Monday, 14 September 2009

Economic Stimulus and Objective Economics

Tom O'Connor: Most of the academic economic advisors to the government have done a Master's or PhD in the USA and though believing that they are 'objective' are actually working ex-ante from a neoliberal mindset, based on neoliberal training. The economics they studied in the USA or the US-led economics they base their views on is already ideologically driven before they make a single pronouncement.

This has huge significance for the obvious need to stimulate the economy. I asked several senior eminent economists how they could justify non stimulation. Their answers were, ' it's the banks job to lend' or 'the money would leak from the economy'.

My response to these economists was: the banks are not lending, and when they did they didn't do so appropriately. Ergo, the state is the only entity that can stimulate the economy and get funds to existing and new businesses. The responses included blanket rejections of lean neo-keynesian solutions, 'you can have that' based on nothing more than ideological opposition.

The 'leakage' arguments do not hold water: if the government was to invest in indigenous exporting industries, this would increase Irish exports and improve the balance of payments. Ergo, no leakage. If the government was to invest money in building schools, mental health services and other internationally non-traded areas, there obviously would be no leakage either. If the government set up state-owned enterprises which were competitive in high knowledge areas, there would be no leakage either.

None of these forms of stimulation have been tried. I have had discussions with Prof.Aldo Mustacchio of Harvard Business School on the subject of setting up state-owned enterprises (SOEs). His view is that these have always been a part of the capitalist system and that, in the post-financial collapse era, SOEs are a hugely viable option.

The Irish cabinet does not have any economic competence itself and depends on paid economists to advice it. These are overwhelmingly either American-trained or American-led. They set their face against bold solutions such as the above and the cabinet follows suit. This is the antithesis of democracy.

At the heart of neoliberal ideology is the classsic Phillips Curve mindset. In times of recession, the government must wait for the economy to naturally correct itself despite the huge increases in unemployment. This will be good in the long run, as the over supply of wage labour will drive down wages to incentivise employers to rehire, and then the economy will grow again without government intervention. The fact that wages may fall to slave labour proportions can only be good for the competitiveness of the economy.

This is essentially the way the Irish model works. That is why there are no plans for government intervention, even though 500,000 people will be signing on the live register by june 2010. If you read the Winter Quarterly Economic Commentary from the ESRI at the end of 2008, it advises the government to do nothing, sit tight and wait for an international recovery. This is precisely the type of ideology I am referring to. In the meantime, the unemployed person, to quote Norman Tebbitt, ex-Chairman of the Thatcher's Conservative Party, should 'get on your bike'.

It is imperative that this mindset be challenged and ultimately changed.
Tom O'Connor lectures in Economics at the Cork Institute of Technology


Michael Taft said...

Absolutely, Tom. There's a knee-jerk reaction to stimulus - that it would just leak out of the economy. The areas you identify show that it wouldn't - not to any greate extent. The CSO's Input-Output tables show that in the education sector, only 9% of inputs are imported; in Health, only 16%; while in Research & Developent services, only 20%. Any stimulus programme would have to be forensic to ensure maximum domestic output, but it can be done - even in a small open economy.

In addition, maxmising employment and enhancing income among low/average income groups is also less likely to leak since these groups' consumption would have less import content.

At the end of the day, many of the arguments against stimulus are not grounded in the data but in a political perspective, as you pointed out.

Anonymous said...

I agree that after every neoliberal option has been tried and failed the state will have to stimulate the economy. NAMA is just another neoliberal scam that may be inflicted on Irish citizens depriving the state of funds for this stimulus.

Aidan C

SlĂ­ Eile said...

