Grant me microeconomic efficiency, but not yet

It has always struck me that the first order consequence of making it easier for firms to fire people in the middle of a depression would be that…firms would fire more people. And it has never struck me that this would be desirable.

Now Gauti Eggertsson, Andrea Ferrero and Andrea Raffo have a new paper pointing out that at the zero lower bound, where monetary policy cannot offset the deflationary impact of structural reforms that would otherwise be desirable (lowering mark-ups in product and labour markets), such reforms can be contractionary (by generating expectations of deflation and raising real interest rates).

All of which seems obvious once you think about it, but it needed someone to point it out. And this is a problem for a continent whose leaders refuse to take the demand side of the economy seriously, and are hoping that “structural reforms” will obviate the need for them to rethink their macroeconomic strategy.

Another chance for Paul Krugman to cite St Agustin!

(H/T Eurointelligence, which also links to a report on how the Greek government is saying that there will be no more austerity next year, even under a third bailout. This crisis is not yet over.)



Fitch Report: Property Markets Remain Soft, Irish Borrowers on Strike

Namawinelake has a link to the new Fitch report on global property markets, including Ireland which gets considerable attention in the report. The Irish picture is mixed with some positive signals (affordability ratios have become more normal) and other negative signals (continued bank distress limits future mortgage lending).

Fitch also highlights the unusual behaviour of Irish arrears, and connects this to the Irish policy framework.

Irish Borrowers on Strike: Despite economic stabilisation, Irish arrears continue to trend upwards. Fitch believes this to be partially driven by policy framework changes. Lenders are constrained from large-scale repossessions, dis-incentivising borrowers from paying their mortgages. In addition, borrowers in arrears are also likely to benefit from significant debt write-offs when personal insolvency legislation becomes effective.”

Energy could be so much cheaper

Gas interconnection

The Celtic Tiger died five years ago. The economic crisis hurts. The end of the pain is not in sight. So you would think that the government would do everything it can to keep prices low. For energy prices, you would be wrong.

Natural gas is an important fuel for heating homes and cooking. It is also used to generate electricity. The gas used in Ireland comes via two pipelines. Bord Gais Eireann (BGE) owns and operates both interconnectors. BGE cannot abuse its market power because the Commission for Energy Regulation (CER) regulates the price. Each year, total costs are divided by the volume of gas transported. BGE is allowed a modest profit.

This simple rule was fine when there was one source of gas only. That will change. Eventually, the gas from Corrib will be brought onshore. There are advanced plans to build an Liquefied Natural Gas (LNG) terminal in Kerry. With LNG, Ireland would no longer depend on the European market, where gas is dear. Gas is cheap in North America because of the abundant shale gas. As gas transport is expensive, it would be cheaper still to exploit the Irish shale reserves.

The costs of interconnection with Great Britain are largely fixed. If another source of gas captures a small part of the market, BGE will spread its costs over a smaller volume. That is, BGE would raise its price. The competition would thus capture a large share of market, and be able to raise its price at the same time. BGE would be forced to raise its price again.

The CER anticipated this and has changed the price regulation. The CER should be praised. It is not often that a government agency locks the door before the horse bolts. However, the new regulations are not good for consumers.

In the future, the right to transport gas over the interconnectors will be auctioned. There is overcapacity now and probably in the future, so the highest bid will not be very high. Therefore, there will be a reserve price. And if BGE still makes a loss, a levy will be imposed on all importers and producers of gas. This levy will be passed on to consumers.

This arrangement guarantees the profits of BGE. It drives up the price of gas and electricity. And because it hurts would-be importers and producers of natural gas, competition is hampered and prices go up again.

Indeed, the Shannon LNG project was stalled earlier this week, primarily because of the new price rules. The CER in effect shielded BGE from competition at the expense of anyone who buys gas or electricity.

BGE is largely state-owned, but a minority share is owned by employees, who will directly benefit from the new CER regulation. The exchequer could benefit too, but state-owned companies in Ireland have a poor track record of paying dividends. Instead, profits are diverted to vanity projects of managers and politicians.

It would therefore be better if BGE gradually writes down the capital invested in the gas interconnectors, and compete in the market on the basis of its variable costs only. Gas and electricity would be cheaper.

The new pricing rules are not yet set in stone. It will be a few years before households will pay more for their gas and electricity. People will complain bitterly to Pat Kenny and #gasprice will trend on Twitter. But then it will be too late to change the rules. The CER should reconsider now.

Atlantic oil

After a long absence, oil exploration companies returned to Irish waters. There is oil in the Atlantic. Now that experience is growing with the ultra-deep oil off Brazil and Angola, there is increasing confidence that the oil in the Irish Atlantic too may be commercially exploited – although the water is colder and choppier.

