The Irish Economy

Rui Esteves discusses nineteenth century Greek debt crises here.

… happy!

So I thought I would share my thoughts on how the Irish are faring on this front.

Kevin O’Rourke delivered a hugely insightful talk on the crisis and the global situation at a conference in Dublin last week. His presentation is here.

I was asked to write this chapter for a forthcoming RIA volume on Irish foreign policy. A summary:

A country’s foreign policy is largely driven by what it perceives to be in its economic interests. That this does not provide a complete picture is evidenced by the fact that Irish development assistance has never taken the form of tied aid. Nor can the influence of powerful vested interests be discounted. A case can be made that Ireland turned protectionist again once membership of the European Union had been achieved. Agricultural and sheltered-sector interests have sought to stymie the liberalisation efforts of the WTO and the European Commission respectively. A further complicating factor is that a society’s own economic interests can occasionally be miscalculated. Joseph Lee has noted that “while the ‘political’ skills of Irish representatives in negotiating positions are widely acknowledged… there seems to be no comparable criterion for assessing the calibre of conceptualisation of the Irish case.” Irish foreign policy through the years has nevertheless recorded many successes in defending the economic interests of the citizens of the state.

The paper considers the political and economic determinants of Irish trade policy, the evolution of its inward foreign direct investment strategy, and the country’s position on international migration and on the broadening and deepening of European integration. A separate case study focuses on how successive governments have sought to defend and exploit the advantages of Ireland’s low corporation-tax regime in international negotiations.

Paul Krugman is upset about some pretty fanciful accounts of what supposedly happened during the Great Depression, and I don’t blame him. He also wonders whether economics is a progressive science (I am using the word ’science’ in its German sense). Well, one of the things that philosophers of science have argued about in the past is whether, when you have a paradigm shift, you end up losing knowledge, and it’s pretty clear what has happened in this instance.

I recently came across this quotation from Mark Blaug’s 1980 book on the methodology of economics which seems worth quoting, given when it was written:

At this point, it is helpful to note what methodological individualism strictly interpreted…would imply for economics. In effect, it would rule out all macroeconomic propositions that cannot be reduced to microeconomic ones, and since few have yet been so reduced, this amounts to saying goodbye to almost the whole of received macroeconomics. There must be something wrong with a methodological principle that has such devastating implications.*

Now, as Krugman points out, this ain’t necessarily so. (See his point 5 in the last of the three links, and see this paper for an example of how you can have all the theoretical bells and whistles these days and still make a sensible argument.) But there is no doubt that a lot of people have been more than happy to say goodbye to the whole of received macroeconomics — for example, I have been reliably informed that a well-known department stopped teaching its undergraduates IS-LM just before the crisis hit in 2008. And the result is that you had people seriously peddling the line that austerity would be expansionary in the wake of the biggest downturn since the 1930s — and these claims were influential in Europe, it seems clear, in the fateful spring and summer of 2010.

One lesson is that it is one thing to play counter-intuitive intellectual parlour games in order to get tenure at a fancy university, but another thing entirely to say something about the real world. For that you need a little common sense.

Another lesson is that economists need at least some training in economic history. No-one with the slightest feeling for historical reality could believe that the Great Depression was due to supply side forces, for example. I observe that Krugman, along with such luminaries as Maurice Obstfeld and Ken Rogoff, did his graduate work in MIT, and I surmise (without having any inside knowledge on the matter) that all three were exposed to Charlie Kindleberger and Peter Temin. They are all distinguished theorists, but also have a historical sensitivity, and this makes them better economists — if your definition of a good economist includes the ability to say sensible things about our very messy real world.

One of the most important things that a bit of history gives you is a sense of the importance of context. A model will work very well in some technological or institutional contexts, but not in others. For example, the Reverend Malthus devised a model that did a pretty decent job of describing the world up to the point that he started writing, but which soon became essentially irrelevant in the century that followed, at least in the richer countries of the world. (He had an economist’s sense of timing.) Sometimes the world is well-described by Keynesian models, and sometimes it is not. And so on.

If the only thing that economic history did was protect us from one-size-fits-all merchants, it would still be worth the price of admission.

*I am looking at the 2nd edition, published in 1992, but I am betting that this sentence dates from the 1980 edition.

