27/1/20: The Value of History and the Shifting Winds of Public Policy

My latest contribution to the Manning Financial for January 2020 is out: https://issuu.com/publicationire/docs/mf_january_2020?fr=sZTk2MDI2MTg4NA.

16/2/19: Deep Crises: past, present, future?

Venezuela's economic (and political, social, public, etc) woes have been documented with exhaustion, although no one so far has produced a half-meaningful outline of solutions that are feasible and effective at the same time.

Take for example, the @IIF pitch in: "Venezuela’s economic collapse is almost unprecedented in recent history. Zimbabwe in the last 20 years and the collapse of the Soviet Union are the only comparable episodes." This accompanied the following chart:

What is, however, remarkable in this exposition, is not Venezuela's demise, which is impressive, but the experience of Russia and the contrasting experience of Ukraine in post-Soviet collapse era.

Here is the data from the World Bank on post-USSR collapse recoveries, through 2017. It is the similar to the one used by IIF, but a bit more current and details. And it compares the Western 'darling' of Georgia experience with that of the Ukraine and Russia:

You don't need to have a PhD in economics to comprehend the chart above in political terms: like it or not, the Western 'policies prescriptions' have not been a great source of optimism for Georgia,  Ukraine and Russia in the 1990s.  It hasn't been a great source of optimism for Georgia in the 2000s, and it hasn't been of much use for Ukraine since 2014.

In part, the reason is that the Western prescriptions for policy development and reforms were not exactly followed by these countries in the past, and in part, these prescriptions were not suitable to these economies and their societies. But, also in part, the reason as to why Western reforms did not work their magic in the three former-USSR states is that they were never accompanied by the genuine buy-in from the West. There was no 'great trade' opening, no 'structural FDI rush', no 'Marshall Plan supports'.  What little tangible support was extended to these countries (and other post-Soviet states) from the West was largely siphoned off into the pockets of the Western contractors and domestic oligarchs.

Russian recovery 'miracle' that is traceable above was down to the removal of the Western contractors from the proverbial feeding trough, and consolidation of domestic oligarchs and corrupt elites. One can't call these changes 'liberal' or 'reforms', but they were successful while they lasted (through 2014).

What is also telling is that the rates of recovery - at peak rates - in Georgia (during the hey-days of Western-style reforms) were not quite comparable with the same rate of Russian economic recovery. And that is before one considers the peak recovery in Ukraine since 2014.

Incidentally, returning to the IIF chart above, neither Peru (it took the country 8 years to recover from its 1989 crisis) nor Bolivia (same duration for its crisis of 1982) compare to the cases of the post-USSR collapse crises in magnitude and recovery duration. Zimbabwe does, and it recovered from its 1998-started economic collapse in 18 years, by the end of 2017). Last time I checked, Zimbabwe also did not follow the Western 'prescriptions' in its policies path, and still beats Georgia and Ukraine in terms of its experience (both former USSR states are now in year 28 of post-1989 economic crisis).

12/4/17: European Economic Uncertainty Moderated in 1Q 2017

European Policy Uncertainty Index, an indicator of economic policy risks perception based on media references, has posted a significant moderation in the risk environment in the first quarter of 2017, falling from the 4Q 2016 average of 307.75 to 1Q 2017 average of 265.42, with the decline driven primarily by moderating uncertainty in the UK and Italy, against rising uncertainty in France and Spain. Germany's economic policy risks remained largely in line with 4Q 2016 readings. Despite the moderation, overall European policy uncertainty index in 1Q 2017 was still ahead of the levels recorded in 1Q 2016 (221.76).

• German economic policy uncertainty index averaged 247.19 in 1Q 2017, up on 239.57 in 4Q 2016, but down on the 12-months peak of 331.78 in 3Q 2016. However, German economic uncertainty remained above 1Q 2016 level of 192.15.
• Italian economic policy uncertainty index was running at 108.52 in 1Q 2017, down significantly from 157.31 reading in 4Q 2016 which also marked the peak for 12 months trailing period. Italian uncertainty index finished 1Q 2017 at virtually identical levels as in 1Q 2016 (106.92).
• UK economic policy uncertainty index was down sharply at 411.04 in 1Q 2017 from 609.78 in 4Q 2016, with 3Q 2016 marking the local (12 months trailing) peak at 800.14. Nonetheless, in 1Q 2017, the UK index remained well above 1Q 2016 reading of 347.11.
• French economic policy uncertainty rose sharply in 1Q 2017 to 454.65 from 371.16 in 4Q 2016. Latest quarterly average is the highest in the 12 months trailing period and is well above 273.05 reading for 1Q 2016.
• Spain's economic policy uncertainty index moderated from 179.80 in 4Q 2016 to 137.78 in 1Q 2017, with the latest reading being the lowest over the five recent quarters. A year ago, the index stood at 209.12.

