Reasons To be Cheerful # 0001

Per Felix Salmon

The Baltic Dry Index, which measures international shipping costs, was fixed today at 2,503, down 9% on the day and down 79% from its May high of 11,793. It's a volatile index, and these levels are hardly unprecedented: the index was below 3,000 for a good year from mid-May 2005 onwards.

He wrote that on Thursday, and the index fell by another 200+ points on Friday.

This, like the falling oil price, is much-needed good news for the world economy. The level of shipping costs, some people were saying, had become a more important obstacle to world trade than tariff levels.

And Some Will Still Say that I am anti-EU

I have read economist Brendan Lynch's piece in Friday's "The Irish Times" carefully, and yet cannot find a single sentence with which I disagree.

The crucial passage is this one

The Government would be foolish if it did not remind voters that we would never have achieved our current level of living standards without EMU participation thanks to low interest rates, having a world currency and the additional IFSC projects that EMU participation helped bring to Ireland. Having to play by the EMU rules is an acceptable long term price to pay for EMU’s economic benefits

The writer might have added that membership of the single currency area attracted more than just IFSC projects. If he were more politically-minded, he might also have mentioned the huge gains in convenience for Irish tourists visiting other Euro-zone countries.

Note, however, that I remain concerned by the robustness of the arrangements for the Euro. The Stability Pact is not the only one of its foundation pillars that is looking shaky: President Sarkozy, nothing daunted by the fact that the head of the ECB is French, wants the ECB to be more responsive to political concerns.

As an a priori issue, one can hold divergent views on how independent a central bank should be - I myself have become more enamoured of independence as years have passed, from which phrasing an obvious conclusion may be drawn - and there is a good argument for making the ECB's mandate less ascetically monetarily pure. But a French-inspired move to a "political" ECB would quickly lead to disaster. Ironically, it would be a political disaster in the first instance: the German electorate would finally lose all patience, and the Czechs would not be the only ones to follow.

Recession=Innovation Deficit

This is interesting.

It is not really news that a focus on the source of job losses is a waste of attention, but I do not recall it being illustrated quite as well as in the labour market statistics quoted by David Leonhardt in this New York Times article. What the data over 14 years appear to show is that what happens in a slow-down is not that more jobs are lost but that less jobs are created.

Hat-tip:The Economist's "Free Exchange" online-column.

Prophetic, no ?

I just happened across this post of mine from earlier this year, before the dread words "sub-prime" emerged into public consciousness, in which the following passage appears:

"Today, a bank can grant a leveraged loan with impunity, since it can offload the credit risk. And market demand for that risk is insatiable. The form of credit derivative known as the collateralised loan obligation, or CLO, feeds on just such loans."

To which my reaction is: That "insatiable" demand will surely not last for long. After all, the market for securitised UK home loans was affected by the big blow-out in the housing market c.1990, was it not ?

The current turmoil in the world's stock markets is a result of that "insatiable" demand going sharply into reverse, mainly because investors have belatedly realised that money was being lent with wild abandon.

The Growth of Nations

Martin Wolf is The Financial Times chief economics commentator. He recently wrote a review of"How Rich Countries Got Rich...and Why Poor Countries Stay Poor" by Erik S. Reinert and also "Bad Samaritans: Rich Nations, Poor Policies and the Threat to the Developing World"by Ha-Joon Chang. It was a passionate (but controlled)"rave review". If you have any interest in the subject - one that was a very lively interest of every Irish person until about 10 years ago - then I would urge you to read it in full.

Here are some extracts:

..The broad question is the one Erik Reinert states in his title: How Rich Countries Got Rich... and Why Poor Countries Stay Poor. Reinert is a Norwegian professor who now teaches at Tallinn, Estonia. Ha-Joon Chang, a well-known Korean development economist, teaches at Cambridge. But both give strikingly similar answers to this question.

Both state that the priority in development is rapid and sustained growth. Only industrialisation can deliver such growth, because industry is the only sector in which rapid and sustained rises in productivity are feasible. Furthermore, to industrialise, countries must upgrade their technological and managerial capabilities, which can be achieved only if they are able to nurture infant sectors. That requires protection, they both argue, as has been the case in every successful economy of the past half-millennium.

