Proinnsias Breathnach: One thing that has always struck me about Irish economists is that, despite the importance of foreign direct investment and international trade to Ireland’s economy, they actually know very little about the activities of the transnational firms in question, or the structure of Ireland’s foreign trade and, above all, about the factors which attract foreign firms to Ireland and allow them to use Ireland as a base for serving external markets.
Rather than conducting real research in these areas, most economists who write on these topics appear to draw on undergraduate textbook models of how markets operate – models which in turn were originally devised to explain the kinds of competitive markets for commodity-type products (clothing, food, furniture) which were fairly typical of the British and US economies in the 19th century. Subsequent developments, such as industrial concentration, globalisation, rising living and educational standards, advertising and marketing and technological change, appear to have bypassed many of these people entirely.
Thus, a few weeks ago, we had Anthony Leddin of the University of Limerick (writing in The Irish Times) postulating trends in Ireland’s foreign trade which anyone with knowledge of this area would have realised right away were completely wrong. More recently (January 28), and again writing in The Irish Times, former Central Bank Chief Economist Michael Casey wrote: “At present the only bright spot in the economy is the output and exportation of pharmaceutical products”. This is an extraordinarily uninformed statement for a person of this status to make. Of the nine broad product categories into which the CSO divides Ireland’s merchandise exports, eight experienced growth in nominal export value in the first ten months of 2010 compared with the same period in 2009. Of the total growth in these eight categories, pharmaceutical products accounted for less than half (46.5%).
The growth in total merchandise exports, in turn, accounted for only one half of the overall growth in exports (including services) in the first three quarters of 2010. The growth in exports of computer services in this period exceeded that in pharmaceutical products by 24 per cent. Many economists have been unable to internalise the fact that services exports exist at all, never mind that they have been the main growth sector in Irish exports for many years and, in 2009, accounted for 46.5% of total exports. In the five years to 2009, exports of both computer services and business services grew much more strongly than exports of pharmaceuticals. In 2009, exports of both computer services and business services exceeded exports of pharmaceutical products in value terms.
In that year, these three sectors, along with organic chemicals, accounted for over half of Ireland’s total exports. If we throw in insurance & financial services, food & beverages and office & data processing machinery, the proportion rises to almost three quarters. If one were seeking the key to Ireland’s international competitiveness, one should be looking at why these seven very disparate sectors are able to use Ireland as a successful base for serving external markets.
But this would require some real research. Instead, our economists reach for simplistic and largely irrelevant statistics which are both readily available and tend to confirm deeply-entrenched prejudices. We got a good example of this in an article on Ireland’s competitiveness by The Irish Times’s chief economics journalist, Dan O’Brien, in the issue of February 4 last. While acknowledging that there are many ways of measuring competitiveness and that the National Competitiveness Council employs more than 100 competitiveness indicators in its annual reports,O’Brien then devotes most of the rest of his article to the old diehards – prices and labour costs.
Irish economists have an extraordinary tendency to rely on the EU’s harmonised index of consumer prices (HICP) as a measure of competitiveness, even though its relevance to Ireland’s export competitiveness is not immediately obvious – it is hard to see what bearing the price of a meal or a CD player has on the competitiveness of the organic chemicals or software sectors. Nevertheless, O’Brien regards the fact that Ireland’s HICP fell relative to the rest of the EU between late 2008 and early 2010 as evidence of Ireland “regaining” competitiveness.
O’Brien then suggests that trends in economy-wide unit labour costs (the ratio of wages to net output) are a better indication of Ireland’s improved competitiveness. However, the fact is that the vast majority of the Irish workforce are not engaged in export activity and, again, it is hard to see how the unit labour costs of a waitress or CD player salesperson have a bearing on the competitiveness of the main export sectors identified above. While Ireland’s economy-wide unit labour costs have tended to rise relative to the rest of the EU over the last ten years, the opposite has been the case in unit labour costs in manufacturing, the great bulk of whose output is exported. Yet, while the latter are to be found in the same page in the OECD website as the former, they are rarely, if ever, quoted by Irish economists.
There are no comparable data for export services, but the Forfás Economic Impact surveys indicate that payroll costs as a proportion of value added in foreign-owned export services (which account for 95% of the total) fell from 19% in 2000 to 9% in 2008 – a fall of over 50% in unit labour costs.
This is not to say that labour costs are important (never mind crucial) in the competitiveness of Ireland’s main export sectors. If general labour costs were a key determinant of competitiveness, then one should expect exports in all sectors to be influenced by labour cost trends. However, Ireland’s main export sectors have been very variable in their export performance, and there is no evidence that this variability has been influenced in any way by labour cost trends. Between 2000-2006 (the last year for which the relevant data are available), the chemicals & pharmaceuticals sector experienced volume output growth of 50%, despite a rise of 50% in the share of costs accounted for by pay (up from 12.6% to 18%). In the electronic components sector, there was a more modest rise in the labour share of costs from a lower base (up from 13.1% to 16.4%) yet production volume fell by 7%. In the office machines and computers sector, a fall in labour’s already very low share of total costs (down from 4.1% to 3.5%) produced volume growth of 22% - much more modest than that experienced by chemicals & pharmaceuticals.
