Chapter 1: Historical Context

Why Study History?

Fascinates

Debunks

Perspective

Testing Theory

Misuses 1690-1815: Early Industrialisation and Wealth

2m in 1690, 8m by 1841.

Dublin population 60K to 200K.

Wealthy landlords in huge stately manors

Trinity central part of class structure

Penal laws, suppression of Catholics

Restrictive legislation, absentee landlords, Jonathan Swift

European wide class structure 1815 to 1860: Rural Disaster

Decline and then Famine in 1840s

2.5 million died in 1840s and 1850s: millions emigrated

Huge impact on Irish psyche

Emigrant ships: many perished on them

Average incomes just 40% of GB level

Causes: economic factors, plus political

Inequality; based on class and religion

1860 to 1921: Falling Population but Rising Incomes

8.2M in 1841 to 6.6M in 1851 to 4.2M (2.9M in Republic) in 1926

60% of GB income level by 1913

Industrialisation of North East. Why? Belfast shipyards

Unrest; end of landlords; rise of strong rural middle class

Arrival of railroads: globalisation

Tillage to livestock; internal migration; Arthur Griffith

From Independence to 1973

1920s: Civil War. No protection

introduced. Why?

1930s: Protection, Economic War and Self-Sufficiency. Why? 1929 Crash, FF to power, Annuities issue, infant industry argument.

1940s: War and post-War boom

1950s: Initial Hope to Despair.

Population; emigration; living standards

1960 to 1973. T.K. Whitaker,

Outperformed UK but not EU

Signing of EU accession Treaty

1974 to 1994: Mini Boom, Abject Failure

and Recovery

1974 to 1975: oil crisis and recession

1976 to 1979: boom again

1980 to 1987: sustained failure

Public finances out of control: mood of utter despair

UE = 18%, Debt/GDP = 125%; corruption, political instability

1987 to 1994

Problems in world economy

Major social change

Why? 1994 to 2007: ‘Celtic Tiger’ Years, Astonishing Growth

3.53M in 1991 to 4.4M in 2007.

Euro in 2001

Physical landscape utterly altered

Immigration

Radical social change

Incomes 115% British levels But… 2008 to 2012

Celtic ‘cat’ in need of rescue!

Collapse of housing sector

Collapse of banking sector

NAMA and bank bailouts costing

Drop of around 15% in GDP

Unemployment up to 14.5% in 2011.

Return of large net emigration

Collapse of tax revenue; fiscal deficit

Social Partnership in abeyance

Euro crisis

Bailout 2010: IMF/EU/ECB troika

Back to 2004 or 2003 levels: NOT 1994 though

Where next?

Hit bottom in 2012; recovery mid 2013, 2014 and also 2015

Depends on: international economy;

public finances; competitiveness;

No simple solutions. What an interesting economy to study! Postscript 1: Exchange Rate Policy in Past

1828 to 1922: monetary union UK

1922 to 1979: effective monetary union with UK

1979 to 1992: ‘torn’ between DM and £ and exchange rate chaos

1993 to 1998; tracking DM, UK ‘gone’

1999: single currency

2002: € notes and coins

Growth and Stability Pact (see later)

2010-2012: euro crisis (N.B. See pp. 66-68)

Postscript 2: Single Currency Advantages

lower transactions costs

transparency of prices

certainty

stimulus to trans-european mergers

‘stepping stone’ to federal Europe

Stability, especially for small economy Disadvantages

loss of ‘sovereignty’

Inflexible labour markets.

Contagion effects

Where next? (pp. 66-68)

Stress tests for euro zone banks

Banking Union

Ukrainian crisis

Grexit crisis

Implications of Brexit

Balance of power in EU shifting more to East (e.g. Poland)

Chapter 2 : POLICY OBJECTIVES (D. McAleese)

1 Introduction From ‘large’ economy to SOE, to small region of EU

UK v Yorkshire, Germany v Bavaria Implicit Assumptions (not in book)

1. Maximise Ws 2. Ws = F (Wi), where i = 1 to N 3. Wi = F (A, B, C, D) 4. Person i best judge of Wi

Role of Markets (not in book)

PPF and Pareto Efficiency (Fig 2.1)

Market and efficiency: Adam Smith’s ‘invisible hand’.

Market and choice/freedom Hayek and economic freedom

Criticisms of Market

Ignores distribution (Chapter 8)

Efficiency failures (Chapters 3 and 5) Assumptions True? (not in book)

Does government want to maximize Ws? (Ch 3)

Who to include in Ws (see Ch 2)?

Market only looks at A, not B, C and D (see later)

Is i best judge of Wi? (see also pp 117-119) - Children; mentally handicapped? - Sale of some goods restricted - Full information, about A and

consequences for B, C and D? - How are preferences formed?

