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We Couldn't Understand the Peace


More or less randomnly, and thanks to a conversation my wife had with a TD and a Monk, I made a radio documentary with Ian Kenneally and Ronan Kelly.

It's about a period in 1972 when 'refugees' came from Belfast to stay in Glenstal Abbey, a Benedictine Monastery near where I live. The story is fascinating and uncovered a different side of the history of the Troubles for me. It was also a privilege to listen to people's stories, record them, and write and record a script around their experiences for RTE's listeners.

You can learn a bit more about the documentary here.

First Broadcast Saturday 3rd September at 1pm.

Repeated Sunday 4th September at 7pm.

You can listen to it by clicking this link. (.mp3)

Governing is about making decisions. Sometimes those decisions are life and death

Ultimately, governing is choosing the best option for society given many competing alternatives and scarce resources. What is best for society might not be best for individual groups within society, however. When you are about to decide to harm a section of the population by action, or inaction, you need robust evidence. And how robust is that evidence? How do you evaluate an emotional claim?

Cystic fibrosis is a genetic condition that affects sufferers’ lungs and digestive systems. About 70,000 people worldwide have it. Ireland’s 1,200 cystic fibrosis sufferers have lobbied for years for specific treatments from the state, with some notable successes including specialised hospital facilities, and some treatments.

In each case, the taxpayer, via the state, comes to the rescue of a group of citizens whose only fault was to be born. This is correct and right. The price you pay with your taxes is not just social services. It is also civilisation. So my taxes help you, and your taxes help me. Very often we forget this important circularity when discussing individual issues such as public sector pay or universal social charges.

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Evincing the emotion of housing

Home ownership is the most emotive policy issue in the state. Not water charges, not public sector pay, not Travellers’ rights, not reproductive rights, not even the status of Ireland’s so-called military neutrality. Nothing evinces emotion like housing.

The tip of the spear is, of course, homelessness. We are one of the richest countries on planet Earth, and we have thousands of families living in hotel rooms, hostels and on the streets while vulture funds buy properties and jack up rents only to pay no tax on their gains.

We have a generation of young people for whom owning a house is not a dream but a fantasy. We have a banking system still stuffed with non-performing loans nearly nine years after those loans stopped performing.

We have a minority government incapable of action, hamstrung by domestic politics and fiscal and monetary rules.

None of what I’ve written above is wrong. It’s just not very helpful. The words you’ve just read is not analysis so much as emotive language, aimed at identifying a problem and sympathising with sufferers of that problem without trying to fix it. It’s virtue-signalling, which is just whinging, basically, and it’s what much of the commentariat has been doing since the Central Bank introduced its rules on loan to income and loan to value for homeowners in February 2015.

Blamed for doing nothing before the crisis, the Central Bank was blamed for doing something to avoid the next one. Regulators shouldn’t be popular. That’s why they aren’t elected, they are independent, and they get paid lots of money.

I was a fan of the prudential rules when they were introduced because I listened to the entire banking inquiry online. As each banker came in to be roasted (consequence-free, of course), it was clear they hadn’t a clue of the damage they were doing while they handed out the loans to grateful (and greedy) homeowners.

Unfettered access to credit via a loan to value ratio that was much, much too high was the true cause of the housing bubble from 2002 to 2007. It is the Central Bank’s job to safeguard the stability of the entire financial system. It didn’t do that before 2007. We know this because there was a peak-to-trough fall of over 50 per cent in residential property between 2007 and 2012.

A build-up of credit on the household sector’s balance sheet made this sector much less resilient to the 2007 downturn.

Flawless logic of the rules

The logic of the rules on households and banks to restrict the supply of credit is flawless. Requiring those borrowing a mortgage to put up a minimum percentage as a deposit and then capping the amount they can borrow at 3.5 times their own incomes means the borrower is much more resilient to any change in the value of their house.

This is exactly what the rules are there to do, and new research by John Joyce and Fergal McCann shows that newer mortgages given out since 2009 are much more resilient. The probability of these homes defaulting is much, much less than the homes borrowed for in 2005 and 2006 with 100 per cent (and more) mortgages, but this is probably because banks had reverted to their historical role of gatekeepers of credit rather than being dispensing machines for it, a role they had assumed from 2002 to 2007.

