Coleman on Taxes and the Evils of PhD Economists

Even by his own standards, Marc Coleman outdid himself in his latest column in the Sunday Independent. In addition to standard Colemanisms such as the invocation of the Laffer curve as an established fact (tax rate increases “emaciate tax revenues”) he delivered the following assessment of PhD economists:

With their theoretical backgrounds and lack of real world forecasting experience, many PhD economists sadly don’t grasp these realities.

Worse still, they have tremendous influence. Last January a bevy of them tried to prove that our tax burden was too low. By measuring our tax revenues as a share of GDP — which is about one fifth higher than GNP — they made the tax share of the economy look one fifth smaller than it actually is. This is because the bit of GDP that isn’t included in GNP — multinational activity — generates relatively little taxes and shouldn’t be included. Their point wasn’t just illiterate. They have been a major contributor to the disastrous mistake the Government has made, a mistake that will create tens of thousands of job losses. It is a good reason why the suggestion of recruiting PhD economists to the Department of Finance — made unsurprisingly by PhD economists — is at best wrong-headed (in John McGuinness‘s case) and at worst self-serving (in the case of PhD economists who want taxpayers to feather their nests).

I’ll leave it to our commenters to discuss the issue of whether a ban on PhD economists is the best way to improve the quality of economic analysis in the Irish public sector. However, as one of the apparently illiterate economists referred to (the chief dunce, I reckon — damning evidence here and here — and this despite years of “real world forecasting experience” at the Fed) I will note that I don’t agree with Marc’s argument that our tax base is best measured by excluding sectors “that generate relatively little tax”. This is for two reasons.

First, multinationals do pay taxes on their repatriated profits and it is incoherent (illiterate?) to include those taxes in a measure of the tax burden but not include these profits in the measure of the tax base.

Second, it is a deliberate policy choice to set a low corporation tax rate. One can debate this choice on substantive grounds (and we have had some discussion about the importance of corporation tax to the Irish economy on this site) but it is simply not correct to argue that multinational profits are not part of the tax base.

32 replies on “Coleman on Taxes and the Evils of PhD Economists”

From someone who is not an economist (I only studied while i was in college) i have no view on way or the other on the comments regarding PhD’s however as regards real world forecasting maybe the following will add a bit to the debate.
Many years ago i did a study on the forecasting ability of bank economists in the area of fx and interest rates. These forecasts were typically out to multiple quarters. The forecast for the current quarters were very inaccurate but if you looked at the forecast from the one quarter out to two quarters and used this for the forecast for the current quarter they ended up to be very accurate! There are many ways to explain this but my take on it that was the economists were being overly influenced by short term noise in making their forecast for the current quarter.

Is this Marc Cole, author of the recently published book The Best is Yet to Come and self styled ‘media economist’ (or as Speaker Solutions describes him: “one of Ireland’s foremost econonomists.” – Well, he does go on I suppose)?

Following that, this is probably not a good place to suggest another challenge to the IE consensus. Michael Taft is challenging what he refers to as the ‘real devaluationists’, those who argue that because we can’t devalue our currency we must devalue other inputs into the economy.

Suggesting that many of these devaluationists write here he offers an analysis of real wage levels in Ireland compared to other EU countries and invites the ‘devaluationists’ to write a guest post on his own blog in response.

http://www.irishleftreview.org/2009/05/14/14th-morning-recession-diaries/

http://notesonthefront.typepad.com/politicaleconomy/2009/05/here-is-my-challenge-to-the-real-devaluationists-will-any-of-them-take-it-up-real-devaluationists-claim-that-since-we-c.html

I think it would help the debate if someone would.

@PJ : forecasting these aggregates is a bit of a mare…see http://www.thefinancialreview.org/PDF/FR699_Lucey_Exchange_rate_puzzle_cointegration_tests.pdf

Beyond that : its not about phd or anything else other than fit for purpose. Thinking that the DoF is fit for purpose as it is is wrong. Parachuting the First Guards Forecasting Phd Brigade on it own would be wrong. A culture change, that takes a deep breath and assesses all evidence in a humble fashion would be required as a prerequisite.

