The Dail in the 21st Century - book review

Dr. Anthony O Halloran is a lecturer in Politics in Carlow Institute of Technology, and holds a Ph. D in Government from U.C.C.

His thesis is that much contemporary media and popular criticism of Dail Eireann is misplaced. It compares what happens in the Dail with an ideal of liberal democracy and parliamentary sovereignty that has not existed anywhere in the modern era. This ideal would require Parliament to exercise directive power and for Governments simply to carry out the will of Dail, which it had arrived at through free deliberation among its members. . The ideal was only attained, if then, in the nineteenth century UK Parliament. This was before the advent of wide suffrage, and the need to make quick decisions on complex matters, necessitated the introduction of a tight party whipping system which made the ideal unrealisable and impractical.

But the expectations of citizens continue to be shaped by the theory that all power reposes in Dail Eireann. In our modern , complex, and globalised world, power is dispersed much more widely . While a Minister may be theoretically accountable to the Dail for the fact that hospital X Rays have not been examined by radiologists, the real responsibility lies elsewhere. This gap between theory and practice is corrosive of respect for the Dail, even though it is the theory not the Dail that is out of date.

The assumption is that TDs should be legislators. The truth is that individual Dail members do not have much influence on the content of legislation. The chance of an amendment to a Bill, that the Minister and his officials do not want, being accepted, is almost nil. Many sections of important Bills are not examined at all, and long ministerial amendments are often introduced at the last minute, to accommodate the rhythm of work of the civil service rather than that of the Dail.

Answers to parliamentary questions are often evasive and there is no appeal mechanism to which a TD who has good grounds to be unhappy with the answer can turn. The facility to ask supplementary questions is often used as much to generate sound bites as it is to probe inadequate answers. Time limitations, and the need to rotate questions among all the parties, prevent a forensic line of questioning being developed. Partly because the capacity of Dail questioning to achieve full accountability from Government has been inadequate, we have had to turn to Tribunals of Enquiry to get at the facts.

Anthony O Halloran does not dispute these criticisms but he says that the Dail has strengthened its role as a deliberative body in recent years. While it rarely exercises direct power over Government decisions, it has developed its role as a deliberative body. The Committee system has become stronger. Interest groups who find it hard to get a hearing from the civil service can often get it from a Dail Committee. Television broadcasting of Dail and Committee proceedings has also helped. The fact that the Oireachtas Commission, not the Department of Finance, settles the details of the Dail’s own expenditure makes a big difference.

I think the author’s presentation is a little too kind. Dail debates still take place in an empty chamber because everything is timetabled , and speakers increasingly read scripts in breach of the rules. Interruptions, which are supposed to encouraged, are actually discouraged. There is still no sanction on a Minister who give an inadequate or incomplete answer to a parliamentary question. Many sections of important Bills are still not debated in detail during Committee stage.

A solution to these difficulties could be found in one reform which is not touched on at all in this book....an enhancement in the powers of the Ceann Comhairle. The Ceann Comhairle should be given the power to require a Minister to come back with a new answer ,if the Ceann Comhairle at his complete discretion deems a reply to a parliamentary question was incomplete. He/She should have the discretion to disregard lists of speakers provided by the party whips, and call on members to speak on the basis of how long they have been sitting in the Chamber listening to other members. Likewise he should actively encourage orderly interruptions of speeches to promote dialogue. He should have a role in the timetabling of Committee stage debates to ensure that all important sections are discussed.

To have the mandate from the members to exercise this authority, without the sort of challenging of his rulings that has become commonplace, the Ceann Comhairle should cease to be chosen by the Taoiseach ,but should instead be elected by a secret ballot of members.

This is a very worthwhile book, which should be read by all who write editorials and otherwise comment on the so called decline of the Dail.

Book Review for the Irish Journal of Public Policy by John Bruton.