Despite some encouraging changes and some moderation, economic policy uncertainty remains highly elevated across the European economy as shown in the chart and highlighted in the chart below:

Of the Big 4 European economies, only Italy shows more recent trends consistent with decline in uncertainty relative to 2012-2015 period and this moderation is rather fragile. In every other big European economy, economic uncertainty is higher during 2016-present period than in any other period on record. 

17/1/17: Russian Economic Policy Uncertainty 2016

In the previous post (link here), I covered 2016 full year spike in economic policy uncertainty in Europe on foot of amplification of systemic risks. Here is the analysis of Russian index.

As shown in the chart above, 2016 continued the trend for downward correction in Russian economic policy uncertainty that took the index from its all-time high in 2014 (at 180.4) to 160 in 2015 and 142.5 in 2016. All data is rebased to 1994 - the first year for which Russian data is available. However, at 142.5, the index is still well above its historical average of 94.1 and stands at the fifth highest reading in history.

Much of the reduction in economic policy uncertainty over 2016 came over the fist seven months of the year, with index readings rising into the second half of 2016 and peaking at 251.1 in December.

In simple terms, while the peak of 2014 crisis has now passed, questions about economic policies in Russia remain, in line with concerns about the sustainability of the nascent economic recovery. Moderation in economic policy uncertainty over the course of 2016 appears to be closely aligned with:

1. Variations in oil prices outlook; and
2. External geopolitical shocks (including the election of Donald Trump, with raw index data spiking in August and September 2016 and November and December 2016, while falling in October, in line with Mr. Trump's electoral prospect).

In other words, relative moderation in the index appears to reflect mostly exogenous factors, rather than internal structural reforms or policies changes.

15/1/17: 2016 was a year of records-breaking policy uncertainty in Europe

When it comes to economic policy uncertainty, 2016 was a bad year for the Big 4 European states, except for one: Italy.

Consider the above chart showing indices of Economic Policy Uncertainty across Europe's Big Four states, as represented by period averages across four main periods, plus 2016.

German economic policy uncertainty rose from 87.9 average for the period of 2002-2007 to 144.5 for the period of 2008-2011 and 152.1 over 2012-2015. In 2016, the index averaged 230.5. While not in itself indicative of a crisis, the trajectory is consistent with systemic rise in uncertainty, especially since 2016 was not a political outlier year (there were no major elections or external shocks, other than shocks related to German policy itself, such as the refugees crisis). That German index increase took place during one of the strongest years for growth and employment is, in itself, quite revealing.

Like Germany, France also experienced increases in uncertainty index over the recent years, with index rising from 109.7 in 2002-2007 period to 189.2 average over the period of 2008-2011 and to 235.6 over the years 2012-2015. In 2016, the index averaged 309.6. Once again, as in the Germany's case, there were no external or political catalysts to this, other than the dynamics of internal / domestic policies. And, as in the German case, economic cycles cannot explain this rise either. Thus, it is quite reasonable to conclude that systemic uncertainty is rising within the French society at large.

Perhaps surprisingly - given the outrun of the Italian Constitutional Referendum and the dire state of the Italian economy - Italy's Economic Policy Uncertainty Index has managed to eek out a small (statistically insignificant) reduction in 2016, falling to 129.3 in 2016 from 2012-2015 average of 130.9. However, December 2016 referendum is not fully factored in the 2016 average, yet (there are lags in Index adjustments and revisions that are yet to show up in the data), and both 2016 average and 2012-2015 average are well above 2008-2011 average of 113.7 and 2002-2007 average of 94.3.

Perhaps the only European country where index readings in 2016 can be clearly linked to internal structural shocks is the UK, where 2016 average index reading reached 528.8, compared to 2012-2015 average of 228.5. Chart below clearly shows that the increase in uncertainty started around the date of the Brexit referendum.

