Business cycles, beliefs and ideology Post author By Kevin O’Rourke Post date September 27, 2009 This is worth a look (HT Mark Thoma). Categories In Uncategorized 15 Comments on Business cycles, beliefs and ideology ← G20 and Reforming Banking Regulation → Ireland in 2050 15 replies on “Business cycles, beliefs and ideology” @ Kevin O’Rourke. When I worked for Liam Carroll during the height of the property bubble we had problems hiring architects to work in house for us. Frank McDonald in the Irish Times often criticised Zoe for not hiring architects. The truth is, we tried very hard, but perceptions created by journalists such as McDonald gave the workforce a negative perception. Whether the perception is justified or not is a matter of opinion, and where you stand. One thing I do know is that architects we did manage to hire, soon got wise to the fact that consultant practices outside our group would pay a lot more, so we lost a lot of staff, because we tried to keep in line with reasonable and sustainable long term pay guidelines. Consultant practices on the other hand used to rise and fall sharply as the property bubble took its course. That is the thing that Frank McDonald forgets to mention in many of his comments. He paints professionals as ‘butter would not melt in their mouths’ kind of people, which they aren’t. Anyhow, to cut this short, I remember hiring a student architect once at Zoe and he worked for one day. He phoned me the following morning and informed me he couldn’t work for me anymore, because he needed better hours and better pay. I was already paying him way over €500.00 after tax per week. I wished him well and said best of luck with his thesis project in college the following year. Then it really struck me, I had been part of the generation of professionals who had studied architecture in the very early 1990s, coming out of the deep 1980s recession in construction activity in Ireland. I was perhaps under-confident. While on the other hand, this young man I spoke to on the phone, would not even wait a week and politely apologise, our having given him the job, he could have bowed out with his integrity and reputation intact. Instead, he was like the opposite end of the extreme to myself, he was over confident. He made a ‘point’ of the fact he didn’t like employment deal he had signed up to and threw the toys out of his pram. I had to go and inform my senior about this development, and my senior’s impression of the 2006 generation went down considerably. My senior informed me, and many other high up professionals in architecture have confirmed, they have experienced up to 4 or 5 recession periods in their 30 odd years of working in the sector. Each one having quite a deep impact on their livelihoods. This might call for “sibling studies” along the lines of the “twin studies” which have been so illuminating in psychological research. Consider pairs of siblings (thereby controlling for differences across families) born in boom and bust, and differences in attitude. From the US perspective I compare my 70s generation (the worst decades economically in the USA since the 1930s) to the 60s generation that proceeded us (one of better decades economically). We were notably more cynical and pessimistic than our older siblings. So this theory makes sense on that level. When I saw the title of this thread my hopes rose that we would have a discussion over the incredible on-line war being fought by Krugman, De-Long and other salt-water economists agaianst Lucas, Prescott and Cochrane and other fresh-water types. It is hugely entertaining, in a train crash sort of way. Of course, that is not what this very worthwhile thread is actually about. Any of you site owners fancy starting one? (I know some references have been made here, particularly to the Krugman NY Times piece, but there has been a Tsunami of wonderful stuff since he wrote that. I can supplya load of web-links if anyone is interested) OK simpleton: here’s some homework for you. If you can establish that saltwater types are more likely to have come of age in periods of recession than the freshwater types, then we would have an interesting story to tell! Starter for 10: http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/09/dark-age-in-macroeconomics-a-history-of-taught-approach.html Who begins his autobiography with a tale of the 1930s “I was born in 1937, in Yakima, Washington, the oldest child of Robert Emerson XXX and Jane Templeton XXX. My sister Jenepher was born in 1939 and my brother Peter in 1940. My parents had moved to Yakima from Seattle, to open a small restaurant, The xxxx Ice Creamery. The restaurant was a casualty of the 1937-38 downturn, and during World War II our family moved to Seattle, where my father found work as a steamfitter in the shipyards “ @Kevin So it depends on what you mean by ‘came of age’. The autobiography is Lucas’. A child of the depression but a PhD circa 1960 I would guess. Then spent the next decade and a half waiting for the neo-classical sysnthesis to blow up. It would be interesting to find similar personal detail for Solow or