@Tom spot on. You are among those progressive economists prepared to argue in public and on the airwaves for a pro-stimulus strategy. The weight of opinion in academia, media, politics is 'we have no money' or 'we cannot spend our way out of recession'. This needs to be challenged lest we deliver ourselves to a W rather than a U progression. Tipping into a fresh recession, here, is not impossible if Government administers 3 fiscal shocks in a row. It might impress some international commentators but it will lose us jobs, consumption and valued time.
A key issue that needs airing in regard to a stimulus strategy:
targetting/forensic (point raised by Michael)
changes in corporate and public sector organisation/ethos/governance
other policies to address banking failure, inequality and exclusion.
(While it is true that many Irish economists have been trained as postgraduates in the US one should also point out that at least some have adopted a critical and non-conventional approach to the mainstream. Also, the irony of the current recession is that while the Anglo-American model of the 1980s-2000s reaped this present economic tempest, in some respects the US and UK governments are charting a way out of the impasse in part due to quantitative easing. If anything, many of the other EU15 States are less so inclined although their starting point is more healthy and their infrastructure more developed over a longer period. We were - comparatively - the new rich kids on the block who blew are fast gains on a riot of bad loans, obscene and growing inequality and lopsided economic development that was neither sustainable or just. We sure are paying the price now.

Paul Hunt said...

It is common, but intellectually dishonest and lazy, to describe this perceived consensus as neo-liberal, since it is a neocon thrust to usurp, purloin and abuse the powerful and relevant liberal tradition that stretches from Adam Smith through JS Mill and JM Keynes into the modern era in the work of Stiglitz and Sen. However, it is probably too much to ask progressives, in Keynes' words "to escape the invalidism of the Left".

Damian said...

Tom, I think what you are referring to is a lack of variety in the economic debate - a fascinating feature of the crisis, which you’ve just highlighted, is why Irish economists generally have clung to the belief that state intervention/fiscal stimulus/ a national industrial policy, if applied correctly cannot work in Ireland. This is despite the fact that these are commonly applied policies elsewhere (including US and UK). There is a consistent failure to ask the question of how Ireland should compete in a global economy with markets that don't automatically clear?

Whether or not this has to do with US training is debatable - US PhD training is highly regarded and quite rigorous. It may have to do with generational issues, the emergence of macro-modelling and the dominant ideology/interpretations of the time; or more worryingly the difficulty of fostering a variety of opinions at a time when all economics seems to be local.

On thing is certain, one of the single biggest differences between us and other countries is the ability of others to draw on a wide range of policy solutions, either through think tanks, govt or academia.

Tom O'Connor said...

I'm relieved to see that there is an apparent consensus from all five comments that it is the neoliberal ideological fixation that prevents an economic stimulus.

Some people were unsure as to whether or not my thesis that neoliberalism is bolstered by US-trained economists is true. This is the current evidence:

In UCD: Prof. Paul Devereux, PhD North Western University; Prof. Ron Davies, PhD Penn State; Prof. Morgan O'Kelly, PhD, Yale; Prof.Aisling Reynolds, PhD Univ of Illinois; Prof.Karl Whelan, PhD, MIT; Prof. Philip Lane, PhD, Harvard; Prof.Kevin O'Rourke, PhD, Harvard; Prof.D. Mc Aleese (retired), PhD, Johns Hopkins.

UCC: Prof.Connell Fanning, PhD Cornell
Maynooth: Prof. Rowena Pecchino, PhD University of Wisconsin; Prof. Donal O'Neill, PhD Univ of Iowa;

UCG: Prof. Alan Ahearne, PhD, Carnegie Mellon; Prof. Michael Cuddy, PhD North Carolina State; Prof.John Mc Hale, PhD, Harvard; Prof.Alan Barrett, PhD Michigan State.

These represent the single largest proportion of economics professsors from any other country in the world. Most of these people, if not all, received there doctorates after the Friedmanite neoliberal revolution in economics from the late 1970s onwards. These were all pilgrims to the Fukuyama shrine of 'the end of history'. This meant essentially that the world had gone beyond the challenge of providing for all as resource distribution problems have been sorted out in the economically developed world!!

Not one of these economists has expressed any faith in a stimulus package on the media or elsewhere. This is becasue, this is the antithesis of their economic training in which neoliberal free market economics is embedded implicity and viewed as 'normal'or 'natural' or 'good' economic reasoning.

