Without getting into the specifics of the US debt ceiling crisis, this is an appalling state of affairs from two perspectives.
Firstly, ideological differences about big government versus small government, though important and worth debating -should never be allowed to get in the way of balancing budgets. Regardless of whether you think the State should do a lot, or do a little, it seems obvious that it must pay its way. Day-to-day expenses should not be paid for by borrowing.
Unlike Ireland, where a bank and budget implosion has caused us to borrow heavily in recent years, the Americans seem to simply be indecisive. They want the State to pay for things, but they don't want to pay the state for doing them. Whatever economic efficiencies may be achieved from tweaking the model of economic governance in the US, they will not compensate the state for having to borrow on the markets to fund a lifestyle deficit.
Personally, I think it is outrageous that the richest people in America can get away with contributing so little, but whether or not the books are to be balanced by cuts or taxes is unimportant beside the crucial task of balancing them.
Secondly, the divisions over this philosophical issue are not only crippling the US' ability to balance its books, but in recent weeks it has been shown, that both sides of this absurdly overheated discussion are willing to bring the country to the brink (seemingly beyond the brink) of chaos simply to win the argument. This is not about economics. Economics is about tweaking governance to try and achieve the greatest prosperity. This artificial crisis, has been created to serve bitter political ends without regard to the economic consequences.
Watching this completely reckless argument, one can't help but feel the decline of America, and recognise that it is (mostly) self-imposed. Friends of the United States must watch on in acute embarassment at this abject failure to complete one of the most basic tasks of any democracy -to agree a budget. You would be aghast to see this in the most turbulent banana republic, but in democracy's greatest champion it's unthinkable.
The state's services must be paid for; when they named it the land of the free, they did not mean there's no charge.
Saturday, July 30, 2011
Monday, July 25, 2011
A tax on advertising
I believe that we should levy a small tax on high-value advertising.
Advertising is unpopular and is generally regarded as a blight on our lives. Though low-end advertising like classifieds and small notices serve an important economic purpose; most high-end advertising serves no useful purpose. It exists to artificially inflate the price of and demand for products by exaggerating their intrinsic worth. This artificial inflation of demand does increase economic indicators, but does not actually improve economic wellbeing -indeed, it harms the economy by encouraging citizens to misallocate their own resources.
Apart from its economic impacts, there is also much work linking advertising and anti-social problems. Advertising has been linked with eating disorders, materialism, burglaries, feelings of inadequacy, depression etc.
Therefore, apart from raising (much-needed) revenue, there are sound economic reasons and indeed possible social benefits from reducing the pervasiveness of advertising. Therefore I would like to see such a tax levied.
It could be argued that advertising pays for much of our media. Nevertheless, at this time, when the VAT on newspapers and magazines has been reduced as part of the Governments jobs initiative, it seems like a perfect time to introduce such a measure. By introducing a levy on advertising as the VAT on newsprint is reduced, we will effectively be reorienting the income structure of news outlets, increasing the income derived from customers and reducing the income they derive from advertisers. In this way, news outlets might (a bit of a stretch) be inclined to print more quality material and eschew hollow articles about consumerist lifestyles and unnecessary products.
Advertising is unpopular and is generally regarded as a blight on our lives. Though low-end advertising like classifieds and small notices serve an important economic purpose; most high-end advertising serves no useful purpose. It exists to artificially inflate the price of and demand for products by exaggerating their intrinsic worth. This artificial inflation of demand does increase economic indicators, but does not actually improve economic wellbeing -indeed, it harms the economy by encouraging citizens to misallocate their own resources.
Apart from its economic impacts, there is also much work linking advertising and anti-social problems. Advertising has been linked with eating disorders, materialism, burglaries, feelings of inadequacy, depression etc.
Therefore, apart from raising (much-needed) revenue, there are sound economic reasons and indeed possible social benefits from reducing the pervasiveness of advertising. Therefore I would like to see such a tax levied.
It could be argued that advertising pays for much of our media. Nevertheless, at this time, when the VAT on newspapers and magazines has been reduced as part of the Governments jobs initiative, it seems like a perfect time to introduce such a measure. By introducing a levy on advertising as the VAT on newsprint is reduced, we will effectively be reorienting the income structure of news outlets, increasing the income derived from customers and reducing the income they derive from advertisers. In this way, news outlets might (a bit of a stretch) be inclined to print more quality material and eschew hollow articles about consumerist lifestyles and unnecessary products.
Friday, July 22, 2011
A plan to save Euros
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/123978.pdf
Well, I certainly can't remember a more anticipated EC. But ultimately I'm disappointed with this document.
The big headline outcomes are a new bailout for Greece, voluntary private sector involvement in Greece's debt crisis is to be pursued, extension of the loan-terms for all 3 program countries, as well as a loosening of EFSF rules to allow it provide support to countries that are not in a program.
Extending the terms of the loans was regretfully necessary. The idea that the program countries will be going back to the markets in the next couple of years has lost all credibility. This much I concede was unavoidable.
The involvement of the private sector is a good idea (if it is done with a moderate hand). European Governments (and especially the program countries) are financially exhausted and it is important to ease the pressure somewhat by shifting some of this assumed responsibility back to the original risk-takers. Besides, after 4 years of turbulence, anyone still holding Greek bonds is probably a speculator anyway and it is highly unlikely that any truly fragile financial institution is still exposed to a Greek default. We will probably find that a moderate default will have very little financial impact. However, I find the part of the document dealing with private sector involvement vague. It states that private sector involvement will be voluntary, citing willingness on the parts of investors to roll over Greek debts. But it is doubtful that they are volunteering to do anything greater than this. Rolling over debts is well and good, but frankly it doesn't really relieve the Member States.