Tobin — there is a book or website somewhere with reminiscences of Nobel prizewinners that might yield something. Solow was born in 1924 so would actually remember the Depression years. Tobin was born in 1918. Let’s define coming of age as something that happens between 18 and 25. In this case, it works very nicely. Lucas is as you say someone who came of age in the late 50s and early 60s when all was well with the world. Krugman came of age in the 1970s like Greg. De Long is a late 70s/early 80s guy. With a few carefully selected datapoints my R squared is one! @simpleton, I share your desire to encourage some debate on the “saltwater v freshwater” dispute. My interest is not so much in the dispute per se, but on how it might illuminate the economic policy options that need to be considered in Ireland. I have made an attempt previously to encourage this debate – http://www.irisheconomy.ie/index.php/2009/09/15/stiglitz-report-on-measuring-economic-progress/#comments – but without success. Despite the high quality of posts and debate on this site, I am a little disappointed that there has been little evidence of the joined-up policy thinking that is needed to address the economic problems that are mounting up. Perhaps it’s the nature of this almost instantaneous communication and exchange, but I can’t help thinking that potential for wider benefit is being under-exploited. Key elements of the policy debate, e.g., bank resolution, taxation, fiscal adjustment, etc. , are being examined thoroughly, but I feel key linkages are left unexplored. There seems to be a consensus that (a) any form of fiscal stimulus, due to the open nature of the economy and the resulting leakage, would be totally wasteful, (b) the economic equivalent of a devaluation is required (since Euro membership precludes a real one), but that the focus should be on cutting labour costs and (c) the focus should be on fiscal adjustment (wth the emphasis on expenditure cuts rather than taxation) and economic recovery in Ireland’s main trading partners will pull the Irish economy along. I am not disputing that there is a substantial body of theory and practice supporting this consensus – even Paul Krugman has been pessimistic about Ireland’s policy options (http://www.nytimes.com/2009/04/20/opinion/20krugman.html?_r=1) – but I think it’s unwise to go down this road unquestioningly. For me, it smacks too much of the freshwater/necon approach. To avoid this post being any longer than it need be I will suggest some examples that might be seen as running counter to this consensus, but could be worth exploring. 1. Much of the NAMA debate has focused on the valuation of the loans being taken off the banks’ books – and implicitly the value of the property behind these loans. Strong opinions are expressed about whether the Irish property market is close to bottoming out or has further to fall – and unfortunately this all they can be. The NAMA focus on LTEV is a means of supporting and underpinning the market. Any further fall in prices is seen as a BAD THING. But is it really? A further fall in prices (provided rents were allowed to fall as well) might reflect the economic reality and have impacts similar to some of the effects of a devaluation. Any reduction in economy-wide costs will make any wage and pay reductions more palatable. 2. Of course, allowing the property market to find its own level will impact on houseowners (particularly new houseowners) who are being hit by unemployment or lower income. It would also compel the Government to reconsider the scope of the NAMA package – this is still possible while the legislation proceeds through the Oireachtas. What it would highlight is the perceived unfairness of NAMA; the banks escaping the full implications of their folly and the developers being allowed time and space to resolve their difficulties while ordinary citizens face the normal legal and banking procedures of bankruptcy and repossession. These issues of fairness are explored by researchers such as Marc Hauser at Harvard: http://www.wjh.harvard.edu/~mnkylab/Home.html. This issue is political (not party political) as it impacts on the relationship between the governed and those who govern. The Government, in addition to reducing the scope of NAMA, would be advised to consider the sistuation of private individuals in financial difficulties. 3. If the focus is on cuts in public expenditure and in pay and wages, every effort should be made to strip out costs and implicit taxes, but there seems to be very little economic focus on these. 