Jim O’Leary has an op-ed about the Local Property Tax in today’s Irish Times, based on his recent report, How (Not) To Do Public Policy: Water Charges and Local Property Tax, published by the Whitaker Institute at NUI Galway. The report was launched at a conference last month at NUI Galway featuring senior policymakers, public servants, academics and other experts who evaluated the strengths and weaknesses of the policy-making process in Ireland with a view to suggesting how the quality of policy-making might be improved. Highlights from that conference, including videos of Jim’s presentation and Robert Watt’s keynote speech as well as audio of the panel sessions can be found here on the Whitaker Institute website.
President Higgins delivered a lecture at the University of Melbourne last week. It was well received. Given the content, I thought readers of this blog might like to listen to it. The President also gave a podcast which summarises some of his views on economics here.
The suspension of belief is commonly needed for science fiction. Most space dramas require alien races to speak English or the existence of some form of instantaneous universal translator. It now seems that something similar is required when moving in fiscal space. Fiscal space is the money available for new measures while achieving minimum compliance with the rules. Lots of words are being used to describe this but can we tell what they actually mean?
My latest Critical Quarterly column, on the political upheavals of 2016, is available here.
The world is awash with populists. From Ireland’s independents to President Duterte of the Philippines, from Germany’s anti-immigrant AfD party to Norbert Hofer of the far-right Freedom Party of Austria, from Ukip and Jeremy Corbyn in Britain to Donald Trump in the US, populists are on the rise. And we’re not talking just a few random demagogues here, though personality does go a long way. (Trump-related Pulp Fiction pun intended, by the way.)
We are seeing a rise in populist parties getting and holding onto power in several European countries including Finland, Hungary, Latvia, Lithuania, Norway, Ireland and Switzerland. Iceland is about to elect the Pirate Party (no really) to power. The French Front National may well take power in France, riding a wave of anti-immigrant sentiment there.
Populists come from both sides of the political spectrum: Greece’s Syriza party and Spain’s Podemos party consider themselves of the left, while Germany’s AfD and France’s Front National are on the far right.
So it’s a problem. Old, established, centrist parties have lost their grip on power – spectacularly so in Greece – while newer parties are standing mostly on a basis of what they are not – Corbyn is not a Blairite, Marine Le Pen is not Nicolas Sarkozy, and so forth. The 32nd Dáil contains 19 TDs who are nominally ‘independent’, with 12 more in left or far-left groupings. Ireland does not produce far-right TDs that often, though it does produce some very right-wing policies from time to time.
It’s just over a week since Commissioner Vestager announced the state-aid ruling on the tax treatment of Apple in Ireland. We only have the press release and the Commissioner’s statement to go by so it’s still too early to be definitive on what the Commission are actually doing. It could be months before the full ruling is available here but that doesn’t mean we can’t have a stab at what might be going on.
There has been a lot of reaction to what the ruling means for Ireland’s Corporation Tax regime. While there has been massive reputational damage (possibly irreparably so) the ruling does not have any implications for Ireland’s Corporation Tax rate or even for any of the rules that Ireland applies to Corporation Tax.
Unlike previous instances the Commission is not looking for any change in Ireland’s Corporation Tax regime. In this instance looking for changes would likely have been overreach but that is not what the Commission is seeking. Nor is the Commission seeking to retrospectively impose alternative transfer pricing standards which was a central focus of the recent White Paper from the US Treasury. If the Commission’s case required a change of rules or the application of new standards it would have had little hope of standing up to an appeal.
A fortnight after the British referendum on EU membership, Britain is still in turmoil. Some of the negative lessons are all too clear: don’t try to solve party political problems by invoking existential issues; referendums are volatile and uncertain; if you must have one, get a crack team together first. But, as weary politicians are fond of saying, we are where we are.
So what is likely to happen now?
There are different views about what course of action the referendum requires; but there are also very different views about what it might mean to ‘take back control’, which was the core theme of the campaign.
Britain has voted to leave the European Union (EU), or more accurately, England has voted to leave. The majority in Scotland, Northern Ireland and Gibraltar voted to remain. The opinion polls, the bookies and the markets did not predict this outcome. The mood of the nation, it would seem, is becoming increasingly difficult to measure. Or is it?
