Convery defends the Green New Deal

in today’s Irish Times

Convery starts with stating that “raising the price of carbon is a necessary and sufficient step for tackling global warming” […] if and only if the tax was high enough to achieve the necessary reductions”. This stretches the definition of “necessary”. The carbon tax should, of course, be equal to the marginal damage cost. Such a tax does not lead to the emission reductions required by a forthcoming EU directive. Perhaps that is a sign that the EU is overambitious. But even if you except the writ of the EU, then we should still meet the EU-wide target at a cost that is minimum at the EU-level — and for Ireland not accept a cost that goes beyond that. This means that the carbon tax should equal the ETS permit price. Not less. Not more. Equal.

Convery then argues that, because methane from agriculture cannot be monitored, the uniform price principle is broken. True. He then seems to imply that because it is broken anyway, it does not matter to break it further: Because the tax on methane is zero, the price of carbon dioxide need not be uniform. This is plain nonsense.

Convery does not repeat the recommendation by Comher SDC that the carbon tax revenue should be used to subsidise energy efficiency. That would indeed be wasting tax money on double regulation.

Convery does argue that “[s]ubsidies […] be directed exclusively at enhancing fuel efficiency in poor households.” I have argued that the monies for this can more appropriately be found in the budget for fuel allowances.

Convery finally argues for a stimulus package of 2% of GDP, but does not state where that money should come from. The Comher SDC report recommends more borrowing and using the capital of NAMA, Anglo-Irish and the pension funds.

The affordability of a stimulus aside, investing in renewable energy is not the best stimulus. Climate change may be a problem for Ireland in 100 years, but extra borrowing surely poses a problem in 10 years time. The Irish economy needs jobs and capital, while energy is capital-intensive and labour-extensive. Renewable energy may create export opportunities in 10 or 20 years times, but we need to increase exports this year and next.

If there were money for a stimulus, then we should slash labour taxes. If we cannot slash labour taxes, then we’ll have to slash wages.

NAMA Business Plan

NAMA has released a draft business plan. It is a truly extraordinary document. To summarise, those who thought that NAMA would largely be a property fund—closing on delinquent developers and selling on the assets—are wrong. It appears that NAMA’s game plan is to wait a few years and then the vast majority of the developers will be able to pay back their loans in full.

Among the highlights:

  1. NAMA is assumed to make a net profit of €5.48 billion by the end of its anticipated lifetime of ten years.
  2. However, contrary to the million times that we have been told that NAMA will “wash its face” on an ongoing basis, it is projected that NAMA will pay out €16 billion in interest payments on its debt but will receive €12 billion in interest income on the loans acquired.
  3. In addition, fees and expenses will add up to €2.64 billion over ten years.
  4. The profit of €5.48 billion stems from NAMA recouping payments of €66.1 billion from loan repayments and asset recoveries to pay off the €54 billion in loans issued.
  5. Interestingly, from Table 5’s cash flow projections, the only year in which NAMA is not projected to lose money on an income flow basis is 2010 when an interest outflow of €1.3 billion will be offset by interest income of, em, €1.3 billion. Table 7’s “budget projections” attempts to show that NAMA will make a profit in 2010-2012. The difference between this and Table 5 is “The interest income projections in this table include the impact of contractual rolled-up interest on land and development loans in addition to interest income from cash flow-producing assets.” So any “profit” reported will be of a phantom variety.
  6. From Page 10: “The projections assume that, of the €77 billion nominal value of loans acquired, €62 billion will be repaid by borrowers and that loan defaults or debt restructuring will occur on €15 billion (a rate of 20%). Over a five year period in the early 1990s, one UK bank experienced a default rate of less than 10% on its whole book. Given the concentrated nature of the prospective NAMA portfolio and the risk of a prolonged recession, a 20% default rate assumption has been made. It is also assumed that €4 billion will be realised from the sale of underlying assets secured by the defaulting loans of €15 billion. These are conservative and prudent assumptions.” Yes you read that right. 80% of the loans will be repaid in full.
  7. The 80% who pay back their loans will be in no rush to do so. Repayments will be €1 billion next year and the year after, €2.5 billion in 2012. Then in 2013 (after the next election!) the loan repayments will start arriving in buckets—€7.5 billion every year.
  8. What if more than 20% of the loans can’t be paid back? The document tells us: “Stress-testing of this assumption indicates that the default rate would have to increase to 31% to erode in full NAMA’s projected Net Present Value gain of €4.8 billion.” Feel better now?
  9. NAMA will acquire €14.6 billion in derivatives positions, mainly interest rate swaps.
  10. By the turn of the year, NAMA will only have taken on 10 loans with a total value of €16 billion.
  11. NAMA’s potential new lending: “NAMA will inherit any commitments entered into by the banks as far as the drawdown of funds is concerned; it is estimated that undrawn commitments on loans transferring to NAMA are of the order of €6.5 billion.” This exceeds the €5 billion limit placed on it in the legislation. The document says “the limit can be adjusted by order of the Minister and Resolution of the Dáil, thus ensuring parliamentary accountability for borrowing levels.”

Anyone in the Green Party up for a revote?

Upcoming SSISI events

SSISI have a very interesting schedule for this term:  full details here.

NESC Report: Next Steps in Addressing Ireland’s Five-Part Crisis: Combining Retrenchment with Reform

NESC has released a new report on how to address the current crisis situation: you can download it here.

ESRI against Welfare Cuts – but What’s a ‘Cut’?

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.