Saturday, July 29, 2017

28/7/17: 1H Marker: Russia on Track to a Weak Recovery in 2017

A quick top level update on the Russian economy from Bofit and Fitch Ratings.

Fitch Ratings today: “The recovery in Russia continues to gain traction. Domestic demand is responding to greater confidence in the economic policy framework, particularly as the inflation-targeting regime becomes entrenched. Activity in Turkey has bounced back rapidly from the coup attempt, with growth hitting 5% yoy in 1Q17. Momentum was supported by government incentives, including temporary fiscal measures and a jump in the Treasury commitment to the fund that backs lending to SMEs.”

Chart from BOFIT confirms the above:

Overall, the recovery is still on track, and remains gradual at best, posing elevated risks of reversals. For example, industrial output, having previously posted gains in January-May 2017, contracted in June 2017 on a quarterly basis. Still, industrial output was up 2% in 1H 2017 y/y.  Despite the U.S. and European sanctions, and generally adverse trends in the commodities sectors, mineral extraction sector expanded 3% y/y in 1H 2017 according to BOFIT. Oil output was up 2% and gas output was up 13%. The above figures imply that higher value added manufacturing posted sub-1% y/y growth in 1H 2017.

Agricultural production was basically flat - due, in part, to poor weather conditions, rising only 0.2% y/y in 1H 2017 and unlikely to post significant growth for FY2017 as crops reports are coming in relatively weak. That said, 2015-2016 saw record crops and very strong growth in agricultural output, so barring a major decline this year, agricultural sector activity will remain robust. Food production sector was the fourth highest growth sector over 2013- 1H 2017 period across the entire Russian economy, rising cumulative 17%  in 1H 2017 compared to 1H 2013 in real (inflation-adjusted) terms.

Construction sector posted a robust 4-5 percent expansion in 1H 2017 compered to 1H 2016, a rather positive sign of improving investment.

Pharmaceuticals (+36%), plastics (+25%), Chemical industry (+22%), paper industry (+19%) were the main sectors of positive growth over 2013-2017 period, according to data compiled by Rossstat.

Really good news is that household demand is now recovering. Retail sales by volume were up ca 1% y/y on a seasonally-adjusted basis and real disposable household income rose from the cycle lows to the levels last seen in May-June 2016. Bad news is that with income growth slower than retail sales and even slower than actual household consumption (which grew faster than domestic retail sales due to accelerating purchases abroad), Russian households are dipping into savings and credit to fund consumption increases.

We shall wait until July 2017 PMI figures come out over the next few days to see more current trends in the Russian economy, but overall all signs point to a moderate 1H and 3Q (ongoing) expansion in the economy, consistent with 1.2-1.3% real growth. The Economy Ministry recently reiterated its view that Russian GDP will expand at more than 2% rate in 2017. Achieving this will clearly require a large and accelerated cut in the Central Bank rate from current 9% to below 8%. Even with this, it is hard to see how above-2% growth can be achieved.

Agricultural and food production are quite significant variable in the growth equation. In 2016, Russia became number one exporter of wheat in the world, with annual production tipping 120 million tons - historical record. Bad weather conditions in 2017 mean that current expected output is estimated at around 17% below 2016 levels. Russia consumes 70 percent of its wheat output internally, so cuts to exports are likely to be on the magnitude of 1/2 or more in 2017. Domestically, food prices inflation is rising this year, threatening overall Central Bank target and putting pressure on CBR to stay out of cutting the key policy rate. Inflation rose in June to 4.4% - moderate by historical standards, but above 4% CBR target.

28/7/17: Risk, Uncertainty and Markets

I have warned about the asymmetric relationship between markets volatility and leverage inherent in lower volatility targeting strategies, such as risk-parity, CTAs, etc for some years now, including in 2015 posting for GoldCore (here: And recently, JPMorgan research came out with a more dire warning:

This is apt and timely, especially because volatility (implied - VIX, realized - actual bi-directional or semi-var based) and uncertainty (implied metrics and tail events frequencies) have been traveling in the opposite direction  for some time.

Which means (1) increasing (trend) uncertainty is coinciding with decreasing implied risks perceptions in the markets.

Meanwhile, markets indices are co-trending with uncertainty:
Which means (2) increasing markets valuations are underpricing uncertainty, while focusing on decreasing risk perceptions.

In other words, both barrels of the proverbial gun are now loaded, when it comes to anyone exposed to leverage.

Friday, July 28, 2017

28/7/17: Long term U.S. growth trend is still weak: 2Q 2017 Update

U.S. GDP growth estimate for 2Q 2017 came in at 2.6%, matching the post-1948 trend for expansionary periods almost to the notch. The problem, however, is that the trend is ... declining over time.

