6/5/2012: Live Register for April 2012 - Sub-trends Part 2

Last post of three on the Live Register. The first post looked at the core trend in the Live Register, the second dealt with sub-trends by nationality, duration and casual/part-time employment.

In this post, I am dealing with occupational distribution of Live Register.

CSO covers occupational data as follows:

"Craft and related (24.1%) remained the largest occupational group on the Live Register in April, despite the fact that the number in the group fell over the year by 8,580 (-7.6%) to 103,626. The second largest annual percentage decrease was in the Clerical and secretarial group (-5.4%). Slight increases were seen in the Sales group (+1.8%) and the Personal and protective service group (+0.6%) over the year".

Here are some additional details:

Comparing y/y changes by category:

So several interesting things jump out of the data.

As expected, Associated Professional & Technical occupational category performed better than overall Live Register, posting stronger declines. This is consistent with the idea that exporting firms are maintaining their employment levels of mid- to lower-end staffing with some specialist knowledge. Alas, this outperformance is hardly spectacular.

Managers and administrators did relatively well until March 2012, since when their Live Register reductions have been underperforming overall Live Register - a worrying movement, but too short-lived to establish a trend. Clerical and Secretarial is posting some significant improvement relative to overall trend, but this comes on foot of average performance since November 2011 through February 2012.

Craft and related (the category including construction workers) is performing surprisingly well, suggesting that much of 'improvements' in the Live Register overall have been driven by people dropping out of LR coverage, not by jobs creation (recall, construction activity continues to tank).

An interesting feature of underperforming sub-categories is that they include manufacturing-linked Plant and Machine Operatives category (a sign that overall exports-led growth is jobless) and Sales category (showing the level of jobs destruction in domestic services, such as retail).

Changes in 2010-2012 April figures in absolute levels, shown in the first chart above show that Professional and Associate Professional & Technical categories have managed to reduce their overall Live Register counts by a combined 1,415 in two years! This is hardly consistent, overall, with a boom in profits expatriation by the MNCs and exports that we have experienced. Welcome as these numbers might appear, I wonder, how many of these LR reductions were due to emigration of skilled workers?

To summarise, I suspect that the core (practically the only) drivers of LR reductions have been drop-outs from the LR due to benefits expiration (especially for the categories with largest recorded declines), plus transition into state sponsored training schemes, plus emigration. I see basically no evidence consistent with the story that exports-led (or rather MNCs transfer pricing-led) growth has been strongly net additive when it comes to jobs in any of the occupational categories. In fact, this economy might be becoming top- and administration-heavier, rather than more skills-intensive.

6/5/2012: Live Register for April 2012 - Sub-trends Part 1

In the previous post I looked at the headline Live Register stats for April. Here, let's take a look at the sub-trends.

The number of long term claimants on the Live Register in April 2012 was 184,053, up 14,633 y/y and down 412 m/m. This is not seasonally adjusted. Per CSO: "The number of male long term claimants increased by 7,744 (+6.2%) in the year to April 2012, while the comparable increase for females was 6,889 (+15.4%) giving an overall annual increase of 14,633 (+8.6%) in the number of long term claimants.

Numbers of those in casual and part-time employment declined 274 to 88,442 in April 2012. Year on year the number is up 2,848 (+3.33%), compared to y/y change to March 2012 of +2,561 (+2.97%) - marking a slight deterioration of the trend. Overall, as chart below shows, things are running with a slightly upward trend. Again, you can opt to interpret part-time and casual employment as a good thing, or as a bad thing - glass half-full or half-empty, but generally, in my view, absent robust new jobs creation, this speaks more of a hidden unemployment, rather than of nascent entrepreneurship or a pick-up in some hiring activity.

Last 3 months average is now running at 1.89% increase on previous 3 months, and 3.33% rise y/y.

Now, for Live Register breakdown by nationality:

In April 2012, 77,015 non-Irish nationals were on the Live Register, down 1,065 from march 2012 (-1.36%) and down 508 (-0.66%) y/y. In March 2012, y/y decline was 514 (-0.65%). Since series is not adjusted for seasonal variation, it is worth looking at 3mo averages. 3mo average through April 2012 was up 1.72% on 3mo average through January 2012, but down 0.61% on same period 2011. The trend for non-nationals is therefore practically flat.