The chief economic advisor to the government, Prof.Alan Ahearne has been a professor at Carnegie Mellon and for seven years before coming to Galway in 2005 worked for the US Federal Reserve, a bastion of neoliberal free market economics.

In addition, there is no counterweight in the ranks of professional economists. Almost all are hugely free market-driven or else they wouldn't be in the globalised shares and fund/ exchange markets: so for example we have the PD economist Jim Power of Friends Provident; Colm Mc Carthy of DKM, also in UCD; Bank of Ireland's Dr. Dan Mc Laughlin, Austin Hughes, Alan Mc Quaid and many more.

The academic economists mentioned train graduates to be a mirror image, and thus these graduates become the stockbrokers of tomorrow. However, given that the Irish government depends on economists, a case in point being the recent revelations of millions being paid for their advice during the banking crisis, these economists now determine the state's economic and social policies, to devastating effect.

The idelogical one-sidedness of this position is almost Orwellian.

Eoin McGuirk said...

"Not one of these economists has expressed any faith in a stimulus package on the media or elsewhere. This is becasue, this is the antithesis of their economic training in which neoliberal free market economics is embedded implicity and viewed as 'normal'or 'natural' or 'good' economic reasoning. "

Spurious stuff from an economist, no? Many of the listed economists above have offered very little to the debate, for whatever reason. Deciding that they are free-market, neolibral zealots on the basis that they have not publicly called for a stimulus is flagrant conjecture.

Two random examples:
Prof Devereux is a 'reduced-form' labour economist, as is Prof O'Neill - quite why they would go on air to spout macro policy solutions is beyond me and, thankfully, beyond them too. It seems they prefer to speak about things they know. On another note, Prof O'Rourke has been consistently advocating Keynesian solutions in the US economy. Some pilgrim.

Pavement Trauma said...

Perhaps you should take a read of this and then reconsider your theory that all American academic economics depts are part of one monolithic, mono-culture block.

The saltwater economists (Yale, Harvard, MIT, etc.), well represented in your list above, do favour Keynesian policies of fiscal stimulus. Moreover it was renowned Keynesian, and big supporter of Obama's stimulus plan, Paul Krugman, of Nobel fame, that made the comment: "But there isn't much disagreement about the need for fiscal austerity. As far as responding to the recession goes, Ireland appears to be really, truly without options, other than to hope for an export-led recovery if and when the rest of the world bounces back."

Stimulus requires money. We don't have it so we have to borrow. We're already borrowing too much and will need to continue to do so for the foreseeable future just to keep the lights on. And then there's NAMA on top of that.

Non-Partisan Economist said...


I must strongly disagree with the sentiment in your commentary. Of the economists you mention, those who have publicly reacted to the crisis are strongly against Nama. In fact, the arguments against Nama have been mostly lead by high-profile academic economists in Ireland.

These are the individuals arguing most articulately another approach to our banking problems that would be more in line with social justice. That's a far cry from your label of "neo-liberalism".

As Graham Stull said on the Irish Economy blog, "what makes Nama so interesting is that it so neatly divides the camps in two... those who use clear economic logic to defend efficiency and social justice, against those who will say just about anything to protect their vested interests"

That same logic has been applied to the dangerous idea of "job sudsidies" for the Irish economy. David Begg has said: "(Sarah)Carey is correct to point out that a “jobs subsidy scheme” of the nature she outlined would be disastrous. It would be a waste of vital taxpayers’ funds, it would do nothing to ease the jobs crisis and, of course, it would be wide open to corruption and abuse."

Also, commentators on these issues would do well to remember who exactly is calling for job sudsidies. David Begg again:

"Unfortunately, where she (Sarah Carey) went wrong was in attributing such an initiative to congress. The truth is that precisely this approach has been repeatedly proposed by employer and business groups. We have opposed such feckless initiatives from the outset."

I'll conclude by saying that we need to be very careful in forming economic policy at this time. As Professor Paul Walsh has noted: "It is hard to prevent unintended displacement and substitution effects in these interventions, employees taking on subsidised workers and letting go unsubsidised workers or taking on subsidised workers instead of intended unsubsidised workers."