However, my greatest problem with the deal is in its loosening of the rules of the EFSF/ESM. The idea of lending to countries that are not in a recovery program seems obviously silly -all the expense and none of the reform -who could argue that's a good idea? A reform program is the necessary exit strategy from providing support to Member States. It is indispensible. If Member States have to be bailed out, then we need to map a route for them to stand on their own feet again, or else we will end up with a proper transfer union.
I doubt that will ever be allowed to happen, neither the lenders nor the borrowers want it. So it appears to me that this is some sort of a PR stunt to reassure markets that IT and ES will be allowed access EFSF funding without having the humiliation or terms of a bailout. These countries may gain some short-term, pre-crisis credibility because of the access to credit this brings, but noone could argue this would be a good idea if we decided to do it in practice. Not only would we be sacrificing the reforms that rightly come with access to bailout money, but this change could (and I stress could) create expectations of the EFSF being used as a mechanism for some sort of transfer union.
The whole idea of the ESM was to create a mini-IMF for the Eurozone, bailing out countries on the condition of mending their credit positions. This proposal nominally drifts way beyond this. This is not rehabilitation, it is artificially cheap credit -the source of all our woes. Taxpayers may be willing to assist their neighbours to turn around their situations, but they will quickly squash any notion of paying for the indebted countries to carry on with business as usual. Frankly I'm surprised it has been even made it onto this document.
There is also provision for the ESM to dabble in secondary markets. This could be a very useful policy tool if it is used to involve the private sector in debt reductions, but seemingly it is only permissible with the agreement of each MS and the ECB. One must wonder then why it was necessary to include it in this document if it can only be used when everyone is in agreement -more spindoctoring?
Finally, the new Greek bailout. Unavoidable in my opinion, but it has to be properly funded. While the document promises big on the involvement of the private sector, I have already expressed some doubts about this. I will go further. The document also calls on the IMF to participate in the new bailout. I do not think it is incredible to suspect that the IMF may decline to involve itself without more private sector involvement. That would be a quite incredible humiliation for everyone involved, but right now, I would not rule it out.
So my verdict is that the only people that got what they wanted were the Irish. The concessions on our interest rate and also on the term of our loans, alongside the modest burning of financial bondholders, fiscal austerity and the gradual recapitalisation of our banks means that Ireland is now in a much better position than 3 years ago. Though it is not smooth sailing from here, it is likely that Ireland will begin to make a recovery in the next 2 years and recover strongly soon after. Doubtless the banks will still require more capital (even though we have sworn on our honour that we tested them properly this time), but the whole mess seems more manageable these days. Economic reforms scheduled under our bailout deal will go further to getting us out of Dodge.
But the concessions to the program countries on the terms of their loans, does not in any way compensate for the lack of hard details on the Greek bailout, or the fudging of the role of the EFSF. Though markets have reacted well today, I am not satisfied with this deal and fear it is based substantially on wishful thinking and fuzzy economics. Frankly, we need to cluck at this text and tell them all to try again.
Markets are not the measure of these deals. Markets rise and fall on the self-interest of investors. Rising markets in response to more public stimulus is unsurprising -not a true yardstick of the effectiveness of policy.
TEXT of the Deal:
Well, I certainly can't remember a more anticipated EC. But ultimately I'm disappointed with this document.
The big headline outcomes are a new bailout for Greece, voluntary private sector involvement in Greece's debt crisis is to be pursued, extension of the loan-terms for all 3 program countries, as well as a loosening of EFSF rules to allow it provide support to countries that are not in a program.
Extending the terms of the loans was regretfully necessary. The idea that the program countries will be going back to the markets in the next couple of years has lost all credibility. This much I concede was unavoidable.
The involvement of the private sector is a good idea (if it is done with a moderate hand). European Governments (and especially the program countries) are financially exhausted and it is important to ease the pressure somewhat by shifting some of this assumed responsibility back to the original risk-takers. Besides, after 4 years of turbulence, anyone still holding Greek bonds is probably a speculator anyway and it is highly unlikely that any truly fragile financial institution is still exposed to a Greek default. We will probably find that a moderate default will have very little financial impact. However, I find the part of the document dealing with private sector involvement vague. It states that private sector involvement will be voluntary, citing willingness on the parts of investors to roll over Greek debts. But it is doubtful that they are volunteering to do anything greater than this. Rolling over debts is well and good, but frankly it doesn't really relieve the Member States.
However, my greatest problem with the deal is in its loosening of the rules of the EFSF/ESM. The idea of lending to countries that are not in a recovery program seems obviously silly -all the expense and none of the reform -who could argue that's a good idea? A reform program is the necessary exit strategy from providing support to Member States. It is indispensible. If Member States have to be bailed out, then we need to map a route for them to stand on their own feet again, or else we will end up with a proper transfer union.
I doubt that will ever be allowed to happen, neither the lenders nor the borrowers want it. So it appears to me that this is some sort of a PR stunt to reassure markets that IT and ES will be allowed access EFSF funding without having the humiliation or terms of a bailout. These countries may gain some short-term, pre-crisis credibility because of the access to credit this brings, but noone could argue this would be a good idea if we decided to do it in practice. Not only would we be sacrificing the reforms that rightly come with access to bailout money, but this change could (and I stress could) create expectations of the EFSF being used as a mechanism for some sort of transfer union.
The whole idea of the ESM was to create a mini-IMF for the Eurozone, bailing out countries on the condition of mending their credit positions. This proposal nominally drifts way beyond this. This is not rehabilitation, it is artificially cheap credit -the source of all our woes. Taxpayers may be willing to assist their neighbours to turn around their situations, but they will quickly squash any notion of paying for the indebted countries to carry on with business as usual. Frankly I'm surprised it has been even made it onto this document.
There is also provision for the ESM to dabble in secondary markets. This could be a very useful policy tool if it is used to involve the private sector in debt reductions, but seemingly it is only permissible with the agreement of each MS and the ECB. One must wonder then why it was necessary to include it in this document if it can only be used when everyone is in agreement -more spindoctoring?