The key point is that the idea of Ireland Inc. gaining or losing competitiveness is meaningless. Ireland’s exports are dominated by a small number of sectors whose characteristics are extremely varied and whose export performances are equally varied. Adding up these performances and then concluding from the total that Ireland is becoming more or less competitive is pointless. Over the last ten years Ireland has experienced strong export growth in a range of export services, and in pharmaceuticals and medical devices, modest growth in chemicals, and, overall, a sharp fall in exports of electronics hardware. A wide range of factors account for this export variability, of which labour costs play, at most, a minor role. In compiling its Global Competitiveness Index, the World Economic Forum employes no less than 113 quantitative criteria; in Ireland’s case labour cost factors account for less than two per cent of the total value of the competitiveness index.
The economists’ disconnect from the real world is nicely demonstrated from a passage towards the end of Dan O’Brien’s article. Referring to evidence that average productivity in Ireland has been raised by the collapse of the low-productivity construction sector, he suggested as an example that “a bricklayer produces less than the average assembly-line worker or office drone (sic)”. Productivity in the construction industry is indeed low when compared with manufacturing or business services, but O’Brien’s choice of bricklayers for his example was surely unfortunate. Assuming that earnings bear some relationship to productivity, in 2006, when industrial production workers were earning €601 per week, clerical and secretarial workers €540 and administrative civil servants €819, the average weekly earnings of all skilled construction workers came to €877 and there was one report of bricklayers at that stage earning over €3000 per week! The company making these payments was also reportedly paying its Turkish labourers €2.50 per hour. They might have been a better choice for O’Brien’s example.
Showing posts with label economists. Show all posts
Showing posts with label economists. Show all posts
Wednesday, 16 February 2011
Tuesday, 25 January 2011
A code of ethics for economists?
Paul Sweeney: The failings of the economics profession in predicting the Crash of 2008 have been a widely commented upon and criticised. One of the contributing factors to the Crash was tainted “advice” and “opinion” which urged people to borrow money from financial institutions and “get on the property ladder”. This too often came from economists with direct or indirect links to the financial sector, while newspapers with fat property supplements or pages of adverts for tax-break investments also regularly relied on such commentators.
This month (January 2011) almost 300 economists haved called on the American Economic Association to establish a code of ethics requiring disclosure of even potential conflicts of interest. And the AEA’s executive has just voted to set up a committee to consider the matter. Prof George Martino of the University of Denver said "There is a lot of hand-wringing in this profession over whether... we may have contributed to the financial crisis." The last time the economists’ ethics came up (in 1994), the AEA dismissed the idea.
What would a code of ethics requiring full disclosure mean for economists in Ireland? First, it would hit many of RTE's radio economic commentators, many of whom have links and agendas which they did not nor do they still reveal. Nor has RTE insisted on such disclosure. Secondly, it may hit those “independent economists” who write articles for the newspapers and magazines and, thirdly, it might make government and its agencies less enthusiastic about hiring advice which is so ideologically tainted.
As an economist working for the trade union movement, I am often taken aback by the hostility shown by some in the media to my critical perspective on markets, and by the contrasting soft interviews with those who worked for financial companies during the boom. The implication is that they are “independent” and I am biased. Yet it was far clearer where I was coming from, representing the largest civil society organisation in Ireland, whereas the “independent economists” were representing themselves or the companies who paid them.
Economists who work for companies in finance or other sectors like transport, whether full-time or as consultants, have urged changes in economic policies which benefit their linked companies, often without disclosing their connections.
It’s true that many academic economists are remote from the real world, and working with industry can help educate them in the workings of the economy. But during Ireland’s boom years the finance sector economists, who seemed to have their own desks in RTE and Today FM, played a very influential role in opinion formation, which was ultimately very destructive on the eocnomy
A study by two MIT academics, Epstein and Carrick-Hagenbarth, examined the work of 19 prominent academic financial economists who advocated financial “reform” (de-regulation) in newspaper and journal articles between 2005 and 2009; the study found that the economists were not honest in pointing out how they were conflicted.
“Our main findings are that in the vast majority of the time, these economists did not identify these affiliations and possible conflicts of interest. In light of these and related findings we call for an economists’ code of ethics which would require academic economists to identify these connections in appropriate contexts.”
The 19 academic economists were consultants, on the boards of financial firms, or had been trustees or advisors to them. They did not mention their affiliations.
Even the Economist magazine recently cited George DeMartino of University of Denver commenting on economists who have pushed free market policies, including financial liberalisation “on the basis of limited understanding or worse, because they ignored ways in which the real world departs from the idealised one of neoclassical economic theory.”
DeMartino says that, in the light of the immense impact that their opinions have had on the lives of ordinary citizens because of the Crash, economists should be a bit more humble about the limits of their knowledge. I add: not just in America.
This month (January 2011) almost 300 economists haved called on the American Economic Association to establish a code of ethics requiring disclosure of even potential conflicts of interest. And the AEA’s executive has just voted to set up a committee to consider the matter. Prof George Martino of the University of Denver said "There is a lot of hand-wringing in this profession over whether... we may have contributed to the financial crisis." The last time the economists’ ethics came up (in 1994), the AEA dismissed the idea.
What would a code of ethics requiring full disclosure mean for economists in Ireland? First, it would hit many of RTE's radio economic commentators, many of whom have links and agendas which they did not nor do they still reveal. Nor has RTE insisted on such disclosure. Secondly, it may hit those “independent economists” who write articles for the newspapers and magazines and, thirdly, it might make government and its agencies less enthusiastic about hiring advice which is so ideologically tainted.