I did my bit for Irish service exports the other week, organising the 9th conference of the European Historical Economics Society in the fabulous Guinness Storehouse. There were a couple of plenary sessions, one of which was a roundtable on the causes of the Industrial Revolution, featuring Bob Allen, Nick Crafts, Deirdre McCloskey, and Joel Mokyr. There was also a keynote speech by Bob Allen on the causes of wealth and poverty. Karl Deeter very kindly came along and filmed the two events, and you can find the videos here and here. My sincere thanks to Karl.

I’ve seen various explanations for the 2008 crisis: global imbalances, dodgy financial innovations, lack of proper financial supervision, the interaction of all of the above. And a few others besides.

But this is a new one to me, I must confess.

Kantoos is a German blogger who occasionally posts in English; he has a thoughtful response to an earlier piece by Ryan Avent here.

(I would add two comments. First, that when people talk about fiscal union they can mean many different things. And second, that we already have the politically noxious conditionality which Kantoos is worried about.)

Tony Wrigley has posted a short introduction to his work on the role of energy during the Industrial Revolution, here.

This post is well worth a read, if necessary using google translate. It essentially takes the well-known point that moderate inflation can be beneficial in that it helps downward real wage adjustment, in circumstances when this is necessary; and extends this to the context of real exchange rate adjustments in a diverse currency union. It also cites some supportive evidence from the history of the classical gold standard, courtesy of Flandreau, Le Chacheux and Zumer.

Kevin Myers had a piece in the Indo on Norman names the other day; here is a link to the underlying research, by Greg Clark.

One of the things that has always marked out economic history as a subfield within economics is its focus on the economics of technological change. The Habbakuk thesis held that the high wage environment of the United States helps explain the nature of that country’s technological progress in the 19th century, and Bob Allen has recently argued that high wages and cheap energy are key to understanding the British Industrial Revolution.

I was pleased to see John Bruton referring to this in his recent LSE speech.

Since this is the weekend, here is another example of directed technological change (or at least, such is Roger Cohen’s interpretation), this time from Denmark.

This is an addendum to John McHale’s last post and a response to JTO’s plea for more real data on this site. Below is a consistent series (based on CSO data) for the net migration rate from 1961 to 2010.  The net flow has been expressed as a rate per 1,000 average population. The years are to end-April.
We await with great interest the results of the 2011 Census, which will give us a fix on the migration trend for the year ending April 2011 and allow the estimate for 2002 to 2010 to be updated. 
Preliminary Census results should become available by the end of the summer.

Readers might be interested in this analysis of the (bureaucratic and electoral) politics of the introduction of export profits tax relief in 1956, available here. The abstract is as follows:

T. K. Whitaker and Seán Lemass are generally credited with effecting the policy shift from protectionism to outward orientation. Ireland’s low corporation tax regime, however, has its origins in the export profits tax relief (EPTR) measures introduced by the second inter-party government in 1956. EPTR was introduced at the behest of the Department of Industry and Commerce in the face of long-standing opposition from Revenue and the Department of Finance. Industry and Commerce at the same time successfully thwarted the desires of the Taoiseach, the Department of Finance and other state agencies to have restrictions on foreign ownership of industry repealed. These apparently contradictory positions were rooted in the historical legacy of protectionism. The inter-party Taoiseach, John A. Costello, downplayed the connection between EPTR and foreign investment in an apparent attempt to deprive Fianna Fáil of an opportunity for controversy. Its introduction hastened the end of Fianna Fáil prevarication on the issue of foreign ownership.

The importance of the intense electoral competition of the period is also frequently ignored in accounts of the policy shift towards outward orientation. Following sixteen years of unbroken Fianna Fáil rule, the next four general elections brought four changes of government. Along with the depth of the 1950s recession, this forced Fianna Fáil into a comprehensive reexamination of its industrial strategy. The economic thinking of the major political parties co-evolved, and many of the institutional innovations of the period, including the Capital Investment Advisory Committee, the Industrial Development Authority, the early Córas Tráchtála, and, of course, EPTR, were the result of inter-party government initiatives.

The defeat inflicted on Finance by the Department of Industry and Commerce partly motivated Finance’s work on Economic Development, the 1958 publication of which was important in providing political cover for Fianna Fáil’s U-turn on overall economic strategy.

Even the Taiwanese are making cartoons about us (HT Gideon Rachman).