Title; The Dail in the 21^st Century

Author; Anthony O Halloran

Publisher; Mercier Press

Haarlem

Last week, I had the chance to visit a place I had never been before, Haarlem in the Netherlands. I was there at the invitation of the Innovation Platform , established by the Government to motivate the Netherlands to become more innovative so that it can pay its way in the highly competitive world of the 21^st century .

Haarlem is a beautiful city of canals, old houses, and church squares. I was fortunate to have a few hours to walk around the city to see it for myself. The people were really friendly.

The Netherlands Government’s paper on innovation, which was discussed at the conference, is very interesting. It is self-critical, and does not attempt to hide flaws in the country’s economic model.

While the country has come relatively well through the current economic crisis, its big companies are not as innovative or profitable as those of its German neighbour . The country tends to rely on a few well established big companies. In 2003, only 8% of Dutch companies were in the fast growing category, as against 26% in Italy, 14% in Spain, 13% in the US, and 9% in Finland.

Conservatism may be related to the age of those making key economic decisions. The private capital of people aged 65 or over accounts for more than half of all the private wealth of the country . At the other end of the age spectrum, the Netherlands has a prospective shortage of technology graduates.

My own sense is that economically viable innovation comes from contact with customers and consumers, as well as from abstract work in laboratories.

Innovation is a cultural state of mind as much as a technical process. Saving is good so long as others are able and willing to borrow and to spend. If they are not, the economy will stagnate. German economic policy makers need to keep this in mind as we seek to devise a sound common economic policy for the eurozone, as we are required to do by EU Treaties.

If universities are to help with innovation they must be willing to see some of their academics working with the customer support teams of companies where they will see what customers really want and will pay for and use, rather than make assumptions about those things. That element has been missing from Irish efforts to promote innovation. Ireland, on the other hand, scores better than the Netherlands in supports for individual entrepreneurs. Ireland’s recent paper on innovation is much less self critical that the Dutch one.

Cornered, The new Monopoly Capitalism and the Economics of Destruction

Book Review for Irish Independent by John Bruton

Author; Barry Lynn - Publisher; John Wiley and sons

This book argues that the rash of mergers and leveraged buy outs that have been a feature of business on both sides of the Atlantic have led to a concentration of economic power that is politically and economically dangerous.

The problem of some corporations being “too big to fail” is not confined to banks that got so big that they had to be bailed out by taxpayers to prevent a collapse in credit and confidence.

Other sectors in the United States, such as grocery retailing, brewing , toothpaste manufacture, pet foods , are all demonstrated by the author to have become so concentrated in a few hands that the market in these goods is effectively “cornered’’. He claims that this has in led to a fall off in the innovation of new products in these fields, and that that in turn has led to a fall off in job creation.

He also argues that the drive to reduce costs has also led to several competing manufacturers relying on a single overseas supplier for certain components and that this make the whole system vulnerable to an event like an earthquake, a strike, or a war that might put the single supplier temporarily out of business.

He puts this all down to a change in policy that came about when President Ronald Reagan came to power in 1981. Under the influence of the Chicago school of economists led by Milton Friedman, the Reagan Administration bought the argument that Government control on mergers was too severe, that it involved unnecessary red tape for business, and that consumers did not benefit from it. The argument was that mergers often led to more efficiency and thus to lower prices to consumers. So mergers were to be permitted, unless it could be clearly shown that they would result in higher consumer prices.

Lynn accepts that the mergers often did result in lower prices in the short term , but he claims that in longer term they led to less diversity, to barriers to entry of small business to many markets, and to risks to the entire system of the kind we have seen recently in banking. He also argues that these mega mergers have led to an unhealthy concentration of political power.

Although this book deals with the United States, the forces it describes are obviously at work in Ireland and in Europe. The European Commission does question some mergers and monopolistic business practices, but it is often fighting an uphill battle. In Ireland competition policy is particularly weak because of a requirement to use our expensive courts system to get action on many issues.

This is not a diatribe against free markets in favour of Government intervention. Rather it is an argument that more state intervention is needed to ensure that markets are really free, in practice as well as in name.

