Public Policymaking and the Marketplace for Ideas

In a recent speech to a conference on “Transforming Public Services”, I argued that official policy-advice and decision-making processes are overly secretive and cartelised and that increased transparency and contestability would yield superior outcomes.  Good ideas would have a greater chance of driving out bad ones and the possibilities for interest-group and regulatory capture would be reduced. The paper argues for:

– clearer lines of demarcation between expert policy advice and political decision making

– a US-style Council of Economic Advisors, to allow a greater diversity of competing voices and an increased likelihood of resignations if political decisions went grossly against expert advice

– a further loosening of the traditional doctrine of “the corporation sole”, which obfuscates the assignment of responsibility

– a radically reformed and better resourced Oireachtas committee system to enhance oversight of the executive

– a relaxation of the libel laws along the lines of the 1991 Report of the Law Reform Commission (e.g. “that the prosecution should be required to show that the matter was false as well as defamatory”)

– a constitutional rebalancing from rigid protection of the “right to one’s good name” in favour of greater freedom of speech

– extending the powers of the Comptroller and Auditor General to “name and shame”

– mandating the public-sector Top Level Appointments Committee to identify and penalise blame-avoidance motivations

– reconstitution of the Special Group on Public Service Numbers and Expenditure Programmes (“An Bord Snip”) at ten-yearly intervals to check the empire-building instincts of the bureaucracy and reduce agency proliferation, which diffuses blame and helps to avoid difficult decisions.

The full paper is here.


We heard on RTE radio yesterday that the shopping centre in Bandon which is now under flood was build in an area known to locals as “the swamp”.   Other councils and planners were also known to have allowed buildings to be erected in the flood plains of rivers over the boom period.  How can they be held to account?  

Consultants also face inefficient incentive structures.  Will PWC lose any future contracts for failing to highlight the importance, in their report to the Minister for Finance, of the €7 billion deposit that ILAP had placed in Anglo-Irish Bank?  This was damaging to the credibility of the Minister for Finance and his department when it emerged into the public domain several months later (Irish Times, February 12, 2009). 

A correspondent recently drew my attention to a statement from the same Minister on November 28, 2008.  Referring to a report he had received on the Bank Guarantee Scheme, the Minister noted that:

 “The report confirmed that the capital position of each of the institutions reviewed is in excess of regulatory requirements as at 30 September 2008. The report also concludes that even in certain stress scenarios the capital levels in the financial institutions will remain within regulatory requirements in the period to 2011.” 

Since the report remains confidential, the extent to which the Minister’s interpretation and explication may have been politically motivated remains unclear; i.e. how broad a range of the stress scenarios does his statement refer to?  If the report’s authors got it completely wrong, then surely they should have consequences to face?  

The powers and remit of the Comptroller and Auditor General need to be extended to cover such matters.


Executive Pay

The government caps the pay of bank Chief Executives but not of their more junior colleagues, leading to AIB’s creation of a new post of “Managing Director”, presumably in an attempt to exploit the loophole.  The comedy of errors continues.

Patrick Honohan warns that banks need to be able to offer competitive remuneration packages.  But don’t Irish banks need to return to the much more staid banking practices of decades ago, and will have the regulators looking over their shoulders to ensure they do so?  It is not clear to me that these institutions will require Goldman Sachs-type globetrotters as CEOs; I suspect there must be many people capable of performing these functions, whose opportunity costs would be well below the level of the cap.

On a tangentially related point, I see from yesterday’s Sunday Tribune that Maurice Manning, as President of the Irish Human Rights Commission, earns a higher salary than the Taoiseach.  Much less responsibility, and this salary has to be well above Manning’s opportunity cost (as a former middle-ranking academic and senator).   No global competition arguments apply to such political appointments.  Definitely something wrong here.

Revisiting the Cost of the Bank Guarantee

The Government charged the banks €1 billion for the two-year guarantee announced on 30 September 2008.  How was this amount arrived at, and does it represent good value for the taxpayer?

According to the Annual Report of the Comptroller and Auditor General issued in September 2009 (available here), the charge of €500 million per year appears to have been calculated as:

{The increase in the cost of funding government debt due to the guarantee}TIMES {The liabilities covered by the guarantee}

The former was set at 0.15%.  Liabilities at the end of December 2008, as shown in Figure 23 of the C&AG Report, came to around 345 billion.  The product of these two terms comes to around 500 million. (Not an exact match because average rather than  end of quarter figures would presumably have been used).

The 0.15% figure comes from the “the advice of the National Treasury Management Agency  ..  that the cost of funding Government debt would rise as a result of the guarantee by between 0.15% and 0.3%”. 

Note that the lower figure was chosen, while many might argue that even the higher value is low, given the extent of the spread over German rates (though part of this is due of course to the budgetary crisis).

Figure 23 of the C&AG Report indicates that the expansion in the Deposit Guarantee Scheme announced on 20 September 2008 (which raised the guarantee per depositor from around €20,000 to €100,000) was not charged for.  This would have raised the second term in the equation from 345 billion at end December 2008 to 427 billion. (According to footnote 15, the Deposit Guarantee Scheme is apparently “not regarded as a State guarantee”).

Note also that the charge is based on the cost to the government, not on the value to the banks, which would have been very high. Section 7.23 of the C&AG Report reports however that “account was also taken of the capacity of the covered institutions to pay the charges”!

Academic Cassandras: Iceland and Ireland

Timely warnings were issued by academic commentators in both Iceland and Ireland long before the collapse.   On Iceland’s sidelining of its most internationally-prominent economist, see my recent book review for the Irish Times.  The Sunday Independent afforded me the chance, a few weeks ago, to review the policy concerns that I had been expressing over the last decade (see here).  I was not in any way a lone voice, but the space allotted allowed me examine only my own record.  I was particularly disappointed to see Minister Eamon Ryan coming out with as ignorant a reaction to academic economists’ interventions as Denis O’Brien’s.