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I spent today in Dublin at a conference organised by the UCD economics department and the Dublin Economics Workshop. Speakers included Philip Lane, Ciaran O'Hagan (a TA in UL in the early 1980's), Colm McCarthy (who will speak in this semester's seminar series), Karl Whelan, Patrick Honohan and Brendan Walsh, and Morgan Kelly, who delivered the best rant of all time, ever.
Kelly's rant was so powerful, hair pieces fell off at the back of the room. The strength of his rant could have powered most of the economy's electrical requirements, were there a way to harness this purest of the pure rant juice efficiently. Prof. Kelly, far from being a Dr. Faustus, is in fact my new hero, whom I shall strive to emulate in my lectures and public discussions. I will refrain from emulating Morgan in private, for fear of divorce.
But everyone else, look out.
Below you'll find my notes on the different papers from the day, and I'm sure that recordings of the conference's proceedings, as well as links to the slides, will be available on www.irisheconomy.ie shortly, and I'll link to them when I get a chance.
Notes from Economic Recovery Conference
S.Kinsella
2009-01-12
Philip Lane "A new fiscal strategy for Ireland"
1. Ireland's problem: openness, structural imbalances, sustainability of pubic debt. Irish case is open to different views, need a consensus.
Sustainability: SGP, v. high debts, >10% of GDP, not a strong anchor
Structural Fiscal Deficit-->Banking crises & Reputational issues here.
Fiscal costs of banking crises have been substantial, v.difficult to get out of it.
How quickly should we make the adjustment? What is the fiscal multiplier? (+), but not for wages. Negative fiscal multiplier.
Increase wages, decrease in the export sector.
Total govt. outlays/GDP have dropped, now going back up.
Income taxes 37->27, asset taxes 5-15
2. A Plan: multi year strategy credible & sustainable
Preserve high quality capital projects; adjustment in current spending req'd.
Broaden tax base; increase income tax; pre-announce design of future tax increases.
OECD taxing wages: taxes have fallen out of all proportion, substantial reductions. Average earners with kids are paying negative taxes.
3. Pay Cuts
Premium in public sector pay, social partnership, promotes adjustment, true deflation risk independent of domestic wages; Front load wage reduction; option element to give worker's share in upside. Can help private sector if you cut pay in the public sector.
4. Going forward
Sensitivity of economic performance to fiscal plan not explicitly stated.
5. What needs to be done:
V. small pressure for external reform, no currency attacks. Can delay reform, can run up debt. Need a domestic solution, earlier the better.
****
Ciaran O'Hagan, SocGEN "How much can small sovereigns borrow?"
Ireland, even with large budget deficits, has no real borrowing constraints relative to other EU partners.
(SEE SG Outlook, 2009 for details.)
Perception of credit: Ireland CDO spread up, since AIG + Govt guarantees, widening comes purely from perceptions.
How much can small sovs borrow?
Need credit, credence, confidence & cash flow, v. little credulity.
Lots of small probabilities with unbearable consequences, v. hard to measure things like cashflow.
VVI: Sales of Debt need buyers of debt.
Sales of debt going well in 2009, so far.
How to increase cash flow? Usual prescriptions, but also privatise, create agencies, raise rates on domestic savings, IOUs to suppliers, restructure debt, use banks to source liquidity at ECB.
Reinhart & Rogoff paper relative to Ireland: personal savings are going to really matter.
Guarantees wrt banks are going to require credibility tests, big issue in the US.
Many risks, biggest ones are small probability/high impact events---Black Swan!
Never seen such a large sum being auctioned by the market for TBills and Bonds.
Colm McCarthy Presentation: Fiscal Consolidation in Context
Priortities:
1. restore fiscal balance
2. resolve baking crisis
3. restore competitiveness
4. de-leverage national balance sheet
(This time the public has borrowed, the govt has deliverted)
Private sector owes 400bn to the banking system, v. high wrt/GNP
Deleveraging has commenced.
Balance Sheets + Flows matter too
State's balance sheet also has a book of assets, NPRF equity portfolio needs to be managed.
PSDebtRpayments to disp. income has increased by 10%.
Banks lending to property has increased by 100bn in 7 years.
State Balance Sheet:
1. Focussing on GGB & Net Debt, policy needs to consider measures to gt rid of balance sheet items.
2. Tiger ended in 2002.
3. Credit fueled property bubble which was unsustainable.
Economy actually began to slow in mid 2007/early 2008.
