Bad News from Big Pharma

We have reached the long-awaited “patent cliff”. Lipitor, which Pfizer produces in Ireland, has just gone off patent and others are set to follow shortly. Big Pharma’s new product pipelines are sparse. Bloomberg reported on this a few weeks ago here.

I don’t think Chris Van Egeraat is quite as pessimistic as he appears to be in the article, and he tells me that the figures quoted come from Bloomberg’s database rather than from him.

Furthermore, Big Pharma is fighting back. And we know that mergers and acquisitions in the sector have increased in recent years, against trend, as the pharma companies diversify into biotech, from which the new innovations are likely to emerge. (See the section on pharmaceuticals, pps. 16-17, here).

But worrying all the same!

More on the EU Summit

My take on it went out as an op-ed on Bloomberg today. (I’m not responsible for the headline!).  It’s quite similar to KOR’s and CMcC’s, which is hardly surprising since we have been ad idem on this for more than a decade, though my repeat of the phrase I used some months ago – coup d’etat – might strike some as excessive (though it came from paying attention to Garret FitzGerald).  By the way, I see that Ciaran O’Hagan asked, in a comment on KOR’s piece, about the decision to sever the link with sterling.  Patrick Honohan and Gavin Murphy have written on this. The final sentence of the abstract shows how prevalent was the mindset displayed by Stephen Collins in his article in last Saturday’s Irish Times. (I agree with Karl that this must be one of the least insightful articles to appear over the current debate). I emphasised to Kevin Myers on some radio show at the time of the single currency debate that there was no clash between my nationalism and my recognition of the continuing importance to Ireland of our economic links with the UK. In fact I argued that this was an indication of the maturity of political attitudes on our side of the debate.

The Irish Debate on the Single Currency

I was asked by an Irish Times journalist recently if anyone had written up a review of the Irish debate on joining the single currency.  This paper of mine from 1997 came close, though it doesn’t for the most part name or ascribe  positions to the participants.  Rereading it now though, it strikes me that a lot of it remains relevant.

The Bayoumi and Eichengreen material makes clear that central control of national fiscal deficits across the eurozone – the suggestion du jour – will not remove the vulnerability of Ireland and the Mediterranean economies to asymmetric (country-specific) shocks.  This is what I was referring to in my post of a few months ago entitled:  Jean-Claude Trichet, 2004: ‘no design flaw in the euro project’.

Colm McCarthy and I agreed recently that the Irish debates (in which both of us were anti) did not identify the precise fault lines that would ultimately emerge.  Centralised eurozone banking regulation and resolution regimes – the absence of which we all now recognise as design flaws – will not address the problem of asymmetries however.

The article makes the point that “those worried about the rigidity of the single currency system argue instead for policy co-ordination alongside floating rates.  In that way the destabilising element associated with ‘maverick’ macro policies would be removed but the exchange rate would still be free to adjust to counter country-specific shocks.”

Alternatively, within the single currency, “fiscal federalism” could go some way towards correcting the problem.  The Federal Budget absorbs about one-third of  the average region-specific shock in the US; the figure for Canada is around one-fifth.  We have nothing similar in Europe.  But think of the pork-barrel politics this would (will?) entail.

And have a wry smile at footnote 11, which I had forgotten about, concerning an aspect of the debate between Patrick Honohan on the one hand and Peter Neary and Rodney Thom on the other.  (The ‘foreign currency’ refers to the euro).  How times can change!

Economic Foundations of Irish Foreign Policy

I was asked to write this chapter for a forthcoming RIA volume on Irish foreign policy. A summary:

A country’s foreign policy is largely driven by what it perceives to be in its economic interests. That this does not provide a complete picture is evidenced by the fact that Irish development assistance has never taken the form of tied aid. Nor can the influence of powerful vested interests be discounted. A case can be made that Ireland turned protectionist again once membership of the European Union had been achieved. Agricultural and sheltered-sector interests have sought to stymie the liberalisation efforts of the WTO and the European Commission respectively. A further complicating factor is that a society’s own economic interests can occasionally be miscalculated. Joseph Lee has noted that “while the ‘political’ skills of Irish representatives in negotiating positions are widely acknowledged… there seems to be no comparable criterion for assessing the calibre of conceptualisation of the Irish case.” Irish foreign policy through the years has nevertheless recorded many successes in defending the economic interests of the citizens of the state.

