ESRI Geary Lecture – Tim Besley, LSE

This year’s Geary Lecture will be delivered by Tim Besley, Professor of Economics and Political Science, LSE. He will speak on

“Making and Breaking Tax Systems: Institutional Foundations of the Fiscal State”

Date: Friday 19th October

Time: 4pm

Venue: ESRI, Sir John Rogerson’s Quay

Booking
Attendance at the event is free but must be pre-booked. There are a limited number of places available and early booking is encouraged. To book a place, please send details of attendee’s name, organisation and contact telephone number by email to geary@esri.ie

Inflation in Ireland and the Euro area

In an earlier post I drew attention to the extent to which Ireland’s recent apparent competitive gains reflected the weakness of the euro relative to the dollar and sterling.

Another component of competitiveness is, of course, our rate of inflation relative to that of the Euro area as a whole.

It is therefore of interest to put on record the inflation rates in Ireland and in the Euro area since 1999.

This is facilitated by the European Central Bank’s website, from which monthly data on the rate of inflation as measured by the Harmonised Index of Consumer Prices (HICP) may be readily downloaded.

The following Chart tells the story.

It may be seen that for the first five years of the new monetary union Ireland’s inflation rate was – contrary to expectations – significantly higher than the Euro area average.  This resulted in a significant loss of competitiveness relative to the rest of the Euro area.

For the years between 2004 and 2007 our inflation rate behaved as expected in a monetary union and differed little from that of the Euro area average.

During 2009 and 2010 we experienced more deflation than the rest of the Euro area. This helped restore some of the competitiveness we had lost in the early years of membership and the ‘internal devaluation’ was hailed at the time in the belief that it would play a big role in getting the economy moving again.

Since 2010, however, our inflation rate has been climbing back up towards the Euro area average.

It would seem that any further ‘restoration of competitiveness’ will require further weakness of the euro on the foreign exchange markets.

Dutch Bankers’ Bonuses Go Bye-Bye, Thanks to Twitter

One thing journalists from other countries ask quite frequently is why there haven’t been more riots or other expressions of collective anger in Ireland, given the scale of the problems we’ve faced and the sheer injustice of some of the actions taken since all of this began in 2007. I always answer that I have no idea why we haven’t seen more grass roots reactions like Bondwatch Ireland. I really don’t know.

Last March in Holland we had an example of twitter-inspired social unrest leading to the reversal of bonuses being paid out. This is the first I’ve seen of it, so I thought I’d blog it.

From the piece:

ING customers mobilised on Twitter and other social networks to protest at bonuses paid to bosses at the bank, one of the biggest in the country. The threat of direct action raised the spectre of a partial run on ING, terrifying the Dutch establishment. Fred Polhout, union organiser at the bank, says: “People were outraged. We heard about the bloated sums being paid again in the City and in New York; but suddenly the issue exploded on our own front door.”

and:

So severe was the public reaction to Hommen’s bonus that within days he had agreed to waive the award and told other ING directors to do the same.

Fascinating, and perhaps something to watch for in the coming months in an Irish context.

Nama’s Mortgage Enhancement Scheme

In today’s Irish Times, Fiona Reddan has an interesting short article about Nama’s planned mortgage-enhancement scheme. The scheme is intended to unload some of Nama’s large inventory of houses and flats without unduly lowering property prices.  The scheme, at least as it has been described so far, will work as follows.  Suppose that Nama wants to sell a particular flat for 100,000.  It will offer a buyer the following deal. The purchaser must put down 10,000 in cash, and take out a mortgage from a bank for 72,000.  Nama will pay (itself) the remaining 18,000 and record the flat as sold at 10,000+72,000+18,000 = 100,000.  If after an initial period, say five years, the fair market value of  the house is more than 82,000 (the amount already paid by the homeowner) than the homeowner must “top up” the difference to a maximum of 18,000.  If the fair-market value of the house is 82,000 or less at this date, the homeowner has no need to pay the remainder. Continue reading “Nama’s Mortgage Enhancement Scheme”

ESRI – TCD Conference: Turning Globalisation to National Advantage: Economic Policy Lessons from Ireland’s Experience

This conference will be held at the ESRI on Thursday 28th October from 13:30 to 17:30 and will discuss research results from two IRCHSS-funded projects focused on the effects of globalisation on the Irish economy and related policy responses. The conference programme can be found here. There is no attendance fee, but guests are asked to register here by the 23rd October. Any queries can be addressed to Karen Mayor (karen.mayor@esri.ie).
 

