The ESRI’s Quarterly Economic Commentary

The ESRI’s Quarterly Economic Commentary (QEC) by Alan Barrett, Ide Kearney, Jean Goggin and Thomas Conefrey, published in December, is now available to download free of charge from the ESRI’s web site here. This QEC contained a number of pieces of research which may be of general interest.

1. Measuring Fiscal Stance

In box 1, entitled “Measuring Fiscal Stance”, the stance of fiscal policy in every year since 1976 is analysed within a consistent modelling framework. This research shows that the 2010 budget, while definitely contractionary, was actually not one of the toughest budgets of the last half century. That “accolade” goes to the 1976 budget, with fiscal policy in 1983 and 1984 and in 1988 and 1989 coming in next in line. After that comes the series of budgets implemented for 2009 and 2010. However as is noted in the box, a futher contractionary budget is planned for 2011 so the cumulative contraction in these years may well ultimately exceed the cumulative contraction in the late 1980s.

This measure is obtained by running the HERMES model with taxation and welfare rates indexed and certain rules on public expenditure. This “budget” is taken to be neutral – generally under this rule the relative size of the public sector in the economy would change little in the long term. This result is compared with the actual outturn with the difference being attributable to discretionary fiscal policy.

This measure of fiscal stance tells us whether a particular budget is deflationary or inflationary. It does not tell us whether it is appropriate. However, as discussed in the box, more often than not the stance has been inappropriate – i.e. procyclical.

While not discussed in the QEC, I think that it is interesting that the day of the budget the Department of Finance published an alternative measure for 2010 using the EU standard methodology. This actually suggested that the budget for this year was stimulatory. This strange outcome arises from the inappropriate nature of the EU methodology. The Department of Finance understandably did not draw attention to this result as they clearly saw that it was not a sensible approach. This problem with the EU methodology is not unique to Ireland but affects its application to other EU member economies under current circumstances. I think that the EU approach was not designed to deal with a crisis of the kind experienced in Europe over the last two years. This issue merits further research to find a more robust approach which can be applied in a consistent way to different Euro area economies.

2. The Balance of Payments and the Flow of Funds

In box 4, entitled “Balance of  Payments”, the implications of the economic forecasts for the capital side of the balance of payments is considered. With the government sector likely to borrow over 11% of GDP this year and with a prospective small balance of payments surplus, in 2010 the private sector will have a major net acquisition of financial assets abroad (more properly a repayment of net liabilities). Some of this repayment will not flow through the banking system. However, a significant part of it will affect the domestic banking system as households and companies increase savings or reduce borrowings from domestic banks. In turn, the banks are likely to reduce the size of their balance sheets and, hence, their net foreign liabilities. As shown in the box, there was a substantial reduction in these liabilities (largely to the ECB) in the second half of 2009. If this trend were to continue, with the prospective continuing large net repayment of foreign liabilities implied by the 2010 forecast, there should be a continuing substantial reduction in the banking system’s foreign exposure, especially in its exposure to the ECB. This will be important as the ECB begins to wind down its support for the Euro area financial system. Obviously this must be seen against the background of the government sector’s increasing foreign liabilities, a significant part of which will be needed to recapitalise the banking system this year.

3. Distributional Effects of Budgets

In Box 2 the distributional impact of tax and welfare policy changes in 2009 and 2010 was considered by Tim Callan, Claire Keane and John Walsh. They found that while Budget 2010 was clearly regressive, the combination of Budgets 2009 and 2010 placed most of the burden of fiscal adjustment on higher earners. 

IPCC reform, now

After the leak of emails from the University of East Anglia showed global warming advocates apparently manipulating data and blackballing dissenting voices, now comes perhaps an even bigger scandal. This time, the discovery of serious scientific errors and accusations of conflicts of interests center on what was considered the gold standard of climate science: the Intergovernmental Panel on Climate Change (IPCC) and its chair Rajendra Pachauri.

When the latest IPCC report in 2007 claimed that global warming could lead to the melting of the Himalaya glaciers by 2035 and thus to major water shortages in the region, it generated headlines around the world. The sensationalist prediction now proved to be grossly in error, based entirely on nothing but speculation by one little-known scientist way back in 1999. Astoundingly, Mr. Pachauri’s initial reaction was to deny everything. Claiming that the IPCC does not make mistakes he first viciously attacked people who disagreed, calling the criticism of India’s Environment Minister Jairam Ramesh the stuff of “climate change deniers and school boy science”, before the sheer weight of evidence made him grudgingly admit the error. Another IPCC scientist, Georg Kaser, claims to have realized already in 2006 that the outlandish claim of melting glaciers was wrong, but could not get the IPCC to exclude the mistake from the report. the author, Murari Lal, admitted that “we thought that […] it will impact policy-makers and politicians and encourage them to take some concrete action.” In another example of the IPCC’s substandard scientific process, the panel claimed, based on a paper that was not peer-reviewed, that there has been an upward trend in the damage caused by weather-related disasters. At the same time, it ignored a peer-reviewed paper that showed the opposite, namely that there has been no such trend. Likewise, it failed to listen to reviewers of the IPCC report who had pointed out this error.

