Review of the ESRI

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A curious remark from a high level panel of experts..

“The Panel is unsure whether it is really useful for Ireland to know where CO2 emissions take place as only total emissions for the country matter.”

This is from the Executive Summary of the ESRI’s Medium Term Review 2005-2012:

“The fundamental factors driving the Irish economy, which are considered in Chapter 2, remain quite favourable. In particular, the economy faces a very fortunate set of demographic circumstances over the next fifteen years. However, there are considerable dangers in the current situation: in particular the very high level of dependence on the building industry. This is compounded by apparent insouciance about the future manifested by many borrowers in the household sector.

“These internal risks to future prosperity must be seen against the background of the global economic imbalances that, if anything, are growing in magnitude. A key part of the story of this Review is the future evolution of these global imbalances.”

These were sensible observations, the sort of thinking that could have truly transformed the lives of a great many people in this country if carried to its logical conclusion.

By contrast, the Medium Term Review 2008-2015 of May 2008 claimed “the Irish economy is resilient” and “the fundamentals of the Irish economy are sound”. Projecting GNP growth at “an average of around 3¾ a year”, the authors claimed their “analysis suggests that, even if the current downturn were to be more severe than anticipated, the economy would eventually recover more vigorously to realise the medium-term growth rate”. Even if “a severe liquidity crisis in the US” were to occur, it stated in outlining the most pessimistic scenario examined, “the US recession would not do long-term damage to the Irish economy. In the medium term, when the global economy recovered, the rate of growth in Ireland would accelerate to return the economy to its medium-term growth path”.

In aggregate this wasn’t just failure, it was failure on a monumental scale, failure of genuinely epic proportions. It stands comparison with the most absurd projections made prior to the Wall Street crash.

Brian Cowen and Brian Lenihan seized on this landmark publication as proof that things were fine. How many people were tipped into purchasing ludicrously overpriced property based on the resulting feelgood factor? Fantastically, readers were told that housing was “in short supply” and the accompanying press release highlighted “the economy needs continuing substantial investment in housing … over the coming decade”.

Let’s see what the ESRI reviewers have to say about all this, starting with section 7.1 where it states that “the ESRI stands out in terms of its academic productivity…Its output is among the highest quality internationally”. Section 7.2 continues “the Panel finds that its publications are similarly of a high quality, and contribute to achieving the Institute’s enviable reputation”. Stakeholders, we’re told, find “the Institute is achieving a gold standard”. Only by assuming the stakeholders felt the ESRI sent out the messages stakeholders themselves wanted people to believe in the 2005-2008 period is this imaginable.

Slightly more realistically, section 6.1 states “while there is an advantage to have a consensus on ESRI as the primary independent source, there is obviously also a danger that there could be insufficient input of new or conflicting views”. The ESRI is a knowledge monopoly, then, something Professor Tol is not fond of. His attacks on the IPCC would carry more weight if he exhibited any balance, or if he started closer to home with his zeal for reform.

His inflammatory media attacks on the likes of the Climate Research Unit or Nicholas Stern would be more tolerable if he displayed any self-critical inclinations whatsoever or if he ever criticised the likes of Ian Plimer or Bjorn Lomborg or the ESRI itself, targets that simply cry out for a little bit of patient examination regardless of anyone’s ideological convictions.

When the journalist Brendan O’Connor was questioned about his bullish sentiments during the same period, he gave the original excuse that his views were “valid at the time”. What’s the ESRI’s excuse for the bizarre volte-face between 2005 and 2008, a period when the Ireland’s condition slipped from severe to critical?

Science that cannot make reliable predictions is useless. Economics certainly presents special difficulties and complexity, as do weather forecasting or vulcanology. Just as a weather forecaster can reliably tell that summer will follow spring, a vulcanologist can tell when an eruption is due even if he can’t tell the exact date.

Just as a 14 day weather forecast is exceedingly difficult, predicting the economic trajectory over more than 2 years is next to impossible. The 5-20 year timescale should be much simpler, though — a matter of climate rather than weather to extend the meteorological analogy further. If an economic institution cannot make a useful contribution to this sort of projection it is less than useless, offering false certitude with a misleading scientific gloss. The self-evident pointlessness of the ESRI’s macro-economic predictions detract from the other useful social, statistical and micro-economic work it does.