There is a lot of data suggesting that ‘immigration’ was the dominant concern for those who voted to leave the EU. This should not be too surprising. In the latest Eurobarometer data, immigration was cited as the main concern of UK citizens, alongside Germany and Denmark.
According to YouGov data, which is more revealing, income was the best predictor as to whether someone intended to vote to leave or remain. Basically, the lower your income, the more inclined you were to vote leave. Some have referred to this category as ‘those with lower education’. But let’s be honest, it’s called social class.
Another predictor as to whether someone was more inclined to vote leave was age. Younger, more liberal voters, were much more supportive of remaining in the EU. The only problem with this category of voter, is that they failed to turn out en masse to vote. According to the data, electoral turnout among 18-25 year olds was fairly weak. Older conservative citizens were much more inclined to vote.
The precise data on how particular communities and constituencies across England voted is perhaps most revealing. The poorest twenty districts in England overwhelmingly voted to leave the EU. Or to get at it another way, according to this report, those areas with the most stagnant wages are the same communities with the most anti-EU attitudes.
What can we infer from all of this? What should EU policymakers infer from all of this?
The core inference is that England is a deeply class divided society, and that the poorest in England are increasingly venting their anger at immigrants and the EU. Further, and not captured in the Brexit data, right-wing political parties are now mobilising working class England.
Those same electoral constituencies most likely to vote leave, and with the most stagnant wages, are the same constituencies most likely to vote for the far-right populist UKIP party. In addition, they are the same people most likely to be discursively conscripted into the anti-immigrant lies of England’s infamous red-top tabloid press.
Class politics in England increasingly overlaps with enthno-nationalism, whereby identity and immigration, rather than economic self-interest takes precedence in shaping electoral behaviour.
In political science, there is a large literature on economic voting. One of the core findings of this literature is that in times of crisis and economic austerity, voters punish incumbent governments. This is partially what happened in the UK. Disenfranchised working class voters punished the Tories, liberal elites, the EU and the city of London.
However, the economic voting literature, whilst useful in describing why voters punish government, tells us very little about who these voters turn to, when expressing their social grievances.
In theory, those voters most affected by austerity, unemployment, underemployment and precarious work, would turn to parties on the left and those parties committed to reducing economic inequality. Most research, particularly within Europe, however, suggests, working class voters are turning to the ethno-nationalist right.
To put it simply, those affected by austerity and right-wing economic policies don’t necessarily vote in their class interest; they increasingly vote in their ethno-nationalist interest. UKIP’s economic policies are aggressively libertarian, not social democratic.
Economic liberalisation, rising inequality, and the complete free movement of peoples has social and electoral consequences. Societies will react to this disruption in different ways. Nationalism provides a sense of meaning, community and belonging, to those most affected by liberalisation. Far-right parties, such as UKIP, know this.
This realisation, however, does not seem to have seeped through to policymakers in the EU or Germany, who, despite a near complete destabilisation of the parliamentary party system in Southern, Eastern and Central Europe, remain committed to their failed neoliberal economic adjustment of austerity induced cost competitiveness.
Most political science research in the aftermath of the great recession increasingly suggests that not only are electorates losing trust in the EU, but that the support for national democracy, in general, is in decline. When the politicians change, yet the policy remains the same, voters lose trust in the institutions of liberal democracy.
The question for national leaders in the European Council, and policymakers in the European Commission, is whether they need to wait for the election of Trump in the US, Le Penn in France, or the Five Star Movement in Italy, to realise that their economic policy response to the crisis has failed, and must fundamentally change?
Polities disintegrate when they begin to loose control of their external borders and their internal legitimacy. Or, as W.B Yeats poignantly wrote in 1919, “things fall apart; the centre cannot hold; mere anarchy is loosed upon the world“. The UK and the EU are now faced with the potential for disorderly disintegration. Political scientists are accustomed to thinking that ‘more EU integration’ is inevitable. This is wrong.
Yeats wrote this after WW1, which coincided with the end of the first wave of free-market globalisation, when economic inequality peaked, much like today. In many ways Brexit can be interpreted as Europe’s Polanyi moment. It was a counter-reaction to a political economic system that is perceived to be designed in the interest of the comfortable elite.