4. Property led taxes led to the collapse: 6bn drop in direct property related revenue in 3 years to 2009.
5. Should we bring back rate?
Fiscal Deterioration:
GGB Deficit: 10% in 2009 without policy changes
Likely to rise to 12%.
GGB gross debt 21% of GDP @ end 2008, might be 50% by end 2009.
Without policy change, not including bank bail out costs, annual borrowing at 10%+ brings 100% debt in 5 years. (Think the 1980's).
Q: Raise taxes or cut spending?
Real total excheq. spending, rose by 6.5% in 2008
Will rise without policy changes in 2009 by 6.3%
Tax. increasses have already been imposed.
We will enjoy our neighbour's fiscal stimulus packages.
1987 comparisons:
Less low hanging fruit now.
Real cuts in 1987--89 were small+capital based, no cuts to current spending.
Total exchequer spend has dropped from 1985 to 1990, went up in 2000's.
GNP, a measure of the tax base, is back up in 2009 to the same levels as late 1980's.
Taking out debt services, we're back where we were in early 1980's.
Debt selection & balance sheet management.
Ireland should issue indexed link gilts, might help.
***
Karl Whelan "Discussion of the papers"
Where do we stand?
Spend 79bn, 20bn on pay, 28bn on transfers, 31bn on stuff. Govt will get 60bn, get a shortfall of 19bn.
Public Sector pay cuts don't matter, b/c if pay cuts are cut by 10%, we're still 17bn in the hole.
20bn pay bill goes on:
1. Health Service, 8bn
2. Education 6.4bn
3. The Gardai Siochana, 1.3bn
All societally useful, Not paper pusher. Somehow its 'Bloated'.(?)
Share of GDP on compensation for govt employees relative to EU-15 countries only shoots over EU-15 this year.
Multi-Sector Adjustment Required, but realistic political commitment not possible anywhere else in the economy.
What's the right package of adjustments? That's a political decision.
(See Table 6 of the addendum to the Stability program)
Plan unlikely to survive social partnership debates.
Our tax base is cyclically dependent, so the sudden collapse in revenue. New taxbase too small & too sensitive. Replace stamp duty with a property tax, much more stable & stops distortion.
Civil service has very few PhD trained economists.
Need a team of technically trained economists, US Council of Ec. Advisors in.
Independent Fiscal Policy agency, eg: swedish fiscal policy council.(Whistle blowing agency)
****
Questions
1. GDP/GNP?
2. Bond issue competition with banks + ireland.
3. Any prospective changes?
LANE: tax base needs labour income + asset taxes. Public sector pay cuts won't help, but there will be spillovers, this will help with competitiveness. Now, we need a plan that's credible.
O'Hagan: Bond issuance coordination agencies will resolve this.
COLM: GNP/GDP: we should just adjust the tables.
Pay: private sector pay round negotiation will drop pay as well. Public sector pay cuts will help this. VVI: in 2010 the debt must FALL, this is important for public confidence & investment.
Honohan/Walsh Paper
Why/How did banks get into trouble
How much was forseen?
Containment/Resolution
Getting things back on track.
Sources of Problem:
1. too much mortgage lending
2. boom >2002 was facilitated by more than driven by credit.
(no computers)
New international positions of irish credit institutions
Boom not just credit driven: boom seemed credible: low eurozone i rate, tax bias, etc.
Banks felt safer during previous housing booms.
Foreign contribution:
1. global banking crisis stops rollover of foreign bank credit, etc.
2. Irish prob. not a subprime mess.
Many economists foresaw the price of housing.
Few predicted solvency problems.
Public info loan to value ratios & secturities taken by lenders quite sketchy.
Jump in LTV rates? Growth of Angle/INBS exceeded 20%, very scary.
All stress tests relied on BANKS OWN PROJECTIONS.
Bank guarantees ar empirically associated with higher fiscal costs in crises around the world. (honohan 2003)
Regulators & Stress testing: they took the banks' word for it !
Containment (Sept 2008)
Govt or someone should acquire more capital & restore fiscal autonomy for the banks.
Capital is a necessary but not sufficient condition for recovery. When the guarantee lapses, the banks will need to convince investors to keep cash on board.
Resolution
Try to kill `zombie' banks, looking for systemically important banks to keep them alive.
Morgan Kelly: Best Rant. Ever. No point in even trying to summarise it.