The Mechanics of Buybacks

The Sunday Business Post reports the government intends to launch a buyback from Anglo bondholders (available here). 

The government is expected to launch a bond buyback for Anglo Irish Bank in the coming weeks, as part of a restructuring plan agreed with the EU Commission. 

The buyback, which will reduce the bill for taxpayers, will offer some bondholders in the new Anglo asset recovery vehicle the option of a bond, or a term deposit, in the new funding bank at a significant discount.

In the discussion of buybacks, or negotiating with bondholders”, it sometimes seems to be forgotten that the only way these negotiations succeed is that there is a credible threat that losses will be directly imposed on bondholders.   One particularly strange example was when the Minister for Finance took credit for the earlier round of Anglo subordinated debt buybacks, even though these buybacks only took place because of the lack of credibility of the governments policy of protecting bondholders.   The main reason the bondholders were willing to accept the buyback must have been the risk of a change of government.  

A good cop, bad cop routine may be going on at the moment, with the opposition parties being quite explicit about their intentions.   The Post reports,

Last week, Fine Gael leader Enda Kenny wrote to the EU competition commission saying there was, in his partys view, no sound legal or economic case for the Irish taxpayer to repay bond investors in Anglo Irish Bank following the expiry of the guarantee.

The letter made it clear that he was referring to those bondholders who invested before the September 2008 guarantee, both subordinated and senior debt holders. 

In considering what the threat point in buyback negotiations should be, I have also been surprised by the lack of curiosity about the details of the proposed Anglo split.   Most commentators have been content to repeat the mantra about the need for certainty on the cost and timing of resolving Anglo.   

It will take some time before these uncertainties can be resolved.  But surely we should be told now exactly how the mechanics of the split will work.   What will be the value of the claim that the funding bank will hold on the recovery bank?   Will this bond be guaranteed?   How will capital be divided between the two entities? 

On the last question, a number of reports make the point that the funding bank will only need light capitalisation given that it wont be making new loans.   This strikes me as a strange claim.  The main purpose of capital is to protect depositors from losses.   Surely a key objective of the split is to protect depositors so that they are willing to keep their funds in the funding bank, potentially weakening the need for guarantees of deposits or the bond issued by the recovery bank.   On the other hand, if the goal is to encourage the bondholders to accept buybacks, shouldnt the recovery bank be capitalised as lightly as possible?  Some harder questioning about the mechanics of the split seems warranted. 

Who Blinks First? Ireland, Greece, the ECB, and the Bank Guarantee

The rules of the game have changed for Ireland.  Should Ireland respond to this new risky-game environment by selling off some or all of its domestic banks to large foreign bank holding companies?  I believe that it should.  We can keep the names on the high street bank offices, but lose the liability guarantee.

Continue reading “Who Blinks First? Ireland, Greece, the ECB, and the Bank Guarantee”

CRUgate

The Climate Research Unit (CRU) of the University of East Anglia is a leading research centre on climate change. They are known for the data that they provide, particularly their estimate of the annual, global mean surface air temperature since 1850 or so. One of their servers was hacked and some 1000 emails and 3000 documents were stolen, most of them 10 years old. These emails were posted on the web, and are now being scrutinised by every one who has a grudge against climate change or climate policy, and against people who harbour such grudges.

What has emerged? There is a lot of chit-chat, and bitching about colleagues (with perhaps ground for a defamation suit or two). There are attempts at blocking other people’s careers, but no signs of success. There are hints of data manipulation. None of this surprised me. There are also indications of a systematic obstruction of freedom of information requests.

What does this mean? Not much really, although some people may end up in jail for stealing data and others may lose their jobs for breaking legal and academic rules on transparency.

Doubt has been cast over the CRU data. Insiders never really trusted their data, and it is actually little used as an input to other climate research. The global mean temperature record is used for communication rather than research. Most of the temperature graphs you have seen in the newspaper are from the CRU, but independent research has corroborated their main findings. Statistical analyses similarly have used alternative data series, and the results are broadly the same.

