Central Bank presentations at the DEW

Four presentations from Central Bank economists were made at the recent Dublin Economics Workshop, reflecting a range of research activity on the commercial real estate, enterprise credit and interbank markets. Paper titles and a brief description below.

Eoin O’Brien and Maria Woods: “Applying a macroprudential risk analysis to Irish commercial  real estate prices”

Research focuses on Irish commercial real estate market and presents a range of indicators that can be used to assess the sustainability of prices and enhance the Central Bank of Ireland’s existing macroprudential risk assessments of this sector.  Developing analytical tools to identify real estate risks, among other areas, is a priority for policy makers focused on mitigating systemic risk.  To complement traditional statistical indicators of price misalignment such as the deviation of the price-to-rent ratio from its historical average, two reduced form models are specified drawing on the property literature and long-run Irish data (1985Q1 to 2013Q4) to approximate a fundamental price series.  Periods where actual prices deviate from this fundamental series can be identified over the sample.  Non-linear methods suggest that the relationship between price changes and estimated misalignments may vary over the property cycle.

James Carroll, Paul Mooney (Dept of Finance) and Conor O’Toole: “Irish SME Investment in Economic Recovery”. Link (p73).

An in-depth look at the types of SME engaging in investment during the economic recovery, along with the financing sources behind said investment. Key findings:

  • The share of SMEs investing has increased steadily since 2012, and currently about a third of SMEs are investing on a six-monthly basis.
  • Younger firms, controlling for other firm characteristics, invest more. Improvements in profitability and turnover are important drivers of investment.
  • SME investment responds to regional  economic conditions, as measured by the unemployment rate.
  • Smaller, younger, non-exporting firms, who are likely more reliant on local household spending, respond most to domestic conditions.
  • Investment is mainly financed through internal funds, and there is no evident increase in the external financing share since early 2013.

James Carroll and Fergal McCann: “Cross-country comparisons of SME borrowing costs”

This research provides a methodology to strip out borrower- and bank-related factors which may form part of the explanation for cross-country interest rate differentials. Using the case of UK and Irish lending by Irish-owned banks, the research suggests that, of a 240 basis point (bps) difference in raw average borrowing costs, about 100-150 bps is not explained by bank- and borrower-level characteristics and can therefore be attributed to market-level factors such as bank competition, collateral enforceability and the aggregate outlook for default probabilities. Earlier research from the two authors shows that across Europe, such aggregate factors are indeed associated with higher enterprise borrowing costs.

Paul Lyons and Terry O’Malley: “Monitoring Ireland’s payments system using Target II”

  • Research provides a description of Ireland’s component of the Eurosystem’s large value payment system (TARGET2-IE).
  • TARGET2-IE forms an important part of the Bank’s analytical toolkit in that it can be used to examine the degree of interconnectedness between banks in Ireland; to develop indicators for systemic risk monitoring; to map Ireland’s payment networks to provide a source for measuring price and quantities in the short term interbank loan market involving Irish banks.
  • Early research results identify differences between the interbank and customer payments networks with the customer payment network displaying a small number of highly connected banks in addition to a large number of isolated banks.

 

The Dog Ate My Wind-Farm

The Irish Times relates this morning an Oxford Mail report of a lucky escape for a corporate financier formerly employed with Barclays and Lehman Brothers. Michael Chase-Sarver copped a four-month prison sentence from Judge Eccles at Oxford Crown Court. He had been prosecuted for perverting the course of justice in attempting to avoid a speeding conviction.
He called a witness from Derry who testified that Mr. Chase-Sarver was the promoter of a wind-farm project in Donegal which would cost €1 billion, occupy 35,000 acres and employ 300 people. The judge suspended the sentence, citing the risk to the 300 jobs.
Neither Donegal County Council nor An Bord Pleanala are aware of this project according to local media.
This is surprising. The average cost of 1 MW of wind capacity is about €2m, so the billion Euro tab would equate to around 500MW, the largest generation facility to be built in Ireland since Moneypoint in the mid-1980s. At 35,000 acres the site (70 acres per MW sounds about right) would occupy 3% of the land area of Donegal, a large county. The witness from Derry, a co-investor in the mystery project, claims that agreement has been reached with 100 very discreet farmers.
Ireland already has about 2,500 MW of intermittent wind capacity. Peak demand is about 5,000 and total capacity about 10,000, of which 7000 is dispatchable. Wind gets priority when available and a price guarantee, or compensation if ‘constrained off’. Further additions of intermittent generation, from wind or solar, will add to the subsidy costs and strand more gas-fired assets, many of which belong to the government.