4. I remain unconvinced that any form of investment stimulus should be ruled out – either because of leakages or public funding constraints. Without holding any brief for FG, I have been impressed by their proposals for restructuring the existing semi-states to generate a major investment stimulus. On the funding side – even if FG is a bit coy, restructuring and privatisation of selected semi-states would provide funding resources that could be leveraged to finance significant investment in modern infrastructure and utilities. For example, the Italian electricity industry has invested heavily in rolling out smart meters to all consumers. The investment has been high, but the future pay-off in terms of load-shifting, more efficient operation of the system and reductions in investment in peak capacity will be significant. Ireland could make a similar investment. There is no reason why the meters could not be manufactured in Ireland. Ireland still retains considerable advantages as a location for investment and it is a market that will expand in the future. There is huge potential for significant efficiencies in the water and waste water industry, but it will require invesment. As will the telecomms industry – once the financial engineering occupying STT and the Eircom ESOT has been resolved. I suppose in essence I am arguing that the State should beg, steal or borrow to finance investment in modern infarstructure and services to generate employment and economic activity and to lift the future growth potential. There has been much debate on this site about the future extent of net emigration, but there is a general acceptance that it will happen – and is happening. My fear is that Ireland will lose far too many people with high levels of human capital – as has happened so often in the past. Some joined-up policy to minimise this outflow would be good. Paul Hunt You are correct, of course. But there is a problem. We are not a club or a firm or company. We do not get paid for this, and the main burden is on those named at the side. You make a good point about metering. Now will the government run with it? The ESB are willing to pay more to their employees when others face pay cuts, so they may do this. They are paid to do it. I contribute based on my experiences and acquired knowledge. I am not an economist but like everyone else, I have an opinion. The great thing about this site is that if someone wants to know about current topics in Ireland, economy related, they can come here and they may learn something and contribute too! Genius is only 1% inspiration, but it does require this. Then the perspiration starts, but it won’t be, cannot be on this site. But if we (who?) starts another site dedicated to specific tasks, that is an idea?! @Pat D Many thanks for the kind words. I realise I should have more sense, but, I suppose, deep down I am angry at the continued drift into the economic mire. For a start I’m way off-piste on this thread, but I’m less concerned about the future behaviour and additudes of young people affected by recessions in the larger economies than I am about young Irish people with skills and abilities being compelled to emigrate as a result of avoidable (or, at least, alterable) economic factors. The former tend to move within their national economies to where opportunities arise; the latter just leave and other economies benefit from their skills and abilities. And I take your point about the purpose and nature of this site and Edison’s inspiration/perspiration ratios. I suppose it’s simply that this site appears to have the highest concentration of economic expertise on the island and there has probably never been such a requirement for clear-sighted economic policy analysis and prescription. You’re probably right that another site is required, but the likelihood is that it would be just another voice crying in the wilderness. So it’s back to the day job and chanelling my energies in directions where I might actually achieve something. @Paul Hunt We probably need at least a small BOP surplus for a few years to help support the (smaller, hopefully) balance sheet, so hard to see the case for a higher I/GNP ratio. Plus the lower output trajectory means less need for capacity-expanding investment. But things like smart metering can be looked at on their merits – you should have a look at recent (and good)report from the Irish Academy of Engineering on this and other energy issues. I know some engineers who are sceptical about smart grids/meters. Some Bord Snip recommendations are not big money-savers but more aimed at controlling implict taxes/regulatory costs. I worry about mission creep at semi-state companies, including ESB. Job creation is none of their business – they can help to create jobs at their customers’ businesses by driving down costs at their own. @Colm, Many thanks for taking the time to engage with my ramblings. There seems to a consensus that the economic equivalent of a devaluation is required – and I expect your take on the macroeconomic imperatives is in line with this. I suppose my concerns can be boiled down to some thoughts on the future levels and composition of C + I + G + (X – M) that are informed by a (perhaps) naive interpretation of Keynes. Deleveraging is likely to continue to depress C; once NAMA and Lisbon II are out of the way the Government’s focus will be on bringing G down. The hope is that X will pick up as Ireland’s major trading partners move out of recession and the deflationary impact of the implicit devaluation kicks in. I’m not suggesting that I should be increased simply to comspensate for falls in C and G. Bit I think there may be