Some people have portrayed the climate debate as noble scientists versus savage businessmen. That image is now shattered, but it was pretty naive anyway. There are bad apples on both sides of the debate.

So? Objectively, nothing has changed. Climate change is still real, and still a real problem. A carbon tax is still the right policy. Subjectively, things are different. It is harder to argue that wise scientists of impeccable standing recommend action. Proponents of climate policy have to make a real case. I do that here.

UPDATE (26 Nov)

This story keeps growing. The latest person to get entangled is John Holdren, the science and technology advisor of President Obama. While Holdren’s email contains nothing untoward (in fact, he’s remarkably patient and polite), it does demonstrate a closeness between Holdren and people who are tainted.

Another new development: One of the CRU emails has language that may be read as financial irregularity.

UPDATE (30 Nov)

CRU has belatedly agreed to open its data bases.

It appears that it deleted duplicate records. While that is fine for archiving reasons, combined with the poor documentation of CRU’s algorithms, it does imply that the CRU’s homogenized data cannot be reconstructed.

UPDATE (2 Dec)

Penn State U had already announced an internal inquiry into the conduct of Michael Mann, citing the results of an earlier inquiry (but omitting the results of another) in its press release.

U East Anglia has now also announced an internal investigation, and Phil Jones (whose mailbox was hacked) has temporarily stepped down as director.

My prediction that the mainstream media of Ireland will soon report on this matter, is unfounded.

Waste policy

Minister Gormley just released a 1232 page review of waste policy. The press release is short and vague, but it does announce an increase of the landfill levy to €75 per tonne in 2012. It’s €15/t now, so that’s a 400% increase. The average price at the landfill gate is about €140/t. This will go up to €200/t, a 43% increase. Curtis et al. show that the effect on the volume of waste is small.

The press release also announces an incineration levy of €20-38/t. I do not know the details of the contract between Dublin City Council and Coventa/Dong, so I do not know whether its Dublin taxpayers or C/D shareholders who will be paying the annual €12-24 mln.

The summary report has a number of recommendations:

  1. More waste separation at source (7 bins for you), and improved collection of recyclables from homes
  2. Nonlinear waste charges applied at the county level (i.e., you will pay if your neighbours have too much waste)
  3. Stringent targets for recycling (we won’t be soccer champions, but we’ll beat the world on this)
  4. A ban on inter-county waste trade (this complies with WTO rules)

And this will of course cut emissions, create jobs, and save money.

A more detailed assessment will follow shortly.

The Northern Ireland economy

As far as I know, there has not been a single blog relating to Northern Ireland since The Irish Economy blog began earlier this year. Northern Ireland is having a relatively good recession for various reasons on which I do not wish to dwell. However, it has serious long-term problems which have been addressed in a report commissioned by the devolved economy Minister. The report is available here. What will interest readers of this Blog was that 4 out of the 5 report authors are economists, of which I am one.

In essence, the Northern Ireland economy has operated under wartime conditions for nearly four decades. Public sector output amounts to around 60% of gross value added (the regional equivalent of GDP). More specifically, industrial policy has consisted of providing large scale grants to both inward investors and indigenous firms. This has been partly successful: employment growth has been high in the last decade and at the peak of the recent boom, the unemployment rate was hovering just above 4% as in the Republic of Ireland case. What was different was that productivity growth was low to non-existent. Consequently living standards have not converged on the UK and have diverged markedly from the Republic of Ireland and other successful countries.

Continue reading “The Northern Ireland economy”

Managing Housing Bubbles in Regional Economies under EMU: Ireland and Spain

 

Today Thomas Conefrey and myself publish a working paper entitled “Managing Housing Bubbles in Regional Economies under EMU: Ireland and Spain”. It is available here .

With the advent of EMU, monetary policy can no longer be used to prevent housing market bubbles in regional economies such as Ireland or Spain. However, fiscal policy can and should be used to achieve the same effect. This paper shows that the advent of EMU relaxed existing financial constraints in Ireland and Spain, allowing a more rapid expansion of the housing stock in those countries to meet their specific demographic circumstances. However, the failure to prevent these booms turning into bubbles did lasting damage to the two economies, damage that could have been avoided by more appropriate fiscal policy action.

