The Great Mortgaging

By

October 14th, 2014

Òscar Jordà, Moritz Schularick, and Alan Taylor provide a little historical perspective on banks’ mortgage lending here.

Economics and Psychology Workshop

By

October 12th, 2014

The seventh annual one day conference on Economics and Psychology, co-organised by researchers from UCD, ESRI and NUIM, will be held on October 31st in the UCD Geary Institute. The purpose of these sessions is to develop the link between Economics, Psychology and cognate disciplines in Ireland. A special theme of these events is the implications of behavioural economics for public policy though the workshops have covered work across all areas of intersection of Economics and Psychology. Programmes from the previous six events are here. We welcome students, academics, policy-makers, industry representatives and others with an interest in this area. Registration is free of charge but you should sign up on the link below if you are attending. Other questions about the event can be addressed to Liam.Delaney@stir.ac.uk

Sign up to attend here 

The programme is available below.

Read the rest of this entry »

Sinking, fast and slow

By

October 11th, 2014

For well over a year now some of us have been pointing out that the Eurozone crisis was entering a very dangerous phase, in which slowly increasing unemployment would eat away at the foundations of Europe’s societies, while short-sighted politicians and excitable journalists proclaimed that the Euro was saved. The invaluable Eurointelligence has been doing a great job recently tracking the apparently inexorable deterioration in the economic fundamentals of the Eurozone, with Germany itself now apparently affected. But for both political and personal reasons I find myself worrying most about France.

Twiddling their thumbs and hoping that something (the economy) will turn up, flawed macroeconomic policy notwithstanding, seems to have been the French government’s master plan up till now. As a result it is hard to see Francois “Say” Hollande, or any other Socialist for that matter, getting through to the second round in 2017.

You may think that Paul Krugman is being too alarmist when he raises the possibility of President Le Pen, and I hope you are right. But Sarokozy’s apparent return to the political fray does worry me. Of course, you may think that if he wins the UMP nomination, the Left will rally round and vote for him when it comes to the second round.

How confident are you about that?

Mental Health and the Irish Economy

By

October 11th, 2014

A long literature has examined the role of  economic factors in promoting well-being. This has been a particularly active area for the last decade or so in Economics (summary of recent workshop we did on this topic with readings etc.,). Lately, a major topic of interest has been the role that mental health plays in producing economic outcomes at individual level. For example, an influential 2011 PNAS paper pointed to dramatic long-run economic effects of early life mental health conditions (see my review paper with one of the authors).  Richard Layard has called mental health the new frontier of labour economics and argued for mass expansion of mental health research and treatments. A big focus of the discussion has been the idea that mental health has been systematically discounted compared to physical health conditions in terms of health funding. Various proposals have been put forward to enhance the profile of mental health service in the UK (the recent speech by Nick Clegg one of most prominent).

A few major points to come from this literature and worthy of wide debate in the Irish context include:

The utility losses (for want of a better phrase) of mental health conditions are enormous even outside of effects on productivity and income (e.g. paper here). The interaction of this with physical conditions is also very important. Chronic pain is one particularly important area that should have greater priority in debates on health care (see Alan Krueger on this here).

Childhood mental health has dramatic effects on later life economic outcomes. There is a strong rationale to increase funding for child mental health research and services.  Many childhood mental health problems are practically ignored for the purpose of policy-making. For example, there exists almost no evidence on the long-run effects of prescribing stimulants to children diagnosed with ADHD with recent papers not exactly painting a glowing account of their usefulness (e.g. paper by Janet Currie here).  If you reflect on it, it really is an odd state of affairs that such important questions are neglected. The role of school mental health services for primary school children and teenagers is another area that is important to debate more given the hugely predictive effect of early mental health on life-long trajectories.

Lord Layard and others have argued for a substantial expansion of talk-therapies and a wider roll-out across society (short article outlining this view here; see also Layard and Clark’s recently released book Thrive). In the context of high rates of unemployment still in Ireland and in particular high rates of youth unemployment, this is worth discussing a lot more in the Irish context. Developing funding streams for large-scale referrals for brief talk-therapies is one of the most concrete suggestions to come from the recent literature.

