Relevant and even prescient commentary on news, politics and the economy.

Apple set to lose billions in EU state aid case

The Financial Times reported on September 30th that the European Commission has decided to open a formal investigation into whether Apple received illegal subsidies (“state aid,” in EU-speak) from Ireland going as far back as 1991. The FT quotes “people involved in the case” as saying that this can cost Apple billions of euros.

What the decision technically does is establish what is known as an “Article 108(2)” investigation, which means that the Commission has concluded from its preliminary investigation that state aid has been granted in violation of the EU’s competition policy rules. It is therefore opening a more comprehensive investigation. It is worth noting that if the Commission opens an Article 108(2) investigation, it almost always decides that illegal state aid was given. The only recent exception I can think of is state aid from Poland to relocate Dell computer manufacturing from Ireland in 2009, and I actually think the Commission should have ruled against that as well, as I discussed in my book Investment Incentives and the Global Competition for Capital.

As I speculated in June, one issue raised by the Commission is Apple’s “nowhere” subsidiaries created under Irish law. Both Apple Operations Europe (AOE) and its subsidiary, Apple Sales International (ASI), are incorporated in Ireland, hence not immediately taxable by the United States until they repatriate their profits to the U.S. However, they are managed from the U.S., which by the provisions of Irish tax law makes them not taxable in Ireland. It is these provisions that are at issue in the case. See, in particular, paragraphs 25-29 of the decision, especially paragraph 29: “According to the information provided by the Irish authorities, the territory of tax residency of AOE and ASI is not identified.” Richard Murphy suggests today that these corporate provisions account for the largest proportion of Apple’s tax risk.

What is especially important for this investigation (and the similar ones of Starbucks and Fiat) is that if the Commission finds that state aid was given, it was never notified in advance to the Commission. The state aid laws require that any proposed subsidy be notified in advance and not implemented until approved. Ever since the 1980s, the penalty for giving non-notified, illegal (“not compatible with the common market”) aid is that the aid must be repaid with interest. Since this alleged aid was not notified, and will probably be found to be incompatible with the common market, Apple will be on the hook for aid repayment.

As I reported in June, this would not be the first time the Commission has used the state aid law to force changes to Ireland’s tax system. In 1998, it ruled that Ireland’s 10% corporate income tax for manufacturing was specific enough to be a state aid. Ireland then reduced the corporate income tax to 12.5% for non-manufacturing firms, while raising it to that level for manufacturing (mainly foreign multinational) companies.

If the Commission rules against Ireland and Apple, this will send a signal that the European Union is going to take tax manipulation very seriously with all the tools at its disposal. It would be especially great to see one of the pioneers of arcane tax avoidance strategies taken down a notch. For Ireland, at least there would be a small silver lining from losing this case: Apple’s aid repayment would go to Ireland and help reduce its budget deficit.

Cross-posted from Middle Class Political Economist.

Irish austerity exodus lingers on

August brings us the annual Irish immigration data, so it’s time to look at what has happened in their statistical reporting “year” that ended in April 2014. While better than last year, it’s still not pretty.

According to the Central Statistics Office, net emigration continued in 2013-14, with net emigration of 21,400. a decline of just over 1/3 compared to net emigration of 33,100 in 2012-13. Of the new total, once again, the Irish themselves accounted for over 100% of the net departures, with 29,200 more Irish nationals leaving the country than returning.

This continued out-migration continues to diminish any published improvements in Irish employment numbers and unemployment rate. In the year to the second quarter of 2014 (the closest quarter to April 2014 immigration figures), employment  increased to 1,901,600, a rise of 31,600 over a year previous. Unemployment fell by even more, 46,200, in the year to Q2 2014. So, while there is definite improvement even accounting for emigration, Ireland is nowhere near back to its peak 2007 employment figure of about 2.15 million. So employment is still 11.6% below its peak.

In Iceland (create a custom table here), by contrast, despite (but also in part because of of) the almost 50% decline in the value of the kronor, the sharp dip in unemployment has been almost completely erased, with July 2014’s value of 179,000 employed being a mere 1.7% below May 2008’s maximum of 182,100. Indeed, Iceland’s unemployment rate has fallen to a mere 4.4% in July 2014, compared with 6.2% in the United States — and 11.5% in Ireland.