This peer review offers no clue as to the origins of the disastrous MTR 2008-2015, just as none have emerged from the ESRI itself. We’re offered no evidence as to what steps if any have been taken to correct the errors that lead to it. Bromides about transparency are a regular feature of ESRI reports but it demonstrates none itself.

@MarcusOC

The test should be whether or not policy makers (and the movers and shakers around them) find something informative or interesting. That paper when presented to SSISI (at CSO in Cork) certainly went down well and was not forgotten by policy folks..

The civil servants who have to draft 6 different justifications of the unjustifiable before breakfast for their ministers must be in awe.

I would say so. It certainly provided me with an entertaining read this morning.

Can anyone justify why climate change is claimed to be more easy to predict than weather change?

Analogies are of course the refuge of the scientifically ignorant!

Weather is driven by magneto-electrical movements. Heat is far less powerful than this invisible force, which becomes visible only as St Elmo’s fire or lightning.

It is very similar to having banks growing bigger and bigger and then suddenly, failing. It is nerely part of a natural cycle. Electrical charge builds and overcomes the insulation of air. But what causes the electrical build up? Can it be predicted? The connections with the solar output are becoming more plain and more difficult to ignore, just like an economy credit bubble. Eventually, the truth becomes evident, but the blinded refuse to learn. The sooner they are culled the better? Their entertainment value is limited.

Very eloquent observations above.

I would offer a more quick and dirty one. I seem to recall even the RTE main TV news reporting for years that the ESRI had suggested house prices might be as much as 30% or whatever, overvalued.

Looks to me like they just startred to feel like idiots after a while and, in classic emperor’s new clothes fashion, saw the new truth of the Tiger economy. They lost their bottle – like lots of others did.

When you are invited to review the work of an organisation, it is really not regarded as cricket to come up with observations like that though. You don’t do it, especially in a small community like Ireland, if you want to remain on the “safe pair of hands” list and get similar gigs.

I would agree with many of the observations above. Their output over the last few years has been suspect in many areas. The ESRI do not come across as an independent outfit and from my perspective could do with a couple of new dissenting voices in its ranks if it is to become relevant again. I don’t agree with all they say but Paul Hunt, Michael Hennigan, Morgan Kelly, Niall Fitzgerald, and Michael O’Leary (at arms length!) might be good additions to the ESRI in consultative roles.

There appears to be too much focus on academic background within narrowly defined sectors in the ESRI’s current skill set and there are many other types of people that may have a better overview of sectors like health that they should consider for future roles. That retired lady with 35yrs of social work experience who was commenting in the IT recently is one such example of this.

@grumpy, Joseph O’Toole & Tom Morrisey,

For convenience I’ll address the points your raise together. To varying extents I think you may be being a tad harsh. The ESRI can defend itself, but I think an excerpt from John Fitzgerald paper on fiscal recovery to last year’s DEW at Kenmare (ESRI WP No.36/2009) might provide some balance:

“For those working within the financial system it was not easy or realistic to expect them to cry foul in public. It is certainly clear that, even if they had misgivings, they did not act on them in managing their own businesses. However, the wider academic community also paid little heed to these risks. In the case of the ESRI we had scant resources to devote to researching or monitoring the domestic financial system. Similarly those doing research in financial economics tended to concentrate on areas of interest other than financial stability.1 One suspects that the Department of Finance, like the academic community, also relied on IFSRA and the Central Bank over the same period to do the work, allocating very limited resources to monitoring developments in the financial system.” (p3)

He also added the following mordant footnote: “There was also the danger of legal action if too trenchant views were expressed on the stability of an individual bank.” (fn 2, p4)

Everyone was expected to don the Green Jersey; anyone who didn’t or had the impertinence to query any aspect of the unfolding policy and regulatory lunacy – and not just in the financial sector – had their prefessional integrity and reputation traduced. (I know; I’ve been at the receiving end.)