There were 352,986 nationals on the Live Register in April 2012, representing a decline of 2,988 on March (-0.84%) and a drop of 9,062 y/y (-2.50%). This compares to a y/y decline of 6,625 (-1.83%) in March 2012. 3mo through April 2012 average was down 0.41% compared to 3mo through January 2012 and declined 1.85% y/y. So the series are showing stronger downward momentum, but still a flat, albeit volatile trend. Chart above clearly shows the seasonality pattern and the flat trend.

April 2012 non-Irish nationals accounted for 17.91% of the total number of persons on the Live Register - an increase from 17.64% a year ago, but down from 17.99% in March 2012.

Stay tuned for occupational analysis of the LR in a subsequent post.

5/5/2012: Live Register in April - trending flat at 'glass half-full'

It's been a while since I updated the Live Register figures, and given that some fresh data was released this week, I think it's time to revisit the trends.

First off, the LR-implied unemployment (or standardized unemployment rate) remained at 14.3% in April 2012, unchanged from March 2012 ad below 14.6% reading for the actual unemployment rate for Q4 2011 (based on QNHS).

So far, crisis-period average LR-implied unemployment rate is 13.8% - still below that for April 2012, although with STDEV of 1.3 we are getting closer and closer to the statistically average rate. Crisis-period average monthly movement in the LR-implied unemployment is 0.14 percentage points, so with zero movement in April 2012, things are better than average. April 2012 marks 6th consecutive month during which the implied unemployment did not rise, of which exactly 3 months have seen zero change in unemployment and 3 months say declines of 0.1 percentage point. So as can be seen pretty clearly, January-April 2012 trend is not exactly encouraging, but on the 'glass half-full' side, it is also not exactly severely disappointing either.

In terms of absolute numbers, seasonally adjusted LR rose by 100 entrants in April 2012 to the seasonally-adjusted 436,000, so year on year LR dropped 6,400 in April 2012 (-1.45%) against a y/y decline of 8,000 (-1.80%) in March 2012. 3-mo average for the period through April 2012 is 1.35% below same period in 2011. This marks a moderate, but positive trend for the series and is a good news.

Alas, as the above figure illustrates, the good news on LR are clearly offset / accounted for by aggressive reclassification of assistance recipients into training programmes. Before you start biting off my head, let me clarify - training and re-training is good, but until the person exits the programme and gains a job, in my opinion, it is dishonest to claim that this person is not unemployed. So, per chart above, if we add March 2012 (latest) data for state training programmes participation numbers, we get 517,440 persons on the live register and in state run training programmes in April (against 517,340 in March). That is a rise of 12,694 y/y (+2.51%).

Chart below shows the LR struggle to break out of the flat trend since Q4 2010 that continues to-date.

The following post will look into some sub-trends in the LR composition.

5/5/2012: Marx v Austrians: 0:1... still

A superb and a must-read paper on virtues, failures & quantifiability of 'alternative' ideological structures: Capitalism, Socialism and Calculations, by Brent Butgereit and Art Carden.

The paper is now published in the Economic Affairs, Vol. 31, Issue 3, pp. 41-45, 2011  but you can get a working paper version of it free here.

Per authors: "The merits and demerits of what we call ―capitalism have been sources of much attention since Adam Smith...  We consider the criticisms of the Smithian capitalist system as stated most prominently by Karl Marx, and we evaluate Marx‘s proposed solution to the evils of capitalism—specifically, socialism. We also explore the contributions of Ludwig von Mises and Friedrich Hayek to the debate about whether Marx‘s proposed alternative was really an alternative.

Mises and Hayek provide powerful critiques of Marx‘s socialist vision by addressing the problem of economic calculation and the inability of central authorities to acquire knowledge diffused and distributed across an entire society.  We question whether Marx offered a solution and then consider more recent attacks on capitalism and its alleged destruction of cultural capital.

The theoretical contributions of Mises and Hayek are supported by recent empirical contributions suggesting that liberal political economy is robust."

Worth a read!

5/5/2012: Can austerity work as default probability evaluation aid?

