Economics, voodoo, and climate policy

John Gibbons is having a go at Bjorn Lomborg. Mr Gibbons argues that Lomborg has a PhD in spin, while in fact he has a PhD in political science. Gibbons oddly suggests that Lomborg is behind “climategate”, and refers to economic models as “voodoo”. Most seriously, Gibbons suggests that statisticians and economists have no relevant expertise on climate science and policy.

Climate is defined as the 30 year average weather. Statistics is therefore at the core of climate science.

Greenhouse gas emissions are caused by economic activity. Emission reduction already costs a heap of money, will cost a lot more in the future, and would cost a whole lot more if economists do not help design abatement policies. Economics is therefore at the core of climate policy.


The government have finally announced the details of their National Solidarity Bond mentioned in the last budget and previously recommended by ICTU and Fine Gael. The brochure is here. The bonds will pay an interest coupon subject to DIRT of 1% per year and then have a final tax-free balloon payment of 40% when the bond matures at ten years. You can get your money out at any time with seven days notice but the tax free lump sum element is much smaller in this case. Held to maturity, the bond has an after tax Annual Equivalent Return of 3.96%.

On the face of it, the initiative is a bit puzzling. This after-tax rate of interest is lower than the current yield on ten-year government bonds, which is now at 5.2%. However, this scheme will most likely move money out of domestic bank savings accounts (at a time when they really need them) and the government will then be forgoing the DIRT tax that these funds would have paid on the interest payments from those accounts.

For example, if the alternative investment strategy was to obtain a 4% rate for a similar long term savings account, then with DIRT at 25%, the government would be foregoing 1% per year in tax payments. This would bring the real net cost of this scheme to 4.96% per year. Add in the additional administrative cost of dealing with lots of small investors and this doesn’t seem to be a particularly cheap source of borrowing.

In addition, the NTMA already offers a range of products aimed at small investors that carry slightly lower rates with maturities of three or five years. The Solidarnosc bond offers a higher AER in return for tying up your money for a longer period. It seems more like a term premium than national solidarity.

I suspect, however, that my behavioural friends out there will tell me that the existence of a bond with a catchy name like this will uncover a large previously untapped source of funds for the government. Perhaps. I guess we’ll find out. Alternatively, a simple advertising campaign to inform the public about the existence of state savings schemes may have worked just as well.

Finally, I’d note that I don’t agree with Fine Gael’s Simon Coveney that the proceeds from this bond should be ring-fenced for infrastructural projects. Money is fungible. The fact that some money is raised from a new source with a catchy name shouldn’t in any way change the processes used to assess which types of public spending should be prioritised.

Global Finance Academy Conference

The 4th Global Finance Academy (GFA) conference will taked place at the University College Dublin (UCD) Michael Smurfit Graduate School of Business on May 26th.

The 2010 conference will be held over 1 day on Wednesday 26th May 2010 at the Graduate School of Business campus in Blackrock.

The speakers include Michael Brennan (UCLA), Cal Muckley (UCD), Bart Lambrecht (Lancaster),
Christopher Polk (LSE), Matt Spiegel (Yale) and Hassan Tehranian (Boston).
The conference is free, but delegates must register by emailing the organizer, Cal Muckley (, as soon as possible or by Friday, May 7th at the latest.

Thinking the Unthinkable

Even as Greece appears willing to accept a larger austerity package in return for a much-expanded financing package, some leading economists are contemplating radical alternatives.  

Paul Krugman no longer sees a euro exit as impossible (NYT article here):

So what will happen to the euro? Until recently, most analysts, myself included, considered a euro breakup basically impossible, since any government that even hinted that it was considering leaving the euro would be inviting a catastrophic run on its banks. But if the crisis countries are forced into default, they’ll probably face severe bank runs anyway, forcing them into emergency measures like temporary restrictions on bank withdrawals. This would open the door to euro exit.

Nouriel Roubini  and Arnab Das argue in the Financial Times for a Plan B that involves a pre-emptive debt restructuring:

Continuing on the path of least resistance – a “Plan A” of official financing banking on a mix of deep fiscal cuts, inadequate structural reforms and hopes that markets will stay open, with growth doing much of the heavy lifting – is a risky bet that is very likely to fail. Already this week, financial markets and credit rating agencies have voted against this approach and started to price in a high probability that Greece will need to restructure its public debt coercively, with contagion to the rest of the eurozone periphery now a serious risk. Augmenting the programme for Greece alone – up to €100-€120bn as suggested by the IMF – will not work either.

Far better to move to Plan B. This would involve a pre-emptive debt restructuring for Greece; a strengthened fiscal adjustment plan in the eurozone periphery; far-reaching structural reforms; a larger IMF/European Union programme to help Greece and prevent contagion to others; further monetary easing by the European Central Bank; fiscal and domestic demand stimulus in Germany; and a co-ordinated effort to address the institutional weaknesses of Europe’s economic and monetary union.

Conference on Regulating Financial Market Liquidity and Stability

See below for details of an upcoming conference, “Regulating Financial Market Liquidity and Stability,” taking place on Friday, May 14th , 5 pm – 7 pm, at the Irish Institute of Bankers in the IFSC. This is an outreach event intended for a mixed audience of practitioners, regulators and academics. This blog’s noted contributor Karl Whelan will be speaking, along with Roland Meeks of the Bank of England, and Robert Korajczyk of Northwestern University.  REGISTRATION: The event is free, but delegates must register by emailing Irene Moore (, as soon as possible or by Friday 7th May at the latest.