As an economist working for the trade union movement, I am often taken aback by the hostility shown by some in the media to my critical perspective on markets, and by the contrasting soft interviews with those who worked for financial companies during the boom. The implication is that they are “independent” and I am biased. Yet it was far clearer where I was coming from, representing the largest civil society organisation in Ireland, whereas the “independent economists” were representing themselves or the companies who paid them.
Economists who work for companies in finance or other sectors like transport, whether full-time or as consultants, have urged changes in economic policies which benefit their linked companies, often without disclosing their connections.
It’s true that many academic economists are remote from the real world, and working with industry can help educate them in the workings of the economy. But during Ireland’s boom years the finance sector economists, who seemed to have their own desks in RTE and Today FM, played a very influential role in opinion formation, which was ultimately very destructive on the eocnomy
A study by two MIT academics, Epstein and Carrick-Hagenbarth, examined the work of 19 prominent academic financial economists who advocated financial “reform” (de-regulation) in newspaper and journal articles between 2005 and 2009; the study found that the economists were not honest in pointing out how they were conflicted.
“Our main findings are that in the vast majority of the time, these economists did not identify these affiliations and possible conflicts of interest. In light of these and related findings we call for an economists’ code of ethics which would require academic economists to identify these connections in appropriate contexts.”
The 19 academic economists were consultants, on the boards of financial firms, or had been trustees or advisors to them. They did not mention their affiliations.
Even the Economist magazine recently cited George DeMartino of University of Denver commenting on economists who have pushed free market policies, including financial liberalisation “on the basis of limited understanding or worse, because they ignored ways in which the real world departs from the idealised one of neoclassical economic theory.”
DeMartino says that, in the light of the immense impact that their opinions have had on the lives of ordinary citizens because of the Crash, economists should be a bit more humble about the limits of their knowledge. I add: not just in America.
Tuesday, 19 October 2010
Meanwhile, elsewhere ....
In the UK, the Progressive Economics Alternatives Coalition has published a pamphlet, 'Challenging the Cuts Consensus', with articles from a range of contributors including PE's own Michael Burke, Diana Abbott, Caroline Lucas MP of the Green Party, Richard Murphy of the Tax Justice Network, Jimmy Kelly (Regional Secretary of UNITE, giving an Irish perspective), Ann Pettifor and many more. Meanwhile, a new blog, Fixing the Economists, takes a look at international economics from an Irish perspective.
Monday, 23 August 2010
Airbrushing in
Michael Taft: Here is an antidote to recent attempts to airbrush out of the economic debate anyone who doesn’t follow the line. An Irish Times editorial stated, ‘There is near-universal agreement among this State’s independent economists that there is no option but to remain on the path of fiscal correction set out by the Government last December.’ Central Bank Governor Patrick Honohan stated that: ‘ . . we don’t have the flexibility to do a spending stimulus now. There’s no one who is even arguing for it.’
Never mind that a number of economists argued differently (and in the Irish Times) in the TASC open letter, something Sinéad Pentony reminded the leader writers.
There’s Paul Krugman writing (again, in the Irish Times) about ‘austerians’: ‘Anyone who doubts the suffering caused by slashing spending in a weak economy should look at the catastrophic effects of austerity programmes in Greece and Ireland.’
Of course, Professor Krugman can be dismissed on the grounds that he ‘doesn’t understand’ Irish exceptionalism. But the leader of the second largest union in ICTU, Jimmy Kelly of UNITE, wrote at length recently in the Sunday Tribune, arguing for an investment-led strategy to replace the failed fiscal policies pursued by the Government: ‘This is not a traditional stimulus programme, whereby the government temporarily boosts demand until such time as the private sector gets back on its feet. It is an investment-led programme constituting a major drive to modernise our economic base and boost productivity. It will increase job numbers and profitability throughout the private and public sectors.’
Yes, there is a debate going on – even if some don’t want to admit it and are doing everything possible to shield it from the public.
Never mind that a number of economists argued differently (and in the Irish Times) in the TASC open letter, something Sinéad Pentony reminded the leader writers.
There’s Paul Krugman writing (again, in the Irish Times) about ‘austerians’: ‘Anyone who doubts the suffering caused by slashing spending in a weak economy should look at the catastrophic effects of austerity programmes in Greece and Ireland.’
Of course, Professor Krugman can be dismissed on the grounds that he ‘doesn’t understand’ Irish exceptionalism. But the leader of the second largest union in ICTU, Jimmy Kelly of UNITE, wrote at length recently in the Sunday Tribune, arguing for an investment-led strategy to replace the failed fiscal policies pursued by the Government: ‘This is not a traditional stimulus programme, whereby the government temporarily boosts demand until such time as the private sector gets back on its feet. It is an investment-led programme constituting a major drive to modernise our economic base and boost productivity. It will increase job numbers and profitability throughout the private and public sectors.’
Yes, there is a debate going on – even if some don’t want to admit it and are doing everything possible to shield it from the public.
Thursday, 29 July 2010
Evolution ... and economists
The following is the text of a letter from Terry McDonough carried in today's Irish Times:
Michael Casey, reviewing The Company of Strangers: A Natural History of Economic Life (Business, July 26th), reads that evolutionary theorists believe the murder of 20 million Congolese by Belgian colonists was not down to imperialism but due to an evolutionary failure to develop sufficient trust in strangers. And yet the remainder of that day’s business pages are replete with the most touching examples of misplaced trust. We learn from Wolfgang Munchau that the strategy behind the recently completed stress tests (grade inflation for banks) was premised on the assumption of an innocent trust in the results by investors and the public, validated apparently by your reports of a positive response from “the markets”.
