Not The Conventional Wisdom

The euro crisis and the fiscal compact treaty

2012-03-04T20:17:00.004Z

Frank Barry and David McWilliams both had insightful pieces on the euro crisis and the fiscal compact treaty in today's Sunday Business Post (SBP content appears to be behind a paywall). Both make the point that the treaty won't solve the euro's problems. Fiscal deficits were not the cause of the eurozone crisis. Rather it was structural imbalances within the eurozone. The logic of monetary union requires a fiscal transfer union to help absorb the inevitable shocks that will occur in any large, diverse economy. Are Europeans prepared for the creation of a federal European (eurozone) state and the concomitant transfer of national sovereignty to a supra-national government?

Joe Stiglitz on the 1%

2012-01-02T20:42:00.002Z

Joe Stiglitz, writing in May 2011, sets the scene for the emergence of the Occupy movement in this discussion of US income inequality.

A Year of Revolution

2011-12-21T13:38:00.003Z

Update (2 January 2012): This article has been published in full on Irish Left Review and an edited (shorter) version has been published on Social Europe Journal. In a related piece in December's New York Review of Books, Michael Greenberg asks what future for the Occupy movement.

******

In a year of revolution, causes have been easier to identify than consequences.

In 1989, following the end of the Cold War, the American political scientist Francis Fukuyama wrote in The End of History? of the “unabashed victory of economic and political liberalism”, marking “the end point of mankind's ideological evolution and the universalization of Western liberal democracy as the final form of human government”.¹ In the decades since Fukuyama's landmark essay, the very concept of revolution – at least in the context of the rich, Western world – had itself come to be seen as an almost anachronistic idea. While still idealized in some quarters – most notably in student houses where posters of El Che [Guevara] are proudly hoisted to the walls, in defiance of the no-blue-tack clauses of student lease agreements – revolution had attained a quaint, nostalgia-tinged hue. That is, until this year. In 2011, revolution has returned to the center of global geo-political discourse. People have taken to the streets en masse across the Arab world, as part of the Arab Spring popular revolutions. The revolutionary fervour has since spread to the capital cities of the rich world. From Spain's indignados, to the riots in London, Athens and Rome, to the Occupy Wall St protests that have spread from New York to other major cities around the world, the Arab Spring is turning into a global Autumn of Discontent.

Viewed through Fukuyama's lens, the Arab Spring could be interpreted as the natural progression of these once repressive regimes into modern, Western-style democracies. How then do we reconcile with such a theory, the emergence of the Occupy movement, which originated at the heart of the financial-corporate-political nexus on Wall St? Certainly those involved in these protests, while apparently reluctant to articulate a list of “demands”, do not appear content to be living at the apogee of the modern participative democratic society.

There are many parallels in the genesis of these two movements (if the various riots, protests, occupations and revolutions are indeed reducible to two distinct groups according to their Western and Arab origins), and they appear to have fed off the oxygen of each other's success. The Occupy movement explicitly models itself on the Arab Spring's largely peaceful occupations of central squares and plazas. But the Arab world has also been paying close attention to the Western Autumn of Discontent. The London riots in August, for example, provoked jibes from the less “Western-friendly” Arab leaders about popular revolt and the London regime's hardline crackdown in response. The Arab media, more generally, appear to have been paying close attention to the Occupy movement long before Western media began taking the protesters seriously. The Tunisian blogger Lina Ben Mhenni has said she is proud of the role the Arab Spring has played in inspiring young people in other parts of the world to come out and “say 'no' to their systems”.²

The apparent solidarity between these groups of protesters should come as no surprise. In both cases the protests have been led mostly (although by no means exclusively) by young people. In a direct parallel of the Arab Spring, the Occupiers represent a generation increasingly disillusioned with a system in which many have been marginalized, without work or the prospect of a job, a system they claim has left them without a voice – thus the emphasis among protestors on the use of an elaborate and disciplined form of participative decision making. While national unemployment rates are running at between eight and ten percent in the US, Britain and the Eurozone (with double digit rates in Spain, Ireland and Greece), youth unemployment is significantly higher. In the US, 17% of under-25s are without work. In Europe, that figure is over 20%, while in Spain almost half (46.2%) of all young people are jobless.³

The Arab Spring was clearly a “liberal” movement, in the sense that popular protests rose up to challenge repressive, authoritarian regimes. But do its participants aspire to the particular version of liberalism that has been predominant in the Western world – and most particularly in the Anglo-Saxon world – over the past three decades?

Even during the boom times, when unemployment rates were relatively low, income inequality was rising in many rich countries – most notably those that pursued most vigorously the Anglo-Saxon model of deregulation (i.e. the US, Britain and Ireland). One of the most appealing slogans of the Occupy movement – “we are the 99%” – is a pointed reference to the top 1% of income earners, who in 2007 received 23.5% of total US national income, with an average wage income of around $713,000.⁴ Not since the late 1920s – in the years immediately preceding the Wall St crash and the Great Depression – the era of the “robber-barons”, have the few at the apex of the income pyramid, captured such a disproportionate share of national income.

The period since the beginning of the 1980s, which has seen the financial and economic elite steadily increase their share of national income, has been characterized by the political economist and former US secretary of labour Robert Reich, as the Great Regression. The systematic deconstruction of social and labour protections during this period has created a sense of financial and economic instability in young people's lives, the social costs of which have yet to be fully counted – but symptoms of which are evident in the recent violence on the streets of London and Rome.

Writing in 2007, in response to a UNICEF report at the time, which found British children had the most miserable upbringing in the developed world (with Americans second from bottom), Maria Hampton provided a remarkably prescient discussion of the causes and potential consequences of declining living standards for young people in the UK. Her article quotes LSE economist Nick Bosanquet and Blair Gibbs of the independent think tank Reform, who in their Class of 2005 survey characterised Britain’s under-35s – the “iPod Generation” – as insecure, pressured, over-taxed and debt-ridden.⁵ From among this generation have come the majority of the protestors.

