James Prendergast
Deputy News Editor
The rates of economic growth, Ireland experienced between 1994 and 2000, “were a form of one off”, according to former Taoiseach John Bruton. Giving the keynote address to the Trinity Economic Forum (TEF) 2014, Bruton said that Ireland was “blinded by success, a success we did not fully understand”.
“Warning signs” such as the divergence of house prices from incomes and the large balance of payments deficit were ignored Bruton said, because “busy optimists had neither the time, nor the inclination” to heed them.
The exceptional growth of the 1990s was Bruton argued, the result of the removal of “external constraints” like high oil prices and interest rates, and the entry of more women and of young people born during the baby boom of the 1970s and 80s into employment.
However “fundamental structural advantages of the Irish economy, the base of high tech industry, and the flexibility of our workforce” remain, he assured the audience. Bruton, who is President of the Irish Financial Services Centre (IFSC) said the expanding global middle class is “major market opportunity” for the Irish funds industry.
He maintained that Ireland must adhere to its Treaty obligation, passed by referendum, “to reduce our debt/GDP ratio at a steady pace, down to 60% of GDP from its present level.”
While growth is needed for Ireland to escape “the debt trap”, Bruton warned that to achieve this through increasing domestic demand “would be counterproductive if it meant that we stopped reducing our very high household debts or increased salaries and wages in a way that diminished our ability to compete on export markets”.
He called for greater “supranational democracy” in the European Union and for either the President of the European Commission or the European Council to be directly elected. Power in the EU had, he contended, “gravitated back to the big member states at the expense of the common EU interest. He blamed Ireland’s rejection of EU treaties for “entirely unintentionally and indirectly” contributing to this process.
Earlier, Professor Martin Hellwig, Director of The Max Planck Institute for Research on Collective Goods, and co-author of The “Bankers New Clothes” told students “we still don’t know anything about how the monetary system works”. The recent crisis was, he said, “largely driven by lack of equity.” He proposed that banks should be 20-30 per cent equity funded. He criticised the Basel III recommended levels of 3 per cent, pointing out that that was level at which Lehman Brothers went bankrupt in 2008.
Big banks today, are, Hellwig said, hedge funds with a “traditional appendage” and are reliant on “government guarantees and subsidies”. Competitiveness on this basis is “economically harmful”, he said. He called for a move back to a “system where we don’t have bailouts”.
Hellwig described the Euro crisis as a mixture of an “Irish-style crisis” a “Greek style crisis” and the “insolvency of German and French banks”. It would have been “much better”, he said, if the Irish government’s proposals in the autumn of 2010 to impose losses on senior unsecured bondholders had been allowed. He said he wasn’t “sure” if the “culprit” for blocking this proposal is the ECB or the German government.
However, Fiona Muldoon, director of credit institutions and insurance supervision at the Central Bank of Ireland, called Hellwig’s 20-30 per cent equity target unachievable and “a little like nirvana”. The sovereign and banks in Ireland are “still totally linked”, she said, meaning that “we need the banks to make money”. However, “I’m capitalist in enough to say regulation is not there to prevent failure”, she added.
Professor Blainaid Clarke of TCD’s School of Law, said that while the “structures were in place, the “ideas were wrong”. She criticised “perverse incentives” that led to the adoption of a “short-term approach”, and the linking of remuneration with risk. “Bankers aren’t seen as professionals” who act in the best interests of clients, she noted. Banks are, she alleged, circumventing new compensation rules by increasing fixed pay.
Professor Gregory Connor of NUI Maynooth said the banking sector in Ireland would not be a “key driver of growth”. “Light touch regulation”, while good for the IFSC, was he said, a “disaster for the domestic economy”.
Later the University of Chicago based economist Professor Casey B. Muligan told students that much of the decline in employment and business investment in the US is explained by the “sudden” and “significant” increase in the welfare safety net since 2007. “Incentives matter”, he insisted, although where we choose to be in the “trade-off” between safety and efficiency is a “value judgment”, he asserted.
At a panel discussion about the state of third level education in Ireland, Ferdinand von Prodzynski, Principal and Vice-Chancellor of The Robert Gordon University in Aberdeen and former President of Dublin City University, called free higher education a “massive transfer of wealth from the poor to the rich”. Parents have a “malign influence” he contended, by pressurising their children into courses such as law.
Massive open online courses or MOOCS “won’t last long”, von Prodzynski claimed, because they have no “funding structure or business model.” However, TCD Vice-Provost Linda Hogan said that MOOCS would be “rolled out” in college within the next eight months.
Internships, volunteering, and a “spirit of creativity”, should Hogan said, be “embedded” in degrees and she indicated a “co-operative programme” is planned for Trinity. She called higher education a “high-cost activity” for which industry, students, taxpayers and alumni must pay.
Marie Bourke,Head of Human Capital and Labour Market Policy at the enterprise advisory board Forfás, called for greater “enterprise engagement” in higher education. “Expertise” might be better provided, she claimed, “by people at the cold face in multinationals”.
