27/7/2012: Ireland's Institutional Accounts Q1 2012

Some positive news on the economy front: Q1 2012 Non-Financial Quarterly Institutional Accounts are out today from CSO (link) and headline numbers showing no significant deterioration and even improvements in areas that do matter, except for the one that matters most to Government plans for the future.

The text below mostly quotes from CSO release linked above, with my comments in italics:

Point 1: The gross disposable income of households was €21,986m in Q1 2012 – an increase of €771m or 3.6% y/y.

This was driven by wages rising by +€170m and profits increases for the self employed of +€365m. Lower interest repayments on loans of -€272m further increased gross disposable income.

Point 2: Household expenditure fell marginally by €9m in Q1 2012 compared to Q1 2011 to €19,361m.

Point 3: Points 1 and 2 above mean that gross household savings increased from €2,439m in Q1 2011 to €3,209 in Q1 2012. The gross savings ratio, which expresses savings increased from 11.2% of gross disposable income in Q1 2011 to 14.2% in Q1 2012. Meanwhile, consumption of fixed capital by households fell from €1,056m in Q1 2011 to €1,037m in Q1 2012, and overall deficit in capital account for the households was shallower at -€154m in Q1 2012 as opposed to -€296m a year ago. This suggests that while deleveraging is still on-going, the rate of capital paydown has slowed slightly. In other words, households have slowed deleveraging and potentially increased capital acquisition. Albeit both effects are very small, these are welcome, if confirmed.

Point 4: An increase in current taxes of €673m between Q1 2011 and Q1 2012 was slightly offset by a fall of €312m in social contributions over the same period, resulting in an increase of €361m in the resources side of the government account.

Point 5: On the uses side of the account social benefits paid by government increased by €289m.

Point 6: Combining Points 4 and 5, the government savings deficit (resources less uses) showed an improvement of €125m – up from -€3,700m in Q1 2011 to -€3,575 in Q1 2012.

Point 7: When account is taken of investment and capital transfers, the net borrowing of the government sector amounted to €4,182m in Q1 2012 compared with €4,489m in Q1 2011.

Point 8: combining Points 4-7: in the nutshell, taxes went up faster than spending went up and voila we are ‘doing less worse’.

Point 9: A major bit: the rest of the world recorded a surplus of €994m with Ireland in Q1 2012 so that Ireland recorded a current account deficit with the rest of the world compared with a surplus of €1910m in Q1 2011. A swing of €2,904m in the wrong direction. Recall that per economics gurus of Green Jersey type, current account surpluses are the only hope for Ireland’s recovery. Oops…

26/7/2012: Soft Skills - Survey of Evidence

A superb survey of the literature on soft skills (major component of human capital) published by IZA (DP No. 6580 May 2012) and written by my old prof: James J. Heckman and Tim Kautz, titled "Hard Evidence on Soft Skills". H/T to Professor Liam Delaney for spotting the paper.

The paper summarizes recent evidence on 

• what achievement tests measure; 
• how achievement tests relate to other measures of “cognitive ability” like IQ and grades; 
• the important skills that achievement tests miss or mismeasure, and 
• how much these skills matter in life. 

Core conclusions are: 

• Achievement tests miss, or perhaps more accurately, do not adequately capture, soft skills – personality traits, goals, motivations, and preferences that are valued in the labor market, in school, and in many other domains. Incidentally, this is straight confirmation of the Nozickian bais (see here).
• Ssoft skills predict success in life, causally produce that success, and 
• Programs that enhance soft skills have an important place in an effective portfolio of public policies

Awesome to see this work summarized.

24/7/2012: Residential Property Price Index for Ireland, June 2012

So that 'stabilization' in Irish property markets on foot of 0.2% rise in May in the Residential Property Price Index (RPPI) turned out to be just the statistical noise? Looks increasingly so to me. The latest data from CSO is bleak:


"In the year to June, residential property prices at a national level, fell by 14.4%. This compares with an annual rate of decline of 15.3% in May and a decline of 12.9% recorded in the twelve months to June 2011."

Overall residential property prices "fell by 1.1% in the month of June. This compares with
an increase of 0.2% recorded in May and a decline of 2.1% recorded in June of last
year."

Dublin - the 'bright spot of the previous months for the 'green jerseys' hopes on recovery in the property markets has recorded a fall of 1% m/m in June and a 16.4% decline y/y.