There was widespread agreement at the time it was announced - that the €250 million job subsidy proposal— was a bad plan.

Tom O'Connor said...

In response to the last three comments can I say: to be a Keynesian economist one must argue that in times of recession, the government has a moral, economic and social responsibility to intervene in the economy. None of the economists I mentioned have argued publicly for this option. The argument that because the Saltwater colleges have a Keynesian tradition is irrelevant because the economists quoted have no record in this regard. Economists, if they are worth anything have to offer correct advice, update their thinking and work for the common good. This requires arguing for a stimulus. None of the quoted economists have done that which speaks for itself. Keeping is tantamount to tacit agreement with the economic status quo in my view. In addition, how can Krugman be correct: if the government can drive the debt/GDP ratio over 100% with NAMA, how can we not afford a stimulus of 3 billion per year for the next 2 years? Comments about Begg are spurious as this is not what I would do to stimulate the economy. It has been proved since the late 1980s that employment subsidies carrry huge deadweight costs.
On the issue of the labour market economists: of all people who need to argue for a fiscal stimulus, surely these are the ones who need to so most.
It seems from the comments that you have not got the sense of urgency about reducing unemployment. You condone a whole raft of highly paid economists for not getting off the fence and arguing for a rescue package. Articles such as mine are necessary to provoke people do come out and state their position. Many of these economists have come up forecfully against NAMA on a sustained basis. This proves that when they are in disagreement or in agreement with something in the economic domain, they come out and say it. On that basis, it is reasonable to conclude that they are not in favour of a fiscal stimulus. I have spoken to several of these people and they have confirmed as much. There may be the odd Keynesian amongst them. However, the dominance of the neoliberal position within the ranks is so great as to silence these. The reality is that there is a neoliberl consensus in Ireland and none of the most highly positioned economists have done anything to change that. Their writings are also devoid of any stimuli arguments. On this basis, I would be very confident that if one was to interview the economists mentioned, they would come up with a neoliberal economic assessment of the world. Given that they learned their trade in the USA, I would be very surprised if they didn't attribute the source of their world view to their intellectual training.
Finally, the idea of tasc is to stimulate debate for change. None of the economists above are unemployed. Nama is fashionable and real economics. Boring unemployment isn't. It's time that highly paid economists to engage with solutions to unemployment and declare their position. Your commentary suggesting reasons as to why their silence doesn't count as evidence only lets them off the hook.

Anonymous said...

@ Tom
"The 'leakage' arguments do not hold water: if the government was to invest in indigenous exporting industries, this would increase Irish exports and improve the balance of payments. Ergo, no leakage. If the government was to invest money in building schools, mental health services and other internationally non-traded areas, there obviously would be no leakage either. If the government set up state-owned enterprises which were competitive in high knowledge areas, there would be no leakage either."

Even if the initial payment does not involve leakage, it is not hard to imagine that there will be SOME leakage subsequently. e.g. pay a builder to build a school - inputs may come from abroad and he may spend his wages on goods from abroad.... The question is how much. However even if we accept that there is little leakage. If we are going to pursue the type of stimulus outlined in the quotation above I would be sceptical about the benefits which will accrue directly (So) unless the policy is well targetted. In the current scenario I (and PERHAPS, other economists) suspect a stimulus to be hijacked by vested interests....

To give the example of schools, mental health services and internationnlly non-traded areas seems overly simplistic to me. Firstly, it ignores to a certain degree the skill sets of those currently unemployed [e.g. probably not too many unemployed mental health counsellors]. Secondly many of the suggested areas will lead to few direct financial benefits since e.g. increasing the number of schools will not increase the number of students being taught (and is unlikely to have as significant impact on outcomes as the replacement of sub standard teachers.)

What internationaly non-traded sectors are do you have in mind?? What specific well targetted stimulus are you suggesting which has a reasonable chance of funding a significant proportion of its initial outlay through direct financial benefits(as opposed economic benefits based on utility - since in the final analysis we cant repay loans with utility...)?

