Sunday, January 31, 2010

Driving in Dublin

With cities throughout the world making attempts to increase the speed of city centre traffic because of congestion, Dublin City Council have announced plans to slow down traffic in a large area of the city centre.


The map above shows most of the areas that will be subject to the new speed restrictions.  Click the image to enlarge.  The pink shaded areas were the original extent of the 30kph zone.  The yellow areas reflect the new extended 30kph sone from 31st of January.  Is this a worthwhile initiative?

According to Dublin City Council the initiative is.
It is well recognised that dangerous and inappropriate speed is the primary contributing factor to road fatalities. Pedestrians, cyclists and motorcyclists are particularly vulnerable if involved in a collision with a vehicle. A review of accident statistics for Dublin City area for the period 1998 – 2007 reveals that 47% of fatalities and 24% of injured persons were pedestrians. Research indicates that the percentage of pedestrians killed when in a collision with a vehicle travelling at 50 kph is 45 % but reduces to 5% when the vehicle speed is 30 kph.
This map has markers of road fatalities in Ireland in 2006.  Here is the grim picture for the whole country showing markers covering most of the country.


If we will zoom into the area of Dublin City Centre we get the following image.  Click to enlarge.


There are two fatalities in the area of the map.  Was a motor-cycle accident on the Phibsboro Road.  The second was a pedestrian who died when struck by a truck on Gardiner Street. Neither of these roads are in the new 30 kph zone.

A report from the Road Safety Authority, Safety in Irish Cities 1997-2006, shows that shows that despite an increase in population and motor vehicles, there has been a steady decline in the number of road deaths and serious injuries in the five major Irish cities over the ten year period, 1997 to 2006.  Dublin City recorded a 73 per cent reduction in the number of killed and seriously injured, with a 77 per cent reduction in pedestrian fatalities.  This image from the RSA's 2007 Road Collision Facts publication shows that Dublin has the safest roads in the country as measured by the number of road injuries per million population.

It seems fairly clear that the safety benefits of the speed limit measure are going to be very limited.  This view is echoed by Conor Faughnan of AA Ireland.
This is an action that appears to the AA to be more vested in ideology than reason. In road safety terms Dublin City is one of the safest places in the country. There have of course been some fearful accidents. There was a dreadful tragedy on Wellington Quay in 2004, and other pedestrians have been killed or injured. There have also been fatalities involving cyclists and trucks turning left which were particularly horrific. But even in these high-profile cases the vehicles were travelling at less than 30kph to begin with. With opening of the Port Tunnel in 2007 and the subsequent removal of HGVs from the city centre the safety situation has improved considerably. The risk to road users is less in Dublin city centre than almost anywhere else in Ireland.
The Dublin Cycling Campagin disagree with AA Ireland suggesting that the reduced speed limit will reduce congestion.  Slowing down traffic seems to me to be the antithesis of congestion reduction!  This is almost as absurd as increasing parking charges to reduce congestion.

It seems this speed limit measure comes with costs of slower traffic and very few benefits.  Well maybe one benefit.  From today's Sunday Tribune

Dr Enda Murphy, of the school of planning and environmental policy at UCD, claimed that Dublin City Council's new speed limit by-laws will have the positive effect of reducing noise levels in the capital.  He said: "Generally, there is a direct correlation between reductions in speed and reductions in noise levels within cities."

Murphy, who has conducted a number of extensive studies in this area, believes that "there should be a positive reduction in noise levels in Dublin with the introduction of the new speed limits."  He also contends that even though people "may not be totally aware of the reduction in noise, it may reduce annoyance levels. For example, people get angry when a car races past quite quickly.

"Implementing the speed decrease is likely to have a slight impact on reducing noise pollution, but the real benefit is likely to be in making the city more attractive for cyclists."
But unfortunately people "may not be totally aware" of this benefit!  But at least the cyclists might be happier.