So to consequences. In the Arab Spring, a mass popular movement coalesced around the clear and unambiguous goal of overthrowing brutal dictators. Now that aim has been achieved – in Tunisia, Egypt and Libya – the way forward is less clear. Similarly, the aims – and ultimate political consequences – of the Occupy movement remain unclear. From the outset, the Occupiers have been reluctant to specify their “demands”. While some in the media have seen this lack of focus as a reason to dismiss the protestors, for some within the movement, the process – with its egalitarian, democratic ideals and methods – is the cause. Avoiding setting out specific “demands” may also represent a clever strategy for the protestors, at least for the time being. As The Onion recently quipped, the public are waiting for the Occupiers to state their demands so that we can all rationalize our reasons for choosing to ignore them, and “go back to waiting for the sluggish economy to recover while blindly accepting things the way they are”.⁶

As the repeated failed attempts to solve the European debt crisis attest, simply muddling through and hoping for a return to the halcyon days of the mid-2000s, may no longer be a serious option. Lest we forget, there were mass protests in poor countries around the world, in response to high food and energy prices in 2008. Similar protests were seen recently on the streets of Israel. While the poorest may have felt the effects of the squeeze on resources before most, ultimately, these protests are symptoms of the same underlying problems. Indeed it was the rise in commodity prices – food and energy in particular – that pricked the bubble economy of the last decade. The unbalanced and unsustainable growth of recent years has left too many people, in both rich and poor countries, feeling disillusioned, marginalized and concerned about their economic futures.

There is now an urgent need to articulate an alternative to the failed neo-liberal agenda of recent decades. The financial crisis generally, and more specifically the recent protest movements around the globe, challenge us to consider what kind of society we wish to live in. If in every crisis lies opportunity, then we must embrace this opportunity to start a discussion about the ideals of liberty, equality and justice – upon which most modern democratic states were founded – and what these values mean in a modern, globalized society.

This crisis also presents a threat – one which will only grow in its potential to be destructive, if the underlying causes of the crisis are not addressed. The last time a financial crisis of this magnitude occurred, the world was plunged into a period of darkness. In the wake of the economic collapse, self-interested, nationalistic policies were enacted through the exploitation of people's fears and insecurities, culminating in the rise of fascism. The result was a global conflict that claimed millions of lives. We have already witnessed the rise of an “extremist” right-wing party in the US, with sufficient power to force the US government to the brink of default.⁷ Even the remotest sense of modern history should suffice to give us all pause for concern at such developments.

Writing in his last major publication before his death, the historian and social commentator Tony Judt warned that if the history of the 20^th Century has taught us anything, it should be a healthy suspicion of totalitarianism in all its forms.⁸ One such form has been the disturbing – and ultimately misplaced – certainty of the free market ideologues. Judt also argued that the great failure of the Left, in all its various shades, has been the apparent inability to articulate any coherent alternative to the predominant neo-liberal agenda of the past 30 years. Indeed, the ideological hubris implicit in Fukuyama's End of History could only have arisen in the context of an ideological vacuum to the Left of the predominant neo-liberal political-economic paradigm.

Back in 2007, Hampton concluded her article on the plight of British youth as follows: “If the crisscrossing fault-lines of greed, geopolitics and social inequality do reach a tipping point, we may well see a conflict between youthful brutality and the power of old age”. If we are to avoid such conflicts, we must start a conversation about the kind of society we want to live in and the state of the world we will pass on to our children. These are challenges for which there are no simple answers or quick-fix solutions. There will be dilemmas about how to balance competing aims that we wish to embrace. That does not mean we should not try.

- Dublin, October 2011.

1Fukuyama, Francis (1989). The End of History? The National Interest, Summer 1989.

2As quoted in the Irish Times Weekend Review, 22 October 2011.

3Rates quoted are from the Economist, 22 October 2011 (http://www.economist.com/node/21533447)

4Figures taken from Robert Reich's article “The Limping Middle Class”, NY Times, 4 September 2011.

5The article “Generation F*cked: How Britain is Eating its Young” first appeared in the magazine Adbusters (#71, May/June 2007) and was republished recently on the magazine's website, Adbusters.com (11 August 2011).

6“Nation waiting for protestors to clearly articulate demands before ignoring them”, The Onion, 12 October 2011.

7As characterized by Moses Naim in La Repubblica (11 September 2011).

8Judt, Tony (2010), Ill Fares the Land. Penguin.

Time to burst the austerity bubble

2011-12-06T11:28:00.001Z

Meanwhile, Philip Lane is quoted in The Telegraph as saying "every [Irish] government for the next 20 years will have to keep cutting". As it is, we know the next two budgets will contain even more severe cuts than those being imposed right now. This is just what the government and "troika" have publicly admitted. What happens when the anticipated recovery (i.e. growth) doesn't materialize? More austerity?

It's time we all realized that the path we're on is unsustainable. Just as the boom was unsustainable - and on some level we all knew this, but allowed our instincts to be over-ridden by reassuring talk of "economic fundamentals" and "soft landings". The logic is simple and clear - this programme of austerity will not work. I think most people intuitively understand that. But we are allowing ourselves to be mollified by talk of restoring confidence, of "growing" exports and jobs. Just where are we going to export to, with the eurozone - and possibly the global economy - facing a sharp recession next year? Who is going to create jobs as domestic consumer demand continues to fall? The only thing we are growing right now is a generation of young people for export.

Stiglitz on the Euro Crisis

2011-12-06T10:57:00.003Z

Joe Stiglitz discusses the sources of the present crisis and the (misguided) attempts to solve it, in this article. He includes several references to Ireland (direct and otherwise) ...

The prevailing view when the euro was established was that all that was required was fiscal discipline – no country’s fiscal deficit or public debt, relative to GDP, should be too large. But Ireland and Spain had budget surpluses and low debt before the crisis, which quickly turned into large deficits and high debt.

...

Without a common fiscal authority, the single market opened the way to tax competition – a race to the bottom to attract investment and boost output that could be freely sold throughout the EU.
Moreover, free labor mobility means that individuals can choose whether to pay their parents’ debts: young Irish can simply escape repaying the foolish bank-bailout obligations assumed by their government by leaving the country. Of course, migration is supposed to be good, as it reallocates labor to where its return is highest. But this kind of migration actually undermines productivity.
...
Public-sector cutbacks today do not solve the problem of yesterday’s profligacy; they simply push economies into deeper recessions. Europe’s leaders know this. They know that growth is needed. But, rather than deal with today’s problems and find a formula for growth, they prefer to deliver homilies about what some previous government should have done. This may be satisfying for the sermonizer, but it won’t solve Europe’s problems – and it won’t save the euro.

