Exit, voice, loyalty and – something else

by niamh on December 13, 2011

I’ve been thinking about the size of the gap that has opened up between human suffering and politics as usual, which I think makes this crisis unlike anything we’ve had for quite a long time.

Albert Hirschman, in his classic 1970 book, suggested that there are three responses to failure in states, firms, and other organizations: exit, voice, and loyalty. If you are alienated enough, you leave (if you can). You can protest. Or you can stay and put up with it. But these are not mutually exclusive options. You might, for example, use the possibility of exit to amplify the power of protest (he thinks this applies to marriages as well as to states – nothing if not theoretically ambitious). Similarly, you might increase the effectiveness of protest, and delay the need for the exit option, by professions of loyalty.

I’m looking around me at the damage to the Irish social fabric caused by austerity measures to date, and wondering how to think about it, using these categories. Ireland is still a developed economy. But unemployment is now over 14 per cent, half of it is long-term, and it’s worst for young people. The domestic economy is below water, and emigration rates have surged. There are many forms of personal misery – the special needs children who can’t keep up at school because the budget for their personal assistants has been axed, the mental hospital patients who are to be moved into a locked ward for five weeks over Christmas because of staffing shortages, the formerly comfortably-off families seeking help from charities to keep afloat. We can see all the signs that economic activity is faltering – the rash of ‘To Let’ signs on office space, the closing-down sales on high streets and in shopping centres. We listen to the myriad stories told by family and friends of families trapped by unrepayable mortgages; of desperate small businesses running at a loss, hoping their accumulated reserves will buffer them until there is a recovery. We witness the increase in suicide rates, devastating for all affected.

People can put up with austerity for quite some time, if they believe it is necessary and unavoidable, and if they think that there will eventually be some improvement. But it’s becoming clearer that things are more complicated this time round.

We need the loans the Troika disburses, so our government has no choice about the size and scale of the austerity. More fiscal oversight is now on the cards, and it may well be a good idea in its own right. But the ECB is wrongly treating a gathering financial crisis as if were solely due to fiscal imbalances – treating consequence as cause. And our government is chained to the enormous rock of failed bank debt, which the ECB insisted needs to be repaid in full ‘to save the Euro’. Well, we’re sinking fast and it still hasn’t saved the Euro.

So what can we say about Hirschman’s threefold response options?

The experience of representative democracy has led us to assume that national politics will be responsive to social misery. The balance of power may shift – the heyday of Social Democracy was the period of ‘embedded liberalism’ between the 1940s and 1970s, when countries could run their own distinctive policy mix internally alongside a growth in international trade. Capital liberalization, along with the spread of new ideas about market efficiency, changed the terms of the game sharply in favour of business since the 1980s. But still, we’d got used to the idea that there were limits to what governments could get away with and still be electable.

But if your government is not actually ultimately responsible for what is going on, what’s to happen? In line with the multi-level EU system we live in, I think we need to think about this in two parts: citizens’ responses to national governments, and national governments’ responses to international decision-makers.

At the national level, there is growing evidence of ‘exit’ in Ireland in the form of increased emigration; less so in Greece or Spain (skills, languages, family networks). Not unrelatedly, in my view, there is much evidence of ‘voice’ in Greece and Spain; less so in Ireland. ‘Loyalty’ is probably mostly a function of time elapsed since the last election. But I think we need another category – ‘silent screaming’ perhaps, the kind of thing you do when you’re having a horrible dream – to capture that sense of impotent rage and visceral worry.  This is what the Occupy movements are tuned into; but they have no political vehicle to carry them. Silent screaming might find other forms of ‘voice’ too, such as on the radical right, and if things got bad enough, could erode support for democratic government itself (this is what Polanyi worried about, and is a danger that Kevin O’Rourke hints at).

At the EU level, as I’ve noted before, decision-making practices are buckling under the crisis. There are too many sectional actors and interests. The very narrow ECB policy remit is still strongly endorsed by the most powerful national actors. The result is a shockingly limited capacity for collective action, and very little interest in the miseries of the European periphery. But the Irish government has no intention of exiting either the Eurozone or the EU. Options for protest are limited. The government made some progress on getting better interest rates on the terms of the loan programme, but have drawn a complete blank on the now indefensible pay-out to zombie banks. The dominant strategy seems to be to knuckle down and play by the rules, to be visibly the best boys and girls in the class – ‘loyalty’. But this is a superficial reading. We need a fourth category – ‘waiting in the long grass’ perhaps, which is the Irish vernacular for biding your time now in order to extort a better deal later – since the current deal is not sustainable either politically or economically in the longer term. The difficult issue now is when and how to play their hand. Immediately, some say, while Frankfurt is in disarray. Or sometime next year, since new Treaty requiring a referendum would need a pretty heavy quid pro quo to have any chance of securing voter support.

So we seem to have two possibilities, one at national, one at European level; and scope for four-way rather than three-way interactions:

Voters and national politics: exit, voice, loyalty, ‘silent screaming’

Government and European politics: exit, voice, loyalty, ‘waiting in the long grass’


Or maybe I’m complicating things unduly. Am I?

{ 87 comments }

1

Rich Puchalsky 12.13.11 at 11:31 pm

I haven’t read Hirshman’s book, but I’m starting to get tired of references to it. Exit, voice, loyalty, sure, but how about fixing the problem?

There is really no reason why banks should exist any more. Most of their functions can be taken over by government-and-nonprofit-run electronic networks, with maybe some private business services on top. Exit, voice, loyalty are all pretty useless on an individual basis. There’s going to have to a change in how the system works. If people don’t get together to make it happen, it will happen anyways, only more unpleasantly.

2

Piers 12.13.11 at 11:49 pm

I think your analysis is broadly right, and what it reveals about Hirshman’s analysis is that it doesn’t have a time dimension, a sense that response to a particular situation shifts as it goes on. Both ‘silent screaming’ and ‘waiting in the long grass’ are versions of his categories which emphasize the temporal–one move first shifting into another when that doesn’t work.

3

Jawbone 12.14.11 at 12:03 am

Interesting point that the Irish have more “exit” opportunities than most in the Eurozone.

The real mistake Ireland made was for the government to take responsibility for the Irish banks’ debt. That’s what bankrutpcy is for! Should have let the loss fall on the banks’ creditors. Ireland, as an open and small economy, doesn’t even particularly need “Irish” banks. In the wake of the Irish banks’ bankruptcy non-Irish banks would have established branches in Ireland. No big deal. Look at Iceland–they let their banks go bankrupt and are already recovering. . . .

4

Yarrow 12.14.11 at 12:04 am

Rich Puchalsky @ 1: Exit, voice, loyalty, sure, but how about fixing the problem?

If I weren’t a strategic pacifist I’d suggest exit, voice, loyalty, and defenestration. Maybe a first-floor window?

5

Eimear Ní Mhéalóid 12.14.11 at 12:05 am

I’d actually be very interested in your co-blogger Dsquared’s views on this. I have the impression he disagrees quite strongly with the idea that the bank loans/ promissory notes shouldn’t continue to be paid off. On the other hand he appears to be no great fan of “austerity” – if he’s in favour of our instead raising the needful by a substantial tax on the wealth which still exists among a not insignificant minority, that gives him a unique set of views among commentators. ( the usual choice being A.cut welfare/ public service/ anything which benefits the poor but don’t de-incentivise the rich/ scare off the multinationals / alienate rest of Europe or B. soak the rich / burn the bond holders/ go back to bhe IR£. I suppose there is a C. of sorts, the Sunday Indo main editorial line which simultaneously blames public service and rest of Europe with the added bleating for the government to reinflate the property market.)

6

bob mcmanus 12.14.11 at 12:26 am

if he’s in favour of our instead raising the needful by a substantial tax on the wealth

ATHENS, Greece (AP) — Greece has reached its limit in raising taxes and needs to refocus its austerity program on long-term spending cuts, the International Monetary Fund said Tuesday.

4 hours ago

7

gordon 12.14.11 at 12:33 am

Nice post, and thanks for the links.

Maybe another option would be to read Lenin’s “What Is To Be Done?”

8

Enda H 12.14.11 at 12:44 am

Silent screaming puts it perfectly. Nice post, Niamh.

9

Emma in Sydney 12.14.11 at 12:52 am

Where are the Irish emigrating to? They used to come to Australia, but like most other countries we are putting up the gates against immigrants without money or a very limited set of skills. Many Greeks hold dual Australian Greek citizenship (Greece has the largest Australian expat population) and anedotal evidence suggests that some of them are expatriating their spare cash to Australian relatives. I guess those who can might also get out if things get worse. But it seems to me that emigration is a far less available option than it once was, given a US recession, increased barriers to migration, and no huge labour shortages in pleasant parts of the world.

10

Watson Ladd 12.14.11 at 1:00 am

How about elsewhere in the EU? Better beer, they mostly know English, and no visas. Or to various developing countries with skilled labor shortages?

