SOVEREIGNTY IS OVER-RATED,SOCIETY IS UNDER-RATEDAn economist’s thoughts on Ireland’s future

Ronan Lyons, Balliol College (Oxford)

Parnell Summer School, 13 August 2012

Outline• Sovereignty: Ireland’s economic sovereignty is in long-

term decline – but that’s no real cause for concern

• Society: Ireland’s policymakers need to step up and start valuing society

• Ireland’s future: economically easy, politically challenging?

Sovereignty: the current consensus

• The current consensus on Ireland’s economic sovereignty is along the following lines:• “You either have

economic sovereignty or you don’t”

• “Ireland lost its economic sovereignty in December 2010”

SIPTU: “Formal loss of economic sovereignty [occurred] when Ireland

negotiated a bail out during the winter of 2010...”

Enda Kenny, St Patrick's Day 2012: "You're all welcome to the hooley

that's going to take place all through 2013 as our country celebrates its return to economic sovereignty!"

Sovereignty’s history not encouraging

Trade policy

From the early 1970s, Ireland lost its external trade policy

Exchange rate policy

With ERM, Ireland lost its exchange rate policy in the 1980s and 1990s

Interest rate policy

From the mid-1990s, Ireland lost its ability to set interest rates

Fiscal policy?

As of 2010s, have we lost fiscal policy also?

The reality: sovereignty’s a continuum• No country is 100% sovereign – answering only to its

taxpayers…• Economic sovereignty is not like a light switch, either on

or off – it is a continuum• Ultimately in order to borrow, a country has to run its

plans and its budgets past the lender• In Ireland’s case, replacing the markets as the primary

lender with the EU-IMF changes very little• Likewise, a return to the markets will change very little

• It certainly does not mean that Ireland is sovereign enough to be fiscally irresponsible again

The reality: sovereignty’s a continuum• No country is 100% sovereign – answering only to its

taxpayers… and with good cause!• On paper it may sound great not to have to answer to

anyone else but… "no island is an island"• Just like a country, a student loses economic sovereignty

when they take a loan to go to higher education – so does a family when it borrows to buy a house• But they are investing in their futures

• Borrowing in and of itself – which brings about constraints on our behaviour – is not a bad thing

• In fact no country has ever become prosperous without large-scale borrowing

Don’t mourn lost sovereignty! • So what some might call "loss of economic sovereignty" is

a prerequisite for a good standard of living!• Thus discussions about Ireland’s economic sovereignty

framed in terms of the bond market largely miss the point • Neither the incidental change in Ireland's economic sovereignty

score brought about by borrowing at preferential rates from the EU and IMF nor a return to more standard borrowing patterns is important in the grand scheme of things

• What is important is what Ireland borrows for• Is Ireland borrowing for the past or the future?

Outline• Sovereignty: Ireland’s economic sovereignty is in long-

term decline – but that’s no real cause for concern

• Society: Ireland’s policymakers need to step up and start valuing society

• Ireland’s future: economically easy, politically challenging?

The status quo, 1: economic policy

• The Irish government spends almost €70bn a year• €45bn is spent on health,

education and social welfare• €5bn is spent on

infrastructure for the future

• The Irish government has revenues of €50bn• Mostly VAT, income tax and

social insurance

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Other spendingCapitalEducationHealthSocial welfareOther taxesOther revenuesSocial Solidarity#REF!Direct taxesIndirect taxes

The status quo, 2: economics• “Economists only care about markets, right?”• Why do economists focus so much on markets?

• Signals about how society’s scarce resources should be used

• How is public money raised and spent?• Largely without any signals about the return society gets on

spending that money – an accounting basis (costs only)• Hardly surprisingly in the absence of this that markets have come

up with their own simplistic but ultimately meaningless rules-of-thumb (such as debt-to-GDP ratios or primary balances)

• Let’s move to an economic basis – not just costs, but benefits as well (“here's the return society got from spending this amount on that public good”)

Can’t we just measure happiness?

Ireland is happy! Ireland is unhappy!

Irish Times, Dec 23 2011

"The EU Survey on Income and Living Conditions

showed 79 per cent of the Irish population aged 18

and over reported themselves in 2010 to have been happy all or most of

the time over the four weeks prior to the

interview."

Irish Times, Jan 4 2012

"Irish are among the unhappiest of 58

nationalities, according to a poll by WIN-Gallup International of “net happiness”, or the

percentage of people who considered themselves

happy, minus the percentage who considered

themselves unhappy."

Happiness seems to be “adaptive”: people learn to cope with their circumstances… but does that mean we should leave people in poverty?

The answer is in valuing society• “Priceless” just means zero to an accountant!• There are a variety of ways of understanding the benefit

society gets from the resources it uses• Usage statistics• Willingness-to-pay surveys• House prices contain a lot of information on natural and social

amenities

• “Why do economists love markets so much?” revisited:• Because people love them! Where no obvious market exists,

people end up creating one – even if it isn’t immediately obvious• E.g. paying more to live near good schools, the coast or a Luas

stop

Estimates of certain natural amenities

Estimates of transport facilities

What’s this got to do with the IMF?!• The short and medium term is (perhaps understandably)

dominated with emergency measures to reduce the deficit from levels that will cripple the next generation with debt

• But getting out of one crisis does not mean we’ve prevented the next one – need to focus on the long-run basis for spending money

• This involves connecting up monies raised with monies spent, ensuring that society is getting the best possible return• Measuring that well will stop “the markets” having to use rule-of-

thumb statistics on public debt

Outline• Sovereignty: Ireland’s economic sovereignty is in long-

term decline – but that’s no real cause for concern

• Society: Ireland’s policymakers need to step up and start valuing society

• Ireland’s future: economically easy, politically challenging?

Ireland’s fiscal issues are clear• Overall: Connect money raised with money spent• Higher education: Switch third-level to “equity stake” to

fund exceptional service, risk share & avoid debt aversion• Social welfare: destroy inequalities in the system (and

save money!) by treating social welfare as other income• Healthcare: pick a model and stick to it! (Preferably

Singapore-style model, with a healthcare ‘pension’)• Income tax: tax credits back in line with other countries –

minimum tax rate for wealthiest to ensure fairness• Property tax: the obvious hole in public finances and the

best way [with a site value tax] of connecting money raised with money spent (through local government)

Broader economic issues also clear• Competitiveness:

• The awareness in Ireland of our need to sell internationally to fund domestic standard of living is as good as anywhere globally

• Pensions and demographics:• Much less awareness around need for mandatory defined-

contribution pension system and radical increase in working age (I expect to work into my 80s)

• Ratio of working years to retired has gone from almost 10:1 to less than 2:1 – crippling our children with debt

• The eurozone crisis:• In brief, nothing more complicated than savers not wanting

“haircut” while it becomes increasingly obvious borrowers can’t repay

• Either default or devalue (inflate) – certainly no need to break up euro

The challenge is political• Very easy for an economist to say – I don’t have to get

elected!

• The challenge then becomes engaging and informing…• Firstly the political class, who frame the choices and ultimately

make the decisions• Secondly the general electorate, who have the final say

Thank you!• Looking forward to comments, questions and the

discussion

• Keep in touch, if you’d like, via:• www.ronanlyons.com• @ronanlyons on Twitter