Advertising, peer pressure, etc

2 and 3: Growth in Material Living Standards Definition/Measurement

Growth and the PPF

Output per head or total output? (see Table 2.1)

Output = A = GDP

Problems with measuring GDP (apart from does not include B, C and D) (see later)

Growth and Employment

Q = (Q/E) x (E): implication, growth required for E

Efficiency loss if UE

Individual: loss of income AND social standing

Growth and Human Welfare (see Section 3)

Is A a good proxy for Ui? What about B, C and D?

Leisure

Public goods: clean environment

Non-material well-being

GDP/head not a good measure of A: some inputs counted as outputs in GDP

Growth though facilitates social change and brings influence

Yr 1 Yr 5 Yr 5 Yr 5 --------------------------------------------------------- A 100 90 120 110 B 20 30 40 30 20

120 120 160 160

Growth and Human Development Indicators

Conclusions

Demanded therefore desirable

No impact on well-being, ex post 4 Equity (leaving to Chapter 8)

Equity of what?

Ui = f (A, B, C, D): distribution of Ui and not just A.

Opportunity or income? Is former possible?

Equality of income or minimum income for all?

Happiness: depends not just on income, but other factors, plus income distribution AND stability/security.

Price stability just subset of overall stability

5: Stability: Prices What is it?

Overall price level

Differences in euro zone possible

What included in CPI?

Neglect of asset price inflation What is wrong with rising consumer prices, namely inflation?

Economic and political stability: Germany 1930s

‘menu’ costs

Uncertainty and lack of investment

Distributional considerations

Much easier to prevent than cure

Asset price bubbles can cause financial and economic collapse

What causes prices to rise?

Closed v SOE v regional economy

Import/export prices determined in euro zone

Also interest rates and labour costs

In long run inflation in Ireland same as euro zone

Wage setting must recognize this reality

Cost control and competitiveness then central to a regional economy

How to control asset price rises? 6: Competitiveness

Keeping Ahead

Narrow sense: prices out of line

Altering exchange rate or reducing demand irrelevant for this now.

Reducing exchange rate not attacking root cause: but politically easier

Broad sense of competiveness. Ireland Inc.

Selling the ‘right’ products? Quality of these products? Price? Reliability of supply?

Marketing/promotion?

Work force? Infrastructure and cost of other public services?, etc

German manufacturing

High up ‘value chain’

National competitiveness Council

Rationale for whole book

Chapter 3 : ROLE OF GOVERNMENT: RATIONALE, LEVELS AND SIZE (P. Lane)

2 Rationale or Functions

Rule setter and referee: football analogy

Infrastructure

Establishing market: competition and information (Ch 5)

Efficiency: public goods

Externalities

Distribution 3 Levels (G20, WTO) of Government Global: Why?

Rules of ‘engagement’ for trade

Rules of engagement for international banking and investment

Safety/health standards: infections, viruses, airlines, food

Externalities: climate change

Migration, economic and political

Security and defence

Inequality: otherwise instability, migration

Tax competition

Who polices oceans and space?

No world government though to enforce and regulate.

Only peer pressure

Except at EU level

European Union: A Case Study of Supranational Co-operation

Only advanced, international intergovernmental structure in place

Majority voting on many issues but veto still in many areas

High level of peer pressure also

Ever closer economic and political integration

Signing of Treaty of Rome 1957

Four Freedoms: goods, services, investment and people

Huge progress on economic front

Democratic ‘deficit’ issues

Taxation

Euro huge step forward in economic co-operation

Independent CB critical

Policy though for all of euro zone

Need budget surveillance

Integration of banking system but not its governance, until now

Contagion in banking sector; linking of financial and sovereign debt

Devolution also, e.g. Scotland, Catalonia, local government in Ireland

4 Public Expenditure Consumption (e.g. education, health) (Chs 12 and 13)

Legal system and police/army

Education: socialization, equality, failure capital markets

Health: externalities (e.g. infectious diseases or costs to others), equity, informational failures

Transfers (e.g. pensions, sickness and unemployment benefits) (Chs 6 and 8)

Distributional effects and security

Disincentives and fraud

Producer subsidies Investment (e.g. roads, energy, internet broadband, etc) (Ch 10)

Essential to growth

Input to production and consumption (e.g. roads, internet)

Network externalities

PPP

Effective cost-benefit analysis needed

Many benefits/costs impossible to value

Financing

Taxation and borrowing (Ch 4) 5 Other Policy Instruments State-owned enterprises

Historical and pragmatic role

Shift in last 25 years

Issue price at privatization and union support, e.g. Eircom

Private monopoly replaces public monopoly?

