The Irish Economy

Venue: The ESRI, Whitaker Square, Sir John Rogerson’s Quay, Dublin 2

Date: 20/06/2013
Time: 4pm

Speaker: Prashant Bharadwaj, University of California, San Diego.

Abstract:
This paper investigates the role of initial health endowments on school achievement in early childhood through adolescence. Using birth weight as a proxy for childhood endowments, we investigate this link using twins and siblings fixed effects estimators. We collected birth weight and basic demographic data on all twins and siblings born in Chile between 1992-2000 and match these births to administrative school records between 2002-2008. Twins effects reveal that a 10% increase in birth weight improves performance in math by nearly 0.05 standard deviations in 1st grade.

We exploit repeated observations on twin pairs to show that the effect of birth weight is a persistent effect that does not deteriorate as children advance through grade 8. Siblings fixed effects estimators between grades 1 through 8 show a birth weight effect that declines as children age, but the decline is less among siblings closer together in age than among siblings who are further apart. OLS estimators also show a steady decline in the birth weight effect as children age: birth weight has a large effect in grade 1, but this effect diminishes significantly by grade 8.

Using data from a unique survey that asks both parents and children about parental investments relating to school work, we suggest parental investments as a plausible mechanism for the observed patterns in twins and siblings fixed effects estimators, and OLS. While parental investments are negatively correlated with birth weight, we find evidence of no differential care (by birth weight) within twin pairs; however, within siblings pairs and across families in general, the lower birth weight child appears to receive greater investments. Thus, it appears that parental investments that compensate for lower initial endowments can lessen the impact of birth weight on later life outcomes.

Prashant Bharadwaj is an Assistant Professor in the Department of Economics at the University of California, San Diego. His research interests are in development and labor economics, focusing on the interactions between early childhood health, gender and education.

All welcome. No booking required.

here.

Interesting WSJ article on the current negotations here.

Asmussen speech here.

Ashok Mody writes here.

The current economic crisis has led to large reductions in public health budgets in Ireland and across the EU.

Already stressed health systems are under huge pressure to maintain safe services and to do more with less. At the same time, they are expected to meet more complex, growing health needs while improving and reforming service delivery.

The economic crisis provides a unique opportunity to examine how different health systems are faring in recessionary times, and to draw out lessons for policy coming from cross country comparisons.

‘Health systems in the Era of Austerity’ is a joint ESRI/TCD conference, held at the ESRI on Tuesday June 18^th 2013.

A panel of Irish and international experts will examine national and international experiences, drawing on TCD research on the resilience of the Irish health system and on a joint ESRI/TCD/WHO ‘rapid response’ report on health system responses to the economic crisis. Contrasting lessons from Spain, Estonia and the wider WHO Europe region will also be presented.

Link to conference programme here.

• 13-6-2013
  Maximising Investment and Creating Jobs NewERA and €6.4 Billion Ireland Strategic Investment Fund (ISIF).
  
• 13-6-2013
  NTMA presentation on NewERA and ISIF

• 13-6-2013
  Draft Memorandum of Understanding June 2013
  
• 13-6-2013
  Draft Memorandum of Understanding June 2013 searchable
  
• 13-6-2013
  Draft IRELAND: MEMORANDUM OF ECONOMIC AND FINANCIAL POLICIES searchable

The World Bank has produced a new report on global trends in saving and investment over the next 20 years - lots of interesting material here.

Daniel Gros writes here.

With advance apologies for a too self-referential post, I think it might be useful to put my response to commenter Shay Begorrah from Tuesday’s thread on the front page.   Shay clearly sees me as an unabashed fiscal hawk, where more deficit reduction (and more expenditure-focused deficit reduction) is always better.   As this is not at all my view, and given my official role through the fiscal council, it might be worthwhile to explain my actual view a bit. 

During 2009 and the first half of 2010, the main thrust of my fiscal policy posts on IrishEconomy was that the fiscal adjustment was too frontloaded (see, e.g., here).    At the time I assumed that Ireland’s credtiworthiness was reasonably robust.   I underestimated how fragile Ireland’s creditworthiness  was in the context of monetary union with an underdeveloped lender of last resort to governments.   My basic approach to fiscal policy is Keynesian.   But since the middle of 2010 it has been clear to me that fiscal policy must steer a difficult course between supporting demand and sustaining the borrowing capacity of the State.   Not least, the latter is essential to ensure that the fiscal adjustment can be phased in any sort of reasonable way, and thus to sustain the essential protections and services of the welfare state. 

The idea that there is a trade off between demand and creditworthiness is challenged from both right and left.   From the right, the idea of an expansionary fiscal contraction is invoked: discretionary deficit reduction would then increase demand, further enhancing the deficit reduction.   I do not read the available evidence as supporting this contention (see, e.g., the important work from the IMF).   From the left, the idea of self- defeating austerity is invoked.   This comes in different forms: discretionary deficit reduction does not actually reduce the deficit; discretionary deficit reduction does not reduce debt to GDP ratio; and discretionary deficit reduction does not improve creditworthiness.    I do not believe that such self-defeating effects are borne out by the Irish experience (see Box C, p. 46 here).  