Usual argument in favor of a fiscal contraction in response to an adverse fiscal shock goes along the lines of the Expansionary Fiscal Contraction - or structural - argument. There are many who agree/disagree with this proposition, but there's plenty of literature covering it.

A new argument in favour of 'austerity' response to a fiscal shock is presented in the recent paper from the Bank of Italy.

Optimal Fiscal Policy When Agents Fear Government Default, by Francesco Caprioli, Pietro Rizza and Pietro Tommasino (March 2012), link here, argues that under optimal fiscal policy, when a government is facing with investors who fear a sovereign default, and assuming investors learn over time so as to gradually correct from the initially over-pessimistic view of the default probability, "a frontloaded fiscal consolidation after an adverse fiscal shock is optimal". In other words, 'austerity' can work when it facilitates learning process to support investors' discovery of the 'true' lower probability of default.

In a summary, the findings are:

• When agents fear government default, a fiscal consolidation after an adverse fiscal shock becomes optimal. The intuition is that the interest rate on government debt is too high due to distorted expectations about government default; therefore the marginal cost of higher distortionary taxes today is more than compensated by the expected future marginal benefits of lower distortionary taxes tomorrow. 
• The incentive to reduce debt is stronger: a) the more pessimistic agents are about government solvency and b) for a given degree of pessimism, the higher the post-crisis debt level. 
• The state of agents initial beliefs has an effect on the long-run mean value of the tax rate and debt. In particular, the more pessimistic agents initial beliefs, the lower the long-run mean value of debt. The intuition is that the more pessimistic the agents are, the stronger the incentive to change their expectations.

5/5/2012: Incentivising Altruism?

Yesterday, I was honored to help launch a new - and a very promising and interesting, including from economics research point of view - initiative in Clonakilty, the Clonakilty Favour Exchange.

There has been some coverage of the Exchange launch here, here and here. And there's more forthcoming.

At the launch, myself and Bill Liao (a fantastically engaging speaker with a hell of a great message to share on the role of altruism and passion in our lives - social and individual alike) had a very interesting, albeit brief discussion as to the balance between the economic values of human capital and the social values, as well as individual well-being. Bill, absolutely correctly, in my opinion, raised the issue of how rewarding altruism and care for others in the community must be an integral part of the economic exchange.

Here is an interesting piece of recent research showing that traditional economic incentives, such as pay for altruistic endeavors, can empower greater engagement

Written by Nicola Lacetra, Mario Macis and Robert Slonim, the study "Rewarding Altruism? A Natural Field Experiment" was published as Milton Friedman Institute Working Paper No. 2011-010 (link here) and looks at the evidence "from a natural field experiment involving nearly 100,000 individuals on the effects of offering economic incentives for blood donations". Key findings are:

• "Subjects who were offered economic rewards to donate blood were more likely to donate, and more so the higher the value of the rewards."
• Subjects "were also more likely to attract others to donate, spatially alter the location of their donations towards the drives offering rewards, and modify their temporal donation schedule leading to a short-term reduction in donations immediately after the reward offer was removed." 
• Although offering economic incentives... positively and significantly increased donations, ignoring individuals who took additional actions beyond donating to get others to donate would have led to an under-estimate of the total effect, whereas ignoring the spatial effect would have led to an over-estimate of the total effect." 
• The authors also found "that individuals who received a reward by surprise were less likely to donate after the intervention than subjects who received no reward, suggesting that for some individuals a surprise reward adversely affected their intrinsic motivations."

In fact, as I recall, Bill explicitly raised a point that in some cases, rewarding for altruistic behavior can lead to apprehension on behalf of the person carrying out altruistic activity.

I am certainly looking forward to having a deeper discussion on the topic with Bill.

And in the mean time - massive thanks to the wonderful people of Clonakilty and to all engaged in the Clonakilty Favour Exchange for their hospitality and for their enthusiasm! Contagious stuff.