Recent developments: banks

Initial gain but lose asset

Regulation and Competition Policy

Covered in Ch 5 Social Partnership

Definition: Germany/Sweden v UK/US

Started in 1980s

National ‘picture’ taken into account

Need sweetners to make it work

Role of interest groups outside unions

Party to excesses of ‘tiger’ years

Distorts working of labour market?

Accepts existing distribution of wages.

Benchmarking mania and power of public sector unions

State Financial Policies (NAMA, NTMA)

National Pension Reserve Fund

Mostly used already

NAMA: ‘hidden’ means of state intervention

NTMA: manages public debt

6 Size of Government: Economic and Political Factors

Trends and International Comparisons

Measure = PSE/GDP

Transfers? All levels of Government?

Change over time: 19% in 1920s, 30% in 1950s, 40% in 1960s, 45% in mid 1970s, 55% in mid 1980s

30-35% 2000s, to 45% today (Table 3.2)

Composition (Table 3.2)

Compared to other countries.

What Causes PSE/GDP to vary? ‘Legitimate’

Changes in PSE AND changes in GDP

Wagner’s ‘law’

Baumol’s ‘disease’

Demography

‘Political’

Down’s ‘paradox’: pressure groups

Civil servants and bureaucracy

Electoral cycle

Checks: free press, Dept. Finance, C&AG

Public debt and interest payments

Other checks: Fiscal Council, and Troika

In future, more EU surveillance. 7 Conclusion

Is there an optimal size of Government?

Government a major ‘player’

Government and competitiveness

Changed attitudes to State

Huge global interdependency

State expenditure important, but also Taxation (Ch 4) and State Regulation (Ch 5)

Chapter 4: TAXATION AND NATIONAL DEBT

1 Introduction Why taxes?

To finance PSE the main reason, but unintentional effects on behaviour

To influence behaviour (e.g. tax on plastic bags or on tobacco)

2 Principles of a Good Tax System Efficiency

Minimise disincentive effects

Income v substitution effect

Wedge between producer and consumer price

Savings

Labour supply/demand: see later.

Elasticities and deadweight effects

Intentional incentive effects, corrective taxes (tobacco, alcohol, etc) Equity

Ability to pay principle (DMU)

horizontal v vertical equity

ex ante v ex post equity.

Equity v efficiency, e.g. taxation of food, female labour supply

Transitional equity (e.g. stamp duty)

Simplicity

Administration and compliance costs: latter lead to evasion

3 Irish Taxation System Concepts/Issues

Direct v Indirect taxes (e.g. income tax v alcohol tax)

Marginal v average rates (e.g. income tax)

Tax base v tax rates (e.g. income tax or VAT)

Tax expenditures

Tax Incidence

Avoidance v Evasion

Tax amnesties

Historical and International Comparisons

Tables 4.1 and 4.2

Table 4.3: income tax (34%), PRSI (19%), VAT (22%), Excises (10%), Companies (9%), Other (6%)

Operation of Personal Income Taxes (Table 4.4)

Gross income v taxable income

Deduct credits, some expenses (e.g. payments on health), and exemptions (e.g. U2 royalties)

Low and high rates, 20% and 41%

Tax bands

Must also add PRSI and USC: can bring marginal rate to 52% or higher

Average rate v marginal rate

Other Taxes

Consumption taxes

Different VAT rates plus exemptions.

Special or excise taxes apply to tobacco, petrol and alcohol.

Environmental taxes apply to carbon products, plastic bags, etc

Corporation taxes: rate of only 12.5%

Capital taxes: CGT and CAT

Property taxes: stamp duties, business rates, homes

DIRT, BIK, VRT, plastic bag levy, land windfall tax, development levy

4 Evaluation: Taxes on Income Effective tax rates and progressivity (Table 4.4) Tax base

Different for income tax, PRSI and USC

Narrowness of income tax base

Different rates depending on income source

Tax wedge and employment

Hypothetical example

Table 4.5

L demand effects

L supply effects: work less; exit employment, through emigration, black economy or no work.

Reliefs and exemptions

Tax reliefs or tax expenditures

Provide incentives

Favour well off

Dubious benefits: e.g. holiday homes

Simplicity

System progressive but undermined by exemptions

Complex especially for small business and some individuals

5 Evaluation: Other Taxes VAT

Heavy reliance

Narrow base

Inequity: Fig 4.1

Efficiency Excise taxes

Externalities

Revenue

Simplicity

‘Voluntary’

Severe distributional effects: horizontal and vertical (Table 4.1)

Corporation Taxes

Tax competition issue and mobility of capital

Nominal v actual rates: France v Ireland!

Transfer pricing issue

Common tax base in EU?