So the lesson, if I have haven’t pounded it into your head enough already, is that Ireland’s austerity measures are not paying off, as it has failed to regain its pre-crisis employment level  and has seen its unemployment rate fall only by reverting to its historical solution of exporting people, as in the 1980s.

Cross-posted from Middle Class Political Economist.

Ireland, Krugman, Kenneth Thomas

Paul Krugman points to Angry Bear Kenneth Thomas in this piece in the New York Times on the use of Ireland as somehow a success story of what are failed policies regarding employment:

Ireland Is The Success Story Of The Future, And Always Will Be

Via Mark Thoma, Kenneth Thomas analyzes the latest attempt to claim that Ireland is a success story — is this the third or the fourth time around? — and concludes that the modest fall in unemployment is all about emigration. Actually, we can reach the same conclusion by going straight to employment data:

Surprise! Facebook Avoids its European Taxes

If you are as cynical as I am, I know you are not surprised that Facebook paid Irish taxes (via Tax Justice Network) of about $4.64 million on its entire non-US profits of $1.344 billion for 2011.* This 0.3% tax rate is a bit below the normal, already low, Irish corporate income tax of 12.5%.

As with Apple, Facebook funnels its foreign profits into its Irish subsidiary. As the Guardian article explains:

Facebook is structured so that companies buying advertisements on the website in the UK, or anywhere outside of the US, have to pay Facebook Ireland.

As a result, Facebook manages to slash its taxes in other countries, paying, for example,  $380,800 in British tax on estimated 2011 UK profits of $280 million, or a little over 0.1%. What is shocking is that Facebook paid so much Irish tax since it managed to convert its $1.3 billion gross profit into a net loss of $24 million.

As you’ve no doubt figured out, it’s that “Double Irish” ploy again. Facebook operates a second subsidiary that is incorporated in Ireland but controlled in the Cayman Islands. This subsidiary owns Facebook Ireland, but the setup allows the two companies to be considered as one for U.S. tax purposes, but separate for Irish tax purposes. The Caymans-operated subsidiary owns the rights to use Facebook’s intellectual property outside the U.S., for which Facebook Ireland pays hefty royalties to use. This lets Facebook Ireland transfer the profits from low-tax Ireland to no-tax Cayman Islands. For more on the arcane mechanics, see Joseph Darby’s article “International Tax Planning,” downloadable at Wikipedia.

This makes no sense of course, but is, in David Cay Johnston’s inimitable phrase, Perfectly Legal. But it shouldn’t be. And in the UK, Chancellor of the Exchequer George Osborne has announced 

a £154m [$246.4 million] blitz on tax avoidance and evasion, with HMRC [the British equivalent of the IRS] hiring an extra 2,500 tax inspectors to target high earners who aggressively exploit loopholes to avoid or evade tax.

The U.S. should do the same.

* Dollar figures converted from pound sterling figures in the Guardian at an exchange rate of $1.60 per pound.

Cross-posted from Middle Class Political Economist.

Is Ireland the Poster Child of Growth?

by Rebecca Wilder

Is Ireland the Poster Child of Growth?

I wanted to familiarize myself with the economic statistics in Ireland, so I thought that I’d share my findings with you all. Many politicians refer to Ireland as the poster child of austerity – according to the contentious thesis of expansionary austerity (a review from the IMF .pdf here), is it therefore the poster child of growth? In this post, I review the cyclical data and find that the Irish economy is quite divergent with optimism only evident in the industrial and export sectors. In aggregate, there’s really been no momentum at all.
On the one hand, the industrial sector seems to be holding in okay, with the manufacturing PMIs remaining above 50 since March 2012. Furthermore, international saving, or the current account, moved from a 6% of GDP deficit in Q3 2008 to a small surplus in the fourth quarter of 2011 (4-qtr moving average). However, the current account has been deteriorating slightly at the margin, beginning in the second half of 2011.

Note: Except where noted in the legend, all charts below relate to the Irish economy.

In contrast, the consumer sector is suffering quite explicitly. After yesterday’s revisions to previous months, we now see the harmonized unemployment hovering near its peak rate, 14.6% in May vs. 14.8% peak (in the chart below, the red line maps the pre-revised unemployment rates). Consumer confidence is very low, which implies that retail sales could tumble a bit in coming months. Furthermore, price inflation lost some steam, although it remains above the deflationary period that ended in 2010 by the headline measure. Core inflation dropped off in the last couple of months to just 0.4% Y/Y in May. Finally, for all of the optimism on Ireland, Q4 2011 GNP and GDP are just 1% and 0.7%, respectively, higher than their 2010 lows.