But that doesn’t mean the ESRI isn’t fit for purpose; it just seems to be pursuing too many purposes. And the impact of the conflicts between these purposes is not being recognised. This “peer review” skates elegantly over these conflicts.

@Pat Donnelly

I referred to climate, not climate change. That hurricanes will sweep through the Gulf of Mexico during given periods is as certain as drizzle falling from overcast skies in Ireland during June. The precise date or location cannot be predicted, just as the precise date could not be predicted when the hammer of doom would strike the Irish economy but its certain arrival was always inevitable.

Q3 2007

A sensible note that “We do not see that there is a role for government in artificially propping up either prices or building activity” is set aside, and the general tone has now shifted markedly:

The adjustments in the housing market, both in terms of building activity and price, are part of a process of returning the Irish economy to a sustainable growth path.

…which echoes the positive spin of the “welcome moderation in prices” and “increased affordability” cheered on by banks and estate agents at the same time. How fortunate the country was, being on the way to “a sustainable growth path”!

Whereas in the June Commentary, we forecast GNP growth in 2008 of 3.7 per cent, we are now forecasting GNP growth of 2.9 per cent.

One of the special publications associated with this QEC was written by Vincent Hogan (UCD) and Pat O’Sullivan (Bank of Ireland Private Banking). This was a warmed over version of a 2002 working paper (ISSC WP 2003/15) for the ISSC (now the Geary Institute). O’Sullivan was one of the most culpable boosters of the boom era, being the author of the notorious “The Wealth of the Nation” produced by BoI Private banking in 2006. From the abstract:

We find that until very recently the marginal propensity to consume out of housing wealth was essentially zero. This is in marked contrast to the recent evidence for other OECD countries. The evidence is robust to changes in statistical methodology. Thus we can conclude that the recent consumption growth was not financed by borrowing against housing wealth. This suggests that any decline in house prices would not cut consumption significantly.

‘Very recently’ is 2002.

In the main body of the article:

“Initially, if house prices fell this would hit consumer confidence but over the longer term, if the servicing costs are not altered significantly, it should have no long lasting impact on consumption.”

(…)

“Furthermore, if households have not used housing wealth for personal consumption purposes to date then personal consumption would remain unaffected by a fall in house prices. This would imply that the recessionary effects of a decline in house prices would not be severe. However, this might be a bit simplistic as Engelhardt (1996) found that there is an asymmetry in the consumption and saving behaviour of households and that consumption reacted more when house prices were declining than when prices were rising. We found no evidence of such asymmetries in the Irish case.”

Details of this search to verify Engelhardt’s asymmetries are not given. Parsed carefully, this last sentence is therefore a method for evading Engelhardt’s findings without argument.

The contrary opinion of Morgan Kelly is cited, but without elaboration.

Almost simultaneously, O’Sullivan was citing himself in “The Wealth of the Nation”, an exercise in shameless boosterism which claimed that “viewed in isolation, the debt numbers can be made to look ominous, but we should not forget the other side of the household balance sheet, which has seen an explosion in the growth of assets”. Given that he was discussing an alleged bubble, the logic was peculiar of suggesting the debt explosion could “be made to look ominous” but that bubble prices of the relevant assets meant there was no problem.

BoI Private banking was at this time advising its clients to invest in Belgian and French property instead of in Ireland or the UK.

Q3 2007

Once again, we have had to revise downwards our growth forecast for 2008, relative to our previous Commentary. We are now forecasting GNP growth in 2008 of 2.3 per cent.

“With these elements being removed, there is an increased need for competitiveness to be restored. This will be helped in part by the economic slowdown next year. We expect wages to growth by 4 percent next year and this will be below the growth of recent years. If this trend continues, there is reason to be optimistic.”

From here on out, it’s all sunshine and happiness from the ESRI. The economy was expected to create 8000 jobs net in 2008.

(contd.)

@Richard

In remarks above which have gotten routed to the moderation queue, I deal with these issues. You may wish to clarify whether your response was to these points or not. Between summer ’07 and summer ’08 there was a dramatic shift in ESRI’s language. MTR 2008-2015 had none of the cautionary tone of earlier analyses.