Finally, the new Greek bailout. Unavoidable in my opinion, but it has to be properly funded. While the document promises big on the involvement of the private sector, I have already expressed some doubts about this. I will go further. The document also calls on the IMF to participate in the new bailout. I do not think it is incredible to suspect that the IMF may decline to involve itself without more private sector involvement. That would be a quite incredible humiliation for everyone involved, but right now, I would not rule it out.
So my verdict is that the only people that got what they wanted were the Irish. The concessions on our interest rate and also on the term of our loans, alongside the modest burning of financial bondholders, fiscal austerity and the gradual recapitalisation of our banks means that Ireland is now in a much better position than 3 years ago. Though it is not smooth sailing from here, it is likely that Ireland will begin to make a recovery in the next 2 years and recover strongly soon after. Doubtless the banks will still require more capital (even though we have sworn on our honour that we tested them properly this time), but the whole mess seems more manageable these days. Economic reforms scheduled under our bailout deal will go further to getting us out of Dodge.
But the concessions to the program countries on the terms of their loans, does not in any way compensate for the lack of hard details on the Greek bailout, or the fudging of the role of the EFSF. Though markets have reacted well today, I am not satisfied with this deal and fear it is based substantially on wishful thinking and fuzzy economics. Frankly, we need to cluck at this text and tell them all to try again.
Markets are not the measure of these deals. Markets rise and fall on the self-interest of investors. Rising markets in response to more public stimulus is unsurprising -not a true yardstick of the effectiveness of policy.
TEXT of the Deal:
Greece:
1. We welcome the measures undertaken by the Greek government to stabilize public finances
and reform the economy as well as the new package of measures including privatisation
recently adopted by the Greek Parliament. These are unprecedented, but necessary, efforts to
bring the Greek economy back on a sustainable growth path. We are conscious of the efforts
that the adjustment measures entail for the Greek citizens, and are convinced that these
sacrifices are indispensable for economic recovery and will contribute to the future stability
and welfare of the country.
2. We agree to support a new programme for Greece and, together with the IMF and the
voluntary contribution of the private sector, to fully cover the financing gap. The total official
financing will amount to an estimated 109 billion euro. This programme will be designed,
notably through lower interest rates and extended maturities, to decisively improve the debt
sustainability and refinancing profile of Greece. We call on the IMF to continue to contribute
to the financing of the new Greek programme. We intend to use the EFSF as the financing
vehicle for the next disbursement. We will monitor very closely the strict implementation of
the programme based on the regular assessment by the Commission in liaison with the ECB
and the IMF.
3. We have decided to lengthen the maturity of future EFSF loans to Greece to the maximum
extent possible from the current 7.5 years to a minimum of 15 years and up to 30 years with a
grace period of 10 years. In this context, we will ensure adequate post programme monitoring.
We will provide EFSF loans at lending rates equivalent to those of the Balance of Payments
facility (currently approx. 3.5%), close to, without going below, the EFSF funding cost. We
also decided to extend substantially the maturities of the existing Greek facility. This will be
accompanied by a mechanism which ensures appropriate incentives to implement the
programme.
4. We call for a comprehensive strategy for growth and investment in Greece. We welcome the
Commission’s decision to create a Task Force which will work with the Greek authorities to
target the structural funds on competitiveness and growth, job creation and training. We will
mobilise EU funds and institutions such as the EIB towards this goal and relaunch the Greek
economy. Member States and the Commission will immediately mobilize all resources
necessary in order to provide exceptional technical assistance to help Greece implement its
reforms. The Commission will report on progress in this respect in October.
5. The financial sector has indicated its willingness to support Greece on a voluntary basis
through a menu of options further strengthening overall sustainability. The net contribution of
the private sector is estimated at 37 billion euro.
underpin the quality of collateral so as to allow its continued use for access to Eurosystem
liquidity operations by Greek banks. We will provide adequate resources to recapitalise Greek
banks if needed.
1 Credit enhancement will be provided to 1
debt buy back programme will contribute to 12.6 billion euro, bringing the total to 50 billion
euro. For the period 2011-2019, the total net contribution of the private sector involvement is
estimated at 106 billion euro.
Taking into account the cost of credit enhancement for the period 2011-2014. In addition, a Private sector involvement:
6. As far as our general approach to private sector involvement in the euro area is concerned, we
would like to make it clear that Greece requires an exceptional and unique solution.
7. All other euro countries solemnly reaffirm their inflexible determination to honour fully their
own individual sovereign signature and all their commitments to sustainable fiscal conditions
and structural reforms. The euro area Heads of State or Government fully support this
determination as the credibility of all their sovereign signatures is a decisive element for
ensuring financial stability in the euro area as a whole.
Stabilization tools:
8. To improve the effectiveness of the EFSF and of the ESM and address contagion, we agree to
increase their flexibility linked to appropriate conditionality, allowing them to:
- act on the basis of a precautionary programme;
- finance recapitalisation of financial institutions through loans to governments including
in non programme countries ;
- intervene in the secondary markets on the basis of an ECB analysis recognizing the
existence of exceptional financial market circumstances and risks to financial stability
and on the basis of a decision by mutual agreement of the EFSF/ESM Member States,
to avoid contagion.
We will initiate the necessary procedures for the implementation of these decisions as soon as
possible.
9. Where appropriate, a collateral arrangement will be put in place so as to cover the risk arising
to euro area Member States from their guarantees to the EFSF.