That such a large body of work as the IPCC report would contain some errors is unavoidable. But what’s striking in this example is the sheer lack of the most basic standards of scientific review that allowed the glacier and disaster claims to be incorporated. It also illustrates that the IPCC lacks any mechanisms to correct false or contested knowledge.

The whole situation became even more explosive when Richard North, a blogger at http://eureferendum.blogspot.com/, discovered that Mr. Pachauri’s institute, The Energy Research Institute (TERI), has built a sizeable research effort on the Himalayan meltdown claim, collecting large grants based on this IPCC blunder. TERI and Mr. Pachauri are also the beneficiaries of considerable sums from companies with a financial interest in climate policy, such as Pegasus Capital Advisors, Toyota and the Chicago Climate Exchange. Amazingly, it appears that Mr. Pachauri has not broken any IPCC code of conduct for the simple reason that there is no such code of conduct governing conflicts of interest for IPCC participants and leaders.

Mr. Pachauri’s reaction to what has been billed “Climategate” was equally politicized. When the leaked University of East Anglia emails revealed, among other things, the intent of IPCC authors to violate IPCC procedures by selectively excluding peer-review literature, Mr. Pachauri’s initial reaction was also to play down any wrongdoing. Only when the scandal attracted broader media coverage did he agree on an investigation, which he later cancelled though without giving any reason.

All this seems par for the course for an IPCC chair who in recent months has increasingly participated in overt political advocacy, such as when he called on people to eat less meat and on Washington to implement policies that cut U.S. CO2 emissions. Mr. Pachauri also endorsed what appears to be an arbitrary target of 350 parts per million for the atmospheric concentration of greenhouse gases, even though the IPCC itself has offered no such recommendation.

The IPCC has now started the preparations for the next major report, to be released in 2014. It may be advisable to pause for wholesale institutional reform. The IPCC was set up to advise policy makers on climate science with the stated goal to be “policy-relevant and yet policy-neutral, never policy-prescriptive.” Yvo de Boer, the executive secretary of the UN Framework Convention On Climate Change explained on January 21 that “the credibility of climate change policy can only be based on credible science.” The IPCC seeks to meet its rigorous standards of academic integrity through a thorough review process “to ensure an objective and complete assessment of current information.” The IPCC has fallen way short its own standards. An effective climate policy that is acceptable to the public must be based on sound and impartial advice from institutions that do their science sustainably over many decades. Partisan advice will be unpicked, sloppy research will be exposed.

The IPCC cannot continue its work without adopting strong ethical guidelines for its officials. Under normal conflict of interest rules as followed by other leading scientific advisory institutions, Mr. Pachauri would no longer be tolerable as the IPCC’s chairperson. Any proper IPCC reform would also have to include a formal mechanism to correct errors and more transparent procedures for the appointment of key personnel. Apart from adopting new rules, the IPCC won’t be able to regain its credibility without adhering to existing rules regarding the appointment of experts and the review of scientific material. What’s at stake is not just the reputation of the IPCC but the reputation of all of climate science.

Richard Tol, Economic and Social Research Institute, Dublin and Vrije Universiteit, Amsterdam
Roger Pielke Jr, University of Colorado at Boulder
Hans von Storch, GKSS Research Institute and Hamburg University
This piece was copy-edited by Daniel Schwammenthal

See also
http://www.spiegel.de/international/world/0,1518,673944,00.html
http://www.spiegel.de/wissenschaft/natur/0,1518,673765,00.html
http://www.nrc.nl/opinie/article2467237.ece/VN-klimaatpanel_moet_drastisch_hervormen
http://www.spiegel.de/spiegel/0,1518,673779,00.html
http://rogerpielkejr.blogspot.com/2010/01/tol-pielke-and-von-storch-in-der.html
http://rogerpielkejr.blogspot.com/2010/01/der-spiegel-on-ipcc-and-disasters.html
http://klimazwiebel.blogspot.com/2010/01/save-ipcc.html

UPDATE:
Lal’s quote was copied from here: http://www.dailymail.co.uk/news/article-1245636/Glacier-scientists-says-knew-data-verified.html
He now claims he never said that: http://www.sciencenews.org/view/generic/id/55682/title/Indian_climatologist_disputes_charges_over_Himalayan_projection
David Rose says he did: http://dotearth.blogs.nytimes.com/2010/01/19/heat-over-faulty-un-view-of-asian-ice/

FURTHER UPDATE:
Pachauri explains himself here: http://www.sciencemag.org/cgi/content/full/327/5965/510/DC1