Finally in calling for government investment in indigenous exporting industries you seem to assume that there are suitable firms with markets awaiting their produce willing to pay prices yielding profits. What/where are these businesses?

Or perhaps as opposed to investment you instead mean we should subsidise some businesses to make them competitive internationnally? Surely such subsidies are a purer form of leakage?


Anonymous said...

I see a link on the side of this blog to a talk given by James Galbraith, PhD Yale, on behalf of TASC. Obviously this is evidence of the prevalence of neoliberal thinking in TASC. Beware of anyone with a US PhD!

This is absolute garbage. This site used to be worth reading.

Tom O'Connor said...

There are a whole series of growth areas in the government's own commissioned report: Ahead of the Curve (2006). These include: biomedical devices, food ingredients, telematics and many others. It is conceivable that indigenous companies should be set up in these areas who would not engage in profit repatriation. State-owned enterprises in these or areas such as biopharma may also be beneficial. On the second comment, it is very easy to label somebody's comments as 'garbage', particularly when you post as 'anonymous'. The fact that Prof. Galbraith is a Keynesian does not negate my argument: the predominant economic mindset in US universities in the USA in the past 30 years has been neoliberal. As I said above, you will always get some Keynesians, but they are very much in the minority. Unless, you are blind, deaf and dumb, you must realise that most American-trained professors of economics in Ireland are on the neoliberal end of the continuum and far removed from Kenynesian stimulus policies. The lack of public pronouncements on this by them surely verifies that. No amount of insults from you changes that position.

Tony said...

To be honest I'm not sure that (in the short term at least) investment into biomedical devices, food ingredients or telematics can do much to significantly improve the economic outlook. I suspect they don't readily match the skill sets of those currently unemployed O(althoug perhaps new graduates) and would suspect that prior to seeing real employment growth a period of R&D would be required? Also we would need people with real expertise in these areas to spear head them - given that its 3 years since the report was published, has much groundwork been laid? (sincere question, as I don't know myself!)


Donal O'Brolchain said...

"It is conceivable that indigenous companies should be set up in these areas who would not engage in profit repatriation."
What about the indigenous companies already set-up that do engage in profit repatriation into this Republic eg. Kerry Foods (food ingredients), CRH (construction materials), Ryanair (airline services). These are all multinationals with HQs here. They were not set up by the state even if they have benefited from public expenditure and changes in regulation eg. Kerry-EU Agricultural policy, CRH-construction in Ireland, Ryanair-deregulation.

"Nama is fashionable and real economics. Boring unemployment isn't."
I suggest that part of the reason NAMA is fashionable is that it is a huge committment of public funds by our Government that might better be used in other areas that could lead to employment opportunities emerging.

Was it just a typo that you omitted TCD in your listing of economists? In fact you assign two economists now employed in TCD to UCD in your list. ie Prof. Philip Lane, PhD, Harvard; Prof.Kevin O'Rourke, PhD, Harvard;

Tom O'Connor said...

There is ample evidence for the ideological hegemony of neoliberalism in US universities. Consequently it is not ‘rubbish’ to suggest that in all probability, those who studied for PhDs in the US are more likely to have been moulded by neoliberal economic ideology. For those interested, you might check out any of the following which verify my position:
Review of David Harvey- A Brief History of Neoliberalism in Travail Journal, Spring 2007, no.59
'If this was the intent of capitalist classes beginning in the mid-1970s, then their successes were bigger and better than most would have dared to imagine at the time. Harvey shows convincingly "that when neoliberal principles clash with the need to restore or sustain elite power, then the principles are either abandoned or become so twisted as to be unrecognizable." (19) In this view, then, the "theoretical utopianism of neoliberal argument" — as developed over time by Friedrich von Hayek, Milton Friedman, the Mont Pelerin Society, endless American think-tanks, the business press, and the business schools and economics departments of ivy league universities such as the University of Chicago, Stanford, and Harvard, and innumerable other institutional channels — "primarily worked as a system of justification and legitimation for whatever needed to be done to achieve" (19) the goals of the economic elite.