Fiscal consolidation and growth in the euro area:
10. We are determined to continue to provide support to countries under programmes until they
have regained market access, provided they successfully implement those programmes. We
welcome Ireland and Portugal's resolve to strictly implement their programmes and reiterate
our strong commitment to the success of these programmes. The EFSF lending rates and
maturities we agreed upon for Greece will be applied also for Portugal and Ireland. In this
context, we note Ireland's willingness to participate constructively in the discussions on the
Common Consolidated Corporate Tax Base draft directive (CCCTB) and in the structured
discussions on tax policy issues in the framework of the Euro+ Pact framework.
11. All euro area Member States will adhere strictly to the agreed fiscal targets, improve
competitiveness and address macro-economic imbalances. Public deficits in all countries
except those under a programme will be brought below 3% by 2013 at the latest. In this
context, we welcome the budgetary package recently presented by the Italian government
which will enable it to bring the deficit below 3% in 2012 and to achieve balance budget in
2014. We also welcome the ambitious reforms undertaken by Spain in the fiscal, financial and
structural area. As a follow up to the results of bank stress tests, Member States will provide
backstops to banks as appropriate.
12. We will implement the recommendations adopted in June for reforms that will enhance our
growth. We invite the Commission and the EIB to enhance the synergies between loan
programmes and EU funds in all countries under EU/IMF assistance. We support all efforts to
improve their capacity to absorb EU funds in order to stimulate growth and employment,
including through a temporary increase in co-financing rates.
Economic governance:
13. We call for the rapid finalization of the legislative package on the strengthening of the
Stability and Growth Pact and the new macro economic surveillance. Euro area members will
fully support the Polish Presidency in order to reach agreement with the European Parliament
on voting rules in the preventive arm of the Pact.
14. We commit to introduce by the end of 2012 national fiscal frameworks as foreseen in the
fiscal frameworks directive.
15. We agree that reliance on external credit ratings in the EU regulatory framework should be
reduced, taking into account the Commission's recent proposals in that direction, and we look
forward to the Commission proposals on credit ratings agencies.
16. We invite the President of the European Council, in close consultation with the President of
the Commission and the President of the Eurogroup, to make concrete proposals by October
on how to improve working methods and enhance crisis management in the euro area.. COUNCIL OF
THE EUROPEAN UNION
Brussels, 21 July 2011
STATEMENT BY THE HEADS OF STATE OR GOVERNMENT OF THE EURO AREA
AND EU INSTITUTIONS
We reaffirm our commitment to the euro and to do whatever is needed to ensure the financial
stability of the euro area as a whole and its Member States. We also reaffirm our determination to
reinforce convergence, competitiveness and governance in the euro area. Since the beginning of the
sovereign debt crisis, important measures have been taken to stabilize the euro area, reform the
rules and develop new stabilization tools. The recovery in the euro area is well on track and the euro
is based on sound economic fundamentals. But the challenges at hand have shown the need for
more far reaching measures.
Today, we agreed on the following measures:
Wednesday, July 20, 2011
Signs
Signs
It's a rotten summer. Cold, wet and relentless. Earlier in the year (March), after a 2 day downpour, there was a sudden die-off of all the plants. Everything from the grass to the trees and bushes all suddenly died off, with their leaves turning brown and whole plants perishing in many instances. They still haven't recovered.
I remember a very similar thing occured in 2007. A storm came and almost immediately afterwards, the trees and grass all became burnt and shrivelled. There followed a terrible summer.
It seems that this formula is repeating itself this year. I can't claim to understand the mechanics of it. Maybe the plants know that there's a bad summer ahead, or perhaps some sort of acidic content in the rain kills off plant life and this in turn effects the weather (we are still quite ignorant of how vegetation effects the weather, though it's an area of increasing interest).
Either way, I am now going to watch for this "sign" in future.
It's a rotten summer. Cold, wet and relentless. Earlier in the year (March), after a 2 day downpour, there was a sudden die-off of all the plants. Everything from the grass to the trees and bushes all suddenly died off, with their leaves turning brown and whole plants perishing in many instances. They still haven't recovered.
I remember a very similar thing occured in 2007. A storm came and almost immediately afterwards, the trees and grass all became burnt and shrivelled. There followed a terrible summer.
It seems that this formula is repeating itself this year. I can't claim to understand the mechanics of it. Maybe the plants know that there's a bad summer ahead, or perhaps some sort of acidic content in the rain kills off plant life and this in turn effects the weather (we are still quite ignorant of how vegetation effects the weather, though it's an area of increasing interest).
Either way, I am now going to watch for this "sign" in future.
Friday, July 15, 2011
NOTW-News International-Murdoch scandal
I must confess, I have no particular antipathy towards Murdoch. While I think his anti-monarchy, anti-EU line has damaged British politics and he is pretty craven to Chinese interests -nonetheless he is a fairly restrained media mogul.
However, no democracy should tolerate one person or organisation controlling large chunks of the media. It robs us of the pluralist discussion which is the greatest strength of a democracy.
Though noone can know for sure, it looks very likely that these scandals are not about phone-tapping at all. Over the last number of years there has been a series of clashes between the murdoch press and the British establishment, ranging over superinjunctions, phone-tapping, paparazzi tactics, spying on royals etc.. The pattern is the same and there has been a gradual, but perceptible increase in Murdoch's struggles to get his way with the British powers that be. The only conclusion that can be drawn is that somewhere in the British establishment, a decision has been made to clip his wings a bit and reduce the influence of News International on British politics. The struggle over superinjunctions, phone-tapping, police bribes etc. appear to simply be theatres for a broader struggle.
The heat has clearly been turned up on this struggle in recent weeks, and the most explosive revelations have only come recently. The phonetapping of a teenage murder victim, bereaved families of war casualties etc. is public relations dynamite. So much so that Murdoch has had to close one newspaper and postpone his takeover of BSkyB.
But the real question is whether it will rest there? Will this movement against press centralisation carry forward to see legislative controls created for media ownership?