4/5/2012: Direct democracy and fiscal profligacy

Here's a very interesting study on the effects of direct democracy rules on the size of government. The paper: "Does Direct Democracy Reduce the Size of Government? New Evidence from Historical Data, 1890-2000", published in the Economic Journal, vol 121, issue 557, pages 1252-1280, 2011, but available free as an earlier draft working paper here, sets out to estimate the effect of direct democracy institutions on the size of government expenditure. The study uses Swiss cantons asa the 'test-bed' for direct democracy.

The study shows that once fixed effects are deployed to control for unobserved heterogeneity, and once instrumental variables are used to control for potential endogeneity, direct democracy can be linked to imposing constraints on cantonal spending. However, the overall impact of direct democracy on curtailing public spending is much more modest than previously suggested.

Thus: "a mandatory budget referendum reduces canton expenditures by 12%. Lowering signature requirements for the voter initiative by 1% reduces canton spending by 0.4-1.4%. We find little evidence that direct democracy at the canton level results in higher local spending or decentralization.


Update:


And another very interesting case study on effects of direct democracy, in this case - the study of Icelandic Constitutional change in the wake and in response to the crisis:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2034241

4/5/2012: Fitch Bells: Ringing de Panic?

Yesterday, Fitch Ratings issued an interesting report, titled "The Future of the Eurozone: Alternative Scenarios". The report sounds alarm bells over what some markets participants have thought of as a 'past issue' - the risks of contagion from Greece to the Euro area periphery.

Fitch Ratings core view is that the eurozone will 'muddle through' the crisis, surviving in its current composition,  while taking 'gradual steps towards closer fiscal and economic integration'. 


The interesting bit comes in the discussion of possible alternatives and the associated probabilities of these alternatives. According to Fitch, there is rising (not falling, as we would expect were LTROs and Greek debt restructuring, plus the Fiscal Compact and the ESM working) risk of a protracted growth slowdown or political shock or some other shock triggering either a possible facilitated Greek exit from the Euro or a disorderly Greek exit from the common currency.


And, crucially, according to Fitch, this risk cannot be discounted. 


This bit is where Fitch's assessment is identical to mine and contradicts that of the majority of Irish 'green jersey' economists: the tail risk of a disorderly unwinding of the euro is non-zero and rising, while the disruption or cost associated with such a outcome is by far non-trivial. Prudent risk management policy would require us to start contingency planning and addressing the possible realisation of such a risk. Instead, we are preoccupied in navel gazing through the lens of the Fiscal Compact, and not even at our own 'navel', but at the European one.


Fitch view is that a full break-up and demise of the euro is probabilistically highly unlikely. This belief is based on Fitch foreseeing large financial, economic and political costs of a break-up. More interestingly, Fitch determines that a partial break-up of the euro zone - with one or more countries exiting the common currency -  would "risk severe systemic damage, although cannot be discounted". 


For those thinking we've done much to resolve the systemic euro crisis (by doing much we usually mean creation of EFSF and agreeing ESM, deploying LTROs and restructuring Greek debts, and putting in place the Fiscal Compact), Fitch has some nasty surprises. Basically, Fitch believes (and I agree with their assessment here), that "additional measures will be needed to resolve the crisis. These are likely to include some dilution of national fiscal sovereignty [beyond the current austerity programmes and Fiscal Compact], potentially some partial mutualisation of sovereign liabilities [basically - euro bonds of sorts] and resources [some transfers to peripheral states], as well as measures to enhance pan-eurozone financial supervision and intervention, combined with further institutional reforms to strengthen eurozone economic governance". Basically, you can read this as: little done, much much much more to do still...


It gets worse.


Of all the alternative scenarios presented, Fitch believes that the most likely scenario will involve a Greek exit, with Greece re-denominating its debt in a new currency and default on its bonds again. Per Fitch, the core danger will be to Cyprus, Ireland, Italy, Portugal and Spain based on:

1. Greek exit creating an 'exit precedent' for the already distressed economies
2. Greek default impacting adversely other peripheral countries banks (especially true for Cyprus)
3. Greek default increasing the risk of capital flight from the countries
4. Greek default triggering a run on peripheral bonds just around the time when the 2013 'return to markets' horizon is in the crosshair.

Just as I usually do in my presentations on the topic, Fitch distinguishes two potential paths to Greek 'exit' - a structured and unstructured or 

• an "orderly variation with an effective eurozone policy response and minimal contagion" and 
• a "disorderly variation", involving "material contagion to the periphery and a significant increase in contingent liabilities facing the core".