I’m not at all left-wing and wouldn’t normally agree with the Irish Left Review. But, in this case they are spot-on. In fact, their comments are very similar to what I’ve posted here on a number of occasions in recent months.

The fundamental feature of the increase in unemployment in Ireland is that it is due to a collapse in consumer demand from within Ireland and not due to anything ressembling a poor performance on the part of the export-oriented wealth-producing sectors of the economy. Until this is recognised by policy-makers, there is little chance of stemming the increase in unemployment. The ‘loss of competitiveness’ theory to explain the increase in unemployment is a complete and utter fraud.

Let’s look at the figures for manufacturing, the sector of the economy most exposed to international competition and which would have borne the brunt of the decline in output, had there genuinely been a loss of competitiveness and market share as many economists claim. I present 3 tables below. The first is for the changes in manufacturing output in EU15 countries between 2000 and 2008. The second and third are for the y-o-y changes in manufacturing output in EU15 countries in the first two months of 2009.

changes in manufacturing output between 2000 and 2008:

[ 1] IRELAND +43.3% <<<<
[ 2] Austria +34.1%
[ 3] Finland +26.9%
[ 4] Germany +21.4%
[ 5] Sweden +15.3%
[ 6] Denmark +13.9%
[ 7] Luxembourg +12.8%
[ 8] Belgium +11.2%
[ 9] Neth’lands +9.3%
[10] France -1.0%
[11] Spain -1.0%
[12] Greece -2.8%
[13] Italy -3.7%
[14] U. Kingdom -4.3%
[15] Portugal -9.0%

y-o-y changes in manufacturing output in Jan 2009:

[ 1] IRELAND -0.4% <<<<
[ 2] Austria -9.0%
[ 3] Denmark -10.6%
[ 4] Neth’lands -11.0%
[ 5] U. Kingdom -12.6%
[ 6] Greece -12.8%
[ 7] Belgium -15.9%
[ 8] Italy -16.8%
[ 9] France -17.3%
[10] Portugal -17.5%
[11] Sweden -18.3%
[12] Germany -19.6%
[13] Finland -21.5%
[14] Spain -22.8%
[15] Luxembourg -26.0%

y-o-y changes in manufacturing output in February 2009:

[ 1] IRELAND -1.7% <<<<
[ 2] Greece -6.5%
[ 3] Austria -9.0%
[ 4] Neth’lands -12.8%
[ 5] U. Kingdom -13.5%
[ 6] Denmark -13.6%
[ 7] Belgium -15.9%
[ 8] France -17.8%
[ 9] Sweden -19.4%
[10] Italy -20.3%
[11] Portugal -20.8%
[12] Finland -21.5%
[13] Germany -22.5%
[14] Spain -23.3%
[15] Luxembourg -26.0%

Where is the evidence of loss of competitiveness in these figures? In most EU15 countries, manufacturing output in the first 2 months of 2009 was 10% to 20% below its 2000 level. In Ireland it was 40% above. Yet, we are told ad nauseum by some economists that manufacturing has been doing so badly that wage rates in manufacturing must be slashed.

The reason the manufacturing output figures are as good as they are is because manufacturing wage rates in Ireland are highly competitive. Manufacturing wage rates are below the EU15 average, while manufacturing productivity is well above the EU15 average. In addition, employers’ non-wage labour costs are extremely low in Ireland compared with other EU15 countries. I have no objection to this. I’m quite happy with manufacturing wage rates in Ireland being lower, even while productivity is higher. But, I reject the view of many economists that manufacturing wage rates now need to be slashed further, at a time when (as the above figures show) manufacturing output is doing spectacularly well relative to all other EU15 countries, but consumer demand is collapsing.

