Tuesday, April 28, 2009

Designs for our Future

The waste of public funds is the cause of intense resentment in the post-Tiger era. Examples abound of Government waste and poor value for money (HSE, e-voting, FAS). But in truth there was extreme wastefulness in private spending also and nowhere was this more evident than in domestic property. Not only did we spend extravagant sums on purchasing real estate, we also paid unreal prices for building work, for kitchen appliances and fitting, for all types of domestic luxuries.

The Designs for Life series on RTE is intended to show that architects can make houses better suited to the needs of their owners. Instead, it has unwittingly documented a wasteful era. The last programme was an extreme example which showed a couple spending over a million euro on a house in a rural part of East Clare.

I used to think that all those soul-less, ugly shoeboxes were the product of ignorant developers, short-sighted developers, greedy bankers etc. but I'm beginning to think that, in reality, they are what Irish people want. First-time buyers might have little choice (although I think the market would respond to some degree to their preferences) but when people can afford something more expensive than a bog-standard three-bed semi, they spend it on space and glitz, not on aesthetics and not on the environment (except for phony touches).

Most Irish people don't even understand that good design can make a house a better home i.e. the basic premise of this series. First-time buyers might be forced to accept bad design in the hope of "getting on the property ladder" but look at the McMansions strewn across our beautiful landscape. Not only are these houses eyesores but I now realise that they don't even function rationally for their owners, with dead spaces, inefficient designs, dysfunctional layouts etc.

If the problem was just aesthetic, I might put it down to a difference of taste but there are objective, practical objections which are really design failures. I'm beginning to think most Irish people don't grasp the importance of design i.e. working out what you want a house to do, how you want to live etc. and then seeking solutions based on the site, the budget etc. . They seem to believe that commonsense or tradition will provide the solutions.

In recessionary times, the case for good design is stronger than ever. The couple last night would have been much better served by a well-designed house at half the size (and price!). Nonetheless, there will be very little scope for Irish architecture in the coming years. The tragedy is that, apart from some notable public buildings, the standard of Irish architecture during recent years, which could have been a golden era, is now irredeemable The couple last night were being ripped-off by the builders not the architect but the coming years will see even more false economy as Irish people cut out the architects from the few projects going.

This is not just a problem of domestic architecture. It clearly has a profound impact on how Irish families live their lives. Even those fortunate enough to live in large expensive houses are all to often not living in a space that suits their lifestyles. That has a negative impact on family life.

There are also broad economic implications. Ireland will only emerge from the current crisis when it is again competitive in the world market. The sources of competitiveness for the Celtic Tiger (low wages, demographics) will probably not help us in future. That means being competitive through being efficient and thinking ahead of our competitors, in short: competitiveness will require good design.

Saturday, April 25, 2009

Economists and the Crisis

Today's article in the IT by economist Alan Ahearne offers a defence of the Government's plans for NAMA while opposing his colleagues' proposals on nationalising the banks. The reactions to his article raise broader issues about the role of economists in the present crisis and the nature of economics as an academic discipline.

On nationalisation, there is a developing consensus among academic economists who see nationalisation as a necessary evil which is part of an essential project: putting our banking system back on a sound footing. They would not share the enthusiasm of Sinn Fein and other left-wing commentators for nationalisation per se and they want the banks re-privatised at the earliest practicable moment. Of course, we have already nationalised a bank and it is not clear why this course of action was chosen for Anglo-Irish but not for others.

In my view, banks are the very last sector of the economy which should be nationalised because the opportunities for political interference (i.e. corruption) would be manifold and exceedingly difficult to control.

Nonetheless, I agree with those calling for nationalisation because I see it as the only way to ensure the taxpayer does not overpay for the assets which NAMA will acquire. Ahearne argues that "the taxpayer is protected from unforeseen losses through the Government’s commitment to levy the banks for any losses incurred." That depends on your view of the Government's handling of the ICI debacle. AIB and the Department of Finance like to say that rescue cost the taxpayer nothing. In reality, the 2% insurance levy was a charge on the general consumer, not on the financial institutions who were adept at passing on costs to their customers (with the result that our insurance costs became a serious impediment to our economy).

