20/7/2012: European Corporatism comes full circle

A very important analysis from Edmund Phelps in today's FT (link here) of the roots and core causes of the euro area crisis.

Some major points of interest:

"The difficulties of many European countries derive from their corporatism: state projects serving cronies and vast social protection programmes, both run by elites. These surged in the 1970s and 1980s. The prospect of a lifetime of such benefits – sweet contracts, soft loans, early pensions and the rest – created something new: social wealth."


On the money. And


"As increases in benefits outpaced increases in taxes, households saved some of the gains in disposable income. So households saw their private wealth rising alongside the social wealth."


Also on the money. Even more so because 1) taxes were already high so there was no room to increase them by much, and 2) lowering of taxes was used strategically to strengthen corporatist re-distribution of income & wealth from the more productive to the less productive activities (a combination of corporate and social welfare state).


"In both Italy and France, the ratio of household net private wealth to household disposable income soared, rising by one-fifth from 2000 to 2007. (The increase was one-sixth in Germany, negative in the US.)" 


Now, note: what does the European (and Irish) Left wanted and still wants? Higher income taxes. Which, of course, will mean wealth/income ratio would have been / will be even higher! This is exactly what I said during my recent appearance on TV3 Vincent Browne's show. 


The role of banks and debt in all of this charade? To cover the widening gap in wealth/income ratio and public deficits, "So it was a relief that the Basel I agreement, which went into effect in 1990, lowered to zero banks’ capital requirement on sovereign debt – no matter how risky." In other words, European sovereigns financed their corrupt corporatist regimes via leveraging private deposits to fund government bonds purchases by the banks - privatizing public waste first. 


So two lessons or questions from above are:

1. Does transfer of private banks debts to public purses in Europe constitute the return of previously privatized public debts? And if it does, the effect is that the state has twice colluded with the banks to defraud the people of Europe - first as savers and consumers, second as taxpayers.
2. Does the ongoing process of increasing government bonds holdings in domestic banks and investment and pensions funds actively promoted by the European and national authorities (see for example ECB LTROs and Irish NTMA latest plans) not constitute exactly the replay of the road to the crisis? 

12/3/2012: Social partnership is Ireland's institutionalized corruption

This is an unedited version of my article for the current edition of the Village magazine.

Illegal corruption – in its various forms and expressions – is hardly a rarity in Irish society. So much we know. Perhaps less well understood, are the legally permitted forms of corrupt behaviour that contribute to social and economic degradation and undermine democratic institutions and state legitimacy.

Economists identify corrupt activities to include illegal abuses of the system, such as bribery, cartels,  explicit collusion, price fixing, and embezzlement. But corruption also includes activities that fall into grey areas of the law – tacitly allowed: cronyism, nepotism, patronage, implicit collusion, and influence-peddling.

Over the years, the Irish state recognised that both types of these activities exist in the realm of private and semi-state business, and in order to restrict the former forms of illegal corruption, has decided unofficially – of course – to give the perpetrators of the latter quasi-legal ones the strongest political representation in the land – direct access to policy formation. In recent decades our Government and elites Left and Right, went so far as to institutionalise the arrangement.

Since 1987, Social Partnership has constituted a closed shop with membership restricted to select organisations, representing certain subsets of Irish society. Since this membership restriction is codified and since Partnership is explicitly concerned with fixing prices for some forms of capital and inputs into production (for example – wages, that serve as the compensation for human capital, and via planning restrictions linked to State-determined development agenda, to land), it is both de jure and de facto a cartel. That it is a public cartel, as opposed to a private one, does not change its corrupt and corrupting nature.

This cartel actively and with State support promoted policies that led to gross distortions of the markets and of competition between the market players; and also led directly to the relegation of the State’s duty of care to consumers and ordinary investors. An unobservable, but nonetheless equally distorting feature of the system is the effect this system had on preventing formation of competitive enterprises and entrepreneurship, as Social Partners colluded to restrict and re-allocate (to their benefit) investment and employment opportunities, and re-shape the space of new policy ideas formation, formulation and expression.