Here's the kickers to today's cheerful media reports on U.S. growth:

  1. Current expansion period average growth remains the shallowest amongst all post-recession recoveries since the end of WW2. That's right: the miracle of this Great Recovery is how weak it has been, despite all the Fed efforts.
  2. Current 4 quarters average for growth is 2.4%, which is only 0.2 percentage points above the overall recovery period average. Or, put differently, even before the revisions to 2Q 2017 numbers, last four quarters of growth have been un-inspiring. 
  3. The trend for historical growth during expansion periods has been sloping down since around the end of the 1980s. And we are, currently, still on that trend. In other words, recoveries are continuing to trend more anaemic over time.
So keep telling yourself that everything is coming out 'on expectations'. Just don't think about the pesky fact that expectations are trending lower.

27/7/17: U.S. labor markets are not in rude health, yet

As we keep hearing about the wonders of the U.S. labor markets, there is an uneasy feeling that the analysts extolling the virtues of the Great Non-recovery are bending the facts. Yes, unemployment is down significantly, and, finally, in recent months the participation rate started to climb up, although it remains depressed by historical norms. But these are not the only metrics of jobs creation or employment. Much overlooked are other figures, that paint a much less pleasant picture.

So with this in mind, lets update some of my old charts relating to the side of the labor markets than majority of analysts have forgotten to mention.

First up: average duration of unemployment. In other words, a measure of how long it takes for a person to get back into the job.

Good news is: the decline in duration of unemployment continues.  Better news: we are well past the crisis-period peak. Bad news: duration is at around 2009 levels, so not even at the levels pre-crisis. Worse news: current duration is higher than that recorded at the peak of any other recession in modern history. That's right: with miraculous recovery, we have folks collecting longer unemployment benefits than at the peak of any previous recession.

That was in absolute terms. Now, let's look at how we are performing relative to each pre-recession expansion:
Again, good news: the horror show of the peak during the height of the Great Recession is gone now. But, again, bad news: we are still at the levels of relative duration comparable to 15 months into the Great Recession. And, again, the worst news: after 108 months of 'recovery' we are much worse off in terms of duration performance than in any other post-recessionary recovery since 1948.

But what about employment, you might ask? Aren't U.S. companies generating huge numbers of jobs that are being filled by the American workers? Err... ok...

No. Employment is not performing well. Current cycle (from the start of the Great Recession through today) is long. But it is also extremely shallow when it comes to employment. So shallow, that it marks the worst long cycle in history (per above chart) and, when compared to shorter cycles, ... again, the worst cycle in history. 1953 cycle was bad - sharper jobs destruction than current, but it ended faster and on a higher employment index level than the current one.

So no, things are not fine in the U.S. labor markets. Not by the measures which are harder to game than standard unemployment stats.

Thursday, July 27, 2017

27/7/17: Designing a More Equitable System of School Access

In the decades old battle for the future minds, U.S. Republicans and Democrats have been constantly at odds when it comes to how one achieves, simultaneously, higher quality of education and more equitable access to education for those from less well-off families. In the mean time, one country - Chile - has been building up a system of vouchers that, after 36 years worth of experimentations, is delivering on both.

In 2008, Chile introduced a massive reform of its 27-years-old system of education vouchers by passing the Preferential School Subsidy Law (SEP). The system of education funding in Chile is based on universal school voucher payments, but until 2008, the system did not target explicitly those on lower incomes. Then, SEP changed this set up by hiking the value of the voucher by 50 percent for a large category of so-called “Priority students”, a category that primarily covers students “whose family incomes fell within the bottom 40 percent of the national distribution”.

A recent NBER study looked at the results (see full citation and link below).

Specifically, SEP reform stipulated that “to be eligible to accept the higher-valued vouchers from these students, schools were required to waive fees for Priority students and to participate in an accountability system.”

The study used data on math scores attained by “1,631,841 Chilean 4th-grade students who attended one of 8,588 schools during the year 2005 through 2012” and asked the following two questions:

  • “Did student test scores increase and income-based score gaps become smaller during the five years after the passage of SEP?” and
  • “Did SEP contribute to increases in student test scores and, if so, through what mechanisms?”

The study found that:

  1. “On average, student test scores increased markedly and income-based gaps in those scores declined by one-third in the five years after the passage of SEP.” So the effects were in desired direction for all students (improving outcomes) and stronger effect for targeted students (the Priority Students). Better result for all, more equitable result for those in most need.
  2. “The combination of increased support of schools and accountability was the critical mechanism through which the implementation of SEP increased student scores, especially in schools serving high concentrations of low-income students.” So poor performance of less well-off schools improved more than the performance of better-off schools. Again, better result for all, more equitable result for those in most need.
  3. Another important aspect of the study was to identify whether the new vouchers triggered a massive redistribution of better-performing poorer students away from less well-off school. In other words, whether the scheme reform benefited predominantly more those students from the less privileged background who would have gained otherwise. The authors found that “migration of low-income students from public schools to private voucher schools played a small role.”

So you can design a market-based solution for education system funding that does preserve schools choice, enhances educational outcomes for all, and reduces educational inequality.

