Showing posts with label Regional development. Show all posts
Showing posts with label Regional development. Show all posts

Thursday, February 6, 2014

6/2/2014: Rip-Off Ireland: Alive and Kicking… Courtesy of the State


This is an unedited version of my Sunday Times article from January 26, 2014.


Ninety five years ago, in his book The Economic Consequences of Peace (Chapter VI, pg.235-236), John Maynard Keynes observed that "By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens."

This week's announcement of price hikes by VHI serves as a timely reminder of the salience of Keynes' analysis.  As are the CSO release of comparative data for the cost of living and income per capita for Ireland and the rest of the EU.

The former shows the extent of the ongoing confiscation of households’ wealth through targeted price increases – a core feature of Irish response to the crisis. The latter highlights the combined effects of inflation and income declines on Irish consumers. In 2012, Ireland was the fifth most expensive state in the European Union in terms of the cost of final consumption by private households. At the same time, Irish per capita pre-tax national income, adjusting for purchasing power differentials, was only 11th in the EU.

Irish recovery from a deep fiscal and financial crisis has been a tale of financial repression. Since 2008, our successive Governments have underwritten the status quo of inefficiencies in public services, as well as the cost of recapitalizing the failed banks using the sweat and blood of Irish consumers and taxpayers. As a by-product of this, the state transferred vast amounts of wealth and income from the Middle Ireland and the less well-off households to state-protected and often state-owned producers of goods and services.


Significant parts of these transfers took form of targeted inflation.

Per CSO data, released earlier this month, average annual consumer inflation in 2013 fell to just 0.5 percent, less than one quarter of the average annual inflation recorded in 2011-2012. However, underlying these figures, there is a growing disparity between price trends in the sectors dominated by the state and the sectors where private enterprises compete directly for consumer demand. Not surprisingly, the highest inflation over 2013 was recorded in state-priced and state-owned sectors, such as Education, where prices rose more than nine times faster than across the whole economy.

Looking at the longer-range data reveals an even greater divergence between the state-controlled and market prices. Since the beginning of 2008 through December 2013, aggregate consumer prices rose by slightly more than 3 percent in cumulative terms. Over the same period of time, state-controlled prices were up 22 percent. These sectors cover goods and services that account for around one third of all household consumption in Ireland. Meanwhile, private sectors prices are up only 0.2 percent.

Take the Housing, Water, Electricity, Gas and Other Fuels category, where cost of services to Irish consumers, on aggregate, fell 3.7 percent between 2007 and 2013. This decline was driven by a 25 percent drop in Mortgage Interest costs and 13 percent decline in Private Rents. Costs also fell across virtually all maintenance and repair services associated with housing. In contrast, Local Authority Rents and state-controlled gas prices rose almost by one fifth over the same period. Cost of electricity was up 26 percent. All state-controlled or regulated prices within this group are on the rise, with majority posting double-digit inflation.  Price inflation in the energy sector is now so far divorced from underlying costs that a single new entry into the market by Energia is expected to drive prices down by some EUR 300 per annum, potentially erasing two thirds of the price hikes introduced over the last two years.

None of the above services, however, come close to the rampant inflation in Health and Education.

Since the onset of the crisis, costs of Hospital Services in Ireland rose more than 36 percent, over three times the rate of inflation for Outpatient Services. The very same policies that purposefully drove up the cost of Hospital Services are also responsible for a whooping 117 percent cumulative rise in Health Insurance costs since 2007. These policies forced health insurance purchasers to cover the shortfalls in funding available to the HSE, despite the fact that their insurance premiums and general taxes already fund state healthcare. As the result, the cost of health insurance rose at more than three and a half times the rate of inflation in home insurance costs and eleven times faster than inflation in motor insurance.

Tertiary education charges are up 60 percent since 2007. Private-sector dominated secondary and vocational education services meanwhile saw costs rise at roughly one third of the rate of inflation registered in our ITs and universities.

Based on CSO-estimated weights of different goods and services in a standardized consumer basket, inflation in controlled sectors is responsible for confiscating, using Keynes’ terms, just over 10 cents out of every euro spent on consumption of goods and services by an average household in Ireland since the beginning of the crisis. CSO and IMF reported producer prices and international exchange rates and inflation comparatives show that majority of these losses had nothing to do with increased costs of raw materials, intermediate goods and capital used in production. Put simply, they represent a crisis levy designed and imposed by the State and its semi-state companies.