11

Clay Shirky 12.14.11 at 1:22 am

“I haven’t read Hirshman’s book, but I’m starting to get tired of references to it. Exit, voice, loyalty, sure, but how about fixing the problem?”

I nominate Rich @ #1 for the coveted Refudiation of the Year award: “Since I haven’t read this, and references to it never seem to describe how it will create Magic Pony Rides for All, why don’t we just skip straight to the Pony Rides!”

What Hirschmann’s book does, par excellence, is describe a system for thinking through various ways committed actors do and do not have for fixing the problem, when those actors have to act in such a way as to affect the inner workings of institutions, and when those institutions have insulated themselves (as institutions do) against having to respond.

But you’d probably have to, you know, read the book to get that part.

12

Ed 12.14.11 at 2:01 am

“But it seems to me that emigration is a far less available option than it once was, given a US recession, increased barriers to migration, and no huge labour shortages in pleasant parts of the world.”

Its not, something quite a few bloggers and commentators have yet to realize. This is one reason this crisis will shape up differently than the past ones.

13

Dan Hardie 12.14.11 at 2:28 am

I’m glad someone else shares my opinion of who would make the ideal intellectual companion for Rich Puchalsky:

‘So Clay Shirky is like, facts, evidence, argument, yadda yadda yadda. I said to him, BORING, CLAY. NOT LISTENING’.

‘Sounds like he’s a real eliterist, Rich. Did he tell you that you were wrong ‘cos he’d *read the book*?’

‘He totally did, Sarah!’

14

Salient 12.14.11 at 2:36 am

I nominate Rich @ #1 for the coveted Refudiation of the Year award

You abstained from diagnosing him with mental illness this time. The world thanks you for your restraint.

15

Rich Puchalsky 12.14.11 at 3:19 am

I have no idea what Dan Hardie is on about. I think that Clay Shirky is still grumpy because I didn’t like the lead anecdote in his book, in which some Wall Street guy righteously harassed a teenager into returning stolen property. But who knows.

In any event, if I wanted to impeach the book, I wouldn’t have said that I didn’t read it. The book, whatever its merits, is a source of references elsewhere that I find particularly ill-suited to circumstances. For instance, this post says that we need a fourth category, “silent screaming”, as something that the Occupy movement is tapped into. Perhaps if I read the book I’d understand why Occupy, which I’ve been involved in for a while now, needs a fourth category of “impotent rage and visceral worry” that doesn’t match my experience of the movement. But that appears to me to be far enough off so that the book, whatever its merits, doesn’t seem to have led to a well-chosen analytical shorthand in this case, or really in almost any case I’ve run into. If the book does do a great job of describing ways in which committed actors do and do not fix problems, then the references it spawns don’t represent it well.

16

bh 12.14.11 at 3:25 am

I’m not getting this quite right, because it’s going to sound half like a Daily Mail column, but…

We do have precedents for describing behavior under authoritarian governments. Obviously there’s lots of bad stuff associated with those that can’t be fairly put on the EU. But it’s not like Irish citizens are making their own choices, either.

And I know I should resist adding to the dung pile, but Rich P and Salient… what on Earth do you think you’re contributing here? Who could possibly gain anything, even a meaningful disagreement, from your comments? If you have such contempt for this sort of thinking, why are you here?

17

Dan Hardie 12.14.11 at 3:48 am

Shorter Rich Puchalsky: ‘This is a post about a book by Albert Hirschman, which I have not read, and about the Republic of Ireland, which I have no wish to discuss, so we shall talk about me and my experiences of protest in the United States. Foreigners, comply.’

18

Witt 12.14.11 at 3:49 am

What is most useful about this post is how its framing reflects three realities on the ground:

1. Many old ways of demonstrating loyalty have been dismantled, and new ones have not meaningfully emerged. (Greeks owe loyalty to…the European Central Bank?)

This is true to a lesser extent with voice and exit as well — a disgruntled customer can post a tweet or a video and potentially get a company response in ways they couldn’t have in 1990, but we’re (collectively) still figuring out what political organizing looks like in the days of Twitter. The lack of a shared model leaves us with… the silent scream.

2. The rapid and widespread demolition of barriers to the circulation of capital has not nearly been matched by a similar demolition of barriers to the circulation of labor. (In fact, many barriers to labor have gotten higher — ahem, US immigration post-Sept. 11.)

Thus, while waiting in the long grass may be a potential strategy at the societal or national level, it’s near-impossible at the individual level.

3. While cosmopolitan elites have more in common with similar elites in other countries, the enormous explosion of new technologies has allowed people at all levels of society to insulate themselves from the local environmental effects of their political decisions.

In the midst of recession, elites still have some room to maneuver, while the rest are place-bound due to underwater mortgages, unable to move easily even within countries to find better work or “exit” unwelcoming political climates.*

*Speaking/thinking specifically of the US here, as I don’t know enough to comment intelligently on other countries.

19

Witt 12.14.11 at 4:08 am

Whoops, meant Niamh’s “silent screaming,” of course. Definitely did not mean to evoke the political associations with my mistaken re-phrasing!

20

nnyhav 12.14.11 at 4:09 am

So, was Cameron’s veto exit or voice?

21

Salient 12.14.11 at 4:09 am

If you have such contempt for this sort of thinking, why are you here?

Aww, I have no contempt in my heart for Hirschman or Niamh, and I commented in order to acknowledge that Clay had adopted a much more appreciable framework this time than in that communications technology post back in October. I suppose maybe “The world thanks you” in print sounded more sarcastic and less relieved than it did in my head.

22

John Quiggin 12.14.11 at 4:11 am

Could we get back on topic please. The pointless headbutting above is part of the problem we CTers were discussing when we decided to tighten up the comments policy. It’s hard to specify a rule, but I think I can speak for all of us in saying we don’t like comments threads to go this way.

23

Rich Puchalsky 12.14.11 at 4:11 am

“This is what the Occupy movements are tuned into” refers to Ireland only? OK.

Weirdly enough, the accounts I’ve seen of Irish Occupy protests seem very similar to ones here, and the Irish Web sites have the same tone. Not silent screaming at all. But no doubt you know better.

24

Jawbone 12.14.11 at 4:14 am

#20–legally, “voice,” but seems to be drifting towards being treated as “exit”

25

Emma in Sydney 12.14.11 at 4:33 am

From what I can see in the Irish Times, more than half of the people leaving Ireland are non-Irish going home, and fewer are Irish going somewhere else.

Of the 65,300 people who left the country in the 12 months to April 2010, 27,700 were Irish citizens. About 19,900 were eastern European; 8,100 were originally from states outside the EU. In the previous 12-month period just 18,400 of the 65,100 emigrants were Irish citizens, while a staggering 30,100 central and eastern Europeans left. So in terms of absolute numbers of Irish citizens leaving, things aren’t as bad as they seem.”

Some of those seem to be young Irish travellers who get temporary work visas for Australia, but they have to go home in 2 years — it’s not a permanent solution. As things get worse all over the EU, intra-Union migration won’t be a solution either. It’s not clear that emigration can be the answer it used to be, but the Irish, like the Greeks and Italians, seem to assume it will be. It seems likely, as Ed said, that this is one reason things might turn out differently.

26

Dan Hardie 12.14.11 at 4:39 am

Niamh: ‘There are too many sectional actors and interests. ‘

I’d put it slightly differently. The move to the Euro seemed to involve a massive denial that sectional actors and interests would continue to matter. Rather, supporters of the Euro seemed to believe one, or both, of two things. One was that separate nations would not be susceptible to major economic shocks in different ways, to different degrees, at different times. The other was that the Euro had some mechanism (never specified) for dealing with such shocks.

These beliefs were held by pro-Euro political elites, of course. But in certain European countries they were also held- at least at the time when it mattered, when the Maastricht treaty was being written- by most of the electorate.

One of the most notably ‘pro-European’ countries was of course Ireland, where a referendum ratified Maastricht by a vote of 68.7%, on a turnout of 57.3%. Of course, Irish popular opinion later became less uncritically pro-Euro-Federalist. And one very strong reason for Irish enthusiasm for the EU was of course the perfectly rational and understandable desire to get out from under the Brits. But I do think that the Irish story is more complex than just the big fellows screwing the small fellows.

Of course the big fellows have been doing lots of screwing. The Dublin elite, especially the concern trading as Fianna Fail, mismanaged the boom years. And now the Berlin-Paris-Frankfurt elite are making a frightful mess of mitigating the bust years.

But I would stress, at the risk of becoming as popular as Dsquared, that it’s wrong to see the current sufferings of Ireland as being entirely imposed on the country by its own leaders, or by Brussels, Frankfurt, Paris and Berlin.

A majority of Irish voters wanted the single currency, which has had such awful consequences for their country, and the rest of the Eurozone. That is something that Irish citizens are going to have to think about.

