Monday, January 4, 2010

Economics 04/01/2010: Daily points

Minister Brian Lenihan's statement today - available here - deserves reading. Irrespective of one's disagreements with his policies, Brian Lenihan deserves our best wishes for speediest and fullest recovery and his family deserve our praise for the way they handled the public aspects of such a very private matter. Minister's statement today only re-enforces the sense of dignity and respect which he has projected to the entire nation at this time of a serious threat to his health. Let us hope that his treatment, that begins this week, will be swift and fully effective and that he will be as comfortable in the process of treatment as possible.

Now, onto few interesting issues I cam across in today's press:

A rather humorous mention of Ireland in a Kenyan newspaper (here).

A quote from the Economist reproduced in the paper:
"If we are to generate the sort of sustained and genuine boom that will deliver Vision 2030, we must move away from outdated practices. We must imagine success beyond beacons and title deeds. We must understand that we live in a world where success now comes from the contents of your head, not the soil on which you stand. We must make banks and financial institutions the handmaidens of development, not the brides. We must invest in knowledge, innovation and science. ...Our future lies in making and doing things better than others, not in building a cheap-credit economy in which property is the key asset. Let us learn that lesson before we find ourselves sharing a bad Irish joke."

Here is an interesting observation: over the weekend, Mr Cowen stated that the Government has no intention to help resolve the problem of negative equity. This is exactly the 'bad Irish joke' that the Business Daily Africa is talking about. Negative equity undermines returns to human capital by locking people in specific locations regardless of whether they can obtain a job suited to their qualifications or not. Thus, negative equity acts to undermine:
  • incentives for skills acquisition, upskilling and mobility;
  • returns to human capital investments to individuals and the economy at large; and
  • the potential rate of growth for our economy.
Sadly, Mr Cowen does not seem to understand that this threat is far more severe and harder to deal with than the threats to our banks. One can replace Irish banks or sell them to the highest bidders. One can replace liquidity from the bond holders with alternative sources of financing. All within 2-3 years if not earlier.

But one cannot reverse long term structural unemployment that will be the outcome of the negative equity - often, even after generations pass.

There is an interesting essay on Seeking Alpha (here) discussing some evidence that the 2000s was a lost decade in the US and that this trend is going to continue into the new decade. The second chart, plotting real S&P500 against payroll population ratio to total population is a telling one.

The EU Observer (here) has a story on the French courts striking down the new Carbon Tax as imposing an arbitrarily unfair burden on consumers, while letting industry off the hook. Is there a case for Ireland's courts to protect consumers? Tall order. In the case of the Irish CO2 tax, we, consumers, will pay the full load through:
  1. paying directly at the pump and through VRT, and
  2. paying indirectly through energy charges set by regulators for semi-state monopolies running our energy sector,
  3. through higher charges at the airports and on public transport, also set by unaccountable regulators, and
  4. at a later date - through incineration surcharges that will be inevitable given the conditions of the contract between the Poolbeg operators and Dublin City.
Here is a telling quote: "Socialist Party grandee Segolene Royal cheered the ruling, calling the law 'ecologically ineffective and socially unjust.' The Greens for their part back the principle of a carbon tax but welcomed the ruling, believing Mr Sarkozy's version of such a tax inegalitarian."

It wouldn't be the job of the Irish Green Party to make sure that our own carbon tax is effective, egalitarian and socially just. But what about the economic logic? Ireland spent 2009 solidly in pursuit of improved cost competitiveness as businesses and the Government cut employment costs. Now, we just managed to hike up the cost of doing business in this country and reduce our ability to accept lower wages by raising a new tax. Anyone to notice a grand contradiction?

1 comment:

Kevin Denny said...

Most people raise the dreadful spectre of negative equity (NE) as if it is well, something like cancer. Nobody tries to articulate why its such a problem. You do at least, but in a fairly unconvincing way.
The usual argument, which is what you give, is that its a barrier to labour mobility. This is what British and US academics say. Problem is, this is a small country so their experience is not that relevant. We don't have large population centers which are big distances apart. A big chunk of the population are within commuting distance of Dublin.
For some people if they are going to migrate it will be to foreign parts, in which case they may just do a runner, leaving NE behind - as is happening.
So it is not at all clear to me that NE is such a big drag on the labour market in the absence of any evidence to the contrary. I suspect the cost of NE is more psychological:it doesn't feel nice. This is not to be dismissed but I am not sure there is a good case for government intervention.