Author: Richard Tol

Price inflation and income distribution

With the risk of being ridiculed for self-promotion, readers may want to have a look at some recent computations.

Earlier, Callan, Keane and Walsh had a look the impact of recent changes in taxes and benefits on nominal income. They found a sizeable redistribution from rich to poor.

An Bord Snip Nua argued that benefits should be indexed on the consumer price index, which would be tantamount to a 5% cut.

In the paper with Jennings and Lyons, we compute the consumer price index per income decile. The highest incomes have seen the fastest deflation, up to 5.1% for the period July 2008 to June 2009 for the top 10% earners. The three lowest income deciles have seen deflation in the range of 3.0 to 3.4%.

By the argument of An Bord Snip Nua, a 5% cut in benefits thus seems a bit harsh.

On the other hand, deflation has been slower for lower incomes because local authority rents have continued to go up even as the rest of the housing market collapsed. As local authority rents are indexed on renters’ incomes, a cuts in benefits would in fact induce deflation for this, particularly vulnerable group.

A 3% cut in nominal benefits would therefore mean that the poorest people in Ireland would see a rise in their real income.

An Bord Snip: Energy, Environment and Transport

An Bord Snip Nua has a number of recommendations in the intertwined areas of energy, environment and transport:

1. End energy, environment and climate awareness programmes

2. Water charges and road pricing

3. Reduce energy subsidies to the price of carbon; abolish said subsidies when the carbon tax is introduced; end subsidies to regional airports and domestic flights

4. Discontinue selected train services

5. Merge water authorities, market regulators, and safety regulators

6. Privatise Bord na Mona and Bus Eireann Expressway

I agree with all of the above.

On 4, I would also end public subsidies to the planned interconnector to Wales. This is a commercial proposition; there are few externalities, it is not a public good, nor is it a natural monopoly.

On 5, Sean Lyons pointed out that the Irish Aviation Authority is a market regulator and should therefore be merged with other market regulators rather than with the Road Safety Authority, the Railway Safety Commission and the Maritime Safety Directory. I confused the Irish Aviation Authority, the safety regulator, with the Commission for Irish Aviation, the market regulator. The safety regulators should all be merged into Safety Ireland. The market regulators should be merged into Competition Ireland.

On 6, I would go further. An Bord Snip Nua argues that state-owned companies should pay higher dividends, but I would sell them at the first opportunity. 2010 may be too soon, but we should be able to get a decent price from 2011 onwards. I would also end the monopoly of Dublin Bus.

An Bord Snip Nua is silent on waste management.  While two incinerators are being build, the government is trying to divert future waste away from incineration towards other, more expensive forms of treatment. If the government succeeds, it will (1) destroy capital and (2) increase costs. Arguably, this is not in the budget yet and therefore outside the remit of An Bord Snip Nua, but the investment is measured in hundreds of millions of euros.

An Bord Snip: Research

One of the recommendations of An Bord Snip Nua is to transfer all research money from the departments and agencies to a single research body.  Besides the cost savings, I see three advantages:

1. Competition for research allocation between fields (as opposed to the current earmarking of research money for someone’s pet projects)

2. Academic quality control (captive agencies occassionally grant funding to researchers of low repute but the right political colour)

3. Streamlining of applications and administration (at present, research bodies need to keep track of the rules of a range of bureaucracies)

I see two disadvantages, however:

1. Disruption: Transfer of tasks between public policy inevitably leads to chaos, and no research funding will flow for a certain period. This may lead to the destruction of human capital — that is, the good researchers may leave the country, leaving the dross behind. Continuity is therefore a high priority.

2. Applied research has a lower status, and funding will be under additional pressure from blue-skies research. The agencies and department that lose their research grants should have a substantial say in the type of research to be funded (but not, of course, select the researchers).

New rankings at IDEAS/RePEc

IDEAS/RePEc has (at last) released rankings of universities. Previous rankings spread economists over department, institutes and what not, so that the institutional ranking reflected fractionalisation as much as quality.

The new rankings are here: http://ideas.repec.org/top/top.toplevel.html

No big surprises. One non-US university (U London) in the top 10, two (Oxford U) in the top 20. Tilburg U (at 27) is top of the non-Anglon-Saxons, beating Toulouse (at 32).

UCD is top of the Irish at 98. TCD comes at 143. Ireland does better than Norway and New Zealand but worse than Denmark, countries with a comparable population.

Not bad. Could be better.

The Spirit of Ireland

In an unrelated thread, people were asking for my opinion on the Spirit of Ireland (the specific project, not in general). So, at the risk of insulting people, here we go.

The project promises to:

  • “[Create t]ens of thousands of jobs
  • Achieve energy independence in five years
  • Save €30 billion importing fossil fuels
  • Create potential to add €50bn to our Economy
  • Slash carbon dioxide emissions”

and “[…] help secure European energy supplies” at that.

The secret is pumped hydropower. Wind power is variable and unpredictable and therefore cannot provide more than a certain share of total electricity supply. International studies cap the share of wind at 10%, maybe 20% if you’re lucky. The Government aims for 40%. (This came about after an optimistic study by the Dept Energy concluded that 30% may work, and that 40% is not infeasible.) The Spirit of Ireland wants to go to 100% wind. That means that electricity will have to be stored, so that supply and demand can be matched. The storage method in this case is to use wind power to pump water into a reservoir and use hydropower to generate power.

All this is proven and scalable technology.

The wholesale price of electricity varies quite substantially over the course of the day,  by an order of magnitude between peak and trough. This means that one could make a lot of money if one would be able to store electricity for 12 hours or so. The fact that the market is not rushing in to build pumped storage, not in Ireland and not anywhere, is because pumped storage is very expensive and often controversial.

The Spirit of Ireland has not released any detail on their cost calculations.  However, reservoirs have been build for thousands of years. It is unlikely that the Spirit of Ireland has a technological break-through that drastically reduces the costs. If pumped hydro is not commercially viable elsewhere, why would it be in Ireland?

In any case, their costs are private costs. If electricity is 100% wind in the foreseeable future, then all our existing power stations would be sitting idle. A number of them are quite old, but there are a good few new ones as well. This would amount to a destruction of capital that is measured in billions of euros.

Their employment numbers are suspect too. Their plan would destroy thousands of jobs at the ESB, but in return they plan to create tens of thousands of jobs. This does not square with their claim that they would reduce the price of electricity. For one, their labour cost would be 5-10 times as high as the current labour cost. It is also not clear what those tens of thousands of workers would be doing. Perhaps they would build the dams by shovel and wheelbarrow, and when the dams are finished, turn the turbines by hand when there is no wind. There simply is not that much to do.

The aim to reduce greenhouse gas emissions is not clear cut either.  Dams use a lot of concrete, wind turbines use a lot of steel and reservoirs generate a lot of methane. This would not reverse the sign, but take away substantially from the gains.

They promise to achieve all this in five years. The problem with that is that they’d need planning permission for turbines, transmission lines, and reservoirs. Five years may just be feasible if they’d start building now.

There is an interesting twist to the reservoirs. The plan is to build these in the west, where geology is indeed suitable. They plan to build the reservoirs with salt water. The environmental impact assessment is thus quite tricky. Under European legislation, they would need to compensate the loss of nature — that is, take a tidal saltwater marsh and turn it into a non-tidal freshwater marsh. Empoldering part of Dublin Bay would qualify, but may run into other objections.

In sum, the Spirit of Ireland is unrealistic in its every aspect.

Unfortunately, if you tell the story enthusiastically enough, there are always people who actually believe you — and this is probably more so in times of doom and gloom.