The failure to tighten fiscal policy in Spain and Ireland in the early years of this decade laid the ground for the housing market bubbles in the two economies. The Stability and Growth Pact proved a distraction: government budgetary balance was not an appropriate fiscal target for those two economies. By contrast, Finland, having learned from its mistakes twenty years ago, ran substantial government surpluses to prevent domestic overheating. Specifically in relation to overheating in the housing market, we consider that a temporary tax on mortgage interest payments (first suggested in 2001) should have been used to target overinvestment in housing, investment which seriously crowded out the traded sector of both economies. This tax would have mimicked an increase in interest rates. Obviously it will be a very long time before such a tax might be needed in either Spain or Ireland to limit overinvestment in housing.

The paper shows that demographic circumstances in both Spain and Ireland meant that it was appropriate that investment in housing in those two economies should have been somewhat higher than in their neighbours. Even after the housing bubbles have burst, the relatively low endowment of housing infrastructure in the two economies (relative to adult population) means that there will be a need for additional investment in the next decade, when the current excess supply has been worked off.

In the paper we also include a graph taken from our paper “Recovery Scenarios for Ireland” published in May  which, inter alia, considered likely housing demand over the coming decade. Our model included estimated 2009 population numbers which were quite close to the latest estimates published by the CSO. We assume that between 2009 and 2015 there will be cumulative net emigration of up to 120,000. Our analysis would suggest that the underlying population increase would lead to somewhat higher demand for housing than Brendan Walsh has estimated in a recent post for the period to 2015. In addition to the pure “demographic” effect we also factor in some increase in headship on the basis of the recent rise in the number of households, which possibly reflects falling rents.


 

Bank Asset Price Bounce: Irish versus US Banks

Perhaps the most contentious issue in NAMA planning is the distinction made between the long-term economic value and the current-market prices of bank assets, particularly developer loans collateralized by Irish property portfolios. 

Optimists see a strong case for a liquidity-related price bounce in these bank assets, that is, low current-market prices recovering to higher “true economic value” prices over coming years, as financial market distress dissipates.  This optimistic view, forecasting a bank asset price bounce, provides a strong justification for setting up NAMA, and also justifies paying the banks more than current-market prices for their bad loan portfolios (but still much less than accounting book value).

Pessimists forecast either flat or declining market prices for these bank assets over coming years.  This pessimistic view implies that NAMA (if it comes into existence) should pay current-market prices or less for bank assets. 

 I think that the optimists might be over-extrapolating from the current US environment.  There are important differences for the case of Irish bank assets.  In my opinion, the market prices of US bank assets will bounce up strongly sometime during the next few years, whereas the prices of Irish bank assets will recover more modestly or not at all. Continue reading “Bank Asset Price Bounce: Irish versus US Banks”

Tilting at windmills

In considering how to value land under current economic circumstances answers may turn up in unexpected places. One of the most important state regulatory authorities, the Commission for Energy (CER), has taken the plunge and revised down their assumed value of land. In this case it is the site procurement cost for windmills. My colleague Laura Malaguzzi Valeri pointed me to page 41 of their document on Fixed Cost of a Best New Entrant Peaking Plant & Capacity Requirement for the Calendar Year 2010 where they say:

 “Due to the significant movements in the economy over the last year, the value of land has reduced. An independent assessment was carried out on current land values, and the RAs are satisfied that the estimate for 2010 is an reasonable reflection of the current costs.”

As a result, they have revised downward the value which they assume by 63%.

Because wind producers are price takers on the competitive wholesale market this will not affect current electricity prices. Nonetheless, the fall in land prices should reduce the long-term cost of producing wind energy, with beneficial effects for consumers.

If NAMA want to read up on the details of this valuation it can be found at:

http://www.allislandproject.org/en/capacity-payments-consultation.aspx?article=f6ff1ea8-5f01-416d-a863-cb945a3d71d9

Price inflation and income distribution

With the risk of being ridiculed for self-promotion, readers may want to have a look at some recent computations.

Earlier, Callan, Keane and Walsh had a look the impact of recent changes in taxes and benefits on nominal income. They found a sizeable redistribution from rich to poor.

An Bord Snip Nua argued that benefits should be indexed on the consumer price index, which would be tantamount to a 5% cut.