Good economics tells us why. The economist Hyman Minsky described a financial cycle where banks, stung badly in a previous crisis, are extremely reticent to lend. Only the best projects get funded. So for example only two senior civil servants married for 20 years with no other debts get a mortgage. These people are safe as houses (pun intended). Then as the economy recovers, more and more loans repay, and so banks make credit more freely available. The process moves from careful extension of credit to euphoria and collapse with remarkable regularity.

It is clear we are at the start of yet another cycle of credit extension, over extension, and property mania. The end is a collapse. The Central Bank is doing its job in guarding against the Minsky cycle, but has bowed to pressure to change its rules.

Rental sector is the problem

The problem is the damaged and poorly regulated rental sector, which is unable to accommodate all these people, stuffed full of accidental landlords who need rents to go up to heal their own damaged balance sheets. Fergal McCann’s research on Irish rents shows that they increase where the population is higher, unemployment rates lower, house prices higher, and rental supply lower. Dublin, in other words. The locus of the problem is the supply of available rental accommodation in Dublin.

The residential property price index for Dublin was almost 9 per cent above the rest of the country in September 2016. Since mid-2013, all residential property prices have been rising, but Dublin has done all the running. Many people think that apartment prices are rising faster than house prices, but this isn’t the case. The recovery in Dublin house prices is the real story since 2013.

The loan to income rule is there to stop banks over-extending themselves across the household sector. It is a crude measure which penalises people who have costs other than buying the house: for example, those who have to commute long distances to and from work. Banks can only lend 3.5 times the value of the house, capping the exposure they previously had to households with relatively low incomes who, once made unemployed, were unable to service any portion of the pre-crisis debts they were allowed to run up.

The loan to income rule isn’t changing. If any rule was to change, this one would make the most sense in my view. It is in the loan to value area that everything went really wrong before 2007. Research by Gerard Kennedy, Eoin O’Brien and Maria Woods showed using the ratio of prices-to-income and the ratio of prices-to-rent that house prices fell below their long-run values during the crisis - meaning they were undervalued - and today they are slightly above these long-run averages, meaning they are slightly overvalued.

The loan to value rule is there to make sure households have an equity buffer. Today, if you are a first-time buyer, you can only borrow 90 per cent of the value of the property up to €220,000 and 8o per cent for the remaining balance. In 2017, you’ll be able to borrow 90 per cent of the entire value. Combined with the mortgage relief and tax credits introduced in Budget 2017, and the fact that banks can make ‘proportionate allowances’, the effective deposit will be reduced from slightly under 20 per cent to 5 per cent.

A concrete example: first-time buyers purchasing a property worth €400,000 need €58,000 today. By January 2017, the same buyer will need a deposit of €40,000, and they can avail of tax rebates of €20,000. The effective deposit has gone from €58,000 to €20,000.

It is very difficult to see how this will not result in price increases, especially where the supply, reasonably, of housing is fixed.

With credit now more easily available, with a much smaller equity buffer, households will also be that bit less resilient to downturns.

It is very interesting to see where the unpopularity of the rules came from. Of course, the populists hated them. Of course, the tabloids hated them. Stories of young families struggling to raise a large deposit while paying rising rents shot through the media. Most interestingly, the strongest critics were the mandarins of the Department of Finance, which lobbied intensively behind the scenes to get the loan to value and loan to income rules relaxed. In its August 16 submission to the Central Bank, the department argued for exactly the changes the Central Bank has brought forward.

Anyone who bought in 2016 might feel like a sucker today, but they shouldn’t. They are much more resilient to any downturn. They owe less, and the Central Bank’s changes mean they can expect to see rises in the price of their property, especially if they are in Dublin. The rental market may see an easing of price increases as first time buyers who now need a far smaller deposit can exit the rent market in favour of ‘getting on the ladder’. Those who are looking today are in a better position, but their expectations have been changed, and they don’t know what risks exactly the Central Bank thinks might be worth changing the rules again.

