I have posted a few times (here and here) before on developments in the micro-side of behavioural economics. I think that a lot of policy developments will come out of this area in the next ten years and I have been trying to keep as informed as possible, and have been giving lectures on this in both UCD (to economics students) and TCD (to psychology students). It should go without saying that this area is too broad to give anything approaching a comprehensive summary and my goal here is to point to some areas that might be of interest.
Month: April 2011
One of the frustrating things about doing macroeconomics during the crisis is that it is so hard to pin down key empirical parameters. The size of fiscal multipliers is probably the main case in point. The combination of short time series and a wide range of conditioning factors – confidence effects, the state of credit markets, import leakages, etc. – make it hard to identify the causal impacts of changes in taxes and government spending.
While there is a widespread view that Irish fiscal multipliers are small (mainly due to the openness of the economy), I have always believed this is exaggerated given offsetting factors such binding credit constraints, an almost completely accommodating monetary policy and a large negative output gap. At a time when I thought Ireland could retain its creditworthiness, this led me to believe we should pursue as gradual a fiscal adjustment as the State creditworthiness constraint would allow. But with creditworthiness proving more fragile than expected, there is now little choice but to move expeditiously to close the deficit.
With significantly more fiscal adjustment to come – probably at a minimum the €9 billion planned for in the EU/IMF programme – there is an obvious reason to hope fiscal multipliers are small. But there is also a reason to hope they are large. With the IMF reducing its growth estimate for 2011 and the exchequer returns hinting at a weaker than expected recovery, we would be better off if the fiscal adjustment is a significant source of the observed weakness in domestic demand.
It is the underlying rate of potential output growth that really matters for Ireland’s debt sustainability. Uncertainty about this rate is a significant part of our creditworthiness problem. As others have pointed out, there are competing narratives about Ireland’s medium-term growth potential. On the positive side is the strong growth in net exports (which added about 3.5 percentage points to Ireland’s real GDP growth in 2010). On the negative side is the combined impact of the fiscal austerity and the drag from impaired balance sheets (which subtracted about 4.5 percentage points from growth in 2010).
While unfortunately we are in for a good deal more austerity, it will eventually end; the more of the current drag on domestic demand that is coming from the austerity, the higher is the implied underlying potential growth rate. Even if the fiscal adjustment is making less headway now in reducing the deficit due to relatively high multipliers, the large changes in taxes and social welfare rates should allow for a rapid improvement in the deficit once the austerity ends and decent overall growth returns. The hoped for growth narrative – which I think we have good reason to believe is true – is that Ireland has an economy with a strong underlying export-driven growth potential that is being temporarily held back by unavoidable fiscal adjustment.
Am a bit late to this, but better late than never. Ronan Lyons, who has indirectly contributed a lot of material to this blog, and Ed Burke are co-editors of a new book called Next Generation Ireland. The book includes contributions from Ronan Lyons and Ed Burke themselves who give an introductory essay. Ronan also provides a chapter on improving the public sector and a co-authored chapter with Stephen Kinsella on improving fiscal policy in terms of both levels and composition. Eoin O’Malley takes on the issue of political and governmental reform. Michael Courtney has a chapter on identity, migration and citizenship. Michael King offers a chapter on improving competitiveness. Joseph Curtin has a chapter on environmental issues. Aoibhin de Burca has a chapter on North-South and Ireland-UK relations. Neil Sands and Nicola White provide an essay on the global extent of Irish identity and the importance of thinking along these dimensions. Co-editor Ed Burke’s final chapter is on Irish foreign policy.
Please feel free to use this post to debate aspects of the book if you have read it. Might also be worth debating what qualities the next generation of people who influence policy and business in Ireland should possess.
Stiglitz and Cragg advocate an alternative approach in this Irish Times article.
I figure that some of you reading this blog may be interested in undertaking further study in economics. So this seems like a good place to provide some information about UCD’s MA programme in economics. Information about the course is available here, including an electronic version of our glossy brochure.
I suspect some of the economists from other universities may also wish to use the site to promote their programmes, so let me briefly indicate what I see as the strengths of our programme. According to RePEc, UCD is Ireland’s leading university for research in economics, so the modules are taught by highly qualified research-oriented staff. The programme has a strong research element to it, with students doing a research thesis, for which we offer significant supports in the form of personal supervision by a staff member and classes on research methods. Finally, the programme offers a range of module options in the second term, allowing students to take advanced core modules (effectively tracking those taken in the first year of international graduate programmes) or to take a range of more applied and policy-focused modules or a mix of both. This means that students can decide at the end of their first term which track they want to go down.
Anyone who has questions about the programme should feel free to contact me at karl.whelan@ucd.ie.
Update: Hugh Sheehy points out in the (surprisingly entertaining) comments that our MA site isn’t clear about fees. I’ll try to get that fixed but I can tell you from this that they are €5,400 for EU students and €10,800 for non-EU students. Hefty, I know, but less than other comparable programmes.