The paper considers the political and economic determinants of Irish trade policy, the evolution of its inward foreign direct investment strategy, and the country’s position on international migration and on the broadening and deepening of European integration. A separate case study focuses on how successive governments have sought to defend and exploit the advantages of Ireland’s low corporation-tax regime in international negotiations.

Jean-Claude Trichet, 2004: “no design flaw in the euro project”

I mentioned on this site before how a number of academic economists, during the debate on whether Ireland should adopt the euro, referred to a design flaw that had been well recognised by US economists: the lack of a federal budget.

It was known that the Irish business cycle was out of sync with the eurozone core and that the timing of ECB interest rate changes would not be appropriate for Irish conditions. A large part of such asymmetries (or ‘region-specific shocks’) are offset in the US at the federal level: a $1 decline in US regional income relative to the national average induces a fall of around 25 cents in federal tax liabilities and an increase in inward transfers of about 10 cents.

Karl Whelan’s recent proposal re Irish bank debt was to federalise it. Morgan’s was similar to one I advocated recently on this site: monetize it. Both entail responsibility being shared at the federal (i.e. European) level.

Paul de Grauwe warned, as far back as 1999, that the “failure (to create a European government with similar responsibilities to present national ones) creates the risk of the break-up of the monetary union”.

I have just now stumbled on a speech made by ECB President Jean-Claude Trichet in Dublin in May 2004 which rejected claims of such a design flaw, as follows: “Moving to the second topic of my speech, i.e. fiscal policies, let me stress that we Europeans have been very bold in creating a single currency in the absence of a political federation, a federal government and a federal budget at the euro area level. Some observers were indeed arguing that without a federal budget of some significance the policy mix would be very erratic, depending on the random behaviour of the different national fiscal policies of the member countries. They were also arguing that without a federal budget it would be impossible to weather, with the help of the fiscal channel, asymmetric shocks hitting one particular member economy. In this respect, the very existence of the Stability and Growth Pact actually allows (us) to refute these two arguments: first, the Maastricht Treaty and the Pact provide a mutual surveillance by the “peers”- i.e. the Ministers of Finance – of national fiscal policies; second, by calling upon Member States to maintain their budget close to balance or in surplus over the medium term, the Pact allows the automatic stabilisers to play in full in countries facing an economic downturn, without breaching the 3 % ceiling for the deficit.”

The full text of Trichet’s speech is here.

Common Consolidated Corporate Tax Base: a critique

I presented this paper on CCCTB to the Kenmare economics conference back in 2008. Many in attendance felt that it was unlikely to come to pass. It is clearly on the agenda now though it is not yet certain that it will meet the requirements associated with “enhanced co-operation” (which, under Lisbon, requires nine countries rather than the eight mentioned in the paper, which was correct at the time. Nothing else, as far as I can see, needs updating).

I characterise the proposals as a “Trojan horse”. The logic is similar to that of Bettendorf et al., writing on “Corporate Tax Harmonization in the EU” in the journal Economic Policy in 2010. They say “consolidation with formula apportionment does not weaken incentives for tax competition. Tax competition instead offers a rationale for rate harmonization, in addition to base harmonization.”

O’Rourke – thar sáile ar an mBád Bán

Kevin O’Rourke – one of our leading academics and a frequent contributor to this blog – is to leave Ireland to take up a Chair at Oxford. I use ‘leading academic’ to mean one whose works will still be known a hundred years from now; this applies at the very least to his superb 2007 book with Ron Findlay – Power and Plenty: Trade, War and the World Economy in the Second Millennium. How many people could even dream of writing, never mind complete so successfully, a history of 1,000 years of world trade? Also ar an mbád bán – go Meiriceá – is another leading Irish academic, Declan Kiberd, Professor of Anglo-Irish Literature at UCD. Best of luck to them both.