This book should be read by the Minister for Enterprise and Employment, and by the EU Competition Commissioner, so that they can draw up new and transparent guidelines for Competition Policy that will ensure that no entity is ever again allowed to become too big to fail, that free enterprise means free entry to all markets, and cosy cartels become a thing of the past.

John Bruton is a former Taoiseach

DOES EUROPE MATTER TO AMERICA ANYMORE?

US and EU together make 27% of the world’s total exports and take in 34% of the world’s total imports. But that is not what is really important.

Where Europe and the US come into their own in the field of overseas investment. The EU and the US combined make 75% of all Foreign Direct investment in the world.

European investment is hugely important to America. Europe provides more than half of all FDI in US (except in Rocky Mountain States where it provides 41%)

Texas, New York, and California are the big destinations for European FDI in the US. FDI is responsible for 10% of all output in NY.

It is responsible for 25% of output in London, and much of that foreign investment in London comes from the United States.

But surely, one might suggest, the emerging markets of China, Brazil and Russia are more important nowadays?

Not so.

US investment in China is only70% of US investment in Ireland.

US investment in Brazil is only 70% of its investment in Spain.

US investment in Russia is 50% that in Italy.

In 2009, US FDI fell by 44% pa to Europe ... but by 185% to China. So Europe is holding its own in relative terms.

Europe is still the place where a vital part of America’s wealth is kept. And it is the same in reverse.

What does this mean in practice? It means that we own part of one another. We have a bigger stake in one another than either of us has in anyone else.

HOW IS THE WORLD CHANGING?

But the world is changing.

Since 1989, it could be argued that the world is experiencing a bigger supply side shock than any that has occurred since the European discovery of the Americas, that discovery transformed the world economy by opening up new supply sources of raw materials.

Since 1989, there has been an equally dramatic increase in the worlds available supply of labour, as billions of Chinese, Indian , Brazilian and other emerging market workers entered the world market and, thanks to IT, are now , able to perform tasks for Europeans and Americans, that previously could only be done in Europe and America .For example Indian radiologists can now read US X Ray results without ever leaving India..

3 billion new people joined the world economy in the 1990’s That is a huge change.

As a result, even in the midst of a crisis caused a bigger loss in wealth in western countries than occurred in 1929, 5 of the world’s 7 billion people are seeing their living standards improve, and are enjoying new opportunities their parents could only have dreamed of. That is the other side of globalisation.

As China’s rural population joins its export economy, they add the equivalent of an entire French or Italian workforce to the world’s available workforce every year. China produced 1% of worlds GDP in 1980, it produces 11% today and that share is rising fast.

WHAT EFFECT IS GLOBAL CHANGE HAVING ON OUR SOCIETY?

The effects of all this are only beginning to be felt. It is highly disruptive, just as the discovery of the Americas was disruptive to medieval Europe!.

Globalisation is redistributing income and wealth within our own societies, because some people can gain from it, the educated and the well placed, while others, with few skills and facing new Chinese and Indian competitors, can only lose. Making sure those among us who lose are helped is a matter for ourselves, not for the Chinese or the Indians. Protectionism is not the answer.

The fear of unemployment corrodes confidence. The median duration of unemployment here in the US is now 20 weeks, twice what it was in the 1981/2 recession. 20% of men between 25 and 54 are not working now, as against 5% of that age group who were not working in the mid 1960’s.

This follows a period in the 1990s, when the rate of growth in wealth has far outpaced that in jobs. For ten years we had jobless growth.

In Europe we have another problem, that of people retiring too early. Only 46% of people over 55 are still at work in Europe, as against 62% here in the United States.

AN INCREASED RELIANCE ON THE FINANCIAL SECTOR

Both Europe and the United States have come to rely heavily on the financial sector as a source of jobs.

The financial sectors share of EU GDP was 30% just before the crisis. It was only 13% in 1970. The financial sector has become increasingly concentrated. The three biggest banks in the UK already were worth 200% of British GDP in 2005. By 2008 they were worth 400% of it.