Full citation: Murnane, Richard J. and Waldman, Marcus and Willett, John B. and Bos, Maria Soledad and Vegas, Emiliana, The Consequences of Educational Voucher Reform in Chile (June 2017). NBER Working Paper No. w23550. Available at SSRN:

27/7/17: The Gen-Lost is still lost...

Today, Marketwatch reported on a research note from Spencer Hill of Goldman Sachs Research claiming that the young workers cohorts in the U.S. have now caught up in terms of employment with older workers' cohorts.

Sadly, the argument is based on highly flawed analysis. The core data presented in support of this thesis is the unemployment rate, as shown in the chart below:

But official unemployment figures mask massive decline in younger cohorts' labor force participation rates, as evidence in this chart from Peterson Institute for International Economics:

In simple terms, when you reduce your employment base by moving people into 'out of workforce' category, you lower unemployment rate.  This is supported by other research, e.g. as reported here: Skewed, against the Millennials, workplace conditions are also to be blamed: or as highlighted in these data:


So, no, beyond superficially deflated official unemployment metric, there is no evidence of the labor force conditions recovery for the younger workers. The Generation Lost is still lost. And that is before we consider the life cycle effects of the crisis.

Wednesday, July 26, 2017

27/7/17: Work or Play: Snowflakes or Millennials?

Snowflakes or Millennials? Flaky or serious? Careless or full of determination? Attitudes or aptitudes? Well, here’s an interesting study on the younger generation.

“Younger men, ages 21 to 30, exhibited a larger decline in work hours over the last fifteen years than older men or women.” In other words, average hours of labour supplied have fallen for the younger males more than for the older cohorts of workers. Which can be a matter of labour demand (external to workers’ choice) or supply (internal to workers’ choice).

One recent NBER study (see below) claims that “since 2004, time-use data show that younger men distinctly shifted their leisure to video gaming and other recreational computer activities.”

So we have two facts running simultaneously. What about a connection between the two?

“We propose a framework to answer whether improved leisure technology played a role in reducing younger men's labor supply. The starting point is a leisure demand system that parallels that often estimated for consumption expenditures. We show that total leisure demand is especially sensitive to innovations in leisure luxuries, that is, activities that display a disproportionate response to changes in total leisure time.” Economics mumbo jumbo aside, the authors “estimate that gaming/recreational computer use is distinctly a leisure luxury for younger men. Moreover, we calculate that innovations to gaming/recreational computing since 2004 explain on the order of half the increase in leisure for younger men, and predict a decline in market hours of 1.5 to 3.0 percent, which is 38 and 79 percent of the differential decline relative to older men.”

Some data from the study:

So it looks like this data suggests that attitude beats aptitude, and choices we make about our recreational activities do cramp our decisions how much time to devote to paid work.

Full citation: Aguiar, Mark and Bils, Mark and Charles, Kerwin Kofi and Hurst, Erik, Leisure Luxuries and the Labor Supply of Young Men (June 2017). NBER Working Paper No. w23552. Available at SSRN:

26/7/17: Credit booms, busts and the real costs of debt bubbles

A new BIS Working Paper (No 645) titled “Accounting for debt service: the painful legacy of credit booms” by Mathias Drehmann, Mikael Juselius and Anton Korinek (June 2017 provides a very detailed analysis of the impact of new borrowing by households on future debt service costs and, via the latter, on the economy at large, including the probability of future debt crises.

According to the top level findings: “When taking on new debt, borrowers increase their spending power in the present but commit to a pre-specified future path of debt service, consisting of interest payments and amortizations. In the presence of long-term debt, keeping track of debt service explains why credit-related expansions are systematically followed by downturns several years later.” In other words, quite naturally, taking on debt today triggers repayments that peak with some time in the future. The growth, peaking and subsequent decline in debt service costs (repayments) triggers a real economic response (reducing future savings, consumption, investment, etc). In other words, with a lag of a few years, current debt take up leads to real economic consequences.

The authors proceed to describe the “lead-lag relationship between new borrowing and debt service” to establish “empirically that it provides a systematic transmission channel whereby credit expansions lead to future output losses and higher probability of financial crisis.”

How bad are the real effects of debt?

From theoretical point of view, “when new borrowing is auto-correlated [or put simply, when today’s new debt uptake is correlated positively with future debt levels] and debt is long term - features that are present in the real world - we demonstrate two systematic lead-lag relationships”:

  • “debt service peaks at a well-specified interval after the peak in new borrowing. The lag increases both in the maturity of debt and the degree of auto-correlation of new borrowing. The reason is that debt service is a function of the stock of debt outstanding, which continues to grow even after the peak in new borrowing.” It is worth noting a well-known fact that in some forms of debt, minimum required repayment levels of debt servicing (contractual provisions in, say, credit cards debt) is associated with automatically increasing debt levels into the future.

  • “net cash flows from lenders to borrowers reach their maximum before the peak in new borrowing and turn negative before the end of the credit boom, since the positive cash flow from new borrowing is increasingly offset by the negative cash flows from rising debt service.”