I would claim that the fact that “most of [the concern] was in private and, in public, in coded language” aggravates the culpability of the ESRI instead of extenuating it. Why were private citizens not entitled to the same advice as the government? You’ve tacitly acknowledged an intent to mislead the public on the part of the entire institution.

@Richard Tol
“we did not foresee that the home-made recession would coincide with an international financial crisis and a global recession ”
Ah here now. I’m going to have to take the JohntheO line on this. Or sort of. Exports of goods and services were hit mainly by Dell leaving. This was happening recession or no recession.

I think the ESRI got it wrong on the soft landing –
1. That such a thing was likely or even possible
2. That a property crash would not damage the banks
3. That a property crash would not damage the economy

2&3 being wrong follow from 1 being wrong. If you don’t believe property is going to crash, you don’t believe that there can be bad consequences.

With ‘property’ amounting to some 22% of GNP, though, and with all the other madness that was identified (25% of newbuilds remaining empty, perverse incentives to build in bizarre places and too many of particular assets – hotels for example) it should have been clear that a downturn would have serious consequences. This is, indeed, was some independent analysts were saying.

But I don’t blame the ESRI for getting it wrong. Almost everybody else got it wrong too, many of them now desperately recanting.

What I blame the ESRI for is not presenting any alternatives. Their sole scenario was the optimistic one, a mistake they repeated earlier this year with their projections for the economy of either low growth or high growth. No particularly adverse outcomes are presented.

I don’t understand why this should be the case. To me, it doesn’t matter that the ESRI are right. What matters is that they are not ‘outranged’; events should fall within their range of possibilities, otherwise we end up with six impossible things happening before the ink is even dry on their report.

Going with the flow of the status quo is usually the best route career and money wise.

The lot of the sacrificial lamb or whistleblower is to be either ignored or despised.

There are always a lot more white swans than black swans and what was striking during the boom was that only 1 or 2 at most from within the established public organisations – – civil service and public bodies, including the universities – – had the courage to publicly shout stop.

The benchmarking payment was happily taken and a few years later, after the onset of the credit crunch, the SG of the Dept of the Taoiseach took an additional 25% pay hike as did his 3 retired predecessors.

What has changed since the crash? Not much in my view – – why is there so much silence on the scandal of public staff pensions?

There was of course some dissent during the boom but it was no match for the politicians who had been tutored in the rough schoolyard of Haughey politics.

They were supported by the prized Svengalis in the banks and some broker firms, who provided intellectual respectability for self interest and ignorance. These same shills could take to the airwaves to peddle their propaganda with impunity and more often than not a programme was chaired by a boom-time multimillionaire.

It’s interesting to observe that two outsiders at the ESRI — Richard Tol and Paul Gorecki – – are the ones who have been prominent in sailing against the wind.

As for lack of banking expertise, this is what could politely be termed post hoc bullshit.

As late as 2007, the Central Bank had not even bothered collecting data on interest only loans, usually for up to 5 yrs, which had for years been the mainstay of the Irish investment property market.

The risks were also evident in the US housing market: interest-only mortgages accounted for less than 2% of all US loans in 2001; BusinessWeek magazine showed that San Diego rated No. 1, by number of “IOs” in 2004 at 47.3% of all new mortgages; Moody’s said in 2005 that 65% of the US commercial loans that it rated in the second quarter of 2005, were interest-only for part or all of the loan’s term.

There was no miracle Irish economy and the ESRI should have driven this point home.

I had highlighted ad nauseam on Finfacts that the economy wasn’t on a sustainable path; no jobs growth in the internationally traded goods and services sectors after 2000; exports from indigenous firms stagnant while foreign firms accounted for 90% of exports; the windfalls from the boom going into overseas commercial property at €10bn annually while less than €200m in venture capital investment was going into Irish business firms.

Brian Cowen said in 2005 in relation to poor public project management : “We need a more accountable, transparent and effectively functioning public sector.”