What is really needed is for a special competition regime to exist to ensure pluralist ownership of private media outlets. I have not heard anyone raise the possibility yet, but MPs and the public are furious and it is difficult to imagine such a proposal failing if it was put before the House of Commons tomorrow.
I certainly do hope that such a regime is created, it would be a massive boon to British democracy. A generous transitional period could be permitted to allow Murdoch exit with his wealth intact, but ultimately, it is vital that no person or organisation be permitted to control more than a small fraction of the media (apart from the BBC).
I wonder how Denis O'Brien feels about all this?
However, no democracy should tolerate one person or organisation controlling large chunks of the media. It robs us of the pluralist discussion which is the greatest strength of a democracy.
Though noone can know for sure, it looks very likely that these scandals are not about phone-tapping at all. Over the last number of years there has been a series of clashes between the murdoch press and the British establishment, ranging over superinjunctions, phone-tapping, paparazzi tactics, spying on royals etc.. The pattern is the same and there has been a gradual, but perceptible increase in Murdoch's struggles to get his way with the British powers that be. The only conclusion that can be drawn is that somewhere in the British establishment, a decision has been made to clip his wings a bit and reduce the influence of News International on British politics. The struggle over superinjunctions, phone-tapping, police bribes etc. appear to simply be theatres for a broader struggle.
The heat has clearly been turned up on this struggle in recent weeks, and the most explosive revelations have only come recently. The phonetapping of a teenage murder victim, bereaved families of war casualties etc. is public relations dynamite. So much so that Murdoch has had to close one newspaper and postpone his takeover of BSkyB.
But the real question is whether it will rest there? Will this movement against press centralisation carry forward to see legislative controls created for media ownership?
What is really needed is for a special competition regime to exist to ensure pluralist ownership of private media outlets. I have not heard anyone raise the possibility yet, but MPs and the public are furious and it is difficult to imagine such a proposal failing if it was put before the House of Commons tomorrow.
I certainly do hope that such a regime is created, it would be a massive boon to British democracy. A generous transitional period could be permitted to allow Murdoch exit with his wealth intact, but ultimately, it is vital that no person or organisation be permitted to control more than a small fraction of the media (apart from the BBC).
I wonder how Denis O'Brien feels about all this?
Thursday, July 14, 2011
Paying the Piper
I am a europhile. I am committed to good relations between European neighbours, as well as cooperation in areas of mutual benefit -especially the Single Market and all of its offshoots.
However, I have never been seized by the Euro. Though I did not really comprehend the difficulties that could arise from a common currency (now laid bare for all to see), there was enough negative commentary to assure me that it was far from a secure venture. Most of all, the benefits of having a stable currency regime always seemed overhyped and the whole thing seemed to have been thrown together with limited vision for how it would work in practice.
Which brings us to the present day. I am living in a country which has really borne an incredible burden on behalf of this common currency. When the Irish banks began to implode, the ECB (a European institution with a mandate to safeguard Eurozone interests) forbade the collapse of any banks in Ireland -regardless of how insolvent they were. The cost of the necessary support however was to come from the Irish State and Irish taxpayers.
While I have no objection to the ECB looking after the European interest and having the power to make decisions in the interest of the currency -this becomes problematic when individual Member States end up paying the bill (in this case -a disastrous bill which has plunged us into 3 years of depression with no recovery in sight). It seems obvious that the people who make the decisions should bear the consequences. If the Eurozone has the power to make us support the banks, then the Eurozone must pay for this support. If Ireland must pay for the bailouts then the Irish authorities must have the power to decide their own policy. But instead we have a clearly broken model where the ECB decides what's best for the eurozone and individual Member States (in this case, one of the smallest Member States) bear the burden.
Since we have been forced to seek IMF/EZ assistance, we have heard a great deal from Eurozone media-hacks about "he who pays the piper calls the tune" -i.e. swingeing reforms and cuts must follow from their assistance. Apart from the bloody-minded arrogance entailed in this dismissal of our quite extraordinary cuts to vital services, there is a fundamental hypocricy. We were never allowed to call the tune when bailing out the banks, but we were forced to pay. Now, in our national bailout talks it is the same people calling the tune, and it is debatable how much they are really contributing to our recovery.
It is impossible for us to leave the Eurozone right now, but once recovery happens (if it ever does), we should leave at the first opportunity. I am still a committed europhile and wish us many years of happy cooperation with our european partners in the EU proper -but the Eurozone is not a cooperative, it is clearly a disfunctional organisation, and no place for a small Member State.
All this austerity has been for nothing.
However, I have never been seized by the Euro. Though I did not really comprehend the difficulties that could arise from a common currency (now laid bare for all to see), there was enough negative commentary to assure me that it was far from a secure venture. Most of all, the benefits of having a stable currency regime always seemed overhyped and the whole thing seemed to have been thrown together with limited vision for how it would work in practice.
Which brings us to the present day. I am living in a country which has really borne an incredible burden on behalf of this common currency. When the Irish banks began to implode, the ECB (a European institution with a mandate to safeguard Eurozone interests) forbade the collapse of any banks in Ireland -regardless of how insolvent they were. The cost of the necessary support however was to come from the Irish State and Irish taxpayers.
While I have no objection to the ECB looking after the European interest and having the power to make decisions in the interest of the currency -this becomes problematic when individual Member States end up paying the bill (in this case -a disastrous bill which has plunged us into 3 years of depression with no recovery in sight). It seems obvious that the people who make the decisions should bear the consequences. If the Eurozone has the power to make us support the banks, then the Eurozone must pay for this support. If Ireland must pay for the bailouts then the Irish authorities must have the power to decide their own policy. But instead we have a clearly broken model where the ECB decides what's best for the eurozone and individual Member States (in this case, one of the smallest Member States) bear the burden.