"Talking about depression" ... the media and editorial decision based on "legal advice"

2011-12-02T10:58:00.005Z

Update (4 December 2011) : The Irish Times has issued an apology - and in the process, essentially accused Kate Fitzgerald of lying in her last words:

http://www.irishtimes.com/newspaper/opinion/2011/1203/1224308526623.html?via=mr

Some responses from the blogosphere:

http://ourmaninstockholm.wordpress.com/2011/12/03/a-right-of-reply/

http://backfromthepast.wordpress.com/2011/12/03/suppressionofsuicide/

Original blog post (2 December 2011):

I submitted the following letter to the Irish Times yesterday, 1 December 2011 (not published in today's paper), in response to various articles and letters relating to the death of Kate Fitzgerald (see broadsheet.ie coverage here).

Sir,

Thank you for continuing to publish articles and letters that discuss issues of suicide and depression (e.g. Tony Bates, Opinion, 1st December; Kevin Byrne, Letters, 1st December; Peter Murtagh, Weekend Review, 26th November; Kate Fitzgerald, Opinion, 9th September). These issues are badly understood in our society and stigmatized as a consequence.

However, I must join with others in expressing my disappointment at your decision, on "legal advice", to edit the words originally written anonymously by Kate Fitzgerald. Giving a voice to those who experience depression is crucial in fostering greater understanding of this illness. Her article was deemed fit to publish in your paper on September 9th. If something in that original article has been found to be untrue and/or libelous, you should issue a correction and apology immediately. This could be added as a footnote to the original article in your archives. If not, the original article should be restored in full, and you should have the courage and editorial conviction to stand over what you publish.

Yours etc.,

Tom McDermott,

No Alternative to Budget Cuts?

2011-11-25T15:33:00.004Z

It is often argued that there is simply "no alternative" to the destruction of social safety nets implicit in proposals to cut government expenditure, e.g. the Irish government's consideration of cuts to child benefit, a reduction in unemployment benefit and the introduction of medical card fees etc., as ways to achieve the required €3.8bn "adjustment" in the forthcoming budget. This line was repeated by Stephen Collins in Saturday's Irish Times. However, the idea that there is "no alternative" to a government decision could never be accurate. The "no alternatives" myth is nothing more than a politically convenient way of saying we don't want to consider the alternatives.

Thankfully, various groups outside of government have put together detailed proposals on alternative ways of saving money in the budget. Michael Taft of TASC has outlined potential "alternative" savings of around €6bn.

It's worth noting that some of the proposals here - e.g. removal of property tax reliefs - present the relatively rare opportunity for government, in imposing taxes, of a win-win on both equity and efficiency grounds. Removal of these reliefs would also represent a reversal of the much criticized policies of the previous government. Rather than subsidizing asset accumulation, taxing wealth (in the form of a property tax or capital gains tax) makes sense as both a progressive tax measure and one which avoids the disincentivization of work entailed in higher income taxes.

On income tax, the proposal to increase the top rate to 48% is still some way below the "optimum" top rate of tax (to be applied only to the top 1% of income earners) of over 70%, as calculated in this new paper in the Journal of Economic Perspectives, and discussed here (Paul Krugman's NYTblog) and here (Kevin Drum of Mother Jones).

The calculation is based on US data. For Ireland we might consider that the "behavioural elasticity", as Krugman calls it - i.e. the reduced work effort in response to higher taxes - is likely to be higher than for the US, given the historically high international mobility of Irish workers and the infamous culture of tax exiles among Ireland's elite. I'm not sure if studies on this elasticity exist for Ireland. But there is another way of looking at this. If we assume that the current top rate of income tax in Ireland is the optimum rate, what degree of "behavioural elasticity" would this imply? Ireland's top marginal rate of income tax is officially 41%. However, if we include the top rate of the Universal Social Charge (USC) at 7% and PRSI at 4% we have a top marginal rate of 52%. This implies a "behavioural elasticity" of about 0.62.* This is still higher than even the most conservative upper bound estimates for the US - around 0.57. Also, as Diamond and Saez note, most of the behavioural response observed in studies to date consists of tax evasion or avoidance behaviour, and not the kind of changes in real economic behaviour that opponents of higher income taxes claim to be concerned about (e.g. labour supply, business creation and savings decisions).

So while increases to the top rate of tax will be dismissed by this government on pragmatic grounds - that such increases would be self-defeating - such claims may not stand up to close scrutiny. Imposing a higher rate of tax on the top 1% of earners in society - and ensuring they actually pay their tax by closing loopholes, removing tax reliefs, and clamping down on tax exiles and tax evasion - could offer a more socially equitable and sustainable means of closing the gap between public revenue and expenditure.

Certainly the notion that we have "no alternative" to the proposed cuts, appears to have no basis in the available facts and figures. Instead it is revealing of an ideologically driven budgetary process.

*The calculation is based on the formula used in the paper by Diamond and Saez cited above: T = 1/(1 + ae), where T is the optimal top rate of tax, a is the Pareto parameter that describes the distribution of incomes at the top, and e is the behavioral elasticity. I assume that the distribution of incomes at the top in Ireland is roughly equivalent to that in the US and so I use the same Pareto parameter as used in the Diamond and Saez paper, i.e. 1.5.

170 economists sign statement in support of OWS

2011-11-22T12:52:00.001Z

170 economists have signed a statement in support of the Occupy Wall St movement. Read the statement here.

The value of third level education and who should pay for it

2011-11-20T20:13:00.001Z

Mass student protests took place in Dublin last week (see photos here) over expected increases in fees and cuts to maintenance grants in the forthcoming budget. Students feel betrayed by the apparent unwillingness of the Minister for Education, Ruairi Quinn of the Labour Party, to stand by his pre-election pledge not to raise fees or cut grants for third level students. The protestors also rightly question the wisdom of the proposed measures, given the likelihood that they could end up costing the government money as hard-pressed students are forced out of college and on to dole queues. Roughly one in four young people (17-25 year olds) in Ireland is unemployed, while the figure is more like one in three for young men (see here, here and here). The alternative to the dole queue is, of course, emigration. According to the CSO, 76,000 people left Ireland in the year to April 2011. Almost all of those leaving were aged 15-44 (see here).