Ahearne also argues that that taxpayer would see some upside from the option to acquire 25% of ordinary which is attached to the re-capitalisation programme. This would be a very modest return for a huge investment in defunct businesses.

The sharp division of views between Ahearne and his colleagues raises questions about economists are a profession.

Is there a scientific basis on which this crucial issue can be decided? What relevant cases which could be studied? Are there agreed criteria to judge success or failure in this cases? There is much talk of the Swedish model but they did not completely nationalise their banking system. If not, are economists akin to sociologists - a large pool of expertise where experimental evidence is never conclusive because the variables are too complex? This crisis must be an opportunity for he "new economics" which challenge orthodox views. If traditional economics is not capable of offering a coherent response, it will have failed to meet a crucial test.

There is a related problem: where were the economists when we needed them? Why were they apparently silent when the banks lost the run of themselves? There were some honorable exceptions but they were so few and so subsidiary that it can fairly be said that the profession as a whole was culpable of non-feasance if not of malfeasance.

There were egregious examples of economists employed by banks and estate agents who were utterly devoid of objectivity and used the media to advance their employers' agenda under the guise of academic expertise. Beyond those sinners were the bulk of academic economists who may have cautioned against the housing bubble but made no concerted effort to expose the false basis of our credit boom. Alan Ahearne fell into this category and co-wrote a paper which claimed that the house price increases were due to changes in contraception laws but predicted that democgraphics would continue to underpin house price growth.

Journalism and the public service also have questions to answer. Were they sufficiently detached from our political masters? Some journalists have done outstanding work in documenting the crash and Simon Carswell wrote a book exposing the nefarious carry-on in our banks. His article today on NAMA is another example of his ability to see the shape of things to come, at least in the coming weeks.

I think it would be a serious misjudgement to give Peter Bacon a leading role in NAMA. His expertise as an economic consultant is not enough to prevent a serious conflict of interest given his history with Ballymore.

Similar issues arise in a global context and Yves Smith offers some sharp answers which I think also apply here. Her critique of Alan Greenspan and the Fed is riveting.
John Hurley gave the Oireachtas an extrordinary account of his stewardship of the Central Bank but it was left to politicians to criticise him. This goes to the core of our financial crisis yet the economists seem to shy away.

Thursday, April 23, 2009

Public Expenditure 2009

There has been little fanfare for the Government's Estimates of Public Expenditure which were published today. They are called "Revised Estimates" because in a normal year preliminary estimates are published in advance of the Budget showing how the Government intends to spend the money it will raise in the coming year. Revised Estimates are then published in February with refinements showing the final allocations to each Vote.

The revised Estimates published today are really the first opportunity to see what the supplementary Budget means for government spending. The headline figures show an 6% increase in current expenditure from €53.4Bn. to €56.6Bn. with an 19% decrease in capital expenditure, from €9.0Bn. to €7.3Bn..

Sadly, this was the pattern in the 1980s: cuts in current expenditure were resisted fiercely but capital expenditure i.e. investment in the future was slashed to the bone.

Guess what: our children can't vote (yet). For example, capital spending on Sport and Culture is cut by over 50% (so forget that swimming pool or youth centre) but current expenditure in this area is cut by just 6% so all the arts and sports organisers will continue to get paid.

This means the €20.35Bn. that the Exchequer is borrowing this year is largely for current spending. Indeed, can anyone say how much of the €7.3Bn allocated to capital expenditure will provide additional infrastructure future generations can enjoy while they are paying off the enormous debts which they will inherit from this era?

The cuts are anything but even-handed. Indeed, there are large increases are in the area of social welfare: the combined expenditure for Social and Family Affairs and the Social Insurance fund will increase from € 17.7Bn. to € 21.3Bn. - an increase of 20%. I think this can be explained in one word: unemployment.

Despite all the talk of cutbacks, the HSE will get an increase of 1.7% in their gross budget which will total €14.6Bn. . The total spend in the health area remains fairly static at € 16Bn. but the Office of the Minister for Children and Youth Affairs is slashed by 38%.