I do concede that there are some non-labour costs to manufacturing industry in Ireland that are above the EU15 average and need to be cut. For example, waste disposal and energy. However, their impact is small relative to labour costs.

Brian,

Feel free just to call me stupid. But I thought the forward rate was simply an price arbitraged from spot rates and relative carry?

I agree with much of what John says.

All of these figures are despite the reallocation of an entire sub-industry out of Ireland (electronics), which resulted in employment in that industry falling by probably around half from 55,000. Yet the incerase in chemicals/pharmaceuticals to replace this has indeed been very impressive. The case that Ireland is highly uncompetitive remains unproven.

Can I add to John’s comment that showing comparisons such as rising landfill costs – while accurate – would not be allowed in a court of law as being prejudicial to a fair trial. With costs such as waste being so vanishingly small, they should no longer be picked out for mention in macro discussions of the price level.

Classic. Ditch the PhD eggheads and replace them with people with real forecasting experience (tarot card readers, mystics, psychics and witch doctors would be a good start).

Has anybody actually heard Coleman defending his “best is yet to come” book – apparently he’s still right and the recession is just a trifling short-term detail which wasn’t worth mentioning in an economic forecast.

If nothing else he’s a pretty interesting, if extreme, example of psychological egocentric bias.

We should only start to worry when Marc Coleman calls for more phd’s to be involved in formulating public policy.

I for one am glad that Marc “The Best is Yet to Come” Coleman’s forcasting antennae have not been corrupted by a PhD. Seriously, the phrase “real world forecasting” is laughable, as is the idea that detachment from it should be seen as some kind of damning inditement of academic economists, given the glaringly tenuous relationship between forecasting and “real world” outcomes.

@ John
Caution is always required when using Irish stats in comparisons because of the dominance of US firms in the Irish economy.

When producer prices were spiking elsewhere last summer, Irish prices were falling and conversely now.

Davy economist Rossa White commented today on “the fact that Irish exports outperformed during the collapse in global trade late last year and in early 2009 received little attention.”

However, overnight, the Irish Exporters Association ramped up their forecast for a decline in exports in 2009 and said 60% of merchandise exports are accounted by the pharmachem and medical devices sector – which are effectively recession proof.

So the issue of competitiveness can have more relevance for the rest of the exporting sector, which is more labour intensive.

@ Ronnie O’Toole
In 2007, the World Bank said Ireland was among the four most expensive economies in the world.

The Big Pharma sector is under pressure with depleting pipelines and pressure in the US to reduce costs.

If restrictions are placed on parking patents in Ireland, among other changes in the US, the economics may change.

Should we continue to rely on US firms to be responsible for 90% of our exports while more than 50% of exports from home grown firms go to the UK?

One of the problems in addressing this issue is that most of the input comes from people who have no international business experience and politicians who are more interested in marketing spoof than developing credible enterprise policy.

http://www.finfacts.ie/irishfinancenews/article_1016593.shtml

Michael: Virtually all your points indicate risks, rather than objective measures of where we stand now. Before we get into such conjecture, could we agree if Ireland does or doesn’t have a competitiveness problem currently?

Some quick points:

> The Irish Exporters figures are very interesting, though they have been very unreliable in the past, so I think we will have to await the official stats. However I wouldn’t dismiss them lightly either;
> As John points out, Irish industrial wages are significantly below N. European levels. These are the bulk of non-imported business costs. For every €100 spent on wages, less than €1 are spent on land fill costs, so lets just drop this one red-herring from the debate;
> One of the areas where we didn’t fare so well in the past is property related costs, and God knows thats a problem thats going away.
> There are, however, many locally traded services which haven’t reformed, and which should be a great focus currently. The reform of legal services, Ireland’s payments system etc.

However the presumption that these failings render is dead competitiveness-wise is, I believe, baseless. I can’t prove you are wrong as we don’t have good enough data to be 100% sure, though I do know taht the almost universal belief that Ireland is uncompeititve has little data support.