27

shah8 12.14.11 at 4:59 am

It really is amazing, the power of a well thought out derail.

One thing I’d like to note, though…That “silent screaming”? That’s a function of a reasonably capable apparatus for disintermediating people from successfully politicking on their own. Hirschmann wrote the book in 1970, right after the civil rights movement, Vietnam, and all that other stuff, and there has been a number of state innovations, both in terms of tech and in terms of social weaponry like av media, since then. I think that it is also important to emphasis that this is also about isolating elites from possible mass support (the tyrant-masses dynamic), so it’s not just the rubes. It’s about eliminating the dynamic of voice in the sense that people negotiate with elites for mutual benefit. Along with debt/health care (US) as a means to block exit, the game is effectively fixed such that explicit and violent rejection is probably going to be the only game in town.

The name of the political game for me, is about two things. Pre-empting revolution, and failing that, installing a tyrant (Chavez being a good example). It’d be pretty bad, but Saddam Hussein types are worse. Pre-empting revolution, i.e., the day when either the generals or the bankers walks into Congress and tells the Republic that the jig’s up, and dealing with any spontaneous violence that might occur, would be the better option. However, any progressive work on that almost *has* to involve at a minimum, expropriative violence, in the sense of strikes, denial of resources, etc, etc (no matter how Eric Loomis might feel for the people made to sacrifice–*few* ever really choose freely, and only a few ever has in such actions)…

Mubarak was brought down by export industry strikes and elite bargaining against international businesses. As one can guess, the only thing that really matters in this process is communications. That’s Voice. We have to have secure coms. We have to be able to broadcast to public at large. What matters is splitting elite consensus away from the bleeping insane, thieving, reactionaries. The 99% works in broadcasting a very simple scream, but it’s not actually a dialogue, and the people at large have a hard time connecting to other people around them and working out what they are committed to, for reasons of access and security. The late capitalist state has many more, and subtle means of punishing dissent than do late communist states so this is a serious challenge.

For example, the difficulties in creating some sort of consent of the governed in Russia, say… alt!Kerensky being forced to exit Russia from WWI for domestic reasons instead of bowing to international pressure to engage in another offensive that the state could not support (or bailing out Irish banks with the EU gun to their heads). That almost certainly would have given patriotic Russians, no matter their inexperience and xenophobia, a better chance at at better Russia than what they wound up getting. That’s Voice, that’s what this sort of power is and can do for us. Constantly rebuilding the consent of the governed.

28

dsquared 12.14.11 at 6:57 am

I think a lot of the problems are, as Dan H says, significantly more domestic and less European than Niamh does. I’d suggest that:

1) Ireland is not only “still a developed country”, it’s still a very rich country. It still has a median income higher than France, for example. It also still (as Finance Minister Noonan pointed out at the budget) has a significantly more generous welfare system than a lot of European countries. This obviously isn’t much comfort to people below the median, or who are users of specific services that have been cut, but it makes it quite difficult for the EU to justify making large fiscal transfers to Ireland.

2) Ireland still has a corporation tax rate of 12.5%. This is not only a constant source of bad blood with countries who see it (correctly) as engaged in unfair tax competition, it puts the austerity budgets in context. All of the austerity budgets have been heavily biased toward spending cuts rather than tax rises; so far in the crisis there hasn’t been a single income tax rise – unlike in the UK, for example, where the top rate of tax was raised to 50% with a special levy on bankers’ bonuses. There is much more agency available to the Irish government than it uses, and its claims to be impotent shouldn’t be taken at face value.

3) The bank bailout really wasn’t the great mistake that people portray it as. The losses of the Irish banks very largely reflect the writedowns of debts owed by Irish people, which in turn reflect the collapse in Irish property prices. This cost was always going to end up being borne by Irish people, because it was their houses that had the price bubble. The EU/IMF provided very large amounts of credit to Ireland to smooth the adjustment process, but it wasn’t unreasonable of them to make it a condition of that aid that Ireland, which had made a ten year decision to become a financial centre, didn’t then try to gain a short term advantage by blowing up the Euro financial system. (On a technical note, it bugs me that so many discussions of the banking system liability don’t mention the corresponding asset at all; this makes a huge difference to the net fiscal position).

4) Prosperous, well-educated small countries which are on the fringes of larger economic regions (like Denmark, New Zealand, the Netherlands; even Canada fits into this model although it’s obviously not a geographically small country) tend to structurally have large youth emigration. It’s a normal state; the abnormal one was the case in which Ireland suddenly started drawing labour in from across the EU.

5) The debt burden isn’t unsustainable in Ireland like it is in Greece – <a href="http://www.esri.ie/UserFiles/publications/QEC2011Aut_SA_Fitzgerald.pdf"John Fitzgerald and Ide Kearney's analysis of the debt dynamics has the Irish debt/GDP ratio topping out at a lower level than Italy currently has, and they don’t incorporate the reduction in the EFSF interest rate or give any credit for the banking sector net assets (this is for reasons of conservatism in what is an excellent and thorough analysis, but both points are likely to matter in practice).

Ireland is having a horrible time, but they’ve got a big problem because they had a massive asset bubble, not for any other reason.

29

Jawbone 12.14.11 at 7:25 am

@28–Could you say more about why “This cost was always going to end up being borne by Irish people, because it was their houses that had the price bubble.” The cost would not be born by the Irish to the extend Irish bank creditors were not Irish. I am assuming many were not Irish if Irish banks’ bankruptcy would have amounted to an attempt to “gain a short term advantage by blowing up the Euro financial system.” I just really don’t understand why a decision to finance Irish real estate through private banks should be treated equivalently to a decision to finance same through public debt. The Irish did the former, yet wound up with the latter. This seems unsound to me.

30

dsquared 12.14.11 at 7:55 am

The cost would not be born by the Irish to the extend Irish bank creditors were not Irish.

yebbut,

1) most of them were – even at the end, the Irish banks were still substantially deposit-funded (apart from Anglo, which was a much more arguable decision although still justifiable on grounds of contagion to Bank and AIB)

2) obviously, losing the Irish banking and deposit system would be a problem for everyone, but a much bigger problem for Ireland than for anyone else. The cost/benefit analysis of getting a maybe 30% benefit from the non-Irish liabilities of the Irish banks, versus the cost of systemic collapse doesn’t even nearly stack up.

I just really don’t understand why a decision to finance Irish real estate through private banks should be treated equivalently to a decision to finance same through public debt.

Same reason why everyone else guarantees their banking system – this is actually the cheapest and least painful way to do it.

31

Jawbone 12.14.11 at 8:22 am

The cost/benefit analysis of getting a maybe 30% benefit from the non-Irish liabilities of the Irish banks, versus the cost of systemic collapse doesn’t even nearly stack up.
_________________________________________________

Can you say more about why 30% of the cost on the non-Irish would have lead to “systemic collapse” but 100% of the cost on the Irish taxpayer doesn’t? I still don’t understand why banks need to be bailed out more than internet start-ups, particularly when the banks are in small, open economies like Ireland where they don’t really need “Irish” banks anyway. In other words, why would bondholders of Irish banks losing money lead to “systemic collapse” whereas bondholders in Irish tech firms losing money is just part of capitalism? I’m only 3/4 educated on this topic, so am grateful for further thoughts.

32

niamh 12.14.11 at 8:34 am

To Rich Puchalsky: I do not appreciate your dismissive tone, particularly when your derailing comment was the very first in this thread. Please be polite and engage seriously if you wish to contribute. If you don’t find the post interesting, there’s always the off button. (And to others responding to him – please don’t encourage the distraction by having a go at him in turn).

On emigration from Ireland (various people): It’s true that emigration options for everyone are more restricted now than during the 1980s (recessions, tougher visas) and that more people are tied down by negative equity. Some of the emigration is by non-nationals returning home, but there is also some increase in the rate of emigration of Irish nationals: http://www.irishtimes.com/newspaper/ireland/2011/0916/1224304194602.html

To dsquared: you are right that Ireland’s capacity to manage its debt is nowhere near as troubled as Greece’s. The collapse of the property bubble is extremely painful, and it’s aggravated by other underlying policy mistakes. But I disagree with your analysis on several points, among them these:

1. ‘Soaking the rich’ is simply not going to fill the revenue gap. I think there is certainly scope for a more progressive income tax (Piketty et al made the more general case recently on Vox). Property and wealth taxes are quite low, and should also be addressed on equity grounds. High-end tax evasion is intolerable and I think the Revenue Commissioners has been getting serious about this, though there’s always scope for improvement. Other issues such as the income and pensions privileges of the senior public service have still not been seriously reviewed. However, one of the big mistakes during the 2000s was to let so many income tax exemptions grow, and the big revenue gains will come from closing these. But this affects everyone, not just the highest incomes, and making labour more expensive is not consistent with the stated aim of trying to support job creation. Piling on domestic taxation in the middle of a recession – or technically, a depression – is not generally a great idea.