Using a panel of 17 countries from 1980 to 2015, the paper “empirically confirm the dynamic patterns identified in the accounting framework… We show that new borrowing is strongly auto-correlated over an interval of six years. It is also positively correlated with future debt service over the following ten years. In the data, peaks in debt service occur on average four years after peaks in new borrowing.” In other words, credit booms have negative legacy some 16 years past the peak of new debt uptake, so if we go back to the origins of the Global Financial Crisis, European household debts new uptake peaked at around 2008, while for the U.S. that marker was around 2007. The credit bust, therefore, should run sometime into 2022-2023. In Japan’s case, peak household new debt uptake was back in around 1988-1989, with adverse effects of that credit boom now into their 27 years duration.

When it comes to assessing the implications of credit booms for the real economy, the authors establish three key findings:

1) “…new household borrowing has a clear positive impact, and its counterpart, debt service, a significantly negative impact on output growth, both
of which last for several years. Together with the lead-lag relationship between new borrowing and debt service this implies that credit booms have a significantly positive output effect in the short run, which reverses and turns into a significantly negative output effect in the medium run, at a horizon of five to seven years.”

2) “…we demonstrate that most of the negative medium-run output effects of new borrowing in the data are driven by predictable future debt service effects.” The authors note that these results are in line with well-established literature on negative impact of credit / debt overhangs, including “the negative medium-run effect of new borrowing on growth is documented e.g. by Mian and Sufi (2014), Mian et al. (2013, 2017) and Lombardi et al. (2016). Claessens et al. (2012), Jorda et al. (2013), and Krishnamurthy and Muir (2016) document a link between credit booms and deeper recessions.” In other words, contrary to popular view that ‘debt doesn’t matter’, debt does matter and has severe and long term costs.

3) “…we also show that debt service is the main channel through which new borrowing affects the probability of financial crises. Consistent with a recent literature that has documented that debt growth is an early warning indicator for financial crises, we find that new borrowing increases the likelihood of financial crises in the medium run. Debt service, on the other hand, negatively affects the likelihood of crises in the short turn.”

In fact, increases in probability of the future crisis are “nearly fully” accounted for by “the negative effects of the future debt service generated by an increase in new borrowing”.

The findings are “robust to the inclusion of range of control variables as well as changes in sample and specification. Our baseline regressions control for interest rates and wealth effects. The results do not change when we control for additional macro factors, including credit spreads, productivity, net worth, lending standards, banking sector provisions and GDP forecasts, nor when we consider sub-samples of the data, e.g. a sample leaving out the Great Recession, or allow for time fixed effects. And despite at most 35 years of data, the relationships even hold at the country level.”

So we can cut the usual arguments that “this time” or “in this place” things will be different. Credit booms are costly, painful and long term.

26/7/17: Panic... Not... Yet: U.S. Student Debt is Cancerous

Reuters came up with a series of data visualisations and brief analytics pieces on the issue of student loans in the U.S. These are ‘must read’ materials for anyone concerned with both the issues of debt overhang (impact of real economic debt, defined as household, non-financial corporate and government debts, on economic activity), demographic and socio-political trends (e.g. see my analysis linking - in part - debt overhang to current de-democratization trends in the Western electorates, as well as issues of social equity.

The first piece presents a set student loans debt crisis charts and data summaries: Key takeaway here is that although the size of the student loans debt market is about 1/10th of the pre-GFC mortgages debt overhang, the default rates on student loans are currently well above the GFC peak default rates for mortgages:

The impact - from economic point of view includes decline in home ownership amongst the younger demographic.

But, less noted, the impact of student debt overhang also includes behavioural and longer-term cross-generational implications:

  1. Younger cohorts of workers are saddled with higher starting debt positions that cannot be resolved via insolvency/bankruptcy, which makes student loans more disruptive to the future life cycle incomes, savings and investments of the households;
  2. Behaviourally, early-stage debt overhang is likely to alter substantially life cycle investment and consumption patterns, just as early age unemployment and longer-term unemployment do with future career outcomes and choices;
  3. Generational transmission of wealth is also likely to suffer from the student debt overhang: as older generations trade down in the property markets, the values of their properties are likely to be lower than expected due to younger generation of buyers having lower borrowing and funding capacity to purchase retiring generations' homes;
  4. The direct nature of student loans collections (capture of wages and social security benefits for borrowers and co-signers on the loans) implies unprecedented degree of contagion from debt overhang to household financial positions, with politically and socially unknown impact; and
  5. The nature of interest rate penalties, combined with severe lack of regulation of the market and a direct tie in between Federally-guaranteed student loans and the fiscal authorities implies higher degree of uncertainty about the cost of future debt service for households.

On the two latter matters, another posting by Reuters worth reading:  Student loans debt is now turning the U.S. into an expropriating state, with the Government-sanctioned coercive, and socially and economically disruptive capture of household incomes.