It’s probably too early to fully discount the orthodox expansionary austerity thesis – but at the minimum, it does appear as if any economic momentum has been gained primarily through global trade, and that sector is struggling. In all, I’d say that Ireland looks more economically depressed than ambitious and not the poster child of growth.

Rebecca Wilder

crossposted with The Wilder View…Economonitors

A Modest Forecast: The Average Real Growth in Ireland will Exceed 10% a Year From 2012 to 2014

by Mike Kimel

A Modest Forecast: The Average Real Growth in Ireland will Exceed 10% a Year From 2012 to 2014

 You read the title correctly: the Irish economy will grow by more than 10% next year. Now, hearing that, you might be asking yourself: “Is this guy for real? He must be nuts.”

 Because I’ve looked around and nobody is predicting that sort of growth for Ireland for the next few years. So let me lay out ten facts that should make it obvious to just about everyone:

1. According to the Central Statistics Office of Ireland, real GDP (measured in 2009 Euros) peaked at 45,583 million Euros in the fourth quarter of 2007. It bottomed out in the fourth quarter of 2010 at 39,403 million Euros. That is, real GDP fell by 13.5%. Since then, GDP has barely budged. So its safe to call 2011, four years after the peak, as a year when the bottom out process was ongoing.

2. According to the OECD, Ireland’s all in top marginal tax rates are about 52.1%.

3. According to the BEA, real GDP (measured in 2005 dollars) was 976.1 billion in 1929. It reached a nadir of 715.8 billion in 1933, amounting to a drop of 26.6%. Note that while growth was negative in 1933 (four years after the peak), it was just a small drop. The bulk of the decrease occurred from 1929 to 1932. 

4. According to the IRS, the top Federal marginal tax rate was 63% in 1934, and it rose to 79% in 1936. Note that this wasn’t an “all in” rate.

5. According to the BEA, real economic growth in the US in 1934, 1935 and 1936 was 10.9%, 8.9% and 13.1%. The annualized rate of growth from 1933 to 1938, years which I’m cherry-picking to show some relatively poor growth, was 6.7% a year.
6. FDR instituted a number of large scale programs. For instance, [b]y March, 1936, the WPA rolls had reached a total of more than 3,400,000 persons. For comparison, according to the BEA’s NIPA Table 7.1, the entire population of the US in 1936 was 128.181 million. Thus, 2.7% of the US population was employed in the WPA alone. Throw in the CCC, the Rural Electrification Administration, the TVA, and I think we can all agree that the Federal government was playing a big role in the economy.

7. Many eminent worthies, too many to name, in fact tell us that the rapid growth in the economy from 1933 to 1940 was due to the bounce-back in the economy. They also tell us that the economy would have recovered much more quickly if FDR had not followed socialist policies.

8. Ireland doesn’t have as far to bounce back from as the US did in 1934, implying slower growth in Ireland today than in the US in 1934.

 9. On the other hand, taxes are much lower in Ireland today than in the US in 1934, and nobody is accusing the Irish today of following socialist policies, implying faster economic growth in Ireland today than in the US in 1934.

10. Facts 8 and 9 probably cancel each other out, leaving us to expect, on average, about the same growth rate in Ireland over the next few years as we saw in the US during the New Deal years when FDR ruined the economy.

As the eggheads say, QED. 

What’s nice about this is that we will see rapid growth in other countries too. Taxes are much lower in the US now then they were during the New Deal years, and for all the cries of socialism and whatnot, there is WPA or CCC or Rural Electrification Program. Heck, even the Fed doesn’t seem to want to do anything about jobs and that’s part of its mandate. Back to the eggheads for a moment.

There’s a bunch of them who think the New Deal helped the economy, that lower taxes don’t generate faster economic growth or that its a good idea for the government go out and buy stuff to boost demand at times of economic weakness. Boy are those folks about to be surprised by the magic of the free market and low taxes. — Disclosure:

I profess, in the sincerity of my heart, that I have not the least personal interest in endeavoring to promote this necessary work, having no other motive than the public good of my country, by advancing our trade, providing for infants, relieving the poor, and giving some pleasure to the rich.