It would be naive to assume that the popular reaction to rising inequality, precarious work, economic uncertainty, liberal elites and fear of immigration will lead to something politically progressive. The wave of anti-immigrant, nationalist sentiment, sweeping England, clearly shows that it won’t. France could be next. The EU should not wait to find out.
Via Commenter @DOCM:
The final report of the Oireachtas sub-committe on reform is now available here.
It represents a major, even historical, change, including the introduction by 2017 of an IPBO, which we discussed here.
There remain, however, a number of major ambiguities e.g. no definition of the “budgetary cycle”, lack of clarity in the role of the Budget Oversight Committee (BOC) and its relations ship with the the sectoral committee “shadowing” Finance, PER and the Taoiseach’s department and, in particular, the other sectoral committees (page 9) “Committee also to consider option where Departmental Estimates would be considered by sectoral committees which would make their views known to Budget Oversight Committee for its consideration of aggregate position.”
In short, plenty on the form but very little in the matter of the substance of the involvement of the Dáil in deciding the levels and allocation of expenditure and taxation. It seems. however, that the split between PER and Finance will be between these two issues cf. the remarks by the Minister of Finance:
“The Spring Economic Statement will become a summer statement and it should be ready by June. There will be a full debate in the House. I am providing all the text papers to the finance committee so that there will be a full debate on taxation at that point, in advance of the budget.”
I notice that there is no election thread, which makes sense given that we were probably all fed up with the campaign before it even began. And I’ve nothing original to say on the subject either. But there probably should be an election thread, and if there is to be one, someone has to kick it off by saying something. So, in that spirit: do we all agree that (a) the Irish economy is now recovering, and doesn’t need further stimulus right now; (b) that the Irish economy has proved itself over previous decades to be unusually volatile; (c) that the international outlook right now suggests that there are risks on the horizon; (d) that the Eurozone is a very dangerous place to be anyway, if you are a small country; (e) that broad tax bases are preferable to narrow tax bases; and (f) that given all of the above, arguing for the abolition of the USC or water charges (water charges, as opposed to Irish Water) is grossly irresponsible, and should suffice to disqualify a party from being taken seriously as a “safe pair of hands”?
UCD College of Social Sciences and Law will host the Garret FitzGerald Lecture and Autumn School on Monday 19th October, in the UCD Sutherland School of Law. The daytime School (from midday) will focus on the significance of the social sciences. The evening Lecture will be delivered by Professor Cass R Sunstein,Harvard Law School, on the theme ‘Is Behavioural Science Compatible with Democracy?’. More details and bookings here.
Call for Papers: Macroprudential regulation: policy dynamics and limitations
A joint academic-practitioner conference with the theme Macroprudential regulation: policy dynamics and limitations will be held in Dublin, Ireland on Friday September 4th, 2015, organized by the Financial Mathematics and Computation Cluster (FMC2), the Department of Economics, Finance & Accounting at Maynooth University and the UCD School of Business at University College Dublin.
Macroprudential regulation is fairly new, and there are many unanswered questions. Can macroprudential constraints on credit be reliably attuned with the business cycle and/or credit cycle? Are fixed constraints on credit safer and more reliable than attempts at dynamic anti-cyclical ones? Should regulators take account of market or regulatory imperfections, such as in the construction sector, in setting constraints on credit growth? Is macroprudential control by an independent central bank consistent with the democratic accountability of government economic and social policies? Potential topics include:
* Business cycles, financial cycles, and the feasibility of dynamic macroprudential control
* The desirability and effectiveness of LTI and LTV limits on mortgage lending
* Democratic accountability and central bank independence
* Modelling house price movements and household debt and their interactions
* Controlling credit growth and credit flows in the Eurozone
* International case studies of macroprudential regulation.
* Assessment of macroprudential credit-restricting policies
Please send papers or detailed proposals by June 15th, 2015 at the latest to Irene.firstname.lastname@example.org; all papers must be submitted electronically in adobe pdf format. There will be both main conference sessions and poster sessions. We will consider proposed contributions to the poster session until 31st July. The academic coordinators for the conference are Gregory Connor and John Cotter, who can be contacted at Gregory.email@example.com or John.firstname.lastname@example.org.