Race to bottom?

Incidence: shareholders, workers or

consumers? Property Taxes

Less disincentive effects

Base

Revenue stability

Political backlash and enforceability issues

6 Deferred Taxation: Public Debt Buy today pay tomorrow!

Future income flow from capital

Not so for current expenditure Trends

Dramatic improvement: from 105% 1987 to 30% of GDP in 2007

But, mainly due to growth of GDP

Huge rise since 2009: 125% peak

Also in US, UK and most of EU

Stability and Growth Pact

Fiscal policy critical in EMU but largely ignored till now

Contagion danger

External discipline: can blame someone else for strict budget!

‘Golden Rule’: only borrow for capital, but capital v current issue

3% and 60% rules: Fiscal stability treaty

German constitutional check on deficits: others to follow?

Banking union, fiscal union, euro bonds, etc

Back to Monet and work that should have been done at formation of euro

7 Conclusion

Tax increases again

EU dimension: corporate tax and VAT/excise, financial transaction tax.

Also taxing mobile high-worth people

Impact on employment the key

Taxation not new!

Chapter 5: Regulation and Competition Policy

1 Introduction Context (not in book)

Ireland is a small open economy (SOE)

Small? Geographic and economic senses

Open? Trade and product market linkages

Factor linkages Technology linkages Cultural linkages

Definition of traded (T) and non-traded (NT) sectors

Traded: R and M subsectors

‘Modern’ and traditional M subsectors

SOE needs imports to survive, implies needs Xs to pay for these.

Hit your export target

However....

Over 60 per cent of employment in services

What is a service?

Telecommunications: consumer and producer can ‘meet’ without travel.

Also restrictions to such competition being removed

NT means less chance of competition.

Small size of market and danger of collusion.

Need competition and regulatory authorities

Need EU/global competition enforcement and regulation for traded sector (e.g. banking, trade)

Scope of Chapter

Regulation permeates all walks of life and hard to limit definition (see book)

Arises in most other chapters

Labour markets (Ch. 6), e.g. hiring and firing law

Safety (Chs 11 and 12)

Distribution issues (e.g. minimum wage, rights of way, Chs 8, 12 and 13)

Regulation also required in relation to competition (e.g. Ryanair and Aer Lingus) and regulation of networks (e.g. electricity, gas) (Ch 10)

Huge EU dimension 2 Reasons for Regulation Information and Co-ordination

Health and safety standards, e.g. food, airlines, fire escapes

Disclosure: e.g. contents of food, for informed choice.

Quality standards (e.g. B & Bs)

Medical records

So many regulations!

Externalities

Outright ban on guns, child pornography, rabid dogs.

Planning permission

‘Forced’ consumption

Unequal Bargaining Power/Social Policy

Safety at work

Minimum wage

Anti-discrimination laws

Rights of way, e.g. on farm land ‘Nudging’ and Paternalism

Framing of questions

Default options

Myopia Difficulties with regulation

When is a market failure significant?

What is risk of something happening (see risk-based regulation section)?

Regulator also lacks information

Regulator can be ‘captured’ and lack ‘teeth’ (banking sector in Ireland and elsewhere, see Section 4)

Rent-seeking, e.g. food industry (public interest v interest group approach)

Lack of choice, e.g. untested drugs

Stultifies working of market and innovation.

Interference in other personal choices

Regulation Theories and Strategies (largely skip)

Theories

Strategies: necessity, effectiveness, proportionality, accountability, and consistency

International best practice

3 Banking

See book for good case study

4 Competition Policy

Much employment in this area!

Perfect competition v monopoly v contestable markets

MC pricing rule

However huge economies of scale

Also innovation gains from large companies

Potential competition

How to measure market power?

Low price elasticities

Concept of ‘significant’ market power

Relevant market

Market share and concentration measure

Barriers to entry

General competitive environment

Legal Issues

Economic issues drafted into effective law: real challenge

Price fixing: vertical v horizontal agreements

Market dominance

Proactive in relation to mergers

EU competition law

Competition across whole single market the goal

Enforcement increasingly done nationally

Regulation/Competition Examples

Below-cost selling

Pharmacy sector

Office supply stores

5 Natural Monopolies and Networks

Basically policy towards networks and infrastructure for gas , water, airlines, telecommunications, electricity, transport

Huge economies of scale in having one supplier

Railway network v train operators

National gas grid v provision of gas

Privatisation (see earlier discussion Chapter 3)

Need regulation though if just one supplier

CPI-X approach with surplus retained

Penalises efficiency

Competitive tendering

7 Concluding Comments

Need for EU/US cooperation

Regulation over-emphasis now?

How to ensure independence of regulators?

Who controls the regulators?