Coup d’état?

Shamefully, it has taken me several weeks to realise the full import of the attached Irish Times piece by Garret FitzGerald.  He has for many years sought to draw the attention of the Irish public to the role of the European Commission as defender of smaller states’ interests.  Here he warns, in much more modest language than that with which I have entitled this entry, that the current German-French proposal for euro zone reform “represents a new attempt to bypass the union’s tried and tested decision-making system… There is a new danger that the decision-making system that for over half a century has sustained and kept in balance an inherently cumbersome union… may lose its hitherto carefully preserved cohesion, and for the first time become dominated by some larger states.”

Tackling Unemployment

The twin problems of unemployment and the public deficit make it imperative to search for low-cost schemes that can help to stimulate employment creation. “Marginal employment subsidies” were much discussed in the international literature in the early 1980s and might have a role to play today.  

A specific and fairly modest proposal to start with would be to abolish employers’ PRSI contributions for new jobs; i.e. for any increase in a firm’s employment over and above the level recorded at a specific date in the past, e.g. X/X/2010. (The importance of choosing a date in the past is that it would prevent firms gaming the policy by shedding jobs in advance of its introduction). This avoids the extensive deadweight losses associated with e.g. a cut in employers’ payroll costs. There would still be some deadweight loss in tax revenues resulting from jobs that would have been created anyway, but it seems unlikely that there is much new employment creation at present. The proposal would amount to a wage subsidy of over 10% for new jobs. (If it looked like it was starting to have an effect, it could be extended by taking into account some of the resultant savings in social welfare).

Care would need to be taken to prevent firms closing down and establishing under a new name to exploit the scheme, but I assume this could be surmounted.  

Many of the existing schemes in place today (details here) might be thought similar to the present proposal. Most are targeted however at particular groups of disadvantaged workers, which make them less likely to succeed, and, as far as I recall, some displacement effects were found. The present proposal avoids these.

The proposed scheme might be gradually wound down as follows: the implicit subsidy to be reduced by Y% for each 50,000 jobs recorded in the economy over and above the level prevailing at X/X/2010.  

If the economy were solely cost-constrained, the proposal would raise employment through both the output and substitution effects. The substitution effect will still apply if the economy is purely demand-constrained, and by getting people back to work will have beneficial demand effects. 

Examples of the literature from the 1980s include:

Chiarella, C., and A. Steinherr (1982), “Marginal employment subsidies: an effective policy to generate employment”, Commission of the European Communities, Paris, Commission of the European Communities Economic Papers No. 9, November.  

Layard, R., and S. Nickell (1980) “The case for subsidizing extra jobs”, Economic Journal, Vol. 90 pp.51-73.  

Oswald, A. J. (1984) “Three Theorems on Inflation Taxes and Marginal Employment Subsidies”, Economic Journal, 94, 375.  

Whitley, J. D. and R. A. Wilson (1983) “The Macroeconomic Merits of a Marginal Employment Subsidy”, Economic Journal, 93, 1983.  

See also:
Snower, D. (1994), “Converting unemployment benefits into employment subsidies”, American Economic Review, Vol. 84 pp.65-70.

Historical Origins of Ireland’s Low Corporation Tax Regime

Readers might be interested in this analysis of the (bureaucratic and electoral) politics of the introduction of export profits tax relief in 1956, available here. The abstract is as follows:

T. K. Whitaker and Seán Lemass are generally credited with effecting the policy shift from protectionism to outward orientation. Ireland’s low corporation tax regime, however, has its origins in the export profits tax relief (EPTR) measures introduced by the second inter-party government in 1956. EPTR was introduced at the behest of the Department of Industry and Commerce in the face of long-standing opposition from Revenue and the Department of Finance. Industry and Commerce at the same time successfully thwarted the desires of the Taoiseach, the Department of Finance and other state agencies to have restrictions on foreign ownership of industry repealed. These apparently contradictory positions were rooted in the historical legacy of protectionism. The inter-party Taoiseach, John A. Costello, downplayed the connection between EPTR and foreign investment in an apparent attempt to deprive Fianna Fáil of an opportunity for controversy. Its introduction hastened the end of Fianna Fáil prevarication on the issue of foreign ownership.

