Throwing away all the hard work

Good news is hitting the government like a man in a safari suit getting slapped in the face with a massive halibut. It’s not that big of a deal unless the hapless safari-suited chap is standing at the edge of large body of water into which he can fall.

Well, this government can fall.

So much more tax is coming into the state’s coffers that, for 2015, the gap between government spending and income from different taxes is €2.1 billion compared to around €6.1 billion in 2014. That’s quite the halibut. Our exchequer is run like a GAA club’s accounts, so we tend to just look at money in minus money out as a good measure. It is roughly in balance. We took in €41 billion, and spent €41.1 billion.

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Everyone should pay their fair share

Nobody likes paying taxes. We hate income taxes such as the USC. We loathe consumption taxes like Vat. We truly hate even the idea of a wealth tax.

Everyone feels like someone else should be taxed to pay for the services we are all provided by the state. If you are blessed with a high income and lots of property or financial assets like bonds and shares, you’ll point out, correctly, that people like you - the top 5 per cent - already pay well over 50 per cent of all taxes. You’ll point out, again correctly, that after the next budget, far more than half a million workers will pay almost no income taxes, and surely will receive more in benefits from the state than they contribute in taxes.

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In Janet We Trust?

World economic growth is slowing. The 3.3 per cent world growth projected by the IMF for 2015 is now only a fairy story. It will be closer to 1.5 to 2 per cent when the data comes in during the middle of 2016. Slowing growth has huge consequences for the world. Where is it coming from, and what can anyone do about it?

The eurozone’s economy is faltering, with its core inflation level below 1 per cent, despite quantitative easing and a host of other unconventional monetary stimulus programmes, including a promise by Mario Draghi, the European Central Bank president, to keep interest rates as low as possible for as long as necessary.

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That old chestnut: it’s the economy, stupid

We like to feel that we’re special, that in Ireland things run differently because we aren’t like other countries. We’re a little better at some things. Our welcomes are more welcomey. Our smiles are broader. Our grass is greener. Even our booms are boomier and our busts are, ahem, bustier. The ould sod is a special place.

But it just ain’t so. We are not unique or special, and when it comes to voting patterns, Irish people confirm the old adage that it’s the economy, stupid. The economy is on the up, and voters are responding to this increased economic growth by appearing to prefer the incumbent government who will naturally enough claim they created the conditions for that growth.

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Bet on it -the house will always win

Markets are forward-looking. There are three sides to the ‘markets’ story. There are savers, investors and middlemen, who make their money by connecting savers to investors. Over the last 30 years, the middlemen have exploded in size and ambition.

Writing in the 1990s, economists could credibly buttonhole ‘financial intermediaries’ into simple categories: banks, pension funds, insurance companies and ‘other’, where ‘other’ included hedge funds, venture capitalists and a few other specialised money management services.

Today, any categorisation of the ‘other’ column quickly runs into ‘angels on the head of a pin’ territory. Everything from derivative traders to vulture funds to exotic investments like sovereign debt of defunct countries to shadow banks to algorithmic traders to guys sitting in the basement of their mother’s house in their underpants staring at a screen ‘prop’ trading. It’s all there and it is huge.

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Welcome Students!

Welcome back to UL for the autumn semester! If you're studying EC4004, Economics for Business, the module outline, notes, and assessment details are on the module page here, and mirrored on SULIS if you like using that service.

If you're studying EC6021, Macroeconomic theory, the module page is here. Again, there's a SULIS mirror for this page.

If you're studying Mathematics for Economists, the module page is here.


Storm in a China teacup

I see headlines talking about ‘market turmoil’, that China’s heading for a meltdown and apparently I should care about the Kazakhstani Tenge’s devaluation or something. What’s going on? Like, should I be stocking up on canned goods and shotgun shells?

No. You should calm down. Turmoil is a state of unrest, ambiguity and uncertainty, but it is not the end of the world because a few rich people get worried about the returns on their portfolios. Buy canned goods and shotgun shells another time.