There are no submission fees or attendance fees for the conference. We are grateful to the Science Foundation of Ireland and the Irish Institute of Bankers for their generous support of this conference. The Financial Mathematics Computation Cluster (FMC2) is a collaboration between University College Dublin, Maynooth University, Dublin City University and industry partners, with support from the Science Foundation of Ireland.
Scott Sumner provides a valuable discussion of the shifting ideological biases of American economists in this piece.
There is lots of excitement this morning about a story in the Financial Times about the European Commission state-aid investigation into Apple’s tax arrangements in Ireland. The story first appeared online under the headline “Apple hit by Brussels finding over illegal Irish tax deals”. When put on the front page of today’s print edition the headline was “Apple hit by Brussels findings over Irish backroom tax deals”. The story begins:
Apple will be accused of prospering from illegal tax deals with the Irish government for more than two decades when Brussels this week unveils details of a probe that could leave the iPhone maker with a record fine of as much as several billions of euros.
Preliminary findings from the European Commission’s investigation into Apple’s tax affairs in Ireland, where it has had a rate of less than 2 per cent, claim the Silicon Valley company benefited from illicit state aid after striking backroom deals with Ireland’s authorities, according to people involved in the case.
The headline and story resulted in widespread opprobrium from the usual sources being directed at Ireland. The reality is that the headline is nonsense and the presentation of the story in the text was misleading (at best). Anyone with even a summary understanding of the issue would immediately see that, but there are plenty who love jumping to and jumping on adverse conclusions about Ireland’s corporation tax regime.
The errors include:
- there are no “fines” in state-aid cases
- the case does not involve “billions of euros”
- there are no “preliminary findings”
- there is no “rate of less than 2 per cent”
And that’s just the first two paragraphs!
At present Apple pays very little corporate income tax on its profit earned on sales made outside the US. These profits will be taxed based on the source-location of the risks, assets and functions from which the profits are derived. The risks, assets and functions that generate Apple’s profits are mainly in the US and under current rules the US is granted the taxing right for the bulk of Apple’s profits. The fact that the US allows Apple to defer the payment of this tax until the profits are transferred to a US-incorporated company is a matter for the US.
Sometimes we tend to use the word “repatriate” when it comes to these profits. But Apple’s non-US profits don’t have to be repatriated to the US; they go there directly and there is no stop-off in Ireland. Yes, Apple’s non-US profits are accumulated in Irish-incorporated companies but almost everything about these companies happens in the US. Using US rules, Apple was able to create this situation and maintain that these companies did not have a taxable presence in the US. The EC investigation will examine none of the headline issues about these companies highlighted in the US Senate Report last May.
The EC can only investigate the taxing of activity that happens in Ireland and decisions that are made in Ireland. In its June announcement, the EC said the Irish element of its investigation relates to:
the individual rulings issued by the Irish tax authorities on the calculation of the taxable profit allocated to the Irish branches of Apple Sales International and of Apple Operations Europe;
It is the profit attributed to just the Irish branches of the companies that is in question not the entire profits of these companies. In his opening statement to the US Senate hearing last May, Sen. Carl Levin (D) said: Continue reading “Barking up the wrong Apple tree”
Many readers of Irish Economy are likely to be aware of a project to rethink the teaching of Economics, linked to the Institute for New Economic Thinking, and organised by a committee chaired by Professor Wendy Carlin of UCL. Some people associated with this blog, including Kevin O’Rourke, are also involved in this work.
On my preliminary and (so far) partial reading of ‘The Economy’, it achieves its goal of being strikingly different to the standard first-year textbook. It places at the centre of the story familiar ideas that students and the public expect to feature in Economics and understand better through Economics, including capitalism, technology, living standards, the environment, institutions, and property rights before turning to the more abstract aspects of microeconomics. All the bells and whistles of digital publication are there too including hyperlinks to many of the readings. And of course it’s all freely available. The organisers are seeking user (student and faculty) feedback via a Facebook page and it seems there is supplementary material to follow in due course.
On Thurs., 29th of May, a special seminar on Social Investment in Europe will be hosted by the Department of Sociology/ NIRSA, Political Economy and Work Cluster and the New Deals in the New Economy project. The seminar will run from 9.30 to 1.30 and will be followed by the launch of a new MA in Sociology (Work, Labour Markets and Employment) by Minister Joan Burton.