Since we have been forced to seek IMF/EZ assistance, we have heard a great deal from Eurozone media-hacks about "he who pays the piper calls the tune" -i.e. swingeing reforms and cuts must follow from their assistance. Apart from the bloody-minded arrogance entailed in this dismissal of our quite extraordinary cuts to vital services, there is a fundamental hypocricy. We were never allowed to call the tune when bailing out the banks, but we were forced to pay. Now, in our national bailout talks it is the same people calling the tune, and it is debatable how much they are really contributing to our recovery.
It is impossible for us to leave the Eurozone right now, but once recovery happens (if it ever does), we should leave at the first opportunity. I am still a committed europhile and wish us many years of happy cooperation with our european partners in the EU proper -but the Eurozone is not a cooperative, it is clearly a disfunctional organisation, and no place for a small Member State.
All this austerity has been for nothing.
Wednesday, July 6, 2011
A simple tweak to create representative Governments.
A discussion topic I just kicked off on a matter of national concern. I think this gets to the heart of the poor performance of Irish democracy.
http://www.wethecitizens.ie/talk/article/representative_government_coalitions
Currently, the Dáil elects the Taoiseach who appoints a Government from amongst his/her own followers. As Taoisigh are chosen by the Dáil on partisan lines, they then proceed to select Governments on partisan lines, reinforcing tribal politics. Instead of forming a Government that is representative of the Dáil (and therefore of the people's choices at General Elections), we end up with Governments of one tribe or another, representing only a segment of Irish society. The entrenchment of partisan politics means Dail debates focus on highlighting divisions between the parties rather than the details of the issues before the house.
I propose that the Taoiseach's power to select the Government should be subject to the results of the General election (or more precisely, the make-up of the Dáil). The Taoiseach, when presenting a Government to the Dáil should have to secure approval from a supermajority (80%) of Deputies, or if he/she is unable to secure this supermajority, then the Government should be selected directly by the Dáil in a Proportional Representative (PR) vote.
The advantages of this would be that the Government (the principal decision-making organ of the State) would be more representative of the Dáil as a whole and therefore of the choices made by the electorate. Taoisigh will have the chance to form a representative Government(exercising some choice as to what would be a workable team), but if the Dáil feels that the Taoiseach's selection does not represent the broad opinions of the Dáil (i.e. more than 20% of Deputies are aggrieved by the make-up of the Taoiseach's proposed team), then they can directly select the Cabinet. In practice, there would always be a cross-party deal to allow the Taoiseach to win the supermajority vote, but not without making concessions to minority voices, and under the threat of having the power to form the Government taken from his/her hands if he/she fails to build a broadly based coalition. A baldly partisan Government would be impossible. Broadly based coalitions would represent the people as a whole, taking decisions in the general interest, being less indulgent of underperformance by their colleagues, and less beholden to sectional groups. Cooperative deliberation instead of sectional fighting would begin to define Dáil and Government debates. The current preference for backbiting over deliberation would lose its appeal if the Government was representative of the Dáil's make-up.
The principal disadvantage would be that we would be sacrificing the position of strength that has been invested with every Taoiseach since the 1937 Bunreacht. Our 1937 constitution (as was the trend in 1930s Europe) focused on creating a strong individual at the heart of the State, to be in a position to direct all the resources of the State to combat specific problems, especially threats to security. This principle has served us well (though in the rest of Europe it was a disaster), and the Taoiseach has always had the clout to mobilise any resources available to combat security threats. By depriving him/her of the power to dominate the Dáil, we will lose the ability to focus the State's efforts on a particular priority issue. We cannot have deliberative democracy without sacrificing authorative Taoisigh.
http://www.wethecitizens.ie/talk/article/representative_government_coalitions
Currently, the Dáil elects the Taoiseach who appoints a Government from amongst his/her own followers. As Taoisigh are chosen by the Dáil on partisan lines, they then proceed to select Governments on partisan lines, reinforcing tribal politics. Instead of forming a Government that is representative of the Dáil (and therefore of the people's choices at General Elections), we end up with Governments of one tribe or another, representing only a segment of Irish society. The entrenchment of partisan politics means Dail debates focus on highlighting divisions between the parties rather than the details of the issues before the house.
I propose that the Taoiseach's power to select the Government should be subject to the results of the General election (or more precisely, the make-up of the Dáil). The Taoiseach, when presenting a Government to the Dáil should have to secure approval from a supermajority (80%) of Deputies, or if he/she is unable to secure this supermajority, then the Government should be selected directly by the Dáil in a Proportional Representative (PR) vote.
The advantages of this would be that the Government (the principal decision-making organ of the State) would be more representative of the Dáil as a whole and therefore of the choices made by the electorate. Taoisigh will have the chance to form a representative Government(exercising some choice as to what would be a workable team), but if the Dáil feels that the Taoiseach's selection does not represent the broad opinions of the Dáil (i.e. more than 20% of Deputies are aggrieved by the make-up of the Taoiseach's proposed team), then they can directly select the Cabinet. In practice, there would always be a cross-party deal to allow the Taoiseach to win the supermajority vote, but not without making concessions to minority voices, and under the threat of having the power to form the Government taken from his/her hands if he/she fails to build a broadly based coalition. A baldly partisan Government would be impossible. Broadly based coalitions would represent the people as a whole, taking decisions in the general interest, being less indulgent of underperformance by their colleagues, and less beholden to sectional groups. Cooperative deliberation instead of sectional fighting would begin to define Dáil and Government debates. The current preference for backbiting over deliberation would lose its appeal if the Government was representative of the Dáil's make-up.
The principal disadvantage would be that we would be sacrificing the position of strength that has been invested with every Taoiseach since the 1937 Bunreacht. Our 1937 constitution (as was the trend in 1930s Europe) focused on creating a strong individual at the heart of the State, to be in a position to direct all the resources of the State to combat specific problems, especially threats to security. This principle has served us well (though in the rest of Europe it was a disaster), and the Taoiseach has always had the clout to mobilise any resources available to combat security threats. By depriving him/her of the power to dominate the Dáil, we will lose the ability to focus the State's efforts on a particular priority issue. We cannot have deliberative democracy without sacrificing authorative Taoisigh.