Tuesday, January 26, 2010

Keynes versus Hayek - The Rap

In this short news segment Lord Skidelsky and Russel Roberts discuss the opposing views of John Maynard Keynes and Friederich von Hayek.  We also get a early preview of rap Roberts is writing on the Keynes versus Hayek debate.



The rap is now completed and has been posted to ever reliable Youtube and is available below the fold.




A version of The Police's Every Breath You Take adapted for Fed chief Ben Bernake is also worth a look. See here.

The full lyrics of the Keynes/Hayek rap from the associated website are reproduced here.

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

[Keynes Sings:]
John Maynard Keynes, wrote the book on modern macro
The man you need when the economy’s off track, [whoa]
Depression, recession now your question’s in session
Have a seat and I’ll school you in one simple lesson

BOOM, 1929 the big crash
We didn’t bounce back—economy’s in the trash
Persistent unemployment, the result of sticky wages
Waiting for recovery? Seriously? That’s outrageous!

I had a real plan any fool can understand
The advice, real simple—boost aggregate demand!
C, I, G, all together gets to Y
Make sure the total’s growing, watch the economy fly

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

You see it’s all about spending, hear the register cha-ching
Circular flow, the dough is everything
So if that flow is getting low, doesn’t matter the reason
We need more government spending, now it’s stimulus season

So forget about saving, get it straight out of your head
Like I said, in the long run—we’re all dead
Savings is destruction, that’s the paradox of thrift
Don’t keep money in your pocket, or that growth will never lift…

because…

Business is driven by the animal spirits
The bull and the bear, and there’s reason to fear its
Effects on capital investment, income and growth
That’s why the state should fill the gap with stimulus both…

The monetary and the fiscal, they’re equally correct
Public works, digging ditches, war has the same effect
Even a broken window helps the glass man have some wealth
The multiplier driving higher the economy’s health

And if the Central Bank’s interest rate policy tanks
A liquidity trap, that new money’s stuck in the banks!
Deficits could be the cure, you been looking for
Let the spending soar, now that you know the score

My General Theory’s made quite an impression
[a revolution] I transformed the econ profession
You know me, modesty, still I’m taking a bow
Say it loud, say it proud, we’re all Keynesians now

We’ve been goin’ back n forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Keynes] I made my case, Freddie H
Listen up , Can you hear it?

[Hayek sings:]

I’ll begin in broad strokes, just like my friend Keynes
His theory conceals the mechanics of change,
That simple equation, too much aggregation
Ignores human action and motivation

And yet it continues as a justification
For bailouts and payoffs by pols with machinations
You provide them with cover to sell us a free lunch
Then all that we’re left with is debt, and a bunch

If you’re living high on that cheap credit hog
Don’t look for cure from the hair of the dog
Real savings come first if you want to invest
The market coordinates time with interest

Your focus on spending is pushing on thread
In the long run, my friend, it’s your theory that’s dead
So sorry there, buddy, if that sounds like invective
Prepared to get schooled in my Austrian perspective

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

The place you should study isn’t the bust
It’s the boom that should make you feel leery, that’s the thrust
Of my theory, the capital structure is key.
Malinvestments wreck the economy

The boom gets started with an expansion of credit
The Fed sets rates low, are you starting to get it?
That new money is confused for real loanable funds
But it’s just inflation that’s driving the ones

Who invest in new projects like housing construction
The boom plants the seeds for its future destruction
The savings aren’t real, consumption’s up too
And the grasping for resources reveals there’s too few

So the boom turns to bust as the interest rates rise
With the costs of production, price signals were lies
The boom was a binge that’s a matter of fact
Now its devalued capital that makes up the slack.

Whether it’s the late twenties or two thousand and five
Booming bad investments, seems like they’d thrive
You must save to invest, don’t use the printing press
Or a bust will surely follow, an economy depressed

Your so-called “stimulus” will make things even worse
It’s just more of the same, more incentives perversed
And that credit crunch ain’t a liquidity trap
Just a broke banking system, I’m done, that’s a wrap.