9th Annual Irish Economics, Psychology, and Policy Conference

9th Annual Irish Economics, Psychology, and Policy Conference

Queen’s University Belfast

November 25th 2016
The ninth annual one day conference on Economics and Psychology will be held on November 25th in Queen’s University Belfast, jointly organised by researchers in QUB, ESRI, Stirling and UCD. The purpose of these sessions is to develop the link between Economics, Psychology, and cognate disciplines throughout Ireland. A special theme of these events is the implications of behavioural economics for public policy. If you would like to attend, please register on the following link. There is no registration fee but we require advanced registration in order to provide access to the building etc.,
As well as the annual workshop we have developed a broader network to meet more regularly to discuss work at the intersection of economics, psychology, and policy. This has had six meet-ups so far, as well as some offshoot sessions. Anyone interested in this area is welcome to attend. A website with more details and a mailing list to sign up to is available here. There are currently 226 people signed up to the network and the events have been, at least in my view, very lively and interesting. There are several more planned for throughout 2016/2017 and we welcome suggestions.

830am – 850am: Registration

850am Welcome

9am to 10.40am: Behavioural Science and Policy Case Studies (Chair: David Comerford)

Katja Fells (RWI) “Behavioral Economics and Energy Conservation – A Systematic Review of Innovative Interventions and their Causal Effects”.
Nicole Andelic (QUB) “Debt advice is better delivered face-to-face than via telephone”.
Thomas Conway (NUIG): “Investigating the effects of the Great Recession on the mental health of Irish third-level students.”
Mark McGovern (QUB) “Disparities in Early Life Investments and Children’s Time Use”.
Cathal FitzGerald (DCU) “Surprisingly Rational? The Case of 100% Mortgages in Ireland in 2005”.

10.40am to 11am: Coffee

11am to 1pm:  Measurement, Method, and Behavioural Science (Chair: Pete Lunn)

Carla Prentice (QUB): “Time Discounting as a Mediator of the Relationship between Financial Stress and Health”.
Seda Erdem (Stirling): “Discrete Choice Experiments and Behavioural Economics”.
Aine Ni Choisdealbha (ESRI) “Harnessing habitual behaviour in the laboratory: an experiment on how busy consumers respond to environmental information”.
Arkady Zgonnikov (NUIG): “Using decision space visualisations to characterise individual decision makers”.
Marek Bohacek (ESRI) “Investigating a central mechanism of economic decision making: the ability to trade-off incommensurate attributes”.
Danny Campbell (Stirling): “Discrete Choice Experiments and Behavioural Economics”.

1pm to 140pm: Lunch

140pm to 320 pm: Regulation, Policy, and Behavioural Science (Chair: Liam Delaney)

Clare Delargy (BIT): “Behavioural Insights and Public Policy”.
Michael Daly (Stirling): “Self-control, health, and public policy”.
Maureen Maloney and Alma McCarthy (NUIG): “Automatic enrolment and employee risk:  An analysis using a bounded rationality framework”.
Leonhard Lades (Stirling) “Self-control, well-being, and normative measures of welfare”.
Karl Purcell and Laura Watts (IGEES). “Behavioural Economics and Irish policy”.

320pm to 330pm: Coffee

330pm to 415pm: Keynote Speaker 1: Professor Muireann Quigley (Newcastle Law School) “Libertarian Paternalism & Nudging: On Alluring Concepts and Public Policy”.

415pm to 5pm: Keynote Speaker 2: Professor Michelle Baddeley (UCL) Title TBC “Behavioural Economics and Regulation”.

How much of Ireland’s “fiscal space” will climate inaction consume?

Here’s a guest post on the very important potential fiscal costs of climate mitigation by the IIEA’s Joseph Curtin. 