The CEO of the Higher Education Authority Tom Boland pointed out that the ratio of students to staff had risen from 15 to 1 to 19 to 1. Higher education is “nearing the limits of what’s possible” with resources, he said, although he argued that funding is a “deeply political issue”. “I’m not an educator I’m a bureaucrat”, he later declared.
“There are too many higher education institutions in Ireland”, Boland claimed while he complained about there being “no capacity to make lecturers redundant”. Ferdinand von Prodzynski said that “some lecturers are given a large work load because they’re not good at anything else.”
Later speaking to Trinity News, the economist and author David McWilliams said that “ultimately” higher education will be privatised. “I’m not sure if you can keep the huge numbers going through college with the budget constraints”, McWilliams argued. This privatisation of the “expense of college” could result, he warned, in students incurring “big debts”, as in the United States.
McWilliams said that Trinity “does seem to be a little bit neurotic about where it is going” and said “there is a lot of self-doubt at the academic level”. However, he said that if any university in Ireland can “break away” from the rest and succeed in the “new model” based on endowments and privatisation, “Trinity can because the brand is much much stronger”. In the “new world”, based on the American Ivy League system, “only one university in Ireland will make it”, he maintained. However, he pointed out that in America small universities “lose out” while elite universities are endowed with “huge amounts of money”.
Simon Kuper of the Financial Times, described how football which “until recently had escaped the enlightenment” had become one of the leaders in using data analytics in hiring new players. However the wage bill a club pays over ten years remains a “perfect predictor” of performance, he said. Manchester United’s recent poor performance was, he said, almost exclusively due to the absence of Van Persie, rather than any failure on the part of the new manager David Moyes.
Increased use of data analytics would, Professor Peter Antonioni of University College London predicted, begin to displace middle class jobs. This should make politicians very worried, he said, because “these are the people who really vote”. Antonioni analysed the TV show “The Wire” to emphasise the importance of studying “points of fragility in a systems context” above individual incentives. Ireland can’t “have a Google”, he said, because it is a “product of a system” and “system interaction”. The price of having functional systems is “eternal vigilance”, he added.
Peter Lunn of the Economic and Social Research Institute (ESRI) called the failure of Trinity to teach behavioural economics to undergraduates an “absolute scandal”. A recent paper of his that involved behavioural economics had to be published in a political journal, he said, because mainstream economics publications wouldn’t accept it.
The economist Kevin O’Rourke, formerly of TCD and currently Professor of Economic History at the University of Oxford gave a presentation comparing the Euro Zone with the ill-fated Gold Standard. The “foolhardy experiment” of creating a currency union without a political, banking or fiscal union had “failed” he said.
Optimal currency criteria had, O’Rourke said, always indicated that monetary union in Europe was a “bad idea”. He ridiculed the European deficit rules, quoting a French civil servant as saying he made up the 3 per cent target “on a napkin”. However, “you shouldn’t expect us to be able to forecast”, O’Rourke warned students.
Chairing a discussion about Ireland’s economic future, economist and Newstalk radio presenter, Marc Coleman castigated “vested interests” for “defeating the majority” who “want cuts”. Margaret Thatcher had, he said, won three successive general elections while implementing the same policy. By “sheltering” the public sector, he warned we may be “disincentivising people from going into the private sector”.
Coleman, who unsuccessfully ran for Trinity’s Senate seat in 2011, claimed that because of greater job security in the public sector, the private sector is “locked-out” of politics and RTE. He called on Ireland to emulate Finland and Israel and “go bilingual”. “Bilingual kids are smarter”, he claimed. He also trumpeted Ireland’s population growth, declaring that a country with this kind of growth is “not going to be beaten in the long run”.
Fitzgeralde said that a return to “vigorous growth” is more probable, although there is still a possibility, he cautioned, that the Euro Zone could “screw up”. If it doesn’t, he added, Ireland could have “seen the end of belt tightening” and could return to surplus by 2017.
John FitzGerald of the Economic and Social Research Institute countered Marc Coleman’s berating of the public. A senior member of the Troika had, he claimed, told him over dinner that Ireland has “one of the best public administrations”.
Fitzgerald said the economy would need “a lot more money from the banks” to recover. James Whelton, co-founder of CoderDojo, a network of free computer clubs for children, called the Irish banking system “extremely antiquated” compared to the US and said entrepreneurs were staying away from banks for seed capital.
Feargal O’Rourke of PwC claimed that the recent paper published by Jim Stewart, assistant professor of finance at TCD which found that US multinationals paid an effective rate of 2.2 per cent in 2011, is “wrong”. While he conceded that “some parts of the Irish taxation system don’t play well optically”, he insisted low corporate taxation remained “key” in attracting investment. The so-called BEPS proposals to base taxation on the location of customers would “dilute the attractiveness of Ireland”, he added.
Marc Coleman asked whether the large gap between the marginal tax rate of 55 per cent for entrepreneurs and the low corporation tax rate, indicated that corporations are “too powerful”. Feargal O’Rourke claimed that Ireland, as a capital importer needs low corporate tax rates to attract capital. John Fitzgerald said that high marginal tax rates were particularly discouraging to women, while Fidelma McGuirk of taxback.com said Ireland should allow the expenses of relocating to find work be tax deductible, as in the United States.