The importance of the intense electoral competition of the period is also frequently ignored in accounts of the policy shift towards outward orientation. Following sixteen years of unbroken Fianna Fáil rule, the next four general elections brought four changes of government. Along with the depth of the 1950s recession, this forced Fianna Fáil into a comprehensive reexamination of its industrial strategy. The economic thinking of the major political parties co-evolved, and many of the institutional innovations of the period, including the Capital Investment Advisory Committee, the Industrial Development Authority, the early Córas Tráchtála, and, of course, EPTR, were the result of inter-party government initiatives.

The defeat inflicted on Finance by the Department of Industry and Commerce partly motivated Finance’s work on Economic Development, the 1958 publication of which was important in providing political cover for Fianna Fáil’s U-turn on overall economic strategy.

Banking Crisis, Bondholders and the Single Currency Project

When a country finds itself overburdened with debt, the solution – if the debts are denominated in its own currency – is to inflate its way out of the problem. Debt is denominated in nominal terms so inflation reduces the real debt burden. Ireland cannot do this, but the ECB can. It would not do it for Ireland or Greece or Portugal alone but if Spain comes under attack, given its size relative to the European Financial Stability Facility, this option will be forced up the agenda.

What would inflating our way out of the debt entail? It can be seen as a type of orderly default. Assume for the sake of argument that the ECB is the owner of all Irish bank bonds; the Irish taxpayer currently owes these funds to the ECB. The ECB could accept a debt for equity swap, which would mean a substantial haircut, so that it – rather than the Irish taxpayer – now owns the banks. It recapitalises them by printing money and then sells them on. The downside is higher European inflation (it will have to take similar steps all across Europe because many banking debts are in fact to other banks, meaning that many will require recapitalisation) and a higher risk premium on all European debt. The risk premium could be moderated though by a pan-European regulatory system which would tackle one of the design flaws in the entire single-currency project.

The major design flaw was that there was no mechanism to tackle asymmetric (i.e. region-specific) shocks. The US has a huge federal budget which absorbs a major share of such shocks; e.g. if California goes into recession, it pays 25 cents less in federal taxes for each dollar its income drops, and it receives 10 cents more in federal funding. There is no such “fiscal federalism” in Europe (the nearest to it, the Structural Funds programmes, transfer about one cent for every dollar gap in income). Asymmetries prevail however, as is evident in that the business cycle in peripheral countries such as Ireland is out of sync with Germany and the core eurozone countries. This design flaw featured strongly in contributions made by Kevin O’Rourke, myself and others (all of us at the UCD School of Economics at the time) during the Irish national debate on whether to join the single currency. So Spain and Ireland got very much lower interest rates than were appropriate over their respective booms, which fuelled their property bubbles. The problem could have been reduced, though not eliminated, by tight pan-European regulation of the financial system.

These design flaws must be tackled in one way or another if the eurozone is not to stumble from crisis to crisis, though it is doubtful that there is the political will for substantial fiscal federalism. There is no painless way out of the current crisis, but inflating our way out of the debt and coming to grips with the design flaws look to me to be the least painful option.

I try to make these points in a politics programme recorded several days ago and due to be shown on RTE when the EU/IMF announcement is made. They’ll only use snippets so I’ve tried to join up the dots here.

Concurrent Irish Perspectives on the Great Depression

This is about the 1930s!  UCD historian Mary E. Daly and I have just concluded a draft of our paper examining how the Great Depression was perceived in Ireland at the time.  The paper is purely historical and makes no attempt to draw any parallels with the current situation.  It might nevertheless be of interest to some readers.  It is available here.

Depression-Era Economics

The literature on the Great Depression throws up some curious parallels and contrasts to today.

From Kindleberger (The World in Depression, 1929-1939, p. 194):
“In the electoral campaign, Roosevelt charged Hoover with total responsibility for the depression. It’s origin, he said, was entirely within the United States… Hoover, in reply, insisted that the depression had originated abroad.”

