Before we dive into the issue of Systemic Risk Regulation, a quick note on travel industry troubles (those who would like to do so can skip down to the second topic)
Some of the readers of this blog and of my articles in press disagree with my assertion that high charges at the Dublin Airport and the travel tax imposed on passengers matter to our travel figures. I have wrote before about:
- an independent Government group report calling for abolition of the tax, and
- on an independent economic assessment from international transport economics consultancy linking travel tax to jobs losses and revenue collapse in the sector; and
- evidence on routes closures and aircraft cut backs that were explicitly linked by the airlines (Ryanair, EasyJet and Aer Lingus amongst them) to the charges and taxes collected in Dublin.
- Withdrawal of BMI earlier this year from Dublin, with a loss of 30 jobs and some 300,000 passengers was also not enough.
This was not enough to convince some. Sadly, many continue to insist that protectionist barriers to travel (trade) are an effective means for ensuring viability of Irish tourism and domestic sectors (see last Sunday Times letters page).
Now, Irish media reports that the DAA will be offering substantial discounts to airlines that launch new short and long haul services, amounting to 25-100% cuts in charges for the first five years of a route opening.
Of course, DAA had seen a 17% year-on-year drop in traffic in December 2009, while Cork saw a decline of 15.5% and Shannon – 29.9%.
Offering deep discounts is a funny thing to do, if the charges and taxes were not the problem with traffic in the first place. Unless, that is, people like myself have been all along correct in stating that high costs of services provided by the DAA (inclusive of travel tax – which DAA had nothing to do with) act as an impediment to sustaining tourism and business travel to Ireland.
It is a basic feature of international trade theory and practice – tariff protection does not work. Not in the short run, nor in the long run. Visitors to Ireland are price-elastic, while many of us, living here with families and connections (personal and business ones) overseas are less so.
Hike tax and foreign tourists will have a greater ability to avoid coming here, while domestic travellers will have to adjust their expenditure (abroad and at home) to cover the additional cost.
What the former means is that a Spanish person deciding on where to take a city break will be less inclined to chose Dublin or Ireland in general because of a higher tax/cost.
The latter means that an Irish person going to, say, Paris, will have an added incentive to shop there more (to generate greater savings over the comparable purchases in Ireland and thus compensate herself for extra costs incurred in travelling) or equivalently – to shop less in Ireland (to avoid incurring added cost). Both effects act in the direction of reducing total revenue to businesses based here.
Ann Siebert has weighed in on the issue of systemic risk regulation in Europe in today’s voxeu column (here):
"Any committee dealing with assessment of systemic risks “should be small and diverse. …ideally it should be composed of five people: a macroeconomist, a microeconomist, a financial engineer, a research accountant, and a practitioner. …As the size of a group increases so does the pool of human resources, but motivational losses, coordination problems, and the potential for embarrassment become more important. The optimal size for a group that must solve problems or make judgements is an empirical issue, but it may not be much greater than five. The reason for diversity is that spotting systemic risk requires different types of expertise. A board composed of entirely of macroeconomists might, for example, see the potential for risk pooling in securitisation, whereas a microeconomist would see the reduced incentive to monitor loans.”
Needless to say, these are not the principles taken on board by Nama and the Irish banks. Nor is it an approach even being discussed for the Irish Financial Regulator or the Government. Why? Why not?
“The committee should be composed of researchers outside of government bodies and international organisations; career concerns may stifle the incentive of a bureaucrat to express certain original ideas. It is of particular importance that the board not include supervisors and regulators. [Again, look at Nama – virtually the entire top management of this organization is composed of people unqualified to deal with the task of spotting structural risks]. This is for two reasons. First, it is often suggested that supervisors and regulators can be captured by the industry that they are supposed to mind, and this may make them less than objective and prone to the same errors. Second, a prominent cause of the recent crisis was supervisory and regulatory failures, and these are more apt to be spotted and reported by independent observers than the perpetrators.” [No illusions here - Nama is captured by the industry, and to boot - by the worst parts of the industry, not the best.]
"Finally, it is important that the board be made sufficiently visible and prominent that a member’s career depends on his performance. Given the importance of the task, pay should be high to attract the best qualified, and the members should not have outside employment to distract them.” [Good luck to anyone who thinks that Nama board or any of its risk structures will come close to these parameters, except one - they will be handsomely remunerated for their work].
Alas, this dreamy transparent and professionally sound proposal is too late, even in the EU case, for: “The Eurozone has already swung into action, creating the European Systemic Risk Board (ESRB), set to begin this year. Unfortunately, this board, responsible for macro-prudential oversight of the EU financial system and for issuing risk warnings and recommendations, is far from the ideal. It is to be composed of the 27 EU national central bank governors, the ECB President and Vice-President, a Commission member and the three chairs of the new European Supervisory Authorities. In addition, a representative from the national supervisory authority of each EU country and the President of the Economic and Financial Committee may attend meetings of the ESRB, but may not vote. This lumbering army of 61 central bankers and related bureaucrats is a body clearly designed for maximum inefficiency; it is too big, it is too homogeneous, it lacks independence, and its members are already sufficiently employed.”
Pretty much on the ball, I would say.