This is good news. Oil exploitation brings well-paid jobs and welcome royalties. It is early days though.

Some commentators and politicians have jumped to the conclusion that there is an immense richness under the Irish seabed that is being plundered by foreigners, and have called for punitive taxes.

Fact is, a few companies are exploring for oil. They are losing money at the moment, and it will be ten years or more before they would see a return on this investment, if any. There are plenty of other oil provinces that look just as promising as Ireland. Shell’s troubles in Mayo are well known in the international oil industry, and the story of Shannon LNG is making the rounds. Talk of high taxes, even nationalization, may well scare off the next round of would-be investors in Irish oil. The goose will be slaughtered before it has laid its first egg, perhaps golden.

Wind for England

England has a problem. Power plants are aging, and no one is willing to invest in new ones. The European Commission has imposed stringent targets for renewable electricity. The plan is now to build a great many wind turbines in the Irish midlands, and transmit the power to England.

The wind blows harder in Ireland than in England, but this does not justify the extra cost of long distance transmission. Rather, locals effectively use the English planning regulations to block new wind turbines.

Transmission will be over a dedicated grid. EirGrid would not have to invest even more than it already does, and English wind would not be eligible for the generous subsidies on Irish wind.

So what does Ireland get out of this? Some construction jobs, fewer maintenance jobs, and more wind turbines to look at. It seems that England struck the better bargain.

Wind power should pay royalties, just like oil and gas pay royalties. England would contribute money to the Irish exchequer if they still want to go ahead.

Royalties would make wind power more expensive in Ireland too, another reason to switch to cheaper gas for power generation.

Paul Hunt had excellent comments on an earlier version.

An edited version (part 2, 3) appeared in the Independent. Without byline online but on paper there is apparently a picture and a wrong email address.

UPDATE: John Mullins, CEO of BGE, disagrees.

Gas interconnection, decision made

I blogged earlier about the draft decision of the CER on the pricing rules for the gas interconnectors.

The decision is now final. I find the document hard to read, because it assumes that you are familiar with the draft decision, and it rambles between the actual decision, decisions that might have been, justification of the decision, and responses to comments to the draft decision. This is what I think was decided:

  1. The interconnector will be moved, legally, from offshore to onshore.
  2. Interconnector capacity will be auctioned.
  3. There is a reserve price for the auction.
  4. The reserve price is the long-run marginal cost.
  5. If the auction does not cover the costs of the pipe-formerly-known-as-the-interconnector, the difference will be split over ALL gas suppliers.

I am not sure whether there will really be an auction, or whether the reserve price will always hold.

The contentious point, however, is the long-run marginal cost. This implies that Bord Gais will have a guaranteed income on its assets.

Instead of forcing BGE to take a hit on what might turn out to be a bad investment in interconnection, the CER forces gas consumers to make up the difference.

This is wrong in principle. It is a transfer from gas users to the owners of BGE. And it distorts competition.

New issue/re-launch of journal Administration available

A new issue of the journal Administration is out today.

To mark the journal’s ‘re-launch’, this issue is available in full for free online here.

As many readers will know, Administration is published by the Institute of Public Administration, and has been a key locus for research-led debate on economic development, and of course on wider developments in the public sector and society, since 1953.

The current issue includes prefatory articles from the incoming editor Muiris MacCarthaigh, who `sets out his stall’, and from Tony McNamara, who has edited Administration since 1989. These will be of interest no doubt to a wide readership and to various contributor bases, (e.g., from academic, practitioner and civil society perspectives).

As the contents indicate, the focus of this issue is on public sector reform, with an opening piece by Brendan Howlin TD, Minister for Public Expenditure and Reform. I guess that Ministers historically have been uneven in how or whether they contribute to debate at this level; perhaps this is a good cue to them, and to politicians more generally, to get their quills out.

Contents
Notes from the Editors:

  • “Renewing public administration research and practice” by Muiris MacCarthaigh
  • “A final word” by Tony McNamara

Articles:


  • “Reform of the public service” by Brendan Howlin, TD
  • “Progress and pitfalls in public service reform and performance management in Ireland” by Mary Lee Rhodes & Richard Boyle
  • “Regulating everything: From mega- to meta-regulation” by Colin Scott
  • “Trust and public administration” by Geert Bouckaert
  • “The reform of public administration in Northern Ireland: a squandered opportunity?” by Colin Knox

Reviews:

  • Third report of the Organisational Review Programme
  • The challenge of change: Putting patients before providers

www.ipa.ie/administration