This is about the 1930s!  UCD historian Mary E. Daly and I have just concluded a draft of our paper examining how the Great Depression was perceived in Ireland at the time.  The paper is purely historical and makes no attempt to draw any parallels with the current situation.  It might nevertheless be of interest to some readers.  It is available here.

The Irish State Administration Database was launched last week at an event which formed part of the Innovation Dublin festival. The Database was developed by an interdisciplinary team working in the UCD Geary Institute, led by Dr Niamh Hardiman of the UCD School of Politics and International Relations, with funding from the Irish Research Council for Humanities and Social Sciences. The searchable Database records details of births, marriages and deaths of all central stage agencies (including government departments) since the foundation of the State in 1922. Avid agency watchers can study the growth in agency numbers to their peak in 2008 and subsequent modest decline. The Database shows that there are currently 350 central state agencies. However, the rich data can be mined in other ways, enabling users to look at trends by reference to such characteristics as function (eg delivery, trading, regulation, adjudication), policy domain (eg health, education, transport), and legal form (eg statutory corporation, public company, company limited by guarantee). Some further information about the Database can be found here. Users need to register here to use this free resource. There will a be hands-on demonstration of the Database on 23 November, 3-5pm, in Room G-5, Daedalus Building, UCD Belfield Campus, with an emphasis on the range of potential applications. This event is open to all but requires advance booking with mary.shayne@ucd.ie.

I don’t agree with everything in this article, by any means, but it is thought-provoking and topical. And I definitely agree with the authors about the brilliance of Albert Hirschman.

Besides, it gives me an excuse to post a link to this piece from April.

This is a very useful primer on interwar protectionism by the leading historian of US trade policy. (I had never heard of ‘Smoot Smites Smut’, which is worth the price of admission alone.) Although Doug could have usefully mentioned that the biggest costs of protectionism then were geopolitical, and those ended up being fairly catastrophic.

Economists sometimes assume that the right way to talk about protectionism is to moralize. I prefer analyzing the causes of protectionism: it may be a very bad idea, but sometimes, in democracies, it becomes inevitable. Doug, in a manner reminiscent of Adam Posen, argues that expansionary monetary policies in the US are a good way of keeping the protectionist wolf at bay there right now. The same logic applies to Europe as well.

Barry Eichengreen and Peter Temin have written classic accounts of the Great Depression. If you haven’t read Golden Fetters, and Lessons from the Great Depression, you should.

But if you don’t have time for that, they have a piece on Vox which reprises the main conclusion of their work:

an international monetary system is .. a system in which countries on both sides of the exchange rate contribute to its smooth operation. Actions by surplus countries, and not just their deficit counterparts, have systemic implications. They cannot realistically assign all responsibility for adjustment to their deficit counterparts.

This is as true for EMU and “Bretton Woods II” as it was for Bretton Woods, or the Gold Standard, but it is a lesson that at times seems to have been completely forgotten.

The literature on the Great Depression throws up some curious parallels and contrasts to today.

From Kindleberger (The World in Depression, 1929-1939, p. 194):
“In the electoral campaign, Roosevelt charged Hoover with total responsibility for the depression. It’s origin, he said, was entirely within the United States… Hoover, in reply, insisted that the depression had originated abroad.”

Also from Kindleberger, p. 139:
“The Unemployment Insurance Fund, being in deficit, had to be made up by the German government, which thereby suffered a budget deficit. The Socialist Party proposed raising contributions to the fund by a 4 per cent levy largely on government officials, whose contracts provided protection from unemployment.”

In Ireland, the first Fianna Fáil budget of 11 May 1932 included a tax amnesty for those with undeclared overseas accounts.

The settlement would enable them to resolve any outstanding liabilities by paying 75 per cent of the amount owed in outstanding taxes on foreign holdings from 1914 to the present, with no penalties or interest charges.
(Dáil Éireann - Volume 41 - 11 May, 1932 - In Committee on Finance. - Financial Resolutions—Minister’s Statement.)

Ronan Fanning’s book on the Department of Finance, pps. 233-4, reveals that the same government hoped to but failed to cut public service pay.