Wages are one thing, but there are other factors. I talk to international business people relatively frequently and they have a list of issues they explore when deciding on relocations.
I know one company that figured out that the cost of locating in Ireland would be way more expensive than other European alternatives due to electricity prices (any company that needs a large data centre needs a lot of electricity). Professional fees appear to be much more expensive too ( as Ronnie refers to). (though it’s not enough to dismiss the property factor just because its coming down now – the damage has been done)
But there are non-$$ related issues too. For example, the TIME it takes to get certain things done in Ireland is also a competitiveness issue. Planning can delay projects for years. It’s not enough to compare wages, find they are lower, and then claim lack of competitiveness is a myth. We can’t be complacent.

Ronnie

The competitiveness issues faced by start-ups would differ from those of concern to the likes of Intel and Pfizer.

Obviously it would be useful to have more specific comparative data.

For an economy that is so dependent on FDI, it doesn’t help to be known as a very expensive place while still having iffy infrastructure.

Ask Asian business people about the cost of restaurant food in Dublin and its standard e.g Chinese cuisine

Property is still very expensive relative to most countries.

When members of the Oireachtas are among the best paid in the world and the MD of a Small State agency, the NCA, gets paid as much as Ben Bernanke, you could get the impression that some sectors in this small country are overpaid.

How many?

Indirect taxes are among the highest in Europe. The cost of a new car is 30% above the Eurozone average.

What is a tax? Health insurance is of course a tax because of the poor standard of teh public service.

As for export’ data, the CSO doesn’t do a great job either.

It is unable to publish monthly total export data (merchandise data + services) and yesterday when Eurostat published industrial output data for the EU, there were blanks for Ireland for the months of Jan, Feb and March.

@Sarah: I agree that these are important, though again the available data suggests that these issues are a strength for Ireland.

The NCC includes data on cost/# procedures in setting up a business (we are bettered only by Finland), that our general level of regulation is low (4th in OECD), that we have amongst the least restrictive product regulation (5th in OECD), and that our employment legislation is flexibile (5th from 18). I could go on. We occasionally slip to being ‘only’ average, but generally the picture is a very positive one.

On a related point, one very very cheap way of improving our FDI prospects would be to look at those regulations institutions that matter to foreign MNC posted executives, e.g. visa requirements, foreign schools, passport issues, bringing in pets from abroad. Sounds silly, but these things might matter disproportionately.

@ Michael: Sorry, our posts crossed. Some things I agree with. The one area where wages do seem badly out of line is the public service, and the levy + higher remuneration body will at least put a dent in that. Your other issues are too eclectic for a limited intelligence like mine (chinese meals to indirect tax!), so I’ll leave this debate (unresolved) at this point.

As another poster said, how coleman hads tehneck to show his face on any national media after writing that ridiculous book “teh best is yet to come” is truly beyond me.

Like – has teh guy any shame at all !!

If he had any sense he would be hiding under teh biggest rock he could find.

He has lost ALL credibility since that particular forecasting.

I wonder does he also have a Phd given that his forecasting was so bad 🙂

The bottom line for me is that employment in exporting industries hit a ceiling around 2001, and getting it growing again is our only real prospect of filling the hole left by the deflating construction bubble. If we can’t get exporting employment growing strongly again once things pick up internationally, that’s a serious competitiveness problem, whatever the other data say.

Just on this thing about the reasons for rising unemployment, if you disaggregate changes in employment by sector you will see that the vast bulk of the change in employment levels can be accounted for by falling construction industry employment and what appears to primarily be the direct consequence of that fall in construction employment for non-traded services sectors.

There is also a fall in total traded industry employment, which has probably also contributed to the fall in non-traded services employment, but I’ll set that to one side because as of Q4 2008 it is small relative to what has happened in construction, and also because it is reasonable to guess that it is mainly a cyclical matter relating to the international recession.