Also from Kindleberger, p. 139:
“The Unemployment Insurance Fund, being in deficit, had to be made up by the German government, which thereby suffered a budget deficit. The Socialist Party proposed raising contributions to the fund by a 4 per cent levy largely on government officials, whose contracts provided protection from unemployment.”

In Ireland, the first Fianna Fáil budget of 11 May 1932 included a tax amnesty for those with undeclared overseas accounts.

The settlement would enable them to resolve any outstanding liabilities by paying 75 per cent of the amount owed in outstanding taxes on foreign holdings from 1914 to the present, with no penalties or interest charges.
(Dáil Éireann – Volume 41 – 11 May, 1932 – In Committee on Finance. – Financial Resolutions—Minister’s Statement.)

Ronan Fanning’s book on the Department of Finance, pps. 233-4, reveals that the same government hoped to but failed to cut public service pay.

“This proved a difficult process and the reductions were widely resisted by public servants, including the senior civil servants that the government relied on to implement its policies – some , whose tenure predated the state were threatening to take early retirement under a clause in the 1921 Treaty. The proposed cuts were targeted at higher-paid public servants – including Government ministers. This dispute suggests a strong division of opinion, with the farming community very much in favour of cutting the cost of public services. One minority report to the report on this topic concluded that:

‘Even at the reduced rate there are many competent people who would gladly exchange places with public servants for the next ten years. The discontented State Servant would derive much benefit from a sojourn in the beet fields of Leinster, the cow pasture of the Kerry hills, or turf banks of the Bog of Allen for £1 a week’.”

The New UK Government and Northern Ireland Corporation Tax

Northern Irish economists and politicians were delighted to have secured a commitment in the Conservative Party election manifesto (here) to “produce a government paper examining the mechanism for changing the corporation tax rate in Northern Ireland”.   There is cross-party agreement in the Assemby for adoption of the Republic’s 12.5% rate.  An interesting paper by the Northern Ireland Economic Reform Group (here) explores the legal issues, drawing heart from the European Court of Justice’s “Azores Judgement”.

More on Bank Executive Pay

The comedy of errors continues.

From a recent Irish Times article by the forensic and understated Colm Keena: “Lenihan said he was going to seek a cap of 500,000 euro on the salaries of the chief executives of Bank of Ireland and AIB… When the then governor of the Bank of Ireland wrote to Lenihan about Boucher’s pay arrangements, he suggested pay of 500,000 euro and a “pension cash allowance” of 123,000 euro. The Minister did not want the new chief executive getting any allowance that had been criticised in the (Covered Institution Remuneration Oversight) Committee report, and the amount ended up being rolled into a salary of 623,000 euro. Ironically, this appears to have been an improvement in Boucher’s terms, as the salary amount is pensionable, while the cash allowance is not”.

Ireland’s inward-FDI sectors over the recession

Adele Begin and I have just issued a working paper (available here) on the performance of foreign-owned industry and services over the recession, and prospects for the future.

The non-technical summary reads as follows:

The current global downturn has been accompanied by a collapse in international foreign direct investment (FDI) flows.  Having reached an all-time high in 2007, worldwide flows fell by 14 per cent in 2008 and by a further 30 percent in 2009.  Given the FDI intensity of the Irish economy, this collapse might be thought to have particularly adverse implications for Ireland.  FDI inflow data however are the outcome of complex MNC financial decisions and bear only a very weak relationship to MNC employment, investment and export activities in FDI destination economies.

The analysis presented here of the recent performance of Ireland’s inward FDI sectors shows them to have played an important role in helping to stabilise the economy in the face of severe downturns in both export and domestic markets. A critical factor in this has been the particular sectors in which foreign-owned MNCs in Ireland operate.  Export demand for pharmaceutical products and medical devices in particular has remained relatively buoyant.  Employment in Irish-owned exportables (i.e. in Enterprise Ireland-assisted firms), on the other hand, fell more over the course of the downturn than did employment in the entire private sector, which is largely ascribable to the weakness of sterling

The paper also explores the country’s medium-term prospects in key foreign-dominated sectors such as ICT, pharmaceuticals and international financial services, which are experiencing substantial structural change.  The consequences of ongoing developments in the global FDI market – such as the growth of China – and in the international regulatory and corporation-tax environments – including recent and prospective policy changes on the part of the new US administration – are also assessed.