In the paper with Jennings and Lyons, we compute the consumer price index per income decile. The highest incomes have seen the fastest deflation, up to 5.1% for the period July 2008 to June 2009 for the top 10% earners. The three lowest income deciles have seen deflation in the range of 3.0 to 3.4%.

By the argument of An Bord Snip Nua, a 5% cut in benefits thus seems a bit harsh.

On the other hand, deflation has been slower for lower incomes because local authority rents have continued to go up even as the rest of the housing market collapsed. As local authority rents are indexed on renters’ incomes, a cuts in benefits would in fact induce deflation for this, particularly vulnerable group.

A 3% cut in nominal benefits would therefore mean that the poorest people in Ireland would see a rise in their real income.

An Bord Snip: Research

One of the recommendations of An Bord Snip Nua is to transfer all research money from the departments and agencies to a single research body.  Besides the cost savings, I see three advantages:

1. Competition for research allocation between fields (as opposed to the current earmarking of research money for someone’s pet projects)

2. Academic quality control (captive agencies occassionally grant funding to researchers of low repute but the right political colour)

3. Streamlining of applications and administration (at present, research bodies need to keep track of the rules of a range of bureaucracies)

I see two disadvantages, however:

1. Disruption: Transfer of tasks between public policy inevitably leads to chaos, and no research funding will flow for a certain period. This may lead to the destruction of human capital — that is, the good researchers may leave the country, leaving the dross behind. Continuity is therefore a high priority.

2. Applied research has a lower status, and funding will be under additional pressure from blue-skies research. The agencies and department that lose their research grants should have a substantial say in the type of research to be funded (but not, of course, select the researchers).

Baby Boomers

The number of births recorded in Ireland reached a twentieth century peak of 74.0 thousand in 1980 and fell to an all-time low of 48.2 thousand in 1994.

Births began to increase in the second half of the 1990s and the rate of increase has been rapid over the past five years. The latest figures released by the CSO (Vital Statistics Third Quarter 2008) raise the possibility that the 1980 peak may soon be surpassed, although of course this would still imply a significantly lower birth rate as the population is now some 30 per cent above its 1980 level. The TPFR (total period fertility rate – roughly the number of births per woman over her child-bearing life span) declined from 3.23 in 1980 to a low of 1.85 in 1994 but was back up to 2.03 in 2007.

These huge swings in the birth rate have serious implications for resource allocation, especially in the health and education sectors. The Dublin maternity hospitals are now bursting at the seams, while the educational system will continue to feel the impact of growing numbers of school-age children for years to come.

Will the number of births continue to grow? Population projections are notoriously uncertain, at best serving to illustrate the implications of alternative assumptions about key demographic variables.  The projections for 2011-2041 published by the CSO in April 2008 assumed that the TPFR would decline to 1.78 by 2011, which seems a high given the continuing buoyancy in the birth rate.

But there are reasons for believing that the birth rate could suddenly take a nosedive, as happened in the 1980s. The peak in the number of births recorded in 1980 was quite dramatic and the subsequent rate of decline steep. (The decline began shortly after Pope John Paul II’s visit to Ireland in September 1979, when he preached against contraception and abortion.)  More significant is that it coincided closely with the sharp rise in unemployment as Ireland entered the deep recession of the 1980s. The following graph shows the correlation between the number of births (four quarter moving average) and the seasonally adjusted numbers on the Live Register, lagged three quarters.  The coincidence between the peak in the number of births and the floor in the unemployment rate is striking.

The second graph is the comparable picture for the years 2005 to date (using the standardised unemployment rate in place of Live Register figures).

The unemployment rate began to increase dramatically in the second half of 2008, so it should begin to affect births registered from the second quarter of 2009 onwards.  The latest available data are for 2008Q3, but it is interesting to note that the graph shows the number of births plateauing over the period 2007Q4-2008Q3.  If the experience of the early 1980s is anything to go by, this graph will nosedive over the coming years. Watch this space!

Voting with their feet

Not literally, of course, as no one since Fionn mac Cumhail has left the island on foot. Most people fly. While reliable and timely data on migration are hard to get, we do know how many people fly out of country, and how many fly in. This data can be had from the CSO for every month since January 2006. Unfortunately, the data are released with a six-month delay (courtesy of Dublin Airport Authority). They are instructive nonetheless.