In Europe the financial sector It made 42% of all profits in 2008, as against 25% in the mid 1980’s. It also attracted the biggest share of the talent coming out of our universities.

This was placing a very big bet on one horse.

THE TRANSFORMATIONS WE WILL HAVE TO MAKE

Both Europe and the United States are going to have to undertake a huge transformation of our economies, to identify and capture the niches in the world economy where we will enjoy a comparative advantage against our competitors in Asia and the other emerging economies.

We will be competing for resources, human, material and financial, with a whole range of new competitors that were not there before.

As we seek to transform our economies, we can afford to let no capital go to waste, least of all can we afford to waste human capital.

Unemployment is a waste of human capital, and a permanent diminution in the earning power of people, even when they eventually get back to work.

EDUCATION

How much human capital is wasted when a young person leaves school without a qualification?

I do not know the answer.

We do not measure that, but just because something is hard to measure, does not mean that it does not count.

It is not all about throwing more resources at the problem. Ireland spends 5700 dollars per elementary school pupil, but gets better test results in international comparisons in reading, science and math than does the US, which spends 9156 dollars per pupil.

But South Korea has more students per teacher than either Ireland or the United States does, and gets far better test results than either.

Any response to the challenge of the emerging markets has to start with education.

We need skills if we are to compete. 50% of Japan’s 25 to 34 year olds have a university degree, 40% of Americans in that age group do, but only 30% of Europeans.

We have to ask very hard questions about how well our education is preparing people for the entirely new world in which they must compete. Are they adaptable enough? Do they have the language skills in Chinese, Portuguese and Spanish?

Are too much of our resources going to things that do not add to our competitiveness?

HEALTHCARE- IS IT ABSORBING TOO MUCH RESOURCES?

Healthcare, which might more accurately be described as illness care, is absorbing an ever increasing share of our resources - 25% of US Federal spending today, as against 11% in 1980. Europe does not spend quite as much, but the upward trend in Europe is just as fast.

I was really surprised to see the main Opposition party in a major European country recently promise to cut spending in every area, presumably including education, but to exempt health spending. That is the wrong priority.

If we take note of the fact that baby boomer generation will soon retire, and of the fact that their health and pensions will have to be paid for by a much smaller generation of people of working age, this sort of promise makes little sense. It is not the best use of scarce resources.

GREECE AND THE EURO

That brings me to the problem of Greece and the eurozone,. and to the problems of Portugal, Spain, and other eurozone countries with large deficits and debts.

The problem may present itself as a problem of borrowing or of exchange rates. But they are only symptoms of the real problem which is the misallocation of increasingly scarce resources.

Scarce resources being committed to the wrong things in Greece and the other countries in difficulty. Or as economists like to describe it, it is a structural problem.

In Greece, people can retire too early on a state pension, taxes are not collected efficiently, and the bureaucracy is overstaffed. That is poor use of scarce resources.

In Spain and Ireland, too much resources were ploughed into building houses, again a poor use of scarce resources, in a notoriously cyclical sector of the economy.

There will be no default by Greece or any other European country.

As the economist Charles Wyplosz recently told the European Parliament,

“No European country has any reason to default because they have all the taxing ability to raise enough resources to service their debts and because a default would cause enormously costly disruption”

The problems of Greece do not call the euro into question.

Of course the euro exchange rate that suits Germany might not always suit Italy. But the dollar exchange rate that suits New York might not always suit Michigan. In both cases the former can live with a stronger currency than the latter, but have to hang together because they do not want to hang separately.

IMPROVING THE WAY THE EURO IS MANAGED

The pact that governs the euro, the Stability and growth Pact, needs to be improved.

The assumptions, on which national budgets are prepared, must be consistent and honest.

They should be independently vetted. Opposition parties need to be part of that vetting process, so they are not taken by surprise by the state of the finances if the take over power, as the new Greek Government was.

The mystery and the secrecy should be taken out of budget making in Europe. That will go a long way toward introducing greater discipline, because no one really wants to be seen pass on big liabilities to their children.