There is a strong rationale for examining the proportion of health funding allocated to mental health in Ireland. It is widely documented  that mental health services in Ireland are given less priority compared to other countries (e.g. recent report here also O’Shea and Kennelly report).

Job Opportunity – Senior Researcher

By

October 10th, 2014

Read the rest of this entry »

Hair of the Dog?

By

October 9th, 2014

Michael O’Sullivan’s latest Dublin Review of Books piece is here, and it is well worth reading.

10-year bonds issued at 1.63%

By

October 9th, 2014

NTMA note here.

Europe and the World

By

October 8th, 2014

IMF WEO here

 

Martin Wolf on the Geneva Report here

Mario Monti on public investment in Europe here

Ireland

By

October 8th, 2014

Summary of ESRI QEB here.

Cronin-McQuinn paper on macro impact of fiscal policy here.

Central Bank macro-prudential regulations here.

Jim Stewart’s FT article on taxation of corporates here.

TASC Budget 2015 Briefing

By

October 8th, 2014

Available here.

Hugh Rockoff on what the US learned from WW1

By

October 8th, 2014

The latest on the VoxEu series on the economics of World War 1 is available here.

IMF 2014 Triennial Surveillance Review

By

October 7th, 2014

Documents here.

Central Banking Boundaries

By

October 7th, 2014

The UCD Economics Society speech by Patrick Honohan is here.

Dublin Economics Workshop 2014

By

October 6th, 2014

This year the DEW, kindly sponsored by the Dublin Chamber of Commerce, will be held at the River Lee Hotel in Cork City on Friday and Saturday, the 17th and 18th of October. This year’s programme is here.

All bookings and reservations for the event can be made from here.

This is the 37th DEW annual conference and will begin with a number of parallel sessions on Friday afternoon.  Over the two days there will presentations across a range of topics from 35 people including policymakers, academics, commentators and members of the business community. 

On Friday evening Jerry Dwyer of Clemson University will give a plenary session on ‘quantitative easing’ while the final session on Saturday will be a panel discussion on ‘fiscal policy for the long haul’ and will include a contribution from Robert Watt, Secretary-General of the Department of Public Expenditure and Reform. 

Shifting tax burden and investment is way forward

By

October 4th, 2014

My thoughts on budgetary policy in the run up to Budget 2015 are here in today’s Irish Times.

The Irish Case for LTV and LTI Caps on New Mortgage Lending

By

October 3rd, 2014

The Irish Central Bank discussion paper on macro-prudential policy tools published yesterday seems to be a trial balloon for possible caps on Loan-to-Income (LTI) and Loan-to-Value (LTV) ratios for new residential property mortgages in Ireland. The general theory behind imposing these limits is laid out clearly in that document; there is no reason to repeat it here. I want to discuss some notable features of the Irish environment which strengthen the case for these caps (but do not make the decision easy).

Read the rest of this entry »

Recruitment: Graduate Economists in the Irish Government Economic & Evaluation Service

By

October 1st, 2014

Details here.

Presentation of Geneva Report: Thursday, October 2 at Noon

By

October 1st, 2014

I will present the report in a Policy Institute seminar in TCD during 12-1 tomorrow Thursday in the IIIS seminar room (top floor, Arts Block). All welcome – no registration required.

A Macro-Prudential Policy Framework for Ireland

By

October 1st, 2014

The Central Bank has published its framework here.

See also the new Economic Letters:

Macro-prudential tools and credit risk of property lending at Irish banks’ (Economic Letter Vol. 2014 no. 10) by Niamh Hallissey, Robert Kelly and Terry O’Malley

and

Housing market developments and household consumption,” by Daragh Clancy, Mary Cussen and Reamonn Lydon

Is there a fishing expedition going on?

By

September 30th, 2014

Having read the Commission letter through it is clear that the game has moved to a different pitch.  The key issue is not the 1991 transfer pricing arrangement or its subsequently revision in 2007.  Yes, there was little objective basis for the 65/20 margins used and there was no reference to the arm’s length principle and the arrangement seemed to be reverse engineered, but there is nothing in the EC letter to say that the margins used were wrong and led to taxable income figures that were significantly out of line if a more careful and objective approach was taken in line with OECD standards (which weren’t introduced here until 2010). 