"House prices in Dublin are 56% lower than at their highest level in early 2007. Apartments in Dublin are 62% lower than they were in February 2007. Residential property prices in Dublin are 57% lower than at their highest level in February 2007. The fall in the price of residential properties in the Rest of Ireland is somewhat lower at 47%. Overall, the national index is 50% lower than its highest level in 2007."


Charts updates and forecasts later today, so stay tuned.

23/7/2012: Eurozone, Greece and the IMF - Part 2

On foot of my previous post on Greece and the IMF, the Fund has issued the following statement, quoted in full:

"We have received a number of inquiries related to the Der Spiegel report on Greece. You can attribute the following to an IMF spokesperson:

“The IMF is supporting Greece in overcoming its economic difficulties. An IMF mission will start discussions with the country’s authorities on July 24 on how to bring Greece’s economic program, which is supported by IMF financial assistance, back on track.”"

Key words here are "...to bring Greece's economic programme... back on track" which is a de facto admission by the Fund that the programme is 'off track' now. Another key issue with the statement is that it does not directly reject the claims made in Der Spiegel that the IMF is considering exiting the programme funding Greece.

Now, here's a problem the Fund is facing: it has two options now:

1. Admit that the programme is off track and hope that meetings with Greek authorities will put it back on track via some new additional measures to deliver more savings. In which case Greece buys few months more until that new sub-programme gets off track again, or
2. Admit that the programme is off track and cannot be restored to any reasonable level of performance. In which case the Fund must exit the programme.

Economically, (2) is the only rational choice. Politically (1) is the only feasible option. 

So long and thanks for all the fish, as they say...

23/7/2012: Eurozone, IMF and Greece

One must treat seriously the possibility that Greece will see its funding from the IMF cut-off or suspended. For a number of reasons, extending well beyond the simple financial arithmetics of aid.

Here are the details of the report.

Assuming the report is true, the questions it raises are:

• Validity of the Troika assessment during the structuring of the 'aid' packages: Greece received two 'bailouts' including a partial debt restructuring. Both packages were heavily criticised during their structuring as being insufficient in scope and excessively restrictive / ambitious in terms of fiscal adjustments required. In all cases, Troika rejected any criticism and pursued adjustments as planned.
• Validity of the Troika monitoring: since May 2010, there were ample signs that Greece will not be able to deliver on the 'bailouts' targets due to: (1) political constraints, (2) lack of real policy enforcement by Troika, (3) structural economic failures in the economy incapable of generating growth, (4) nature of the 'bailouts' that did not correct for debt overhang, and (5) social breakdown within the Greek society. Yet, the Troika continued to insist on compliance with the programmes that were clearly misfiring.
• Validity of the Troika assessments: since May 2010 numerous Troika reports were issued, all in effect (albeit with caveats) confirming that the programme in Greece was 'on track'. There was not a single report that sounded an outright alarm. Prior to each report publication, Greece was pressured to deliver on targets, with some marginal noises from the Troika that the programme is at risk. However, every tranche of loans was delivered in the end. With every bogus report being published, Greek authorities and international markets received a wrong and purposefully deceitful signal that no matter what, Greece will be provided loans to cover its ongoing obligations.
• Validity of the Troika capacity to design functional economic programmes: since May 2010, Greek economy continued to accelerate in the rates of decline - as measured by growth, unemployment, and growth components metrics. Objective assessment of the Greek situation can only conclude that an outright and full default on the country debts back in 2010 would have by now corrected the major debt imbalances and most likely restored economy to some positive expansion path. Objective assessment of the Greek situation also clearly shows that the Troika measures have not only failed to do this, but actually made the situation far worse.

Now, given that the Troika programmes for Greece were effectively driven by European, not the IMF, structuring, the questions above clearly reinforce the view of the EU authorities as being (a) incapable of economic policy formation, (b) unwilling to be honest and transparent in the assessment of the economic, political and social conditions in the member states, and (c) completely out of touch with reality of what is happening within a member state.

And at this stage, the IMF is left with few options but to present this exact assessment of the situation to the EU counterparts in a hope that they wake up and smell the roses. Unfortunately, to do so would require the IMF to exit the programme of assistance to Greece. Doing so might rescue the IMF reputation. Or it might not. But doing so will also clearly expose the EU's failure, with implications not only for Greece, but also for the rest of the euro area 'periphery'. Contagion will, therefore, be carried over straight to Spain and Italy - the heart of the EU core.

22/7/2012: Banking sector deregulation and corporate innovation

An interesting study: “Credit Supply and Corporate Innovation” by Mario Daniele Amore, Cédric Schneider and Alminas Zaldokas (July 19, 2012, link) covers the impact of banking sector deregulation in the US on corporate innovation.