‘Social Investment’ focuses on investing in people’s skills and capacities and supporting them to participate fully in employment and social life (EU Commission). Does ‘social investment’ lead to a renewal or an erosion of the welfare state? Will ‘social investment’ support economic and social recovery?
The event will start at 9.30 with registration and coffee followed by the seminar at 10.00 in the Phoenix building on the North Campus in NUIM keynoted by Prof Anton Hemerijck, VU University Amsterdam and Prof Brian Nolan, UCD, and chaired by Prof. Seán Ó Riain.
Following a break for coffee there will be a roundtable discussion with: Rossella Ciccia (NUIM), Tom Healy (NERI) and Rory O’Donnell (NESC), chaired by Mary Murphy (NUIM).
Please register for seminar by emailing email@example.com before May 26th, 2014
The economic rationale for the new Insolvency Service of Ireland is well-founded in economic theory. It hinges on the concept of Pareto improving bargains. The idea is that a debtor, with the guidance of a personal insolvency practitioner, can construct a Pareto improving bargain to everyone’s benefit: the debtor, the lender, and society as a whole.
Consider a debtor with unsustainable debt who, to avoid the personal and social costs of bankruptcy, goes to a personal insolvency practitioner (PIP). The PIP objectively examines the debtor’s situation and suggests a payment scheme which offers only part-repayment of loan value. Let the offered proportion of loan value be denoted by OFFER where OFFER < 1. If OFFER = 1 then the debtor is not insolvent since he/she can afford full-value payment and the PIP has no role. The PIP describes the offered repayment plan to the lender (or lenders).
The lender knows that the alternative to a personal insolvency plan is bankruptcy for the borrower, and that bankruptcy entails large financial costs, most of which will be borne by the lender. The uncertain proportion of loan value received by the lender after accounting for bankruptcy costs will be denoted by RECOVER. The debtor will accept the PIP offer if it provides higher expected value of total payments:
OFFER > E[RECOVER], (A)
where E[ ] denotes the expected value.
The economic rationale for this process is that it can make all three interested parties (debtor, lender, and society) better off. The debtor avoids the personal/social costs of bankruptcy; the lender gets a loan recovery amount which is higher than the expected bankruptcy-cost-adjusted amount received otherwise. Society avoids administrative bankruptcy costs and gets the benefits of a debtor freed more quickly from debt distress. Of course the PIP has lots of other duties (counselling the debtor, dealing with multiple lenders, administrative duties) but dealing with equation (A) is very fundamental.
The banks understand equation (A); the politicians understood equation (A) when they set up the enabling legislation. Does anyone in the Insolvency Service of Ireland understand equation (A)? It is fundamental to the Service performing its important task competently.
The Primetime news show recently highlighted a young couple whose PIP offer was rejected. I do not want to focus particularly on the individual case, keeping in mind the adage “hard cases make bad law.” According to the discussion in the show, the couple owed a mortgage-related debt of €276,000 and their PIP constructed an alternative loan repayment of €2,000. That is, relying on the numbers as discussed in the show, they made an offer of:
OFFER = 2,000/276,000 = 0.0072.
It is important for clarity to note that this does not denote a concessionary interest rate of 72 basis points; rather, 72 basis points is the total proportion of repayment including all principal repayment. Unsurprisingly, the PIP offer was rejected by the lender.
One could argue that the bank could just forgive the couple the loan debt as a gift (skip the 0.0072 partial payment which is too miniscule to consitute a meaningful debt settlement arrangement). That is, the insolvency system can be brought in as a useful component of parish pump politics, in the good sense, of parish pump politics as using the political system to create unfunded sources of benefits for local causes. There is certainly a case for doing this, but it was not actually the intention of the legislation. Doing so would greatly increase the effective political power of the ISI as controller of this new source of unfunded social benefits.
A technical feature of equation (A) is a convexifying effect for OFFER proportions close to zero. OFFER is known with certainty whereas RECOVER is a random proportion. Since RECOVER has a lower bound at zero, Jensen’s inequality means that the expected value of RECOVER is much higher than its maximum likelihood value in the region near zero. Is seems extremely difficult to create a scenario where E[RECOVER] could fall as close to zero as 0.0072.