There is no doubt the 1991 advance pricing arrangement (APA) was put together in a pretty arbitrary manner as indicated by the minutes and notes taken by the Revenue official but that was as much the nature of the regime at the time rather than any special or preferential treatment to Apple.  The detailed nature of the records kept suggest it was not unusual.

Can it be argued that similar arrangements were not put in place for other companies?  APAs on a cost-plus basis for entities that engage in the activities attributed to the Apple’s Irish operations are not unusual. 

Apple Operations Europe:
- the "manufacture of a specialised line of personal computers."
-  providing "shared services to Apple companies in Europe, the Middle East and Africa (EMEA) region, including payroll services, centralised purchasing and a customer call centre."

Apple Sales International:
- the "procurement of Apple finished goods from third-party manufacturers"
- the "onward sale of those products to Apple-affiliated companies and other customers"
- "logistics operations involved in supplying Apple products from the third party manufacturers to Apple-affiliated companies and other customers."

Manufacturing, shared services, procurement and logistics are not high-profit activities.  The Commission can argue that the 65/20 cost-plus margins in the 1991 APA and the updated margins in the revised 2007 agreement were "wrong" but they are unlikely to result in a material difference to the amount of tax Apple would have had to pay in Ireland.  In monetary terms, any finding here would be relatively insignificant.

It is pretty clear that the issue has moved on and that these transfer pricing arrangements are no longer central.  The key issue is Apple’s intellectual property, or more precisely, the location of Apple’s intellectual property.

If we look at the five items requested by the Commission in June letter published this week none of them relates to the pricing agreements.  The information requested was:

- Provide the financial accounts of ASI and AOE for the period 2004-2013, in particular the P&L accounts.
- In the case of ASI single out in the P&L the amount of passive income each year and specifying if such passive income comes from Ireland.
- Provide the number of full time equivalent employees (hereinafter “FTE”) of ASI and of AOE over the same period (each end of reporting period).  Provide the FTE of the Irish branch of ASI and of AOE for the same period (each end of accounting period).
- Provide the cost sharing agreement between Apple Inc., ASI and AOE in all its variations since 1989 until the last modification.
- Describe in detail the type of intellectual property covered by the cost sharing agreement.

It is clear the Commission are focusing on the ASI subsidiary as a whole and not just its Irish branch.  The key issue is whether any of the intellectual property rights held by ASI are located in Ireland.   Last year’s US Senate report contained a good deal of information on ASI. The post continues below the fold with a a selection of quotes relating to ASI, and its parent AOE, in the Senate report.

Read the rest of this entry »

EC letter to Ireland on Apple State-Aid Case

By

September 30th, 2014

The document is here.

There is a lot in it and the extracts here just focus on one element of it: a 1991 transfer pricing agreement that was done on a cost-plus basis, i.e. the profit attributed to the Irish operation was based on the costs incurred by the Irish operation.  This is not an unusual transfer pricing basis and, as expected, the amounts involved are relatively small, i.e. not billions.

The quirk is the structure of the agreement. For example the 1991 agreement for Apple Operations Europe was  [from paragraph 31]:

According to that ruling, the net profit attributable to the AOE branch would be calculated as 65% of operating expenses up to an annual amount of USD [60-70] million and 20% of operating expenses in excess of USD [60-70] million.

In the notes of a meeting (attendees not provided) it was said that (paragraph 37):

Following further discussions it was agreed that, subject to receiving a satisfactory outcome to the capital allowance question, to accept a mark-up of 65% of the costs attributable to the Irish branch. In addition it was agreed to accept a mark-up of 20% on costs in excess of $[60-70]m in order not to prohibit the expansion of the Irish operations.

On the two margins applied the Commission notes the following (paragraph 63):

Second, the margin on branch costs agreed in the 1991 ruling, as described at recital (31), is either 65% or 20% depending on whether the operating costs are below or above USD [60-70] million. According to the excerpt at recital (37), the reduction of the margin after a certain level above USD [60-70] million would have been motivated by employment considerations, which is not a reasoning based on the arm’s length principle. In particular, the two margins of 20% and 65% are relatively far apart and, should the margin of 65% effectively constitute an arm’s length pricing, the margin of 20% would be unlikely to fall within the same range of pricing, while applying the same degree of prudence.

