Monday, March 8, 2010

Economics 08/03/2010: 28 Alices in Wonderland of Tasc economics

Update: one of the signatories to the Letter of 28 is responding to my comment here.

After a very lengthy period of navel gazing, Irish left has produced its own platform for economic policy (here). And what a marvel it is. Right out of Alice in Wonderland.

The letter of 28 social scientists published in the Irish Times is worth a read, if only to see what passes for ‘independent thinking’ in our country. Here are few pearls.

“Consumer spending has collapsed while at the same time unemployment and emigration have soared. Crucially, investment has plummeted off the chart. Not only have Government policies failed to stem this haemorrhage, they have actively contributed to this collapse.”

No one can deny these facts. But there are serious omissions here. Investment collapse in Ireland is driven foremost by the collapse in construction sector – the sector that accounted for over 70% of total private investment in this country until 2007. So no - the Government has not contributed to this.

Investment the authors have in mind is the NDP-related allocations, which are less than 50% about real capital and more than 50% about ‘soft’ investments – in equality, poverty reductions, etc (all noble objectives, but hardly affordable in current circumstances).

Note, however, that the 28 ‘leading’ policy lights do not mention draconian tax increases here as the contributing factors. Oh, no – this article is about how good more public spending would be to our country.

“The most damaging are cuts in transfers to low-income groups which, along with general tax increases on low and average pay in 2009, have reduced spending power in the economy at a time when it was most needed.”

Really? Social welfare payments were cut by 4% in Budget 2010. They were raised by 3.3% in Budget 2009, which means that in nominal terms, post-Budget 2010 our welfare recipients are only 0.83% worse off than they were in 2008. And then there was deflation – in 2009 CPI fell 4.5% and HICP declined 1.7%. Say we use HICP, since majority of those on social welfare don’t have a mortgage – their housing costs are usually covered by the taxpayers. This means that in real terms post-Budget 2010 Ireland’s welfare recipients are still 0.883% better off than they were in December 2008. Is that so deflationary, folks?

“Equally damaging have been the cuts in public investment at a time when private investment has plummeted. This has laid the foundations for a low-growth, high-debt future where unemployment will remain high and inequality endemic.”

One can relate to this statement. The problem is that while some of the cuts were to productive investment, the real error of the Government policy has been the lack of systematic approach to assessing the value-for-money of various projects and freezing or canceling outright the ones that do not yield sufficient returns. For example, parts of road building programmes relied on the outdated and often utterly unrealistic expectations of development in remote locations. Binning these ‘investments’ is ok – they are the luxury we cannot afford. Ditto for Metro North – which in its current incarnation is a White Elephant.

And how on earth cuts in public investment are going to make income inequality endemic? During the Celtic Tiger era, income inequality rose (judging by the works of some of the 28 experts), yet public investment also rose. So public investment boosts did not work then for income inequality. Any reason they should do so now?

Irony has it, the 28 ‘wise ones’ have failed to grasp the idea that far from stimulating public investment, we should be stimulating productive private investment – that is what creates sustainable jobs and growth. And to do that we need lower taxes, and less borrowing by the Exchequer, so our banks have no Government bonds to roll over at the ECB lending window.

“Budgetary policies have been short-termist and reactive. Instead of cutting real waste in the public sector by increasing productivity and efficiency, the Government has cut public services and the living standards of those who can least afford it, further reducing domestic demand and, thus, employment.”

I agree with this. The Government has wasted a golden opportunity to have real reforms in the public sector and public spending, as well as taxation. So why would the 28 'wise ones' give even more dosh to such a wasteful Exchequer?

The authors do not understand that increasing consumption – by borrowing at 5-6% per annum to give the money to our welfare system and to pay public sector’s obese wages is taking money out of investment. Instead, they seem to think that both: welfare payments increases and public sector wages can be sustained while increasing state spending on capital projects.

So do the simple additions. To maintain NDP investment at previously planned levels, on top of the current budget deficit we will need some odd €6-7 billion more. To return welfare payments to their 2009 levels, and to reverse pay cuts in the public sector and reductions in employment there, we will need additional €3.4 billion. These are all net of receipts. So the Exchequer will be borrowing some €29 billion this year - 18% of our GDP. What would the Greeks say with their current 12.7% GDP deficit and heading for 10.7%?