Social Partnership rubber-stamped a policy of ‘Never at Fault, Never Responsible’ for our financial regulatory and supervisory regimes. It trumpeted the culture of unaccountability in the public and protected private sectors. Without Social Partnership support, it is hard to imagine the State sustaining the very regimes that led to open, but never-prosecuted violations of the law (e.g. breaches of regulatory liquidity-requirements), ethical codes (e.g. loans-for-shares machinations and misclassifications of deposits), MiFID (Markets in Financial Instruments Directive) requirements (e.g. the mis-selling of investment products by at least four banks in Ireland, explicitly uncovered two years ago) and violations of prudential ethics in financial regulation (e.g. resistance to full public-data disclosure and investor-suitability testing and protection in the case of property transactions).

Neither the Unions, nor any other Social Partners stood up at the Partnership Table in support of the handful of whistleblowers pointing to the above failures. The ‘straw man’ argument is that the Unions always advocated ‘more regulation’. Alas, history shows that other priorities miraculously took precedence time and again over the proper regulation of finance, the protected professions, quangos and pretty much every other aspect of Irish governance. These, of course, were pay and conditions for the Unions’ members, slush-funds for ‘training’ and ‘research’ activities, and state-board appointments, including to the boards of financial regulation and supervision bodies. Having been bought by the ‘robbers’, the self-appointed ‘cops’ have, since the late 1980s, stayed nearly silent lest they damage the regulatory charade performed by the Government and rubber-stamped by their own members in charge of the regulatory bodies.

The Unions, of course, were neither unique, nor the most active participants in regulatory capture of the state by vested interests. Irish semi-state companies, banks, protected professions and public sector own (outside the Unions-led) self-interests were. Nonetheless, by deploying the rhetoric of ‘integrity’ and by relying on the arguments that their actions ‘protected the vulnerable’, the Unions were some of the most damaging – ethically speaking – players in the game.

In effect, the Irish state didn’t just tolerate corruption, it actively managed and encouraged it. Even debating the merits of the form of corruption embodied by Social Partnership shows how instrumental ethics replaces real values when the cancer of corruption metastases. Social Partnership is simultaneously a collusive cartel, a conduit for influence peddling, a vehicle for patronage and a price-fixing mechanism. Its goal is to preserve the status quo of wealth and income distribution, skewed in favour of the Partners.

It should come as no surprise that in 2011, Ireland ranked 19^th in the Transparency International Corruption Perception Index (CPI) – the lowest of all small open economies in the Euro Area, bar Estonia and Cyprus. As the Moral Sages of our Left ardently decry market economics, its flagships – New Zealand (ranked 1^st in the world), Singapore (5^th), Switzerland (8^th) and Hong Kong (12^th) – are less corrupt than the Social Partnership-governed Ireland. In Political Risk Services International Risk (PRSIR) rankings, Ireland is placed between 26th-31^st in the world – alongside Uruguay, the UAE, Botswana, Israel and Malta. The only euro area country that scores below us for overall political risks is Estonia.

Higher corruption overall is associated with a significantly lower quality of economic institutions. The correlation between the CPI score, the Economist Intelligence Unit Country Risk Assessment score, the IMD World Competitiveness score and the PRSIR score is in excess of 0.9 or, in statistical terms, nearly perfect. This shows the costs we pay for corruption in terms of economic institutions quality.

In 2011, in Ireland, trust in the Government as measured by the Edelman Trust Barometer – another metric of democratic institutions quality that correlates strongly with CPI – stood at 20%, against an average of 52% for the 23 countries surveyed in the report, making Ireland the lowest ranked country in the study. On the back of 2011 elections, the reading rose to 35% in 2012 and remains significantly below the 43% global average. As of today, of all institutions of the society – private and public – the Irish Government has the lowest trust of its people compared to businesses and NGOs, and equivalent to that of the Irish media.

Years of institutionalised corruption, sanctioned by the State and sanctified as Ireland’s panacea for industrial conflict and policy stalemate – Social Partnership – have definitely come home to roost.