Economics 19/07/2009: 'Punter's perspective' in my INIA report

A quick reply to a box-out by Liam Fay in the main section of the Sunday Times with a critique of the Irish Nightclubs Industry Association (INIA) report, launched last week, which was prepared by me.

I like Liam's column and was certainly amused by his allegory for my economic career. Not being familiar with Mrs Sophie Ellis-Baxtor's career or personality, I would presume that Liam's reference is a positive one, especially given my suspicion that he is familiar with my established credentials as a champion of competitive and lower cost markets for consumer services and goods and the opponent of the rip-off culture that is a feature of some areas of our economy.

Liam has an acute eye for bulls**t and he spotted something that was missing in my report. "But one of the chief reasons most adults avoid nightclubs is the extortionate prices charged for booze. If Gurdgiev had surveyed the nightlife scene from the punter's perspective, he would've discovered that it's actually the greed of club owners that's killing the groove".

Liam is correct to say that my report was not based on the 'punter's perspective'. I was asked to provide a professional opinion on specific proposals presented by the INIA, not to conduct a general research into what is right or wrong with the industry. Like a lawyer providing a specific client advice, I have my remit and scope of research, and this remit is clearly identified in the title of the report.

But Liam is incorrect to imply that the different approach of my report somehow acts to glance over "the greed of club owners that's killing the groove". If high cost is a deterrent to night clubs attendance, then, as I hope Liam would agree, reducing this cost would help.

Reducing this cost can be done via many alternative ways. Cutting the price of drinks is one, but it is not the policy objective of any of our policymakers, so to deal with high cost of drink, induced by high taxation structure, in a legislative proposal framework would be a waste of time and effort.

Other charges do enter the determination of the cost of entertainment in a nightclub alongside the price of drink. My report clearly shows that these charges can be made more competitive, allowing a punter buying the same drink for the same price to enjoy more entertainment per Euro spent. These are:

• longer hours of access to entertainment,
  
• better quality of music and dancing environments,
  
• more regulated and safer entertainment conditions,
  
• better trained staff etc
  

These benefits are to be delivered as a result of the reforms I was asked to evaluate and these benefits surely provide better value for money to a punter. So, Liam's argument that high cost of drink matters to the decisions made by the punters does not clash with the report findings - it actually supports them.

I do not compare costs of drink in different types of licensed venues, nor do I provide any assessment as to whether a price of drink premium in Irish nightclubs over that of other licensed venues is out of line with other countries. My work did not require this and none of my conclusions depend on any assumptions or inputs relating to these, otherwise very interesting, comparisons.

But even if there are such differentials, to suggest that price of drink is high in the nightclubs (in absolute terms or in relative terms, compared to elsewhere) due to 'greed' of the nightclubs owners is simplistic. My report supplies evidence to show that, at least in part, the cost of drink in the nightclubs is driven by external factors other than 'greed':

1. Table 1.6 on page 9, shows that annual licensing costs to operate nightclubs in Ireland are 8.91% of the total nightclub sector turnover. This is 31 times greater than licensing costs for operating an ordinary on-trade venue and 99 times greater than the off-license licensing cost;
2. nightclubs have to maintain larger physical premises than other on-license venues (e.g at least 20% of the floorspace in the nightclub will be allocated to a dancefloor, which yeilds no drink-related revenue);
   
3. nightclubs operate shorter daily and weekly hours (section 3.7 of the report and Table 3.7);
4. nightclubs face higher rate of amortization of premises (section 3.4);
5. nightclubs maintain higher ratio of staff to clients than oridnary venues (Table 3.7);
6. nightclubs have higher capital cost per each person entertained than other on-license venues (section 3.7 of my report);
7. Table 3.7 in my report clearly states various areas of operations, relating to technology, space utilization and staff requirements, where nightclubs are incurring higher costs than other on-license premises. In fact, of 10 areas related to the subject of my research, 7 show higher cost of operations for the nightclubs;
8. Tables 3.5 and 3.6 show that out of the expected gains in alcohol sales of €122mln pa due to reforms, the Exchequer will receive some €62mln in alcholo-related tax revenues. Roughly 50%, overall value added to the Exchequer will increase by over 2 times tha rate of increase in the value added attributable to labour and 30% more than the value added attributable to physical capital stock. Since roughly 89% of this increase is expected to come from substitution away from home consumption of alcohol, these figures clearly show a vast differences in tax-induced costs of alcohol consumption at home and in the licensed premises.