Say we see a huge spike in house price increases in Dublin as first-time buyers run out in January and bid up the price of every three-bed semi inside the M50. Will the Central Bank act? How and when, and in what measure? People don’t know. The Central Bank is stuffed with smart people whose job it is to keep tabs on price movements, but how it communicates its future policy moves matters a lot when people are considering what will likely be the largest purchase of their lives.

The role of the Central Bank is to dispassionately and independently analyse and regulate an important and highly emotive asset class. It has tweaked the rules once. The question is now: when will the rules change again? Will Minsky be proven right, once again?

Invested: 2017 An economic odyssey

We still live in the shadow of the global financial crisis of 2008. Investors need to be clear about this in order to prosper.

Countries that have failed to recover their previous dynamism have not grown. Economic growth allows the redistribution of more of the fruits of growth to those closer to the bottom of the income distribution. The government taxes those who have done well and transfers it down the income distribution in the form of health, education and social protection expenditure.

Without that redistribution, living standards stagnate and resentment builds. Populists exploit this resentment by lying through their teeth about their ability to deliver more growth and less inequality.

In the past, the ‘elites’ could be relied upon to fatten their own purses first and redistribute second. Without redistribution, typically via the tax system, the people see the purse-fattening much more clearly.

Which brings me back to the global financial crisis. People aren’t stupid. Before the crisis, they see those above them in the pecking order doing very well indeed. Then they see those above them make the most appalling mistakes as the crisis unfolds. And then, once the crisis has happened, they see . . . nothing. Nothing happens. Those above them keep their jobs, their living standards stay high, either because they receive golden parachutes, or they just stay where they are. In a paroxysm of bluster, denial and moral hazard, the system just keeps going.

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Will robots eat your job? @ryanavent's snapshot of a global economy in flux

Review of 'The Wealth of Humans', By Ryan Avent, Penguin, €19

Will robots eat your job? Will your kids have higher standards of living than you, in an age where there are too many workers and too much savings, when technological change makes the jobs many people do obsolete? When their citizens see their jobs disappearing due to international competition or technological change, how will politicians react? Will we see an increase in globalisation or a series of Brexits to re-nationalise the global economy?

Ryan Avent’s new book The Wealth of Humans takes us through the arguments around the digital revolution, the development of the world economy and the very notion of work and wealth in a new post-scarcity age.

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The government doesn’t have the cash, so why are we talking pay

The government is trying to hold the line on public sector pay. It is currently politically convenient for Fianna Fáil to support the government on opposing full restoration of public sector pay in a shorter timeframe than the terms of the Lansdowne and Haddington Road agreements allow. This political convenience may change, of course.

Behind the scenes, and out of the glare of the media, things are lining up for a series of talks between the government and some unions.

The government doesn’t have the cash to meet union demands. To restore public sector pay to pre-bust levels would eat the entirety of 2017’s - and a bit of 2018’s - fiscal space. The fiscal space is a forecast. You figure out the likely fiscal space by extrapolating annual government revenue and expenditure figures into the future and checking what’s left over for additional tax cuts and spending increases.

Forecasts are reliant on the assumptions they make. Many of the assumptions underpinning Budget 2017 are already looking ropey. For example, it assumes an exchange rate between the euro and sterling of 0.85. That’s now drifting towards 0.90. In the event of a hard Brexit, that goes higher, not lower, making the forecasts more and more incorrect.

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When losers from globalisation outnumber the winners, expect changes

We live in a world characterised by the wholesale rejection of elites. Exercising the power given them as citizens, voters are striking back at the systems which they see as rewarding insiders and punishing outsiders.

The median is the object in the exact middle of a distribution. For example, in the list of numbers from 1 to 9, the median is 5. The median is a better measure than the average for our purposes.

The median-income household across the developed world is not without resources, nor is it without education. The median household is increasingly without opportunity, or even the hope of opportunity for its children. The median household sees crumbling infrastructure, outsourced jobs, stagnant wages, and the evaporation of what used to be called the middle class.

The median household understands just how damaged its prospects have been by 40 years of policies aimed at increasing the openness of trade, creating winners at both ends of the income distribution in every country that tries it, and losers in the middle.