Overall, taken over longer term horizon, and smoothing out some occasionally impressive volatility, index averages across all four European economies shows structural increases in uncertainty relating to economic policy since the start of the Global Financial Crisis. These structural increases are not abating since the onset of economic recoveries and, as the result, suggest that the improvement in the European economies sustained since 2011 onward is not seen as being well anchored (or structurally sustainable) on the ground and amongst the newsmakers.

17/6/15: European Policy Uncertainty: May 2015

The latest reading for the European Policy Uncertainty Index (measuring economic policy uncertainty as reflected in the media sources) has continued to trend within the range of the crisis period averages in April-May 2015. This range has been now sustained since September 2014 when the index reversed local decline to below-average levels over the sub-period of March 2014 - August 2014.

Over time, we continue to trend within the post-crisis regime associated with above-historical average levels of policy uncertainty. The trend toward uncertainty decline in the post-crisis period has now slowed down and showing signs of potential reversal despite the media overwhelmingly tending toward a positive news reporting selection bias.

24/5/15: Markets, Patterns and Catalysts: Irish Growth Story

Some of my slides from last week's presentation at the All-Ireland Business Summit, covering three key themes:

The Current State of the Irish Economy "The Market Section"

The New Normal of rising global risk "The Pattern"

A Policy Path to Growth "The Catalysts"

18/12/2013: Portugal's Expresso on Irish Strategy for Growth 2014-2020

Portugal's Expresso is featuring Ireland's Strategy for Growth 2014-2020: "Irlanda quer ser o melhor pequeno país para as empresas" with comments from myself & @seamuscoffey :
http://expresso.sapo.pt/irlanda-quer-ser-o-melhor-pequeno-pais-para-as-empresas=f846740

Economics 22/06/2009: Unemployment & Social Welfare

For those of you who missed my Sunday Times article, here is an unedited version, along with more detailed explanation of my calculations on effective earnings for welfare recipients as compared against those for people engaged in lower-skills work across Irish sectors.


In 1987, after years of gradual decay, Ireland’s economy was scarred by 17% unemployment, of which 10.5% was long-term – of duration over 1 year. What got Ireland out of this quagmire was a combination of drastic currency adjustments, contractionary fiscal policies and a doze of realism when it came to real wages and welfare benefits.

In contrast, so far in the current crisis, 18 months into exponentially rising dole queues, our Government has reduced itself to repeating a handful of old and obsolete clichés.

The first one is to evoke an assumption that our demographic dividend – the term used to describe our younger than EU average labour force – is going to carry us out of the current mess to new heights of growth in years ahead. The second one is to claim that because the onset of unemployment was a sudden one, it is, therefore, temporary in nature. ‘All’s going to be fine, folks, once America starts growing’, says our Government. Will it?

Take the ‘demographic dividend’ argument. It is true that we have a strong younger labour force. However, it is dangerous to assume that these workers are always going to remain in Ireland. In demographics, like in everything else, there is no such thing as a free lunch.

In particular, young worker’s propensity to stay in this country is a function of several variables all of which are under threat from our current policies. Young and highly skilled workers require an environment in which their careers are less constrained by the incumbents. Given that Irish regulations favour the length of tenure over actual and potential productivity as criteria for promotion, layoffs and hiring, this is an area of serious concern. While October 2008 – April 2009 rate of increase in unemployment amongst all Irish workers was 64.5%, for 25-34 year-olds it was 77.5%. To keep young workers in this country, we need to give up some of the tenure-based job security that our trade unions enshrined in labour laws.

Likewise, given a choice between living in countries with much lower income inequalities and in those where pay is linked to individual and sectoral productivity differentials – vast majority of our younger and more able workers prefer to build their careers in the New York, London or Sydney, not in Stockholm or Helsinki.

A corollary of this is that high minimum wage and social welfare rates, and rigid labour markets regulations act as a relative disincentive for highly skilled young workers to remain in Ireland. Higher minimum wage and social welfare benefits depress the premium to skills and aptitude that is collected by the young workers more than for older workers. Younger workers in Ireland already face lower tenure-linked wages, bringing their real consumption and wealth closer to those employed in low-skilled jobs and those who are not engaged in the labour force at all.

Table illustrates by taking an example of single parent in average and lower skills employment in Irish economy and comparing her against a person on social welfare. The current social welfare payments and benefits exceed lower grade workers’ earnings in all broad sectors of our economy, with the gap ranging between €1,423 per annum for production workers in industry overall to €2,006 per annum for lower grade workers in manufacturing.