We’ve been goin’ back n forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No it’s the animal spirits

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
John Maynard Keynes - The General Theory of Employment, Interest and Money

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
F A Hayek - The Fatal Conceit

Saturday, January 23, 2010

Tragedy of the Fishes

In 1968 Garret Hardin published a highly influential article in Science called The Tragedy of the Commons.  A PDF reprint of the article is available here.

You can read Chapter Ten from John McMillan's super book on markets, Reinventing the Bazaar, here.  The chapter deals with externalities and considers three examples of externalities
  • Driving and Congestion
  • Overfishing and Decling Fish Stocks
  • Wages in Sport and Competitive Balance
McMillan describes how market forces can be harnessed to correct externalites.  He looks at the congestion pricing cure to traffic jams and looks at the various input and output methods used to try and address overfishing.  Get an understanding of the commons problem by playing The Tragedy of the Bunnies online.

An excellent artice was on conservation methods in fisheries was published in The New York Times Magazine a few years ago.  A Tale of Two Fisheries looks at formal and informal conservation methods.  Some quotes from it are used by John McMillan.  For example:

"Right now, my only incentive is to go out and kill as many fish as I can," Sorlien said. "I have no incentive to conserve the fishery, because any fish I leave is just going to be picked by the next guy."
The author of the article, John Tierney provides updates, here, here, and here.

Sometimes it can happen that a strategy to correct an externality backfires.  In this example a South Sea Island tries to reduce fishing by ends up making the problem worse. We know that people respond to incentives because of The Theory of Unintended Consequences we have to be careful of how they respond.

Finally, find out what happened traditional cod fish fingers and learn that we may have wild ocean fish for only another 50 years.

Intelligent Tolls

When a driver uses a busy road he is imposing a delay cost on all other drivers.  However, as road users we do not take the costs we impose on others into account, thus roads like most common resources are over used and society is worse off.

Road pricing is a method to try and internalise the costs drivers impose on others and to encourage more efficient use of the road network.  London use a congestion charge for cars entering the centre of London, and makes some mild claims about it's effectiveness.  The problem with the London congestion charge is that it is too blunt a tool.  It is a fixed charge that does not respond to demand and increased congestion.  When roads are moving freely the congestion charge should be low, when roads are choked the charge should be high to encourage drivers to find alternatives.  This is the basis of Vickrey congestion pricing.

Singapore is one of the best examples of Vickrey pricing in action.  Here is a recent report from the Financial Times and the video below the fold gives a television news report on the charges.



You can read more about Singapore's experiences with intelligent road pricing here and see also this fact sheet.  There is excellent article from Wired on The Ultimate Jam Session. IBM have been a key partner in the Electronic Road Pricing project in Singapore and produced a short TV TV ad  based on their contribution.  Some details of IBM's traffic prediction efforts are available here.

Here is a nice summary of congestion changes and an article on VoxEU has a simple cost-benefit analysis of the London congestion charge.  The New York Times discusses the possibility of uses congestion charges to speed up Manhattan's traffic.

A short extract from James Surowiecki's excellent 2004 book, The Wisdom of Crowds, which features the Singapore and London road pricing system is available here.

Thursday, January 14, 2010

Say it ain't so, Joe

A recent piece written by Socialist Party Leader, Joe Higgins, states:
"In 2008, the effective rate of tax on profits (including that declared by the self employed) amounted to a miniscule 10.3% (approximately €6 billion tax out of €58 billion profits).  The corresponding figure for wages including PRSI is 28% (€22 billion tax out of €79 billion in PAYE wages). If profits in 2008 were taxed at the same effective rate as wages, a rate that would still be less than the US and the rest of the EU 15, an extra €10 billion would have been available to the exchequer."
This was repeated by Stephen Boyd in another piece and used by Mick Murphy on a recent appearance on Newstalk's The Right Hook.  Listen here (start at 7:30 into the segment to get the relevant piece).