Grim as they are, official inflation statistics, however, tell only a part of the story of wealth destruction imposed onto Irish consumers.

The above costs of inflation are compounded by the declines in Irish households’ disposable incomes due to various tax measures since 2008, combined with decreases in earnings and working hours. All in, Irish households’ today have around 12-15 percent lower disposable incomes than prior to the crisis. Factoring in the effects of unemployment and inflation, in terms of real purchasing power, Irish households are now down some 28 cents on the euro since the beginning of the crisis. Only around 2 cents of this decline is due to private sectors’ inflation with the rest taken up by changes to taxes, regulatory and pricing policies, plus by the monopoly power awarded to state-protected sectors.

Real Ireland - our lower-, middle and upper-middle classes - is paying the full price of the banking, fiscal and economic crises. Meanwhile, the State elites - senior public sector and semi-state officials, managers, politicians, state services executives and affiliated professionals - are ripping the benefits in form of jobs security, pensions and quality of life.


The economics of state confiscation of income through inflation and taxation do not end there, however. The real impact of these measures of financial and fiscal repression can only be dealt with in the context of their distribution across various households and demographics.

Normally, in response to price changes, consumers have an option to alter their demand for goods and services. In the case of ordinary consumption goods, this means that we switch away from more expensive alternatives.  Overtime, adjusting for quality of supply, our demand favors lower cost producers and suppliers, who gain market shares at the expense of more expensive, less-efficient ones. Thus, more elastic or more responsive demand helps not only to offset the painful costs of inflation in the short run, but also engenders innovation and competition in the longer term.

For example, during the current crisis, Irish consumers showed strong willingness to opt for discount stores when it comes to shopping for groceries and basic household items. Per latest reports from the retail sector, this Christmas, Tesco’s share of the Irish groceries markets shrunk by 6.2 percent at the expense of Aldi and Lidl which increased their share of the Irish market by double digits. A by-product of this is that the discounters are now offering increasingly more goods tailored to Irish tastes and are widening the breadth of offers in their stores across various segments of consumers. Another upside is that indigenous Irish competitors, such as SuperValu, are gaining the ground in this competition.

In contrast, consumers have little choice in switching away from the state-controlled or monopolised sectors. In 2013, Water Supply and Miscellaneous Services prices were up 64 percent on 2003 levels. More price hikes will come once Irish Water starts issuing charges under the state license to raise prices unabated for the first six years. All without any alternative of a different supplier being available to consumers.

Indirect effects of inflation are also stronger for consumers of goods and services with habitual or long-term demand. Healthcare and education are multi-annual commitments with little room for changing consumer behaviour in response to prices. Patterns of transport demand, linked to choices of location where one lives, are also less responsive to price changes, offering few options for trading out of the adverse effects of inflation. In all of these sectors, consumers have no choice but to pay for price increases. Demographically, younger households, usually heavily indebted via mortgages and struggling financially are the prime targets of this inflation.

Keynes had more to say about the role inflation pays in destroying households’ wealth and income. “… By this method [of inflation, the Governments] not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth."

In the case of Ireland during the current crisis, all of the above rings true, save for one important correction: Irish state-sanctioned inflation confiscates wealth and income by transferring money from productive private savings, investment, and consumption to shore up inefficient and often wasteful state services and semi-state sectors. There is little that is arbitrary in the context of the Rip-off Ireland ca 2014.





