Institutions of State a barrier to prosperity

Former British prime minister Harold Macmillan famously replied to the question of what was most likely to trip up governments with “events, dear boy, events”, demonstrating the random way in which small things can spiral. 

Angus Deaton this past week won the Nobel Prize in Economics for a lifetime theorising and evaluating development and the role of institutions and for looking at how consumption and income are related. 

The way in which the Government has reacted and acted shows that these issues are related.

Take events. In particular, take the Web Summit. I am no cheerleader for capitalists who think that the role of government is to get out of the way (except when they want something) but there is something deeply worrying about how, it seems, the Web Summit left Dublin.

It would probably have had to go anyhow, as being a victim of its own success it has all but outgrown any indoor capacity in Ireland.

Taking the leaked correspondence on face value, we see a deeply dysfunctional governance apparatus. 

Here is a body bringing in tens of thousands of high spending, high impact visitors; operating in a space close to the spoken heart of government policy; networked and connected to an astonishing level with the thought leaders of today.

They can’t even get a meeting with the city council to discuss a traffic plan. 

They can’t get the state tourism bodies to sit down with the hoteliers and transport providers to discuss reasonable opportunities for all to profit. 

When they reach out to the prime minister to help break the logjam, they meet, at best, insouciance, at worst indifference. 

We have a governance system where they will happily contemplate running a coach and horses through the planning system to facilitate a concert but won’t stir themselves to meet an ongoing problem.

Then we have the budget. We have John McHale, the chairman of the Irish Fiscal Advisory Council, a statutory body with an EU remit, making an extraordinary intervention, criticising the budget the morning after it was announced and then withdrawing it at lunchtime.

We have the budget leaked weeks before, and parliament sidelined. We have a government which has presided over regressive after regressive budget refusing to produce the analysis for this one.

Both of these reflect the same thing, an issue which Nobel Laureate Deaton has touched on in recent years. They show poor institutional capacity, whether through commission or omission.

There is a large body of literature in economics that shows the importance of institutions, and in particular how the quality of institutions matters hugely for growth. 

I have long suspected that a major source of frustration for Irish people is this: we know we can be as wealthy and effective as Sweden or Denmark or the UK but we also know our institutions are not up to the job, the cognitive dissonance of knowing we can do better while voting to not then drives us batty.

Deaton’s work also gave insight into the relationship between consumption and income and how consumption at household levels responded to variations in income and the relative volatility of same.

Reverting to the institutions and budgets theme we see echos of some of this. Rather than a €1.5bn stimulus to the already expanding economy, we, in fact, have had more like a €3bn stimulus. 

This was achieved by the slipping in of a supplementary budget allocation to departments the weekend before the actual budget.

Leaving aside the issue of how this presents itself when viewed through an institutions lens, the result is a massive boost to permanent spending. These increases are going to be hard to row back.

That may be fine if we have a permanent increase in the tax base, but much of the largesse seems to be as a consequence of unexpected, and therefore possibly transitory, increases in corporation tax. 

Far from eliminating boom and bust in budgetary matters, the Government has gone all-in on same — safe in the knowledge that this will win re-election and they can try to undo any damage in 2016/’17/’18 before restarting the boom for the 2020 election cycle.

We saw how the poor quality of our institutions in regulation and planning led to the bust. We saw how resistant to change much of these were, even under the glare of the troika.

We see how the institutions are weakened further with naked political shenanigans.

But, we don’t seem to care.


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