2. The tax mix features a low corporation tax, which annoys Sarkozy too. However, this is still considered to be a pretty important element in Ireland’s industrial development strategy. It’s part of a package of measures aimed at attracting high-tech foreign direct investment, and it generated a lot of spin-off domestic development in the 1990s and 2000s. Without it, Ireland would have virtually no exporting capacity and a terrible balance of payments situation. Like Greece. I’m not sure why you think countries as different in size and economic structure as Ireland and Britain should have the same tax profile.

3. On the financial sector, I think perhaps you are conflating non-performing bank loans against over-valued commercial property, the largest of which have been taken over by NAMA (controversial enough in its own right), and the obligation to repay all bondholders in full (which appalled the IMF but on which the ECB prevailed).

4. There are different views about debt sustainability, and John Fitzgerald and Ide Kearney would be at the optimistic end of the scale. Commentators such as Karl Whelan, Colm McCarthy, Kevin O’Rourke and others, have been less sanguine (see the many threads and links at http://www.irisheconomy.ie).
They generally distinguish between primary fiscal deficits involving the gap between public expenditures and revenues, which need to be fixed, and the volume of debt incurred and the debt servicing obligations this entails, arising from different tranches of bank recapitalization requirements. They point out that Ireland came under enormous pressure from the ECB to ‘take one for the team’, to load all the bank recapitalization needs onto Irish taxpayers in order to avoid a systemic Europe-wide banking collapse. That’s been controversial on both equity and sustainability grounds.
However, it is isn’t about ‘burning the bondholders’ any more (they’ve largely been repaid). The real issue is about the ‘promissory notes’ with which this has been funded, the Emergency Liquidity Assistance measures. See, for example, here: http://www.businessandfinance.ie/bf/2011/12/commanalyde2011/timeforadealwithsupermario

5. I do think that were are now in a new phase of European political economy, though it will take some time to understand it properly. The parameters of budget policy are completely externally determined for countries in EU-IMF loan programmes. But the scope of domestic policy choice within the Eurozone more generally is suddenly much more tightly constrained. We don’t yet know whether or on what terms this will result in a structural shift toward closer European integration, including a full central budget-making capability (with strong central tax and spending powers, a proper fiscal union that would counterbalance asymmetric regional shocks). So far there is no sign of this, only a new Maastricht-writ-large. This means a systemic deflationary bias, no democratic accountability, and no scope for political response to the uneven spread of the pain of adjustment.

33

dsquared 12.14.11 at 8:51 am

Well basically, if we say that the Irish banking system had assets of EUR100bn, Irish deposits of EUR70bn and overseas non-deposit liabilities of EUR30bn (these are rough, order-of-magnitude numbers and I am ignoring capital). It gets into trouble, because the assets have to be marked down to some unknown amount. The government has two choices:

1) Bail them out at a cost of maybe EUR40bn and a guarantee. This means that the measured debt goes up by 40bn and there is a contingent liability of 60bn; meanwhile the government owns a stake in the banks’ assets (mainly Irish mortgages), which is worth … something. So the liability to be born by the Irish taxpayer is 40bn, assuming that the Irish mortgage-payers pay back 60 cents in the dollar over time.

2) Let them go bankrupt! Now, the overseas creditors take a loss of 30bn, but the Irish depositors take a loss of 70bn. If the Irish mortgage-payers pay back 60 cents in the dollar, then the Irish depositors will eventually get back EUR42bn, reducing the eventual loss to 28bn.

Putting this all together, and recognising that “Irish taxpayers”, “Irish depositors” and “Irish mortgage-payers” are basically the same group of people, then it looks like this is a choice between a 40bn bill and a 28bn bill, so let them go bust! But:

1) You can’t assume that the 60-cents-in-the dollar return is the same in both cases. For one thing, people are always more reluctant to pay back debts to a bust bank, because they know that the collection is going to be weak. For another, in case 2, the mortgage-payers have just seen their current accounts disappear!

2) Liquidity matters. Getting 60 cents in the euro back “over time” on your savings is not much use when you have bills to pay now.

3) In 2) I abstracted from the existence of the deposit guarantee scheme which would have meant that at least EUR40bn of the deposit liabilities would have ended up on the state balance sheet anyway.

Banking sector collapses just aren’t costless things. If the Irish government had been able to selectively default only on the foreign liabilities (which is what Iceland tried to do), they would have been in a much better position, but a) this is obviously illegal under EU rules, and b) it would have had very bad long and short term consequences for other countries’ willingness to do business in Ireland, much more so than, say, a 20% corporation tax rate.

I still don’t understand why banks need to be bailed out more than internet start-ups, particularly when the banks are in small, open economies like Ireland where they don’t really need “Irish” banks anyway

This is a classic “in the long run we are all dead” situation. If Ireland was like New Zealand or Portugal and actually did have a majority foreign-owned banking system you’d be right, but the government had spent decades protecting BoI and AIB from foreign takeover, and then building up Anglos as a national champion. You can’t create (or import) a new banking system overnight.

34

Guido Nius 12.14.11 at 8:55 am

On 2: why should corporate tax be so vastly different in one country vs the other? It is the Irish model that drove and drives corporate tax down in all countries. The net net of this is that labour tax goes up because corporations can move to Ireland and money to the Bahama’s. It is not because Sarkozy is against something that that something is a good.

I still feel that any neo-liberal democratic deficit is due to policies blessed in some countries such that other countries have no option but to follow them. Given party funding in US and UK the only credible counterforce to that can come from a converged EU.

35

dsquared 12.14.11 at 9:09 am

The real issue is about the ‘promissory notes’ with which this has been funded, the Emergency Liquidity Assistance measures.

But those really can’t be seen outside the context of the banking sector assets on the other side of the balance sheet though; I usually have a lot of time for Karl’s analysis but I thought he was all over the place here. He’s valued the IBRC/Anglo loan portfolio implicitly at zero, and he’s ignored the fact that there is a great big double-counting issue here; the notes issued to IBRC are already counted in the national debt. The overall Irish government debt is a big number, and so identifying one part of it (the promissory notes) is also going to be a big number. The way that article is written makes it look like the ELA is on top of the debt, not part of it.

36

john b 12.14.11 at 9:32 am

Some of those seem to be young Irish travellers who get temporary work visas for Australia, but they have to go home in 2 years—it’s not a permanent solution

This is one of those statements that appears to be true when you read Australia’s migration rules, and which the Australian government would like xenophobic swing voters to believe is true, but which is not actually true.

People who aren’t Highly Skilled or Dead Rich can’t get permanent residency any more (unless they have a relationship with or marry an Australian/a permanent Australian resident, which if you’re young and single isn’t entirely improbable); that much is true.

However, anyone who’s spent two years in Australia, knows a fair number of expats, and is good enough at English comprehension to get through Assorted Annoying Hoops will be able to find a way to remain here legally. I know people from Latin America who’ve been here legally for five years on various temporary visas, most of which still exist.

(there’s also the illegal option: if you’re a tradie and work cash-in-hand, and you’re white Anglophone, you’re unlikely to get caught unless you’re arrested for something else. Only problem is when you try and leave the country…)

37

Ashwin 12.14.11 at 9:51 am

In this analysis by Mehrdad Vahabi, he makes the point that there is a continuum of voices from silence to a scream http://books.google.co.uk/books?id=gVk5WcePqrIC&pg=PA95#v=onepage&q&f=false .

I’m not sure silence will persist for much longer. A democratic deficit means that the rich will exit but it also gives the masses the moral right to engage in non-democratic forms of protest http://www.macroresilience.com/2011/06/29/the-democratic-deficit-in-europe-and-the-crisis-in-the-periphery/

38

cormoc 12.14.11 at 9:51 am

Thanks for this interesting piece. There’s one thing I still don’t get though – the ECB’s insistence that Irish banks be bailed out whatever the cost. I read the Irish Times piece when it came out and I’m still in the dark. My understanding is that the government made a decision, by itself, to underwrite all failing banks in Ireland, whatever the cost. When it was clear that it had bitten off more than it could chew, the ECB et al got involved. But the decision had already been made. Was it that the ECB insisted that the government couldn’t renege on its decision to underwrite the banks?

39

niamh 12.14.11 at 10:11 am

To dsquared – P.O’Neill has noted elsewhere that ‘The Anglo ELA is not a counterpart to anything on NAMA’s balance sheet. Even if NAMA was dumped entirely to the EU, there is still a big pile of government promises to make whole the creditors of insolvent banks’.
http://crookedtimber.org/2011/12/09/euro-kremlinology/comment-page-3/#comment-391565

Ireland as a rich country – yes, it is. But this is not really the point. Asymmetric shock and fiscal distress in a monetary union should have some form of fiscal transfer capability built in at a transnational level. Under current conditions, that would indeed mean that it would mostly be Germany taxpayers who carried a good part of the load. But as others have noted, during the 1990s and 2000s, when Germany was funding its reintegration project (providing huge capital and transfer spending to the East), and Ireland and others were growing very fast, a fiscal union would probably have seen net transfers going the other way.