Wilder’s News on Europe

Rebecca Wilder has shifted to publishing her insightful articles on Europe back to her Newsneconomics platform, but will continue to publish on US topics and US/Europe connections on Angry Bear.

I think that the shift is smart…the audience for Angry Bear is focused more on the US and as the election cycle is already quite heated probably will remain so. The material on Europe tends to get lost.

The Financial Times, for instance, picks up her material rather quickly through the Newsneconomics name. Therefore, for now Rebecca has chosen to write for Angry Bear and to keep us abreast of the Eurozone through Newsneconomics.

Such an arrangement allows for a different audience to communicate with each other in comments, many who are economists and readers who live in the Eurozone and whose primary interest is in their own news.

But Eurozone news remains quite pertinent to Angry Bear readers, hence I will post excerpts and a link to her posts through Angry Bear.

Ireland’s Bank run by Rebecca Wilder

I knew that the Irish deposit base was shrinking – I just didn’t realize the severity of the situation. In sum, €21.4 bn in household and non-financial business deposits have been drawn down since their respective peaks.

Irish businesses in aggregate have been in a silent bank run since 2007, households since 2010. So how big is €21.4 bn? Roughly 14% of Irish GDP.

Greece will not be ‘allowed’ to default until policy shores up the Irish bond market

Just look at Tracy Alloway’s imagery at FT Alphaville, and you’ll know what’s expected: an imminent Greek default. I still argue no, although European policy tactics are quite enigmatic and their next move is really anyone’s guess. Alas, here’s mine.

Assuming that Greece does not secede from the Euro area, I give you three reasons why Greece will not be allowed to default soon (at least the next 12 months, given current market conditions). I say ‘allowed’ because true to the IMF legacy, EU/Euro area officials very likely see restructuring as a ‘gift’ for good fiscal behavior.

(1) Moral hazard is an important issue in Europe, and Greece has only begun its austerity program. We’ll need confirmation that they are not on track in order to assess the timing of default, in my view.

Ironically, the EU/IMF/Euro area are sticking to the ‘exports will grow the Greek economy’ story. I say ironically because Greece was exporting a larger share of GDP before the recession, average 22.6% spanning 2005-2007, than it is now, 19.8% in 2010 (average Q1-Q3).

(2) The banking system’s not ready. Unless the Germans want to instantly recapitalize the Landesbanks this year, I’d argue that the Euro banking system remains overly exposed to mark-to-market accounting (i.e. holding the assets at fair value not wishful thinking) for all of the crappy debt that it holds on balance.

In fact, the German banks purchased 11bn 1.1bn euro in Greek sovereign bonds in January. That’s the most current data available; but I bet they’re simply moving debt out of the Greek banks and corporates and into the sovereign as the probability of default rises (see chart below).

(3) This one’s critical: policy makers must shore up Ireland and Portugal in order to avoid a quick contagion across the European banking system. They haven’t done that yet. In fact, the Finnish election results exposed the tenuous negotiation process overall.

See, the Greek yield curve is inverted – so are the Portuguese and Irish yield curves, albeit to a much lesser degree. The point is, that Portugal and Ireland are very close to the Greek brink.
(read more after the jump!)

Inversion matters. Currently a Greek 10yr bond yields 14.5% with a euro price of 59, while a 2-yr bond yields 21.4% with a euro price of 73. Bond investors are going for the cheapest bond not the highest yield (at the end of the yield curve) as a bet on a binary situation: haircut or no haircut. When a curve is inverted, it’s all about price not yield.

Portugal and Ireland are already inverted and close to the Greek brink. If Greece were to restructure without a full-fledged backstop from the Euro area governments, the Portuguese and Irish curves would swiftly turn over. And if European policy makers could stop the contagion there, then that would be a true feat….

Spain, the economic ‘line in the sand’, would be next. We saw last week how markets view the Spanish sovereign, still risky. Bond yields on the Spanish 10yr broke out of a 4-month trading band, hitting 5.55% on April 18 (latest number is 5.47%).

More on Ireland

I assure you, that it’s too early to deem the Irish sovereign as impervious to the Irish banking system’s fake asset base. The banking system is living on emergency liquidity assistance (ELA) and the ECB’s marginal refinancing operations (currently Irish banks can borrow as much as they want on a short-term basis from the ECB at the current rate, 1.25%).