A European Monetary Fund to provide fiscal policy insurance to member states of the euro is a good idea, especially if it involves higher premiums having to be paid by countries which are running excessively big deficits, ones that are not caused by short term problems that will reverse themselves.

Just as China cannot run a policy that privileges exports, neither can Germany.

An export led policy will only work as long as other people can afford to import.

It took Germany twenty years of investment to make a success of reunification with the ex Communist east.. A tremendous achievement. In that period, it needed to save.

Now, it needs to provide a market for its trading partners, just as the United States did after World War two, helping the recovery of Europe and Japan . It can do that by liberalising its economy, including liberalising shop opening hours.

Within the EU, economic policy is a matter of common interest. That is what the EUTreaty says.

German consumers can help the Greek recovery by taking a holiday in Greece, and buying some Greek wine! That is the best way to ensure that the German banks that have bought Greek bonds get all their money back, with interest!

REGULATING FINANCE

We must avoid a big disagreement across the Atlantic on how to change the rules governing finance so we can minimise the risk of another bubble economy. This is no small risk. We should not forget that our efforts to deal with the dot com bubble, contributed to the build up of the sub prime bubble.

We are not going to have exactly the same rules in the EU and in the US. Our political systems and traditions are very different.

But we should aim at equivalence and mutual recognition, rather than at having the same rules. But we must avoid a situation where bad practices creep back in because we are competing to have more lax rules in order to steal business from one another.

Remuneration of top people in finance is controversial. Incomes in our societies have become more unequal in many sectors, not just banking. That inequality reduces a sense of mutual solidarity, which is an important value for Europeans. It makes it harder to persuade taxpayers that it is in their own interests to pursue pro business policies.

A distinction might perhaps be made between rewarding top employees with company stock, where they share in the downside risk, and stock options where they can avoid risk and have only potential gain.

USING THE CRISIS AS A LEVER FOR CHANGE

Should we be optimistic or pessimistic?

It is not an original thought but we should look the opportunity the crisis creates. The crisis should make it possible to make changes that it would be harder to get people to agree to in calmer times.

Let us not forget that 50% of today’s Fortune 500 companies were formed during a bear market.

Microsoft was formed in 1979.

The 1991-93 recession in Finland led to the creation of Nokia.

Every segment of our society –our political system, our educational system, our healthcare system- must ask itself it is contributing all it can to innovation, to cost cutting, and to the building up of human and material capital that will enable our societies to meet the huge economic challenge of the emerging economies.

Speech to The Financial Services Roundtable in the St Regis Hotel, New York on 18^th March 2010

Too big to Fail?

Is this problem confined to banks?

There was widespread concern that the taxpayer had to step in to under pin the banks because some banks had become so big that allowing one of them to fail would bring the whole system down because it would lead to panic and a run on all banks. This concern does not apply to small banks. In the United States during the current crisis, many smaller banks have gone out of business, leaving some of those who lent them money at a loss. But there was no need for the taxpayer to put his or her money on the line to stop these smaller banks going down because the losses did not pose a risk to the wider economy.

The need for intervention only arises when a bank gets too big.

Banks were getting bigger and bigger as the crisis approached. In 2005, the three largest British banks amounted to 200% of the UK’s entire GDP. By 2008, the three largest banks had grown to represent 400% of the UK GDP, a doubling in their dominance in just three years. This was true of many other countries too. Ireland has long been over dependent on two big banks and neither Irish nor EU competition policy enforcers did anything about it.

That trend created intolerable risks for the taxpayer. But it also created intolerable risks for the bankers themselves. A banker who thinks, in the back of his mind, that his bank is now so big that it will have to be bailed out because it cannot be allowed to fail , will be willing and able to take risks that his smaller competitors, who would be allowed to fail, could and would not take. Once the risks can be passed on to someone else, people become reckless. That is human nature. It is interesting to note that in the recent bubble economy, partnerships and family firms in finance, who were putting their own money on the line, have had a better record than limited liability banking corporations, where executives enjoyed upside rewards but were not personally liable for any downside losses.