40

Chris Bertram 12.14.11 at 10:15 am

_it would have had very bad long and short term consequences for other countries’ willingness to do business in Ireland_

Has Iceland’s attempt to shaft foreigners actually had this consequence for them?

41

dsquared 12.14.11 at 10:15 am

Was it that the ECB insisted that the government couldn’t renege on its decision to underwrite the banks?

Partly. In my analysis:

1) I still don’t think this was necessarily the wrong decision, as in #33 above.
2) The ECB/EU were prepared to underwrite the solution, but they wanted to be sure that their money was at least partly going to prevent contagion to the rest of Europe.
3) Having built itself up into a financial centre over the preceding ten years, there was a general expectation of Ireland that it would act like one. Even a 12.5% tax rate isn’t enough to attract investment to a country which suddenly changes the rules when they appear inconvenient.

The IMF, in my view, gave really bad advice, and I think it was based on a fundamental misunderstanding of Irish and EU law – they thought that it was possible for the Irish banks to default on their bonds without also being in default on their deposits. This is possible in the USA for a bank under FDIC control, but the USA is unusual in this regard.

42

J. Otto Pohl 12.14.11 at 10:18 am

Look the Irish, the Greeks, and maybe if things get bad enough the Spanish are just going to have to get used to being poor countries again. Emigration is an option for some. I may go down to the mall today and see if I hear any obrunis with Irish rather than South African accents. On the bright side being a lowly paid professional by rich country standards and living in a poor country gives you a middle class life style. That is something that fewer and fewer people living in the US and parts of Europe are going to be able to obtain.

43

dsquared 12.14.11 at 10:23 am

‘The Anglo ELA is not a counterpart to anything on NAMA’s balance sheet.

No, it’s a counterpart to IBRC, but Karl just says “it is unlikely that any good assets exist here”. That’s tantamount to yadayadaing a EUR33bn loan portfolio, half of which is actually performing, let alone the collateral. He or his editors also make the actual EUR31bn of EBA which refers to IBRC into “the vast majority” of the total EUR42bn outstanding (the other 9bn is related to AIB and BoI and is very likely indeed to be money good).

And more importantly, it’s double-counted with the national debt.

Has Iceland’s attempt to shaft foreigners actually had this consequence for them?

Yes; this is one of the reasons why Iceland is still trying to get the Icesave affair resolved, now that the new government has given up on the silly Grimsson selective-default plan.

44

dsquared 12.14.11 at 10:44 am

Just on tax – as Niamh says, it’s not idea to be raising tax rates in a recession, but of course it’s even worse to be cutting benefits and government spending in a recession. And at present, Ireland is a really amazingly low tax economy. The basic rate of income tax is 20% and the higher rate (which kicks in at roughly 150% of median income) is 40%. There is also a system of tax credits (mainly on pension contributions) which pushes the average rates well below the marginal ones.

This is a known stylised fact about the Irish economy which Henry has blogged on in the past – that the fiscal system became heavily over-reliant on property taxes. Now the property tax revenue is gone, there’s been little attempt to rebalance the tax burden back, with the result that spending cuts have had to do much more work.

To my foreign eye, this looks crazy. As Dan H says above, the average Irish middle class household both voted for and benefited from the policies that created the asset bubble. It just seems obvious to me that (and I agree with Niamh that soak-the-rich policies, while perhaps a good idea independently, can’t come close to generating enough revenue) the tax rates and base ought to be normalised. At the moment, everything is being loaded onto cuts and VAT, rather than on income tax. This seems like a calculatedly unfair way to balance the budget, and probably deserves a bit more attention than it gets.

45

FromGreece 12.14.11 at 10:58 am

“they thought that it was possible for the Irish banks to default on their bonds without also being in default on their deposits”

I am amazed to read this is not the case. In Greece, deposits are insured by the state up to a point. Bonds don’t have such protection as a matter of law. Where do you base your statement that it would be illegal to default on bonds while protecting deposits?

46

niamh 12.14.11 at 11:00 am

You might be interested in this so:
Dellepiane, Sebastian, and Niamh Hardiman. 2012, forthcoming. ‘Governing the Irish Economy: A Triple Crisis’, in Irish Governance In Crisis, edited by Niamh Hardiman. Manchester: Manchester University Press, pp. 83-109.
Also at http://ideas.repec.org/p/ucd/wpaper/201103.html
and http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201103.pdf

On the individualized pay/tax trade-offs in social partnership, which were tied into a systematic tax-cutting strategy from 2000 on, Aidan Regan’s blog features many interesting thoughts, including here:
http://aregan.wordpress.com/2011/10/13/the-future-of-collective-bargaining-in-ireland-–-a-european-perspective/

47

dsquared 12.14.11 at 11:02 am

In Greece, deposits are insured by the state up to a point. Bonds don’t have such protection as a matter of law.

Defaulting on something and having your creditors paid by the state, is very different from “not defaulting”. Also (apologies for the jargon), “deposits” includes corporate deposit accounts and payment system deposits. It’s only retail depositors that are covered by the deposit insurance scheme. Also, as I mentioned above, using the deposit insurance scheme immediately hits the government budget with exactly the liability it was trying to avoid. The case that would have made a difference would be if you could tell the bondholders to take a hike, while still keeping the bank going and using its assets (rather than the government’s) to pay the depositors. That’s not legal in Greece, Ireland or most European countries except Denmark.

48

dsquared 12.14.11 at 11:04 am

that’s very interesting Niamh, thanks.

49

Kevin Donoghue 12.14.11 at 11:15 am

@dsquared
I’m a bit surprised to learn that Ireland “still has a median income higher than France” given that the figures in 2009 were 22.4k and 19.8k respectively. Are you sure France isn’t ahead? In any case median income is a lousy measure of wealth. I don’t have any good information on Irish households’ balance sheets but, given the way we got into this mess, they must be in pretty poor shape.

50

dsquared 12.14.11 at 11:21 am

I’m not sure, but it was still true in the 2010 figures, and since I don’t think that French median income has grown much, I would suspect that you still edge it. I’d also, contrapunctually, say that median income per head is a pretty good measure of whether Ireland is a rich or poor country; if you’re going to use balance sheet wealth, you end up concluding that Italy is a richer country than Germany.

51

Alex 12.14.11 at 11:26 am

I’d also, contrapunctually, say that median income per head is a pretty good measure of whether Ireland is a rich or poor country; if you’re going to use balance sheet wealth, you end up concluding that Italy is a richer country than Germany.

Isn’t this ambiguity more a feature than a bug?

52

Kevin Donoghue 12.14.11 at 11:32 am

“…you end up concluding that Italy is a richer country than Germany.”

Many German visitors to Italy have come to just that conclusion.

53

dsquared 12.14.11 at 11:40 am

good point. But it’s not ambiguous that Ireland is a very rich country, albeit one that’s having a nasty recession. And this matters in terms of the viability or justice of permanent fiscal transfers; I think it also partly explains why the level of popular outrage is so much lower than in Spain or Greece. In per capita terms, income is roughly back where it was in mid 2004 – the real work of the post-EMU boom hasn’t been undone yet.

54

niamh 12.14.11 at 11:42 am

Oddly, income tax in Ireland can be said to be both ‘too low’ and ‘too high’, given the narrow base to which it is applied, the fairly narrow bands with which it is implemented, and only two rates.
Average tax rates on earnings for different kinds of household have been increasing from their pre-crisis low level:
http://budget.gov.ie/Budgets/2012/Documents/Taxation%20Annexes%20to%20the%20Summary%20of%202012%20Budget%20and%20Estimates%20Measures.pdf
But the same document shows that about 38% have no income tax liability at all because of their credit eligibility or age exemption.
Marginal tax rates of over 50% are applicable at not much more than average incomes. See eg:
http://www.davy.ie/content/email/budget2012tax.pdf

55

niamh 12.14.11 at 12:02 pm

Who is the wealthiest of them all…
Eurostat data on GDP per capita in Purchasing Power Standards might be a good one to look at.
Their latest series, reported in December 2011, is for 2010. Taking EU27=100, we get:
133 Netherlands
128 Ireland (GDP)
123 Sweden
118 Germany
115 Finland
112 UK
108 France
104 Ireland (GNP)
101 Italy
100 Spain
90 Greece
80 Portugal
I include the Irish GNP info here because of the disparity between GDP and GNP (GNI might be better), since GNP is a better measure of the resource base available for distribution and redistribution in the domestic economy.