Is what has happened in the construction industry since 2007 a matter of deficient domestic demand, or is it something else? I think it is something else, for a number of reasons. First, is that the construction industry grew to an abnormally large and unsustainable size relative to the rest of the economy. Even the Construction Industry Council agrees with this in its recent submission to the Government, although I think it overestimates what is sustainable. On a QNHS measure, employment reached 13.7% of the national workforce, where something around 7-8% would have been more normal. Second, the construction actvity was financed by a vast increase in borrowing, at a rate far beyond what could be sustained over the long term. My memory (subject to correction) of some stats I looked at a few days ago is that Irish borrowings from Irish financial institutions increased at about €1.9bn per month over much of the construction boom, dominated by borrowing against property.

As an occasional reader on the blog, I think the debate between @Ronnie @Michael @Sarah and @Con is very usefu and I wish the Irisheconomy blog would spend more time debating the real economy rather.

I have indicated previously that the competitiveness discussion is a lazy reflex of economists and business leaders to blame lack of competitiveness on wages. I urge economists to tackle the deficit in reliable information on the Irish economy before becoming policywonks.

Competitiveness is the outcome of efficient business and improved productivity not wage restraint. Let’s not don the blinkers of accountants. We don’t need to slash costs, we need to discuss where investment and innovation can spur a new dynamic for growth. The Irish economy needs a good dose of SWOT analysis.

Each time I finish reading the various contributions to this site I come away with the impression that something (a few things actually) are missing: like a mention of your economic Model-in-Use! What does GROWTH mean? Seriously, what exactly do you mean by this term? I have a real problem with this term, since I no longer accept that the current economic paradigm, Permagrowth, is valid. A massive amount of virtual money (credit) was created to ‘grow’ the economy in this country. Lent out, this virtual money becomes debt and attracts compound (exponential!) interest. So, would one of you ‘Growthists’ please explain in detail, with what and how, we will accumulate a sufficient surplus to repay the principal, and, the exponentially growing debt. Default, Bankruptcy, Jubilee, or what? Every time I do the math on this I get a negative value for discretionary income.

Brian P

@Brian

Don’t worry, I don’t think you are alone in being skeptical about growth. You are just wrong. Given the growing gravy train for smart economics and greentech, I wonder if there are any economists left who passionately believe in capitalism and material prosperity.

As an old-school anti-capitalist of the Left, I had always raged against the economic barriers to material prosperity. Now even business leaders and economists shy away from any association with the human creativity of economic growth.

The economic problem we face is the outcome of 2 decades of superficial growth (characterised by stability, anaemia and durability, ie SAD growth) in Western economies not the wishful nightmare of permagrowth.

anemeconomy.info

I’m always amazed at the level of ignorance about the performance of the Irish economy. For example, in the post by Donagh (3rd one down), there is a link to an irish Times article by Garret Fitzgerald.

http://www.irishtimes.com/newspaper/opinion/2009/0502/1224245835695.html

In it, he says:

“But since 2000 the increase in the volume of our exports of goods has been marginal, and their value has actually declined.”

Garret Fitzgerald is one of the most honest politicians/journalists around. He’s usually meticulous about statistical accuracy. But, his claim is nonsense and its falsity undermines his whole argument. The actual facts are as follows:

Between 2000 and 2008, the value of exports increased from 102,885 euros to 150,336 euros and the volume of exports rose by 46.1%.

Paper or record, indeed!

Oops, I can see I did GFG an injustice. I read his article again and he’s referring to exports of goods only. My figures were for all exports (goods + services). These are, of course, more relevant than goods only exports. For the record, the volume of goods exports increased by 20% between 2000 and 2008.

The forthcoming receivership of Independent News & Media will hopefully calm the shrillness of their various loud mouth correspondents.

Has anyone any ideas as to who the next owners of Independent Newspapers will be and will they want Mark Coleman?

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