There is much to admire about Joe Higgins.  He is a brilliant orator and is a loss to parliamentary politics in Ireland.  He has great energy and his work and support for the less well off in society is admirable.  Every society needs a Joe Higgins. Unfortunately he tends to talk an awful lot of rubbish, such as the claptrap above.

Joe takes figures for 2008 and argues that we could raise an extra €10 billion in tax revenue if corporation and income taxes were at the same rate.  However, if Joe's sums actually added up he'd find that we would lose revenue if we taxed corporate profits at the same rate as earned income.  Why? Well the average effective tax rate on businesses is higher than the average effective tax rate on income.

I can't find complete figures for 2008 so I will work off the most recent figures I can find.  While the numbers may not be exactly the same, the tax rates are almost the same so the proportions Joe uses should still be the same.

First, looking at corporation tax.  Per the Revenue Commissionsers 2008 Report on Corporation Tax  (although it is the 2008 report it provides data for 2007).  From this report we learn that there was €56.806 billion of net income on which €6.305 billion of corportion tax was paid.  See the bottom corner of table CTS1 on page 2.  This gives an effective tax rate of 11.1%.  Joe's sums give 10.3% so surely we're not failing him for a difference of 0.8%.  No, we are not.  But it goes pear-shaped for him soon enough.

For wages, Joe gives an effective tax rate of 28% claiming the €22 billion in tax is paid on €79 billion in wages.  The 2008 Income Distribution Statistics from the Revenue Commissiones provide data for 2006, and state that €81.518 billion in income was earned from which €11.976 billion in income tax (plus the income levy) was paid. See Table ISD1 on page 6.  This gives an effective tax rate of 14.7%.

Joe now proceeds to muddy the waters by including PRSI contributions.  Details on these are available from the 2007 Annual Report of the Social Insurance Fund, into which PRSI contributions are paid.  On page 5 we see that there were contributions of €9.345 billion made to the SIF in 2007.  Adding these contributions to income tax, as Joe has done gives an effective tax rate of 26.0%.  Again this is not too far from Joe's calculated figure of 28% and surely not enough of a difference to write home about.

But Joe's figure just doesn't stand up. Why? He assumes that all PRSI contributions are made by employees and adds PRSI to income tax.  Surely Joe knows that the greater share of PRSI is paid by employers. See a sample of rates here.  And by moving on to page 8 of the SIF Annual Report we get a breakdown of PRSI contributions (% of total).
  • Employer €5.762 billion (74.6%)
  • Employee €1.539 billion (19.9%)
  • Self-employed €0.421 billion (5.5%)
Employers (firms who pay corporation tax) pay almost four times as much in PRSI as employees (who pay income tax).  The remainder of the contributions in 2007 were made up of €1.107 billion from the health levy (paid by employees) and €0.405 billion from the national training fund levy (paid by employers).

If we now redo Joe's sums with the correct information.  To be honest it's a bit of a moot exercise but we'll proceed nonetheless. 

The tax on firms is the corporation tax plus employer PRSI contributions plus the national training fund levy which gives €12.47 billion and an effective rate of 21.95%.  The tax on employees is the income tax plus employee PRSI contributions plus the health levy which gives €14.62 billion and an effective rate 17.93%.  Wage income is taxed less than corporate income.

Joe, if we taxed firms at the same rate we taxed workers we would LOSE €2.28 billion. You get a fail.

Water, water everywhere, but no one stops to think

When the "Big Freeze" peaked about 10 days ago the response of many households was to leave taps running in an effort to prevent pipes freezing and cutting off the water supply to the house. For the individuals in question, this was an entirely rational thing to do. The benefit was continued access to water and no cost to themselves.