“This proved a difficult process and the reductions were widely resisted by public servants, including the senior civil servants that the government relied on to implement its policies – some , whose tenure predated the state were threatening to take early retirement under a clause in the 1921 Treaty. The proposed cuts were targeted at higher-paid public servants – including Government ministers. This dispute suggests a strong division of opinion, with the farming community very much in favour of cutting the cost of public services. One minority report to the report on this topic concluded that:

‘Even at the reduced rate there are many competent people who would gladly exchange places with public servants for the next ten years. The discontented State Servant would derive much benefit from a sojourn in the beet fields of Leinster, the cow pasture of the Kerry hills, or turf banks of the Bog of Allen for £1 a week’.”

Keynes’ famous lecture on economic experimentation, delivered at UCD in April 1933, has recently become available online.

Economic history has lost two giants in the past month: first François Crouzet, and now Angus Maddison. Maddison was a larger than life character and a committed Hibernophile who will be impossible to replace. Both men will be greatly missed.

Paul Krugman and Robin Wells have a lengthy discussion of Reinhart and Rogoff here.

Barry and I have updated our graphs here.

To recall: the red lines show what happen when governments respond to a worldwide economic crisis with monetary and fiscal stimulus. The blue lines show what happens when governments stick to monetary and fiscal orthodoxy. All very purgative and morally satisying no doubt, except that it led directly to the election of Adolf Hitler (something that I have been meaning to blog about for a while, but now I have to prepare for class..)

A reader has pointed me towards this nice post by Michael Pettis, which strays from his usual Chinese turf to take a look at Europe. It makes the same points as the ones Martin Wolf has been making about the need for the large countries with ‘fiscal room’ in the Eurozone, particularly Germany, to do everything they can to maintain aggregate demand in the Eurozone.

This should be obvious to anyone with an understanding of intermediate macroeconomics, so I won’t comment on it. But Pettis also cites Barry Eichengreen’s classic Golden Fetters, which readers may not be familiar with, and in particular Barry’s views on the implications of democracy for the maintenance of the gold standard. That system required adjustment through deflation for countries suffering negative shocks. This was not necessarily a problem in the 19th century, when wages and prices were flexible, and universal suffrage was rare. By the 20th century, however, rigidities in the economy were such that deflation implied unemployment; and democracy meant that this economic cost translated into a direct political cost for policy makers. The gold standard, inevitably, broke down when confronted with the pressures of the Great Depression.

I don’t think it’s fair to compare the euro to the gold standard, as Pettis does. The ECB has lowered interest rates, not raised them, although not by as much as other central banks; and both the French and the Germans have applied fiscal stimulus to their economies. On the other hand, it is true that adjustment in the PIIGS now implies deflation there (unless, as the FT points out today, inflation in the Eurozone as a whole is increased). This is going to be both economically and politically costly, and will have unpredictable effects, especially if the Eurozone as a whole experiences a double dip recession.

I suspect that Ireland will find these adjustments easier to bear than most, since emigration gives us both an economic and a political safety valve. (That was a positive rather than a normative statement by the way.)

À propos of nothing in particular, I can’t resist posting a link to this.

Will Hutton has an op-ed piece today in the Observer which includes some striking historical charts. These are extracted by a very interesting article by Andy Haldane, Executive Director, Financial Stability at the Bank of England. Haldane’s article is well worth a read, as a simple conceptualization of the long run problems facing financial regulators.

Money quote:

Haldane describes “the latest incarnation of efforts by the banking system to boost shareholder returns and, whether by accident or design, game the state. For the authorities, [these pose] a dilemma. Ex-ante, they may well say “never again”. But the ex-post costs of crisis mean such a statement lacks credibility. Knowing this, the rational response by market participants is to double their bets. This adds to the cost of future crises. And the larger these costs, the lower the credibility of “never again” announcements. This is a doom loop.”

Moritz Schularick and Alan Taylor have written a working paper looking at long run trends in money, credit and financial crises. They summarize the paper here. Several of the papers referenced at the end are worth checking out as well.

That’s how Buttonwood describes the relationship between the banks and government in Britain and America in his/her latest column in The Economist.
The piece goes on to predict:

. . . this leads to an odd symbiotic relationship in which governments have stepped in to rescue the banks, only for the banks in turn to finance the government. In the long run the danger is that this cosy relationship means lending is diverted away from productive private-sector projects and into government spending. Economic growth will be slower as a result.

It seems very relevant to the debate on the Irish banking crisis.