The bottom line is - over 50% of what we pay in a nightclub for a drink has absolutely nothing to do with the nightclub owner's profit line. The above points - all clearly identified in the report - suggest that the cost of drink to the punter might be driven by the greed and/or other considerations of the Exchequer.

Once again, Liam is correct, this is not a report written from a punter's perspective. As much as I would have loved to work on such an exciting topic of research, limitations of time, resources and brief require that this research be postponed for the future. Economics, like legal profession, is a field of professional inquiry and this means that one works within a given brief.

However, I see no evidence to suggest at this moment in time that the industry I describe in the report is driven by some exceptional greed or short-termist pricing policies that are killing the groove.

If anything, there is evidence in the report to show that the opposite is true. For example, the proposals for nightclub permit set very strict and costly (to the owners) parameters for what constitutes a nightclub. This is not done because there is a pursuit of a groove-killing quick profit, but because the sector participants have recognised the need to explicitly focus on long-term sector development.

The end result of these proposals would be to deliver better value for money for the punters and safer and more responsible entertainment from the social point of view. These are hardly the reforms a 'greedy' profit-stripping business owner would subscribe to.

Economics 18/07/2009: B-day present

My small Birthday Present to the followers of this blog: I have just published a new post on Public Sector Overpay and Knowledge Economy Wages on the Long Run Economics blog.

Economics 17/07/2009: Oh, the horror in our shops

Well, in the week when the infantile reports from the CB and Forfas have delivered no news (just a mash of poorly cooked up secondary factoids) and the press interpreted the ESRI's dithering as a sign of the bottoming out economy... CSO's data for retail sales told a much more honest story.

Yes, pigs do not fly, unless propelled into the skies by someone else's design. And neither do the theories that the Irish consumer has finally decided to become this Government policies cheerleader. Retail sales have no completely collapsed, going for the double dip move. Let's say thanks for the lack of consumer support (even at already abysmally dismal levels) to our Brian+Brian+Mary 'Economics on Drugs' team.

A few charts on the latest data... They are pretty much self explanatory.
Tell me if need reading glasses, but my usual 20:20 vision can't spot any green shoots... At best - a bounce at the bottom, going into another down spiral?
Yeah, about the only positive is that the monthly rate of collapse is slightly lower for value of sales... inflation cometh? Not quite. Not yet. But gas prices are biting... and a host of other state-led charges... and bars - oh yes, warm weather when even C&C should be able to make money (don't bet on it, for their problem is not the weather, but perennial stupor of the management team, or shall we make it 'pear-anneal'?).

Let me play a weather man for a sec...

Again, aside from bars (weather effect combined with desperation and late night Government meetings) and Electrical Goods (either ESB was doing some frequency manipulations to help economy or good weather got few builders out for nixers and small jobs, thus small appliances purchases went up) not much of a Green Valley out there.And, of course, the same is replayed in rates of growth... 11 categories show things getting worse and worse by the month in value terms, while 2 categories are showing an improvement - Motors and Bars... drinking and driving, anyone? Other 2 categories showing such a small improvement, that you might as well call in the crew that fixed the Hubble for super fine Green Weeds removal. Ditto on the side of volume.

May annual decline was 15.4% in volume terms an improvement in the average decline of 21% in the year to April. But this was driven by the slower rate of decline in motor sales – the sector that has been so thoroughly devastated in the past that continuous decline in it, even at a slower pace, still marks a deepening disaster: -40% down yoy in May. The figures mask a significant, and anticipated by this blog, deterioration in core retail sales (ex motors). In April, core sales rose 0.5% mom for the first time after a four months straight decline. At the time I remarked that this is a technical correction which will be followed by deeper falls. What I couldn’t have known at the time that the preliminary figure will be actually revised significantly down, so now we know that April marked an actual fall of 0.7% in core sales. This has now accelerated to -1.3% in May. Volume is now down 9.2% on annual basis – way down from the already historic 7.4% annual rate of decline clocked in Q1 2009. 3-mo MA also points to further declines ahead: in March, 3-mo MA stood at -7.4%, falling to -7.7% in April and to -8.4% in May.

Food sales – which should have been boosted by good weather, implying higher consumption of meats and other BBQ-items had another disastrous month falling 0.9% in May (mom) to -4.6% yoy. Ditto for clothing and footware – also items that should have been boosted by warmer weather. Instead of that ‘Special-K’ new red bikini, old T-shirts and shorts are out of the donations bins. So the category is down 5.2% in May mom. Pubs sales were up 1%, but this was not due to an improved weather, rather masking a slight statistical bounce on April’s horrific -5.2% fall mom (the category is now 11.4% below May 2008 levels).

