Danger of irrational exuberance on economic recovery Post author By Alan Ahearne Post date September 16, 2014 John O’Hagan cautions against irrational exuberance in the lead up to Budget 2015 in today’s Irish Times. Link is here. Categories In Uncategorized 17 Comments on Danger of irrational exuberance on economic recovery ← European Aviation Conference 2014, Amsterdam → NTMA Technical Paper: What Drove Irish Government Bond Yields During the Crisis? 17 replies on “Danger of irrational exuberance on economic recovery” Off topic completely. Apologies. I have been involved in preparation of a report entitled ’50 REASONS FROM IRELAND FOR SCOTLAND TO VOTE YES TO FREEDOM’ Here is a link: http://statsireland.blogspot.co.uk/ Its a joint effort, so its not under JTO name. People here will have to guess as to whether JTO is responsible for 0.0001% or 99.9999% of it. It would be unwise to admit anything publicly. UK governments in the past have decapitated people for less. I do admit to writing all the graphics software, however. Its a mine of information on Ireland (and to a lesser extent, Scotland). It has 9 sections and contains over 200 tables (plus lots of vivid charts/histograms etc) on population growth, migration, economic growth, health, education, housing etc. As its far too big for one blog page, its split into 16 blog pages. Start at the first one. There should be a link at the end of each page to the next one. Its literally just hot off the press (this is first time a link to it has been sent) , so not tested on different web browsers. It works beautifully on mine, which is Internet Explorer. Heaven forfend, but it might come out as total rubbish with another browser. Hope not. Also, haven’t had time to experiment with font types, colours etc, so may change these. A confession: its not properly finished. If it was a piece of academic research, I’d spend another week polishing it off. But, that would be pointless in the circumstances (referendum on Thursday). I’ve been up all night trying to polish it off, but still lots of typos, a few gaps in narrative (very irritating for reader), and a couple of graphics charts broken. But, 95 per cent is ok. I’ll be working on it today trying to polish it off better. If you support ‘NO’ in Scottish referendum and believe in the United Kingdom like Bob Geldof does, please don’t read. It will be bad for your health. If you support a free Scotland, maybe you can send the link to any contacts you have in Scotland. What struck me most about Professor O’Hagan’s contribution was the following comment on the role of the economics profession. “All democracies are flawed to an extent and economic debates are often fraught and misinformed, Ireland over the last six years being no exception. It is worth remembering therefore that economic policy is exercised in the political market place, and will continue to be so in the years ahead. Economists may have forgotten their history up to recent times but so also do they often forget that economic policy and politics are inseparable. Having a solution to an economic problem is of little benefit if the political system cannot be assured of delivering on it without risking major instability, thereby exasperating the difficulties.” (The contrast with Paul Krugman’s uninspiring piece – also in the IT today – on the same topic may be noted). In the lead-in to the budget, the paradox is that nothing much other than the political aspects seem to be under consideration by the commentariat while the broad hints being dropped by those preparing it suggest that a genuine move to multiannual budgeting on the Scandinavian model is on the cards. It can hardly because there is any shortage of information. http://www.finance.gov.ie/what-we-do/public-finances/medium-term-budgetary-framework-legislation This updated paper on the Swedish experience is relevant. http://www.finanspolitiskaradet.se/download/18.373f439f14832abd2cfe9c6a/1409928058910/Jonung+(2014)+WP+2014-27.pdf cf page 19. “It seems that the most important building-block of the fiscal framework is the expenditure ceiling. Once it was introduced, it put an effective lid on the expansion of government expenditures and programs. Much suggests that it has served as the main instrument for the Minister of Finance to keep the requests from the spending departments at bay. As it is expressed in nominal terms as a fixed sum, the expenditure ceiling has the advantage of being simple to understand and communicate to the parliament and the public. It serves much more as a binding constraint than the surplus target which is defined “over the business cycle”. Such a concept is more elusive as it allows the Government more leeway in interpreting the degree of adherence to such a goal.” (Following the uncertain outcome of the recent elections in Sweden, and the resignation of the current government, it remains to be seen whether the fiscal framework will continue in its present form. Politics rules OK!). @John ‘Son of Dev’ TheOptimist Well done! Saor Alba abu! @John O’Hagan On inter-generational bias …. Agree ‘… largely of our own making …. I dispute the universal ‘our’ – not all partied on high octane cocaine …. yet, I note your comment on Irish ‘universals’ – most of which are regressive. …. and that element not of ‘ a qualified our’ making …. has also been dumped on the Irish Citizenry by The Financial System/Politicos captured by same … On ‘Irrational Exuberance’ – I’ve dumped this construction in the ‘silly bin’ with ‘moral hazard’, ‘contractionary expansion’, ‘the rational individual’, ‘The Purrfect Markets Hypothesis’ and a few more. Best with the book! @DOCM Nothing ‘uncertain’ about the Swedish election; The Social Democrats lead the next Swedish Admininstration. This is the second recent thread to have been hijacked by JtO in his Scottish Referendum campaign. Why does he not start a separate discussion? An article that rankles very deeply. It was all ‘our own’ fault apparently and involuntary emigration appears not to be recognised as a form of protest. As for repeating the mistakes of the 1980s, it was to the eternal credit of the Garrett Fitzgerald led government that it continued to spend money on educating people that had no alternative but to leave the country. The professor sees the “resolution of the remaining issues of the banking sector” as a top priority, while at the same time lamenting the grey power that allocates free seats on public transport to the better off greys. He seems to ignore the reality that the banks were saved to protect the largely grey-owned deposits, and that ” resolution” of the remaining banking issues, is by and large to protect the same grey-owned deposits. He is correct on some issues but seems out of touch with the reality of many young people, in rented accommodation faced with rising rents to protect