focus has been on narrowing the social class differential in participation, spatial factors are now finally being acknowledged as a potential barrier to access.  In a consultation paper on the development of a National Plan for Equity of Access to Higher Education 2015-2019, the Higher Education Authority highlighted the strong geographic dimension to higher education participation.

At present, one of the main policy responses to address inequities in access is the ‘student grant scheme’, which includes maintenance grants, fee grants and postgraduate contributions. The maintenance grant scheme is a contribution towards a student’s living costs and eligibility is based on meeting certain criteria based on parental income levels and means, as well as travel distance from a student’s chosen HEI.  Thus, the grant system explicitly acknowledges the potential impact that travel distance can have on higher education related decisions.  The current grant eligibility limit for the so-called adjacent (partial) grant is 45kms or less (up from 24kms in 2012), while the non-adjacent (full) grant applies to those living more than 45kms from the approved institution.  Thus, two otherwise comparable students, one living 50kms from her chosen institution, the other living 250kms away, would receive the same financial aid.

The results from our studies suggest that consideration should be given to establishing a more flexible or stepwise higher education grant system, with progressively higher payments for those living further away. As it currently stands with a single distance cut-off of 45kms, the maintenance grant system does not take into account that significantly longer travel times could have important implications for students in terms of financial costs, but also in terms of their available time to engage in paid employment to perhaps support their studies. Of course, any revised system would need to be carefully designed in order to avoid unnecessary transaction costs, as well as imposing perverse incentives for students to travel further than necessary.

Finally, one area of current policy likely to impact on geographic accessibility is the proposed consolidations in the Irish higher education sector, with a number of ITs to be possibly amalgamated into new technological universities. In a paper published last week, we used a variety of techniques and measures to consider the effects of the proposed re-structuring on both the level of, and inequalities in, geographic accessibility to university education.  Overall we found that the north-west and areas of the west, south-west and border are poorly serviced in terms of absolute and relative accessibility to university education both pre- and post-policy reform.  These areas consistently remain in the bottom quintile of each measure of accessibility considered, implying that the impact of the reforms for those regions will be negligible.  On a more positive note, we did find that the percentage of the 17-19 year old cohort (a good proxy for the population of school leavers) who live more than 100kms to their nearest university would fall from 14.5% to 7.9% post-reform.  However, the same analysis showed that there would remain a significant minority living more than 150kms from a university.  Overall we concluded that “the reform will do little to remove geographical impediments to university participation for those that are most disadvantaged [currently] from a spatial standpoint.”  This assertion is also supported by the inequality analysis, which shows little improvement in overall geographic inequality in university accessibility across Ireland as a result of the consolidation reform.

So, as Leaving Certificate students take their seats today, it is worth stressing that the choice set facing many of them in terms of their higher education opportunities is very much a function of where they live. For resource-constrained students in particular, the distance impediment is not adequately addressed through current policies. Unfortunately, changes to the grant system rarely feature in the debate around the financing of higher education. Any move to an alternative financing system would provide an ideal opportunity to address this issue.

Sports Economics Workshop

The 2nd sportseconomics.org Workshop will be held on Friday 22nd of July 2016 at University College Cork. The purpose of this workshop is to discuss and stimulate interdisciplinary research ideas from those working in the areas of economics, sport, coaching, public health, management, and related fields from Ireland and abroad.

The keynote address will be delivered by Rodney Fort, Professor of Sport Management at the University of Michigan.

Other confirmed presenters include Professor Rob Simmons, University of Lancaster and Professor Paul Downward, Loughborough University.

The workshop is free and those interested in attending should register here. The full programme will be available shortly.

This event is kindly funded by the Irish Research Council Government of Ireland “New Foundations” Scheme.