One thing neither article mentions is that student loans are a form of investment - investment in human capital. And as all forms of investment, these loans are set against the expected future returns. These returns, in the case of student loans, are generated by increases in life cycle labor income - wages and other associated forms of income - which is, currently, on a downward trend. In other words, just as cost of student loans rises and uncertainty about the future costs of legacy loans is rising too, returns on student loans are falling, and the coercive power of lenders to claim recovery of the loans is beyond any other form of debt.

We are in a crisis territory, even if from traditional systemic risk metrics point of view, the market for student loans might be smaller.

25/7/17: Of Corporation Tax: An American Lesson

Yes, 35% statutory tax rate in the U.S. is delivering magic results... and yes, corporations do pay taxes...

Meanwhile, taxes on labor and income share of total tax take is climbing up primarily due to the 'invisible' (to households) payroll tax. Which, of course, goes hand-in-hand with lack of take home pay growth. Now, extend this picture into the foreseeable future:

  • Estate taxes will go up as Baby Boomers finally succumb to old age; but that increase will be short lived, because subsequent generations have no real savings (back to that payroll tax thingy). Thus, having risen at first (as early cohorts of heirs to Baby Boom Generation start cashing in), estate taxes will fall (as subsequent generations of heirs start selling assets into depressed markets - supply up, demand stagnant... what happens to prices?);
  • Corporate Tax returns will continue trending down because, let's face it, even Canada is now offering a lower tax environment than the U.S.
  • Which means either Payroll Tax or Income Tax will have to rise to keep Washington swamp well lubricated. Payroll Taxes face uncertain future due to (1) declining or anaemic labour incomes/wages; (2) robotization and automation; (3) Corporate Tax competition, etc. So it is doubtful that Payroll Tax can take the slack created by future declines in other tax revenues. Which leaves us with only two feasible alternatives: cut spending or raise income taxes.
Problem is: you need to have income in order to pay Income Taxes. Another problem is: you need guts and political capital to cut spending. Care to tell me where all of this is going to come from?..

Of course, there is an alternative: cut tax rates and close loopholes, and - better yet - ditch the idea of bogus progressivity (see the result of that one above) and go for a flat tax. To offset that, cut wasteful spending. You will likely see higher yield across all three tax headings - Payroll, Income and Corporate. And you might end up with a new generation of growing incomes, savings and investments to at least cushion out the sell-off of inheritance assets from the Boomers. Maybe.

Of course, for that, you still need guts and political capital. But at least you will have some hope at the end of the political bloodbath...

Friday, July 21, 2017

21/7/17: What Irish Civil Service is Good For?..

Recently released data on 2011-2016 Irish Government financial metrics shows that despite all the reports concerning the adverse impact of austerity on Irish Government employees, there is hardly any evidence of such an effect at the pay level data.

Specifically, in 2011, total compensation bill for the Irish Government employees stood at EUR 19.389 billion. This 5.39% between 2011 and the lowest point in the cycle (2014 at EUR18.344 billion), before rising once again by 2016 to EUR 19.354 billion. Total savings achieved during 2012-2016 period compared to 2011 levels of expenditure amounted to EUR2.759 billion on the aggregate, or 2.85% (annualized rate of savings averaged less than 0.57% per annum.

Statistically, there simply is no evidence of any material savings delivered by the 'austerity' measures relating to Government compensation bills.

But, statistically, there is a clear evidence of Irish public sector employment poor performance. Oxford University's 2017 International Civil Service Effectiveness Index,, ranked Ireland's Civil Service effectiveness below average when compared across 31 countries covered in the report.

Spider chart below shows clearly two 'outlier' areas of competencies and KPIs in which Irish Civil Service excels: Tax Administration and Human Resource Management. Rest of the metrics: mediocre, to poor, to outright awful.

In fact, Ireland ranks 20th in terms of overall Civil Service Effectiveness assessment, just below Mexico and a notch above Poland. Within index components, Ireland ranked:

  • 16th out of 31 countries in terms of Civil Service Integrity and Policy Making
  • 26th in terms of Openness (bottom 10)
  • 20th in terms of Capabilities, and Fiscal and Financial Management
  • 13th in terms of Inclusiveness
  • 22nd in terms of Attributes (bottom 10)
  • 28th in terms of Regulation (bottom 5)
  • 8th in terms of Crisis Risk Management
  • 1st in terms of Human Resource Management (aka, working conditions and practices)
  • 4th in terms of Tax Administration
  • 31st in terms of Social Security Administration (dead last)
  • 21st in Digital Services and in terms of Functions (bottom 10)
So while managing to score at the top of the league of countries surveyed in terms of pay, perks, hiring and promotion, Irish Civil Service ranked within bottom 10 countries in terms of areas of key performance indicators, relevant to actual service delivery, with exception of one: Tax Collection. May be we shall call it Pay, perks & Tax Collection Service?

But, hey, know the meme: it's all because of severe austerity-driven underfunding... right?.. 