What would the bond markets say? Ah, here we come to the interesting part that the folks in Tasc did not care to consider. At 18% defict, Ireland Inc's bonds would rise to a yield of ca 7.5%. Ok, let us split the difference and say, 7%. Then scroll below for some calculations...

“These policies are weakening the economy’s ability to cope with growing debt levels.”

Really? Most of the non-banking debt – almost 100% of it – in this country is held by private sector firms and ordinary workers. How is paying more in welfare payments going to help deflate this debt? How is public spending on capital projects going to do the job? Oh, by the way, read further to find what the 28 think about savings (which, remember, in the long run = investment).

“We urgently need measures to tackle five key areas which require fundamental reforms: our substantial physical infrastructure deficits; our poor social infrastructure – early childhood education, ...primary and community healthcare..., housing lists..., ...Irish public transport ...; our high levels of relative poverty and income inequality; our under-performing indigenous business sector – which needs appropriate support to contribute to our export base, RD and innovation capacity; and our unsustainable reliance on carbon-heavy resources and activities.”

Well, if that is not a shopping list we’ve seen before in the Irish Times… We do need more schools, and we do need some other capital. But simply to say ‘more!’ is not enough. One must face the reality of constraints on funding. The 28 do not seem to be bothered by the fact that Irish middle classes simply cannot bear any more of their droning about the need for more ‘public sector’ stuff and shorter housing lists. We’ve got mortgages to pay, folks, never mind your housing lists. And their environmental taxes are simply a ploy to tax income even more.

The irony is - word 'reforms' is equated in the 28 minds with 'more spending'. Again, we've heard this before from some of the signatories.

The 28 also seem to not understand where our exporting capacity comes from. Far from being the domain of domestic enterprises, it is reliant on MNCs, who would flee Ireland were the 28’s ideas implemented.

“It may seem astonishing that we face such economic and social deficits after 15 years of boom but these are the consequences of pursuing a failed low-tax, low-spend model which sought short-term gains from the speculative activity of a small but powerful golden circle.”

Really? I didn’t notice a low tax, low spend economy. The Government accounted, pre-crisis for EU-average level of spending in terms of GNP, and removing the MNCs out of Ireland’s income accounting, leaves the Irish Government in control of over 60% of the entire economy. Low tax? Our taxes are now second highest in the EU at the upper margin level. All of this before you factor in some of the highest indirect taxes and charges.

But wait, to be really wise, the 28 must have done some thinking – low taxes compared to what? To the services and benefits we receive? One has to be ignorant to suggest that given the poor quality of healthcare, the abysmal quality of our transport, and pretty much every other service supplied by the State, our taxes are low. Compared to the French and the Swedes, and the Germans, we are paying through the nose for the little service we get.

“We can employ the strength of our combined public enterprises – their off-balance sheet borrowing and investment capacity to invest in our infrastructure and create new indigenous enterprises, both public and private.”

Please, help me – does anyone actually believe that our semi-state companies are that good in creating 'new indigenous enterprises’? More CIE? ESB? Bord na Mona? Aer Lingus?

“We can further employ new funding vehicles – enterprise development bonds (eg green bonds), municipal bonds and the new National Solidarity Bonds – which can leverage our current high savings ratio and international investment.”

Again, there is apparently not a single person authoring this letter who understands basic finance. At what rate would you borrow through these bonds? Current yield is 5%. Greece at 6.3%. To make these bonds attractive to anyone, you’d have to price them around 7%. Are the 28 suggesting that returns to these bonds will be in the region of 10% (to cover issuance costs and administrative margins)?

Suppose we borrow at 7% for 10 years, invest in new private (not public) enterprises. The rate of survival for start ups in Ireland is, historically, around 25-30% over 5 years. In 10 years – it will be around 15%. To get 10% return on these bonds, the state will need to invest in new ventures that will survive through 10 years slog while yielding over 22% annually! Enterprise Ireland never had this spectacular of a record, even during the boom time. Even Michael O’Leary is not that good.

But wait, the above passage is about taking our savings and spending these on public investment and state enterprises. How is that going to help our families with their debt? And how is that going to provide financing for companies and private sector in general? What effect will this expropriation of personal savings (for it will require compulsory expropriation, given that the bonds will have to be self-financing, aka priced at yields of below 2-2.5% pa - the expected rate of real growth in the economy over the next 10 years) have on consumption? The minute we start even talking about destabilizing peoples savings, all cash will flee the country and consumers will tighten even more their expenditure. Sadly, none of the 28 'leading lights' seemed to have heard of the precautionary savings motive - the one that drives our current savings ratios.

