Tuesday, 25 August 2009

'...the problems facing Ireland are too important to be left to the economists…'

Slí Eile: Speaking at the Michael Collins annual commemoration in Béal na mBláth, County Cork, former President Mary Robinson made a number of very interesting points in regard to where we stand. Two in particular caught my interest:

Ireland needs a vision of where it hopes to go; and
We should drawing on the Swedish model of consensus and tough medicine.

On the vision thing - I completely agree.
On the consensus issue - I am not sure.

Mary Robinson speaking of the Swedish response in the 1990s:
A key factor was that all sides of society, the opposition included, were brought on board so as to have as broad a consensus as possible around the tough measures that needed to be taken...The likelihood is that, in the absence of a vision of our future which enjoys broad support, every interest group will put its own concerns first and fight to protect what it has. That would be a recipe for disaster.
The '1987-88' economic consensus, here, gave us social partnership, and with it the favourable conditions (along with many other factors, of course) that saw jobs double, the population increase and living standards rise very significantly. It worked - up to a point. Poverty also continued in its various forms, and we have seen a growing inequality in access to health services - to take one area. We also built up huge 'economic dependencies' - a bizarre tax profile leaving us vulnerable in many ways, massive dependence on foreign direct investment, a relatively enfeebled indigenous sector and 'growth' - plenty of it with lots of trickle-down. As long as world markets boomed, most of us could boom along and not face the hard and difficult decisions that now arise around sharing a declining national cake, and who should be made redundant first.

The alternative to a consensus is widespread social strife. That is a recipe for disaster, as Mary Robinson correctly said. It is what gave rise, in the 1930s, to the Swedish model of partnership stretching back over decades. However, the nature of any 'consensus' needs to be considered. If the Dublin Consensus is the only variety, on offer it may be that strife is - regrettably - the only way to proceed. I sincerely hope not.

Incidentally, the two principles proposed by Mary Robinson are worth highlighting:

Example from the 'top'; and
Protecting the weakest

But taking this latter point, along with Mary Robinson's comments on education (the need to defend it), I am sure that she would also apply the same reasoning to health. So, there you have the three major components of current spending: social welfare, health and education. If we wish to continue funding these 'big three' (not to mention the banks) then we need to pay for it by way of taxes - local, income, capital, spending etc. No other way.


Anonymous said...

Economic Models Matter

Why did so many economists miss the severity of the present economic crisis? Why might we believe those same economists with an unchanged view or economic model to predict the future?

Some economists did predict an approaching economic crisis. One of these was Professor Steve Keen is an Associate Professor in Economics and Finance the University of Western Sydney. He is very critical of conventional economic theory. He has written a book “Debunking Economics”, 2001 which, as you might expect, is highly critical of mainstream economic theory. He argues for economic theory which is aware of time and the central role of credit/debt. He is particularly critical of the “Efficient Markets Hypothesis”, which still dominates academic thinking about finance. Since 1995, his main research focus has been the development of an alternative, empirically grounded theory, known as the “Financial Instability Hypothesis”, which argues that finance markets are inherently unstable. He has a blog called Steve Keen’s Debtwatch at http://www.debtdeflation.com/blogs/ .

His recent short (19 mins) presentation at the Whitlam Institute in Sydney http://www.themonthly.com.au/new-times-new-approaches-steve-keen-australias-economic-prospects-p3-1894 is a useful introduction to his analysis of the present crisis.

While looking at the video remember that the private sector debt to GDP ratio was 237% last year in Ireland. (Private Sector Credit Outstanding was €429bn and GDP was €181bn).

Any comments?

Aidan C

Slí Eile said...

Steve Keen is one of a small band who warned of impending crash. The debt to income ratio based on private sector credit is a feature of the Irish economic situation. CSO published data last October on asset holdings (equity, bonds and shor-term instruments) by Irish residents abroad. The figure is around 9 times national income. An unknown part of this may be related to foreign MNCs resident here. The 2006 BOI study of wealth in Ireland showed a much more skewed wealth distribution compared to income. So, you are right - private sector and household leverage is a major problem even if the savings ratio is high and asset holdings (non-housing) remains very high. A lot more data on asset holding values and not just income is needed.

Fergus O'Rourke said...

For a site ostensibly about economics, it seems to me that there is an inordinate amount of hostility here, from the contributors, not only to some of its practitioners but to the discipline itself.

I agree that some economists contributed to the Madness, but I wouldn't include Colm McCarthy in their number. In fact, when I try to think of whom I would include, the people are all employed by financial institutions who unwisely felt it necessary to "talk-up" an economy already above Cloud 9.

Most economists were well aware of the craziness of the policy environment, and did not fail to say so when asked. They might be criticised for not being vocal enough, perhaps, but my own experience suggests that it would not have made any difference.

The crisis in Ireland is not a result of a failure by Irish economists as a group to understand the world. It has rather resulted from ignoring the undisputed lessons of economics scholarship.

Slí Eile said...

@Fergus to be fair to many Irish economists the recent communication by the 'G46' redeems the tarnished name somewhat. Still, the international debate about economics cited in my blog illustrates a 'science' in crises because of its failure to understand the moral and systemic nature of market failure. The response by Government shows that nothing has been learned and the mistakes compounded. But it is easy to be critical and harder to be constructive by way of concrete policy directions and rounded explanations. That is where this site needs to do more and all contributors and commentators take a lead.

Fergus O'Rourke said...

Nobody who has paid any attention to what economists as a class have been saying will have been even mildly surprised by the "G46" letter

Anonymous said...

@ Fergus
How Did Economists Get It So Wrong? by Paul Krugman at http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?_r=2&partner=rss&emc=rss is a very interesting essay on competing economic perspectives taking a long term view. Paul Krugman did win a Nobel prize for Economics, but I'm not holding that against him.
Aidan C