Thinking a little about indexation

The Minister for Social Protection wants to index many social protection payments to a cost of living index as an anti-poverty measure. This makes sense on the face of it, as long as that cost of living index is going up, and as long as the level of benefits fall when the cost of living falls. It’s also worth thinking about the virtues of indexation, as this was one of the main criticisms IFAC had of the fiscal space calculations during the last election.

Let’s say you index benefits to the consumer price measure of inflation.

Here’s what happened to that reading over the longer run.

Screen Shot 2016-07-22 at 11.29.28Just messing about with the idea a little more, imagine we ‘begin’ the Irish economy in year 1 with a CPI reading of 100, and grant benefits of €100. Then we can add in (say) the last 20 years of real CPI data from 1995 to 2015 to get a sense of what would have happened to benefits in a year-on-year basis as a result.

The line is the increase in benefits as a result of the indexation, and the bars are the changes in euros to the benefits as a result of the cost of living increase or decrease, measured on the right hand axis. The excel sheet I used to knock this up is here.

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Hopefully you can see two things. First, the measure is highly pro cyclical. Precisely when we want benefits to decrease a bit, because the economy is growing strongly, they go up, and when we want benefits to increase a bit to cover the cost of living during a crash, they go down. Second, in recent years inflation has either stagnated, or fallen, so you wouldn’t see a huge increase or decrease in benefits either way. Now you could smooth out some of these effects out with a moving average of, say, 3 years, but this little exercise shows, I think, that it’s worth looking carefully at indexation proposals.

(Updated with thanks to commenter Tony_Eire.)

Higher Education Funding Links

There have been lots of contributions since the Cassells Report issued. It’s probably worth putting them all in one place. If I’ve missed some, please pop them in the comments.

The Cassells Report itself.

The reaction to the report

Carl O’Brien has a great series of articles on the subject. Here’s one: College funding explainer: The three options to pay for third level

Michael O’Regan: Senators criticise proposal for student loan scheme

The reaction to the reaction

Brian Lucey: Third level financing fails to paint the whole picture

Niamh Hourigan: Student loans will make graduates flee. Face it, tax is the best way to fund third level

Lorraine Courtney: State continues its war on youth, denying them a brighter future

Kim Bielenberg: Facing a higher degree of debt – students could graduate owing €20,000

Darragh Flannery and John Cullinan Study now, pay later? Please read the terms and conditions

Brian Hayes Why this Dáil may actually grasp the nettle of higher education funding

Paying the price for free education

Below is my Sunday Business Post column from this week, reposted with permission.

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Today, I’m writing as an academic and as the Acting Chair of the Higher Education Authority, because I think it’s really important to respond to the recent publication of the Cassells Report on the funding of higher education.

You might not know much about the HEA. It has three main jobs. It disburses about €1 billion in funding to the higher education institutions of this State, it regulates the higher education sector, and it provides policy advice to the Minister for Education and Skills.

The government, the HEA, and all the higher education institutions work within a national strategy around higher education, which takes us out to 2030.

The strategy we as a society have adopted for higher education until 2030 is to push for further and higher education for everyone who wants to go, regardless of their ability to pay at the moment they are admitted. Education should be freely available to those that want to avail of it.

But education is not free. Education has never been free to provide. As I said, the HEA spends over €1 billion of your money on it, and this is nowhere near enough to provide the kind of system envisaged in the strategy to 2030.

Continue reading “Paying the price for free education”

A Slow Negotiation Might Help Achieve a Better Brexit Solution

Writes Patrick Honohan for the Peterson Institute’s blog here. I’ve said a few times that the Brexit negotiations will take years (and–gasp–require immigrant labour).

Patrick’s point is well made. The sheer length of the negotiation process may give time to let the British people understand the benefits of being within a free trade area, while also managing somehow starting to solve the problems the referendum result threw up. These could be solved, arguably, by less austerity and more capital spending in areas left behind in recent decades.