Defining what is “too big” is not easy. It is an intellectual challenge. It will involve arbitrary decisions of the kind lawyers, with their unreal visions of a perfect non discriminatory world, do not like.

But it is necessary that we do it, because no bank should ever again be allowed to be too big to fail. It will involve a new approach to competition policy at national, EU, and international level . The EU has strong enough rules on what aids states can and cannot give to business, and these can be used to require the selling or hiving off of parts of banking businesses ,so that we have far more banks competing with one another .

Another way of preventing any bank becoming too dominant in a particular market would be to make it easier for banks to compete across national boundaries within the EU in offering retail banking services. This is difficult as long as EU countries have radically different and mutually unrecognisable systems for prioritizing and collecting debt, and for regulating mortgages bankruptcies and company liquidations. Cross border retail banking will also require a cross border bank deposit insurance scheme, but that would be well worth the effort ,if it gets national taxpayers off the hook of having to bail out national banks that have become too big because they face insufficient competition on their home market.

But this problem of entities in the financial world getting too big to fail is not confined to banking.

The recent report on the failure of Lehman Brothers was critical of Lehman’s auditors. As in the Enron case, the criticism focussed on off balance sheet transactions that concealed the true vulnerability of Lehman Brothers from the public and from regulators. In the Enron case the accounting firm Arthur Anderson suffered grievously for its failings. Will the same thing happen to the auditors of Lehman Brothers?

Not likely, it seems. The Financial Times reports

“Accounting experts say the Lehman report will not be an Enron for Ernst and Young, in part because with only four big accounting firms remaining, clients do not have many options to move elsewhere”

So the market, that is supposed to punish failure and reward success, cannot work properly. That situation is probably not confined to finance, although finance has special characteristics. We have seen Governments come to the rescue of their motor industry, including amazingly even motor retailers.

Part of the problem with the structure of the rescues of the banking and motor industries in the United States is that firms that were already too big are being assisted to become even bigger. eU state aid rules will hopefully prevent that happening here, but that remains to be seen.

In Irelands case, it is probable that, apart from the banks, the companies that were allowed to get too big were the property developers who were able to secure dominant positions in regard to developable land, which they hoarded . Ireland does not have a good system for monitoring this sort of development to prevent too much of a concentration of resources in too few hands, or in too few economic sectors. The Irish legal system, with its heavy emphasis on process, has weakened Irish Competition law enforcement . The law has become much more part of the problem than part of the solution.

A visit back to Washington

Last week brought me back to Washington for most of the week. I was there to talk at a meeting of the Centre for Transatlantic Relations in Johns Hopkins University on the global economic situation. I have recently become a Distinguished Fellow at the Centre.

I will be doing work with the Centre on the social, economic, and security challenges facing North America and Europe in the next twenty five years.

Of course, it is quite impossible to foretell the future. A similar exercise twenty five years ago would probably have missed many of the most important trends that have since revealed themselves

But we are, each of us, making assumptions about the next twenty five years, whenever we choose a career, buy or extend a house, save money or invest it, buy health insurance, or take out life insurance.

Likewise Governments are making assumptions even further ahead, when they build roads or mass transit systems, set pension policy, and decide which investments to make in education.

Some of these assumptions we use are fairly solid and explicit, for example those in regard to size of the population which are derived from trends in births, deaths and immigration or emigration. We will have major social change in the western world because the average age of our population is rising, and a bigger share of our people will be above retirement age and thus more vulnerable to some chronic illnesses.

Other assumptions we make are much harder to verify, such as those about whether we will avoid a war, whether we will prevent epidemics, and about new technological breakthroughs and how quickly they will be available to the general public.

The usefulness of the exercise I will be doing with the Centre will be in the possibility that it may make some of our hidden or implicit assumptions more explicit, challenge and examine them, and make suggestions for improvements in the way we plan for the future, both as states and as families.

While in Washington , I went to see my first ever Ice Hockey game. It was fast and furious, great entertainment, and easier for me to me to follow than baseball or American football.