We are informed by Tony Jackson that pension funds are still too trusting of the private equity industry despite a report on the opposite page that this industry has “underperformed stockmarkets, taken excessive risks, and overcharged investors”. We find out that despite rising losses at Aras Sláinte, “the group continues to have the solid support of its bankers and shareholders” (one of whom is reported to be a private equity firm associated with Anglo-Irish bank). Speaking of Anglo-Irish bank, we find that after the NAMA process, it lent a developer a further €25 million and entrusted him with a line of credit for over €353 million. Still on NAMA, a survey finds that 66 per cent of Irish chief financial officers think NAMA will improve credit availability.
Finally, in what is perhaps the most moving example, we are told that, in response to queries over royalty payments to executives, director Ivan Yates is reassured because management has said its lawyers and auditors approved the controversial payments. According to the scientists, all of this would seem to violate basic human nature. On this evidence, evolutionary psychologists would appear to be no more worthy of trust than say . . . economists.
Michael Casey, reviewing The Company of Strangers: A Natural History of Economic Life (Business, July 26th), reads that evolutionary theorists believe the murder of 20 million Congolese by Belgian colonists was not down to imperialism but due to an evolutionary failure to develop sufficient trust in strangers. And yet the remainder of that day’s business pages are replete with the most touching examples of misplaced trust. We learn from Wolfgang Munchau that the strategy behind the recently completed stress tests (grade inflation for banks) was premised on the assumption of an innocent trust in the results by investors and the public, validated apparently by your reports of a positive response from “the markets”.
We are informed by Tony Jackson that pension funds are still too trusting of the private equity industry despite a report on the opposite page that this industry has “underperformed stockmarkets, taken excessive risks, and overcharged investors”. We find out that despite rising losses at Aras Sláinte, “the group continues to have the solid support of its bankers and shareholders” (one of whom is reported to be a private equity firm associated with Anglo-Irish bank). Speaking of Anglo-Irish bank, we find that after the NAMA process, it lent a developer a further €25 million and entrusted him with a line of credit for over €353 million. Still on NAMA, a survey finds that 66 per cent of Irish chief financial officers think NAMA will improve credit availability.
Finally, in what is perhaps the most moving example, we are told that, in response to queries over royalty payments to executives, director Ivan Yates is reassured because management has said its lawyers and auditors approved the controversial payments. According to the scientists, all of this would seem to violate basic human nature. On this evidence, evolutionary psychologists would appear to be no more worthy of trust than say . . . economists.
Wednesday, 7 October 2009
Why (Irish) economists' eyes are smiling
James Wickham: There’s a curious paradox about economists in Ireland today. In the middle of the financial crisis, the public standing of economists is higher than ever before. This is odd, because in most countries the claim of economists to any special knowledge about the economy (or anything else) is subject to extensive criticism. Inside and outside the profession, there are calls for greater ‘modesty’. Furthermore, many ‘eccentric’ or ‘heterodox’ economists have long claimed that conventional academic economics has become essentially a branch of applied mathematics. Today their views are being given a wider audience than before. Readers of this blog will be aware of such developments, but they have had no impact in Ireland. Why?
Surely the answer lies in the national specificity of the Irish crisis. While the government claims that what has happened here is just part of a global crisis, this is of course nonsense. The global crisis – or more accurately, the crisis of Anglo-Saxon capitalism - has been exacerbated by our own construction and housing asset boom. And here I think - though I would like to check this - most Irish economists did point out that we were in a speculative bubble and many did call on the government to try to restrain it. However, I suspect that on a more general scale Irish economists were as guilty as their international colleagues. Even at home, how many called for tighter regulation of the banks? And abroad, how many pointed out the dangers of unregulated financial markets?
Surely the answer lies in the national specificity of the Irish crisis. While the government claims that what has happened here is just part of a global crisis, this is of course nonsense. The global crisis – or more accurately, the crisis of Anglo-Saxon capitalism - has been exacerbated by our own construction and housing asset boom. And here I think - though I would like to check this - most Irish economists did point out that we were in a speculative bubble and many did call on the government to try to restrain it. However, I suspect that on a more general scale Irish economists were as guilty as their international colleagues. Even at home, how many called for tighter regulation of the banks? And abroad, how many pointed out the dangers of unregulated financial markets?
Tuesday, 22 September 2009
The Fetishists of Farmleigh
Colm O'Doherty: The conceit at the heart of the Global Economic Forum at Farmleigh was that it lacked the will and resolve to make any alternative to "more of the same"realistic. It is hardly surprising that it elevated "celebrity crisis management"over a genuine inquiry into what Irish citizens want from capitalism.Our current political crisis has been aggravated by economic growth which binged on consumer credit.
Advice from rich entrepreneurs only serves to validate a complacent self-serving worldview where growth for its own sake without any judgement of its wider value in society is promoted.There is a general awareness amongst most thinking people that this recession was triggered,to a large degree,by profligate consumerism-and the mountain of debt that accompanied it.
Farmleigh should have been an opportunity,therefore,to consider the case for a less consumer-oriented society. Instead of fetishising money-capital growth -"Ireland needs to monetise its culture businessman Dermot Desmond told the conference"(Irish Tines, 21/09/09)-we should be thinking about whether we want less consumption and more and better public services. Ironically one of the key note speakers, Dr.Craig Barrett, former head of Intel, did argue for more investment in a public service, education, but only so that it could be the lackey of the self-serving growth for growth's sake merchants.In order for a real debate to have taken place on what kind of ireland we want to live in the Forum needed the participation of social scientists from disciplines other than the dismal science of economics.