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The basic imperative to reduce emissions is easily understood. From March 2015 to July 2016, in each successive month the previous highest global temperature for that month was broken. July 2016 was the warmest of any month on record in the period of historic measurement. Given this record goes back roughly 160 years, the odds of this occurring without man’s input in the form of greenhouse gas emissions is infinitesimally small.

Reducing emissions is a political challenge that is difficult to grapple with, in Ireland as in many other countries. In welcome developments, we now have a Government Department with “Climate Action” in its title, and the newly established citizens’ assembly was given the goal of exploring “how the State can make Ireland a leader in tackling climate change”.fig1.png

But on the ground there are few examples of “action” and “leadership” to draw upon. There has been no plan to reduce emissions since the previous strategy expired 4 years ago. As we can see from the EPA’s latest inventory report, since the end of the recession in 2011 Irish emissions have more or less flat lined. In fact emissions will probably increased in 2015 (although EPA data have not yet been published) and are projected to continue increasing in the years ahead.

Continue reading “How much of Ireland’s “fiscal space” will climate inaction consume?”

Benefit Sanctions in Ireland

The Irish Times reported recently that over 4,000 people on job seekers benefit had a penalty cut imposed from January up to July this year. The culture of using penalties or sanctions in benefit contexts needs to be debated a lot more. They have become a normalised feature of the UK benefit system (blogpost I wrote on this here and lengthy and somewhat eclectic reading list here; see David Webster for detailed analyses of how sanctions evolved from 2010 onwards). There is a substantial body of evidence documenting substantially elevated levels of psychological distress and mental health problems among people who are long-term unemployed. There is also substantial controlled correlational evidence that sanctions at the levels imposed in the UK are associated with a range of negative outcomes  (including here, here) though the causal impact is one that still is for debate.

Furthermore, there have been dramatic problems with implementing an albeit far more extensive system of sanctions in the UK (e.g see the Oakley report which points out what look like very large flaws in the system of administering sanctions). One of the most lucid accounts of this is given by Professor Michael Adler here.  Adler examines UK benefit sanctions from the perspective of eight legal principles below, and argues that they fail most of these criteria and should either be remedied or better yet replaced with non-punitive methods.

The law must be accessible and, so far as possible, intelligible, clear and predictable.
Questions of legal right and liability should ordinarily be resolved by application of the law and not of discretion.
The laws of the land should apply equally to all, save to the extent that objective differences justify differentiation.
Ministers and public officials at all levels must exercise the powers conferred on them in good faith, fairly for the purpose for which the powers were conferred, without exceeding the limits of such powers and not unreasonably.
The law must offer adequate protection of fundamental human rights.
Means must be provided for resolving, without prohibitive cost or inordinate delay, bona fide civil disputes which the parties themselves are unable to resolve.
Adjudicative procedures provided by the state should be fair.
The rule of law requires compliance by the state with its obligations in international law as in national law.

The extent to which the type of things being envisioned under Job Path are susceptible to these criticisms is something that should be discussed more. It is also worth thinking about the direction of this policy in Ireland and whether it represents a move toward the more widespread and normalised use of these methods across a wide range of policy areas and whether it will be ramped up to a greater degree in the employment area itself. At the very least, it would be good if the responsible politicians were asked to articulate the reasoning behind and direction of these policies, and the extent to which they are legal and ethical. There are some empirical papers pointing to a potential role for such sanctions in motivating employment uptake in the short-run (key paper here) but it is reasonable to think that this relationship will depend on the state of the economy, the degree of skills mismatch, and other features of the participant pool and quality of implementation. It is also not an argument for ignoring legal and ethical aspects of roll-out.

The European Commission Have Sparked a Revolution Against Corporate Tax Avoidance

The European Commission made a decision yesterday that is likely to revolutionise corporate tax law. To understand this, it’s important to step outside the narrow lens (and self interest) of ‘Ireland Inc’ and consider the global political background, from the EU perspective.

Globalization has made it much easier for footloose capital and international firms to move across borders, and avoid paying tax. This means it’s increasingly difficult to apply the principle that tax should be paid in the country where profits are made. It’s estimated that more than half of the foreign profits made by US firms are booked in tax havens.

In response to this, scholars in international political economy have long argued that to manage the worst effects of globalization, whilst retaining the democratic legitimacy of the state (tax and spend capacity), governments should shift governance up a level, beyond the nation-state.