In response to my post, the Press Office at Dept. of Public Expenditure and Reform posted the following, quite insightful comments on the LinkedIn, that I am reproducing verbatim here:

Secretary General Robert Watt: I was interested in reading this comment – and in particular the data on civil service performance.  There are methodological issues with the Study quoted.  Nevertheless readers might be interested in other data about the effectiveness of the Irish civil and public service which might give a more balanced assessment of performance. Important to consider the evidence before we reach conclusions.  Also, important to note difference between Civil Service (36,000 staff) and wider public service (320,000 staff)

Public Service performance

Over a range of international rankings, the IPA’s annual public service trends publication shows the Irish public service performing above average on many indicators.

The IPA’s Public Sector Trends, 2016

  • Ireland is ranked 1st in the EU as the most professional and least politicised public administration in the Europe;
  • Ireland is ranked 5th for quality of public administration in the EU;
  • Ireland is ranked 6th in the EU for maintenance of traditional public service values (integrity); 
  • Ireland is ranked 4th in the EU for perception of the effectiveness of government decisions;
  • Ireland is ranked 2nd in the EU for encouraging competition and a supportive regulatory environment;
  • Ireland is ranked 4th in the EU for regulatory quality;
  • Ireland is ranked 3rd in the EU in comparison of how bureaucracy can hinder business;
  • Business update of eGovernment services is higher than most of Europe with Ireland ranked 1st for highest update of electronic procurement in Europe;
  • According to the World Bank, Ireland is ranked well above average for Government Effectiveness (although individual rankings are not available);
  • Ireland is ranked 5th in Europe in the competitive advantage provided by the education system; 
  • Ireland ranks 10th for life expectancy at birth and 8th for consumer health outcomes, but slightly below average for the cost-effectiveness of health spending;

The OECD’s Government at a Glance, published in July 2017 shows Ireland ranking strongly across a range of metrics although healthcare is a notable exception:

  • Ireland is ranked 2nd in terms of citizen satisfaction with the education system and schools;
  • Ireland is ranked 6th for citizen satisfaction with the judicial system and the courts and is also in the top 4 best improved countries in the last decade;
  • Ireland is ranked 26th for citizen satisfaction with the healthcare system (slightly below average).

Recent customer satisfaction surveys of the Irish civil service show it delivering its highest customer satisfaction ratings to date. Satisfaction with both the outcome and the service delivered was rated over 80% which is close to the credible maximum.
General Public Civil Service Satisfaction Survey, conducted Q1 2017:      

  • 83% are satisfied with the service they received (up from 77% in 2015);
  • 82% are satisfied with the outcome of their customer service experience (up from 76% in 2015);
  • 46% would speak highly of the civil service (up from 39% in 2015);
  • 87% of customers claim that service levels received either met or exceeded expectations (up from 83% in 2015).

Business Customers Civil Service Satisfaction Survey, conducted, Q4 2016:

  • 82% are satisfied with the service they received (up from 71% in 2009);
  • 82% are satisfied with the outcome of the service received (up from 70% in 2009);
  • 61% felt that the service provided has improved in the last 5 years.

Lots done but more to do!

My reply to the Department comment:

Thanks for the comments on this, Press Office at Dept. of Public Expenditure and Reform. I got similar methodological comments regarding the robustness of the Oxford study via Facebook as well and, as I noted, in the technical analysis part of the paper, Oxford centre does show improved metrics for Irish civil service performance in the later data, which is heartening. Also, noted the apparent dispersion of scores and ranks across countries, with what we might expect as potentially stronger performers being ranked extremely low. Also, noted the issue of data on Social Welfare for Ireland being skewed out of OECD range and impacted by 2011 legacy issues (although it is unclear to me how spending via health budget on social welfare is treated in the OECD and Oxford data). I will post your comments on the blog to make sure these are not lost to the readers.

I agree: lots done and certainly more to do, still. 

21/7/17: Professor Mario: Meet Irish Austerity Unsung Hero

In the previous post covering CSO's latest figures on Irish Fiscal metrics, I argued that the years of austerity amount to little more than a wholesale leveraging of the economy through higher taxes. Now, a quick note of thanks: thanks to Professor Mario Draghi for his efforts to reduce Government deficits, thus lifting much of the burden of real reforms off Irish political elites shoulders.

Let me explain. According to the CSO data, interest on Irish State debt obligations (excluding finacial services rescue-related measures) amounted to EUR 5.768 billion in 2011, rising to EUR7.298 billion in 2012 and peaking at EUR 7.774 billion in 2013. This moderated to EUR 7.608 billion in 2014, just as Professor Mario started his early-stage LTROs and TLTROs QE-shenanigans. And then it fell - as QE and QE2 programmes really came into full bloom: EUR6.854 billion in 2015 and EUR6.202 billion in 2016. Cumulative savings on interest since interest payments peak amounted to EUR2.65 billion.

