He hasn’t gone away you know…..

Hans-Werner Sinn replies to his critics in relation to Target 2 balances here.  Readers of this blog will undoubtedly draw their own conclusions.  At the heart of his fallacy is the conceptual  absurdity of separate regional credit policies in  a monetary union with perfect capital mobility.

Lending between National Central Banks

See the following contribution here from Hans-Werner Sinn.  It is certainly original but frankly alarmist.  It focuses on the fact that National Central Banks within the euro system are lending bilaterally to each other though without changing the monetary base as a whole.  Sinn jumps from there to draw apparently worrying conclusions:  that these are “forced capital exports”; that they are the counterparty to current account deficits and that “the PIGS would have had a hard time finding the money to pay for their net imports”.

There is not a scintilla of evidence that the private non-bank sector in the PIGS has lost access to normal European financial markets.  If the Bundesbank lends to the Central Bank of Ireland, it does not, in any sense, expand the availability of credit to the private non-bank sector in Ireland.  Similarly, German households and firms do not suffer a credit contraction.  This is, of course, because there is free movement of capital within the single currency area.

The second non-sequitur in Sinn’s article is the association of accumulated current account deficits in the PIGS with these bilateral loans.  Ireland has, of course, a current account surplus so the point is completely irrelevant to at least one of the PIGS.  Sinn notes that Italy has not availed of these inter NCB loans, despite its current account deficit, but mistakenly attributes this to virtuous policy on the part of the Italian authorities!  It is of course because Italy so far has not yet suffered from a banking or sovereign debt crisis.  And for no other reason.

My suspicion is that Target 2 credit is ultimately guaranteed by the ECB: that the Bundesbank loans to the Central Bank of Ireland should be considered as contingent items on the ECB balance sheet.  In short, that Target 2 credit is simply a mechanism for implementing ECB policy.  But I remain to be corrected on this.

Why bother investing in Ireland?

I have been disappointed but not surprised by the lack of comment on Edgar Morgenroth’s  blog about the threat to introduce a low rate of corporation tax in Northern Ireland.

We are all well used to IDA shibboleths about the Republic of Ireland’s advantages other than the low Corporate Tax rate.  We are told about the modern infrastructure, the well educated labour force (sic), EU membership and the fact that the Republic of Ireland is English- speaking.  Northern Ireland has all of these as well as a dramatically lower cost base: we’ve even stopped killing each other in large numbers. 

The UK already has generous R&D incentives and intellectual property incentives are already trumped by other European countries such as the Netherlands. The Republic’s only remaining advantages may be its sovereign ability to skate close to the wind of tax haven status: relaxed rules on transfer pricing, absence of controlled foreign company laws, limited rules on thin capitalisation and its skill at negotiating double tax treaties.

Is that all the Republic has?  Surely, I’ve missed something!

A Call for a Public Retraction from Garret Fitzgerald

In the last 2 years or more, serious academic economists such as Morgan Kelly, Karl Whelan and other contributors to this blog have been subject to a campaign of anti-intellectual abuse by the ‘leaders’ of public opinion in Ireland.  The ad hominem attacks on Brian Lucey were unforgiveable.  Some of these opinion formers (those who work in the financial services sector) may shortly be unemployed.  Those who remain should be shunned, certainly by academics.

However one name sticks out – former Taoiseach Garret Fitzgerald.  Let me make my personal position clear: I can think of almost no one in Irish public life whom I have admired more. Let us not also forget that he served as a faculty member of the economics department in UCD for part of his career.  Consequently, his “gratuitously condescending comments….. regarding the NAMA dissenters”, to quote Kevin O’Rourke earlier today, were particularly puzzling.

Garret, I know you have the dignity to restore your reputation.  Now do so.

Poverty of Irish Academia

I’ve just recovered my composure after reading the following article in today’s Irish Times.  Its entitled “The top 100 best-paid in education” and is available here.

It should not have surprised me that all 100 are essentially full-time administrators.  The salaries of research professors all seem to be subordinate.  This contrasts sharply with UK universities (let alone US institutions)  where serious salaries are paid to top research talent.  Tell me I’m wrong: otherwise I’ll start sending food parcels to my separated brethren in the Republic.

Cuddly Lenihan

The BBC has been leading its bulletins this morning on the latest statement by Minister Lenihan.  He gave an extensive interview on the influential Today  programme on Radio 4.  Listeners can make their own assessment of its tone by listening to it at http://news.bbc.co.uk/today/hi/today/newsid_9047000/9047087.stm

You might be alarmed to learn that the BBC headlines the interview on its website as “Lenihan: Ireland ‘can’t print money'”.  Is the Minister restarting his midnight visits to Dave McWilliams gaff?