Forcing young people out of education and on to dole queues - or on to planes - represents a personal tragedy for the young people and their families who are directly affected. It is also clearly not in the long-term social or economic interests of the country. However, the question inevitably arises as to how we should fund the third level sector in this country. Should free third level education - funded by the state - be offered to all those who wish to attend (and meet some basic minimum academic requirements)? Or should students themselves be asked to pay for their education through some kind of fee system? There appears to be an ideological (or at least political) aversion amongst the current government to the idea of fees based on the full economic cost of a third level education. However, the current approach of creeping fees (or "student contributions" to use the euphemism favoured by politicians) and cuts to maintenance grants, represent highly regressive mechanisms for plugging the funding shortfall. They also guarantee that only those who can afford the fees (and other associated costs of attending college - cost of living, books, foregone income etc.) will pursue third level education. Not only is this morally wrong, it is also economically inefficient - the most talented and those who are determined to make the most of their education are not afforded the opportunity to do so in such a system.

This matter of public funding for third level education is particularly pressing, given the government's current financial difficulties. A simple short-term solution would be not to repay these bonds, thus alleviating the need for such severe austerity in the forthcoming budget. However, even such a dramatic u-turn in government policy would not address the wider issue of the long-term sustainability of a third level sector that, because of Ireland's youthful demographics, will have to cope with large increases in the demands on its services over the coming years - that is, if we expect to continue offering third level courses to a large proportion of the population. Out of a population of almost 4.5 million in 2011, 1.25 million are aged 19 and under, with a particularly large cohort born in the last 5 years. Over the coming years, the college-age population cohort will increase considerably (see CSO figures here).

The protestors and their student leaders were understandably coy during the week about proposing any alternative to raising fees as a means of funding third level education. The USI president was right, however, in pointing out the limitations - particularly in the Irish context - of an Australian style system of student loans repaid through income tax (which appeared to be the preferred approach of the Fine Gael party - now in government - during its time in opposition). For one thing, such a system would only exacerbate the short-term funding crisis, as it would (presumably) involve removal of the existing "non-tuition" fees and would not see any returns to the exchequer until graduates began earning sufficiently high incomes to pay the implied graduate tax. Given youth unemployment rates, this could be quite a wait. There is also the issue of the international mobility of Irish young people and Ireland's history of emigration. Returns (societal or economic) to any investment in education, are dependent - at the very least - on people remaining in the country.

Any debate on the appropriate way to fund education must also consider the value of education, both to the individual and to society. A number of recent analyses have begun to question the value - from the student's perspective - of the enormous investment involved in attempting to acquire a third level qualification (e.g. this New York Review of Books article). In the US, where students pay extremely high fees, young people graduating from university are leaving with worse job prospects and higher debts than ever before (see this Mother Jones article). Worse again, many leave before graduating - with a heavy debt burden and no qualification to show for it.

Over the medium to long-term we must consider what role the third level sector should play in our society, and what sort of graduates (and in what numbers) will be needed or desired in future. Will churning out large numbers of undergraduate degrees, masters and PhDs deliver the hallowed 'Knowledge Economy' of so many political speeches and government documents? As Paul Krugman argued back in 1996 - in what already seems like a highly prescient piece of futurology - "when something becomes abundant, it also becomes cheap. A world awash in information will be a world in which information per se has very little market value."

Much has been made recently of rising income inequality in rich countries - the US in particular - in part thanks to the issues raised by the Occupy movement. Many economists have - mistakenly it seems - linked rising income inequality to the proliferation of technology, leading to higher returns to education. In fact, most of the rise in inequality appears to have been driven by the runaway increase in incomes for the top 1% (see here). For everyone else - including the majority of college graduates - real incomes have not risen over the last 20 or 30 years. The Occupy slogan "we are the 99%" appears to have captured the reality of modern income inequality.

So perhaps the debate ultimately comes back to a question about what kind of society we wish to live in. Certainly, if we wanted to we could decide that a third level education represents a basic right of all citizens and as such should be funded by the state. This would have to be paid for - through taxation of one kind or another, or reduced spending elsewhere - but is certainly not beyond the realms of possibility, as politicians might conveniently argue.

Education is undoubtedly a fundamental right. But should that extend to third level education? Education is also a public good - an investment (as opposed to a cost) to which the returns from a societal point of view far outweigh the benefits to the individual. As such, there is plenty of justification for public investment in education. However, the scientific evidence indicates that the greatest returns to investing in education accrue to investment in early childhood (see here). This is also likely to be the most progressive form of educational investment - given that a child's prospects for educational attainment appear to be determined from a very early age. It is worth noting that the free fees for third level system in Ireland does not appear to have had much of an impact on the participation rates for different socio-economic groups.

So while there is no denying the desirability of significant public investment in education, to the extent that this is constrained by available resources, it should be concentrated on early childhood interventions. The question, then, is whether a free fees third level system is a luxury we can no longer afford, or a social programme we would be poorer without.

NYRB on the Occupy movement two months in

2011-11-20T16:57:00.003Z

On the NYRblog, Michael Greenberg gives a detailed account of a dramatic week for the Occupy Wall Street movement in New York, while Jeff Madrick looks at the evidence on runaway incomes for the top 1% - America's new robber barons.

The meaning of crisis

2011-11-20T16:07:00.002Z

Crisis is a term rooted in Greek tragedy, meaning “a decisive moment or turning point in a dramatic action”. It is a moment of suffering and confusion, a time when everything that seemed to be fixed becomes suddenly unstable. The events of November 2010, with things spinning wildly out of control, certainly meet this definition. But the point of crisis in Greek tragedy is that it leads to catharsis, a sense of things being purged.
Václav Havel, then president of the Czech Republic and himself a distinguished dramatist, used precisely this metaphor while addressing his nation in 1997, when it had been hit by the twin scandals of political corruption and a banking bubble. “However unpleasant and stressful and even dangerous what we are going through may be, it can also be instructive and a force for good because it can call forth a catharsis, the intended outcome of ancient Greek tragedy. That means a feeling of profound purification and redemption. A feeling of newborn hope. A feeling of liberation.”
From that perspective, a cynic might be tempted to remark that the Irish are not even capable of having a proper crisis. We’ve had the unpleasant, painful and dangerous bit – and we’re going to go on having it for the foreseeable future. But we don’t do catharsis.
- Fintan O'Toole, Irish Times, 19 November 2011.