That number equals to 75% of all cumulative savings achieved on the expenditure side (excluding capital transfers) over the entire period 2011-2016. That's right: 3/4 of Irish 'austerity' on the spending side was accounted for by... reduction in debt interest costs.

Say, thanks, Professor Mario. Hope you come visit us soon, again, with all your wonderful gifts...

21/7/17: Ireland: a Poster Child for Austerity through Taxes

Ever since the beginning of the Crisis in 2008, Irish policymakers insisted staking the claims to the heroic burden sharing of the post-Crisis fiscal adjustments across the entire society, the claims closely mirrored by the supporting white papers, official state-linked think tanks and organizations, and even the IMF.

Time and again, independent analysts, myself included, probed the State numbers and found them to be of questionable nature. And time and again, Irish political and policy elites continued to insist on the credit due to them for steering the wreck of the Irish economy out of the storm's path. Until, finally, by the end of 2016, Ireland officially was brought to enjoy falling official debt burdens and drastically declining deficits. The Hoy Grail of fiscal sustainability, delivered by FF/GP and subsequently (and especially) the FG/LP coalitions was in sight.

Well, here's a new instalment of holes that the official narrative conceals. CSO's latest data for full fiscal year 2016 on headline fiscal performance metrics was published earlier this month. It makes for an enlightening reading.

Take a simple chart:

Here, two figures are plotted against each other:

  • General Government Expenditure, less Capital Transfers (the bit that predominantly is skewed by 2011 banks resolution measures); and
  • Taxes and Social Contributions on the revenue side.
The two numbers allow us to compare the oranges and oranges: policy-driven (as opposed to one-off) revenues and policy-driven (as opposed to banking sector's supports) expenditures. Fiscal discipline is the distance between the two.

And what do we see in this chart? 
  1. Gap between tax revenues and non-capital transfers spending shrunk EUR899 mln in 2012 compared to 2011 and proceeded to fall EUR2.698 billion in 2013, EUR 4.22 billion in 2014, EUR 4.416 billion in 2015 and EUR1.815 billion in 2016. So far - good for 'austerity' working, right?
  2. Problem is: all of the reductions came courtesy of higher tax take: up EUR 1.567 billion in 2012 compared to 2011, EUR2.107 billion in 2013, EUR4.525 billion in 2014, EUR4.724 billion in 2015 and EUR2.713 billion in 2016.
  3. All said, over 2011-2016, cumulative reductions in ex-capital transfers tax deficit were EUR14.05 billion, but tax increases were EUR15.66 billion, which means that the entire story of Irish 'austerity' was down to one source: tax take increases. The Irish State did not cut its own spending. Instead, it raised taxes and never looked back.
  4. In fact, ex-capital transfers spending rose not fall, even as labor markets gains cut back on official unemployment. In 2011, ex-capital transfers Irish State spending was EUR71.403 billion. This marked the lowest point for expenditure in the data set that covers 2011-2016. Since then, 2015 expenditure was EUR72.113 billion and 2016 expenditure was EUR 73.011 billion.
  5. So there was no aggregate spending austerity. None at all.
  6. But there was small level of austerity in one category of spending: social benefits. These stood at EUR28.827 billion in 2011, rising to the cyclical peak of EUR29.454 billion in 2012, then falling to EUR28.526 billion in 2013 and to the cyclical low of EUR28.076 in 2014. Just as the labor markets returned to health, 2015 social benefits spending rose to EUR28.421 and 2016 ended up posting expenditure of EUR28.494. So the entire swing from peak spending during the peak crisis to the latest is only EUR418 million. Granted, small amounts mean a lot for those on extremely constrained incomes, so the point I am making is not that those on social benefits did not suffer due to benefits cuts - they did - but that their pain was largely immaterial to the claims of fiscal discipline.
So what do we have, folks? More than 100% of the entire fiscal health adjustment in 2011-2016 has been delivered by the rise in tax take by the State - the coercive power whereby money is taken off the people without providing much a benefit in return. That, in the nutshell, is Irish austerity: charging households, many struggling with debt, loss of income, poorer health and so on, to pay for... what exactly did we pay for?.. I'll let you decide that.

Thursday, July 20, 2017

20/7/17: U.S. Institutions: the Less Liberal, the More Trusted

In my recent working paper (see I presented some evidence of a glacial demographically-aligned shift in the Western (and U.S.) public views of liberal democratic values. Now, another small brick of evidence to add to the roster:
The latest public opinion poll in the U.S. suggests that out of four 'net positively-viewed' institutions of the society, American's prefer coercive and non-democratic (in terms of internal governance - hierarchical and command-based) institutions most: the U.S. Military and the FBI. as well as the U.S. Federal Reserve. Note: the four are U.S. military, the FBI and the Supreme Court and the Fed are all institutions that are not open to influence from external debates and are driven by command-enforcement systems of decision making and/or implementation. Whilst they serve democratic system of the U.S. institutions, they are  subject to severely restricted extent of liberal checks and balances.