Whelan on Ricardian Equivalence

I’m constantly surprised by the naivety of opponents of Ricardian Equivalence.  There are indeed many reasons why it may not hold. Some of these have already been mentioned in a previous post.  I can add another to the list: hyperbolic discounting. 

In addition, the difficulties associated with econometrically testing the proposition are almost intractable, mainly because of endogeneity considerations.  What is certain is the near impossibility of isolating a particular policy episode and conclusively asserting that it does or does not amount to an expansionary fiscal contraction.

Nevertheless, none of the arguments against Ricardian Equivalence are sufficient to enable us to conclude that there is no tax discounting whatsoever.  Such a view cannot provide “a valuable theoretical baseline”.   The same remark applies to policy.   Otherwise, the sort of spiralling sovereign debt burden, which Ireland is currently experiencing because of the bank bailout, would have no welfare implications because it would not affect private behaviour.

The New Development Economics

The current issue of the New Yorker has a profile of Esther Duflo.  In the article, the views of Angus Deaton on the limitations of randomised controlled trials are assessed as wondering if “someone put sand in Angus’s toothpaste”.  Readers will find the offending substance here. 

You will undoubtedly  make your own assessment of the following direct quote from Duflo in the New Yorker piece:  “I want a baby goat” she mused.  “I’ll take good care of it”.

Quality of Irish Economics Departments: it’s neither Size nor Youth that counts

Look at http://www.rae.ac.uk/results/qualityProfile.aspx?id=34&type=uoa

These are the economics results for the most recent Research Assessment Exercise for the UK.

The first numeric column reports the number of staff returned in the subject for each institution: UK departments are comparable in size to many Irish ones.  On the same website, one can browse to a narrative for each department: each institution is specifically required to comment on early career researchers.  Like some Irish deparments, many UK departments are also developing new talent.

Now compare their position in the Tilburg ranking https://econtop.uvt.nl/   to Irish departments. 

Everyone still happy?

Depressing State of Irish Economics Departments

Tilburg has produced a ranking of economics departments for the whole world.  See https://econtop.uvt.nl/ .  It is based on journal publications since 2004.  The nice aspect of this website is that you can change the ranking yourself by including the journals that you like and excluding the ones that you despise.  No matter how the cookie is cut, our economics departments are abysmal.

Low Quality of Irish Universities Confirmed

I’ve been patiently waiting for a response to, or even a report in Ireland of, the  publication of the 2009 Shanghai  Jiao Tong Academic Ranking of World Universities.  See http://www.arwu.org/indexs.jsp.  Could this possibly be a case of socioanalytic denial? 

This is by far the most widely used ranking in the world for three reasons.  It is almost impossible to ‘game’. It is used as an information tool by internationally mobile students.   It is designed to honestly assess the evolution of the relative position of Chinese Universities: we know it’s honest because they don’t score well.  

There have been enthusiastic references in the Irish media and in this blog to other university rankings.  This is because some Irish universities appear to be important in these.  But you should be suspicious: they also rank many British universities well above obviously superior US institutions.  The apparent success of some Irish Universities is a by-product of this ludicrous outcome.

Go on:  check it out.  Has the Portarlington Institute for Science and Society got the recognition it deserves?

The Northern Ireland economy

As far as I know, there has not been a single blog relating to Northern Ireland since The Irish Economy blog began earlier this year. Northern Ireland is having a relatively good recession for various reasons on which I do not wish to dwell. However, it has serious long-term problems which have been addressed in a report commissioned by the devolved economy Minister. The report is available here. What will interest readers of this Blog was that 4 out of the 5 report authors are economists, of which I am one.

In essence, the Northern Ireland economy has operated under wartime conditions for nearly four decades. Public sector output amounts to around 60% of gross value added (the regional equivalent of GDP). More specifically, industrial policy has consisted of providing large scale grants to both inward investors and indigenous firms. This has been partly successful: employment growth has been high in the last decade and at the peak of the recent boom, the unemployment rate was hovering just above 4% as in the Republic of Ireland case. What was different was that productivity growth was low to non-existent. Consequently living standards have not converged on the UK and have diverged markedly from the Republic of Ireland and other successful countries.

Continue reading “The Northern Ireland economy”