There are other elements as well including transfer pricing for some intellectual property that can be explored in the document.

Barking up the wrong Apple tree

By

September 29th, 2014

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: Read the rest of this entry »

Geneva Report on the World Economy: “Deleveraging, What Deleveraging?”

By

September 29th, 2014

This report (written Luigi Buttiglione, myself, Lucrezia Reichlin and Vincent Reinhart) will be available here from 9am this morning.  The VOX summary article is here.  FT report here.

Update: I will present the report in a Policy Institute seminar on Thursday 2nd October, 12-1, in IIIS seminar room at TCD.

McSharry on Trichet

By

September 28th, 2014

Former finance minister and EU commissioner Ray McSharry has contributed a chapter to the book of tributes to the late Brian Lenihan (Brian Lenihan, In Calm and in Crisis, Murphy, O’Rourke and Whelan (eds), Merrion Press 2014).

The chapter contains the following complete paragraph at page 111:

‘Brian had been keen to burn the big bondholders and we discussed this on a number of occasions. One morning I got a call about a quarter past eight and it was Brian. He told me that he was able to burn the bondholders and he was very happy because the European Central Bank President, Jean-Claude Trichet, had told him he could do it. This would have improved Ireland’s position significantly and it was going to be a big story, but later that day a now despondent Brian rang me back. He said Trichet had changed his mind because he realised that the main casualty if the bondholders were burnt would be big German and French banks. This was a disgraceful decision because the ECB is supposed to represent the interests of Europe generally, but they were clearly under the sway of the German and French banks. Even today, I still would not have much confidence in the ECB and until Europe gets a totally independent entity to defend its currency, the euro will remain a fragile currency’.

The context in McSharry’s piece indicates that

(i) the conversation took place in the summer or autumn of 2010, as the bank guarantee was coming to an end or had already ended, but prior to the EU/IMF programme, and

(ii) the bondholders referred to were bank, not sovereign, bondholders.

The phrase ‘…the main casualty if the bondholders were burnt would be big German and French banks…’ refers, it is reasonable to assume, not (or not only) to the direct losses that these banks would suffer as holders of the bonds in question (it is doubtful that they were big holders) but to the impact of default or haircuts in Ireland on their continued access to new debt funding from the bank bond market.

This reported conversation goes to the heart of Ireland’s unfinished business with the ECB. It is reasonable for the ECB president to display concern about the continued access of major European banks to important funding sources. Whether it is within the ECB’s powers under the statute to impose on an individual member state the cost of shoring up debt market access for Eurozone banks generally is not clear and will not be clarified until the European Court of Justice rules on the matter. The statute does not contain any explicit provisions conferring such an important power.

McSharry’s report of his conversation with Lenihan is further support for the view, which I have expressed many times, that Ireland should take a case against the ECB as provided for in the ECB statute. This is important for the credibility of the ECB as an independent central bank. Win or lose, referral of the matter to the ECJ would clarify whether the ECB possesses the powers it appeared to believe it had back in 2010. If the ECB can impose costs of policies aimed at stabilising markets across the common currency area on an individual member state it is time the member states knew about it.

Autumn 2014 Issue of Economic and Social Review

By

September 25th, 2014

Vol 45, No 3, Autumn (2014)

Table of Contents

Articles

Determinants of Pension Coverage and Retirement Income Replacement Rates – Evidence from TILDA PDF
Sanna Nivakoski 299–328
Income and Wealth in The Irish Longitudinal Study on Ageing PDF
Vincent O’Sullivan, Brian Nolan, Alan Barrett, Cara Dooley 329–348
Informational Efficiency in Distressed Markets: The Case of European Corporate Bonds PDF
Aurelio Fernández Bariviera, M. Belén Guercio, Lisana B. Martinez 349–369
The Socio-economic Gradient of Obesity in Ireland – Corrigendum PDF
David Madden 451–454

Policy Section Articles

The Risks of Intuition: Size, Costs and Economies of Scale in Local Government PDF
Mark Callinan, Ronan Murphy, Aodh Quinlivan 371–403
Winners and Losers on the Roller-Coaster: Ireland, 2003-2011 PDF
David Madden 405–421
The Impact of Training Programme Type and Duration on the Employment Chances of the Unemployed in Ireland PDF
Seamus McGuinness, Philip J. O’Connell, Elish Kelly 425–450

 

Nevin Institute: Quarterly Reports

By

September 24th, 2014

The latest reports from the Nevin Institute are available here.

