Thursday, January 26, 2012

26/1/2012: Rip-off Ireland - Sunday Times, 22 January 2012

This is an edited version of my Sunday Times column from January 22, 2012.

Back in 2004, with much fanfare, Fine Gael launched its campaign that highlighted a large number of cases where policy-related or regulated price structures and practices have resulted in our cost of living falling well out of line with other Euro area economies. In 2009, Fine Gael launched a policy paper that was supposed to end Rip-off culture, including in state controlled sectors, once and for all.

Fast-forward to today. Since elections, having abandoned its pro-consumer agenda, Fine Gael has done marvellously in playing a ‘responsible’ possum to Irish vested interests.

According to the CSO, year on year, consumer prices in Ireland rose 2.5% through December 2011. The range of these price changes across sectors, however, was dramatic.

Clothing and footware prices were up 0.4% in 12 months through December, Furnishings, Household Equipment and Routine Household Maintenance prices fell 1.9%, Recreation and Culture deflated by 0.6% and Restaurants and Hotels costs fell 0.9%. Health costs rose 2.6%, Transport by 1.6%, Education by 8.9%.

Majority of these price hikes have nothing to do with private firms ‘profiteering’. Per Purchasing Manager Indices, tracking the changes in input and output prices for goods and services, Irish firms and MNCs have experienced sustained shrinking of the profit margins since the beginning of the crisis, as consistent with deflation. Instead, the largest price increases, and ever expanding profit margins, took place in the sectors that, in the past, Fine Gael have correctly identified as being state-controlled parts of the Rip-off Ireland.

Food and non-alcoholic beverages prices are up just 5.9% in the last 10 years, cumulatively. State-controlled Tobacco prices are up 69.6% and Alcohol 21.6%. Housing, Water, Electricity, Gas and Other Fuels – single largest category of consumer spending – is up 64.4% on December 2001, with 90% increase in Energy Products costs, 63.3% increase in Utilities and Local Charges, and 99.1% increase in Mortgage Interest costs. In the last five years, Rents have fallen 8%, while Mortgage Interest rose 11.3% despite the fact that ECB rates have dropped 2.5 percentage points over the period. Electricity prices are up 28.3% in 5 years and 11.5% in the last year alone, despite the fact that natural gas prices – the main generation source for Irish electricity – have declined worldwide.

While Fine Gael cannot be blamed for the full extent of price hikes since 2001 or 2006, the current Government bears responsibility for failing to address state-controlled inflation since taking the office.

The above sectors are indirectly controlled by the state via regulation, state ownership of banks and enterprises, and indirect tax measures. But what about those costs more directly set by the Government?

Health costs are up 56.5% on December 2001, Education is up 81.5%. In Health, the core drivers of inflation have been Hospital Services (up 40.2% since December 2001 and 9.8% in 2011), Dental Services (up 20.6% in 5 years, but down 0.3% in the last 12 months). Meanwhile, prescribed drugs prices are down 11.3% on 2006 and 4% in the last 12 months. Health insurance costs are up 75.7% and 22.9% since December 2006 and in the last 12 months, respectively. This in a country with younger population and well-established trends in terms of demand for healthcare. In contrast, vehicles insurance – privately provided and similar in predictability of total claims risks – inflation since December 2006 amounts to just 9% and 0.9% in the last 12 months.

Same story of the state-led rip-off is replicated in the Transport sector. Here, overall costs are up 9.3% in the last 5 years, but bus fares are up four times as much. Privately controlled costs of buying vehicles have declined 15.4%, while state-set motor tax rose 14.3%. Ditto in Communications, where telecoms services costs are up 5.8% in the last 5 years, but postal services up double that.

In two sub-sectors of education where the Government has least power to influence prices – Primary Education and Other education and training – inflation is the lowest. The highest price increases are in the third level education, with prices up 50.1% in just 5 years (13.4% in last 12 months alone).

The above clearly shows that the Government and the semi-state bodies and enterprises it owns, along with the banks are at the heart of the extortion racket that is our cost of living. Over the recent years, rapid deflation in prices and costs in the private economy has been offset by the rampant inflation in prices and costs in the state-controlled and regulated sectors. In majority of cases, this inflation was directly benefiting state and semi-state employment, management and Government coffers. In all cases, the costs were directly impacting Irish consumers who are left with no meaningful choice, but to comply with the pricing structures set in the markets.


Sources: CSO database and author own calculations

Meanwhile, Budget 2012 clearly shows that the Government is hell-bent on extracting ever-higher rents out of consumers through taxes and charges.

For example, the Government has introduced increased mortgage interest relief that amounts to €52 million in help for most indebted-households. But the very same Government refuses to intervene in the banks’ internecine policies of shifting the burden of losses from trackers onto the adjustable rate mortgagees. The households that the Government finds in the need of increased mortgage interest relief will be liable for the new Household Charge. And, if Minister Noonan has his way, mortgagees who default on their loans will pass into outright debt slavery to the banks.