Tragically, they argue, the “neo-liberal hegemony” - the broad consensus on liberal trade and freer markets of the past quarter century - has deprived countries of these valuable tools. The result has been a development disaster, particularly in Latin America and Africa, where the International Monetary Fund and the World Bank have run amuck. The World Trade Organisation and a host of one-sided so-called free trade agreements further constrain the ability of developing countries to adopt sensible policies. ....

[Reinert]... points to the success of protection against imports since the Renaissance. Reinert argues that, for poor countries, specialisation in line with comparative advantage means specialising in poverty. ... free trade is suitable only for countries at the same level of development.

So, in respect of Africa - surely the most important and urgent case for treatment - Reinert recommends internal free trade and external barriers to trade, in place of what he condemns as the mere “palliative economics” of millennium development goals, bed-nets and ever more aid....

... I agree with both authors that ....some policies that now affect developing countries are dangerous: restrictions on easy access to intellectual property are perhaps the most important....

South Korea and Taiwan were exceptional cases. The argument that success will follow the overthrow of the neo-liberal consensus and the return of protection is nonsense. But the authors are right that those who argued that free trade alone is the answer were wrong. There are no magic potions for development. Developmental states can work. Many fail. But some may succeed.

Above all, developing countries should be allowed to try, and so learn from their own mistakes. Countries should be warned of the difficulties of following South Korea’s example, but allowed to do so if they wish....

Chang is right that some of the constraints imposed upon developing countries, notably on intellectual property, are unconscionable. Most should enjoy the benefit of open markets from the rich, but be allowed to pursue their own paths, from laissez-faire to its opposite. They will make many mistakes. So be it. That is what sovereignty means.

The comments of Dani Rodrik, my favourite on-line economist at present, on the review are interesting, too, as all of his contributions, especially on this subject, are.

Why the PDs Did So Badly ? Some Facts to Remember

In another characteristically great piece of analysis which he has titled "Fun, Fun, Fun ‘Til Her Daddy Takes Her Calculator Away", Michael Taft shows again how the groups who chiefly benefit from the State schemes most vulnerable to PD propaganda are the same ones who tended to vote PD. (The PD spin is mine, not Michael's).

Here are some extracts from a long piece:

We can all have fun in Household Budget Survey land....

Where else can you find that in the bottom 40% income groups, no one buys limes ? Or that the poorest 10% spend a higher proportion of their income on church contributions than anyone else? Or that the richest 10% spent nothing on funeral expenses (the rich must ‘die harder’)?

...I’d like to try my hand at a small set of figures: the extent to which higher income groups’ spending patterns attract higher state subsidies. For instance, if the state subsidises house-purchasing more than it does rent, we can get an idea of where that public expenditure is going by analysing the spending patterns of the different decline groups. Similarly with VHI relief or a whole group of other categories. ...

Public subsidies are heavily skewered to house purchase as opposed to tenants. ...[and]Nearly ¾ of mortgage interest relief goes to the upper-half of the adult population (the top four deciles of households equals 50% of all adults).

Relief for health insurance is only slightly less regressive though this may be an under-estimate as a number of low and even middle income households may not get the full tax relief if they are not fully in the tax net (these figures only relate to expenditure and not to the actual distribution of tax relief).

Taken together, these two reliefs cost the Exchequer (that is, the taxpayer – which is everyone; from the richest to the poorest) over €500 per year (that’s before the Government increased mortgage interest relief in the last budget – therefore, it’s [now]higher). It is questionable whether the vast majority of people are getting ‘value for money’ here.

It has long been established that pension contributions are highly regressive. The CSO gives us an update...While the top 25% of income earners account for nearly 70% of private pension expenditure – the distribution of tax relief would probably be even more regressive as those on the top rate get 41% relief while those on standard rate only get 20%. And this means a lot of money – employees and self-employed pension relief costs in the order of €1 billion a year (and that’s not counting the pension funds’ full tax exemption).

So the distribution of over €1.5 billion in public expenditure is skewered to the highest income groups. By contrast let’s take a look at one particular tax – refuse charges.

Charges for this absolute necessity of domestic life are skewered in favour of high income groups. This extremely regressive tax (or levy or charge) has such an impact that many low income households pay less in income tax or PRSI than they do refuse charges. In any event, the lowest income group pays five times more than the highest income groups as a % of gross income, even though they have nearly 18 times less income.

Please bear that last point in mind the next time you are tempted to get "sniffy" with those who object to being charged under the "polluter pays" principle, as I confess that I often am (despite the baby brother's repeated correctives).