56

Kevin Donoghue 12.14.11 at 12:07 pm

Lots of people are better qualified to answer Cormoc (Cormac?) #38, but a quick glance suggests nobody has so here’s my effort:

Roughly what happened is this. The Irish government gave a much-too-generous guarantee, covering Anglo-Irish (a total shambles) as well as AIB and Bank of Ireland (both arguably too big to fail). When it became clear that the cost was large enough to sink the state as well as the banks, various devices were tried to protect depositors while cutting bondholders adrift. Some of these would not have involved reneging on any guarantee and the IMF was sympathetic, but the ECB vetoed all proposals. So even the unguaranteed Anglo senior bonds got paid in full. That’s what rankles most in Ireland. It’s generally accepted that if your government makes a stupid promise the promise should be honoured if at all possible, but paying off Sean Fitzpatrick’s IOUs at the behest of EU bureaucrats sticks in just about everyone’s craw.

A side-effect of all the contrivances such as NAMA and the IBRC is that the accounting has become horribly complicated, so that I frankly doubt that I will ever know whether dsquared has his facts right about this. Maybe Karl Whelan will give the wretched Hans-Werner Sinn a break and respond.

57

Zamfir 12.14.11 at 12:13 pm

Is marginal income a good number, when unemployment is the issue that hurts most?

When people talk about devaluation and the Euro etc, there is an underlying assumption that a fall in real wages is preferable to high unemployment. Everybody feels poor when there is high unemployment, even the people who have a job but fear to lose it.

58

Zamfir 12.14.11 at 12:15 pm

Sorry, I meant median instead of marginal.

59

Karl Whelan 12.14.11 at 12:37 pm

@ dsquared

Usually smart but all over the place here is a comment that can be thrown in both directions.

* Trust me, the IBRC now owes about €42 billion in ELA to the Central Bank of Ireland. This is the €38 billion in Anglo’s half-year accounts plus an estimated €4 billion from INBS. Combining the two balance sheets, total non-equity liabilities are about €59 billion. Quibble about vast majority or not if you want, but it’s clear this IBRC is mainly an ELA-repayment operation.

* In relation to IBRC’s performing assets that you think I’ve ignored, remember that the reason IBRC had to provided with €31 billion in promissory notes is because otherwise they were insolvent. The point made “the balance sheet of the IBRC shows very little in the way of good financial assets likely to yield funds to repay this enormous ELA debt, equivalent to almost €10,000 per man, woman and child in the Republic. IBRC’s principal assets are what is known as “promissory notes” from the Minister for Finance” is correct. There’s a €31 billion shortfall without state help and perhaps more if the remaining assets get written down further. So it’s largely left on the state to get the IBRC’s ELA debt repaid.

* Neither the piece Niamh cited nor anything else I have written has double-counted the ELA as part of the national debt and I’m fairly surprised to see you accuse me of that. The ELA is to be repaid to the Central Bank. The promissory notes are the mechanism that will allow this repayment to happen. The promissory notes count on the national debt (this is the only mention of the national debt in the article) while the ELA does not. If the ELA debts are put on the long finger, then the promissory note can be restructured in a way that substantially reduces the NPV burden of this debt.

* In relation to your comments on depositors getting back 60 cents, I’m assuming this is a temporary failure to remember bank resolution regimes. This might jog your memory http://www.bankofengland.co.uk/financialstability/role/risk_reduction/srr/index.htm

* “The overall Irish government debt is a big number, and so identifying one part of it (the promissory notes) is also going to be a big number.” I’m guessing you can see the logical flaw in this.

Not to worry, you’ve had better moments.

60

hix 12.14.11 at 12:41 pm

No one cares about distant isolated social groups and they arent strong enough to help themself, thats all quite normal and has zero to do with austerity measures. Have to see that myself right now in evil Irelands auterity causing Germany (in case someone doesnt get it in his borderline racist blame other countries rage, thats a joke).

61

Alex 12.14.11 at 12:57 pm

On a technical note, it bugs me that so many discussions of the banking system liability don’t mention the corresponding asset at all; this makes a huge difference to the net fiscal position

I’m with Karl in suspecting that a lot of it doesn’t exist. I mean, the recovery rates on foreclosed houses in the US in this bubble have been pretty dreadful. Also, if you leave an unfinished building for a few Irish winters (or a finished one after the cops move the squatters on and leave the gaff open), anyone who buys it will need to gut it to the foundations to deal with the damp and rot before they make good the inevitable vandalism, replace the stolen copper pipes and wiring, etc.

Plus, there’s a lot of stuff in the wrong place, and the only fix for that is to knock it down. No doubt there’s a fair amount of pure bezzle in there, too. Some of it will be “illiquid”, but that’s another way of saying “it might be saleable at some point in the indefinite future but it’s worth nothing now”, and you can’t accuse someone else of yadda-yaddaing and also rely on that.

62

Barry 12.14.11 at 1:21 pm

hix: “No one cares about distant isolated social groups and they arent strong enough to help themself, thats all quite normal and has zero to do with austerity measures. Have to see that myself right now in evil Irelands auterity causing Germany (in case someone doesnt get it in his borderline racist blame other countries rage, thats a joke).”

Could you please repeat in English?

63

roger 12.14.11 at 1:23 pm

@40 – Iceland is doing better than Ireland in terms of the human misery Niamh is writing about – for instance, employment. The argument that Iceland is doing worse has been countered by Krugman, here: http://krugman.blogs.nytimes.com/2011/02/26/iceland-ireland-again/. And I’d like to know the source of the idea that the Icelandic government is planning on reneging on the referendum based repudiation of the program of the government taking over the private bank debt, implied by d2’s comment in 43. Barry Ritzhold has a nice string of references here: http://www.ritholtz.com/blog/2011/11/key-lesson-from-iceland-crisis-%E2%80%9Clet-banks-fail%E2%80%9D/

The idea that time was working against having the Irish banks go bankrupt and be bought by other banks outside of Ireland is, like the idea that the state oughtn’t to simply use its facilities to create an immediate emergency public bank, one that bankers like to wave around. But the time dimension here has to be measured not in terms of bond traders computers, but real people’s future opportunities, which have been systematically sold off in order to maintain a system in which the richest thrive, and the structures that were painstakingly built to create a middle class over the last one hundred years – state supported life cycle goods – are just kicked over.

This seems fundamentally to get one of the questions about the economy wrong: what is the economy for?
In Ireland’s case, it is a rich country – but one with a very thin history of being a rich country. This counts enormously, as well does not simply consist of median income stats over a year’s time, or even a decade, but also infrastructure, the endogenous growth of innovation within an economy (Solow’s residual), etc. In these terms, Ireland has made a terrible mistake in not telling the dead banks to bury their own dead.

64

john b 12.14.11 at 2:25 pm

Ireland is a rich, but not a wealthy, country – this is a fair point.

But comparing with Iceland doesn’t make sense, just as comparing the UK with Norway doesn’t. Iceland’s fish and geothermal-hence-aluminium resources together represent the kind of massive fiscal boost that oil represents for Norway, which is going to make any shock bearable. Ireland, famously, is a bit stuffed for natural resources and has to do what it can with what’s left.

65

Jeffrey Davis 12.14.11 at 2:45 pm

Did Ireland ditch the bankers and wipe out its bond holders when it saved its banks?

66

Karl Whelan 12.14.11 at 4:09 pm

My first comment here and I mess and it by losing all the spaces beween my points. Hopefully, this is easier to read. If not I’ll give up.

@ dsquared

Usually smart but all over the place here is a comment that can be thrown in both directions.

– Trust me, the IBRC now owes about €42 billion in ELA to the Central Bank of Ireland. This is the €38 billion in Anglo’s half-year accounts plus an estimated €4 billion from INBS. Combining the two balance sheets, total non-equity liabilities are about €59 billion. Quibble about vast majority or not if you want, but it’s clear this IBRC is mainly an ELA-repayment operation.

– In relation to IBRC’s performing assets that you think I’ve ignored, remember that the reason IBRC had to provided with €31 billion in promissory notes is because otherwise they were insolvent. The point made “the balance sheet of the IBRC shows very little in the way of good financial assets likely to yield funds to repay this enormous ELA debt, equivalent to almost €10,000 per man, woman and child in the Republic. IBRC’s principal assets are what is known as “promissory notes” from the Minister for Finance” is correct. There’s a €31 billion shortfall without state help and perhaps more if the remaining assets get written down further. So it’s largely left on the state to get the IBRC’s ELA debt repaid.

– Neither the piece Niamh cited nor anything else I have written has double-counted the ELA as part of the national debt and I’m fairly surprised to see you accuse me of that. The ELA is to be repaid to the Central Bank. The promissory notes are the mechanism that will allow this repayment to happen. The promissory notes count on the national debt (this is the only mention of the national debt in the article) while the ELA does not. If the ELA debts are put on the long finger, then the promissory note can be restructured in a way that substantially reduces the NPV burden of this debt.

– In relation to your comments on depositors getting back 60 cents, I’m assuming this is a temporary failure to remember bank resolution regimes. This might jog your memory http://www.bankofengland.co.uk/financialstability/role/risk_reduction/srr/index.htm

– “The overall Irish government debt is a big number, and so identifying one part of it (the promissory notes) is also going to be a big number.” I’m guessing you can see the logical flaw in this.