The authors present evidence that “banking development plays a key role in technological progress. We focus on firms’ innovative performance, measured by patent-based metrics, and employ exogenous variations in banking development arising from the staggered deregulation of banking activities across US states during the 1980s and 1990s. We find that deregulation had significant beneficial effects on the quantity and quality of innovation activities, especially for firms highly dependent on external capital and located closer to entering banks. Furthermore, we find that these results are partly driven by a greater ability of deregulated banks to geographically diversify credit risk.”

Figure 1 shows “the association between state-level innovative activity, as measured by the number of patents, and the total bank credit supply in the state. While it suggests that wider access to bank loans may be associated with a higher degree of innovation, this evidence is plagued by the endogeneity of financial development. Arguably, general economic conditions, industry characteristics and other unobserved factors may influence both firms’ innovation and credit availability, thus biasing the effect of finance on technological progress. In addition, the effect may even be reversed if firms with higher value-added projects create demand for more efficient financial institutions. Our contribution is to establish the causal effect of banking development on innovation.”

Main results:

Patents: 

“Our result suggests that deregulation had a beneficial effect on the number of patents over the analyzed period. In particular, allowing out-of-state banks to enter the state led to a significant increase in the number of granted patents after controlling for state and application year fixed effects.”

“allowing out-of-state banks to enter the state increased corporate innovation by 13.8%”

Overall: “the deregulation coefficient [is] both statistically and economically relevant, indicating a 12.6% increase in patenting” due to deregulation.

Quality of innovation:

The study also shows that deregulation has led to an increase in quality of innovation as measured by the quality and nature of patents. “…interstate banking deregulation led to a significant and economically relevant increase in the quality of patents. … indicating a 10.1% increase in expected forward citation counts.” “…interstate banking deregulation had a positive and significant effect on the generality of patents: firms subject to deregulation exhibited a higher propensity to patent within broader technological fields,” and “firms increased the originality of patents” in response to financial deregulation. “Taken together with our previous finding on citations, these results reinforce the notion that deregulation induced a change in the type of firms’ innovative activities. More general and original patents require a bolder innovation policy. The results also further suggest that firms did not simply patent existing innovation to provide hard information to out-of-state banks.”

Effectiveness over time:

Dynamic effects “…become larger as we move forward from the reform year, with the largest effect corresponding to six and seven years after interstate banking deregulation.”

Industry effects:

“…the positive effect of interstate banking deregulation on firm innovation is more pronounced for firms operating in industries that are highly dependent upon external finance.”

Effects on financial constraints:

“Turning our attention to firm-level characteristics, we further posit that our finding should be stronger for firms that were more dependent upon bank credit prior to deregulation. …the effect of deregulation on firm patents was positive and statistically significant both for young and non-young firms. However, the economic magnitude is much larger among young firms: while young firms subject to interstate banking deregulation experienced a 22.7% increase in patents, the effect is 11.7% for non-young firms.” So that “…the effect of interstate banking deregulation was economically more relevant among constrained firms…”

Alternative channels of funding: 

“Next, we sort firms according to whether they were assigned a long term bond rating by Standard&Poors. By allowing firms to access public debt markets, a bond rating is related to lower credit constraints …and, consequently, lower responsiveness to changes in bank finance. We construct two subsamples depending on whether a firm reports a bond rating or not in any year of the period 1985-95. …the deregulation effect on innovation is significantly larger for firms experiencing tougher access to the public bond market. In fact, … firms that do not have public bonds outstanding over 1985-95 experienced an increase in innovative activities after the interstate banking deregulation while there was no statistically significant effect for firms that were active in the public bond market.”

Effects on industry output:

“The last step of our analysis is to test the association between industry-level output growth and innovation following deregulation. We posit that the increased innovation stemming from deregulation fostered output growth favoring the most efficient firms within an industry. …we observe that the effect of deregulation laws on firm patenting was largest in primary metal, furniture and fixtures and petroleum refining and related industries. When we compare these industry-level effects to future industry growth, we find a close relationship. …A positive relationship, significant at 7%, suggests that industries where deregulation had a higher impact on patenting experienced a subsequent increase in output growth. For instance, the five industries with largest deregulation estimates grew, on average, by 4.9% annually over 1995- 2000. By contrast, the five industries with the smallest deregulation estimates grew, on average, by 0.2%. Furthermore, we find no difference in growth rates between these groups of industries prior to deregulation (in 1980-85), and also we find that the association fades away over a long period.”