Deciphering the jargon of economic crisis

2011-11-20T13:44:00.005Z

Frank McNally provides a guide to the crisis jargon in Saturday's Irish Times (19 November 2011). Two definitions that stand out:

Quantitive Easing: The process whereby the number of economists appearing on Irish TV shows is increased indefinitely, in the hope that the country can talk its way out of the crisis, even at the risk of rampant ego-inflation.

Standard & Poor: Adjectives describing the two main types of judgment exercised by ratings agencies when assessing the sub-prime mortgage packages that started the whole mess in the first place.

More children living in poverty, while the 1% keep getting richer

2011-11-17T13:58:00.002Z

The Irish children's charity Barnardos yesterday estimated that 130,000 Irish children are now living in consistent poverty (up from 90,000 in 2009). On the same day, in his Irish Times column, Vincent Browne discussed two new reports showing that both the number of millionaires worldwide and the value of their combined assets, have continued to grow since the financial crisis began.

Selection of posters and placards from today's student protests in Dublin, Ireland

2011-11-16T18:18:00.019Z

Thousands of students marched in Dublin today in protest against increases in fees and expected cuts to student maintenance grants in the forthcoming budget. Here is a selection of posters and placards from the march.

"What ever happened to free education"

"we write the future"

"If you're gonna take my education, at least book my ticket to Australia"

"Make the 1% pay"

"No cash, no jobs, no hope"

"Sentenced to debt"

"Pay my fees or pay my dole"

"Feck off fees"

"Emma was here! (But probably won't be next year ... )

"Dumbledore wouldn't stand for this sh!t"

"Beans on toast + fees = toast"

Blaming the poor for their condition...

2011-11-13T14:34:00.003Z

Faced with inexplicable inequalities and injustices in society, and feeling disempowered to challenge the status quo, we have a natural tendency to try and rationalize the situation by assigning blame; the unemployed must be lazy, rape victims were "asking for it" etc. In this way we try to evade the unpleasant prospect that such circumstances could befall any one of us.

Oliver Burkeman describes this phenomenon in his latest Guardian column. However, he mistakenly sees this "just world hypothesis" as a difficulty the Occupy protestors will have to overcome. If the majority of us view the travails of those less well off than ourselves as their just desserts, why bother trying to alter "the system"? In fact, the Occupy movement presents an alternative to the vicious cycle of inequality being reinforced by negative stereotyping of the less fortunate members of society. The Occupy protestors force us all to face up to the injustices, to which we have become - subconsciously or otherwise - desensitized. Perhaps even more significantly, the movement also offers a voice of empowerment and the prospect that such inequalities are not inevitable.

Favourite Steve Jobs quotes

2011-10-06T15:21:00.002+01:00

Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart.

Don' t be trapped by dogma - which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice.

- as quoted by the BBC

Unconventional wisdom on the retirement age from James K. Galbraith

2011-10-06T14:05:00.001+01:00

In keeping with the spirit of this blog, here's a nice challenging piece of creative thinking from James K. Galbraith on why governments should consider reducing the retirement age ...

Kevin O'Rourke on the importance of Economic History

2011-10-06T13:48:00.002+01:00

Excellent post on Irisheconomy.ie by Kevin O'Rourke on the importance of Economic History:

One of the most important things that a bit of history gives you is a sense of the importance of context. A model will work very well in some technological or institutional contexts, but not in others.

[...]

If the only thing that economic history did was protect us from one-size-fits-all merchants, it would still be worth the price of admission.

David Cameron probably has a vision ... but I don't know what it is

2011-10-06T11:32:00.002+01:00

In a recent poll in Britain, 55% of people agreed with the statement that "David Cameron probably has a vision for the country ... but I don't know what it is."

- as reported in the Guardian, 6 October, 2011.

Tony Judt on Captive Minds

2011-01-09T14:30:00.004Z

The following is an extract from Tony Judt's essay "Captive Minds" in the NYRB:

Today, we can still hear sputtering echoes of the attempt to reignite the cold war around a crusade against “Islamo-fascism.” But the true mental captivity of our time lies elsewhere. Our contemporary faith in “the market” rigorously tracks its radical nineteenth-century doppelgänger—the unquestioning belief in necessity, progress, and History. Just as the hapless British Labour chancellor in 1929–1931, Philip Snowden, threw up his hands in the face of the Depression and declared that there was no point opposing the ineluctable laws of capitalism, so Europe’s leaders today scuttle into budgetary austerity to appease “the markets.”
But “the market”—like “dialectical materialism”—is just an abstraction: at once ultra-rational (its argument trumps all) and the acme of unreason (it is not open to question). It has its true believers—mediocre thinkers by contrast with the founding fathers, but influential withal; its fellow travelers—who may privately doubt the claims of the dogma but see no alternative to preaching it; and its victims, many of whom in theUS especially have dutifully swallowed their pill and proudly proclaim the virtues of a doctrine whose benefits they will never see.
Above all, the thrall in which an ideology holds a people is best measured by their collective inability to imagine alternatives. We know perfectly well that untrammeled faith in unregulated markets kills: the rigid application of what was until recently the “Washington consensus” in vulnerable developing countries—with its emphasis on tight fiscal policy, privatization, low tariffs, and deregulation—has destroyed millions of livelihoods. Meanwhile, the stringent “commercial terms” on which vital pharmaceuticals are made available has drastically reduced life expectancy in many places. But in Margaret Thatcher’s deathless phrase, “there is no alternative.”
It was in just such terms that communism was presented to its beneficiaries following World War II; and it was because History afforded no apparent alternative to a Communist future that so many of Stalin’s foreign admirers were swept into intellectual captivity. But when Miłosz published The Captive Mind, Western intellectuals were still debating among genuinely competitive social models—whether social democratic, social market, or regulated market variants of liberal capitalism. Today, despite the odd Keynesian protest from below the salt, a consensus reigns.
For Miłosz, “the man of the East cannot take Americans seriously because they have never undergone the experiences that teach men how relative their judgments and thinking habits are.” This is doubtless so and explains the continuing skepticism of the Eastern European in the face of Western innocence. But there is nothing innocent about Western (and Eastern) commentators’ voluntary servitude before the new pan-orthodoxy. Many of them, Ketman-like, know better but prefer not to raise their heads above the parapet. In this sense at least, they have something truly in common with the intellectuals of the Communist age. One hundred years after his birth, fifty-seven years after the publication of his seminal essay, Miłosz’s indictment of the servile intellectual rings truer than ever: “his chief characteristic is his fear of thinking for himself.”