The head of the Insolvency Service of Ireland was on the Primetime show, but he did not seem to be familiar with equation (A), or did not consider it relevant. He did seem to understand that if the ISI had the power to force deals without worrying about (A), then parish pump political considerations would give the agency much greater power. Yet equation (A) was extremely relevant and the absence of any appropriate analysis associated with it detracted considerably from the clarity of the discussion. The staff at the Irish Insolvency Service could benefit from the 30-minute lesson in the economic rationale for their agency’s existence.
[I added a few edits to correct typos, respond to comments (thanks to Sarah Carey and to other commenters who induced me to think more carefully). There may be some time-inconsistencies between the earlier comments below and the later edits.]
Organised jointly by the ESRI, Dublin Economic Workshop, UL, and UCD’s Geary Institute, this year’s policy conference (see previous years here and here) will be on the theme of economic policy after the bailout. This conference brings policy makers, politicians, civil servants and academics together to address this question of national importance. The venue will be the Institute of Bankers in the IFSC. (Click here for a map).
Date: 31st January 2013
Venue: Institute of Bankers, IFSC
9:15 – 10:45: Plenary: The Impact of the Crisis on Industrial Relations
Chair: Aedín Doris (NUI Maynooth)
- Kieran Mulvey (Labour Relations Commission) Prospects for Pay and Industrial Relations in the Irish Economy
- Shay Cody (IMPACT Trade Union) “The impact of the crisis on industrial relations – a public service focus”
- Michelle O’Sullivan/Tom Turner (University of Limerick) “The Crisis and Implications for Precarious Employment’”
10.45-11.15: Coffee Break
11:15 – 12:45: 2A. Migration and the Labour Market
Chair: Philip O’Connell (UCD Geary Institute)
- Piaras MacÉinrí (UCC) ‘Beyond the choice v constraint debate: some key findings from a recent representative survey on emigration’
- Peter Muhlau (TCD) “Social ties and the labour market integration of Polish migrants in Ireland and Germany”
- Alan Barrett (ESRI & TCD) and Irene Mosca (TCD) “The impact of an adult child’s emigration on the mental health of an older parent”
2B. Economics: Teaching and Practice
Chair: Ronan Gallagher (Dept of Public Expenditure and Reform)
- Brian Lucey (TCD): “Finance Education Before and After the Crash”
- Liam Delaney (Stirling): “Graduate Economics Education”
- Jeffrey Egan (McGraw-Hill Education) “The commercial interest in Third Level Education”
12:45 – 1:45: Lunch Break
1:45 – 3:15: 3A. Health and Recovery
Chair: Alex White, TD, Minister of State
- David Madden (UCD) “Health and Wealth on the Roller-Coaster: Ireland 2003-2011”
- Charles Normand TCD) and Anne Nolan (TCD & ESRI) “The impact of the economic crisis on health and the health system in Ireland”
- Paul Gorecki (ESRI) ‘Pricing Pharmaceuticals: Has Public Policy Delivered?”
3B. Fiscal Policy
Chair: Stephen Donnelly TD
- Seamus Coffey (UCC) “The continuing constraints on Irish fiscal policy”
- Diarmuid Smyth (IFAC) ‘IFAC: Formative years and the future’
- Rory O’Farrell, (NERI) “Supplying solutions in demanding times: the effects of various fiscal measures”
3:15 – 3:30: Coffee Break
3:30 – 5:00: Plenary: Debt, Default and Banking System Design
Chair: Fiona Muldoon (Central Bank of Ireland)
- Gregory Connor (NUI Maynooth) “An Economist’s Perspective on the Quality of Irish Bank Assets”
- Kieran McQuinn and Yvonne McCarthy (Central Bank of Ireland) “Credit conditions in a boom and bust property market”
- Colm McCarthy “Designing a Banking System for Economic Recovery”
- Ronan Lyons (TCD) “Household expectations and the housing market: from bust to boom???”
This conference receives no funding, so we have to charge to cover expenses like room hire, tea and coffee. The registration fee is €20, but free for students. Please click here or on the link below to pay the fee, then register by attaching your payment confirmation to an e-mail with your name and affiliation to firstname.lastname@example.org. [Block bookings can be made by purchasing the required number of registrations and then sending the list of names to email@example.com]
UPDATE. The following is probably also relevant here:
Bond Repayments: Motion [Private Members]
“That Dáil Éireann:
calls on the Government:
— to immediately lobby the European Central Bank for a one-off exemption from the rules of monetary financing, to allow the Central Bank of Ireland to destroy the €25 billion in sovereign bonds issued in February of this year, in lieu of the remaining promissory notes, plus the €3.06 billion bond also being held by the Central Bank of Ireland in payment for the 2012 promissory note; and
— to cease any and all interest payments currently being made on those bonds.”