See below for charts and explanations

There is an added external threat to our younger labour force. As an open economy, with wage premia for younger workers rise in increasingly geriatric Germany, Italy, Belgium and other advanced economies, Ireland will face a simple choice – let our demographic dividend slip to other locations or create a more rewarding and meritocratic home market.

On the net, it is hard to make a case that our demographic advantage over older EU15 economies will automatically yield significant economic or social dividend in the near future.


The second major issue with our labour market policies relates to the recent increases in unemployment. Irish commentators and policy makers often take a simplistic view that the current bout of unemployment was unpredictable, concentrated in the construction sector and is a temporary feature of our economic landscape. Once growth returns, the thinking goes, some 250,000-300,000 of the 402,100 currently in receipt of unemployment assistance will go back to work. Happy times are just around the corner, as our Taoiseach as been suggesting as of late.

This is not what the actual data tell us. While the early rise in unemployment was indeed attributable to the construction sector, since October 2008 a rising share of layoffs were coming from white-collar traded and domestic sectors: finance, legal, marketing, advertising and so on. And it is primarily the younger workers who are getting laid off first.

Just as with the ‘demographic dividend’ discussed above, the unemployment figures are influenced by our labour markets policies. According to the latest comparative data, Irish minim wages are the highest in the OECD when measured as a percentage of an average gross wage. Ditto when measured as a percentage of the average after-tax wage. Short of Luxembourg, we have the highest percentage of employees who earn minimum wage.

High minimum wages are generally an impediment to low skills and youth employment. Crucially, high minimum wages are a barrier to jobs creation in professions that require significant on-the-job training and long periods of skills acquisition. Their adverse impact on employment is further exacerbated by the combination of high labour taxes and low capital taxes. The latter effect is simply due to the less understood fact that lower skilled labour is an easier substitute for machinery than skilled workers. Given tax incentives for acquisition of physical capital and simultaneously staggeringly high costs of employing low skilled workers, any employer has strong incentives to reduce lower-skills workforce over time.

This, in turn, means that around 60% of the total new Live Register signatories since November 2007 (the month when the unemployment crisis really started to unfold) are candidates for becoming perpetually unemployed. In a year to April 2009, the number of those on the Live Register for 1 year or more has risen from 49,555 to 70,828 – an increase that can be broken down into a 13.3% rise in April-October 2008 and 26.2% rise in the subsequent 6 months to April 2009. Long-term unemployment is now accelerating, suggesting that by April 2010, long-term unemployment and withdrawals from labour force will affect some 250,000 Irish workers, brining our overall rate of long-term unemployment to over 11% or above that experienced in the dark hour of 1987.

At this point in time, we must face the reality of the labour markets. No amount of spending on FAS or any other up-skilling programmes will make a dent in the gruesome unemployment numbers. Only significant reforms of our labour markets and a reduction in the total cost of employment of younger and less skilled workers will create an environment in which new positions leading to significant on-the-job training can be added to this economy. Chief among these should be lowering our minimum wages, cutting excessively high welfare supports and using the savings generated to reduce employment-distorting taxes on businesses and workers.

Calculations for the Social Welfare Wage Gap:
First, let us start with assumptions on benefits.
Converting the above into the rates of earning, hourly equivalent):

Comparing the above welfare hourly earnings against the latest CSO data on hourly earnings ex-bonuses etc:
Note that above we have welfare hourly equivalent rate of €18.18 per hour exceeding all hourly earnings in lower skilled production workers and manual labour categories for all sub-sectors, except our semi-states dominated Electricity sector. In other words, on per-hourly basis, if you are a lower-skilled worker in the sectors marked with red in the above table, you are better off on welfare than on the job. And this before we adjust for taxes, which we do here:
Just as above, once we factor in the work efforts across different sectors, and net out taxes, we have social welfare recipients coming out better off than lower-skilled employees in all but one broadly defined sectors. Three sectors (marked in blue) are also under threat of being only marginally better off for an average worker (not a low-skilled one, but an average one!).

Lastly, consider recognizing the fact that welfare recipients have virtually unlimited 'vacation' time, while people with jobs have to sweat for their severely restricted R&R allowances. Table below takes this into account by adding the value of 1 month vacation time to the social welfare recipient's benefits...
Bright red now marks new categories of employees who fall below the effective after-tax earnings and benefits of our average welfare recipient.

Lastly, it is worth noting that a person on minimum wage is currently twice worse off working than sitting on a permanent dole.