Ouch, I must say, for all the folks who lost their voice arguing that my views are 'unreasonable' and 'scaremongering'. Sorry to say it, risk management approach to dealing with reality requires taking a probabilistically-weighted expected costs scenarios of the downside into the account. Simply shouting "all is sustainable here, nothing to bother with" won't do.

4/5/2012: Sunday Times - 29/4/2012: Fiscal Compact

My Sunday Times article from April 29, 2012 (unedited version).

When first published, the Fiscal Compact (formally known as the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union) was billed as a ground-breaking exercise in European legislative activism. The main innovation of the treaty was not its content (which largely regurgitates already existent fiscal constraints established under the Maastricht Treaty), but its compact size and designed-to-be-digestible language.

Few months down the road, and the Fiscal Compact has become a subject to numerous conflicting claims and interpretations, thanks to both side of the referendum debate in Ireland. Mythology that surrounds the Fiscal Compact is impressively wide and growing. The fog of politicised sloganeering and scaremongering on the ‘Yes’ side is well matched by the clouds of emotive and quasi-economic nonsense from the ‘No’ camp.

The main alleged problem with the Compact is that its core rules – the 60% debt/GDP limit for Government borrowings, the 1/20 adjustment rule for dealing with excess public debt, the 3% deficit ceiling and the 0.5% structural deficit break – amount to prohibiting of the Keynesian economic policies in the future. This argument is commonly advanced by the Fiscal Compact opponents and implies that in the future crises, Ireland will not be able to use stimulative Government spending to support its economy.

In practice, however, Fiscal Compact restricts, but not eliminates the room for deficit financing. In the current economic conditions, under full compliance with the deficit rules, Irish Government would have been able to run a deficit of at least 2.97% of GDP – much lower than 8.6% targeted under Budget 2012, but close to 3.2% deficit forecast for 2012 for the euro area.

Far from ‘killing Keynesianism’, the Fiscal Compact induces in the longer run fiscal policies that are consistent with Keynesian economics. Any state that wants to secure a ‘fiscal stimulus’ cushion for future crises should accumulate surplus resources during the times of economic expansions, not rely on the goodwill of the bond markets to supply debt financing to the Governments when their economies begin to tank.

The treaty does limit significantly the state capacity to accumulate debt in the future. In the long run, debt to GDP ratio should converge to the ratio of average deficits to the long-term growth potential. Based on IMF projections, our structural deficit for 2014-2017 will average over 2.7% of GDP, which implies Fiscal Pact-consistent government deficits around 1.6-1.7% of GDP. Assuming long-term nominal growth of 4-4.5% per annum, our ‘sustainable’ level of debt should be around 36-40% of GDP. Although no one expects (or requires) Ireland to draw down our public debt to these levels any time soon, over decades, this is the level we will be heading toward if we are to comply with the Fiscal Compact rules.

On the ‘Yes’ side, the biggest myth concerning the Fiscal Compact is that adopting the treaty will ensure that no more fiscal crises the likes of which we have experienced since 2008 will befall this state.

In reality, the collapse of exchequer finances in Ireland has been driven by a number of factors, completely outside the matters covered by the Fiscal Compact.

Firstly, significant proportion of our 2008-2011 deficits arises from the state response to the banking sector implosion and closely correlated property sector collapse. The latter was also a primary driver for the decline in tax revenues. The former was a policy choice. Thirdly, our deficits were driven not just by the fiscal performance itself, but also by the unsustainable nature of our government spending and taxation policies. For example, during the boom, Irish Governments consistently acted to increase automatic payments relating to unemployment and social welfare financed on the back of tax revenues windfall from property transactions. Property revenues collapse coincident with increases in unemployment has led to an explosion of unfunded state liabilities.