There are more direct inflation-linked or inflation-raising taxes, such as VAT. Increase in the VAT rate simultaneously pushes up the overall tax component of all goods and services sold in the state that are taxable at the higher rate (an increase in inflation of some 9.5% for those items) and increases the costs of all goods and services that are dependent on intermediate inputs. Excise tax on tobacco comes against the Revenue Commissioners’ analysis showing that tobacco taxes have reached, even before Budget 2012 measures are factored in, the point where higher taxes harm receipts and fuel black markets. And Carbon Tax quadrupling from €5 per ton to €20 per ton has been responsible for some 2% rise in inflation in fuel and related activities. Motor tax increases, accounting for double the share in an average household expenditure that accrues to bus fares, are going to directly drive up the cost of transport.

Increases in State charges for hospital beds are expected to raise the cost of healthcare for middle class patients by some €268 million in full year terms. Health insurance levy hike further compounds this inflationary grab-and-run approach to policy. Secondary education ‘savings’ are likely to see parents being forced to cover much of the gap in funding out of their own pockets. Third level measures, while relatively modest in size, will compound massive inflation already accumulated in the sector over the last 5 years.

By the metrics of the Budget 2012, the current Government didn’t just mothball its pre-election ideas on reducing the reach of the State-sponsored Rip-off Ireland, it has actively moved to embrace the cost-of-living increases through indirect taxation and encouraging avarice of the semi-state commercial bodies and dominant near-monopolies. All of which means that the path to economic recovery we continue upon is the path of deflationary spiral in private sector economy, with mounting unemployment and businesses insolvencies, offset by the unabated cost increases when it comes to the meagre services the State does supply or control.

Following an almost 11% month on month decline in trade surplus in October, Irish exporters have posted a record-breaking return to health in November, bucking all expectations. The market consensus was for the Irish trade surplus (merchandise trade only) to decline marginally to ca €3.4 billion in November. Instead, the trade surplus rose – on seasonally adjusted basis – to €4.31 billion – the highest on record. In 11 months through November, cumulative merchandise trade surpluses now amount to €40.53 billion or 1.6% ahead of the same period in 2010. As before, the core drivers of trade surplus were exports increases in Organic Chemicals, and Medical and Pharmaceutical products, while indigenous exports rose significantly during the last year in Dairy products category. The latest data highlights the resilience of the Ireland-based MNCs’ exporting capabilities, providing continued contrast to the majority of our counterparts in the Euro area ‘periphery’ who have been posting dramatic slowdowns in exports and deepening trade deficits since the beginning of Q4 2011.


sf ca writer said...

Rip-off Ireland will persist as long as the government feels taking money from it's people is easier than standing up to it's creditors.
Some discussion here

Turgot said...

We have not, however, wished to yield to the promptings of our heart without first having examined and appreciated the motives of our predecessors, by which they have been led to introduce and to suffer to subsist a custom, the embarrassments of which are so evident. It may have been thought that, since the method of the corvee made it possible to work at once on all routes in all parts of the kingdom, communication would be more quickly opened, and that the state would enjoy more promptly the wealth due to the activity of trade and to the increase in the value of the articles produced.

Experience has not been slow to dispel that illusion. It was quickly seen that some of the sparsely populated provinces were precisely those where the construction of highways, owing to the nature of the country and of the soil, required immense labors which one could not flatter himself he might accomplish with a small number of hands without keeping them at it for more than a century, perhaps.

It was seen that, even in the more populous provinces, it was impossible, without crushing the people and ruining the fields, to draft peasants a sufficient number of days to complete within a short time any considerable part of the road.

It was discovered that, on a fixed length of roadway built by corvee, many indispensable pieces of work had to be done, such as bridges, rock escarpments and walls of earth, which could be accomplished only by skilled workmen and for a price in money ; that consequently it was fruitless to hasten the construction of works of corvee, if the impossibility of accelerating in like proportion the skilled work left the roads broken and useless to the public.

Turgot said...

We are convinced, in short, that the quantity of the work accomplished annually by corvee has a necessary relation to the quantity of skilled work which the disposition of the fund for bridges and culverts permits to be done each year, and that it is impossible and useless to pass beyond this proportion; that one flatters himself in vain that all the roads may be made at once, and that the pretended advantage of the corvee is reduced to the possibility of beginning a large number of roads at the same time, without actually accomplishing any more work than could be done by the method of constructing them by contract, by which one part is not undertaken until another is finished and thrown open to the enjoyment of the public.

The present condition of the roads in most of our provinces, and what remains to be built after all these years during which the corvees have been vigorously enforced, prove how false it is that that system can hasten the construction of highways.

Further, we will take all measures in our power that the sums arising from the tax levied for the construction of highways cannot be diverted to other uses.