By my calculations, the Central Bank of Ireland (via the ELA) and the ECB are subsidizing – I say subsidizing because market funding costs are proxied by the sovereign borrowing costs of 10% – 16% of the Irish banking system’s balance sheet. As such, profit margins are thin, and mortgage rates are running low at 3-4%. (see CBI website for plenty of data.) These funding costs are not sustainable – not to mention the Irish stress tests assume that they remain fixed at Q4 2010 levels (see exhibit 2 in Appendix C of the stress test documentation). Nonperforming loans will rise.

I leave you with this illustration of possible non-performing loans when mortgage rates rise on the following:

(A) ECB rate hikes – mortgages are tied to 12-month euribor and most Irish mortgages are variable.
(B) the dissipation of record-low bank borrowing costs (this also is another post, but the ECB has yet to release its medium-term funding program for Ireland).

Note: if/when they do default, Kash at the Street Light blog provides an overview of some technical considerations.

Rebecca Wilder

Update on conditions in Ireland…another letter from Ireland

The first letter from Ireland is here

Update on conditions in Ireland…a second letter from Ireland

Ireland, Land of Thieves, Charlatans and Sodomites… Zeus-Boy

We’re forced to do silly things out of desperation, things that other nations don’t have to resort to. For instance, we’ve the lowest corporate tax rate in Europe at 12.5%. Sarkozy recently excoriated us for this. But we use it as an incentive to bait the multi-nationals. We’ve no other choice. Why else would the big companies bother locating here? If the labour market is cheaper elsewhere then we have to compete somehow, we’re told. We lure them in by offering them tax shelters. We even set aside developed estates for them and we build their factories when they come, with the Taoiseach on hand to cut the ribbons. Their overheads remain very low and then we allow them to siphon all their profits out of the country. Talk about being recolonized by self-imposed deference, but Ireland is a dependent economy and does what it must do to survive.

There are other options, of course. There’s the old reliable one of emigration. 100,000 people will leave Ireland this year alone, and the numbers are rising, again. That’s one way of solving unemployment, but it’s not completely or satisfactorily solving our problem. Our crisis. As of this month, the CSO (Central Statistics Office) quotes the unemployment rate at 14.1%, that’s over 400,000 people out of work. Those people will be on the dole or getting some version of welfare, which starts at €197 per week and rises according to number of dependents.

The CSO’s figures are frightening. They say that of the over 800,000 mortgages in the country, worth €120 billion, 40,000 are in arrears and that figure will rise to 70,000 in the coming year: the banks will be forced to repossess these houses. But the banks don’t want all that property. What good is it to them? They especially don’t want to be shackled with toxic real estate when so many are already in negative equity. Every town and village in the country sports its token ghost estate, the relic of the boom years, a reminder of the savage greed that swiftly plunged us into ruin. More on that in a bit. The ESB [Electricity Supply Board] are shutting off service to 50 homes per month for non-payment of bills.

Health Care in Ireland is totally banjaxed: My father who is 80 spent three nights on a trolley in a hallway last year because there were no beds available. He is no longer able to regulate his body temperature because he suffers from leukemia and other complications, so he nearly shivered to death in the one place he went to for care. My sister is a doctor but she could do nothing. Our Health Care system was dismantled and then rebuilt in order to centralize it, hospitals were closed all over the country and acute services scaled back or abandoned altogether. A moratorium on hiring nurses and doctors was instituted and all administrative staff downsized.

The Minister for Health who oversaw this fiasco, Mary Harney, has just resigned her ministerial post and will get a lump sum of €310,000 plus a pension when she leaves office. We like to reward incompetence in Ireland. Education isn’t faring any better: we dumb down our students and prepare them for a life of servitude and passivity. A moratorium has also been placed on the hiring of new teachers, a freeze more like, and funding has been withdrawn from special needs projects. Almost every other state run body is experiencing the same level of incompetence, and yet the nation is expected to grow its economy enough to pay its debts and still balance its books.

It’s not helpful to speak about the criminal behavior that got our country into this debacle. We’re not allowed to focus on the deranged and delusional freak-show that was the hybrid known as the Celtic Tiger. Our attention is quickly diverted if we mention how local councils all over the country used their zoning powers to wheedle dirty money from developers [this being their only way to raise money] in order to line the pockets of avaricious landowners and bankers. Many of these useless developments were erected on flood plains or dangerously unsuitable terrain. It didn’t matter so long as the bonanza was in full tilt.