Let’s define globalisation as that moment in time when the rate of increase of trade is greater than the rate of increase of economic output per person. Imagine there are only two countries, called ‘home’ and ‘foreign’. Increasing trade makes the people who own the production facilities that make the things being traded much better off – they are the winners – but it also allows them to outsource their operations to cheaper countries, making workers in the ‘home’ country poorer and the workers in the ‘foreign’ country richer. The ‘home’ country workers are the losers, the ‘foreign’ country workers are the winners.

When the uncompensated losers from globalisation outnumber the winners, and those people have a vote, expect to see some changes made. The ‘losers from globalisation’ debate is far from settled but as Harvard’s Dani Rodrik and Oxford’s Kevin O’Rourke have repeatedly shown, the losers from globalisation have never been properly compensated. If it is true that the losers are almost never compensated, it is also true that these losses are somehow compounding. My losses become my children’s losses.

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Profile Mark Carney: The Guv’nor


Age: 51

Appearance: urbane, besuited and calm

Newsworthiness: the British media turns on the only steady hand in the post-Brexit confusion

Oh, the irony. After the Brexit result of June 23, as the leadership of both the Conservative and Labour parties imploded, the person who stepped up to save the system was a Canadian. An immigrant! Taking a British job! In fact, the first immigrant to hold the governorship of the Bank of England in its 322-year history. As the system flailed and sterling’s value collapsed, Mark Carney calmly allocated £250 billion to steady the markets, and promised more should it be required.

In a series of speeches over the next ten days, Carney laid out the fundamental issues with respect to Brexit — uncertainty, economic damage, the loss of Britain’s position as a global power — and provided leadership when none was forthcoming from a political class which, to its eternal shame, did not do its job. He said: “At times of great uncertainty, households, businesses and investors ask basic economic questions. Will inflation remain under control? Will the financial system do its job? Will I keep mine?”

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The fatal flaw of the populist approach

The world is awash with populists. From Ireland’s independents to President Duterte of the Philippines, from Germany’s anti-immigrant AfD party to Norbert Hofer of the far-right Freedom Party of Austria, from Ukip and Jeremy Corbyn in Britain to Donald Trump in the US, populists are on the rise. And we’re not talking just a few random demagogues here, though personality does go a long way. (Trump-related Pulp Fiction pun intended, by the way.)

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Anti-Social Partnership: Ireland's fractious industrial relationship

We have entered the most fractious period in industrial relations in decades. In the private sector, as unemployment falls to more reasonable levels, and sales of all kinds of goods and services pick up, employees are having conversations about pay increases again, fuelled by the rising cost of living, particularly for younger workers who are renting and saving for a deposit for a home, or raising children, or both.

These conversations about wage increases are happening mostly at the individual level, because union density in the private sector is at a historic low. Nonetheless, employers should grant many of these wage increases if the profitability of their business allows it.

Unlike many economists, I don’t see wage growth as a bad thing or something that erodes ‘competitiveness’. I see wage growth as contributing first to increased living standards and increased demand for goods and services — most people will be increasing their consumption; and second, to helping pay down debt. A nice little bump in inflation would be good for highly indebted households as a by-product.

In the public sector, the situation is quite different. The employer’s ‘profitability’ is not assured, as the government has yet to balance its books, let alone generate a surplus of revenue (your taxes) over expenditure (on hospitals, the police force, universities, pensions, etc). It is not clear the state can afford increases in public sector pay when services and capital expenditure are so desperately needed in housing, health and education.

I say all of this as a public sector worker with three children. The state’s finances are too exposed to any kind of macroeconomic shock, either related to Brexit, in Europe, or further afield, to allow any increase in government expenditure beyond the minimal increases required by the minority government to keep the show on the road.

Importantly, the services the state as an employer provides have been damaged by years of austerity. Faced with a choice of (a) more doctors or (b) more money for existing doctors, most people who are not doctors would choose option (a). That is what Minister for Public Expenditure and Reform Paschal Donohoe chose in Budget 2017 as well, increasing funding for teachers, gardaí and other public sector workers.

Public sector pay was reduced as an emergency measure to help stabilise the public finances. Other terms and conditions like the increment structure, security of tenure and very generous pension entitlements were not changed for those already in the system.