I then wrote: “Instead of putting party flunkeys on the public payroll, has there been anyone in government with the savvy to propose a CIO – Chief Information Officer – with key experience in world class IT organisations and successful project implementation experience? A similar function with responsibility for major infrastructure projects would surely have also been merited.”

@Paul Hunt
“The real question is: how should the ESRI be restructured, reconstituted to provide the independent, evidence-based research, analysis and policy advice and scrutiny that is urgently required now – and that would contribute to the avoidance of any future repetitions of what we’re experiencing now?”
Angry young men! (and women!).

I suggest making the ESRI a graduate finishing centre – mentoring PhDs on public finance, administration, taxation etc. perhaps the graduates of the research academy would then feed into the Central Bank or the DoF. In any case, the constant flow of irritating young people would provide some measure of alternative thinking.

@ George

“The Panel is unsure whether it is really useful for Ireland to know where CO2 emissions take place as only total emissions for the country matter.”

Indeed. It’s hard to find the value of it, apart from in being an exercise targeting the Greens from someone with an axe to grind.

“I would claim that the fact that “most of [the concern] was in private and, in public, in coded language” aggravates the culpability of the ESRI instead of extenuating it. Why were private citizens not entitled to the same advice as the government? You’ve tacitly acknowledged an intent to mislead the public on the part of the entire institution.”

I agree – if this happened it’s a bit of a scandal

Why would the organisation say one thing in private and another in public?

When did the organisation become an agent of state spin?

@Richard

History has passed its verdict on whether the private messages changed anything.

As you pointed out and is clear from MTR 10, ESRI understood the risks the economy was running. Persistent albeit muted warnings were issued up to summer 2007, but without the direct language that might have alerted consumers to the trouble. Of course by that stage it was far, far too late anyway.

From autumn 2007 on the language shifted, until finally MTR 11 arrived with its preposterous mania. ESRI was now acting against its remit rather than just ignoring it: “ESRI produces research that … that informs public policymaking and civil society in Ireland… The Institute’s principal output is knowledge that is disseminated widely in books, research papers, journal articles, reports, and public presentations“.

Statements like “the Irish economy is resilient” and “the fundamentals of the Irish economy are sound” were not ‘coded language’, they were lies. They were plain, bald, brazen, devious and absolute lies, and I invite anyone who disagrees to contest this with whatever energy and vehemence they please.

The 3.75% growth projection was impossible even if Irish export markets had taken off instead of plunging into crisis. Fortuitously, this was just the figure that the government’s new NDP was predicated on.

You may as well come clean and admit the attempt was to engineer a soft landing — exactly as Cowen had attempted to do. With this, ESRI left research and science behind and joined in with the banks, government, estate agents and print media in their efforts to pull the wool over citizens’ eyes.

The effort was inept — the day of reckoning had arrived and was inescapable and ESRI’s contribution merely sucked a few more victims into the trap.

This was the era when Cowen, Ahern and Lenihan were insisting everything was fine and the Sunday Independent was asking on its front page “If There’s a Recession, Who Talked Us Into It?”. Trusting and optimistic but already strained to their human limit, the people of the country were ruthlessly betrayed and their future gambled away. A tacit conspiracy of forces it was beyond their power to oppose embroiled them in a disaster not of their making.

ESRI’s culpability and its motivations can’t be directly equated with those of the other interested parties listed. It remains guilty, though, and the institute has done nothing to rebuild its shattered reputation. Until credible and transparent efforts are made to transform it ESRI deserves to have its words carved on granite in foot high letters at its doorway.

TK Whittaker was a great and honest public servant, a man for whom a modest wage was the only reward received for an immense contribution to the nation’s welfare. The embodiment of integrity, he did nothing to deserve the shame his successors have brought to his legacy.

we were, however, aware of some of the risks and constantly warned the relevant people — most of that was in private and, in public, in coded language

Resign

Show some Amsterdam style honour.

Enough of de corruptie.
Sew de mieter op

Danke viel mals.

@Mark
Unfortunately, climate change is the new gathering place for crackpots.

As someone with a reasonable claim to expertise and some media exposure, I am bound to attract their ire.