Lecture by economist Ronan Lyons, at the 2012 Parnell Summer School, outlining the limits to the importance of economic sovereignty - and the greater need to calculate a social return on public resources spent.

1. SOVEREIGNTY IS OVER-RATED,
SOCIETY IS UNDER-RATED
An economist‟s thoughts on Ireland‟s future
Ronan Lyons, Balliol College (Oxford)
Parnell Summer School, 13 August 2012

2. Outline
• Sovereignty: Ireland‟s economic sovereignty is in long-
term decline – but that‟s no real cause for concern
• Society: Ireland‟s policymakers need to step up and start
valuing society
• Ireland’s future: economically easy, politically
challenging?

3. Sovereignty: the current consensus
• The current consensus
SIPTU: “Formal loss of economic
on Ireland‟s economic sovereignty [occurred] when Ireland
negotiated a bail out during the
sovereignty is along winter of 2010...”
the following lines:
• “You either have
economic sovereignty or
you don‟t” Enda Kenny, St Patrick's Day 2012:
"You're all welcome to the hooley
• “Ireland lost its economic that's going to take place all through
sovereignty in December 2013 as our country celebrates its
return to economic sovereignty!"
2010”

4. Sovereignty‟s history not encouraging
Trade policy
Exchange rate policy
From the
early Interest rate policy
With ERM,
1970s, Irelan Ireland lost Fiscal policy?
d lost its From the
its exchange mid-1990s,
external rate policy in Ireland lost As of
trade policy the 1980s 2010s, have
its ability to we lost fiscal
and 1990s set interest policy also?
rates

5. The reality: sovereignty‟s a continuum
• No country is 100% sovereign – answering only to its
taxpayers…
• Economic sovereignty is not like a light switch, either on
or off – it is a continuum
• Ultimately in order to borrow, a country has to run its
plans and its budgets past the lender
• In Ireland‟s case, replacing the markets as the primary
lender with the EU-IMF changes very little
• Likewise, a return to the markets will change very little
• It certainly does not mean that Ireland is sovereign enough to be
fiscally irresponsible again

6. The reality: sovereignty‟s a continuum
• No country is 100% sovereign – answering only to its
taxpayers… and with good cause!
• On paper it may sound great not to have to answer to
anyone else but… "no island is an island"
• Just like a country, a student loses economic sovereignty
when they take a loan to go to higher education – so does
a family when it borrows to buy a house
• But they are investing in their futures
• Borrowing in and of itself – which brings about constraints
on our behaviour – is not a bad thing
• In fact no country has ever become prosperous without
large-scale borrowing

7. Don‟t mourn lost sovereignty!
• So what some might call "loss of economic sovereignty" is
a prerequisite for a good standard of living!
• Thus discussions about Ireland‟s economic sovereignty
framed in terms of the bond market largely miss the point
• Neither the incidental change in Ireland's economic sovereignty
score brought about by borrowing at preferential rates from the EU
and IMF nor a return to more standard borrowing patterns is
important in the grand scheme of things
• What is important is what Ireland borrows for
• Is Ireland borrowing for the past or the future?

8. Outline
• Sovereignty: Ireland‟s economic sovereignty is in long-
term decline – but that‟s no real cause for concern
• Society: Ireland‟s policymakers need to step up and start
valuing society
• Ireland’s future: economically easy, politically
challenging?

9. The status quo, 1: economic policy
• The Irish government 80000
spends almost €70bn a 70000
year 60000
Other spending
• €45bn is spent on health, 50000 Capital
Education
education and social welfare 40000 Health
• €5bn is spent on Social welfare
30000
infrastructure for the future Other taxes
20000 Other revenues
• The Irish government has Social Solidarity
10000
revenues of €50bn #REF!
0 Direct taxes
• Mostly VAT, income tax and Indirect taxes
social insurance