The EU is perhaps the most successful example of this type of supranational governance in the world. It has an executive arm (the EU Commission) with legislative agenda-setting powers, and a supranational Court. In effect, European integration can be conceptualized as a political response to market globalization. But it has no tax and spend capacity.

The core actor driving the process of integration is the Commission. This was most obvious during and after the Eurozone crisis, where member-states, including Ireland, agreed to delegate more economic governance powers to Europe. This included the two-pack; the six-pack; the macroeconomic imbalance scorecard and the European semester. Lest we forget, the Commission was part of the Troika, who actively intervened in fiscal policies of the state, not least in terms of water charges.

All member-states of the EU have actively delegated sovereignty to the Commission to manage a whole raft of policy areas: agriculture, trade, fisheries, competition, the single market, regulation, health and safety. For members of the Eurozone, this pooling of sovereignty is even deeper, and explicitly includes monetary and fiscal policy competences.

Hence, to suggest the Commission has suddenly started intervening and undermining Irish sovereignty is somewhat disingenuous.

Social democratic oriented economies, such as France, Sweden or Denmark, have always tended to view the Commission as an agent of “neoliberalism“. It is perceived as having a narrow commitment to market liberalization, with no capacity to tax and spend. The implication is that the EU cannot build those social institutions that are necessary to compensate for the negative effects of increased market liberalization.

Liberal market oriented economies, such as Ireland and the UK (and parts of the German polity), have tended to view the European Commission as an agent of bureaucratic interference. It is perceived as a political actor that tries to expand it’s executive powers in those policy areas that should remain at the level of the nation-state: employment, social protection, welfare and taxation. The EU is a single market, and should be designed to reduce the transaction costs of trade, nothing more.

These two competing visions of the EU came to a head yesterday.

But for anyone who spends time in Brussels, it’s been a long time coming. In a world of global capital flows, the argument across European capitals has been that, at a minimum, the EU Commission must ensure tax coordination, to ensure that MNCs pay their taxes where profits are made.

Those governments, such as Ireland, that turn a blind eye, and facilitate corporate tax avoidance, have been increasingly viewed with hostility, as they are effectively robbing European citizens of scare taxable resources. This has often been missed in Ireland, as there has not been a public debate on corproate tax avoidance, and therefore it’s not a salient issue.

The EU response to this growing demand in Europe to stop corporate tax avoidance has always been, well, how? It’s a massive collective action problem that requires an assertive Commission, willing to confront rogue member-states, challenge capital interests, and be open to legal challenge. This is exactly what happened yesterday. The Commission concluded that those tax benefits that enable multinationals to avoid tax is a form of illegal state aid, and falls directly under competition law.

The fight is on.

More precisely, the Commission found that Ireland enabled Apple to avoid taxation on almost all of the profits generated by the sale of Apple products in the EU single market. In effect, Ireland facilitated Apple’s ability to build a colossal stock pile of cash that amount to hundreds of billions of dollars. As the Guardian editorial noted today, this is nothing more than “a rainy day fund for the super-rich“. If the Irish government challenge the Commission’s ruling, they are effectively legitimising this, even though they have closed off the tax loophole that made it possible.

All of the focus within Ireland has been whether the government should take the 15 billion. But again this totally misses the point. It’s not Irelands money. It’s tax that should have been paid in Portugal, Greece, Spain, Germany, France and other member-states of the EU, who, like most European countries implementing austerity, are pretty cash strapped.

This is why Ireland has been rightly called out.

In essence, it’s a distributional conflict. Ireland has facilitated one of the richest companies in the world to engage in corporate tax avoidance (money that should have been paid to other governments in the EU). In ordinary language use, this would be called theft.

In responding to the Commission, a clever strategy by the government would have been to accept the ruling; highlight that they have closed off the tax loophole; admit they are in a bit of a legal bind now; and then focus on what really matters in the long run for high-tech FDI: the human capital externalities of thick labour markets, which has been made possible by the process of European integration.

The EU Commission has acted in the general interest of European citizens and business. Hence, it’s decision is being welcomed almost everywhere outside Ireland. The EU Commission has shown that it can act as a supranational counterweight to the untrammelled forces of globalization.