And so they conclude – having established not a single fact or provided not a single relevant statistic or estimate that: “The resources and labour to finance this modernisation drive are there. We just need the political vision and will to make it happen.”

NB: The 28 call for reforming tax system – I agree, this is needed. They are also calling for abolition of tax breaks. I agree – they unnecessarily complicate tax code and should be yielded in exchange for simple low flat tax rate on all income. But we do not need an additional tax band for higher income – we need to bring people on lower incomes into tax net to make them real stakeholders in this society. Again, this can be done by simply dropping the income tax rate and with it – the deductions.


Conor said...

Constantin, this is an exceptionally good post.

Paul MacDonnell said...

Yes. Dr. G. You destroy their stupid arguments, dig a 6 foot hole and bury them in it. And then you dig them up - make the hole another 6 feet deep and bury them all over again. You have taken them apart at a molecular level and dispersed the parts to the four corners. Masterful. Their arguments are nothing less than complete idiocy.

Anonymous said...

Your calculation of social welfare payments excludes the measures adopted in the Supplementary Budget 2009. The rent supplement scheme was significantly altered at this time; the minimum weekly contribution that recipients of welfare under this scheme are required to pay was increased by €6 and the rent supplement allowance was then cut by a further 8%. In addition, the removal of the annual Christmas bonus was tantamount to roughly a 2 per cent reduction in annual income from social welfare.

Ciaran Daly said...

Excellent post, I said the 28 authors were probably socialists, you've convinced me that they are in all likelihood socialists.

Anonymous said...

It seems that part of your piece referring to Grangegorman has been removed. can you say why?

TrueEconomics said...

Thanks for the support to all.

On Grangegorman - I did remove the reference in the edit, just to save space.

In my view, DIT is a real player in the education system and they do need a campus. Grangegorman might be not the most optimal location, but if it suits DIT, they really need a centralized location. So I still support the idea. Of course, the rest of Grangegorman development plan (retail, office, residential) is bonkers in the current economy.

On my social welfare calculations, true - I do not include anything but the actual benefits in my calculations. If I were to do so, then I would have to discount the rent savings generated by tenants and not passed onto welfare system as a net additive to our welfare recipients income.

On Christmas 'Bonus' - again, this in my view is a strange way of paying someone a premium that is completely detached from any fundamentals. The 'Bonus' is unrelated to the issue of hardship (the purpose of having the welfare system in the first place), and it is unrelated to the issue of costs (that welfare system attempts to compensate recipients for). So it is a pure and arbitrary handout.

Just because someone comes to accept this 'Bonus' as an entitlement, such acceptance does not make this 'Bonus' a part of the statutory welfare programme. After all, many stockbrokers came to accept huge irregular (performance-related)bonuses as an automatic entitlement. Until that is 2008 came along.

Sorry, but no - I am unwilling to say that a cut in 'Bonus' constitutes a 'draconian' or 'drastic' measure. Not when 360,000 people are cast into unemployment and negative equity is destroying tens of thousands' savings and retirement funds.

patrick1978 said...

one-year anniversary of the stock-market bottom today

Anonymous said...

I'm all for refutations (or attempted refutations) but do you have to be such an asshole when writing one? The snide references to your opponents ('wise ones' etc.) the histrionic mock-astonishment ('Really?') and other such devices all paint a picture of someone deeply insecure. The Tasc group obviously struck a nerve. Never mind your selective use of statistics to prove that up is down and black is white and Ireland is a high tax, high spending economy when any international comparison shows that it's neither.

Why don't you post this "refutation" on Irish Economy or on the Tasc website so that a broader readership can have at it?

TrueEconomics said...


My snide references and 'astonished' remarks are a choice of style. It might engage some, it might discourage others. My objective has never been to please everyone, or for that matter anyone. Just to express my views.

The balance in style is a tricky one. Kevin Myers strikes it masterly. I am a novice, compared to him.

Has Tasc struck a nerve? Not really. What strikes a nerve is that in this country a rehashed 1970s cliches pass for policy and analysis. And the letter of 28 is exactly that - rehashed cliches un-anchored to today's reality.