We’re supposed to forget that the bankers were throwing money at these developers and builders, money they didn’t have, and never had, money they were borrowing from German savers anxious to invest their surplus. Nobody thought for one second any of this would have to be repaid. Meanwhile, a select group were living the high life, like oil barons or movie stars jetting here and there, flying their private planes and helicopters all over the country to race meetings and golf tournaments and toddler birthday parties. And when they ran out of suitable sump holes in Ireland they spread their good cheer abroad. Over €1,265 billion was invested by Irish citizens abroad in 2009. One shouldn’t mention that the bankers were in the pockets of the builders, who were in the pockets of the developers, who were in the pockets of the politicians and that the resulting circle jerk which met in secret every few days, regular as clockwork, had a grand old wanking session. It is downright begrudgery to allude to the financial regulator or the governor of the Central Bank or to ask how they could sleep so soundly through the nightmare that was the rape of their country.

But the house of cards was destined to collapse and when it eventually did we all know what happened next. It’s yesterday’s news now: the good old boys in the government provided all the safety nets their hand-shandy buddies needed, bailouts, emergency loans, triage funding, congratulatory pats on the ass and golden mickey shakes when they fled the country. It has emerged that our Taoiseach personally guaranteed the odious thugs at Anglo and used NTMA money [resources reserved by Treasury Management for the daily running of the country], to infuse their defunct and toxic bank with the exchequer ‘s funds. The government then nationalized those broken banks, claimed their problems were systemic and shackled the tax-payer with their very private and self-inflicted debt.

The banks debts has now become our sovereign debts, just as NAMA nationalized all the ghost estates and turned the inflated and non-buyable property over to the citizens, as if they’d acquired a new portfolio. Merrill-Lynch was solicited for its counsel prior to the fiasco and advised against a blanket bank guarantee.
That didn’t matter, cronies is cronies, the old boys club needed bailing and the subservient and pliant peasantry could be directed to cough and pay up. That’s what we do so well in Ireland – we rant and rave, we purge and we vent the pent, we get sloshed or high, then we return home in the early hours with our dignity between our legs, all limp and shriveled up, poxed and ridden, and we bend the deferential knee, bare our arses for the ritualistic buggery and we thank our sado-masochistic sodomites for giving us a good hammering. We did it for 800 years. It’s in our blood. And when the Brits left, we installed the church as sodomite-in-chief, just in case we might think ourselves free, self-determining, and independent. We daren’t ask or hold anyone accountable. What’s the use when the slick politicians will only lie and cheat their way out of culpability anyway? We’ll shoulder the burden and we’ll always be ready with the Vaseline.

Besides, our politicians are incorrigible, especially the fuckheads in Fianna Fáil, who’ve been in power for most of our republic’s history. They’ve sold our future into slavery, thrown away our sovereignty, reduced a nation to penury, dismantled an infrastructure that was the envy of the civilized world, broken every institution, shown contempt for the people and utterly disgraced our country. They’ve said to our neighbours across the pond, ‘you were right all along; we were incapable of governing ourselves. We tried and look at the mess we made of things.’ Instead of focusing on the emergency state we now find ourselves in with mass emigration, mass unemployment, a colossal and unmanageable debt, inflation rising and a very bleak future in store, what do these fuckers do? They propose patriotism for the rest of us and entitlement for themselves: we are expected to live on fresh air as they feather their own nests. I can only imagine if a man like Dan Breen were alive today to see what has been made of his sacrifice.

Instead of serving the people, as they were elected to do, these fools turn inward and bicker amongst themselves; their only public statements now are pontifications about their own virtues and to engage in cynical electioneering. Instead of working together, all of them, to save the country they destroyed, they resort to internecine feuds, screaming and yelling at one another across the floor of the Dáil chamber, tearing one another asunder, raising votes of no confidence in their own leader, voting in and out that leader, threatening to resign, and then resigning [six cabinet ministers resigned their posts last week], but not before receiving their handsome Ex Gratia lump sums and, rather than face the truth of his political demise, the leader who has lost half his cabinet persists in the delusion that he can still run the country with a mandate, he refuses to step down or call an election, but then finally he agrees to resign as the leader of his party while remaining as Taoiseach. Such grotesque shenanigans have robbed the people of any confidence they might still have had in the political process. People are pissed off, royally pissed off, not that they will do anything about it.
Our country is a joke, a farce. We’re a disgrace.