Letter to FT on Lomborg's false dichotomy

2010-12-20T14:38:00.004Z

The following letter was published in the Financial Times today (20 December, 2010), in response to this article by Bjorn Lomborg (from the FT, 9 December, 2010).

Sir,

In the article “Time for Europe to show real vision on climate” (FT, 10^th December), Bjorn Lomborg argues that "We will never succeed in making fossil fuels so expensive that no one wants them [...] Instead, we should make green energy so cheap that everyone wants it". There is an inherent inconsistency in this line of reasoning, as the decision to switch from burning fossil fuels to some alternative depends on the relative prices of each.

The figures quoted in the article seem to suggest that emissions reduction is very expensive, while developing green tech alternatives would be relatively cheap. These cannot be simultaneously true. If cheap alternative energy sources are developed then emissions reduction becomes cheap as a consequence. Incidentally, it is notable that no reference is made to the assumptions and uncertainties inherent in the types of estimates to which the author refers.

As regards his policy recommendations, Lomborg advocates supply side solutions to climate change without specifying how the necessary investment might be stimulated. Does he envisage governments giving large-scale subsidies to the green energy sector? Such schemes are unlikely to be cheap.

Private sector investment in green energy alternatives is constrained partly by uncertainty, which pushes up the risk premium required by investors. One way of reducing this uncertainty - and thus stimulating greater investment - is to formulate more coherent climate policy, something which Lomborg seems to think is no longer worthwhile.

The simple, but false, dichotomous interpretation of the available policy options presented in this article may be a good way of getting media attention, but it is not a good way of thinking about complex socio-economic or scientific policy issues.

Yours etc.

Tom McDermott & Stefano F. Verde, Trinity College Dublin

Tim Laing, LSE

and Aurelie Mejean, CIRED, Paris

Update: Lomborg's response to our letter is here.

Learning our Lessons

2010-12-20T14:36:00.001Z

Letter to the Irish Times, 5 December 2010 (not published)

A chara,

Stephen Collins makes the now standard error of blaming wide swathes of Irish society for our current woes ("Bailout teaches what we should have learned years ago", 4 December). We will be living with the consequences of decisions taken by a reckless minority in this country for many years to come. However, we should be very clear about one thing: this bailout and the concomitant loss of sovereignty, has been precipitated by the actions of private banks - both Irish and others - actions which our present government and it's European 'partners' now expect Irish people to take responsibility for.

Is mise,
Tom McDermott

Breaking down the "bailout"

2010-12-06T13:19:00.002Z

Phoenix magazine had a very clear breakdown of the "bailout" in its most recent issue. (I couldn't find it online - you need a subscription - so I'll just quote some of the key points here)

Total borrowing involved in bailout: 60.5bn euro (the remainder comes from Ireland's own funds - pension reserve and whatever cash the NTMA has stored up).

Of this:

- 22.5bn is from IMF at interest rates of around 3-4%

- 17.5bn from the European Financial Stability Facility

- 22.5bn from the European Financial Stability Mechanism

EFSF is mainly German and French money. It's a special vehicle set up to fund EU members in need of restructuring funds. It operates in conjunction with the German Debt Management Office.

According to the framework agreement which set up the EFSF, the interest rate to be charged is "intended to cover the cost of funding incurred by EFSF and shall include a margin [ie a profit] which shall provide remuneration for the guarantors". On top of this there is a service fee to cover operational costs and various fees, which is charged upfront at 0.5% of the total loan (ie 88m).

The rate applied is based on "the rates corresponding to swap rates for the relevant maturities" (today approx 2.7%) plus "a charge of three percent for maturities up to three years and an extrra one percent per year for loans longer than three years" (ie 6.7% - making a profit for the EFSF of 4bn over the lifetime of the, ahem, "bailout"!!!).

It gets worse.

"The anticipated margin that would accrue on each loan to its scheduled maturity date shall be deducted from the cash amount to be remitted to the borrower in respect of loan. The service fee and the net present value of the anticipated margin ... will be deducted from the cash amount remitted to the borrower in respect of each loan but shall not reduce the principal amount of such loan that the borrower is liable to repay and on which interest accrues under the relevant loan". [that quote also comes from the framework agreement].

(ie they take their 4bn of the 17.5bn they are lending us before the money ever gets to Dublin, while charging interest on the full amount!).

EFSM money will be charged at 5.7%, if we draw down the full amount. (Greece paid 5.2%).

Ireland's so-called "bailout"

2010-12-06T13:07:00.001Z

What's happening now is a variation on what I complained about previously (in my unpublished letter to the Irish Times, posted here). Rather than using the "we all partied" line (and what a gem that is -

http://www.youtube.com/watch?v=YK7w6fXoYxo) the line now is this crap about the state running out of money, having no alternative etc., with Fianna Fail taking some culpability for some mistakes somewhere in the distant past (but sure the others would've done the same anyway), and ultimately we should be grateful to our Euro "partners" for bailing us out of this fine mess we've gotten ourselves into.

This is all a web of lies, deception etc. The only reason markets stopped lending to Ireland in the last few weeks is because of the bank debt that has been nationalised. WE CANT AFFORD TO REPAY THIS. The markets know this. Our banks have been shut out of international markets - because their losses on property etc. have been rising beyond any "worst case scenarios" previously envisaged, and because they had become entirely reliant on money from the ECB (this is its role remember: CB = lender of last resort to the financial system, so let's not feel too grateful/ashamed for requiring this facility either). Then the markets got really spooked when Merkel started talking about making bondholders share the pain without giving any details.