Box-out:

"You cannot corral a company to go to a particular part of the country unless it will make sense for their business ‐‐ particularly when the company's alternative location may be Amsterdam, Barcelona or Munich”. With these words the IDA spokesperson this week explained why agency-supported multinationals have been largely staying out of the regions, while flocking into Dublin. IDA made a perfectly valid point. Manufacturing exports, even stripping out patent cliff-hit pharmaceuticals, are barely expanding. Remote back office services – the bread-and-butter of so-called ‘call centres economy’ – are on decline across the advanced economies. This leaves what economists call human capital-intensive sectors – the ones largely dominated by jobs for highly-educated 22-35 year-olds coming choosing Ireland as their career stop-over. Working for Google, Facebook, Twitter and other internationally networked globally-trading multinationals, these employees do not want to live in the suburbs, let alone move to the countryside. They require cultural, social and economic amenities of large cities. Whether we like it or not, the MNCs of the 21st century inhabit the world where human capital defines productivity growth, profitability and value added. Bricks and mortar attractions of an IDA Park somewhere in the middle of nowhere do not. Time to bin Bertie’s Era Spatial Development Plans and to think how to transition our regional economic development model to a new and more sustainable basis.

Wednesday, June 2, 2010

Economics 02/06/2010: Regional variations in labour markets

While working on a project relating to economic policies in Ireland, I was compiling data on regional variations in various series. Here is a set of interesting graphs detailing the labour force differences across the main regions.

Each data set reflects the latest available QNHS data through Q3 2009 and each is presented in two charts - full history and a snapshot of the crisis dynamics since 2007.

First the unemployment rates
Notice that since time memorial Dublin runs at or below average in terms of unemployment rates. This pattern is no persistently broken, with Dublin unemployment performing remarkably better in this crisis. Also note that the top tier of unemployment black spots in the country also remains relatively resilient over time. This has to put to test any assertion that state policies to deal with longer term unemployment are working.

Take a look at a closer time frame, relating to the current crisis:
You hear a lot about the MNCs and exporting companies holding our line from a total collapse of economy. Well, say the same for Dublin, South-West and Mid-East. Of course, the latter is largely, hmmm, Greater Dublin, really.

The chart above also hints at something more disturbing here. Recall that early rounds of layoffs impacted predominantly construction sector and associated services. Well, look at Midlands and South-East. It does appear that the two regions were experiencing significantly faster rates of jobs losses in the early parts of the crisis than any other region.

One wonders what is the exact distribution of jobs in the country relative to places of residence. This, of course, is a long running question that CSO is refusing to ask on QNHS. What trouble can there be, folks, in asking a recipient to state where they physically work. It would tell us a lot about people's commuting patterns (helping to better plan transport systems) and about where people are actually employed (helping us to better plan associated business services provisions). But no - CSO staunchly refuses to ask. Why? Because the state is most likely unwilling to admit that the National Spatial Strategy and the IDA/EI mandates to produce jobs for regions is failing. Ireland has natural hubs of jobs and jobs creation potential - Greater Dublin area, Cork area, Galway-Limerick area. This is where jobs concentrate and where companies want to be. So how about a challenge to CSO - ask an important question, will you? Have some gumption...

Back to data: labour force participation rates next
What the charts above show is the precipitous decline in labour force participation rates since the peak of H2 2007. And these declines are worrisome, for we normally tend to ascribe the destructive effects of the economic crises to unemployment, forgetting about those who leave the work force altogether. Well - take a look at charts above.

Another disturbing realization on the foot of the above charts is that regions with lowest participation rates also tend to be regions with higher unemployment. This is important because it signals that even in a small country like Ireland, mobility between residential location and work location is still restricted (by distance, lack of proper roads, transport shortages etc). It also suggests that in the long run, areas with higher unemployment tend to become traps for non-participation in labour force. The vicious spiral of being jobless in an area with no jobs creation leads to becoming disillusioned and dropping out of the work force for good.

And this implies higher rates of overall dependency. Remember - these are numbers for able bodied adults. So if we take the rate of unemployed and add to it the rate of those who are not in the labour force, we get a proportion of population that needs someone else to work for them to sustain themselves. Now, a caveat here - of course some of those who are not in labour force are gainfully engaged in work at homes - non-market activities that are productive and include, among other very important ones, like carrying for the elderly or ill, raising children etc. These, however, are not the majority in these numbers. Nor are they likely to be distributed predominantly into higher dependency areas of the country. So conclusions presented below stand:
Predictably, the lowest dependency ratios are in high work regions: Mid-East and Dublin. And although these ratios rose in these two regions through the crisis, they are still well below the national average and leagues below the dependency ratios for the likes of Border and South-East regions. Here's a closer look:
Of course, what these trends mean is that throughout the entire series duration (from 1998) Dublin and Mid-East have acted as a subsidy generating regions for the rest of the country. Someone had to pay for the higher dependency rates in regions that are above country average (since the welfare rates are not varied geographically).