However, society incurred a huge cost of this action through what we would call a consumption externality. The cost to society of all the water wasted as thousands of taps were left running. There is no individual incentive to conserve water in Ireland. Remarkably for a country that rarely suffers from a shortage of rain we are in the midst of a water shortage. People leaving taps running during the cold spell now means that we are rationing water.

Much of the debate focused on the level of losses through leaks in our water distribution network. However, these leaks are not the key determinant of the current shortage. Our water distribution system has always been leaky, yet we didn't have water shortages last September with the exact same system in place. Or last July. Or last January. We cannot expect our water system to have anything close to a 0% loss rate. For a county manager operating within a limited budget it is surely cheaper to provide more treated water than repair all the leaks in the distribution system.

The local authority will set supply at a level to meet demand, taking account of the water lost through leaks. If the supply cannot be provided to match demand then efforts will turn to addressing the leaks. Dublin has the lowest percentage of water lost through leaks because they cannot produce sufficient water to meet the demand from the ever expanding city. It is predicted that to meet Dublin’s future needs, water will have to be pumped from the River Shannon, over 100km away. For most local authorities the more cost effective measure is to simply produce more clean water.

Our water system has been in place for years so that cannot be the cause of the current water shortage. Yes, the cold weather has caused some problems to the system because of major faults and leaks to the system in localised areas. This has stopped clean water getting to some households, but it hasn't emptied our reservoirs.

A tap turned on fully will fill a pint glass in about three to five seconds. Even if a tap is not fully turned on their will still be a substantial flow. If a tap is left open, at say one-third full flow, a pint will pour out in about 13.5 seconds. This will mean about four and a half pints of water a minute simply pouring down the drain. If left on for a day, as many were, some 800 gallons of water will be used. For comparison, the biggest fuel tanker trucks we see on the road can carry about 8,000 gallons. In normal conditions it is estimated that the average household uses about 40 gallons of water per day. This is a 20-fold increase.

Just ten taps left on at one-third full flow sees the equivalent of a huge tanker of water poured down the drain a day. Multiply this by the thousands and probably tens of thousands of taps on and we have wasted a colossal amount of water. This may have kept the pipes of householders from freezing but now we are in a situation where many local authorities have reduced water pressure and cut off supply altogether overnight as water levels in reservoirs are extremely low.

For example South Dublin County Council (SDCC) estimate that at the worst of the cold weather the daily demand for water was about 2.25 million gallons per day obove the observed daily average demand seen in January 2009. On the first of January the water level at the Belgard Reservoir stood at 3.52 metres and by the 11th this had fallen to just 0.99 metres. See here. The reservoir has a capacity of 22 million gallons and with demand reaching 18 million gallons SDCC simply cannot fill the reservoir with treated water quickly enough that they purchase from neighbouring authorities. It is estimated that it will take three to four months for reservoirs in the Dublin area to return to levels they were at before Christmas.  Burst pipes stop water getting to some areas; empty reservoirs stop water getting to everyone.

A lot of this record demand is down to simple waste. People incur no extra cost for using extra water so there is no incentive to conserve. This will give credence to that water charges should be introduced but that is an issue that must be addressed carefully. In Ireland we have seen that small incentives can have huge effects. When a levy of just 15c was introduced on plastic bags in 2002 our annual consumption fell from 1.2 billion bags per year (about 325 per person per year) to just 90 million per year (20 per person per year) - a 94% drop! Water charges are unlikely to have as large an effect but they may encourage people to consider the external costs of their actions which they are currently ignoring.

In 2007 the total cost of our water system, production, distribution and collection, was about €1.3 billion. The day-to-day running of the system cost about €645 million with the other half spent of capital improvements and development. Commercial water rates levied on businesses brought in €160 million for local authorities. This means there is a shortfall of over €1.1 billion. Although households do not pay directly for water it is not free, as this €1.1 billion comes from monies raised through general taxation.