Talking up our economy

Today, Brian Cowen has issued a Bertiesque warning to commentators 'talking down Irish economy'. I beg to disagree. Firstly, the problem Ireland is facing is not that some commentators want to uncover the truth, but that our Government is failing to listen to anyone, save for a handful of public sector mandarins and political appointees. Secondly, lest anyone accuses myself of scaremongering, I remind our Taoiseach and his Cabinet that I have publicly put forward a constructive proposal for dealing with the current crisis as far back as in August 2008.

Here are few details:

In August 2008 edition of Business&Finance magazine, I predicted that Ireland will continue its downward trajectory in terms of stock market valuations and economic performance unless the Government were to tackle the issue of public sector overspend and consumer debt. In early October, from the same platform, I re-iterated a call for the Government to get serious with the problem of rising household insolvencies and corporate debt burden. At that time, I provided an outline of a basic plan that I hereby reproduce (some of the modifications to the original plan were featured in my article in Business&Finance in November).

Here is a bold, but a realistic proposal for moving the Government beyond its current position of playing catch up with deteriorating fundamentals. The Exchequer should:

• Announce a 10% reduction across the entire budget and an up to 60% cut on the discretionary non-capital spending under the NDP, generating ca €12-15bn in savings. The cut should include a 100% suspension of all overseas assistance until the time the economy returns to its long-term growth path of ca 2.5-3%.
• Cut, permanently, 10% of the public sector employment (effecting back office staff alone), saving ca €1bnpa after the costs of the measure are factored in.
• Freeze pensions indexation in the public sector for 2008-2015 and make mandatory a 50% contribution to all pensions plans written in the public sector, generating ca €1-2bn in savings.
• Stop the unfunded contributions to the NPRF, saving some €1.5bn per annum.
  

Combining all the savings, the Government should be able to :

• Bring 2009-2010 deficits to within the Eurozone limits; and
• Supply temporary tax refunds of ca €5,000pa per household in 2009-2010 ring-fenced for pensions plans and mortgages funding only.
  

The resulting capital injection of ca €7.5bn pa will be able to:

1. de-leverage the households (amounting, by the end of 2010 to a ca 25% reduction in the total households’ debt), improving consumer sentiment and re-starting housing markets;
2. help recapitalize the banks and improve their loans to capital ratios more efficiently than a debt buy-back, a nationalization, a direct injection of capital from the Exchequer or a debt guarantee.
   

It will result in a sizeable (ca 5% of the entire economy) annual stimulus, without triggering inflationary pressures associated with the Santa-like Government subsidies or consumption incentives.

This proposal implies no burden on the future generations, as the entire stimulus will be paid from the existent fiscal overhang and the set-aside public funds, with the public pensions covered by the contributory schemes.

Lastly, to achieve a morally justifiable and economically stimulative recapitalization of the banks, the plan would require Irish institutions receiving any additional public financing to issue call options on ordinary shares with a strike price set at the date of the deposit and maturity of 5 years. These shares should be distributed to all Irish households on the flat-rate basis.

Thus, assuming the need for additional capital injections of €6-9bn in the Irish financial institutions through 2010 (over and above the €7.5bn pa injected through mortgages repayments and pensions re-capitalizations), Irish households will be in the possession of options with a face value of €4,000-6,000 per household, thus increasing their financial reserves. At the time of maturity, assuming options are in the money, the Exchequer will avail of a special 50% rate of CGT on these particular instruments. Assuming that share prices appreciation of 40% between 2009 and 2014, the CGT returns to the Exchequer will yield ca €1.8bn, ex dividend payments.

Government Plan: VC investments Redux

See the latest on VC investments here, but my favourite bit of this exceptionally well researched and written article is towards the end:

"Illiquid investments like venture-backed startups don’t look so hot. VCs 'have been living off fumes for a long time now,' says one prominent Silicon Valley investor. 'If you have any money, the last thing you’re going to do is put it into an asset class that hasn’t generated a return for ten years.'"

Well, apparently Irish Government knows something that Harvard economists, Forbes journalists, global 'smart' money and this humble blogspot (here) all have missed - an alchemist's formula for turning taxpayers' cash into Exchequer Gold via VC investments in 'greenish and techy things'...

What can possibly go wrong now?

Welcome to my new blog. 

True Economics is about original economic ideas and analysis concerning everyday events, news, policy views and their impact on the markets and you. 

It is also a forum for debating and a place to catch up on my work - academic, policy and journalism.

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