The pay bill was managed through wage repression and reductions in the size of the workforce from around 330,000 in 2008 to around 300,000 today. It is not an exaggeration to say public sector workers helped secure the country’s stability at a crucial moment in its history.


The pieces of legislation enacted to reduce public sector pay and increase productivity are called the Financial Emergency Measures in the Public Interest Acts (Fempi).

I suspect many of the commentators having a go at Donohoe and his advisers haven’t actually read the Fempi legislation. The Acts are pieces of emergency legislation. The emergency is not supposed to last forever. Each piece of legislation requires the minister of the day to review it each year and provide a written explanation for why it has to continue for another year to the Dáil. Donohoe did so this year.

Each cut in public sector pay, and each increase in workload as a result of productivity measures, has happened with the explicit consent of public sector unions. They obviously weren’t happy about it, but they and their members agreed to be bound by the terms of a series of agreements on pay and conditions.


Agreements between public sector unions and the government helped smooth this transition for the public sector pay bill, and the measures were as progressive as possible, given the obvious over all regressive nature of the pay cuts. The Haddington Road Agreement, for example, provided for salary reductions for public servants earning more than €65,000, and for pauses or freezes in the payment of increments for all public servants. Similarly the Lansdowne Road Agreement allowed for pay increases for those earning under €65,000 (and for all teachers) and reductions in the Pension-Related Deduction for all public servants. The new Public Sector Pay Commission is charged with advising the government on how to unwind Fempi entirely without breaking the bank. The fiscal space this year was about €1.3 billion in the end. To increase public sector pay to 2008 levels for everyone would cost about that much again.

Simply put, the bill for restoration is too large for one year, so the question facing the Public Sector Pay Commission, set up to advise the minister, is what the time path to pay restoration would look like, hopefully melded with a reform programme and a path for future pay increases as well.

It’s important to note that right now, we aren’t talking about pay increases. We are talking about pay restoration. Fempi states explicitly that every public sector worker is entitled to pay restoration once the emergency has passed, which it has. The only question really is: when will these restorations come, and what conditions will be attached to their restoration?

Unions have moved sequentially in recent weeks to increase pressure on the minority government to accelerate the restoration. As I argued a few weeks ago in this column, semi-state workers in Dublin Bus, through their unions, will get to pass their pay increases directly onto their customers, as will private sector workers in Luas.

Gardaí and primary and secondary teachers and university lecturers are another matter.

Their pay restoration, by definition, comes at the expense of service expansion somewhere else.

We need to explicitly acknowledge this simple fact: the pot of money is finite, and the national budget still in deficit, if only just. In the situation we find ourselves in, in 2016, increasing the public sector pay bill by restoring pay taken away by Fempi means either increasing public debt, increasing taxes, or decreasing services.

Michael Noonan indicated during his budget speech that the only direction public debt is going is down. Taxes are not going up. The only people to get whacked with higher taxes in Budget 2017 were the smokers.

Those who enjoy sugar and particularly sugary drinks are up next. Everyone else’s taxes either stayed the same or fell.

Services will take the hit, but it’s more accurate to say increases in services will take the hit.

It’s easy to caricature the outcome as ‘fewer extra doctors in favour of more money for existing doctors’, but in reality we’ll see less of a planned increase in service provision to pay for public sector wages.

This is important: the public won’t see what’s lost, because the service increase was never there to begin with. The would-be service user will never know what they’ve been deprived of.

Economic activity means there will be a bit more in the kitty next year, but we can’t really expect over a billion of an increase in one category of spending when the entire allocated fiscal space for current spending for 2018 is only €790 million.

I would like the public sector unions currently throwing shapes in the media to be asked, repeatedly, what services would they like to see reduced (or not increased) to fund their pay restoration. None of them have thought about this, or if they have, the argument is that the money will be found from somewhere, which is not an argument but an article of faith.

The only people who have to think about this exact question are the well-paid mandarins of Merrion Street and their boss Paschal Donohoe. In fairness, those arguing to break an agreement early that they signed up to will have to do the running on what service increases they feel should be lost to fund it.