The social sciences can and should contribute to a greater understanding of the workings of our society and the dynamics of Irish social life. In so doing, they provide us with a mirror upon which we can gaze in order to understand not only what we have been and what we are now, but to inform ideas about what we might become.
Economists are not only incapable of this - they reduce everything to crude instruments of value - but they break the cardinal rule of social scientists by being prescriptive at every turn. They do this continually because they assume that they can predict human behaviour with certainty, ignoring the fact that a necessary condition of human freedom is the ability to have acted otherwise and to imagine and practice different ways of organising societies and living together.
Advice from rich entrepreneurs only serves to validate a complacent self-serving worldview where growth for its own sake without any judgement of its wider value in society is promoted.There is a general awareness amongst most thinking people that this recession was triggered,to a large degree,by profligate consumerism-and the mountain of debt that accompanied it.
Farmleigh should have been an opportunity,therefore,to consider the case for a less consumer-oriented society. Instead of fetishising money-capital growth -"Ireland needs to monetise its culture businessman Dermot Desmond told the conference"(Irish Tines, 21/09/09)-we should be thinking about whether we want less consumption and more and better public services. Ironically one of the key note speakers, Dr.Craig Barrett, former head of Intel, did argue for more investment in a public service, education, but only so that it could be the lackey of the self-serving growth for growth's sake merchants.In order for a real debate to have taken place on what kind of ireland we want to live in the Forum needed the participation of social scientists from disciplines other than the dismal science of economics.
The social sciences can and should contribute to a greater understanding of the workings of our society and the dynamics of Irish social life. In so doing, they provide us with a mirror upon which we can gaze in order to understand not only what we have been and what we are now, but to inform ideas about what we might become.
Economists are not only incapable of this - they reduce everything to crude instruments of value - but they break the cardinal rule of social scientists by being prescriptive at every turn. They do this continually because they assume that they can predict human behaviour with certainty, ignoring the fact that a necessary condition of human freedom is the ability to have acted otherwise and to imagine and practice different ways of organising societies and living together.
Monday, 3 August 2009
Homo Economicus Dublinius
Slí Eile: Commenting on this website, anonymous said
Lets assume Home Economicus Dublinius is a 50 year old male, professor of economics in the Free University of Dublin who earns €120,000 a year, plus external research consultancy fees permitted by his institution of 25%, plus an unknown income stream from investments in property, bonds and equity (being a smart connoisseur of the markets, you know).
OK, Homo Economicus Dublinius has had to take a hardship hit this year of 10% in ‘pension’ levy on his base salary of €120,000. That translates into a nominal wage income cut of, say, 8% (on €150K).
Add to that, Government steals another 5% in various stealth charges and taxes. So the additional burden is over 10%. But, hold on, given sauce for the welfare goose we must factor in the impact of price deflation for the gander. So, his real cut in take-home pay is not as much as 10%. Still, it's hard – some adjustments to the property portfolio....
Now, someone on, say, €25,000 a year (cleaning attendant at the Free University of Dublin) needs to take a nominal pay cut of 20% to help the national war effort to make Ireland competitive again, and get the bloated public sector off the backs of hard-pressed taxpayers in the ‘real economy’ (read: private sector minus banking, property and estate). Or, more effective still, let's see the attendant’s job phased out altogether since she is on a contract and does not have to be replaced (the softest target surely in the public sector).
Where does that leave us?
This is not idle speculation.
Have a read of Kathy Sheridan’s piece in the Irish Times a couple of weeks ago (Taking Stock of the Newly Destitute):
Or, take a real couple this time:
...as a private sector worker married to a nurse I can assure you that the reality of life for us is very different to the majority of people who post to this site.Fair point, although one cannot presume the background of all who contribute, comment or read any site on the internet.
Lets assume Home Economicus Dublinius is a 50 year old male, professor of economics in the Free University of Dublin who earns €120,000 a year, plus external research consultancy fees permitted by his institution of 25%, plus an unknown income stream from investments in property, bonds and equity (being a smart connoisseur of the markets, you know).
OK, Homo Economicus Dublinius has had to take a hardship hit this year of 10% in ‘pension’ levy on his base salary of €120,000. That translates into a nominal wage income cut of, say, 8% (on €150K).
Add to that, Government steals another 5% in various stealth charges and taxes. So the additional burden is over 10%. But, hold on, given sauce for the welfare goose we must factor in the impact of price deflation for the gander. So, his real cut in take-home pay is not as much as 10%. Still, it's hard – some adjustments to the property portfolio....
Now, someone on, say, €25,000 a year (cleaning attendant at the Free University of Dublin) needs to take a nominal pay cut of 20% to help the national war effort to make Ireland competitive again, and get the bloated public sector off the backs of hard-pressed taxpayers in the ‘real economy’ (read: private sector minus banking, property and estate). Or, more effective still, let's see the attendant’s job phased out altogether since she is on a contract and does not have to be replaced (the softest target surely in the public sector).
Where does that leave us?
This is not idle speculation.