Cameron’s Referendum Gamble

This is Colm McCarthy’s latest column for the Farmer’s Journal. They’ve very kindly let us repost it here:

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The decision last Thursday to detach the United Kingdom from the European Union was taken by referendum, a procedure familiar in this country but a constitutional novelty in the UK. Ireland has a written constitution and one of its provisions is that it can be modified only by popular vote. If the Irish government wished to scrap EU membership it would have to seek deletion, by referendum, of the article inserted on entry in 1972. There are other countries with written constitutions which can be modified without a popular vote, usually by some kind of parliamentary supermajority.

Britain is completely different. There is no written constitution at all and parliament is completely sovereign. The UK joined the European Economic Community without a popular vote, could leave without a popular vote, could abolish the monarchy, invade France, expel Scotland or opt for a decimal calendar. Constitutionally a referendum in the UK is always a war of choice, never a war of necessity. The referendum last week was only the third such national poll in British history and the first to go against the incumbent prime minister.

Britain’s first-ever national plebiscite was called by Harold Wilson, the Labour premier, in 1975, not to approve British entry to the EEC but to confirm the entry decision already taken and implemented by simple majority of the sovereign parliament. Wilson called a referendum to heal a rift on Europe in his party, as did David Cameron this time round. Wilson won a comfortable 2 to 1 majority with all main political leaders, including Margaret Thatcher, campaigning in favour. He was widely criticised for this unprecedented constitutional adventure but it was low-risk – there was little likelihood that the electorate would vote for exit. The cost of the ‘wrong’ result was also low – Britain had been in the EEC only a few years, it was a much more limited organisation than the EU has since become and exit would have been a major nuisance rather than a major crisis.

The second also produced a vote against change. When the Conservatives formed a coalition with the Liberal Democrats in 2010 they promised their partners a referendum on the voting system. It was opposed by both Conservatives and Labour and duly defeated 2 to 1. The ‘wrong’ result would again have been no big deal, a limited move towards proportional representation.  Britain’s first two national referenda thus shared some key features. The Prime Minister who initiated each had good reasons to expect a win, and the stakes were not too high. Defeat would hardly have ended their political careers.

The third referendum shared none of these features. David Cameron’s decision was announced in January 2013 at a time when his party trailed Labour in the polls and faced vote leakage to the Eurosceptic UK Independence Party of Nigel Farage. Both his Liberal Democrat partners and the Labour party favoured continuing in the EU and opposed the holding of a referendum. At the time a YouGov opinion poll showed that 40% would vote to stay in the EU with 34% voting to quit and 26% undecided. Cameron promised to hold the referendum should he win a Conservative majority at the election in 2015 which he duly did. It was never likely to be anything but close.

Moreover the European Union had become far more than a free trade zone, with extensive and detailed common policies covering energy, transport, environment, worker protection and a single market in financial services. The international economy had not recovered from the worst downturn since the Second World War. The consequences of withdrawal from the EU by a key member were unlikely to be minor, never mind predictable or easily managed. Cameron’s decision in January 2013 has been described, accurately, as a roll-of-the-dice, a high-stakes gamble driven by concerns about internal party management. His decision to resign was the correct one: he has landed Britain, Europe and indeed the world economy in an unholy mess at the worst possible time.

He is not the first of Europe’s leaders to place domestic political concerns ahead of economic prudence. The faulty design and subsequent mismanagement of the Eurozone owes much to short-sightedness in Germany. The next domino to drop could be in Italy, for long the least successful of the major Eurozone economies. The government plans a referendum in October on constitutional reforms supported by mainstream opinion. But it may be lost. It provides an opportunity to disgruntled voters to give the establishment another kicking in an over-indebted country with a dodgy banking system and could end the political career of Prime Minister Matteo Renzi. More importantly for Ireland, it could spark a terminal crisis for the common currency. The anger of European leaders with the United Kingdom’s referendum gamble is entirely understandable.