Tuesday, March 23, 2010

Economics 23/03/2010: Re-shuffling yields no trump cards

Let us first outline the conditions under which today's reshuffle took place:
  • Earlier today Friends First Quarterly Economic Outlook predicted that after falling 50% since 2007, house prices will decline by 10% more this year. So the total drop through the cycle expected by Friends First is around 55%.
If house prices grow at 3% on average per annum, it will take us until 2038 before we recover the nominal losses in the property prices. If we are to assume that the spread between asking price premium paid in 2007 and asking price discount available today is 7.5% (+/-5%), to will take us until 2044 to regain the peak prices levels in nominal terms.

If property prices grow at 1.5% in real terms per annum (comparable to what has been happening in the better performing developed markets around the world since the 1960s), we will be able to restore 2007 levels of real housing wealth only in 2078, using the +/-5% discount/premium spread, or 2064 if we just take asking prices.

The previous Cabinet, absent three exceptions, has presided over this boom and the bust. The re-shuffled one did as well. Is this a dramatic departure from the policies of the old?
  • Second, also today, a report from PwC has forecast that the Irish economy will shrink by 1.3% this year, before returning to growth of around 1.8% in 2011. This means that peak to trough PWC expects economy to contract 12% in terms of GDP, and approximately 16.3% in terms of GNP. PWC forecasts that economy will return to growth of around 1.8% in 2011.
Assuming this will be the 'new normal' on average, it will take Ireland Inc until 2019 to regain the nominal levels of GDP we enjoyed at the peak of the bubble and until 2021 to do so in terms of domestic economy income.

I am not going to outline the rest of the bleak conditions that form the backdrop to today's cabinet reshuffle, but it was clear from the beginning that a significant change in the Cabinet was required if the country were to have any hope of change in policies.

Which brings us to the new Cabinet formation:

Below, I will marks Taoiseach's decision out of 5 points maximum possible corresponding to 'Excellent' with 0 corresponding to 'Extremely Poor'. These scores do not attempt to rate individual Ministers past performance, but rather the decision made by Taoiseach in making new appointments.
  • Mary Coughlan - Tánaiste, Minister for Education and Science – No comment – the title says everything… 0/5
  • Brian Lenihan - Minister for Finance – the best we can do in this Cabinet… 5/5
  • Mary Harney - Minister for Health – the only person willing to take the poisoned chalice and run with it for 6 years… 5/5
  • Noel Dempsey - Minister for Transport – a safer bet, despite a number of high profile errors (T2 contract to DAA, etc) and insistence on a number of White Elephants, e.g. Metro North – 3/5
  • Dermot Ahern - Minister for Justice, Equality and Law Reform – a better candidate for an economics post, but a good call for his current post as well. Ahearn deserved a promotion by virtue of being a more promising senior and experienced figure for key post and in this environment. Economics posts are the key ones – 3/5
  • Micheál Martin - Minister for Foreign Affairs – best suited for his current role - 5/5
  • Éamon Ó Cuív - Minister for Social and Family Affairs – think ‘experience’ (though he did run Gaeltacht Affairs - a largely welfare scheme) - 0/5
  • Mary Hanafin - Minister for Arts, Sport and Tourism – Mary Hanafin deserved a much greater role in the Cabinet, with good potential to run an economics portfolio, her placement in Arts, Sports and Tourism is an opportunity foregone, 0/5
  • John Gormley - Minister for Environment, Heritage and Local Government – this is a purely political balancing act, 2/5
  • Eamon Ryan - Minister for Communications, Energy and Natural Resources – see John Gormley, 2/5
  • Brendan Smith - Minister for Agriculture, Fisheries and Food - a very significant portfolio especially when one recognizes the role of food exports in total indigenous exports– see Eamon O Cuiv above, 0/5
  • Batt O'Keeffe - Minister for Enterprise, Trade and Innovation – possibly an interesting move, risky, but… Batt O’Keeffe did some honest, if strangely inconsistent work in DofE. His record, ranging from brave and intriguing to unexplainable, should be interesting to watch at DETI. But is this a ‘steady, strong hand’ that one needs to move things forward in the second most important department in the country? I simply do not know. So: 3/5.
Average score: 28/60 or 47%. It won’t earn one a pass in a post graduate programme course.

Now to the second test – the rearranging of the chairs floating over the spot where Titanic sunk:
  • The Department of Enterprise and Trade is now to take responsibility for Innovation. And lose responsibility for Employment. Given that DETE used to be one of the more competent of all departments in the past, this clearly suggests that the Government has no real policy platform for combating unemployment. Score on decision: 0/5.
  • The Department of Education is to become the Department of Education and Skills. DofE has no capability or experience in dealing with the matters of skills. VAC schemes that it runs are shambolic at the very best and never were benchmarked or tested properly. To acquire expertise it would need FAS, plus some Forfas capabilities, plus access to multinational and domestic employers. DofE - focused on the needs of secondary education sector since its foundation - simply cannot be expected to deploy an enterprise-centred culture needed to build them. Score on decision: 1/5.
  • The Department of Social and Family Affairs will become the Department of Social Protection - it will take responsibility for FÁS. Which now puts our Government into a position of formally admitting that FAS ‘training’ schemes are nothing more than social welfare designed to artificially reduce (temporarily) the Live Register counts. Furthermore, DofSocial Protection has neither expertise nor experience in dealing with training. This decision further fractured the employment training and skills policy. It also created an interesting conundrum. FAS has various embedded and affiliated bodies which include participation from private sector leadership. We are now likely to find ourselves in a comical scenario where private corporate leaders will be asked to provide public service to Social Welfare. Score on decision: 0/5.
  • Equality is to go into the Department of Community and Gaeltacht affairs. This, of course, is a purely optical announcement with no real meaning, other than the potential for creation of new public sector employment - 0/5.
  • Mr Cowen also announced the setting up of a Public Service Board, which aims to accelerate public service reform in consultation with the unions. Amazing: after a clear show of intransigence on reforms, the unions are now formally incorporated into the process of reforms. This legislatively establishes a one-sided form of sub-Social Partnership as an official part of the State – 0/5.
  • Junior minister Dara Calleary will also be assigned to push through change in the public service. Junior ministry allocation to reforming something that accounts for over 40% of our economy? For over 1/3 of our entire Exchequer Budget? Combined with the PSBoard announcement, expect no reforms of any sort to come out within the life of this Government. 0/5 folks.
Total score on the Cabinet change and new ‘reforms’ of Departments: 29/90 or 32% - a Fail even in an undergraduate course.

Per RTE report: “Announcing his changes, the Taoiseach said he was not in favour of structural changes for their own sake and said the benefits the changes bring will outweigh the costs.” Read: no costings have been made, no benefits assessment was done.

Prepare yourselves to another Government that provides policies-based evidence instead of pursuing evidence-based policies.
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