Our politicians are gombeen men and women. They’re still only out for number one. While the country is being flushed down into the sewer and the citizenry is drowning in tidal waves of slurry, these clueless, incompetent and shameless bastards are only worried only about whether their political party will survive, whether this or that machination is good for the party, whether the party will be strengthened or weakened going in to the next general election. It’s all a load of tripe. They don’t care about the people. They’ve grown so cynical and greedy, with their Mercs and perks, their expense accounts and their lump sums and pensions, their endless bailouts and their profligate sense of entitlement that the people don’t even compute in their perfidious calculus. It’s all about themselves, their self-interest, their advancement, their self-aggrandizement.

They will never want for anything again, so it’s easy for them to be cavalier about austerity and to bandy about the patriotic buzz words. They’re secure and protected. And we’re the mindless cretins who have protected them. Ireland is broken and on a deathward spiral. The country’s in a shambles and why wouldn’t it be when Biffo’s is the ugly mug we present to the world. If it’s true people get the representatives they deserve, then we Irish aren’t worth a bucketful of rabid mongrel’s piss.

Ireland – The Questions Nobody Seems to be Asking

by Mike Kimel

Ireland – The Questions Nobody Seems to be Asking
Cross-posted at the the Presimetrics blog.

Talk about deja vu all over again. Here’s Tyler Cowen talking about the Ireland bailout, and linking to Megan McArdle discussing the same. Its deja vu, for me, because it seems just about everyone commenting on the issue is ignoring what should be an obvious point, namely that a bail-out is at best a possible solution to the wrong problem. Interestingly enough, this wrong problem has been around for a very long time, and the same cast of characters have been busily ignoring it (or even praising it) for a very long time.

I said this is deja vu all over again for me, because the last time I gave much thought to the issue (back in 2006), I wrote a post that linked to both Tyler Cowen and Megan McArdle (then Jane Galt). I’d like to quote myself extensively if I may:

There seems to be some discussion about why Ireland is growing as quickly as it is.

I am completely ignorant about this, and haven’t even been to Ireland. But I do have a question… Is it possible that part, even a large part, of the Irish boom, is fictional?

By fictional, I don’t mean lacking in physical manifestations such as massive improvements in infrastructure, etc. Consider the effects of something else I’m mostly ignorant about, namely the Menem-and-Cavallo-dollarize-privatize-and-steal plan (as I recall it had a different name, but to me this one captures its essence a little better) in Argentina. For a number of years after it was launched, it looked like Argentina was doing really well. There was all kinds of new investment in infrastructure, the mood in Argentina was upbeat, and many economists (especially the conservative ones) and financial publications such as the Wall Street Journal were breathlessly pointing to Argentina as a country that other developing nations should imitate.

The problem in Argentina was that much of the funding for the short-term but much-hyped prosperity that followed came from the proceeds of the sale of government-owned assets (airline, railroads, etc.), or rather, the portion of the proceeds of the sale of government-owned assets that wasn’t stolen outright. Instead of assuming the proceeds from those sales were a one-time windfall, the Argentine government, foreign economists and the Wall Street Journal acted as if they were recurring sources of funding, leading gullible foreign investors to come running with their money. With so many experts patting them on the back, eventually even the skeptical Argentine public came to believe Argentina had miraculously fixed all its problems. When the windfall ended, the dwindling foreign reserves were not enough to maintain the dollar peg for long, and the whole house of cards came down.

Now… some of the growth in Argentina was real, and both dollarization and privatization may well have created more amenable economic conditions. But not enough to justify all the enthusiasm, or to ignore the very real problems the plan also brought.

So… where does that leave Ireland? Well, the worst year of my life was spent at a Big X (at the time, X was equal to 6) accounting firm, doing transfer pricing. Transfer pricing often amounts to little more than highballing the amount of a company’s activity taking place in low tax jurisdictions and lowballing the amount that takes place in a high tax jurisdiction in order to reduce one’s overall tax burden. It is often done creatively. Say company X transfers ownership of a logo to the subsidiary of company X in the Caymans. Then, every time company X sells a tennis shoe with that logo, it pays a royalty to its subsidiary in the Caymans. If taxes in the Caymans are lower in the US, X hires E&Y or PWC or whoever to argue that most of the value in the shoe sits in the logo (and therefore is income received by the Cayman subsidiary and thus taxable in the Caymans), and not in the shoe itself (which is income received by the parent company and taxable in the US).