Monday, July 4, 2011
Household V. Business debts -policy implications
http://www.centralbank.ie/polstats/stats/cmab/documents/ie_table_a.6_loans_to_irish_residents_-_outstanding_amounts_(incl._securitised_loans).xls
In a sea of confusing data, a significant trend is going largely unreported. With our national fixation on the appalling accumulation of public debt, we are largely ignoring the even greater reductions in private debt held by Irish individuals.
In the last 12 months, over 50bn euros of private debt has been repaid by irish individuals (18% of total private indebtedness). This reduction in debt is even larger than the accumulation of debt by the State and shows that Ireland is indeed mending its position -albeit slowly and with immense pain. This builds on reductions in previous years so that our levels of private indebtedness have fallen from 348bn in 2008 to 255bn today -almost a third of all private debts have been repaid or settled in the last 3 years.
There is hope then that pretty soon, private individuals will have run down their debts and may begin to divert their income from debt repayment to investment, consumption or saving -any of which will be beneficial to our economy and/or banks. If 50bn euros a year is being found for debt reduction, then once our debts fall to a lower level we can expect this flow of money to be diverted back to the real economy, providing a welcome lift to our slumped economy.
However, the picture is not as simple as all that. Within the figures for debt reduction, it is clear that it is businesses and not households that are repaying all this debt. Despite bleating from the faux-tycoons that seem to have taken over all media in the last few years, it is clear that Irish businesses are not just profitable, but are highly profitable and increasingly debt free.
Household indebtedness: Peak 178bn Today 165bn (7% reduction)
Business indebtedness (excl. banks): Peak 170bn Today 90bn (47% reduction)
It is clear from these figures that although private debt reduction continues to happen at an astonishing rate, household indebtedness has hardly fallen at all through the years of recession, and has actually grown as a proportion of income. Given this stubbornly high level of household debt, all talk of a consumer recovery next year (for instance by cutting VAT to high-end goods) is misplaced. Our recovery simply cannot come from a return to the shops as advocated by Michael Noonan -and even if it could, it is foolish of him to encourage highly indebted households to spend more.
Based on these trends, it seems likely that the recovery will happen in business, primarily business that does not depend for its livelihood on selling to Irish households (especially exports). As they run down their debts, businesspeople will increasingly look for alternative uses for their income, whether investing in new fixed assets, expanding their businesses, taking on new staff or saving their cash in financial products. All of these outcomes would be good for the economy in the long run, but in the short run we desperately need to encourage business to hire and save -alleviating our unemployment and banking crises respectively.
Unfortunately, my hunch is that such efforts will fail and business will instead concentrate on upgrading assets and expanding markets. Though this is good, and will stand to us in future, it is not our immediate requirement. This "jobless recovery" seems inevitable based on these figures and the general business outlook and means that we are now facing a situation where business is likely to boom in the near future while households face years of austerity and unemployment.
Which brings me to an unpalatable problem, the inequitable burden of taxation on households by comparison with the low rate of Corporation Tax payable by business has always had its detractors, however now it seems that we are facing a bleak period of rising inequality where a debt-free, lightly-taxed and highly profitable business sector will be coexisting with households plagued by indebtedness, public service reductions, and a likely increasing tax burden.
The obvious solution (unfortunately no Irish politician can even mention this without inviting scorn) is to increase business taxes and use the funds to alleviate the positions of households to allow for a more balanced recovery where households would be given space to reduce their debts to the same extent as business. Given the depth of our problems it is vital that all sections of society bear a share of the necessary burden of adjustment. While we can be relieved that businesses have found the cashflow to reduce their debts, we should be extremely alarmed that in spite of years of austerity, Irish households have not found the surplus funds to reduce their indebted positions. Their should be red warning lights flashing all over policy circles to sound the alarm that despite a consumption slump, households' position has hardly improved at all. We urgently need to rebalance the burden of adjustment (particularly that of taxation) so that our blessedly vigorous businesses start to contribute to our recovery in line with the contributions already made by households.
However, in Ireland, we have developed an unhealthily debate-free credo of low Corporation Taxation. Even though it is now clearly in our economic interest to raise Corporation tax, to promote balanced growth, this topic is off-limits and instead the Government has just delivered a tax cut to restaurants and newspapers in some sort of bizare plan to create employment.
We are rapidly reaching a point where Corporation Tax must be increased or inequality will spire alarmingly. We need to treat this tax rate as it is -a simple revenue raising measure with economic import- instead of the Holy Cow we have allowed it to become.
The situation has not been helped by the invasion (for invasion it is) of a new proto-business commentariat, feeding an industry of armchair tycoons and self-congratulatory professionals. Business and enterprise are now viewed not as mere economic activities, but increasingly also as moral virtues and ends in their own right. While I find this new romantic vision of the world of business (espoused by a host of glitterati who could not possibly be more remote from real business -including comedians, politicians, academics, chiefs of Semi-State bodies etc.) to be somewhat less harmful than other crude ideological prisms which we have popularised over the years to explain a frustratingly complex world, it would nonetheless be extremely harmful if we allowed it to get in the way of the necessary decisions regarding our economic recovery. We cannot allow the burden of adjustment to fall exclusively on households, which clearly are unable to improve their desperate positions despite greatly reduced consumption patterns. High levels of debt interest repayment, increased household taxes and service cuts are obviously depriving them of the ability to run down their debts -all the while as business escapes such measures and is increasingly debt-free. That is a recipe for eventual disaster as household debt is every bit as unsustainable as business debt was at the outset of the crisis.