Not to worry, you’ve had better moments.

67

hix 12.14.11 at 5:03 pm

“Could you please repeat in English?”

That was the best in can do in English. Somehow i tend to understand almost everything written in Englis anyway , i can try German:

Niemand interessiert sich für schwache weit entfernte isolierte soziale Gruppen und sie können sie sind nicht stark genug sich selbst zu helfen, das war schon immer so, ist ganz normal und hat null mit den Sparmaßnahmen aufgrund der Finanzkrise zu tun. Das merke ich gerade selbst im bösen die Irischen Sparmaßnahmen erzwingenden Deutschland (für alle die es nicht Merken aufgrund von ans rassistische grenzender anti Deutscher Wut, der Teil das Deutschland die Irischen Sparmaßnahmen erzwingt war ein Witz).

Or let me try with different English words: Life is not fair, never has been, never will be. That is the case just about everywhere, not just in countries like Ireland that see themself (wrongly) as victims of evil foreign forces like the ECB (which according to general sentiment here in other posts and comments is controled by evil Germans).
For example, im just at the moment expiriencing myself how bad weak social groups are threatend within the aleged crisis winner country that has an evil masterplan for world or at least EU domination.

68

niamh 12.14.11 at 5:16 pm

To Hix:
The fatalism you outline here is precisely what I think is so worrying about current trends.
We have come to expect that national democratic states will respond to the needs and preferences of their own people. Most people are not at all reconciled to thinking that they are not only powerless but that their fates actually don’t even matter, because real life happens elsewhere, and they are too insignificant to be noticed by the powerful.
All the rich resources of western humanism have powered our conceptions of democratic rights on the one hand, and our normative challenges to the scope of markets on the other.
No-one has said anything about evil Germans. This is a vocabulary that has no place in the reflections I’ve set out here and elsewhere.
What I am concerned about is to understand the kind of Europe that is currently under construction by default, and to consider how best we can analyse the responses of both individual citizens and national governments.

69

Barry 12.14.11 at 5:31 pm

Hix – thanks!

Please note that ‘Life is not fair, never has been, never will be. ‘ is not an excuse for deliberately choosing bad policy.

70

SamChevre 12.14.11 at 5:41 pm

We have come to expect that national democratic states will respond to the needs and preferences of their own people.

My question is, and remains–is that a good thing?

It seems to me that one of the generally-good-but-problematic themes of modern liberalism is that states should be constrained by systems internal and external so that the needs and preferences of their own people today are less important, and norms more important.

This is a very broad preference–I would include the various laws of war, the concept of human rights, freedom of movement and amnesty as all attempts in this direction.

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Jeffrey Davis 12.14.11 at 6:57 pm

re:70

“My question is, and remains—is that a good thing?”

One of the laugh-up-their-sleeves aspects of neo-conservatists and their anti-democratic beliefs is the fact that the electorate (2004 Bush) voted for them! The electorate voted for people who lie to them and despise them. Funny? Not funny?

Look at it another way, the big fat lazy electorate is going to be the final stumbling block to effective action against AGW. “Death Before Discomfort!” is their (implicit) battle cry.

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Kevin Donoghue 12.14.11 at 7:14 pm

Since hix may not be alone in thinking that critics of German policy regard Germans as evil, let me say that Axel Weber and Juergen Stark are men of principle in my book. I don’t much like their principles, but the ECB would be better institution if it had more like them. (Or it might have ceased to exist, but that could be a good thing too.)

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Kevin Donoghue 12.14.11 at 7:54 pm

Enough from me, but I don’t want to ignore this from Dan Hardie (good to see you here BTW):

A majority of Irish voters wanted the single currency, which has had such awful consequences for their country, and the rest of the Eurozone. That is something that Irish citizens are going to have to think about.

Lots of us do think about it. There were some things we should have foreseen, for example the way Irish borrowers went wild when they found themselves in a low interest-rate environment. Ireland has form when it comes to property speculation and we should have been ready for that. But a lot of what went wrong was not easy to foresee. Career civil servants had the reputation of being sound, boring people who cared about getting the details right. It wasn’t easy for Sean Citizen to know that the culture had deteriorated so much. Likewise, who knew that the Auditors Reports in the banks’ financial statements really weren’t worth the paper they were written on? Stock market players were rather slow to catch on, so it seems a bit harsh to expect better of the voters.

Some of the worst features of the system have only become evident in the last few years. Economists have only recently woken up to the fact that, in a monetary union, states are vulnerable to the same sort of self-fulfilling panic which has been toppling banks for centuries. Hoocudanode that when that discovery was made the ECB would say: sorry guys, not our problem?

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geo 12.14.11 at 8:14 pm

Sam @70: states should be constrained by systems internal and external so that the needs and preferences of their own people today are less important, and norms more important

Like most political philosophy, this formulation is a lot less significant than it sounds. Norms are simply preferences at one remove, just as constitutions are laws at one remove. Popular sovereignty means that the people, after discussion and through their accountable representatives, must consent both to the framework and the specifics of government, to the normative bases of law and the actual laws.

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Doug K 12.14.11 at 8:23 pm

I fear the as-yet undiscovered fourth horseman of “exit, voice, loyalty” could be violent revolution, as Ashwin noted.

When none of exit, voice or loyalty is possible, waiting (or screaming) silently can not be sustained indefinitely. I saw this happen in South Africa, from which another perspective, inter alia
“There is more money to be made out of financial speculation than out of any other activity that one can do with money. This is the crux of the global financial crisis.”
which seems to my innocence an accurate summation.

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cormoc 12.14.11 at 8:24 pm

@Kevin, thanks for clearing that up. Not living in Ireland anymore I rely on alot of info on family and friends and the message I was getting was that there was a consensus forming around the notion that all this was somehow the ECB’s fault. Whereas it may have contributed to the mess, if we’re trying to attribute responsibility for this it seems that it still lies squarely with the fatal decision to bailout the toxic banks regardless of cost.

@Niamh, I think the financial crisis has given the lie to the belief that states (or rather their electorates) control all aspects of their own destiny. It’s a cliche, but in an increasingly interconnected world it is not now, if it ever was, the case that governments could deliver the (at times unrealistic) expectations of of voters. The world is much more complex and it behoves elected representatives to communicate this to their citizens. Citizens can, through their governments, retain some ownership over external forces by having a voice in bigger groupings like the EU. This is even more important for small states like Ireland I think.

Or am i just being naive as to what the EU can deliver (and the extent to which small states have an, even modest, voice).

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Glen Tomkins 12.14.11 at 9:14 pm

Qui incipit amare, incipit exire,
Incipit exire e Babilonia.

Well, it would seem that exit would have been the obvious first choice for Ireland, and remains the obvious choice now. I mean exit from any and all debt obligations that compromise the more important obligations facing Ireland, some of which you go over. Instead, what the then govt of Ireland chose was to enter further into the maze, to actually enter into an obligation to take over the bad debt of private banks. And ther present govt sees no alternative but stay on that course

That behavior is what is really strikingly odd about this situation. Instead of choosing, in the face of obvious failure, any of Hirschman’s three options, or either of the two alternates you propose of “silent screaming”, or “waiting in the long grass”; the govt of Ireland chose to enter more deeply into the maw of a financial system that had failed so shockingly. It rejected exit, which is perhaps understandable, but it chose instead to go back for more of the same, which is not understandable. Why would it do that?

The proximate cause of what would otherwise seem to be deeply irrational behavior, seems to have been sheer terror at the prospect of the “contagion” that letting the banks fail would have unleashed. I think that it is a fairly clear error to suppose that the govt of Ireland was impelled to take on the debt by a fear of Europe, at least in the sense of Europe’s formal, open governance structure. Instead, it seems that what drove this was the prospect that the whole web of hyper-leveraged, re-hypothecated to the nth degree, international finance threatened to unravel if the Irish banks’ counterparties were not made whole. We don’t and can’t know the details — exactly which raft of CDS convinced them that not assuming their banks’ loans would bring about Armageddon — because that’s the whole point of what we’ve let our financial arrangements become at the high end, completely opaque. We believe in the Hidden Hand over public governance, even when the former has patently degenerated into hands that like to hide themselves.

I don’t think that Hirschman’s frame of analysis includes this dimension of opacity in power arrangments. Of course no one can voice their dissent with the arrangements and organization that have failed here, because their are no open arrangements, there is no organization, just the Hidden Hand, plus or minus a whole lot of hidden hands, the extent of their contribution varying with your taste for conspiracy theories. Loyalty? To who or what? Not to Ireland. Ireland’s govt has admitted that there is no such thing as a sovereign Ireland that can or should chart ts own course. Ireland, such as it is, is certainly not the system that failed here. That would be the great worldwide non-system of finance.

