Category: Economic Performance

Selling State Assets

Paul Sweeney criticises the idea of selling State-owned entities in today’s Irish Times: you can read his article here.   Paul Sweeney’s contribution is incomplete. In particular, he does not fully address some key issues (I raise these points as questions, without having answers)

  • Liquidity.  If a government faces funding risk, selling valuable-but-illiquid assets may reduce the risk of a funding crisis.
  • Ownership and firm performance.  While Paul Sweeney highlights the potential inefficiencies of privatised firms, he does not have much to say about the possible inefficiencies of State-owned firms where the management or workforce may have objectives that are not fully aligned with the common good.
  • Regulation.  Where monopoly power is a severe problem,  regulation is necessary. Can the Irish regulatory system be made more effective to ensure that sectors inhabited by monopoly-type firms deliver efficient outcomes? Does the identity of owners affect the effectiveness of regulation?

Paul Sweeney also highlights the increasing importance of State-owned firms in Asia, Russia and Latin America. It would be good to know the exact lessons to be drawn for countries such as Ireland from this development.

Fiscal Free Lunches

Karl Whelan makes a convincing case against the idea that a fiscal stimulus would lower the deficit (see Unpleasant Fiscal Arithmetic).    But there is another fiscal free lunch idea that I see as even more influential—and probably just as wrong.  This is the idea that discretionary fiscal contractions increase economic growth, which in turn reinforces the improvement in the deficit.   The key mechanisms behind what is sometimes called the “German view” are Ricardian-type expectations effects and a reduced risk premium on borrowing (the latter recently emphasised in ESRI Recovery Scenarios paper).    I doubt that there are many Irish economists who would claim to hold this view if pushed.  However, it seems to me to be implicit in the widely held view that a more front-loaded fiscal adjustment will speed economic recovery. 

Continue reading “Fiscal Free Lunches”

The Future of Finance: The LSE Report

The LSE recently brought together a group of distinguished experts to study the future of finance  – the e-book and individual chapters can be downloaded here.

IMF Article IV Report for 2010

I haven’t yet read it but I thought I’d alert readers that the IMF’s Article IV report for Ireland for 2010 is now available online here. The “Public Information Notice” (i.e. press release) is available here.

Daft House Price Report: 2010:Q2

The latest Daft house price report is now available here. Ronan Lyons discusses the report here and also discusses the need for a property tax.

The report shows asking prices down 36% from peak. Since asking prices during the boom tended to be less than purchase prices while the opposite seems to be the case now, I reckon it’s fair to view this figure as consistent with an actual decline in prices of over 40% since peak.

Are we near bottom? Nothing ever stops real estate vested interests from assuring everyone that things are stabilising and it’s a great time to buy. However, I reckon we still have further to go. The recent Honohan report informed us on page 83 that the (quite sensible) McQuinn-O’Reilly model indicated that house prices were 33% over-valued in 2007:Q2 relative to what could be justified by disposable income and mortgage rates.

This would justify a decline of one-third in house prices even if incomes hadn’t changed. However, nominal GNP has dropped by about 17% since house prices peaked while income tax rates have been increased. Headline mortgage rates are lower now for those on tracker mortgages but the more relevant measure is probably the cost of financing for the marginal new buyer and these are a good bit higher. One also has to factor in that people will need to make allowance for rate hikes to come.

Taken together, I think a peak-to-trough decline of about 60% wouldn’t be too surprising.

Update: John the Optimist reminds me that an overvaluation of 33% corresponds to 25% decline (100/133) which is fair enough. However, to be honest, I was being deliberately understated in the original post. Add in 17% for the decline in GDP, 10% for the effect of increased tax rates, and who knows what for tight mortgage credit and rate hikes to come and one can easily justify greater than 60%.