I recommend going to Michael's website/RSS feed to read the full thing, if only to see the graphics which tell the stories even more clearly.

Let's Have More Inequality !

(Placatory note to my left-wing comrades: think multicultural, OK ?)

As he licks his wounds after losing his political career, Michael McDowell gets support for his position on inequalityfrom economist Arnold Kling.

A couple of months ago, I drew attention to another article by Kling. Like the earlier one, this article is yet another contribution to the debate on immigration which has continued even after the recent defeat of the proposed amendments to U.S. immigration legislation.

Quoth he:

Giovanni Peri writes [that]U.S.-born workers are climbing the educational ladder, acquiring interactive/analytic skills and progressively leaving the manual jobs that would put them in competition with immigrants. If the trend continues as expected, the day is not far off when virtually all manual labor will be performed by foreign-born labor. This implies large wage gains for native workers, since they will be able to specialize in language-intensive and interactive tasks that are typically far better paid.

While some people shudder at the prospect of a more stratified society with immigrants at the bottom, keep in mind that the biggest gainers by far in this situation are the immigrants themselves. They can expect to earn six to seven times what they can now make in similar jobs in their countries of origin.

So it's a win-win. We get more nannies, lawn-care workers, waiters, and hotel maids, the immigrants get more money, and our kids learn skills that keep them out of competition with the underclass. All we have to lose is our self-concept of an egalitarian society.

I can see why economists have difficulty selling our pro-immigration position.

It seems to me that this reasoning is equally applicable to the Irish position.

Incidentally, I see that Sam Brittan, for whose views I have enormous respect, "has a go" at crude equality crusaders in a recent article.

Six Million Reasons Why Public Sector Out-performs

No, it's not a misprint. The conventional wisdom which says that the private sector is always more economical just is not true.

Courtesy of the Cedar Lounge Revolution ("for lefties too stubborn to quit"), I learn that motorway constructed by the private sector cost at least EUR 8 million more - per kilometre ! - than the public sector.

Let's Have More Poverty !

The proposed new law on immigration currently under consideration by the U.S. Congress is really throwing up some interesting discussions, so much so that it is difficult to select the best for you.

Economist Arnold Kling - I hope that he will forgive me, but I cannot help thinking of him as a relative of Klinger, the cross-dresser in M.A.S.H. - has a good oneto start you on:

...we ought to try to double the U.S. poverty rate in the next decade.

The way everyone else looks at it, if a Mexican comes here legally and earns $350 a week, poverty has increased, regardless of whether he is earning 10 times as much as he was before.

I think we ought to try to find a humanitarian way to "increase" this type of poverty.

This is just as applicable to, say, Romanians coming to Ireland, so, shall we all say

"Bring 'em in !- Make Romanian Poverty History!"?

How Much is a Nurse Worth ?

In Ireland just now, the main issue occupying public attention is a dispute between nurses' unions and their employers.

For the first time that I (or anyone, I think) can remember, there is a real debate about whether the nurses have right on their side. This is partly because of a recognition that nurses are no longer as abysmally paid as was once the case, and almost certainly also because everyone realises that giving the nurses what they want this time will be very costly indeed.

Look elsewhere for a discussion of the detailed arguments. My purpose here is to consider the question in the title.

How much is anyone "worth" i.e. what should they be paid in return for the work they do ?

I suggest that the question has no single rational answer. How much someone is paid depends on so many things that, in the end, the only answer is that a person is worth whatever the labour market clearing rate for their services happens to be.

This will infuriate some, perhaps most, people, and indeed was not my starting position when I first considered these matters some decades ago, but I have been forced by the lessons of experience and the application of logic to adopt it.

I hope to elaborate on this over the near future. If any reader is impatient, please do not hesitate to challenge me.

Fixed-rate Loans

I have had an idea about fixed interest rate borrowing for some time now. I wonder how long it will survive exposure on the internet !

Inflation is a monetary phenomenon, and the banking industry is where money is created and, for inflation, over-created. (I am not overlooking other engines of inflation).

Fixed-rate lending means that the banking industry has a vested interest in avoiding inflationary behaviour. Hence, my idea is that it would help to avoid inflation, to encourage more use of fixed-rate borrowing.

It was often said of Germany a couple of decades ago that its good record on inflation was related to the prevalence of fixed-rate lending, not least in the residential mortgage market.