Have a read of Kathy Sheridan’s piece in the Irish Times a couple of weeks ago (Taking Stock of the Newly Destitute):
Or, take a real couple this time:
A couple in their mid-40s who had worked hard since their teens, each running a small business, had bought an old house and were slowly doing it up, but failed to sell their first home before the slump. Now they can’t sell either. Both businesses have come to a stand-still, but for welfare purposes they are regarded as asset-rich so are entitled to no benefits. They are currently surviving on hand-outs from family members and the Vincent de Paul, as well as food parcels left on the doorstep by concerned friends.And some economists are calling for cuts in welfare spending as well as reductions in the minimum wage. Well, let's say it again: it is one thing for someone in the top income decile in relatively secure employment to take a 10% cut in income; its quite another matter for someone in the middle income bracket to lose practically all income all at once (such as in the example above), and yet another matter for someone who is already among the ‘working poor’ (i.e. close the statutory minimum wage) to take a cut of 5, 10 or more percent.
Friday, 3 July 2009
We always need sceptical economists
Paul Sweeney: There is a growing consensus that the collapse in the world economy is due largely to the failure of the liberalisation, privatisation, de-regulation and tax cutting polices. Yet many economists are in shock. Conservative economists’ intellectual belief in the self-correcting workings of the free market has exposed the inadequacy of their theoretical foundations. Life – the real economy – has badly let them down.
This week, the British Government, after three big bail outs of the profitable East Coast Railway, had to renationalise it; the operator walked away because the profit was not big enough. The cost of off-balance sheet PPPs has had to be realised, while plans for additional ones – such as the mooted privatisation of the Royal Mail – have had to be cancelled.
The lack of scepticism among many economists, their incredible confidence in their own beliefs - as if they were scientifically based - has always puzzled. It may be due to the lack of knowledge of economic history and the history of economic thought, and/or to the narrow focus on econometrics. This latter adds to the illusion of scientific rigour but is not a substitute for intelligent, rigorous analysis of real world economics.
There is also the narrowness of real economic debate in Ireland’s universities and in the media. The neo-classical training of economists appears to engender a deep conservatism, a lack of intellectual curiosity and a fascination with technical detail, which ignores the fundamental, policy-relevant issues.
So where are the sceptical economists? I immediately think of four popular economists, three in the US, Paul Krugman, Jamie Galbraith and Joe Stiglitz and Will Hutton in the UK. All have been battling for a new Keynesian economics for some time. They favour a stimulus package amongst other actions, while conservatives want to cut public expenditure.
Last night on Newsnight Stiglitz described the current economic system as “Casino Capitalism.” He said that the weak response by the state on both sides of the Atlantic to the banking crisis was due in large part to the power of financial capital. Even a popular government like Obama’s has not done enough on tackling the power of the banks, he claimed. This is strong comment. We seldom get such strong critical comment in Ireland, though Morgan Kelly of UCD has not minced his words.
While the left has never believed in the self-correcting market, it is important that it is also sceptical of the operation of the state on economic and social matters too. PPARS, useless voting machines, nursing home scandals, poisoning women with bad blood, facilitating the physical and sexual abuse of children for decades, and overflowing sewage works are just some of the more costly state failures. And the money, billions of our tax euros, is not the only cost of these failures by our public service and the politicians who make the main decisions.
But in financial terms, all state failures pale in comparison to the costs of the disastrous economic polices pursued in Ireland between 1998 and 2005/6. The strongly pro-cyclical, tax-cutting policies in a domestic boom, along with adherence to the efficient markets theory by many in our own Department of Finance and the Financial Regulator, allowed the banks to compound our economic collapse; the vast costs of these mistakes are impossible to estimate.
Had key powerful economic state officials been more sceptical of the markets, we might have had some internal opposition to PD McCreevy’s tax cutting policies, and we might have had better bank regulation. The result would have been a more manageable economic downturn. The state was supposed to protect us from the worst excesses of the market. The state let us down, so badly, that the cost may run for decades.
While this failure was largely due to the “intellectual capture” of the cream of the state’s economic establishment by the free market fundamentalists, the reasons are of little comfort to ordinary people. But we must try and learn the political and economic lessons of why this occurred.
How did an economic ideology become so dominant that it captured the minds of so many? McCreevy, the PDs and many in the media sold the pup. But why did so many generally conservative public servants and others buy it?
While progressives can take heart that much must now change, unless we come up with much more coherent strategies Ireland and Europe are likely to end up many cul-de-sacs in the road to building a new economic system that works. This has to include a new paradigm of utilising the best of the public and private sectors.
The excoriation of the public sector by the defeated, retreating storm troopers of new-liberalism has served to distract from the consequences of the abject failure of their market fundamentalism. Yet these attacks have taken us up the first alleyway, away from addressing real economic issues.
The emergence of popular debate on economics in a number of Irish blogs is most welcome. However, the print media, especially the Irish Times, which took comment from academic economists for a time, is again reverting to promoting the utterances of the PR economists from the stockbrokers and finance capital as “fact”. There is no scepticism there – a few facts and self-confident, Big Opinions, rooted in “economic science”! The late Paul Tansey is sorely missed for fairness, accuracy, and most of all, for his perception, which was rooted in a degree of healthy scepticism.
This week, the British Government, after three big bail outs of the profitable East Coast Railway, had to renationalise it; the operator walked away because the profit was not big enough. The cost of off-balance sheet PPPs has had to be realised, while plans for additional ones – such as the mooted privatisation of the Royal Mail – have had to be cancelled.
The lack of scepticism among many economists, their incredible confidence in their own beliefs - as if they were scientifically based - has always puzzled. It may be due to the lack of knowledge of economic history and the history of economic thought, and/or to the narrow focus on econometrics. This latter adds to the illusion of scientific rigour but is not a substitute for intelligent, rigorous analysis of real world economics.