selected insiders and if working at all, working in contract or fragile employments. The beneficiaries of the recovery are being as carefully chosen as the grunts who bore the brunt of the crisis. A fine on message contribution for Ir Times readers who like to hear the bit that it was all “our” fault. It’s a pity the collective punishment was not shared equally by the same Ir Times readership. @ JTO Good work! Website looks poor though, far too wordy for the tweeting generation. It could be more polished looking too, at the very least loose the green background and awful header. While Prof O’Hagen makes some good points but the piece lacks specifics. Some of us remember Alan Greenspan but what is irrational exuberance? The Budget play is simple enough: the Government wishes to have some money for income tax cuts, impress with a low deficit target and under budget for health costs hoping for tax buoyancy to cover the overrun in 2015. It’s laughable to read that Howlin is demanding health cuts when generic drugs can cost as much as the originals. It took exactly 6 years after the onset of the credit crunch for Ireland to legislate to make it easier to prescribe generic drugs – the State’s drugs’ bill rose from €850m in 2002, to €1.6bn in 2006 and €2bn in 2013. The ESRI said in 2013 that Ireland spends 50% above the EU average per capita on drugs. The social protection budget in the 8 months to August was on target. There are over 460,000 on employment welfare. O’Hagen refers to the need to focus on competitiveness but what’s to worry? Today’s ‘Report Card’ from the Dept of Finance has a nice chart and a caption: ‘Continued competitiveness boost through reduction in unit labour costs with a 20% relative improvement forecast against the euro area average’ Is that really true? The line: “Bringing about major further reductions in unemployment is the great social and economic policy challenge ahead.” gives a better context to the issue of irrational exuberance than banking and debt issues as a return to full-employment would solve these issues but alas there are no details on these challenges – some domestic, some not. @ MH There is little point IMHO in getting down to the details of the forthcoming budget for the simple reason that we do not know what they are and will have to wait for the usual spectacle on Budget day of rabbits being pulled out of hats (two as we are entitled to two ministers for finance). A few glimpses have been vouchsafed by various players. However, the bulk of any budget is made up of recurrent expenditure and any leeway, in reality, exists on the margins (even in small – relative – amounts such as will emerge from the proposal to pay back the IMF loans early and consign ourselves once more to the tender mercies of the bond market to allow us to do so). The really interesting point is whether an overall expenditure ceiling exists or not. A coach and four could be driven through the nominal one on the basis of the legislation actually adopted in December last year. http://www.irishstatutebook.ie/pdf/2013/en.act.2013.0029.pdf It seems to me that the enhanced Stability Pact corset – see details in DOF link – actually creates one (at least for a small member state of the Euro Area!). This must be our best hope. On the issue of overall fairness, it seems that the CSO figures demonstrate that only the top three income percentiles are actually “net contributors” after tax and various social transfers are taken into account, the equivalent in the UK being the top four! How this exercise in auto-elevation is to continue escapes me. Universal benefits (i.e. non means related) must eventually reach a tipping point. There is no sign of it happening. A recent blatant example is the decision to refund €100 – in quarterly payments – to those in receipt of the Household Benefits Package in respect of water charges. At the same time, there is unanimous agreement that the Universal Social Charge should be abolished! If I was looking for an alternative to “irrational exuberance”, it would be “delusional expectations”. @ John Sheehan “This is the second recent thread to have been hijacked by JtO in his Scottish Referendum campaign. Why does he not start a separate discussion?” It’s not possible for ordinary posters to start threads on this blog. In view of JtO’s manifold and occasionally illuminating contributions to irisheconomy over several years, I think he should be allowed the occasional off-piste moment. “… thereby exasperating the difficulties.” Hmmm. He obviously means ‘exacerbating’. How did this escape the editing process in the Irish Times? I like the pithy anecdote though on how he travels free on public transport while children have to pay. Not to mention those paying who earn a fraction of his income. Anytime I bring up this subject among friends or colleagues I am amazed at the hostility to introducing any type of means testing of benefits for the elderly. Even among young people there is tremendous sentimentality regarding elderly people. I once mentioned the example of someone like Michael O’Leary who, when he retires, would be entitled to free travel and one young woman was adamant that he should be entitled to everything free like everyone else. The Oecd reduced its 2014 forecast for US growth to 2%. Economic WTF. Q1 climate change. The irish gov should put money aside for winter and start getting real. @ Elia And this is the result; a major slippage in the social justice stakes! (H/t Ann Cahill of the Examiner). http://www.bertelsmann-stiftung.de/cps/rde/xchg/SID-010D38F8-69F6008F/bst_engl/hs.xsl/nachrichten_122135.htm @ JTO fyi NYT: You can’t feed a family on GDP. The graph says it all. I wonder what a similar graph for Ireland would look like. But I know better than to ask the economists on here to produce one. They’re all too busy trying to spin the public-sector “premium” to the Independent’s liking to bother themselves with how the rich get richer aided and abetted by the state’s attention to more important things like shafting those with special needs. http://nyti.ms/1uEdjFP The Konjunktor is not good at all http://www.ft.com/intl/cms/s/0/677aacee-3cc9-11e4-871d-00144feabdc0.html The OECD revised down its forecasts for 2014 growth for all large economies except India. It expects growth of 2.1 per cent in the US, 0.8 per cent in the eurozone and 0.9 per cent for Japan, downward revisions in each economy between 0.3 and 0.5 percentage points. Well done JohnTheOptimist. My take on it was that we wallowed in misery until we had our tender parts kicked by the EEC. Exposure of the shameful facts combined with incentives from Brussels forced us moaning and ologoning into the twentieth century. We should have shrines all over the country to Konrad Adenauer and Charles de Gaulle. 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