In this mind, we have wished that that tax should never be regarded as an ordinary tax and of fixed amount, and that it can never be turned into our royal treasury. We will that it be regulated each year in our Council, for each generalite and that it shall never exceed the sum which it will be necessary to employ in that year for the construction and repair of cause-ways or other works which have hitherto been made by corvee, while we reserve the right to construct bridges and other works of skill by the same funds which have been so used until the present, and which are imposed in our kingdom for that end. Our intention is that the whole sum arising from the contribution in each generalite may be used there, and that no sum may be imposed the following year except in consequence of a new edict decreed in our Council.

In order that our subjects may be informed of the objects for which the said contribution will be employed, we have deemed it proper to ordain that a writ shall be prepared in our Council, in the ordinary form, showing all the contracts for works which it will be necessary to undertake in the year; that that writ shall be deposited, both in the office of our Bureaux of Finance which are charged with the execution of the edicts of the king, and in those of our Courts of parlement, Chambers of Accounts and Courts of Aides, and that each of our subjects may have free access.

Thus we give by commandment, etc.

Shoe said...

I'm curious that you include health insurance as I wrote the first of my undergraduate theses on market failure in the insurance market in Ireland. The intersting thing about what I discovered was that in the Irish version of regulation, there is frequently no effort to remove invisible structural advantages in health insurance competitors, and also secondly, price gouging is not, and has never been in line with the real cost of doing business in that sector in Ireland. For example, VHI repeatedly bleats about the cost of having a larger share of older customers in order to justify enormous insurance hikes, but most of its increases are in segments of the market where it is still very profitable.

I can't remember my source, I'd need to dig it out in order to find the study which backs this, but from what I recall, as of about 5 or 6 years ago, VHI's popular plan B and basic plan A plans were profitable enough to be subsidising high end plans D and E, to an extent that the prices charged in the upper tier in no way reflected the actual cost of those plans. If I am not correct, that was one of the justifications that that BUPA/Quinn gave for opposition to direct transfers: from what I recall, there was substantial evidence to suggest that VHI were already pricing low end plans at a higher cost in order to subsidise more expensive products.

Its not so much the regulation that has led to unsustainable pricing in health insurance, its the selective nature of that regulation, which permits certain unfair practices while banning others and imposing a particular value set on the market in the name of "equity."

I would note, though, that housing has never really been regulated at all in Ireland. We still don't have proper registers of land and property values that is not biased, and the little regulation that does exist is either unenforced or unenforceable. (The Priory Hall saga is a perfect example of the unintended consequences of enforcement that will probably end up with catastrophic consequences for the unwitting owners of the properties in question).

Anonymous said...

The mistake in this approach is that - as the US case demonstrates - where medical care and third level education is organized by the private market/ private insurance, it is much more expensive than when it is organized by the government. Govt control of these sectors keeps costs comparatively low, rather than expensive.

To which one can add: third level institutions in Ireland have very small staff numbers, both academic and non, and can barely hire competitively on the international market in disciplines like economics (indeed, a much wider set of disciplines than that). So the idea that Irish universities are overfunded is hard to maintain.

TrueEconomics said...

There is simply no evidence that quality-adjusted private provision of health, properly supervised and regulated, should be more expensive or less equitably distributed than state provision of such. Rationing arises far more in the case of state ownership of health providers than in the private provision.

As far as Irish academic institutions funding goes - some are grossly overfunded, especially those that should not exist at all given the lack of quality in the first place. Others are underfunded, as compared against the case of their relative merit. This reaches across both the Unis and within the Unis - across faculty members.

Hiring policies in Irish Universities are often of dubious quality and hiring outcomes are often surprising, illogical and, frankly speaking, have nothing to do with the funding model and more to do with cronyism.

So 'over' / 'underfunding' debate is nonsense of the highest degree. Excellent universities here are underfunded to provide support for politically-connected institutions that should, based on merit, be shut down. That's my opinion.

And to conclude, the data is from CSO. The data is exceptionally clear in terms of what it says. Putting smoke screens about small staff numbers, etc. is not a substitute for analysis of the actual data.

Anonymous said...

The small staff numbers at Irish universities are actual data too. And - to repeat - if UCD and TCD were private, they would charge much higher prices than they do now, just as private US universities do, and indeed as even UCD and TCD sometimes do for e.g. masters courses where they are free to charge at the moment. Costs are kept down, not up, in 3rd level - and in healthcare, too - by government control. That remains true even if there has been more inflation in 3rd level costs than in the price of textiles or beer over the last few years.

On healthcare spending, I more or less agree with Yglesias here:

On hiring policies at Irish universities, the ones I have seen tend to be meritocratic if there is a large pool. But when the applicant pool is very small (as it often is more recently, as the salary gets worse) insiders tend to do better. I would favour a ban on hiring ex-Phd students at the universities where they studied. On this issue, though, I think we could do with more data.