This is a disaster unfolding in front of our eyes as the entire establishment – from Taoiseach to ESRI are blabbing about the ‘green shoots’. There is no sign of stabilization in the retail sector.

I like the frankness of the Ulster Bank note: “It is important to point out that we anticipated some weakness in retail sales in May, given that the tax hikes introduced in the April budget began to hit pay packets during this period. However, the May outcome was a bit weaker than we expected with downward revisions to the March and April data adding to the sense of a weak report.” Yes, let’s keep taxing the economy to avoid cutting public sector welfare, as Jack O’Connor suggests – it has been working wonders in improving our consumer confidence.

Economics 17/07/2009: Pathologies of the crisis

If Ireland were a patient, its political democracy would be on its death bed. This is the only logical conclusion from today's An Bord Snip Nua report.

This country is facing a more severe crisis than that of fiscal insolvency or economic depression. This Government, and its predecessors have chosen not to do their duty by the country - they chosen not to govern. Now they have also de facto lost their legitimacy.

The outsourcing of policy decisions to an unelected and unrepresentative external bodies - chiefly the Social Partnership - in the past had a logical culmination in the outsourcing of the crisis management policies to An Bord Snip Nua and Taxation Commission. The fact that An Bord Snip did a decent job in identifying expenditure cuts is a moot point.

The state has paid extravagant salaries to FAS, Forfas, NCC, NESC, Department of Finance, Central Bank, and other policy quangoes to conduct

• analysis of economic and policy conditions in the country for years - they all missed the crisis that was obviously unfolding in front of their eyes, more than that - they directly contributed to the crisis by creating or intellectually underwriting the policies that led us here;
• preparation of policy responses - they all failed to deliver a single implemented policy document of any real economic worth;
• crisis management - they all chose to abstain from engaging in what they were paid to do.

The state has paid billions in wages and perks to an army of civil servants who produce illiterate, embarrassingly childish policies and waste resources, obstructing change and reforms.

An Bord Snip Nua report says this much, yet still leaves them all in their jobs, until they choose to retire and saddles us, taxpayers with the charge of paying their grotesquely disproportionate (by any measure of their competence and/or international comparisons) wages.

CB and Forfas reports this week on Irish economy are the case in point. People who signed these reports earn more than their US, UK, German - you name the country short of some totalitarian oil-pumping hell-hole - counterparts. These reports have zero value, for they contain not an ounce of new information. Their authors will go on working till retirement in permanent jobs, while their bosses will go one collecting wages that are so sinfully out of proportion to their talents, they make them the lottery winners compared to the senior bankers.

But let us get back to the crisis of our state legitimacy.

This Government took the job voluntarily. Their first act in power was to accept huge pay increases for themselves and their senior cronies in the public sector. They have no capacity or legitimacy to rule. Yet our Taoiseach, and his Ministers, collect more in wages and perks than the vast majority of other leaders in mature democracies. Some of our Ministers are simply completely inadequate in positions they fill. We pay them hundreds of thousands in annual wages and millions in pensions benefits believing that if you pay peanuts for a job you get monkeys. What if you pay millions to the monkeys? Will that make them suitable candidates for the job?

Angry yet?

Our trade unionists and anti-poverty NGOs leaders believe that the Government is measured by how it treats the poor not by how much it overpays itself. Fergus Finlay of Barnardo's believes so. This is the morality of such a depraved estate that feudal lords would have cringed. It makes no difference that Barnardo's is a worthy organization pursuing a worthy cause - failing to understand that this state has more than one constituency to answer to (not just the poor), and that the legitimacy of the state objectives (including that of combating poverty) is based on morality of state actions in their totality, Finlay either betrays an amazingly low level of intellect or an extremely high levels of Machiavelian cynicism. Either way - his failure to accept at a basic, DNA-level the moral premises of liberty, legality and democracy make him an unfit public figure, no matter how well-intentioned his direct objective might be.

Our Liberal Left - where are you, Fintain O'Toole, Ivana Bacik and others, to oppose this - believes it is ok for the Government to raid the lower, middle and upper classes, to squander and corruptly allocate billions in public money... as long as their own constituencies are protected. "Give me my dosh", they say, "and we'll close our eyes on what you will do elsewhere," say the Trade Unionists and Finlay's of this world - those who have signed on the dotted Partnership line dividing the spoils of the boom and now have no guts to point the finger at the lack of our government's moral legitimacy.