So back to Ireland…. Say you’re a pharmaceutical company. You have hundreds of highly paid researchers scattered throughout the globe – in places like the US, Switzerland, Germany, etc. Because taxes are lower in Ireland than in the rest of these locations, when a blockbuster drug is discovered, it is advantageous to play up the contribution of the researchers in Ireland and play down the part of the researchers made elsewhere.

This has at least two obvious effects. The first is the direct artificial boost to Irish GDP (and an artificial reduction elsewhere). Since Ireland is relatively small, if a crumb is taken from the US, another crumb is taken from Switzerland, etc., the effect can be very large in Ireland. The second effect is indirect – in order to pull this stunt off, it is necessary to have at least some facilities in Ireland, leading to more hiring and building in Ireland as more companies get more heavily invested in playing the game. But its in nobody’s interest to say this is being as a tax dodge, so a mythology springs up (as it did in Argentina), and part of that mythology, at least, is self-sustaining.

I would imagine the situation is not quite as artificial as in Argentina – Ireland does have a young, fairly educated population, and a convenient location, whereas the change from hyperinflation to rapid growth in Argentina truly looked like a miracle to those who didn’t look too closely (i.e., almost everyone). The Irish miracle has gone on for at least two decades, and there may well be enough of a solid underpinning for it to continue indefinitely. But, I have no idea how much of the Irish growth is due to these effects, nor a clue how to measure them. Any ideas? Any other thoughts as to why Ireland is growing so rapidly?

(Note – transfer pricing was a favorite topic of the early posters on Angry Bear – Angry Bear, Kash, and PGL all had a number of excellent posts on Transfer Pricing that predated mine.)

About six months after that post, I noted some, er, corroborating evidence:

According to the CBO 20% of the returns on investment abroad by US companies from 1993 – 2003 came from Ireland and Bermuda. Ireland and Bermuda. If there’s some way to explain that 20% of the returns of all American companies abroad came from Ireland and Bermuda without invoking tax fraud on a massive scale, I’d love to hear it.

Now, none of this is intended to suggest that the Irish government wasn’t amazingly stupid in agreeing to take on the debts of private banks. (Hey, the administrations of both GW and Obama did the same amazingly stupid thing, but they disguised it a bit better, and the ability to print dollars buys the US some leeway to deal with it.) However, it does raise important issues:

1. How much of the Irish growth was fictitious?

2. What is the expected rate at which fictitious growth is transformed into real growth? Presumably that rate exceeds zero (if companies set up so much as a pass-through in Ireland to reduce their tax rate, some of the money will stick to Ireland), but presumably it is well less than 100% (if you’re attributing a technology developed by 23 engineers in San Jose, CA and 14 in Frankfurt to a single technician in Dublin, you might reduce your tax rate but the knowledge base still won’t be in Dublin.) I imagine that, paradoxically, the more the American and German tax authorities enforce compliance, the more they help the beggar-thy-neighbor types by essentially forcing their companies to do something real in those jurisdictions. Eventually, some of the engineering work actually does move to Ireland.

3. Are the beggar-thy-neighbor countries (or states, natch) more susceptible to downturns than other countries? After all, when the doo-doo hits the fan, and profits are down, Siemens and Intel and the rest of ’em have less of an incentive to minimize profits in high tax jurisdictions, and more of an incentive to show losses in those same high tax jurisdictions. Activities of any sort in Ireland becomes an afterthought. Additionally, I imagine that the Irelands of this world are disproportionately dependent on financial transactions.

4. How much of a hit do places like the US and Germany (or New York and California) take as a result of beggar-thy-neighbor policies? What should these countries (and states) owe to their citizens or corporations that take advantage of the schemes made possible by the beggar-thy-neighbor policies?

5. Is the stupidity of the Irish government (in taking on the debts and obligations of private banks) something that will have a long term deleterious effect on Ireland’s ability to continue playing beggar-thy-neighbor? The collapse of the housing bubble is a separate matter altogether from the transfer-pricing-milking-operation the Irish government was running, but might it affect Ireland’s ability to keep playing the game? (I don’t know enough about the Irish economy to hazard a guess right now, especially given the baby on my lap has just starting screaming since I started writing this sentence… which I guess is a signal to end this post.)