None of these shocks could have been offset or compensated for by the Fiscal Compact-mandated measures. In fact, during the 2000-2007 period, Irish Governments’ fiscal stance, on the surface, was well ahead of the Fiscal Compact requirements. Ireland satisfied EU Fiscal Compact bound on structural deficits in all years between 2000 and 2007, with exception of two. Of course, in all but one year over the same period, we also failed to satisfy the very same bound if we were to use the IMF-estimated structural deficits in place of those estimated by the EU, but that simply attests to the difficulty of pinning down the exact value of the potential GDP, required to estimate structural deficits. We also satisfied EU-mandated debt break in every year between 2000 and 2008. In fact, between 2000 and 2007 our debt to GDP ratio was below 40% - the benchmark consistent with long-term compliance with the Fiscal Compact. More than fulfilling the requirement for a 3% maximum Government deficit, Irish Exchequer run an average annual net surplus of 1.97% of GDP, accumulating 2000-2007 period surpluses of €11.3 billion and the NPRF reserves which peaked in Q3 2007 at €21.3 billion.

In short, the Fiscal Compact is not a panacea to our current crisis, nor is it a prevention tool capable of automatically correcting future imbalances, especially given the difficulty of forecasting future sources of risk.

Instead, Ireland needs a combination of institutional reforms to enhance our domestic capacity to identify points of rising risks and to deploy policies that can address these risks in advance. A flexible and highly responsive early warning system, such as a truly independent Fiscal Advisory Council, coupled with reformed Civil Service, aiming at achieving real excellence and accountability within the key Departments and regulatory offices can help. Furthermore, abandonment of the consensus-focused systems of governance, eliminating the expenditure-centric Social Partnership and the Dail whip system, and reformed legislative and executive systems to increase the robustness of the checks and balances on local and central authorities, are needed to develop capacity to respond to emerging future crises. Legal reforms, to address the imbalances of power of the vested groups, such as bondholders or state monopolists, vis-à-vis the taxpayers, are required to prevent future bailouts of private and semi-state enterprises at the expense of the Exchequer. Local authorities reforms are required to ensure that the madness of over-development and land speculation do not build up to a systemic crisis. Taxation reforms are needed to stabilize future revenues and develop an economically sustainable tax system.

The Fiscal Compact is a wrong policy for all of the above because it risks creating a confidence trap, which can replace or displace other reforms. It represents a wrong set of objectives, as it diverts state attention from considering the nature of underlying imbalances. It also re-directs much of the fiscal responsibility away from Irish authorities, potentially amplifying the reality gap between the real economy and the decision-makers. By endlessly blaming Europe for tying Government’s hands, the Compact will continue building up voters’ perception disenfranchisement, fueling stronger local political orientation toward parochialism and narrow interests representation, while alienating voters from European institutions.

In short, the Compact is not an end to the politics as usual. This, perhaps, explains why no independent analyst or politician is prepared to vote in favour of the new Treaty except under the threat of the Blackmail Clause contained not in the Fiscal Compact itself, but in the forthcoming ESM Treaty and which requires accession to the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union as a pre-condition for gaining access to the ESM funds. Not exactly a moment of glory for either Europe or Ireland.

  

Box-out:

By now, we have become accustomed to the endless repetition of the boisterous claims that the continued declines in Government bond yields since mid-2011 signal the return of the markets confidence in Ireland. Alas, based on the last two months worth of data, things are not exactly going swimmingly for this school of thought. Based on weekly data, Irish benchmark 9-year bond yields spreads over Germany have contracted sharply in year on year terms, falling on average 1.30 percentage points since March 1, 2012 and 1.26 percentage points in April. The former is the second best performance in the euro zone after Italy, and the latter marks the third best performance after Italy and Portugal. Alas, weekly changes have been much less impressive. Since March 1, our yields have actually risen, in weekly terms, with an average rate of increase of 0.02 percentage points. For the month of April, the same metric stands at 0.05 percentage points. The same performance pressure on Ireland is building up in the Credit Default Swaps markets, with our 5 year benchmark CDS spreads declining just 0.24 percentage points compared to Portugal’s 5.2 percentage points drop since a month ago. Overall, European CDS and sovereign bonds markets are now signalling the exhaustion of the positive momentum from the December 2011 and February 2012 LTROs. Ireland’s bonds and CDS are no exception to this rule, suggesting that the ‘special relationship’ that we allegedly enjoy with the markets might be now over.