- The first part of the debate on this motion is available here.
- UPDATE 2: The final part of the debate on the above motion is now available here.
The latest report from the FAC is available here.
Fiona Muldoon, Director of Credit Institutions and Insurance Supervision at the Irish Central Bank, gave a speech yesterday in Glenties at the MacGill summer school (h/t John Gallaher). The topic of the speech was “Restoring Confidence in the Irish Financial System.” Ms Muldoon gave a fairly upbeat assessment of progress. I am less sanguine. The problem is not lack of international confidence in Irish banks and businesses, but rather lack of international confidence in Irish financial regulation. It is still not clear if the Irish Central Bank has the backbone for the tough tasks it faces in the current environment.
It is important to remember that the weak regulatory stance of the Irish Central Bank during the credit bubble period was one of the chief causes of the Irish economic crisis. The Irish Central Bank’s soft and timid approach, and its willingness to be swayed by political and business interests, was a major cause of Ireland’s economic disaster (for evidence, see my paper with Brian O’Kelly). Has the Irish Central Bank sufficiently altered its approach?
The Irish Central Bank has reformed enough so that if the challenges of 2002-2008 ever reoccur, it will be ready for them. This new resolve to block credit bubbles is not likely to be tested for many decades. The Irish Central Bank needs to have the strength and fortitude to deal with the very different challenges of 2013.
The Irish Central Bank showed no leadership during the fiasco of the 2009 Land Reform Act/Dunne Judgement. The previous government (perhaps deliberately) slashed a gaping hole in Irish financial contract law when it passed the flawed 2009 Land Reform Act. The flaw was pointed out by Justice Dunne, and the judiciary reasonably expected that such an egregious flaw (called a “lacuna” in legal parlance) would be fixed by amending legislation. However the legal flaw was politically convenient since enforcing mortgage contracts would have been politically painful at the time. Ignoring the Dunne Judgement and leaving the flaw in place was very poor practice in terms of restoring international confidence in the Irish financial system, but it was politically convenient for a domestic audience. The government did nothing at all about this legal flaw, despite the obvious impact on Ireland’s international reputation.
It took outside interference by the Troika to get this legal flaw fixed. The Troika repeatedly noted the unacceptable situation in their quarterly reviews, and when government action was still not taken the Troika demanded that the Irish government act by an imposed deadline or face a cut-off in national debt funding. Throughout this long, confidence-draining saga, the Irish Central Bank stood meekly by and said nothing. A stronger-willed central bank (US, UK, Germany, others) would have been screaming from the rooftops about the need to fix such a gaping hole in the country’s financial contracting law. It is not to the credit of the Irish Central Bank that we needed Troika intervention to get this problem acknowledged and fixed.
The Central Bank’s response, or lack thereof, to the explosive growth in mortgage arrears is another case where its stance was timid. Even by late 2011 it was obvious to hard-headed observers that some substantial fraction of the mortgage arrears explosion could be traced to strategic behaviour by households. Mentioning strategic default is offensive to many people since it means acknowledging that some Irish people are acting dishonestly in their own self-interest against the interests of society. A few people were brave enough to mention the obvious (take a bow, Karl Deeter!) but none at the Irish Central Bank. Up until early 2013, the Irish Central Bank effectively had a ban on any mention of strategic default by any central bank spokesperson. This gave rise to some stilted presentations, where Central Bank senior spokespeople railed about the explosion in mortgage arrears without any mention of one of the key causal factors. This omerta was finally broken by Patrick Honohan in early 2013. That was too late in the process to be an international confidence-booster. A strong imperative by the Irish Central Bank not to cause anyone any offence is not a good foundation for building international confidence in Irish financial regulation.
On the positive side, the Irish Central Bank’s actions against Quinn Insurance were tough and bold. So the bottom line is that in terms of restoring confidence the Irish Central Bank has a mixed record over recent years.