Thursday, April 23, 2009

Daily Economics 23/04/09: That place called Dublin

Irish Wholesale Price Index, March 2009
Available (here) from CSO: "Monthly factory gate prices decreased by 1.0% in March 2009. This compares to a decrease of 1.6% recorded for March 2008. As a result, the annual percentage
change showed an increase of 4.5% in March 2009, compared with an increase of 3.9% in February 2009. In the year there was an increase in the price index for export sales of 5.5% and an increase of 0.9% in respect of the price index for home sales." So we are not gaining any competitive edge on FX devaluations in exports trade, then. And there is no factory-gate deflation at home either.

In the month Office machinery and computers prices fell 2.1%, and Basic chemicals were down -1.1%. Some multinationals are taking a hit. There were increases in Pharmaceuticals and other
chemical products (+13.1%), Other food products (+11.8%), and Basic chemicals (+8.9%). SO some other MNCs are doing ok, although short-run price hikes can come back and bite these manufacturers. Building and Construction All material prices decreased by 2.4% in the
year since March 2008 and by 0.6% in March 2009. Not enough, if you ask me, and this leads to a question concerning the Government plans to achieve expenditure 'savings' on the back of cheaper capital construction costs... Year on year, the price of Capital Goods decreased by 0.6%, while there was a monthly price decrease of 0.3%.

Of course, our heroic boys of CER/ESB/EirGrid-controlled energy sector are turning out more and more price gauging as "Energy products increased by 3.2% in the year since March 2008, while Petroleum fuels decreased by 23.7%. In March 2009, there was a monthly decrease in Energy products of 0.9%, while Petroleum fuels decreased by 3.8%." Well, table below does show this in indisputable terms...
Is it time to fire CER? In my view, long overdue!


UK Budget

Some in Ireland are making 'happy faces' at the UK Budgetary numbers released yesterday. The UK forecasted that the General Government Deficit will reach 12.6% in 2009 - some 1.85% points above the 10.75% GGD built into Irish mini-Budget of April 7. A catch here is that I personally do not believe the Irish figure, having predicted (here) that our GGD will reach 12.5-13.0% this year - right about where the UK is placing its own expectations.

Going on with the misguided cheerleaders, today's Davy note says: "Moreover, gross debt to GDP is set to remain much higher in the UK than in Ireland." Hmmm... that is true only when it comes to direct public debt, excluding such 'trivialities' as financial sector commitments and guarantees (which total $641bn or 280% of our GDP in Ireland and only $375bn or 13.4% of the UK GDP: see here). Oh, yes, of course, some of the moneys on both sides of the Irish Sea is going to count as 'investment' on public balance sheet, but to you, me and the rest of the productive economy there is no difference - we will be paying the price in our taxes, investment or not. And the cheerleaders are forgetting another small point - Ireland's total debt (public and private) is actually much larger than that of the UK (see here, and the chart below - from here).
Now, I know I won't be welcomed by Davy in years to come for pointing this out, but Reality Bites!

Just to be fair, though, Davy also say that "Gross debt is a different matter: recapitalisation funds that need to be borrowed affect this metric. So the projected gross debt ratios will be quite fluid". Yeah, so fluid that we'll need buckets, not shovels to get that NAMA mess under control. UK liability under banks recaps is likely to be ca 10% of their overall guarantees commitments - taking into account the already substantial paydown of funds and the maturity of the downturn over there. So take it to be $37.5bn. Ireland's commitments are going to be around the same percentage share, or $64.1bn, of which only $9.8bn has been paid down so far. In the mean time, Ireland's benchmark yields on Gov bonds are in 420bps territory, UK's - 237bps. Shhhh... don't say it out loud, but it does look like Ireland's advantageous debt position, relative to the UK, is a quagmire. And no, this stuff is not simply 'academic'. Financing our 'low debt' position will cost us €1.83bn in interest expenditures pa. Financing the UK's 'perilous borrowings' will cost them €635mln per annum. Doughhhhh, as Homer would say it, all is grand in the Davy-world of voodoo economics...