(This piece reproduces a comment I have made to this article on The Economist's Free Exchange service, which I heartly recommend to all those with an interest in economic questions).

The real problem with private equity

From Eurointelligence (requires registration but is currently free) today:

In his regular FT Column, Tony Jackson argues that most of the criticism of private equity groups misses the point. He said the problem was neither profiteering nor lack of transparency, but the fact private equity companies "load a company with excess debt, then strip the cash out as a dividend. If this is done on a big enough scale, the fund can profit handsomely even if the company goes bust."

He said that the pre-private equity world had obvious safeguards against this: The banks would stop lending. But with the advent of credit derivatives all that has changed.

"Today, a bank can grant a leveraged loan with impunity, since it can offload the credit risk. And market demand for that risk is insatiable. The form of credit derivative known as the collateralised loan obligation, or CLO, feeds on just such loans."

To which my reaction is: That "insatiable" demand will surely not last for long. After all, the market for securitised UK home loans was affected by the big blow-out in the housing market c.1990, was it not ?

(I strongly recommend the Eurointelligence RSS feed - very useful for Italian and French political developments right now, as well as for the developing debate on ECB policy/governance which is a very important one for Ireland, and all Eurozone states.)

POSTSCRIPT(1510 hrs): I have just tried unsuccessfully to find the excerpt quoted above on the Eurointelligence website: it came to me in this morning's RSS feed from the site, so that is rather mysterious.

UPDATE (1520 hrs): Ah !here it is.

Update on Friday, May 16, 2008 at 12:06PM by Fergus O'Rourke

That item is now (again) unfindable on the Eurointelligence site. Sigh

That BES Survey re-visited

I may have been a little unfair in my first reaction to this earlier this week, so if I seem to lean in the other direction now,having read it properly, please understand.

The title gives the game away: this is a survey, not a study, nor an analysis. As such, its flimsiness is less inappropriate. Indeed, as a survey, "flimsy" is probably not a fair description at all. The survey is actually fairly comprehensive, and I ended up quite impressed, and even a little persuaded.

Nevertheless, it is, as surveys inevitably are, lacking in analysis. It is also devoid of dissenting views, and I suspect that none were sought. We are not told what brief was given to the non-specialist civil servants who conducted the survey. It may well have been such that seeking dissenters was not appropriate.

There probably is a place for such surveys, but it does not appear to me that this one serves the purpose of justifying increased investment in the BES. What it does do is to set out in impressive and persuasive detail the benefits that the scheme is delivering. That may be enough for Brussels, not least because the amounts involved - even after the limits are increased - are going to be trivial even in Irish terms, are not a complete waste of resources, and are not really very anti-competitive, if at all, in EU terms.

For Irish policy purposes, the survey answers no important questions. In essence, it simply assembles and very effectively presents the positive spins articulated by every possible vested interest. It would be no surprise if the brief given to its authors, parsed and analysed, amounted to a request to do just that. For the politicians in charge of this government, this was quite useful, just a year ahead of the general election. However, in a manner reminiscent of the way the decentralisation policy was brought forward for political reasons but flew in the face of a more considered Spatial Strategy previously given political endorsement, it looks ridiculous when it is remembered that Minister Cowen promised a thorough review of tax incentives in terms of their continued economic effectiveness.

This survey is not such a review; it is, rather, a confirmation from those who benefit from the scheme that, if they are unhappy with it, it is because it could give them even more !

Minister publishes BES Review

Minister for Finance Brian Cowen has this evening published the review on which he purports to rely to justify the boost proposed to the BES in the Budget. (See previous posts here and here).

It is a 50-page PDF, and I have to say that it is a very flimsy piece of work. I cannot imagine that the EU Commission will give it too much attention as a justification for increasing a state aid.

It records amounts of finance provided and numbers of companies assisted, and the opinions of entrepreneurs. As far I could discern on my first quick look, analysis of cause and effect is absent, as is any healthy scepticism towards the tales that were being told by what were essentially the vested interests surveyed.

Update(22.02.07):I have now read the report in full. Having done so, I have to say that "flimsy" is verging towards unfairness as a description of it. Moreover, it may indeed persuade the EU Commission. I am still sceptical that it ought to do so, however, and will explain why later.

"Women lyin' in ponds distributin' swords ..."