The institutional innovations over the deep crisis of the 1950s gave birth to the modern Irish economy. I analysed the process in this article in the Irish Independent last week. Brendan Keenan re edited it slightly to highlight his interpretation of what I was saying. One of the fascinating things about writing anything is how it takes on a life of its own in readers’ minds. (“And the word was made flesh and dwelt among us”). Edna Longley once destroyed the meaning of something I had written by aggressive editing; fortunately no such problems arise with Brendan. I wrote a similar piece for historyhub.ie, a new site developed by a group of young historians. Though I disagree with much of what Bryce Evans has to say on Lemass, I found his interpretation of what I had written illuminating: “it makes the case very convincingly for expertise offered as a basis for policy-making being more robustly based on both independence and breadth of opinion.”
Paul de Grauwe and Yuemei Ji have an interesting commentary on the causes and effects of austerity here.
The Director of Credit Institutions and Insurance Supervision at the Irish Central Bank, Fiona Muldoon, has been widely praised for her speech to the Irish Banking Federation, calling for faster action by the banks in dealing with the mortgage arrears crisis. The speech makes clear that the damaging nexus of the former Fianna Fail government, linking the politically connected property development industry to the banking industry and an overly compliant bank regulator, is no longer in place. The Irish Central Bank is now able and willing to stand up to the industry that it regulates in order to protect the public interest, and it is supported in this stance by the ruling coalition. This is an important positive outcome.
The speech was a step forward, but it was not an unusually brave speech, despite the impression one gets from the wide praise it received in media coverage. A truly brave speech would not be widely praised, since it would need to unsettle people rather than confirm their existing beliefs. The speech ignores a big part of the reason for the mortgage arrears crisis – the deep-seated Irish political aversion to house repossessions. Without facing up to this big part of the mortgage arrears crisis, there will be no solution. Here is an extra paragraph, offered with proper humility, which might have changed Fiona Muldoon’s partly brave speech into a truly brave speech. I have kept the “teenagers” motif, which was a clever oratorical device in the original speech.
“I cannot come here and give a speech about mortgage resolution without once mentioning repossessions; that would be cowering. The notion that 167,000 mortgages-in-arrears can be resolved without a substantial proportion of repossessions is delusional. We on the senior Central Bank staff could give speeches ignoring this reality, thereby pandering to political sentiment, but we will not do so. Meanwhile, the government’s most recent attempt at reforming Ireland’s repossession laws was a shambles, and virtually the entire law was declared invalid by the Justice Dunne ruling in July 2011. This has left Ireland, and it’s banking system, with virtually no repossession system at all since that date. Rather than fix this urgent legislative cock-up of its own creation, the government has chosen to ignore it and pretend that it will go away. The ruling coalition is acting like a bunch of teenagers; blaming everyone else in the household for their problems while neglecting to do their own homework.”
Further information on Geary Lecture and seminar by Tim Besley below. To reserve a place at either/both event(s) please email firstname.lastname@example.org and state clearly which event(s) you wish to attend.
Geary Lecture: Tim Besley
4pm Friday 19 October at ESRI
Making and Breaking Tax Systems: The Institutional Foundations of Fiscal Capacity
We have become accustomed to governments having the fiscal capacity to support revenue raising of more than 40% of GDP. But such levels of taxation were unheard of before the 20th century. This lecture will review some of the trends in taxation over the past one hundred years and how the tax systems were created which support the needs of modern governments. It will use this historical perspective to reflect on the challenges that need to be confronted in trying to build a centralized fiscal state in Europe.
Research Seminar, 1pm Friday 19 October, at ESRI
The Welfare Cost of Lawlessness: Evidence from Somali Piracy
This paper estimates the effect of piracy attacks on shipping costs using a unique data set on shipping contracts in the dry bulk market. We look at shipping routes whose shortest path exposes them to piracy attacks and find that the increase in attacks in 2008 lead to around a eight to twelve percent increase in shipping costs. We use this estimate to get a sense of the welfare loss imposed by piracy. Depending on what is included, we estimate that generating around 120 USD million of revenue for pirates in the Somalia area led to a welfare loss of anywhere between 0.9 and 3.3 USD billion. Even at the lower bound, therefore, piracy is an expensive way of making transfers.