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Differences in Borrowing Behaviour between Core and Peripheral Economies — Economic Environment versus Financial Perceptions

Using the Eurosystem Household Finance and Consumption (HFCS) data, this paper identifies the key differences in borrowing behaviour between core and peripheral nations. As such, we focus on non-collateralized debt such as credit card loans, bank overdrafts and other forms of non-collateralized debt, which reflect daily borrowing behaviour more closely than does mortgage debt. We examine the differences in levels and prevalence of these debts, and break down these differences into two major components: financial perceptions and the economic environment. We aim to explain to what extent these influences contribute to the differences in debt ownership and levels of holding between core and peripheral countries in Europe. We found that differences in financial perceptions do contribute to the differences in debt in a significant way, while the economic environment contributes little to this outcome. Households in the European periphery are much more conducive to debt if they have the same financial perceptions as those in the core countries in Europe.

Download our new working paper here.

Emerging Economies Starting to Wobble

The Chinese economy is weakening. Industrial production is falling. China’s exports fell by 8.9 per cent, year on year in July, compared with a 1 per cent fall in the first half of 2015. Investment in fixed assets is dropping. Household spending is down.

When vast amounts of credit allow economies to expand and use the resources of capital, labour and land in the economy to their fullest extent, this expansion of credit eventually creates its own reversal, as we know well here, and as the Chinese economy may learn in the coming months.
Chinese authorities are saying the equivalent of “it’ll be grand” to the Chinese people, and, perhaps, to themselves. To Irish readers, it should all sound a bit familiar.
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Paper Dragon.

It’s not every day you lose almost ten billion euro. I’d call Thursday a bad day for Argentina’s national debt managers. (Imagine being the person giving that news to the minister for finance. Ouch). Almost one-third of Argentina’s international reserves are held in yuan, China’s currency.

The yuan devalued sharply after the People’s Bank of China, China’s central bank, started setting the yuan’s level relative to the US dollar’s closing level the day before, in effect handing part of the determination of the price of their currency to the private markets. This change has introduced a lot of volatility into the markets.


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So now is the time to ask: do we work for the banks, or make them work for us?

Ireland’s banks. We don’t like them. They’ve cost us a fortune. Given how much they’ve cost us, we want them to function as they used to. We want them to do the simple things, things like taking deposits, creating loans, the bread and butter stuff of funneling credit into the real economy.

We’d like overdrafts and short-term loans for plumbers again. The odd SME loan. Little plastic savings boxes and stickers for kids. We want them to repair their balance sheets and recoup their losses, without causing too many of their customers crippling psychological damage. All that.

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Letter to NY Times

Sir, I read with interest Prof. Hans-Werner Sinn’s assertion (“Why Greece Should Leave theEurozone”, July 24, 2015) that Ireland’s austerity effectively ended in 2010. As an Irish citizen and an economist I can tell you it didn’t. Dr. Sinn says the bubble burst in 2006, it was 2007. Dr. Sinn says no fiscal rescue was available—there was, but it wasn’t enough. Irish debt relative to GDP went from about 35% in 2006 to about 124% in 2013. Dr. Sinn says Irish wages fell drastically. Not so. According to Ireland’s Earnings, Hours and Employment Costs Survey, private sector wages fell by about 4% while public sector wages fell by about 3% over the crissis. Not nothing, but hardly a drop justifying the term ‘drastic’. What actually happened was employers reduced their wage bills by reducing employment and average hours worked per employee. This is important because what is really going on in the Irish economy is a Keynesian adjustment in quantity of labour and not a neoclassical wage-rate adjustment, implying the ‘cure’ for Ireland’s problems was not so much a supply-side set of ‘reforms’ but a (an?) increase in demand, first from the rest of the world thanks to Ireland’s remarkable openness as an economy, and then from a demand response following the end of austerity in 2013--not 2010. The Greek economy is nowhere near as open as the Irish economy, and, as measured by the cyclically adjusted structural balance, has already endured more than double the amount of austerity than Ireland. The Irish story isn’t a price adjustment, it’s a quantity adjustment. Dr. Sinn gets the most important part of his diagnosis wrong. His prescription is likely to kill the Greek patient. I’m not calling him a quack but if it walks like a duck, etc.

Published in the NYT on the 11th of August.