There is also the narrowness of real economic debate in Ireland’s universities and in the media. The neo-classical training of economists appears to engender a deep conservatism, a lack of intellectual curiosity and a fascination with technical detail, which ignores the fundamental, policy-relevant issues.
So where are the sceptical economists? I immediately think of four popular economists, three in the US, Paul Krugman, Jamie Galbraith and Joe Stiglitz and Will Hutton in the UK. All have been battling for a new Keynesian economics for some time. They favour a stimulus package amongst other actions, while conservatives want to cut public expenditure.
Last night on Newsnight Stiglitz described the current economic system as “Casino Capitalism.” He said that the weak response by the state on both sides of the Atlantic to the banking crisis was due in large part to the power of financial capital. Even a popular government like Obama’s has not done enough on tackling the power of the banks, he claimed. This is strong comment. We seldom get such strong critical comment in Ireland, though Morgan Kelly of UCD has not minced his words.
While the left has never believed in the self-correcting market, it is important that it is also sceptical of the operation of the state on economic and social matters too. PPARS, useless voting machines, nursing home scandals, poisoning women with bad blood, facilitating the physical and sexual abuse of children for decades, and overflowing sewage works are just some of the more costly state failures. And the money, billions of our tax euros, is not the only cost of these failures by our public service and the politicians who make the main decisions.
But in financial terms, all state failures pale in comparison to the costs of the disastrous economic polices pursued in Ireland between 1998 and 2005/6. The strongly pro-cyclical, tax-cutting policies in a domestic boom, along with adherence to the efficient markets theory by many in our own Department of Finance and the Financial Regulator, allowed the banks to compound our economic collapse; the vast costs of these mistakes are impossible to estimate.
Had key powerful economic state officials been more sceptical of the markets, we might have had some internal opposition to PD McCreevy’s tax cutting policies, and we might have had better bank regulation. The result would have been a more manageable economic downturn. The state was supposed to protect us from the worst excesses of the market. The state let us down, so badly, that the cost may run for decades.
While this failure was largely due to the “intellectual capture” of the cream of the state’s economic establishment by the free market fundamentalists, the reasons are of little comfort to ordinary people. But we must try and learn the political and economic lessons of why this occurred.
How did an economic ideology become so dominant that it captured the minds of so many? McCreevy, the PDs and many in the media sold the pup. But why did so many generally conservative public servants and others buy it?
While progressives can take heart that much must now change, unless we come up with much more coherent strategies Ireland and Europe are likely to end up many cul-de-sacs in the road to building a new economic system that works. This has to include a new paradigm of utilising the best of the public and private sectors.
The excoriation of the public sector by the defeated, retreating storm troopers of new-liberalism has served to distract from the consequences of the abject failure of their market fundamentalism. Yet these attacks have taken us up the first alleyway, away from addressing real economic issues.
The emergence of popular debate on economics in a number of Irish blogs is most welcome. However, the print media, especially the Irish Times, which took comment from academic economists for a time, is again reverting to promoting the utterances of the PR economists from the stockbrokers and finance capital as “fact”. There is no scepticism there – a few facts and self-confident, Big Opinions, rooted in “economic science”! The late Paul Tansey is sorely missed for fairness, accuracy, and most of all, for his perception, which was rooted in a degree of healthy scepticism.
Wednesday, 10 June 2009
The financial crisis and the systemic failure of academic economics
"The global financial crisis has revealed the need to rethink fundamentally how financial systems are regulated. It has also made clear a systemic failure of the economics profession. Over the past three decades, economists have largely developed and come to rely on models that disregard key factors—including heterogeneity of decision rules, revisions of forecasting strategies, and changes in the social context—that drive outcomes in asset and other markets. It is obvious, even to the casual observer that these models fail to account for the actual evolution of the real-world economy. Moreover, the current academic agenda has largely crowded out research on the inherent causes of financial crises. There has also been little exploration of early indicators of system crisis and potential ways to prevent this malady from developing. In fact, if one browses through the academic macroeconomics and finance literature, “systemic crisis” appears like an otherworldly event that is absent from economic models. Most models, by design, offer no immediate handle on how to think about or deal with this recurring phenomenon". Thus goes the introduction to a paper entitled The financial crisis and the systemic failure of academic economics. This group paper was the outcome of discussions held during the 98th Dahlem Workshop, 2008. Incidentally, the link comes courtesy of the Canadian Progressive Economics Forum blog.
Wednesday, 29 April 2009
Wealth in a downturn
Paul Sweeney: Most of the banks and financial sector economists, especially those paid under the banks’ Marketing Budgets (as apposed to those bank economists who are paid to add value to the banks’ decisions-making) have gone to ground. So it is surprising that the NIB, a Dankse Bank subsidiary, has come out with a report on Wealth. It did one before, at the peak of the boom. It made really interesting reading, I thought, though it was excoriated recently in the book on the property boom, Ireland’s House Party, by Derek Brawn, himself of an auctioneers!
Here, the new report asserts that Ireland’s wealth is down by a large €150bn in the past year. The fact is that it was never as high as the earlier figure. The market said it was, but the market got it wrong! Most economists don’t believe that the market can get anything wrong (though they do talk of market corrections… which also implies that maybe they do think that the market is not always right).
The boom was an illusion and we are still falling to ground – to realistic wealth levels. But in the meantime, I look forward to a government report into wealth distribution in Ireland. The Norwegian Minster for Finance, the leader of the Left party, has commissioned such a report. Ireland has a Tax Commission which will report in mid-summer, but under its terms of reference it is instructed not to examine wealth distribution.