The reference to the EU Commission of the Irish government's proposal to expand, er, enhance the Business Expansion Scheme ("BES") by the Irish Congress of Trade Unions ("ICTU")provoked an incredulous reaction from the appropriate Minister. That reaction has been supported by those on whom the public rely for information about matters of this kind i.e. journalists.

My own reaction has been of a very different disbelief, which has been magnified by almost every media comment. No rational argument has been advanced for boosting BES, which must lead one to suspect that none can be found, even by those who have access to the relevant data. Even the bould Marc Coleman, having clearly shown that there existed no evidence to support it, felt obliged to agree that "the scheme is a good one" and distracted his readers with an irrelevant ad hominem (really ad homines et feminae, but let us avoid pedantry) attack on the trade union movement. Most commentators that I have read or heard simply parrot the ministerial line that many small companies have benefitted from the scheme, sometimes bolstered by examples.

So what ? Is this the only issue ? I would say that it is not even an issue: it is beyond dispute that BES has helped many enterprises and the wider economy as well. The ICTU's Paul Sweeney in Friday's Irish Times observes that it is obvious that those who pick up gold coins in the street benefit therefrom, but sensibly comments that (I paraphrase him and Monty Python) "suited men distributin'gold coins is no basis for a rational system of government".

As for gold coins, so for tax reliefs.

By the way, the Monty Python character goes on to claim that

Supreme executive power derives from a mandate from the masses, not from some farcical aquatic ceremony.

(The last phrase is a reference to King Arthur's Lady in the Lake). Am I the only one left who still thinks that the only legitimate source of supreme executive power is indeed a "mandate from the masses", or democracy as we sometimes call it ? Very few people that I read or encounter day-to-day really think so any more. I may return to this theme.

Our Dodgy Electricity Supply Position

I have added today a new page to this site which links to a real-time graph of our electricity consumption. Our luck is holding so far, but it is scary how exposed to black-outs we have been permitted to become. These black-outs would essentially result from not having enough capacity.

I hope to explain how this happened soon.

I React in Dis-belief...

... and I hope that I am not alone.

Our Minister for Enterprise has expressed his "utter disbelief" that the ICTU is, among other things, suggesting that BES investments would be used as a tax-avoidance measure.

Neither I nor (I imagine) the ICTU is unaware that many BES companies benefit from the scheme, and that the State does well from its investment in some of them.

But the BES has been a terrific tax-avoidance scheme for all of its history, and most higher-rate taxpayers know it for nothing else.

I must refresh my knowledge of the cost-benefit studies. The last time I checked, the results were decidedly dodgy.

I hope that Mr Martin is not about to join the Martin Cullen school of project appraisal.

A Note on Prices and Competition

Competition tends to keep prices lower than would be the case in the absence of competition.

That, however, does not equate to saying that a multiplicity of sellers offering exactly the same price is evidence that there is no competition. It may, and often does, mean that there is lively competition.

For example, if all the petrol stations in a town charge the same for petrol, what will tend to happen if one of them changes the price ? If the change is upward, that outlet will, obviously, tend to lose business.

The owner's failure to commit commercial suicide proves something; but that something is not that there is an effective monopoly, as is often alleged, not just about the petrol retail sector, but about the meat factories, and the airlines, and just about every sector in the economy, it sometimes seems to me.

Of course, it is the case that some sectors are indeed characterised by effective monopoly conditions, but lack of price diversity by itself is not a reliable indicator of that.

The Groceries Order

The Chairman of the Competition Authority has been testifying to an Oireachtas committee today on the effects of the abolition last year of the order. The order prohibited below-cost selling of retail goods. The Authority has been a keen advocate of the change. I have been a profound sceptic: I still do not understand why there are any worthwhile benefits to below-cost selling. Given the extremely high concentration in the Irish retail sector and the lack of transparency consequent on the high foreign ownership share, it seems a crazy move to me.

It was "sold" to the public of course on the basis that it would reduce retail prices, and now the public is getting impatient because there is little sign of price reductions.

I haven't seen the text of what the Oireachtas Committee was told this morning, but I hope that it is an improvement on the "wait a little longer" message that other advocates such as the bould Eddie Hobbs have been peddling. I would like to think that the boffins have a model to measure the effect of the change, but I am not holding my breath.

However, I am not going to join the twits who say that because prices have risen, the change in the law has been a failure: perhaps without the change, the rise would have been greater.