10. The status quo, 2: economics
• “Economists only care about markets, right?”
• Why do economists focus so much on markets?
• Signals about how society‟s scarce resources should be used
• How is public money raised and spent?
• Largely without any signals about the return society gets on
spending that money – an accounting basis (costs only)
• Hardly surprisingly in the absence of this that markets have come
up with their own simplistic but ultimately meaningless rules-of-
thumb (such as debt-to-GDP ratios or primary balances)
• Let‟s move to an economic basis – not just costs, but
benefits as well (“here's the return society got from
spending this amount on that public good”)

11. Can‟t we just measure happiness?
Ireland is happy! Ireland is unhappy!
Irish Times, Jan 4 2012
Irish Times, Dec 23 2011
"Irish are among the
"The EU Survey on Income
unhappiest of 58
and Living Conditions
nationalities, according to a
showed 79 per cent of the
poll by WIN-Gallup
Irish population aged 18
International of “net
and over reported
happiness”, or the
themselves in 2010 to have
percentage of people who
been happy all or most of
considered themselves
the time over the four
happy, minus the
weeks prior to the
percentage who considered
interview."
themselves unhappy."
Happiness seems to be “adaptive”: people learn to cope with their
circumstances… but does that mean we should leave people in poverty?

12. The answer is in valuing society
• “Priceless” just means zero to an accountant!
• There are a variety of ways of understanding the benefit
society gets from the resources it uses
• Usage statistics
• Willingness-to-pay surveys
• House prices contain a lot of information on natural and social
amenities
• “Why do economists love markets so much?” revisited:
• Because people love them! Where no obvious market
exists, people end up creating one – even if it isn‟t immediately
obvious
• E.g. paying more to live near good schools, the coast or a Luas
stop

13. Estimates of certain natural amenities

14. Estimates of transport facilities

15. What‟s this got to do with the IMF?!
• The short and medium term is (perhaps understandably)
dominated with emergency measures to reduce the deficit
from levels that will cripple the next generation with debt
• But getting out of one crisis does not mean we‟ve
prevented the next one – need to focus on the long-run
basis for spending money
• This involves connecting up monies raised with monies
spent, ensuring that society is getting the best possible
return
• Measuring that well will stop “the markets” having to use rule-of-
thumb statistics on public debt

16. Outline
• Sovereignty: Ireland‟s economic sovereignty is in long-
term decline – but that‟s no real cause for concern
• Society: Ireland‟s policymakers need to step up and start
valuing society
• Ireland’s future: economically easy, politically
challenging?

17. Ireland‟s fiscal issues are clear
• Overall: Connect money raised with money spent
• Higher education: Switch third-level to “equity stake” to
fund exceptional service, risk share & avoid debt aversion
• Social welfare: destroy inequalities in the system (and
save money!) by treating social welfare as other income
• Healthcare: pick a model and stick to it! (Preferably
Singapore-style model, with a healthcare „pension‟)
• Income tax: tax credits back in line with other countries –
minimum tax rate for wealthiest to ensure fairness
• Property tax: the obvious hole in public finances and the
best way [with a site value tax] of connecting money
raised with money spent (through local government)

18. Broader economic issues also clear
• Competitiveness:
• The awareness in Ireland of our need to sell internationally to fund
domestic standard of living is as good as anywhere globally
• Pensions and demographics:
• Much less awareness around need for mandatory defined-
contribution pension system and radical increase in working age (I
expect to work into my 80s)
• Ratio of working years to retired has gone from almost 10:1 to less
than 2:1 – crippling our children with debt
• The eurozone crisis:
• In brief, nothing more complicated than savers not wanting “haircut”
while it becomes increasingly obvious borrowers can‟t repay
• Either default or devalue (inflate) – certainly no need to break up
euro

19. The challenge is political
• Very easy for an economist to say – I don‟t have to get
elected!
• The challenge then becomes engaging and informing…
• Firstly the political class, who frame the choices and ultimately
make the decisions
• Secondly the general electorate, who have the final say

20. Thank you!
• Looking forward to comments, questions and the
discussion
• Keep in touch, if you‟d like, via:
• www.ronanlyons.com
• @ronanlyons on Twitter