Category: Uncategorized

The current issue of The Economist has a leader on the growing imbalance between males and females in birth cohorts in China and India and some other countries. The sex ratio at birth, or “masculinity ratio”, is normally about 1.05. Amartya Sen and Ansley Coale drew attention to the high ratios emerging in China and India some twenty years ago. The ratio has continued to rise in these countries and has now reached 1.30 in some Chinese provinces.

The Irish sex ratio at birth was 1.058 in 2008. This is exactly the median for western European countries. Moreover, there has been virtually no change in the Irish ratio over the past fifty years – it was 1.0523 in 1960 and 1.0589 in 2000. This suggests that changes such as the increased availability of pre-natal scans and the rise in pregnancy terminations by Irish women since 1960 have not had any differential gender impact.

As The Economist points out, the sex ratio is an important indicator of the place and status of women in society and the economy. The normality and stability of the Irish ratio is therefore not without its significance.

It is obvious that the Irish banks will need very large amounts of new equity capital in the near future, given their NAMA-related loss crystallisation, along with prospective losses on their retained loan portfolios. This confirms the year-ago forecasts of Brian Lucey, Karl Whelen and others, and contradicts the contemporaneous claims of bank and government spokespersons that there would be no need for additional equity capital. It seems clear that the amount of new equity capital needed is equivalent to majority ownership (Lucey was quoted on Frontline stating that the newly issued equity might constitute 95% of total equity after issuance).

There are three ways to inject new equity capital into the two surviving[1] banks: 1) the government directly purchases more equity shares from the banks, 2) the banks try to raise the equity from existing shareholders using a rights offering, or 3) the banks accept a big block acquisition of equity capital from a large foreign institution probably a foreign bank. The Central Bank and Department of Finance should be pushing hard on the banks to use method 3, since this method is in the best interest of the Irish taxpayer and Irish economy.

The new National Pensions Framework is available here (press release here). 

Details are surprisingly sparse in places for a document so long in the making.   But the proposed reforms are generally sensible.   It is also good to see recent behavioural economics research having an impact on policy.   Some highlights:

·         The retirement age is to rise in stages, reaching 68 by 2028.   While this is unlikely to be the end of the increases, it provides a good start in terms of reducing long-term fiscal imbalances.   Getting better control over long-term finances will also help boost near-term creditworthiness, especially as the NTMA attempts to issue 30-year bonds

·         The new auto-enrolment scheme (to be launched in 2014) is well informed by work in behavioural economics.   The design details generally make sense: automatic enrolment (with automatic re-enrolment after two years for those who opt out); matching government and employer contributions; low administrative costs through utilising the PRSI system, and low-cost investment defaults

·         Tax relief standardised at 33 percent rather than at the marginal rate.   This is high enough to provide an incentive for pension provision, while getting rid of a regressive feature of the old system

There is a strand in what passes for policy discussion which goes like this:

(i) There is an acknowledged problem in some sector or policy area;

(ii) the Government could  do something to ameliorate this problem;

(iii) QED the Government should do something, not always specified.

The result of this line of attack is policies like the Car Scrappage Scheme, of which more anon.

Examples in this morning’s media concern the excess supply of hotels, and the threat of global warming. The Government is being urged to take measures

– to reduce the hotel stock, and

– to support the hydro storage/windpower project called Spirit of Ireland.

Hotel Stock: Hotels are a pure private good. Due to policy-induced capacity expansion, there are now too many. Some are bust, and face receivership/liquidation/NAMA.  Room prices are falling. This is the natural market response. Where is the market failure?

It is true that some long-established hotels have seen their business undermined by State-subsidised competition, but this is a routine business risk in an interventionist political culture. Many of these long-established hotels enjoyed State grants for conference/leisure centres when the going was good. The industry is lobbying for some State-run scheme to take out capacity. Doing nothing will cost less and the industry will adjust. Intervening, yet again, will distort adjustment.

Spirit of Ireland: The externality of carbon emissions is addressed by putting a price on carbon, at which point the State can safely adopt a position of technology neutrality. Power generation, once externalities are dealt with, is a pure private good too. Whether these schemes make sense is a matter for the capital market, not for the Government.

Car Scrappage: Car sales have collapsed and some car dealers have gone out of business. The same has happened with €1,000 handbags, and some handbag retailers are struggling. Ireland manufactures neither cars nor handbags. The Car Scrappage Scheme will spend taxpayer money to sustain, temporarily, the retail distribution network for an imported consumer durable. Why not a Handbag Scrappage Scheme? This scheme is plain daft for Ireland. It is not even clear that it makes any sense for car-producing countries – the German scheme appears to have sucked in imports of smaller cars, which Germany does not produce. 

These ‘Something Must be Done’ schemes provide harmless entertainment for economists, fodder for the 24-hour news cycle and a playpen for lobbyists. But they contribute nothing to sustainable employment, cost the Exchequer money and hinder the necessary post-Bubble adjustment.  

In contrast, the Economics of Doing Nothing is that this is often the best policy, and the cheapest.

Frank McDonald keeps the dream alive in today’s Irish Times.

I have had no new insights since May 2009, but SEI & UCD organized an event where most speakers agreed with my assessment: Pumped hydro is just too expensive.