Beyond this, considering net-disfavoured institutions, executive powers (less liberty-based) of the White House are less intensively disliked compared to more liberty-based Congress.

20/7/17: Euro Area's Great non-Deleveraging

A neat data summary for the European 'real economic debt' dynamics since 2006:

In the nutshell, the Euro area recovery:

  1. Government debt to GDP ratio is up from the average of 66% in 2006-2007 to 89% in 2016;
  2. Corporate debt to GDP ratio is up from the average of 72% in 2006-2007 to 78% in 2016; and
  3. Household debt to GDP ratio is down (or rather, statistically flat) from the average of 58.5% in 2006-2007 to 58% in 2016.
The Great Austerity did not produce a Great Deleveraging. Even the Great Wave of Bankruptcies that swept across much of the Euro area in 2009-2014 did not produce a Great Deleveraging. The European Banking Union, and the Genuine Monetary Union and the Great QE push by the ECB - all together did not produce a Great Deleveraging. 

Total real economic debt stood at 195%-198% of GDP in 2006-2007 - at the peak of previous asset bubble and economic 'expansion' dynamism, and it stands at 225% of GDP in 2016, after what has been described as 'robust' economic recovery. 

Tuesday, July 18, 2017

17/07/17: Debt Relief v Payments Relief: A Lesson Ireland Should Have Learned

An interesting study looked into two sets of debt relief measures:

  1. Immediate payment reductions to target short-run liquidity constraints and 
  2. Delayed debt write-downs to target long-run debt constraints.
It is worth noting that the first measure was roughly similar to the majority of 'sustainable debt resolution' measures introduced in Ireland (e.g. temporary relief on payments, split mortgages, etc) that temporarily delay repayments at the full rate. Even worse, in Irish case, policy instruments that delay repayments are generally associated with roll up of unpaid debt and in some cases, with interest on the unpaid debt, thus increasing life-cycle level of indebtedness. 

The second set of measures used in the NBER study are broadly consistent with debt forgiveness measures, where actual debt reduction took place at both the principal and interest levels.

So what did NBER study find?

"We find that the debt write-downs significantly improved both financial and labor market outcomes despite not taking effect for three to five years. In sharp contrast, there were no positive effects of the more immediate payment reductions. These results run counter to the widespread view that financial distress is largely the result of short-run constraints."

In other words, it appears that empirical evidence supports debt relief, as opposed to temporary payments reductions. Irish banks and authorities, in continuing to insist on preferences for temporary relief measures are simply driven by pure self interest - protecting banks' balancesheets - not by a desire to deliver a common good, such as speedier recovery of the heavily indebted households. 

Specifically, for debt relief: "For the highest-debt borrowers, the median debt write-down in the treatment group increased the probability of finishing a repayment program by 1.62 percentage points (11.89 percent) and decreased the probability of filing for bankruptcy by 1.33 percentage points (9.36 percent). The probability of having collections debt also decreased by 1.25 percentage points (3.19 percent) for these high-debt borrowers, while the probability of being employed increased by 1.66 percentage points (2.12 percent). The estimated effects of the debt write-downs for credit scores, earnings, and 401k contributions are smaller and not statistically significant. Taken together, however, our results indicate that there are significant benefits of debt relief targeting long-run debt overhang in our setting".

For repayment relief: "we find no positive effects of the minimum payment reductions targeting short-run liquidity constraints. There was no discernible effect of the payment reductions on completing the repayment program... The median payment reduction in the treatment group also increased the probability of filing for bankruptcy in this sample by a statistically insignificant 0.70 percentage points (6.76 percent) and increased the probability of having collections debt by a statistically significant 1.40 percentage points (3.56 percent). There are also no detectable positive effects of the payment reductions on credit scores, employment, earnings, or 401k contributions. In sum, there is no evidence that borrowers in our sample benefited from the minimum payment reductions, and even some evidence that borrowers seem to have been hurt by these reductions."

Why did payment relief not work? "The payments reductions increased the length of the repayment program in the treatment group by an average of four months and, as a result, increased the number of months where a treated borrower could be hit by an adverse shock that causes default (e.g., job loss)."

Now, imagine the Irish authorities arguing that no such shocks can impact over-indebted households over 10-20 years the repayment relief schemes, such as split mortgages or temporarily reduced repayments, are designed to operate. 

17/7/17: New Study Confirms Parts of Secular Stagnation Thesis

For some years I have been writing about the phenomena of the twin secular stagnations (see here: And just as long as I have been writing about it, there have been analysts disputing the view that the U.S. (and global) economy is in the midst of a structural growth slowdown.

A recent NBER paper (see here clearly confirms several sub-theses of the twin secular stagnations hypothesis, namely that the current slowdown is

  1. Non-cyclical (extend to prior to the Global Financial Crisis);
  2. Attributable to "the slow growth of total factor productivity" 
  3. And also attributable to "the decline in labor force participation".