Join the dots

By

September 23rd, 2014

There are some days when political myopia and an inability to join the dots is particularly difficult to accept. This is one.

On the one hand, we have the Simon Community’s latest annual report:

Over 1,400 people are forced to seek shelter in emergency accommodation in Dublin every night, according to the charity [Simon]. It believes there is little hope for these people of moving on to somewhere of their own in the long term, with at least 50% of people now stuck in emergency shelter for more than six months. The problem, it says, lies in the collapse of the private rented and social housing market, with additional housing also slow to come on stream.

On the other hand, we have these decisions from Dublin’s local authorities:

Dublin homeowners, the State’s biggest payers of local property tax, will have their bills cut next year, following the decision of councillors in three local authorities to lower the tax by 15 per cent. Dublin city councillors last night voted for the cut, despite warnings from chief executive Owen Keegan that the decision could hit homeless services.

Dublin’s local authorities are foregoing roughly €40m on an annual basis with these measures. The back of my envelope suggests that this amount, if used as collateral/deposit of one third to borrow the other two thirds, could have perhaps provided for building 1,000 units a year. I suggest bringing this up with your councillor the next time they knock on the door, proclaiming the virtues of knocking €80 off your property tax bill, while also claiming they will take action on homelessness.

There are two additional bitter pills to swallow. Firstly, this tax rebate is probably the most regressive one that could be dreamed up, with Ireland’s wealthiest citizens benefiting the most and the poorest third of society gaining nothing. And secondly, Ireland’s left-of-centre parties (particularly those not in Government) led the charge on this. The mind boggles.

Blame cannot lie entirely with local politicians, it must be said. Narrowly, if central government hadn’t given them a target of 15%, and instead let them do whatever they want with their property tax, but live with the consequences, things might have panned out differently.

More broadly, there will always be a segment of society who cannot afford to cover the costs involved in their accommodation, so there will always be a requirement for social housing. The government has long abdicated its duties in this regard.

 

The Big Read: How Ireland’s Nama moved centre stage

By

September 22nd, 2014

The FT continues its focus on Ireland with his long article by Vincent Boland – here.

Conference: Financing SMEs in Economic Recovery

By

September 22nd, 2014

Conference: Financing SMEs in Economic Recovery
ESRI, 26/09/2014, 8.30am -1pm

The ESRI will hold a half-day conference focusing on the bank and non-bank financing environment of SMEs in economic recovery. The research presented aims to contribute to a policy environment that facilitates a smooth recovery in the SME sector. Programme outline below:

PROGRAMME

08.30 Registration and Coffee
09.00 Welcome: Professor Frances Ruane, Director, ESRI
09.05 Opening Address: Simon Harris, T.D., Minister of State at the Department of Finance

SESSION 1
Evidence on SME Financing: Ireland in a European Perspective
Chair: Fergal McCann, Central Bank of Ireland

09.30 Which Firms Apply for Credit in the Euro Area?
Annalisa Ferrando, European Central Bank

10.00 SME Financing Landscape in Ireland: A Comparative Perspective
Conor O’Toole, Economic and Social Research Institute

10.30 Tea/Coffee

SESSION 2
Policy Objectives and Supports for Funding SMEs
Chair: Niall O’Donnellan, Enterprise Ireland

11.00 SME Default in Ireland
Tara McIndoe-Calder, Central Bank Ireland

11.30 Policy Options for SME Financing in Ireland
Martina Lawless, Economic and Social Research Institute

SESSION 3

12.00 Roundtable discussion
Chair: John Hogan, Department of Finance

Participants: Loretta O’Sullivan (BoI), Patricia Callan (Small Firms Association), John O’Sullivan (ACT Venture Capital ), Nick Ashmore (SBCI), Garrett Murray (Enterprise Ireland )

Please register at:
https://www.surveymonkey.com/s/SMECONFERENCE

Lessons from Ireland?

By

September 21st, 2014

The recent data releases have prompted various comments about what might be learned from the Irish recovery: see FT comment here;   and the letter from Hugh McDermott here.