We need to bypass this body of mindless ideology that has taken over the debate about business taxes and form policies with recovery -not the Sindo- in mind. We cannot allow ourselves fall hostage to blowhards who evaluate problems based on ideology rather than substance. Noone can be spared, not even the well connected and (depending on your views) not even the virtuous.
In a sea of confusing data, a significant trend is going largely unreported. With our national fixation on the appalling accumulation of public debt, we are largely ignoring the even greater reductions in private debt held by Irish individuals.
In the last 12 months, over 50bn euros of private debt has been repaid by irish individuals (18% of total private indebtedness). This reduction in debt is even larger than the accumulation of debt by the State and shows that Ireland is indeed mending its position -albeit slowly and with immense pain. This builds on reductions in previous years so that our levels of private indebtedness have fallen from 348bn in 2008 to 255bn today -almost a third of all private debts have been repaid or settled in the last 3 years.
There is hope then that pretty soon, private individuals will have run down their debts and may begin to divert their income from debt repayment to investment, consumption or saving -any of which will be beneficial to our economy and/or banks. If 50bn euros a year is being found for debt reduction, then once our debts fall to a lower level we can expect this flow of money to be diverted back to the real economy, providing a welcome lift to our slumped economy.
However, the picture is not as simple as all that. Within the figures for debt reduction, it is clear that it is businesses and not households that are repaying all this debt. Despite bleating from the faux-tycoons that seem to have taken over all media in the last few years, it is clear that Irish businesses are not just profitable, but are highly profitable and increasingly debt free.
Household indebtedness: Peak 178bn Today 165bn (7% reduction)
Business indebtedness (excl. banks): Peak 170bn Today 90bn (47% reduction)
It is clear from these figures that although private debt reduction continues to happen at an astonishing rate, household indebtedness has hardly fallen at all through the years of recession, and has actually grown as a proportion of income. Given this stubbornly high level of household debt, all talk of a consumer recovery next year (for instance by cutting VAT to high-end goods) is misplaced. Our recovery simply cannot come from a return to the shops as advocated by Michael Noonan -and even if it could, it is foolish of him to encourage highly indebted households to spend more.
Based on these trends, it seems likely that the recovery will happen in business, primarily business that does not depend for its livelihood on selling to Irish households (especially exports). As they run down their debts, businesspeople will increasingly look for alternative uses for their income, whether investing in new fixed assets, expanding their businesses, taking on new staff or saving their cash in financial products. All of these outcomes would be good for the economy in the long run, but in the short run we desperately need to encourage business to hire and save -alleviating our unemployment and banking crises respectively.
Unfortunately, my hunch is that such efforts will fail and business will instead concentrate on upgrading assets and expanding markets. Though this is good, and will stand to us in future, it is not our immediate requirement. This "jobless recovery" seems inevitable based on these figures and the general business outlook and means that we are now facing a situation where business is likely to boom in the near future while households face years of austerity and unemployment.
Which brings me to an unpalatable problem, the inequitable burden of taxation on households by comparison with the low rate of Corporation Tax payable by business has always had its detractors, however now it seems that we are facing a bleak period of rising inequality where a debt-free, lightly-taxed and highly profitable business sector will be coexisting with households plagued by indebtedness, public service reductions, and a likely increasing tax burden.
The obvious solution (unfortunately no Irish politician can even mention this without inviting scorn) is to increase business taxes and use the funds to alleviate the positions of households to allow for a more balanced recovery where households would be given space to reduce their debts to the same extent as business. Given the depth of our problems it is vital that all sections of society bear a share of the necessary burden of adjustment. While we can be relieved that businesses have found the cashflow to reduce their debts, we should be extremely alarmed that in spite of years of austerity, Irish households have not found the surplus funds to reduce their indebted positions. Their should be red warning lights flashing all over policy circles to sound the alarm that despite a consumption slump, households' position has hardly improved at all. We urgently need to rebalance the burden of adjustment (particularly that of taxation) so that our blessedly vigorous businesses start to contribute to our recovery in line with the contributions already made by households.
However, in Ireland, we have developed an unhealthily debate-free credo of low Corporation Taxation. Even though it is now clearly in our economic interest to raise Corporation tax, to promote balanced growth, this topic is off-limits and instead the Government has just delivered a tax cut to restaurants and newspapers in some sort of bizare plan to create employment.
We are rapidly reaching a point where Corporation Tax must be increased or inequality will spire alarmingly. We need to treat this tax rate as it is -a simple revenue raising measure with economic import- instead of the Holy Cow we have allowed it to become.
The situation has not been helped by the invasion (for invasion it is) of a new proto-business commentariat, feeding an industry of armchair tycoons and self-congratulatory professionals. Business and enterprise are now viewed not as mere economic activities, but increasingly also as moral virtues and ends in their own right. While I find this new romantic vision of the world of business (espoused by a host of glitterati who could not possibly be more remote from real business -including comedians, politicians, academics, chiefs of Semi-State bodies etc.) to be somewhat less harmful than other crude ideological prisms which we have popularised over the years to explain a frustratingly complex world, it would nonetheless be extremely harmful if we allowed it to get in the way of the necessary decisions regarding our economic recovery. We cannot allow the burden of adjustment to fall exclusively on households, which clearly are unable to improve their desperate positions despite greatly reduced consumption patterns. High levels of debt interest repayment, increased household taxes and service cuts are obviously depriving them of the ability to run down their debts -all the while as business escapes such measures and is increasingly debt-free. That is a recipe for eventual disaster as household debt is every bit as unsustainable as business debt was at the outset of the crisis.
We need to bypass this body of mindless ideology that has taken over the debate about business taxes and form policies with recovery -not the Sindo- in mind. We cannot allow ourselves fall hostage to blowhards who evaluate problems based on ideology rather than substance. Noone can be spared, not even the well connected and (depending on your views) not even the virtuous.
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