This strikes at the heart of why we have entered the most fractious period in industrial relations in decades: the coalition government of Fine Gael, the Independent Alliance, Katherine Zappone and Fianna Fáil (let’s have no talk that they aren’t in government) does not want to annoy anyone.

If the government allows one set of public sector workers to benefit at the cost of others, then that is unjust. But to fund increases in teachers’, doctors’ and lecturers’ pay when we have a homeless crisis is a worse injustice.


Budget 2017: What's in it for us?

Budgets are all about context. They can’t be understood without a sense of the political situation the government of the day finds itself in, or without a good sense of the state of the international economy. Be assured the government has a good sense of both, if not a sure sense of how to deal with either.

Ministers are far from the disconnected, remote beings bombing around in the back of Mercs they are often caricatured as. It’s closer to the truth to say being a minister makes you hyper-connected. They hear many, many things. Everyone wants a word with them. Everyone has a request or three. Officials fill their heads with analysis of all kinds, and of course, they all read the papers to find out what people are saying about them.

The political situation means the government must solve a constrained optimisation problem, where the constraints are the availability of funds from taxation, the fiscal rules, the needs of three coalition parties, and the expectations of the public. The optimum those crafting the budget needed to reach is the stability required to rule, rather than the maximum welfare of citizens.

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Budget 2017: Will Noonan raid the sweet shop at last?

It’s not a fiscal space - it’s a sweetie space

Sweeties for all. The good times have returned, total domestic demand is forecast to grow by 3.5 per cent in 2017, and everyone seems to have forgotten that the country needs to to borrow to keep the lights on, that only three or four years ago we were in a troika bailout programme, and that the structure of our society has changed markedly since the early 2000s, when sweetie-giving became the order of the fiscal day.

Ireland is almost unique in the developed world in the way it does its fiscal planning. The process is: figure out roughly how much tax you’ll have by budget day, listen to lobbyists, float possible policies suggested by lobbyists through the media, and then do a big announcement in the Dáil, but only after handing the entire budget over to the media, thus making the Oireachtas completely redundant, except as an audience for your big speech and a rubberstamp to the Finance Bill a month or so later. No scrutiny beforehand is allowed.

This process is completely bonkers. It results in policy madness like decentralisation in the 2000s and the abolition of water rates in the late 1970s, and it has to be thrown in the deepest part of the sea, preferably after being set on fire for quite some time beforehand. It is the core of the process which has bankrupted our state three times since independence. It has got to go.

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A witty history of crisis in the Square Mile

Catastrophes need causality. We even call earthquakes acts of God. There’s something about us that needs to find the whys and the hows of the bad things that happen to us. This is common sense, as we’d like to avoid another catastrophe, if we can.

When it comes to financial catastrophes, it turns out we can’t avoid them, and we can’t quite figure out what causes them. Crash Bang Wallop is the latest in a series of books looking at the recent financial crisis through the lens of history. In this case, the subject under review is the history of the Square Mile of the City of London.

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Guess who’s paying for the pay increase?

Dublin Bus workers have secured a 36 per cent increase in the amount recommended by the Labour Court. The lesson? Striking works — if your job matters.

We have semi-state workers, already the third highest paid bus drivers in the EU, both before and after tax, getting an 11.25 per cent increase over three years. This is far in excess of private sector wage claims, and will result in increasing wage demands in the near future by both public and private sector employees.

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Households can give Dublin Bus no more

Tom Waits is always right. The large print giveth, and the small print taketh away. Let’s look at the small print of the Dublin Bus pay dispute by going through the company’s annual accounts from 2008 to 2015.

(You can learn a lot from annual accounts, including how they are presented. Every year since 2008, Dublin Bus has really, really wanted you to know that some of their bus drivers are women, for example. There are pictures of female bus drivers everywhere. But I digress.)

First, the large print: Dublin Bus workers are striking in search of higher wage increases than the 8.25 per cent offered to them over several years by Dublin Bus in previous pay talks. They want 15 per cent to 21 per cent wage increases over several years. The strikes are expected to replicate the recent Luas driver disputes, in that they seek maximum disruption for maximum negotiating leverage. This behaviour pisses off customers, of course, but that is the nature of strike actions everywhere, all the time.

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