Between Jan 2006 and Oct 2008, 30,282 more people arrived at one of the seven airports than left. This trend has reversed however. While 35,453 entered the Republic of Ireland between Jan 06 and Oct 06, and 72,936 between Nov 06 and Oct 07, 78,106 people left between Nov 07 and Oct 08.

That is, eighty thousand people took a one-way flight, before the scale of the recession was clear.

Of those 78,106 people, 58,980 left for Great Britain, 11,018 for Germany, 6,750 for Poland, 6,409 for the Czech Republic, and 4,161 for the Baltic countries. Between Nov 07 and Oct 08, 4,164 people came from Italy, 3,966 from France, and 2,456 from Hungary.

Getting the asset purchase scheme right

As we wait for today’s budget announcements, it is worth reflecting on the challenges of getting the right design and pricing for the asset purchase scheme now being trailed.

Some bloggers have made up their minds that the government will overpay for the assets. How can such an outcome be avoided? I have a slightly novel suggestion for this.

As in the United States, there will be a huge gap between what the banks claim the assets are worth and the value that the rest of the market would place on them.

Finding a mechanism that places a generally accepted price on the assets is as difficult here as it is in the US. Any asset purchase scheme will require a further detailed scrutiny and evaluation of the assets to be purchased.

It is to be hoped that the initial announcement of an asset purchase scheme will not lock the government into prematurely firm commitments on pricing and financial restructuring of the banks. The worst possible thing would be to crystallize the taxpayers’ costs at too high a level.

Buying the assets at inflated prices would surely be politically unacceptable. Indeed, Government sources have clearly trailed that they will not pay current book value for the assets.

Each country’s situation is slightly different. If we were to subtract now the present value of all prospective loan losses (taking recent analysts’ estimates), the main Irish banks would be severely undercapitalized. Removing the problem loans at anything close to the prices implied in the analysts’ estimates will require the banks to take immediate write-downs that have the same effect.

Therefore implementation of the asset purchase scheme at realistic asset prices will create the need for a further recapitalization of the banks.

Injection of more preference shares by the Government will not do the trick. If the banks are to move forward in a sound manner, and be accepted as financially self-sufficent, they must have sufficient equity capital. In quieter times there would be enthusiastic private sector buyers for equity in such cleaned-up banks. Failing that, the residual equity investor is likely to be the government. When you do the sums using the analysts’ estimated, this has to imply huge dilution of the existing shareholders. No wonder many commentators have concluded that full, albeit temporary, government ownership is on the cards.

Given this background, it might be better to do something just a little more complicated: let the asset management company pay even less than fair price for the bad loans, and in return give the existing shareholders of the banks an equity stake in the AMC. This has the advantage of making sure that the surviving bank really is clean, and neatly defuses shareholder objections that they are being expropriated. Of course they are even less likely to own much or any of the surviving bank, unless they choose to contribute to its recapitalization. Other existing risk capital providers, such as the holders of unguaranteed subordinated debt, could also be compensated for write-down by acquiring a stake in the AMC.

Let’s hope this week’s statements do not shut off possibilities such as this which can protect the taxpayer without destabilizing market confidence by allowing well-adapted financial contracts to bridge the gap between taxpayer and shareholder.

Although my idea may seem novel, specialists will recognize it as only an adaptation into our current circumstances of the most conventional form of bank resolution mechanism. It can work.

An aside on the term ‘macro’

A few years ago, when Ben Bernanke’s appointment was ushered through the US Senate with hardly a murmur, Michael Evans—author of a once widely-used textbook called Macroeconomic Activity—quipped, ‘Macroeconomics, unless it messes up, doesn’t matter very much any more’.  Macro is no longer passé, however, so TCD’s Antoin Murphy is lucky in the timing of his The Genesis of Macroeconomics (just out, Oxford University Press). 

 

As Antoin points out the term ‘macroeconomics’ was coined by Ragnar Frisch in 1933.  Frisch also invented ‘microeconomics’ and ‘econometrics’, as well as some other terms that never caught on.   But ‘macroeconomics’ was still unfamiliar enough in 1945 for an article in the American Economic Review  to use it with the ‘macro’ bit in inverted commas.  It might never have caught on but for the Great Depression and Keynes’s General Theory.  Ironically, though, Keynes himself does not seem to have keen on the term.  Who was the first Irish economist to use it?