'Shareholder interests come increasingly to shape government economic policy, and government legislation explicitly invokes the United States as a shiny model of corporate management. As yet, there has not been much change in practices (external directors have been appointed in many firms, but they rarely have much influence). But the shift in the objectives of managers towards the protection of shareholder interests is palpable. It results not only from changes in corporate law, but also from the coming to power in business, government and universities of a generation of people with MBAs and PhDs in economics and corporate law, soaked in the ideological assumption that neo-liberal economics is like the laws of engineering’
Ex: John Ravenhill (2007) Global Political Economy, Clarendon, Oxford.


'A set of organizing institutions bundles neoliberalism and globalization, and seeks to universalize the core ideas. Among these diverse institutions are the media, the lecture circuit, schools and universities, with business faculties being key to developing and disseminating neoliberal ideas. MBA programs serve as vital mechanisms in their transnational spread of a distinctive combination of values and hence for the emergence of a common ideological framework among policy makers in several countries. Indeed, many MBA-toting ministers and senior bureaucrats among the world have been trained in neoclassical economics at leading universities in the US’(Mittelman 2004 :49)
Ex: James Mittelman (2004)Whither Globalization: The Vortex of Knowledge and Ideology, Routledge, Oxford.


The prevalence of neoliberal thinking in US universities is also discussed by Chang:
Ha-Joon Chang (2002) Breaking the Mould:An Institutionalist Political Economy Alternative to the Neoliberal Theory of the Market and the State, Cambridge Journal of Economics & United Nations Research Institute (2001)

paul sweeney said...

While I often disagree with many other economists, particularly those employed by the financial institutions, I really do think that we must keep the debate impersonal. Its fair enough if one of us disagrees with another and we get stuck into one another, but lets not get too personal.
The guys working for the stockbrokers and banks are doing their jobs. For the stockbroker economists their jobs are now on the line if the banks are nationalised, as their employers lose a great proportion of their commissions if the banks shares are no longer traded. No wonder they took such a strong an anti-nationalisation position. On the dole - and some of them wanted the dole cut only a while ago!
I have no problem with American education. There is a far better debate – broader, more philosophical - on economic matters in the US than here, in my opinion. One could argue that the Economic Departments of Irish universities do not encourage debate and wider philosophical reading by students. Alas, the economics profession, such as it is, is by nature, conservative.

Aoife said...

I have found the above debate very stimulating and extremely refreshing. Refreshing in the sense that it has not been manicalled by an overly polite discourse which very often tends to muffle truthful debate. Congratulations to TASC for facilitating this exchange of ideas and to those who contributed and challenged us all!

Paul Hunt said...

@Paul Sweeney,

There is a three-way debate going on, even if it is not reflected on this site. The Freshwater economists in the US are "useful idiots" for the Neocons who have very cleverly purloined the Neo-liberal label. This forces genuine neo-liberals such as Stiglitz, Krugman, Sen et al to fight under a Progressive banner (but only as defined in a US context). Genuine neo-liberals such as these would shudder at the economic nonsense spouted by the Progressive/Left fantasists in the Irish or European context. It is a travesty that the latter seek to co-opt the former to their futile cause.

progressive-economy@tasc said...

Progressive Economy provides a platform for economists and friends of the TASC economists network to share views and perspectives on economic development. We welcome different views and appreciate the time and effort made by many to post blogs or comments to this site. We seek to encourage a lively and open debate about the state of economics, economic thinking and public policy on any relevant matter. In the context of a discussion about Irish economists and their contribution to informing debate, we wish to encourage a debate that avoids personalizing but, rather, focuses on issues, concepts and ideas. As Paul Sweeney has commented the geographical provenance of trained economists is not the point. There is as much, and indeed more, dissent among economists on the other side of the salt Atlantic waters than in this island. We have also noted the call on a comment thread in Irish Economy for a wider debate on these matters.