It has been suggested that we could reduce our income tax by about 8% if the costs of water were paid through water charges. This has many advantages. If it is revenue neutral there is no additional burden placed on society. If water is metered, as it should be, and people pay by use, we would have an excellent demand side constraint on quantity. This could see an average water charge of about €600 levied per household or about €1.60 per day.  Based on current usage of 40 gallons per day this €600 would equate to an average price of about 4c per gallon of water or just less than 1c a litre.

If we increase income tax credits by €600 then nobody can be left worse off. In fact, those who use their water carefully will have a water charge of less than the tax credit so will be better off. Those who waste water will have a higher water charge and will be worse off. That’s the theory.

The first problem is that those who are retired, out of work or unable to work will not benefit from an income tax reduction so they will be substantially worse off. This can be addressed by increasing welfare payments to compensate. Secondly many people in Ireland do not pay enough tax to fully benefit from a €600 tax credit. Figures from the Revenue Commissioners for 2006 indicate that the average amount of income tax paid on incomes of between €25,000 and €27,000 was €325 per year. Some 58% of tax returns handled by the Revenue Commissioners in 2006 had an income of less than €30,000. For these 1.3 million cases the average amount of tax paid was €450 euro. These 58% of earners paid 5% of total amount of income tax.

Low earners in Ireland do not pay much tax and thus cannot benefit significantly from tax cuts. Using income tax to offset water charges would be highly inequitable. Low earners would see little change in income as they don’t pay income tax but their expenditure would increase as they would have to meet the water charges.

Focussing all our efforts on the supply side, production and distribution, will only be partly effective. We need to look at the demand side as well. Water charges should be brought in as they are a very effective way of constraining quantity on the demand side. However, care must be taken in how they are introduced. First, the charge must be progressive so that households can meet their basic needs at low cost, with the price and charge increasing as usage increases. Also, it is not necessary that water charges meet the full cost of provding water.  Secondly, the system must be equitable so that people, particularly those on low incomes, are not worse off. Water charges must be a water conservation measure rather than a revenue raising measure.

See discussion here of water charges on The Irish Economy blog with an update here [25/01].

Tuesday, January 12, 2010

Businesses and profits benefit the consumer - they have to!

In a recent vent, Heather McDonald begins:

If I hear one more Democrat (and occasional Republican) in the House or Senate condescend to business, I am going to throw up. Today it’s insurance and drug companies, tomorrow it’s oil producers, toy companies, banks, chemical manufacturers, or any number of other enterprises that offer necessary or simply life-enhancing products and services. The preening self-righteousness towards for-profit economic activity is not specific to any particular legislative initiative such as “health care reform,” it is part of the psychological make-up of many politicians and huge swathes of educated professionals, including virtually the entire academic world and non-profit sector, the media, and many high-paid lawyers. It is simply unbearable to hear these sheltered senators and congressmen look down upon people who have had the guts to try to create something that other people want to buy; who have had to figure out intricate supply chains and methods of financing; who have had to organize and motivate their employees; and who take financial risks with no guarantee of reward. For the anti-business mindset, the fact that businessmen need to make a profit in order to continue operating renders them prima facie suspect, if it doesn’t outright undercut any claim that they might have to contribute to the public good.
A a film version of the speech from the 1951 film Home Town Story is available below the fold.


The Irish Economy going into 2010

These are the slides from a seminar I gave to the Faculty of Commerce in UCC on Monday 11th of January.

Sunday, January 3, 2010

Deposits and Loans on Banks' Balance Sheets

As well as credit card data the Central Bank's Monthly Statistical release gives information on the balance sheets of financial institutions in Ireland. Here we will use the data from Table C3 from the current release (November 2009) and previous releases to consider the level of customer deposits (liability) and loans extended (asset) of Irish financial institutions from August 2006 to November 2009.

This graph gives the total amounts of deposits and loans of Irish residents in Irish financial institutions.


There has been little change in the amount of money Irish residents have on deposit in Irish financial institutions. In this series it started at around €160 million in August 2006. Two years later it was at its peak of just over €180 million in September 2008 and as of Novemeber 2009 it stands at €172 billion.