And there would seem to be no exit, because Babylon is everywhere, a truly global, transnational transgovernment. It has no formal structure or concrete presence, so you might as well call it Babylon as anything else, at the risk of seeming to take public policy advice from Rastaffarians (Safer to attribute the idea to them, because St Augustine is probably in worse odor these days.).

Exit, voice and loyalty are all irrelevant inside Babylon. Babylon keeps going despite its obvious, and obviously fatal, failures, because it is precisely the prospect of its failure that renders its inhabitants too terrified for any other response than fear. Fear is that fourth response you need to augment Hirschamn’s three. But it’s a peculiar fear that is generated by suchg a non-goveement, non-organization that mevertheless seems so much to be the only really relevant or impoortant source of order left. This isn’t really fear of what Babylon would do to traitors (Who could be afraid of Trichet?), as fear that it will collapse, and in its ruin, ruin all of us. We imagine that the continued existence of all sorts of good things rests on its continued existence.

It’s an irrational fear. The governments of the world would be perfectly capable of separating out the wealth that serves real needs, and thus has to be protected, from the excess wealth that has to be allowed to burn off. But those governments, and the people whose will they represent, are almost certainly too paralyzed by fear to start such a bonfire themselves. Fortunately for all concerned, we don’t have to do anything proactive, as Babylon is busy committing suicide. It would have done so in 2008, but we were too afraid to risk life without it, and so interrupted its self-destruction. All we have to do this time around is leave as the fires start. In practical terms, respond to the failure of banks and other financial entitities by resolving them rather than bailing them out. Have Ireland insure that the widows and orphans are made whole, while GS gets bupkis.

Life will go on without the banks. It’s time to leave them behind, as Abraham left Ur.

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Jawbone 12.14.11 at 9:37 pm

@33 dsquared:
Thanks a lot for the detailed response–very helpful in clarifying my thoughts!

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CMK 12.15.11 at 12:08 am

John B @64

Your point about Ireland ‘being a bit stuffed for natural resources’ is not entirely true. Part of the problem is that what natural resources there are (not on the scale of Norway, granted, but substantial enough) are effectively handed over to multi-national resource extraction companies for a pittance in licences fee and taxes. It’s part of the systemic cravenness towards business interests – domestic and foreign – which is the hallmark of the Irish centrist politician, of all parties. The natural resources we do have could be developed and provide a decent medium to long term revenue stream for the state, but the state has allowed itself to be persuaded that pursuing this would not be worthwhile, just like it allowed itself to be persuaded that guaranteeing the banks made perfect sense.

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dsquared 12.15.11 at 7:24 am

Karl:

Per the H1 11 accounts of IBRC, they had total central bank funding of EUR41bn (this wouldn’t include INBS). I don’t think this was all ELA and I think that note 25 implies that EUR38bn is the total amount including a lot of repo.

I think you are being much too blase about the asset side though. IBRC in the H1 accounts (so ignoring INBS, but that is only going to make the picture better as Nationwide’s assets are in general better than Anglo’s) has 54bn of assets, comprising 24bn promissory note, 15bn customer loans (which have been written down from 32bn) and 16bn other. The “Other” category is made up of 6bn loans held for sale (ie also marked to market), 5bn of cash-like items and the rest in property and bits and pieces. Then on the liability side it has 41bn of central bank funding, 6bn of the bonds and 4bn of equity. The promissory note has come down in value because a tenth of it has been paid in and shows up in the cash. I am not seeing this liability growing at all; at the very least the 4bn of equity needs to be allowed for before you start looking at further losses.

All of which means that the relevant exposure is not the 41bn of central bank funding (which was the basis of your “10k for every man woman and child” figure) but the 23bn of promissory notes. The 41bn number would only be realised if the 30bn of non-PN assets turned out to be worthless, which since 5bn of them are cash seems unlikely.

I think your article is wrong to imply that the whole 41bn is likely to become an obligation of the Irish state, and talking about the ELA as a new liability does double-count the proportion of it which reflects the promissory note (I am sure this was unintentional, because you do actually make the point correctly in the eleventh paragraph, but the surrounding text really does invite the misinterpretation, particularly the 10k figure).

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Oliver 12.15.11 at 11:38 am

I should be said that Germany did not insist on all bondholders be compensated. Germany called in effect for a partial Greek default. If you have to blame somebody blame the ECB, for you cannot expect Germany to make good your promise you call stupid yourselves.

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chris 12.15.11 at 1:15 pm

making labour more expensive is not consistent with the stated aim of trying to support job creation. Piling on domestic taxation in the middle of a recession – or technically, a depression – is not generally a great idea.

By that logic, you can’t close the fiscal gap in the short to medium term *at all* without knocking the recovery on the head. So they should just not sweat the deficits and plan to fix them after the economy is back to full employment.

If you must reduce your deficit during recession, carefully selected taxation is probably the least harmful way to do so (unless you have some genuinely useless spending like excessive militarization).

Or better yet, they should inflate and devalue to improve their account balance and alleviate the weight of debt — but they can’t, having chained themselves to the euro. Since the whole country has little or no voice in decisions on euro monetary policy, that just leaves them with loyalty or exit…

3) In 2) I abstracted from the existence of the deposit guarantee scheme which would have meant that at least EUR40bn of the deposit liabilities would have ended up on the state balance sheet anyway.

Isn’t this an argument in favor of bankruptcy? If the small depositor is already shielded by an Irish FDIC-equivalent, then bankruptcy mainly falls on the larger investor who (a) ought to have been sophisticated enough to hedge (the whole point of the FDIC is that you can’t expect the little guy to hedge effectively against the failure of his own bank, but clearly that doesn’t apply to megafinanciers) and (b) can take the hit without suffering human misery anyway.

So the state ends up taking only the burden that needs to be taken. It seems to be exactly the kind of half-default that they couldn’t do directly but would be beneficial if they could.

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Daniel 12.15.11 at 1:28 pm

If the small depositor is already shielded by an Irish FDIC-equivalent, then bankruptcy mainly falls on the larger investor

but “larger investor” in this context includes working capital balances of corporations. Plus, the small depositor will (eventually) get his money back from the FDIC equivalent, but that doesn’t mean he can get it out of the cashpoint – the bank is bust and can’t operate as a bank.

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Ben Hyde 12.15.11 at 2:01 pm

Hirshman’s book is about how agents deal address a flawed institution. Silent screaming is the initial condition.

All three responses vary in intensity. For example voice: grousing, letter writing, protesting, revolution. At the low end loyalty can mean nothing more than holding your tongue and enduring; but it runs right up thru virulent nationalism. There is a not-to-hot not-to-cold aspect to all the responses around a health institution.

This all gets more confusing once you start enumerating institutions and actors. The ECB technocrats are loyal to their models. The nation states have shifting loyalties to the Euro. The citizens have rapidly declining loyalty to the Brussels et. al.

If actors leave exit one institution they do they double down on loyalty to another institution.

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Bruce Wilder 12.15.11 at 9:28 pm

It is worth remembering that the Euro was a very popular exit in some of these countries. Italy couldn’t move to the Euro fast enough to suit popular attitudes. Ireland, too, loved the Euro at first.

The “optimal currency area” objections, voiced in technical terms, fell on deaf ears, and often did not point sharply at how sovereign currencies provided a means for the internal resolution of institutionalized conflict. Sweden, which has regularly and explicitly used devaluation to correct mistakes in its system of nation-wide collective bargaining over wages, barely avoided committing. The political convenience of French inflation over the years was not appreciated by the mass of Frenchmen.

I don’t think Hirshman’s categories really help with understanding the subtle ways that having a sovereign currency, and being able to abuse it, gave the political system ways and means to solve problems, which arose in the presence of otherwise difficult to resolve conflicts hobbling institutional performance. This was particularly true of fiscal and banking institutions. I suppose people may have hoped that the Euro would bring pressure to reform taxation, in say, Greece or Italy, or commercial banking in Spain. But, instead, without the “out” provided by a sovereign currency regime, those institutions simply broke.

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Karl Whelan 12.16.11 at 12:13 pm

@ dsquared

“The 41bn number would only be realised if the 30bn of non-PN assets turned out to be worthless, which since 5bn of them are cash seems unlikely”

Em, no. The cost of recapping this bank will be €31 billion if everything goes according to plan. If there is an additional €10 billion in losses, then it will be €41 billion. If there were €25 billion in additional losses on non-cash assets, it would be €56 billion. They’re hardly difficult sums Daniel.

At present, three-quarters of funds to repay the ELA are coming from the promissory note. If Anglo’s remaining assets perform poorly, then it could turn out to all be coming from the Irish taxpayer.

Anyway, we both know what the situation is, so I’ll just leave it at that.

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Daniel 12.16.11 at 12:50 pm

If there were €25 billion in additional losses on non-cash assets, it would be €56 billion.

this would involve every single loan being totally worthless, all the property being totally worthless and all the derivatives counterparties paying zero cents in the dollar.

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