I suppose this NIB report is the nearest we will get to such a report until we elect a progressive government. I’m sure many will perturbed to hear that the sale of helicopters has fallen from 66 in 2006 to only 2 (6, but 4 were flogged abroad) and luxury car sales are only one tenth of last year's figure.
Here, the new report asserts that Ireland’s wealth is down by a large €150bn in the past year. The fact is that it was never as high as the earlier figure. The market said it was, but the market got it wrong! Most economists don’t believe that the market can get anything wrong (though they do talk of market corrections… which also implies that maybe they do think that the market is not always right).
The boom was an illusion and we are still falling to ground – to realistic wealth levels. But in the meantime, I look forward to a government report into wealth distribution in Ireland. The Norwegian Minster for Finance, the leader of the Left party, has commissioned such a report. Ireland has a Tax Commission which will report in mid-summer, but under its terms of reference it is instructed not to examine wealth distribution.
I suppose this NIB report is the nearest we will get to such a report until we elect a progressive government. I’m sure many will perturbed to hear that the sale of helicopters has fallen from 66 in 2006 to only 2 (6, but 4 were flogged abroad) and luxury car sales are only one tenth of last year's figure.
Friday, 10 April 2009
Who is Lawrence Summers?
David Jacobson: A New York Times article on 3rd April reveals that Lawrence H. Summers, top economic advisor to Obama, earned millions of dollars last year for his contribution to a hedge fund and for speeches given at events organised by Wall Street companies that received crisis bailouts from the US government.
Despite the fact that he must now be very rich if he’s getting money like that, Summers considers himself to be on the left in the spectrum of American politics. He calls for greater diversity in academia, for example, to help liberalism. "As someone who is a strong Democrat and is a liberal, and does not think that we have won the argument with the country over the last 40 years, rather to the contrary, it makes me wonder whether if you do not engage in intense dialogue with those whom you disagree with in substantial number whether your own arguments will be sharpened and honed to maximum effect," Summers said.
Actually this is an argument that seems to be based on the view that there is some kind of market for ideas, where competition will improve performance. The argument is that there is too great a prevalence of left-leaning people in academia and more from the right would increase competition and force those on the left to improve. This is specious; economics is far from dominated by the left and, in any case, there is little evidence that there is enough in common between left and right in economics for competition between them to have any effect at all.
Summers has been, to say the least, controversial in recent years. He was forced to resign from his presidency of Harvard for a number of reasons, including a speech he made suggesting that genetic differences between men and women explained why there were fewer female than male scientists, and his apparent support for Andrei Shleifer, a “star” economist who invested in Russian shares while advising the Russian government on privatisation. Shleifer, though stripped of the honour of a named chair, remains at Harvard as a full professor of economics (and he and Summers remain friends). Shleifer is one of the most cited economists in the world but his practical work – for example in advising on the establishment of a stock market in Russia – has been less than praiseworthy. His own money has been invested wisely though; one estimate of his wealth puts it at a billion dollars.
Following a case taken by the US government in response to Shleifer’s Russian activities, Harvard – still with Summers as president – made a settlement in 2005 of over $25 million. Shleifer and others (including his wife) involved in his investments in Russia in the 1990s, all also had to make payments totalling a more modest sum of less than $5 million.
With all this controversy surrounding Summers, one can’t help wondering why Obama would choose him as an advisor. It may well be something to do with the fact that there are so few prominent economists who would publically declare themselves to be on the left!
Despite the fact that he must now be very rich if he’s getting money like that, Summers considers himself to be on the left in the spectrum of American politics. He calls for greater diversity in academia, for example, to help liberalism. "As someone who is a strong Democrat and is a liberal, and does not think that we have won the argument with the country over the last 40 years, rather to the contrary, it makes me wonder whether if you do not engage in intense dialogue with those whom you disagree with in substantial number whether your own arguments will be sharpened and honed to maximum effect," Summers said.
Actually this is an argument that seems to be based on the view that there is some kind of market for ideas, where competition will improve performance. The argument is that there is too great a prevalence of left-leaning people in academia and more from the right would increase competition and force those on the left to improve. This is specious; economics is far from dominated by the left and, in any case, there is little evidence that there is enough in common between left and right in economics for competition between them to have any effect at all.
Summers has been, to say the least, controversial in recent years. He was forced to resign from his presidency of Harvard for a number of reasons, including a speech he made suggesting that genetic differences between men and women explained why there were fewer female than male scientists, and his apparent support for Andrei Shleifer, a “star” economist who invested in Russian shares while advising the Russian government on privatisation. Shleifer, though stripped of the honour of a named chair, remains at Harvard as a full professor of economics (and he and Summers remain friends). Shleifer is one of the most cited economists in the world but his practical work – for example in advising on the establishment of a stock market in Russia – has been less than praiseworthy. His own money has been invested wisely though; one estimate of his wealth puts it at a billion dollars.
Following a case taken by the US government in response to Shleifer’s Russian activities, Harvard – still with Summers as president – made a settlement in 2005 of over $25 million. Shleifer and others (including his wife) involved in his investments in Russia in the 1990s, all also had to make payments totalling a more modest sum of less than $5 million.
With all this controversy surrounding Summers, one can’t help wondering why Obama would choose him as an advisor. It may well be something to do with the fact that there are so few prominent economists who would publically declare themselves to be on the left!
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