Table 6 of the Revise Estimates is particularly striking: it classifies current expenditure by function. Out of a total spend of €56.6Bn. , social expenditure (education, health, social welfare and housing) accounts for €46Bn. . Remember when the government was saying they would protect the needy from the cuts? Nonsense.

A much discussed figure is that for public service pay and pensions. According to Table 4, this total will be €17.8Bn.this year. A technical point is that a new item entitled "Receipts from Pension-related Deduction on Public Service Remuneration" is included under Appropriations in Aid for each Vote. This means that the savings on pay are balanced by an "income" which reduces the net total Vote.

Table 5 shows the numbers of staff that underlie that pay bill. Out of 370,000 staff (including pensioners), Health and Education account for 256,000. Add in 48,000 for Gardai and Defence, that leaves about 68,000 spread across some 36 Departments and Offices, most of which have less than 500 staff. Again, the scope for cuts is extremely limited if areas like health, education or security are regarded as sacrosanct.

Monday, April 13, 2009

Fathers and Sons

Deaglan de Breadun is blogging about the politics of fatherhood, reflecting on the Gate's production of All My Sons, the Arthur Miller classic about a family with a dark secret.

It is difficult to write about the "politics of fatherhood" without referring to the many tens of thousands of "biological" fathers in Ireland who play no role in their children's lives.

According to the last census, there wer almost 190,000 lone parent families, of which nearly 86 per cent were headed by females. The number of families headed lone mothers where all of the children were under 15 has increased by an astonishing 57.6% between 2002 and 2006.

It is not clear what percentage of Irish children are being raised without a father but it is certainly a large percentage and growing rapidly.

Does our system penalise those families with a father figure? It provides a cash incentive - however inadequate - to single parent families which would be lost if the parent begins to cohabit. What incentive is there for the father to fulfill his role?

For earlier generations, the father was the breadwinner and the "head of household".
Their sons especially had to come to terms with a father figure who had to reconcile the needs of his family with the pressures of the outside world. This is never easy but it provides a profound life lesson which children will not learn if they have no father figure and their sustenance, however meagre, derives from State provision instead of personal endeavour. Young men, in particular, must learn this lesson if they are to become fathers.

On a related point, how many childen of property developers will grow up with a sense that their father sabotaged this country, as surely as if they had supplied defective parts to an army fighting to defend us? In years to come, someone will adapt "All My Sons" to a post-Celtic Tiger Ireland in which the father's property speculation is the family's dark secret.

Saturday, April 4, 2009

It appears that the "bad bank" plan will be announced alongside the supplementary budget on Tuesday. This is likely to cost the taxpayer far more than the adjustments which will be announced in the Budget yet public attention has not focused on the consequences of a "bad bank"

The key to the"bad bank" plan is the relationship between the price the Government pays and the long-term value of the assets it receives in return. If the Government overpays, the taxpayer will be burdened with the failures which should properly rest with the bank shareholders and management.

If the Irish financial institutions transfer to the State nothing more than the real estate against which bad debts have been secured, the burden on the taxpayer will be enormous because
(a) the Government would pay a price sufficient to avoid nationalisation, but
(b) if we are to develop a sound economy, real estate must never again achieve valuations approaching those of recent years.

In Ireland, real estate lending normally involves personal recourse and the “bad bank” should have subrogated claims against the borrowers. Unfortunately, this will require (a) the political will to pursue speculators and developers and (b) effective means to extract money which, no doubt, they have already put beyond the reach of Irish courts.

Thursday, April 2, 2009

Budget Irony

I don't think anyone has remarked on the irony that we are back with an April budget. It was only in 2001 that we shifted the fiscal year to coincide with the calendar year - one of Charlie McCreevy's reforms. We abandoned most of these budget reforms to get the October budget (when John Bruton finally lost the title of Worst Budget!)

The Department of Finance today published a series of pre-budget documents which answer some of the questions the Opposition have been asking.

There are two tables showing pre-budget estimates of expenditure, one gross and one net. The gross figures include expenditure from the National Training Fund (Training Levy) and from the Social Insurance Fund (PRSI). Expenditure on Central Fund services is not included, regrettably, because this would show debt servicing costs.

