Year: 2010

The Economics of ‘Something Must be Done’

There is a strand in what passes for policy discussion which goes like this:

(i) There is an acknowledged problem in some sector or policy area;

(ii) the Government could  do something to ameliorate this problem;

(iii) QED the Government should do something, not always specified.

The result of this line of attack is policies like the Car Scrappage Scheme, of which more anon.

Examples in this morning’s media concern the excess supply of hotels, and the threat of global warming. The Government is being urged to take measures

– to reduce the hotel stock, and

– to support the hydro storage/windpower project called Spirit of Ireland.

Hotel Stock: Hotels are a pure private good. Due to policy-induced capacity expansion, there are now too many. Some are bust, and face receivership/liquidation/NAMA.  Room prices are falling. This is the natural market response. Where is the market failure?

It is true that some long-established hotels have seen their business undermined by State-subsidised competition, but this is a routine business risk in an interventionist political culture. Many of these long-established hotels enjoyed State grants for conference/leisure centres when the going was good. The industry is lobbying for some State-run scheme to take out capacity. Doing nothing will cost less and the industry will adjust. Intervening, yet again, will distort adjustment.

Spirit of Ireland: The externality of carbon emissions is addressed by putting a price on carbon, at which point the State can safely adopt a position of technology neutrality. Power generation, once externalities are dealt with, is a pure private good too. Whether these schemes make sense is a matter for the capital market, not for the Government.

Car Scrappage: Car sales have collapsed and some car dealers have gone out of business. The same has happened with €1,000 handbags, and some handbag retailers are struggling. Ireland manufactures neither cars nor handbags. The Car Scrappage Scheme will spend taxpayer money to sustain, temporarily, the retail distribution network for an imported consumer durable. Why not a Handbag Scrappage Scheme? This scheme is plain daft for Ireland. It is not even clear that it makes any sense for car-producing countries – the German scheme appears to have sucked in imports of smaller cars, which Germany does not produce. 

These ‘Something Must be Done’ schemes provide harmless entertainment for economists, fodder for the 24-hour news cycle and a playpen for lobbyists. But they contribute nothing to sustainable employment, cost the Exchequer money and hinder the necessary post-Bubble adjustment.  

In contrast, the Economics of Doing Nothing is that this is often the best policy, and the cheapest.

Wasting money on roads?

A number of stories on roads funding have been in the media over the last few weeks.

Firstly, Frank McDonald in a piece in the Irish Times had a go at the motorway building programme of the NRA. In particular he criticises the plans for the Slane bypass (N2 Dublin to Derry). That story was also picked up in Today FM’s Last Word (Matt Cooper) last Thursday.

The rationale for the bypass project involving a new bridge over the river Boyne is straightforward. Currently a significant volume of traffic of which about a quarter is HGVs (some 1600 per day) negotiate the steep valley on both sides of the river which is crossed via a narrow bridge. The nature of the roads has been blamed for a number of serious accidents involving HGVs, and hence the bypass is to be built to reduce accidents.

But why are there so many HGVs on a road connecting Ashbourne (population 6500) with Ardee (population 4000)? The answer is simple once on considers that the N2 runs almost parallel to the tolled M1, which is both quicker and safer. In other words the HGVs are on the N2 to avoid the toll, and now the tax payer is going to help them avoid the toll by building a new expensive bridge and dual carriageway. The simple, cheap and obvious solution to the problem of HGVs going through Slane is to ban them from doing so, as I argued in May 2009. This would also avoid all the hassle of forcing a major construction project through an area rich in archaeological sites and historic significance. I wonder is this a case for the Comptroller and Auditor General?

Secondly, on the 22nd of February Minister for Transport Noel Dempsey announced €411.408 million for 2010 Regional & Local Roads Programme. Of course the Minister did not announce any extra resources, rather he is reprofiling expenditure that was to go to road improvement. Given the damage to many roads due to the flooding in the autumn and the frost over the winter most people will welcome these resources.

But is this money going to be well spent? When it comes to potholes it is curious how they always appear in the same places, and often they are back soon after they were filled. Likewise, the same stretches of road (surprisingly many for a country where rain is not uncommon) are also subject to flooding on a regular basis, with consequent road damage. It is also peculiar that our road surfaces melt at the first sign of the sun (even over recent poor summers), again leading to significant damage.

In that context engineering and material standards should be reviewed in order to minimise future damage and costs before spending €400 million on repairing roads.

I am not against spending money on roads – anyone who has read my work on public investment will know that – but we should make sure we use the scarce resources we put into roads to best use.

Financial Crisis Inquiry Commission: Testimony by Academics

A number of prominent academics testified before the US FCIC last week  – you can download the background papers here.

Debt as a buffer

Following on from his recent Vox column, which Philip linked to previously, Andrew Scott has some more sensible things to say about deficits and debts in the long run here.

Dreaming of pumped hydro

Frank McDonald keeps the dream alive in today’s Irish Times.

I have had no new insights since May 2009, but SEI & UCD organized an event where most speakers agreed with my assessment: Pumped hydro is just too expensive.