Another thrust (obsession?) of my more recent posts has been the critical importance to more robust creditworthiness of strengthening the crisis resolution mechanisms – and more narrowly the fiscal lender of last resort function – for the euro zone.   The political economy of such developments must been seen in the context of weak solidarity between what is an association of nation states, where there is a reluctance to risk transfers and a fear of moral hazard.  While I believe the aggregate fiscal stance of the euro zone has been significantly too tight from an optimal fiscal policy perspective, the strengthening of fiscal rules must also be viewed in terms of the political economy of strengthening the LOLR function.   The fiscal compact, for example, must be seen in this light. 

Finally, on the relative measures of expenditure- and tax-based adjustments, my prior belief around 2009 based on the literature was that expenditure-based adjustments were less contractionary than the tax-based alternative.  (Of course, in deciding on the mix of adjustments, other factors besides the macro effects – such as fairness – are important.)  From the more recent evidence, I have become much less convinced of the macroeconomic superiority of expenditure-based adjustments.   This issue was discussed in the first fiscal council report in October 2011 (see Box 4.1, p. 36, here; a more general review of the multiplier literature is given in Appendix E, p. 93, here).   The inconclusiveness of the evidence is the reason that the council has focused on an overall deficit multiplier in our analysis.

here.

Giancarlo Corsetti and Luca Dedola have a really good VoxEU piece on how cooperation between the central bank and the fiscal authority can avoid the “bad equilibrium” problem for sovereign debt.   The paper on which the Vox article is based is available here; Paul Krugman discusses it here.  

Although the initial focus is on a country with control over its own “printing press”, they also examine how it could work in a monetary union.   I won’t try to summarize the subtle analysis, but the key is how the difference between the interest rates on sovereign debt and central bank reserves can be used to lower the cost of funding below the level that triggers the bad equilibrium.   In contrast to claims that potential central bank intervention has to be unlimited, a central finding is that limited central bank intervention may be sufficient to avoid a bad equilibrium. 

In regard to how it might work in a monetary union, a sting in the tail comes in the last sentence of their closing paragraph.  

The analysis here bears key lessons for the current debate on sovereign default in a monetary union:

·        Countries in a monetary union could indeed be more vulnerable to debt crises, to the extent that the common central bank cannot count on the joint support of national fiscal authorities;

·        The common central bank, however, still has the power to engineer successful interventions.

In doing so, it will have to weigh the benefits and costs of providing a backstop to countries exposed to debt crises, possibly drawing on seignorage accruing to all countries in the union.

“[D]rawing on the seignorage accruing to all countries in the union” raises the familiar political-economy of-transfer-risk problem that has complicated the task of stabilising stressed euro zone sovereign debt markets. 

Details here.

Apologies for the belated response to Paul Krugman’s post on Ireland (linked to here by Stephen last week).   Paul focuses on Ireland’s poor post-crisis growth performance, noting that real GDP is still well below its peak at the end of the property/credit bubble.   There is no disagreement that the growth performance – and especially the performance domestic demand – has been weak.   This reflects a combination of harsh austerity measures, distressed balance sheets and the weak performance of Ireland’s trading partners. 

This graph extends the real GDP series further back in time.   In judging the continuing shortfall from the peak in 2008, we should not forget the unsustainability of the bubble-driven growth that took place from 2002 onwards.   It is also worth noting that the recent flatness of the GDP graph hides a marked slowdown in net export growth (mainly due to the weak performance of the UK and euro zone economies) combined with tentative signs of a stabilisation in domestic demand (see here). 

But any assessment of Ireland’s progress is incomplete without also looking at this picture.  From early 2010 to mid 2011 Ireland steadily lost its capacity to borrow from financial markets.   It is noteworthy that creditworthiness continued to erode in the months after entering into the Troika programme.   This reflected bad news on fundamentals – notably the size of banking-related losses – but also bad signals about the emerging nature of the euro zone’s lender of last resort in terms of the potential for forced debt restructurings and the seniority of official creditors.   The interaction of better news on the a LOLR (most recently the announcement of the ECB’s OMT programme) and the demonstration that Ireland could meet conditions for official assistance has led to a dramatic fall in borrowing costs.  

Given where we were in mid 2011 – particularly the danger of a default that would have added another vicious twist to the adverse feedback loops that laid the economy low – I can’t see how a fair assessment can leave the creditworthiness developments out.

The EU Commission have recommended to the Council that Latvia be admitted as the 18th member of the Euro area from the first of January 2014. Documents here.

Reports today indicate that the UK Treasury has considered (of extent unknown) a swap with the Irish government of Ulster Bank for NAMA loans which originated in Britain.  Here is an extract from this longer BBC report.

However there is another, more radical option also being assessed by the Treasury. Which would be to simultaneously take out of RBS the most troubled of its global operations, Ulster Bank, with its substantial lossmaking business in the Republic of Ireland and Northern Ireland.