a case for increasing I to ensure more efficient delivery of utility services and to provide the platform for increasing X. (I have my doubts about the continuing loyalty of the MNCs – who contribute so much to X – to this “aircraft carrier off Europe” and I think much more will need to be done to enhance Ireland’s attractiveness for FDI.) The difficult task, of course, is to encourage/promote/facilitate efficient investment and to finance this in a way that doesn’t impact on the Govt.’s balance sheet – this is why I advocate restructuring and selective privatisation of some existing semi-states. I am convinced there is significant scope for much more efficient delivery and financing of utility services. In addition to these there are the high costs of professional, financial and insurance services which will require strengthened competition law – and more effective enforcement – as well as consumer collective action. Not to mention NAMA, whose scope and intent will prevent land and property prices and rents reaching their economic values. @ Pat Hunt I also appreciate the call for a greater debate about wider macroeconomic policy. One set of thinking that I think it would be useful to inject into this debate would be the thinking of Jane Jacobs. She is mainly known as a decisive critic of the modernist urban planning errors in North American cities in the 1950s and 1960s but she was also a deep student of economies, especially those of cities, and came up with some deeply unorthodox but compelling ideas about growth and development. Coming from an orthodox economic training, I have been prompted by the recent crisis and the mockery it has made of much of what passes for macro-thinking to search more broadly for answers to basic economic questions. Jacobs’ thinking has not been widely dispersed within economic circles but I believe that its common-sense observations, derived from a study of economies not economics, demand wider attention. There are two document that I would recommend to anyone interested. The first is is an elegant summary of Jane Jacobs thoughts on economic development, entitled “How do We Grow?”, published by a former senior World Bank economist, David Ellerman http://www.ellerman.org/Davids-Stuff/Dev-Theory/Challenge-final-scan.pdf The second is the 1983 EF Schumacher lecture given by Jacobs on the topic of “The Economy of Regions” http://www.smallisbeautiful.org/publications/jacobs_83.html I would love to hear any and all comments on these pieces. @Mick, Thank you for the vote of support. I fear the call may go unheeded; there are so many pressing economic concerns (as measured by the conventional metrics) combined with the demands of tribal political survival that any wide-ranging assessment of policy options or of the future shape of the economy or society is easily squashed. We are also way off-piste on this thread, but I expect we may be indulged. In highlighting the work of Jane Jacobs you are drawing attention to one of the many voices that draw on and develop important strands of the body of knowledge developed since the Enlightenment. Some of these voices are gaining increasing currency – but outside of the “managerial” centist politics (either a little bit right of centre or left of centre) that is in inexorable decline in the major EU economies. This is well illustrated in the results of Germany’s election; all 6 parties represented in the Bundestag have between 10 and 40% of the eligible popular vote. The US is always exceptional in its own way and the UK to the extent that its voting system supresses the preferences of voters. Unfortunately, US exceptionalism tends to dominate the economic discourse, though the work of the Stiglitz Commission for Pres. Sarkozy indicates a French recognition of the need – and a desire – to broaden the parameters of economic discourse. It is almost certain that the US will ignore this initiative and the UK will revert to its knee-jerk anti-Gallic stance – and much of the Irish economic firmanent (insofar as it pays any attention) is likley to take its lead from either one or both. In the Irish context there are numerous issues that impact on the economy (e.g., the role of democratic governance and the need for a broader range of metrics in the formulation of policy, the need for genuine decentralisation of decision-making, collective action and empowerment of citizens, etc.), but the focus is on crisis management. A simple example illustrates the deficiencies of the current metrics. I reckon that something between 5 and 10% of final consumption expenditure in nominal terms is accounted for by surplus profits in the private sector provision of services and inefficiencies in the state-directed provision of services. However, if these surplus profits and inefficiencies were stripped out GDP would fall, even though final consumers would be unambiguously better off. It doesn’t require much reflection to understand why there is little enthusiasm for tackling these profits and inefficiencies. In any event, keep up the good work. Something will have to give eventually. Comments are closed.