There is a document called "Pre-Budget Outlook Aggregate Figures" which gives the broad parameters of the budget.
The deficit is projected at -12.75% of GDP before the supplementary budget. An appendix to that document shows Government expenditure broken down by Department (Vote). There is a marked increase in Social and Family Affairs: almost €4Bn. in current expenditure.

The only other hefty increase on the current side is for Agriculture which get €135M Increases on the capital side include Energy, Comm, NR where there is an extra €52M (interconnector?) and in Education, particularly on capital (school buildings?), Almost everywhere else is being cut, especially on the capital side, where borrowing could be justified as investment but the vested interests are less vocal . Capital expenditure is down 12.6% over last year but current expenditure is up 7.5%

A note for the media says the rest of the information will only be available on Budget Day including the Revised Estimates i.e. the figures for expenditure after the Budget measures

Bad Bank - Bad idea

The idea of a "bad bank" to solve the Irish banking crisis is one of the biggest mistakes the Government has made.

This idea makes some sense where banks have complex assets (CDOs etc.) which the market cannot value at present. The Irish banks have a rather simple problem: they lent absurd sums to developers for real estate which is plummeting in value. The loans are secured on property which is not worth a fraction of the loans and the developers are removing their other assets outside the reach of the banks.

If the "bad bank" were to pay the banks a realistic rate for these bad loans, the banks would be left insolvent. So the State will pay well over the odds for these "assets" but there is a bigger issue. I can think of no better guarantee that the developers will not repay these loans than the transfer of these liabilities to to State agency.

One suggestion: call in the Criminal Assets Bureau for those who default on the loans.

We learn from Simon Carswell in the Irish Times today that Allied Irish Banks and Bank of Ireland have submitted preliminary responses to the Government’s "bad bank" proposals. naturally, both banks "are understood to have accepted" this idea. Well, of course! They'll be popping the champagne corks in Bank Centre when this deal goes through.

The two banks have loans worth almost €35 billion which would be transferred to the "bad bank" and altogether there are some €56 billion in such loans across the six state-guaranteed institutions (ultimately, it's all about that guarantee)

It will all be revealed on maxi-budget Day.

RedC have a peculiar methodology for dealing with "don't knows" which may account for the recent rise in the FF ratings. Those who tell RedC that they don't know who they will vote for (or who refuse to say), RedC will count 50% of them as voting for the party they supported in the last election.

My guess is that the number of "don't knows" has grown substantially in recent weeks (I'm one ). Many FF voters who turned away from the party late last year and early this year are now having second thoughts, particularly about Labour which is identified strongly with public sector workers and seems unwilling to face the need for cuts in public expenditure.

If I'm right, many disaffected FF voters who gave Labour such a boost recently (never vote for a Blueshirt!) are getting cold feet but don't want to reverse themselves so they are now telling RedC that they are "Don't Knows".
RedC is crediting half of them to FF.

In all the commentary on the RedC poll, this point seems to have been completely missed even though it would neatly explain the only salient message in that poll: a 5 point shift back from Labour to FF.

Whether RedC's methodology is valid will be tested in June. My instinct is that this methodology is reasonable where voting patterns are fairly static i.e. assume that party loyalty will re-emerge at an election. Where the nation is facing unprecedented political turmoil, the methodology probably understates the scale of the seismic shifts.

The RedC methodology would address an anti-FF bias i.e. people would actually vote FF but not admit it to pollsters (Sinn Fein had a similar pattern in the North). It was not unreasonable to attribute to FF 50% of the "don't knows" who had voted FF last time out.

Bertie changed that anti-FF factor - his key insight was that FF could never get an overall majority and Haughey had destroyed himself trying to achieve it (now we know why!). RedC were not misleading us in 2002 and 2007 because many "don't knows" went for FF in the final days of the campaign.

All this has changed in recent months. If the current anger is sustained, I think a lot of those who voted FF in 2007 will vote for anyone but FF next time out (i.e. in June). Allocating "don't knows" is a tricky business but it should be done transparently. I would back MRBI over RedC.