So Ireland was pressured into taking the bailout in an attempt to "stuff" the banks with cash (over-capitalise them is what Gov Honohan called it) and convince markets this was the end of it so they would start lending to our banks again. The whole point was to avoid "contagion" to the other Euro countries in trouble. This hasn't worked. Big surprise. The bit about using this money to fund the Irish state is a total sideshow.

We do need to make a big "fiscal correction" over the next few years, but that is totally doable.

So, yes I believe we do have an alternative. As David McWilliams has been saying, what we need is a new "bank resolution" law (I don't think any such legislation currently exists in Ireland, so creating an entirely new one should be straightforward). The law would simply state that in Ireland, when a bank becomes insolvent (the Irish CB could be allowed to decide when this is so) that bank's bondholders must share the burden. Specifically we would create a debt-equity swap mechanism. Bondholders who are owed money by an insolvent bank will have their debt converted into equity (or shares in the bank). The bank doesn't disappear. In fact the bank is now significantly healthier as it has rid itself of debt. Depositors would have to be protected by some sort of insurance. (The Irish government already guarantees anything up to EUR100k. I'm not sure if we would need European cooperation to guarantee bigger deposits.)

The bit about all the medium sized firms imploding in such a scenario is probably exaggerated. Our banking system wouldn't disappear over night. As it is, small firms are having a really hard time getting credit because whatever money goes into the banks is being used to pay down their debts and/or build up these extra capital requirements that are supposed to make them look like good banks again.

So the banks' bondholders would suffer losses. But they expect this, because it will become European law in 2013. Anyway, even if we piss off some investors, so what?! Would the markets ever lend to Ireland again? Of course they would. The 'markets' are not a single entity with some sort of institutional memory. They are made up of lots of different investors all over the world. Investors do not generally hold grudges. They make decisions based on future prospects of risk/return. Even if some of the specific individuals that get burned in this scenario did decide to take it personally and never lend to Ireland again it wouldn't matter. Ireland is small. So are our funding needs by international standards. There are plenty of more investor fish in the sea, so to speak.

An Irish state that is rid of its bank debt obligations would represent a very attractive investment (especially at the kind of rates we are paying for this so-called "bailout"). We will still have low taxes by European standards (even after we get our fiscal house in order). We have a young, well educated workforce. We have a hugely successful manufacturing and internationally-traded services sector, with highly profitable divisions of some of the world's biggest companies based here. We have a lot going for us. Yes this course of action involves some reputational damage, but would that really be worse than the reputational damage already done by fiscal and economic mis-management? And the reputational damage of having to be "bailed out"?? Distinguishing between the Irish state and the Irish banks might actually be a good way to begin restoring our damaged reputation overseas. Anyway, a damaged reputation (and some bruised egos) is a lower price to pay than the costs associated with this bailout and our continued commitment to pay for whatever losses are accrued by our reckless banks.

An open letter on Ireland's proposed Climate Change Bill

2010-11-11T14:43:00.002Z

A chara,

Climate change is a real and significant threat to human welfare, particularly in the poorest parts of the world. While an effective 'solution' to this threat will require global cooperation over a sustained period of time, this is no excuse for not acting now to begin the process of reducing our dependence on carbon-intensive activities.

Ireland has a great record of leading the world in initiatives aimed at reducing global poverty. This work should be complemented and reinforced by action on climate change. Ireland could take the lead in demonstrating to other rich countries (and the rapidly developing 'emerging economies') that reducing carbon emissions can be achieved without jeopardising economic or social welfare. In fact, these goals can be enhanced by such initiatives. This is not only the morally right thing to do, it is also in our interests. Such leadership would help to restore Ireland's image internationally, which has been so tarnished by the excesses, greed and corruption of our recent economic boom and bust. At the same time, intelligent climate legislation could provide an additional source of revenue for government, while potentially improving our competitiveness over the long-term.

Unfortunately, the proposed Climate Change Bill produced by The Oireachtas Joint Committee on Climate Change and Energy Security (and due to be debated in the Dail today, Thursday), will not achieve any of these worthy goals. The proposed bill would legislate for ambitious emissions reduction targets, with the Taoiseach responsible for ensuring that these targets are achieved. The Taoiseach would also indicate what levels of emissions he/she expects each year. How is the Taoiseach to predict annual emissions levels or to enforce any such medium to long-term targets? This is equivalent to imposing legislation that requires the Taoiseach to predict levels of economic growth each year, or somehow to enforce medium to long-term economic targets.

Unless this legislation envisages an entirely new, centrally-planned economic system in this country, I do not see how its objectives can be achieved.

Legislation of this nature will do two things:

1) It provides a convenient sound-bite for politicians to hide behind. It is relatively easy to say "we have proposed/introduced legislation that will force emissions to fall by x% by 2050" etc. without actually specifying how such targets will be achieved (i.e. without having to stand up to various interest groups who may stand to lose from specific climate-related legislation).

2) Such a law obliges the presiding government to make various interventions to attempt to reduce GHG emissions. Crucially, however, it leaves the choice of specific interventions as a purely political decision. How will the government of the day decide how and where to reduce emissions? On what basis? We surely should be sufficiently well chastened in this country by recent experience of political interventions in the property sector (in the form of tax breaks etc.) to understand what a dangerous scenario this type of legislation will create.

We should not allow politicians the convenience of meaningless targets to hide behind, or the opportunity to use climate change legislation as a means of making themselves and their friends better off in the next round of crony-political-economy.

Setting ambitious long-term targets might sound good, but in reality this does not provide any greater certainty to businesses, investors, or consumers, simply because such targets are purely aspirational and are not credible without specific measures to achieve them.

The optimal climate change policy from both an equity and an efficiency perspective is to place a tax on carbon emissions, and allow people to choose the best way for them of reducing carbon dependency. This would obviously have revenue raising potential - revenue that is so desperately needed right now - while any potential threat to vulnerable people could be mitigated by using part of the revenue raised to provide reimbursements to those on low-incomes. Taxes are never popular, but the people of Ireland are acutely aware right now that taxes must rise. In every crisis there lies opportunity. If only we had the courage to embrace this one.

Is mise,

Tom McDermott

Update: A version of this letter was published on the irisheconomy.ie blog on 11 November 2010.