Under the Partnership agreements and the corporatist policies they enshrined, the entire public finance system, since the departure of Charlie McCreevy, has been run like a crude, unimaginative pyramid scheme - partially out of sheer incompetence and partially out of sheer venality of its managers. One exception is that a sleek salesman defrauding old grannies was replaced by a brutish taxman with the full apparatus of coercion this state possesses.

Bernie Maddoff was a saint compared to this Government. It took billions in arbitrary taxes and wasted tens of billions in arbitrary payoffs to its own cheerleaders. The chart on the second page of Chapter 2 of the An Bord Snip Nua report shows this explicitly. All of this - in the hope that we will raise more taxes come next year. They paid lavish dividends to their Social Partners cronies, their pub and childhood chums, and a vast army of clientilist NGOs and quangoes all of whom apparently have no problem with the state officials at the senior level earning excessive salaries as long as their own cogs and constituencies were greased.

The country is bankrupt: morally first, financially second, economically third. Full stop! Read An Bord's Report and think of John Hurley's of this country - earning more than the US Federal Reserve Chairman earns and more than his ECB boss is paid. Golden Circle is not the by-now bankrupt Irish bankers or developers. The real Golden Circle is the army of top officials, majority of the Social Partners and politicos all of whom are grossly overpaid and all of whom are callous and venal enough not be embarrassed by this fact.

Economics 15/07/2009: Bonds Spreads: ECB Model

As promised earlier (here), I have re-done the ECB model estimated for Belgium, Ireland, Greece, Spain, France, Italy, the Netherlands, Austria, Portugal and Finland for the specific parameterisation for Ireland. Taking the path for our debt, deficit and bond issuances through 2013 under three different assumptions:
Assumption 1: NAMA bonds are off the public balance sheet and have no adverse impact on pricing, plus our liquidity conditions are in line with those of Germany (this corresponds to the dream scenario);
Assumption 2: NAMA bonds are on the public balance sheet, implying some adverse pricing effects, but out liquidity remains in line with German (this corresponds to 'markets are asleep' scenario); and
Assumption 3: NAMA bonds impact our balance sheet and yield shut down of the international borrowing markets for NAMA bonds (this is ECB buys NAMA scenario).

Chart below shows the resulting spreads over German 10y Bund:
One quick explanation is also due: 2009 levels are the fundamentals-implied levels of spreads under the ECB model. This is what the spread should be, were the markets pricing our bonds in line with what ECB says they are doing. ECB Monthly Bulletin does not report residuals, so I can't tell the accuracy of the pricing model.

Nonetheless, three things stand out:

1. We are facing potential upward pressure on yield in 2009, should we go to the markets instead of the ECB;
2. NAMA is posing serious risk of destroying our balance sheet in years to come as the cost of debt financing can soar not only for NAMA-own bonds, but also for all the bonds rolled over by the Government.
3. It is relatively clear that any auction since January 2009 below 6.2% yield would have flopped, were it not for the ECB lending window circus.
   

And notice the term structure emerging in the chart below... Someone is not quite ready to buy Brian Lenihan (or for that matter ESRI's) story that we are getting serious about controlling our spending into the medium term future...

Economics 12/07/2009: Travel figures

As an added bonus to Irish Times eager attack on my article in Sunday Times couple of weeks ago here is last week's press release from Ryanair:

"Ryanair, the World’s favourite airline, today (10^th July 09) called on the Irish Government to stop ripping-off travellers after CSO figures confirmed that all Government controlled/regulated bus (up 11%), rail (up 9%) and taxi fares (up 8%) increased in the past year while unregulated airfares fell (14%) thanks to Ryanair. The Irish Government is now targeting air passengers with a self defeating revenue negative €10 tourist tax. The Irish Government’s €10 tourist tax is an effective 100% price increase on many of Ryanair’s winter fares to/from Dublin, Cork and Shannon. Ryanair called on the Irish Government to stop taxing tourists and follow the example of the Belgian, Dutch, Greek and Spanish governments who have all scrapped tourist taxes and/or reduced airport charges to zero to stimulate tourism. "Traffic at the DAA Monopoly run Dublin Airport fell 14% in June to 1.9 million as the Irish Government rips off passengers with a silly €10 tourist tax."

Disclosure (for Irish Times sake): I do not own any shares in Aer Lingus, Ryanair. I have zero allocation to Irish equities at this time, but I feel honoured to be attacked alongside Michael O'Leary...