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John McManus has an article today in which he points out that NAMA has the potential to raise the prices of legal and other professional fees by boosting demand for the providers of those services. He also points out that this will be bad for competitiveness. (And, one might add, for the fraying social fabric of this country.)

I would be interested to know how big such an effect might be: in other words, how many professionals in various categories will NAMA hire, relative to market supply?

I agree with McManus when he says that the state should limit the damage, by capping the fees it pays to such people. But it is hard to see how it could actually succeed in ‘driving down professional fees via NAMA’ through such a strategy, since according to McManus NAMA is adding to total demand in the sector.

Courtesy of Paul Krugman, here is a lovely little piece by Calvin Trillin.

It inspires the question of which percentile the regulators have been drawn from, and how this may have changed over time.

In its QEC released today, the ESRI notes that the fall in the CPI has been driven in part by declining mortgage interest costs, from which those in the lowest income deciles benefit little, since they typically do not have mortgages (pg 39).

ESRI goes on to recommend (pg 43) that there should be no nominal cut in social welfare rates of payment. On RTE’s Morning Ireland, ESRI’s Alan Barrett reiterated this recommendation, adding that the Special Group’s suggestion of a 5% cut relied on the CPI fall, 6.5% in the year to September, and that this fall was driven substantially by mortgage cost reductions.

In its report, the Special Group based its recommendations regarding Social Welfare rates of payment solely on the HICP, which is down 3% in the year to September, precisely because it was aware of the mortgage cost issue. We did not rely on the larger fall in the CPI, whose shortcomings in this regard I pointed out in a QEC article (editor: Alan Barrett) as far back as September 2007.

The Special Group wrote

Rates of payment in the Social Welfare system were increased across the board by approximately 3% in the budget of October 2008. Since that time, the Consumer Price Index (CPI) has fallen by 5.3% (up to May 2009), while the HICP measure of inflation has fallen by 1.6%. The principal difference between the two is mortgage interest on owner-occupied housing, which up to May 09 had been falling quickly in line with ECB interest rates decreases. It is known from the Household Budget Survey that this item is a minor component in living expenses for those income groups most reliant on social transfers, for whom the HICP, which has declined less than the CPI, is more relevant. Nonetheless, and relying only on the HICP, the real value of weekly and monthly Social Welfare payment rates would have risen in real terms since October even if no increase had been granted in the budget. (pg 186, Vol 2).

The intention behind the Group’s recommendation was to bring the real value of rates of payment back to their level of about Summer 2008, in part on the basis that the 3 to 3.3% increase implemented in January 2009 was based on expectations of continuing consumer price inflation which have not materialised. It was emphatically not based on ignoring the effects on redistribution of complexities in the construction and application of price index numbers. Developments in prices since the report was released in July have not altered the situation – prices have fallen a little further.

If someone can show that HICP, with weights from the lowest one or two deciles, is down less than 2% since Summer 2008, they have a case against the Special Group. Otherwise they are arguing for the maintenance of a real increase in rates. This is a legitimate political position, of course.