Politics and Economic Policymaking

This field of study addresses issues such as the factors militating against the adoption of growth-enhancing policies, even when politicians themselves might favour them, and the various sources of political cover that might be available to help resist such pressures.  (Some of the bigger questions can be intuited from the way I’ve phrased these particular ones).  A former student of mine emailed me recently to say that she found these topics “ridiculously interesting; it’s almost like reading gossip”.  (Thank you, N!)  I haven’t yet begun to model these processes (spent the semester boning up on game theory with the intention of doing so) but some of my musings on the topic (in the context of the last 50 years of Irish economic history) are available in this recent paper.  I have discussed other examples of available political cover, such as the “golden straightjacket” of EU and WTO rules (to use Thomas Friedman’s phrase from The Lexus and The Olive Tree) , in other recent writings.

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.

Accountability

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.

Donogh O’Malley’s 1966 Announcement of Free Education: The Hidden History

Donogh O’Malley caused consternation in government when he announced his free education scheme in September 1966 without having brought the matter to Cabinet.  The enthusiasm of the public response forced the government’s hand.  Whether or not Lemass had prior knowledge has been the subject of heated debate among historians.  Lemass denied it, but five members of the cabinet told Brian Farrell, while writing Chairman or Chief?, of their belief that not only had he seen the text in advance but he had actually amended it.

The journalist John Healy was a great friend of O’Malley’s.  Later in life he told Michael O’Regan, who is now the Irish Times parliamentary correspondent, that the paper trail had been designed as a smokescreen  and could not be relied upon.  Healy published his recollections in Magill magazine in March 1988, on the 20th anniversary of O’Malley’s death. At  the behest of Michael O’Regan, I’ve dug it out.  The hidden history is here.

Some Unpleasant NAMA Arithmetic

Regardless of the rights or wrongs of NAMA, it is shocking how many commentators have accepted the notion that a 10 percent rise in property prices over the next decade will be sufficient for NAMA to break even.  The “logic” is this:  we are paying a little over €51 billion upfront for assets thought to be currently worth €47 billion, so a 10 percent rise in the value of the assets will give us our money back.  Let’s be as spectacularly optimistic as John Mulcahy, NAMA’s senior property valuer, who (alone?) believes that the property market is at the bottom of its cycle.  Would anyone consider it a good deal to lend someone €100 today and have them return €100 in 10 years time?  Obviously not.  Firstly, with any increase in the general price level, €100 will be worth a lot less to you in a decade.  And secondly, you would expect the money to be repaid with interest (especially if you had borrowed it commercially yourself!).  Property prices will have to rise by a multiple of 10 percent for NAMA to break even.  (Apologies for having to state something that must be so obvious to everyone on this website!)

Bank Nationalisation

Karl Whelan’s case for nationalisation is very powerful but we shouldn’t lose sight of the dangers that were traditionally uppermost in our minds.  (This does NOT equate to support for the Bacon plan).  Even commercial banks are subject to strong political pressures.  Remember the write-offs of Haughey’s personal debts, and even of some of Garret’s? (Though the similarity ends there, as the Moriarty Tribunal found.  While Haughey’s assets remained intact, FitzGerald’s write-off occurred only after his assets had been exhausted).  It would be much more difficult for a nationalised bank to resist political pressures (or do we really believe that “crony capitalism” will end with the current crisis?).  Quite apart from the other problems with the post-dated levy idea, as identified both by Karl and the FT, it is easy to imagine that it would be applied only very leniently, if at all, for political and pressure-group reasons; the same dangers that arise in the case of nationalisation.  Sweden seems to have a different political culture.  And would a nationalised banking system be able to resist demands that there be no foreclosures on defaulting mortgage holders?   I doubt it.  What would that do to Karl’s figures? These problematic governance issues need to be carefully considered.