Mortgage term as a credit condition

The aim of this post is to introduce the topic of mortgage term to maturity in an Irish setting. I will outline how mortgage terms were highly pro-cyclical during the pre-2008 expansion, and that they were used by credit-hungry borrowers to make high-leverage strategies more affordable on a monthly basis. It is well established that credit conditions, as measured by Loan to Value ratios (LTV), Loan to Income ratios (LTI) and Debt Service Ratios (DSR, ratio of monthly repayments to net income) reached unsustainable levels in Ireland in the run-up to the 2008 crash.[1]  By contrast terms have received much less attention. Previous work by McCarthy and McQuinn (2013) on Irish credit conditions is the only piece known to me which contains an analysis of mortgage terms. They show that median terms increased rapidly in the 2000-2008 period, and did not decrease after the housing market crash. Further, they show that terms were higher for First Time Buyers, and that longer terms are correlated with an easing in other credit conditions. Today’s post concerns recent analysis carried out by my colleague Edward Gaffney which looks at the distribution of mortgage terms for loans originated between 1997 and 2014.

Why should mortgage terms be of interest to us? Firstly, they can have a huge impact on mortgage affordability. Identical loans, for identical houses, to people with identical incomes, at identical interest rates, can have widely varying monthly repayments driven by varying terms. As a simple example, a loan for €250,000 at an annual rate of 4.5 per cent has a monthly repayment of €1,581 when taken out over 20 years, which falls to €1,183 when that loan is extended to 35 years. A saving not to be sniffed at!

Secondly, they appear to have associations with risk-taking behaviour. Research from Central Bank colleagues[2] has shown that, controlling for a range of factors associated with higher credit risk, mortgages with longer terms are more likely to default, even though a longer term allows for a lower monthly mortgage repayment, all else equal!

Finally, terms also have a big impact on banks’ profitability, as longer term loans will have higher lifetime interest income for the bank. Further, longer terms allow banks to make larger loans while continuing to respect any Debt Service to Income rules that may be in place.

So what can we say about mortgage terms in Ireland? In all that follows, I will focus on the First Time Buyer (FTB) segment of the mortgage market. Our first figure (Fig 1) provides clear evidence from Edward’s work that mortgage terms lengthened significantly during the boom phase in Ireland. Of the 1997 cohort still outstanding in 2014, 60 per cent were originated with terms of 20 years or less, with 90 per cent having terms under 25 years. At the turn of the millennium, the 35 year mortgage was close to non-existent. However, its proliferation through the period of rapid credit growth was quite remarkable, moving to a market share of roughly 50 per cent by 2006-07, with a further 5 per cent of the market taking terms between 35 and 40 years.

While Kelly, McCann and O’Toole (2015) report that credit conditions tightened considerably in the aftermath of the financial crisis, Edward’s chart shows that “credit tightening” in mortgage terms has been much less stark, with 60 per cent of mortgages originated in 2014 still having terms above 30 years.

Fig 1: The distribution of originated mortgage terms per year, First Time Buyer segment 1997 to 2014.

term_line

This evidence of a structural shift towards longer terms begs a number of questions relating to the role of term as a credit condition. Figure 2a from Edward’s work provides conclusive evidence that, during the boom phase, longer terms were associated with higher leverage. In 2007, those taking out 40 year mortgages had an average LTV of over 90, with LTVs of 85, 72, 60 and 50 as we move in five-yearly intervals down to 20 year mortgages. While these LTVs have converged since the crisis, the rank ordering persists. Figure 2b completes the picture by showing that borrowers on different terms have in fact been accessing similarly valued houses, which implies of course that those with longer terms were taking out larger average loans. Taken together, these figures strongly suggest that term was being used by FTBs to mount the property ladder at as high a point as possible for a given down-payment amount, using higher originating LTVs to access valuable housing with small down-payments and large loans, while easing the monthly repayment burden of this high-leverage strategy via longer terms.

Figure 2: Average LTV and property value for mortgages originating at different terms.

(a)    LTV (b)   Average Property Value
 term_ltv  term_val

Our next piece of evidence links borrowers’ incomes to mortgage terms. Figure 3 reports clear differences in originating Loan to Income ratios (LTI) across term groups. Those on 40 year mortgages in 2007 were accessing loans with an average LTI of 5, while the equivalent number was under 3 for those with 20 year mortgages, again providing strong evidence that mortgage terms were used as part of a broad “credit conditions package” by credit-hungry borrowers. Figure 3(b) confirms that this highly-indebted strategy was in fact more common among high-income borrowers in the run-up to 2008, with median incomes falling as terms shorten. The one exception to this rule is the 40-year mortgage, which appears to have been popular among lower-income households with extremely high LTIs during its short existence.