The pattern of loans to Irish residents on the balance sheets of Irish financial institutions follows a much more pronounced pattern. In this series the aggregate amount of loans forwarded was €290 billion at the start of the series. There then was a continual rise until October 2008 when the peak of €394 billion was reached. 12 months later the figure had fallen to about €367 billion.

During the phenomenal credit expansion there were months when loans expanded by more than €5 billion. The peak was in September 2007 when the amount of loans on banks' balance sheets rose by some €8.7 billion (close to €300 million a day!).

First we will break down the deposits into their constituent parts.

Irish people have about €35 billion in low-interest current accounts. About €40 billion is deposited in interest earning demand accounts and this amount has been trending upwards recently.

Altough the total amount on deposit has been relatively stable, a noticeable pattern has been the relative decline in agreed maturity accounts (i.e. 3 month to 2 year accounts) in favour of notice accounts (i.e. 7 day to 90 day notice accounts). In Septmber 2008, after a period of rising interest rates, there was more than €100 billion in agreed maturity accounts. This has now fallen to about €82 billion. This fall also coincides with a period of uncertainty in the Irish banking sector. In the following period, as interest rates have been falling, the amount in notice accounts has risen from €8 billion to close to €16 billion.

We will now consider the breakdown of loans issued.

Of the more than €100 billion increase in loans forwarded to Irish residents "only" about €20 billion of this was for residential mortgages. More than 80% of the loan increases was in other categories.

The biggest category of loans is term/revolving loans and this rose by some €30 billion before beginning its recent decline. Short term loans issued rose by about €28 billion.

The biggest increase, and the only main category not to decline, has been in other loans. This has risen by 700% in a peculiar "stepped" pattern, from €6 billion to nearly €42,000. This series is relatively stable between most months but there are five occasions when there is a monthly "jump" of over €4 billion.

The decline over the past 12 months in the amount of loans issued has been the result of two factors:
  1. The amount of new loans issued has fallen dramatically means the repayments on existing loans is now relatively larger.
  2. Increased re-evaluation of existing loans by financial institutions (write-downs, increased provision for bad debts).
As per the most recent Central Bank Statistical Release:
As has been the case throughout most of 2009, the headline month-to-month decline in November was strongly influenced by valuation effects. These mostly relate to an increase in the level of bad debt provisions by reporting credit institutions during the month and account for just over 50 per cent of the monthly decline. The remainder represented a fall in the underlying stock of [loans], as repayments were marginally higher than drawdowns during the month.
It will be interesting to track to impact the National Asset Management Agency (NAMA) has on the banks' balance sheets as it comes into operation in 2010.

Credit Card Data

The Central Bank published the most recent release of their Monthly Statistics. This contains a host of data relating to the financial, banking and monetary sectors of the Irish economy. The end of the release gives an insight into aggregate credit card usage in Ireland in Table C14.

The Central Bank do not present the data in a manner that makes it easy to work with but we can extract some information from it. By combining the data in the current release with the numbers presented in a previous release (September 2006) we can present monthly information beginning in June 2003.

First, we can look at the number of credit cards in issue.

About 93% of issued credit cards are for personal customers. The total number of cards in June 2003 was about 1.9 million. This rose gradually for five years and reached a peak of just under 2.4 million cards in January 2009. The total has fallen slightly over the past ten months and as of November 2009 stands at just over 2.3 million. All of this fall has been in personal cards.

Looking at the change in the amount of debt on these cards, we see that credit card indebtedness was rising at an annual rate of in excess of 15% p.a. up until March 2007.


Since then there has been a dramatic drop in the rate we have been accumulating credit card debt. In November 2009, after hovering on zero for three months, the annual change was negative for the first time, i.e. November 2009 was the first month that had a lower level of outstanding credit card debt that the same month of the previous year.