Ulster has £37bn of assets (loans and investments) on a risk-adjusted basis.

One idea would be to transfer Ulster Bank into the arms and ownership of the Irish government, by swapping all or part of Ulster Bank for low quality British loans and investments currently owned by Ireland’s National Asset Management Agency: NAMA inherited these stinky British assets when it acquired the problem loans of Ireland’s reckless banks.

There is a certain logic to Ireland taking control of Ulster Bank while the Treasury runs off the loans made in Britain by over-excited Irish banks.

That said, the chancellor may conclude that the complexities of valuing all the relevant loans and the legal difficulties in transferring ownership may be too daunting.

Jamie Smyth reviews the new book by Donal Donovan and Antoin Murphy here.

No really.

Bank Resolution Mechanisms Conference

23 May 2013, Institute of Bankers, Dublin 1

A joint academic-practitioner conference with the theme Bank Resolution Mechanisms was held in Dublin on Thursday 23 May 2013, organised by the Financial Mathematics and Computation Cluster (FMC2), the Department of Economics, Finance & Accounting at National University of Ireland Maynooth and the UCD School of Business at University College Dublin.

Speakers included:

Ajai Chopra (International Monetary Fund), Patrick Honohan (Governor, Central Bank of Ireland), Zhenyu Wang (University of Indiana), Viral Acharya (New York University)

Talk details including slides, related papers and recordings of the talks can be downloaded from the conference webpage:

http://fmc-cluster.org/index.php?option=com_content&view=article&id=203

IMF survey paper here.

Summary: The tax on immovable property has been characterized as probably the most unpopular among tax instruments, in part because it is salient and hard to avoid. But economists continue to emphasize the virtues of the property tax owing to its relatively low efficiency costs, benign impact on growth, and high score on fairness. It is, therefore, generally considered to be underutilized in most countries. This paper takes stock of the arguments for using real property taxation, and presents an updated data-set for high-and middle income countries to illustrate its use. It also reflects the renewed and widespread interest in property tax reform globally, and discusses the many policy and administrative issues that must be carefully considered as prerequisites for successful property tax reform.

The June issue of Finance&Development is here.  It includes a profile of Carmen Reinhart here.

David Bell in Stirling has recently launched a blog on economic and policy issues surrounding the Scottish Constitutional debate. A link to the blog is here and it is already turning into a very useful source of information and insight on the key issue dominating Scottish public debate at present. There is obviously quite a lot of discussion ongoing about the lessons to be learned from the Irish experience including yesterday’s post on what would happen to national debt in a post-independence environment. Would be interested in people’s views on how Irish experiences more generally across policy domains should impact on the Scottish debate.

Paul Krugman has a thoughtful post (ht Niamh Hardiman) on Ireland’s role as poster child for austerity. He points out that those in power continually cite Ireland’s imminent recovery as proof things are getting better and sticking to their plan works. Paul doesn’t mention our lack of fiscal headroom or the need for fiscal consolidation of *some* kind–whatever that might be-but I think it’s implicit.

At any rate, his point is more about how Ireland is used as an example of what great things austerity policies can achieve, when clearly, they can’t. At least, not on their own.

Details here.

All the documents for each country can be accessed from here and the general statement from the Commission (“Moving Europe Beyond The Crisis”) is here.

paper by Buiter and Rahbari here.

FT profile here.

A letter on the above signed by the following;

• László Andor, Commissioner for Employment, Social Affairs and Inclusion,
• Pervenche Berès, Chair of the Employment and Social Affairs Committee in the European Parliament,
• Joan Burton, Irish Minister for Social Protection,
• Yves Leterme, former Prime Minister of Belgium, and
• Henri Malossem, President of the European Economic and Social Committee,

is available here.

A Half-Day Seminar with Networking Reception

Wednesday, May 29th 2013, 14h00 - 17h00.

Department of Economics, University of Limerick

The ‘Stimulus Plan’ announced by the Irish Government in July 2012 places Public Private Partnerships at the heart of plans for national economic recovery. The majority of projects earmarked for investment under the €2.25bn plan will be procured under PPP. However, mobilising a renewed wave of PPP procurement in Ireland will be challenging for reasons such as constraints on the availability of private finance and the complexities of procurement under PPP.

The Challenges of PPP in Turbulent Times seminar will bring together academics, public sector procurers and private sector participants to explore the challenges involved in a new wave of PPP procurement in Ireland. The seminar will be jointly hosted by the Privatisation and PPP Research Group at the Department of Economics, University of Limerick and the Cornell Program in Infrastructure Policy at Cornell University, USA.

Speakers on the day include:

Professor Rick Geddes, Cornell University, USA;

Professor Edgar Morgenroth, Economic and Social Research Institute;

Mr. Brian Murphy, Chief Executive Officer, National Development Finance Agency;

Dr. Eoin Reeves, University of Limerick.

For more information contact privatisation@ul.ie, pdf of the programme is here.

Today’s FT Analysis piece looks at austerity and restructuring in Portugal - here.