Figure 3: Average LTI and income for mortgages originating at different terms.

(a)    Loan to Income ratios (b)   Incomes (median)
 term_lti  term_inc

So where did this “credit condition package” leave borrowers on a monthly basis? It is unclear from the above whether long terms acted to offset the affordability difficulties brought on by high-leverage strategies. To do this, Edward calculates a monthly repayment to gross income (RTI) ratio for each loan in the data, applying an indicative opening interest rate. The evidence is conclusive: despite the fact that longer terms mechanically improve mortgage affordability by lowering repayments all other things equal, it was still the case up to 2008 that borrowers with longer terms were taking out such large loans that their RTIs were in fact higher than borrowers with shorter terms. This is likely part of the explanation for the finding of Kelly, O’Malley and O’Toole (2015) that longer-term mortgages have higher default probabilities, even after controlling for a range of explanatory factors.

More posts on the mortgage market in Ireland to follow over the coming months.

[1] McCarthy and McQuinn (2013) and Kelly, McCann and O’Toole (2015)

[2] Kelly, O’Malley and O’Toole (2015)

Teaching macro after the crisis

Olivier Blanchard, pound for pound one of the best macroeconomists out there, is revising his famous textbook. His experience at the IMF has forced him to reconsider the basic short- to medium-term models we teach.

In particular Blanchard wants to keep the ‘IS’ curve, which relates savings to investment, and mostly dump the ‘LM’ curve, which supposedly connects the demand for real balances to the interest rate via the money supply. He also wants to ditch the aggregate supply and demand model, which relates changes in aggregate demand and supply to employment and expectations over the medium term.

Blanchard wants to scrap this and connect the IS curve to an older idea, the Philips Curve, which will be paired with a new curve, called the MP curve in many formulations. Karl Whelan, formerly of this parish, has a nice exposition of the whole IS-MP-PC system here (.pdf). This should replace the older IS-LM and AS-AD formulations over time, but for that to happen, lecturers will need to update their notes, and textbook authors will need to update their offerings. We know Blanchard is doing his bit. What about our Irish colleagues?

A while ago Brian Lucey and I looked at how much the teaching of economics had changed in Ireland since the crisis. Not much, was the short answer. The presentation of our initial results is here (.ppt).

The next thing to do is to change how economists are taught about finance. I have quite a few thoughts on this, perhaps best expressed in my own teaching about financial economics, but Blanchard’s suggestions around the introduction of more than one interest rate reminds me a lot of this classic paper by Jack Treynor, and maybe that can be worked in, in a sensible way.

Either way, Blanchard’s textbook will be top of my recommended reading list when it comes out.

DEW/TCD policy conference on housing & homelessness.

The Dublin Economics Workshop, in association with the Policy Institute at Trinity College Dublin, is organising a half-day event from 9 to 12 next Wednesday (June 8), entitled Homelessness & Social Housing: Policy Solutions for Ireland.

Minister for Housing Simon Coveney will open the event, after which there will be a keynote by Professor Dan O’Flaherty (Columbia), a world expert on homelessness and low-income housing. Eoin O’Sullivan (TCD) and Michelle Norris (UCD, HFA) are also presenting, before Cathal O’Connell (UCC) moderates an open discussion.

The event is free and open to all. To ensure adequate capacity (both venue and refreshments!), if you intend to attend the event, please register here. More details on the event are here [PDF].

The Brexit Debate – EU Integration or Disintegration?

The School of Social Science & Philosophy at Trinity College Dublin is hosting a Brexit debate, on Thursday 9th of June at 6pm. Speakers include economists John O’Hagan and Michael Wycherley (nationalities Irish and English, respectively!), as well as Will Phelan (Political Science) and Francis Jacobs (ex-European Parliament). More details, including how to register for this free event, are here.