 

If JSTOR is to be trusted, the first use of the term in an academic journal was by Jan Tinbergen in 1936 (in ‘Sur la determination statistique de la position de l’équilibre cyclique’, Review of the International Statistical Institute, 4(2) (1936): 173-188).  Tinbergen, by the way, shared the Nobel Prize with Frisch in 1969.  The term was slow to catch on: one JSTOR ‘hit’ before 1940, three in 1940-44, and forty-four in 1945-49.  The story thereafter, as reflected in JSTOR, is summarized in the accompanying table.   Will these ‘interesting times’ reverse the apparent downturn in usage?

 

Year          ‘Hits’
1935-9 1
1940-4 3
1945-9 44
1950-4 149
1955-9 217
1960-4 436
1965-9 959
1970-4 1639
1975-9 2806
1980-4 4429
1985-9 6385
1990-5 7368
1995-9 8028
2000-4 7186

 

 

 

 

 

The Johan Cruijff principle

Besides being one of the best soccer players of all times, Johan Cruijff is also a sage who spouts wise platitudes in a heavy Amsterdam accent. One of them is that every downside has an upside.

The economy is contracting rapidly. This is bad. However, greenhouse gas emissions are also contracting rapidly. This is good.

The EPA will today announce that we will be much closer to our Kyoto targets than previously thought. See Harry McGee’s piece in the Irish Times. This means that we will not have to spend all of the 270 million euro that is reserved for importing emission permits. Every little bit helps.

The details in today’s announcement are of historical interest. The latest EPA emissions projection is based on an ESRI economic projection of mid January.* How times flies. Back then, we thought that cumulative contraction would be 7% between 2008 and 2010. If only.

Should anyone want to update the emission projections, the output elasticity of CO2 is about 0.7 while the output elasticity of all greenhouse gas is about 0.5.

*We also projected emissions at the same time. See another piece by McGee.

Back to the banks

The policy pendulum looks set to swing back to dealing with credit flow in the banking system.  With so many policy proposals floating around internationally, I would be very interested to hear current views on the best policy course for the government. 

 Taking it as given that there has been a severe contraction of new credit, how much is due to: (i) a collapse in the demand for credit as firms and households repair balance sheets; or (ii) a collapse in the supply of credit?  

 Under (ii), is the main reason for the decline in supply: (a) the declining creditworthiness of potential borrowers; or (b) the risk aversion of bankers as they teeter on the edge of insolvency?

 It seems to me that if the contraction is mainly driven by some combination of (i) and (ii a), the government would be wise to limit the additional fiscal commitment.   A large package would further tighten the fiscal solvency constraint and force a more rapid fiscal correction. 

 The case for a large package seems more compelling if the credit contraction is being driven by the caution of the bankers.   Whatever the size of the package, what is the proper balance between re-capitalisation, insurance for new credit flows, troubled asset purchases, etc? 

What a great opportunity for public transport

This will be a nice case study for future students of business administration. Consider a company that holds a near monopoly in a segment of a market that has been growing by 7.7% per year for a decade. What does such a company need to do to turn a loss?

Bus Eireann and Dublin Bus managed this feat (after subsidies). I will not speculate how and why. But with respect for the workers that are being laid off, I think this situation provides a great opportunity for public transport in Ireland.

Bus Eireann and Dublin Bus need to cut costs. They want to do this by reducing the number of busses on the road and the number of drivers on the payroll. That is their choice. The plan is to trim the schedule. That is wrong. Instead of reducing frequency at selected routes, they should give up some routes altogether. The regulator should then sell the concession on these routes to the highest bidder. (This would not save public finance.) Service levels would be maintained where commercially viable. Competition would lead to lower transport costs. (This would not restore competiveness.) Unemployment would fall (but the incoming operators may prefer to hire other drivers than the ones just let go).

Overall demand for transport is down in any recession, but the share of cheap (i.e., bus) transport is up, so I think there is a business case for bus routes in Dublin.

Over time, the state-owned, subsidised incumbents may get their act together, or they may be replaced by commercial operators altogether.

This post was written in Switzerland, where there is a train waiting at the airport to take you to the university’s doorstep. I landed at 2:30 pm in Zurich and was well in time for my 4 pm lecture in Bern. Zurich and Bern are as far apart as Dublin and Athlone.