Regional subsidies
Yesterday, ESRI published an interesting article: Who is paying for regional balance in Ireland? (available here). It is a worthy quick read if only for one reason - after hearing continuously the whingeing that passes for regional economic policy in this country and the anti-Dublin biases out in the country-side, the article puts few facts straight.

"...real resource transfers per head of population (i.e., the per capita excess of expenditure over revenue), have increased over time. In other words, redistribution across regions has increased over time. These transfers tend to flow from richer to poorer areas – a large negative correlation between the implied transfer of resources and real per capita gross value added. ...Expenditure is positively correlated with real per capita output (Gross Value Added), but tax revenue is even more strongly correlated with real per capita output, implying that the fiscal system operates to transfer resources from richer to poor regions."

Put in real (as opposed to ESRI's) terms, this means that few productive parts of the country are subsidising numerous less productive ones. Is this a good thing? Well, no.
  • First, such subsidies distort returns to personal capital (physical and human) of those who receive them. In other words, people living in the parts of the country that are the 'gateways to excellence' are ripping off their productive compatriots while being deluded into believing their work actually adds value. It does not, at least not in a competitive way.
  • Second, the transfers diminish the productive capacity of those who live where real jobs are located.
  • Third, the subsidies continue to perpetuate the already extensive destruction of the country-side as extensive means of production are being subsidised over intensive economy.
"Overall, Dublin and the South-West region are substantial net contributors. For example, in 2004 both Dublin and the South-West contributed just over €2,000 per person while in the same year the Midlands region received a transfer of just over €3,000 per person." This is nice. As a person living in Dublin, I am apparently sending some €6,000 of my family income to the Midlands. This means that my 1,100sq ft Dublin city household is paying for some folks living in average 2,000 sq ft houses in the middle of nowhere. But should I choose to avail of the landscape and natural amenities that my money is paying for out there, I just might get a shovel-pat on my back from the subsidies-receiving locals. Hmmm...

"In 2004 just over €3 billion were transferred from the ‘net surplus regions’ Dublin, South-West and Mid-West to the other regions. Overall the tax burden (including social contributions) averages at €11,000 per person in 2004 with a high for Dublin of almost €14,000 per person and a low of €8,500 per person in the Midlands." Yes, this does account for those Midlands inhabitants working in Dublin too, so no arguments about 'We work in Dublin, so we are productive too' apply.

"In per capita terms ...Dublin is not favoured when it comes to capital expenditure. Indeed no clear pattern of ‘excess’ per capita capital expenditure can be detected in the data." In other words, we are building capital infrastructure stuff in the middle of nowhere.

But ESRI would not be itself if there was no voodoo of socialist economic dogma in the article somewhere. This comes at the end: "The finding that the system provides a significant degree of regional equity is largely the result of the centralised nature of revenue collection in
conjunction with the aim to provide similar levels of service across the full range of government activities in all regions. In order to achieve a similar level of equity with a less centralised system would require a more sophisticated system of fiscal equalisation payments across regions. Thus, while many have argued that the Irish system is too centralised this centrality turns out to be an asset in terms of achieving regional equity."

Run this by me again, please! 'Equity' apparently happens when younger and more productive workers of Dublin and South-West are paying older and less productive workers in the rest of the country? 'Equity' also means that we must achieve 'fiscal equalisation payments across regions'. This is the same economic illiteracy that argues that Sub-Saharan Africa can achieve growth by taxing the developed world.

One thing that was lacking in this paper, and indeed is lacking in overall research on regional transfers is how much more dependent on subsidies are specific areas. One that comes to mind is the area covered by the patchwork of various Gaelic ethnic enclaves sponsored by the Government. Another one - the patchwork of useless 'gateways' we have created across the country.

Yes, folks, ther eason we are forced to accept gang crime in Limerick and parts of Dublin, roads gridlock in the capital, lack of proper public transport, poor broadband services, horrific quality of landline phone services, overstretched schools and universities infrastructure in Dublin and the rest of the mess we call urban living in the Capital City is because we want 'equity' and 'equality' between those parts of the country that work and those that collect subsidies. Regional policy indeed...