Looking at the actual amount of debt on our credit cards, and two of the key drivers of this statistic, monthly credit card purchases and monthly repayments.

The total amount of credit card debt at the start of the series in June 2003 was just over €1.5billion. The amount more than doubled over the next five years and peaked in December 2008 at about €3.1 billion. As of November 2009 this has dropped by €100 million to just over €3 billion.

The monthly amounts of spending and payments are remarkable similar in the above graph and suggest that the difference between them is relatively small. The following graph isolates the difference between spending and payments.

This shows the seasonal pattern in credit card spending with peaks evident for December of each year. However for 44 of the 77 months in the series the level of payments exceeded the level of spending. In fact over six years there is an excess of payments over spending of about €680 million.

Let's reconcile this with our findings on total indebtedness. Over the period the balances on our credit cards increased by about €1.5 billion, yet we made payments of €680 million more than our credit card spending. What gives? Spending and payments alone do not account for credit card balances - the hidden evil is accumulated interest (and other charges).

The Central Bank do not give data on the amount of interest added to credit card balances but we can infer it given that the monthly change is approximately spending plus interest minus payment. The change may also be the result of some non-interest charges and duties. Looking at the approximate monthly interest payments and charges.

The peaks that approach €80 million correspond to April of each year when the annual government duty of €30 (previously €40) on credit cards is due. Ignoring each April in the sample, the average amount of interst and charges added to credit card balances is about €24 million a month or about €2 billion over the six years.

Thus the reason credit card balances have been increasing is not because we are spending more than we are paying (we do the opposite) but because of the interest on outstanding balances. Although we generally pay the equivalent of our monthly spend each month we do not pay down our outstanding balances. The average balances on personal cards are:

The average balance has been creeping upwards from about €900 to over €1,300 for each personal credit card issued. Virtually all of this increase can be attributed to accumulated interest. The Central Bank does not give data on credit card interest rates but it is widely known that a credit card is probably the most expensive way to borrow money.

Saturday, January 2, 2010

Coffee Consequences for Chaves

This could be classified as a further example people respond to incentives or evidence of the theory of unintended consequences. It is also a classic "supply and demand" example of the effects of price ceilings beloved of microeconomics textbooks.



A BBC News video reports that one time coffee exporter, Venezuela, is now importing coffee. The reason for this is attempts by Hugo Chavez's regime to control the market through price ceilings. A coffee producer in the video states:

"The prices for producers are below the costs of production. Two years ago it cost me just over six dollars to produce a kilo of coffee. Today the state pay a fixed price of four and half dollars per kilo. I was losing money by producing coffee."
Not suprising most producers have responded by cutting production. In the same piece the Venezuelan Agriculture Minister, Elias Jaua, argues that:

"The price controls are a guarantee that the Venezuelan people have the right to food and the government compensates the producers by direct and indirect subsidies. That way, producers have a fair income and people have that sacred right of access to basic foods."
The Finanical Times has a piece that describes another unintended consequence of these price controls.

Price controls have made matters worse. Increasing amounts of coffee – and many other goods – are smuggled abroad to be sold at international prices. “Of course there’s contraband. What does Ch├ívez expect when you can sell coffee in Colombia for double or triple the price?” said one coffee producer, who requested anonymity.

Even with rising domestic demand it is expected that Venezuela's coffee production will be about 38,000 tonnes this year, down 70% from its peak. This compares to a 55,000 tonnes level of demand in the country. More data are available here. The shortfall has to be imported and the Venezuelan government cannot fix the price of imports but that doesn't mean they're not trying.

As the self-prolaimed Indiana Jones of International Finance, Robert P. Smith, says:

"In trying to organize and protect domestic industries with the blunt instrument of state policy, Chavez has once again fallen prey to the law of unintended consequences.

The market is there, globally – but it’s been badly distorted. In trying to fix domestic coffee production, the Venezuelan leader has exacerbated the very problem he set out to cure."
 
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