What strikes a nerve slightly less is that our 'paper of record' is so excessively ideologically biased (it does not matter in which direction - left or right) that it publishes this rubbish with a delight, while giving the opposite view virtually no space. The reason it strikes my nerve less is that in the end IT is a private enterprise and they have a right to choose to be biased if they want to.

As far as my facts are concerned - I stand by them. Our upper marginal tax rates are now second highest in the EU. We get far poorer services for these in exchange. Our indirect taxes are the highest in Europe. If you take MNCs out of our GDP, you will have one of the largest Government shares in the economy in OECD.

Our private sector is dominated/chocked off by the state enterprises. These state enterprises are incapable of competing in the open market, hence they need artificial protection of the state. Has Ryanair incident with 500 jobs taught you a lesson about 'jobs creation' by state enterprises? Have years of buses run on the timetables determined by the whim of the driver taught you anything about our state enterprises ability to deliver services? Have decades of paying second/third highest prices for electricity and retarded competition in the markets for energy taught you a lesson about 'growth generation' capabilities of the state companies?

Have a decade of pumping vast amounts of cash into our health services taught you anything about the idea that 'reforming public services' must be about putting more cash into these? After all, what the 28 have meant by 'reforms' can be summed up as 'give them more taxpayers cash'.

Have you ever thought about the promises of reforms made by those 28, many of whom sat for years around the Social Partnership table, promising the same reforms to no end, while at the same time resisting them through the union actions?

Lastly on the issue of not posting on Irish Economy site. I have my own views and my own site. It is in public domain - your comment is proof of that. And my 'brand' is unaligned with anyone else. So, with due respect to many very good economists, analysts, social scientist and ordinary people who do engage with Irish economy site - it is not my venue.

Feel free, though, to put a link to my comment there, or anywhere else in the public domain. And don't hesitate to visit and comment here as well.

Nat O`Connor said...

Dr Gurdgiev, I have posted a response to your comments here.

I welcome any feedback.

Nat O'Connor, TASC

TrueEconomics said...

Many thanks, Nat. I saw it already and will respond once time permits - I am also putting a link to your response at the top of the original post.

Best regards and thanks for engaging.


Tomaltach said...


Your world view and mine are very different - especially on the role of the state and the nature of the market. But I have to say that I concur with most of your criticisms of the recent piece sponsored by TASC. Nothing has disappointed me more than the response of the Irish left to the current crisis. In one sense, the crisis in global finance, and in the global economy generally, has presented the left with an opportunity to re-assert its position in the face of what had become the orthodoxy in terms of markets: they are self correcting and produce the right result when left alone (doubtless you steadfastly hold this to be true regardless!). Yet the Irish left has done nothing but dish up a reheated version of the same old recipe: more spending, more borrowing, increase taxes. Fixated by the market failure, the left has shown no sign of a more nuanced response that might acknowledge state and government failure as well. Two things stand out for me in the arguments of the Irish left. One is the willing refusal to acknowledge that their are limits to borrowing, harder ones now than in the eighties as a result of the global credit crunch and the more nervous approach to lending; the other is more shocking still: it is the stubborn refusal to admit that much of what our government does in terms of spending is wasteful. The left has a burning loathing of the FF administrations that presided over the Celtic Tiger, yet seemingly find it impossible to admit that substantial portions of the massive increases in spending under those regimes have been badly allocated and managed. If the Ahern governments were incompetent, wasteful, and wrong headed (as the left argues), should not a significant portion of their spending decisions be rolled back and re-allocated? I begged this question several times on the TASC website, always without response. The reason is simple. To question spending decisions - even by a government you loath and find corrupt and inept - would mean calling allocations on public spending into quesetion. And public spending, especially it seems on pay, is the sacred cow of the Irish left. I find this unfortunate. For me the, the Irish left's complex on spending is bordering on the neurotic and has now become a self-constructed intellectual prison. At times it seems as thought the quantity of spending is more important to the left than the quality of spending. Overall then, the contribution to the national debate by the left has lacked boldness, and has come across as stale and defensive. The left has managed to turn off even willing listeners and potential recruits to a genuine, refreshing, innovative campaign to reshape Irish society.

Anonymous said...

аффтар жжет! :)