Our happiness is inextricably linked with that of those around us

2010-06-01T14:57:00.002+01:00

"Says one time he went out in the wilderness to find his own soul, an' he foun' he didn' have no soul that was his'n. Says he foun' he jus' got a little piece of a great big soul. Says a wilderness ain't no good, 'cause his little piece of a soul wasn't no good 'less it was with the rest, an' was whole.

...

"Two are better than one, because they have a good reward for their labour."

(Tom Joad, quoting the preacher, Casy, The Grapes of Wrath - John Steinbeck).

Winning the battle with climate change skeptics?

2010-05-20T11:39:00.000+01:00

The following post came out of a debate I was having with my brother about the role of "skeptical" views on climate change in the climate policy debate ...

The likely (and worst) effects of climate change in poor countries are almost indistinguishable from the effects of being poor.* The idea that (in the short term at least, and based on current expectations) money would be better spent on pursuing development goals rather than mitigation efforts (from poor countries' perspective), has often been made in the academic literature on climate change and development (see for example this article by Richard Tol).

For example, malaria represents a "winnable battle" (although "winning" is not as straightforward as some authors have suggested, see this article by Jeffrey Sachs & Pia Malaney), and deserves more attention and money. However, there is a very important and subtle distinction that some of the climate "skeptic" commentary seems to have missed (or intentionally omitted). That is, climate change will make these so-called winnable battles much harder to win. Furthermore, unmitigated climate change will have - almost certainly - disastrous consequences (especially for poor countries and poor people everywhere).

Business as usual is not a good option (as argued in this RealClimate post and this Economist article). The projections now being made about what unmitigated climate change will look like are startling, and scary (see for example this article by Andrei Sokolov and colleagues, and the report from the Hadley Centre in the UK, as reported here in The SundayTimes). The debate needs to be about how much mitigation is optimal, when and how to pursue it, and how to balance resources devoted to mitigation with those devoted to adaptation (from a poor country's perspective this essentially means development).

This is a very worthwhile debate, and should not be stifled by those who use the ugly term "climate denier" and make personal attacks on anyone 'silly enough' to be skeptical about climate change - or the proposed policy responses to it. (Ironically, this is exactly the sort of small-minded condescension that environmentalists and other 'social crusaders' have had to put up with for years).

One thing that is dangerous about the skeptics' approach - and the headlines they generate in some sections of the popular media - is that people are very willing to believe a voice that tells them "everything is fine, everything is going to be ok". We fundamentally prefer the easy option (psychologists term this "cognitive fluency"). We find it very difficult, on the other hand, to take a threat seriously if we have difficulty imagining it happening (people are a lot more frightened by the idea of being attacked by a shark than killed by falling debris from a plane, but apparently that is irrational - the latter being 30 times more likely! This is the so-called 'availability bias' - see this article by Oliver Burkeman, writing in the Guardian).

Climate change, and its potential consequences definitely fall into this category of being difficult to imagine.

As a footnote to this discussion, I'm not sure what is meant by saying that climate change is an 'unwinnable battle' (as I think has been suggested by some of the skeptics who, although not explicitly doubting the existence of climate change - and the contribution human activities are making to it - have challenged the rationale for attempting to prevent it through emissions reductions). There is a strong degree of irreversibility in climate change. However, the level of warming/change is still up for grabs - the irreversibility aspect makes precautionary emissions reduction now, although expensive, all the more justifiable (as the Economist also argues, in the article cited above). If the 'unwinnable' aspect is the contention that we will never change people's behaviour, then I think that is very naive. People will respond to the right incentives (a tax on carbon being the best way to create those incentives), and will change behaviour very quickly when the alternative becomes economically more rewarding. Not easy to get this right, but hardly 'unwinnable'.

*Note: That is, excluding the potential for inundation leading to the destruction - or at least forced relocation - of entire communities or even nations. In fact, this has already happened to the Charteret Islanders of Papua New Guinea.

Easter Island

2010-01-08T22:52:00.000Z

The economy of Easter Island collapsed as a result of resource exploitation: trees were felled to use as sleds and rollers for moving giant stone statues. This led to soil erosion and a collapse of the economy. (As described in this article from the IT, Friday 8 January, 2010).

The only economist who got it right...

2010-01-08T22:49:00.000Z

... Marx of course! (see Deaglan de Breadun's article in the Irish Times).

Forever blowing bubbles

2010-01-08T22:42:00.000Z

Hyman Minsky's model of the credit cycle includes five stages: displacement, boom, euphoria, profit-taking, and panic. See this article "The Minsky Moment" from the New Yorker (February 4, 2008).

Paul Krugman has also written a nice piece, entitled "The Ice Age Cometh" on the evolutionary psychology behind irrational asset price bubbles.

Race and prisons in America

2010-01-03T22:32:00.001Z

The New York Review of Books published an article by David Cole on America's prisons in November 2009. Some of the statistics jump out. For example; the US incarcerates more people per capita than any other nation on earth (its rate of incarceration is 40% higher than its nearest 'rivals' Russia and Belarus); while african-americans make up just 13% of the US population, they represent over 50% of the prison population (together with Latinos, the two groups account for over 70% of US inmates); blacks are 8 times more likely to end up in prison in the US than whites.

The article notes that "For an entire cohort of young black men in America's inner cities, incarceration has become the more-likely-than-not norm, not the unthinkable exception". This observation has the hollow ring of familiarity to anyone that has read Malcolm X's autobiographical account of the young black man's experience of life in the ghetto suburbs of major American cities during the pre-civil rights era years of the '40s and '50s. (Or for that matter watched The Wire, or read Jay-Z's account of how he got involved in selling drugs).

Up to 1975 the US incarceration rate had been steady at about 100 per 100,000. Since then, the rate has ballooned to 700 per 100,000.

According to the article:

"Drug convictions alone account for more than 80 percent of the total increase in the federal prison population from 1985 to 1995. In 2008, four of five drug arrests were for possession, and only one in five was for distribution; fully half of all drug arrests were for marijuana offenses."

Blacks make up about 14% of monthly drug users, around the same proportion they represent of the total population. However, the statistics on drug crime are hugely disproportionate:

"37 percent of those arrested for drug offenses are black as well as 56 percent of those in state prisons for drug offenses. Blacks serve almost as much time in prison for drug offenses (average of 58.7 months) as whites do for violent crimes (average of 61.7 months)."