Learning from the Financial Crisis: Globally and Locally

Colm McCarthy’s suggestion that an inquiry into what went wrong is gaining some level of support in political circles.  While there is plenty of material to digest in terms of what went wrong locally, there is also a lot of interest in understanding what went wrong in the international financial system.  Part of the debate concerns the role of economists, especially in terms of forecasting such crises.

A reader recommends this blog post which is critical of mainstream macroeconomic models.  Of course, Willem Buiter of the LSE issued a notorious critique a while back.

More recently,  a group associated with the British Academy wrote a letter to the Queen to answer her question to Luis Garicano of the LSE as to “if these things are so large, how come everyone missed it?”, while Robert Lucas defended mainstream macroeconomics in the Economist magazine in this article.

An important dimension of this debate is the relative roles of economists in policy organisations, the financial sector and academia in assessing the risks of a crisis and speaking out on these risks. While some of the debate has focused on the role of academic economists, it is maybe more difficult to evaluate from the outside the performance of economists in policy organisations in providing risk assessment, since their advice is often confidential.   In this regard,  the external evaluations of the performance of the IMF in previous international crises sets an interesting precedent, with the Independent Evaluation Office now playing this role on a regular basis.

In relation to Ireland,  the testimony of Kevin Cardiff of the Department of Finance at a recent Oireachtas Committee hearing is quite interesting in explaining the evolution of the thinking of the Department in the run up to the crisis.  You can read the transcript here.

Tilting at windmills

In considering how to value land under current economic circumstances answers may turn up in unexpected places. One of the most important state regulatory authorities, the Commission for Energy (CER), has taken the plunge and revised down their assumed value of land. In this case it is the site procurement cost for windmills. My colleague Laura Malaguzzi Valeri pointed me to page 41 of their document on Fixed Cost of a Best New Entrant Peaking Plant & Capacity Requirement for the Calendar Year 2010 where they say:

 “Due to the significant movements in the economy over the last year, the value of land has reduced. An independent assessment was carried out on current land values, and the RAs are satisfied that the estimate for 2010 is an reasonable reflection of the current costs.”

As a result, they have revised downward the value which they assume by 63%.

Because wind producers are price takers on the competitive wholesale market this will not affect current electricity prices. Nonetheless, the fall in land prices should reduce the long-term cost of producing wind energy, with beneficial effects for consumers.

If NAMA want to read up on the details of this valuation it can be found at:

http://www.allislandproject.org/en/capacity-payments-consultation.aspx?article=f6ff1ea8-5f01-416d-a863-cb945a3d71d9

Norman Glass

Readers of this blog might recall my support for the establishment of something modelled on the UK Government Economic Service.   I was sad to hear of the passing last week of a great Irish economist though perhaps one of the least known – Norman Glass – who was in many ways one of the architects of the GES.

The Guardian obituary is at http://www.guardian.co.uk/politics/2009/jun/29/obituary-norman-glass

Norman was a pioneer in economics within policy circles.   He was the first economist in the UK Department of Health for example in the early 1970s.   But it was his time at the Treasury where he really made his impact, becoming in effect the Chief Microeconomist and the driver of the microeconomic revival at the Treasury during the early days of Blair and Brown particularly in the aftermath of the Bank of England independence move.  The development of the working families tax credit, the innovations in linking labour supply policy and welfare strategies, major initiatives in education and health – Norman was central to all of these moves and to the early success of the ‘New Labour’ era.   Norman also developed an interest in the early skills formation agenda, designing SureStart (and later became a vocal critic of what the UK Government did with that programme in letting it become bloated and without direction).   On retirement from the Treasury he went on to lead NatCen, perhaps the largest and best social research company in Europe.

Norman was a complete gentleman, quietly interested in what went on in Irish economics, hugely supportive of students and researchers who made contact with him.   He is also perhaps amongst the most influential Irishmen of the late 20th century, albeit also one of the most modest and ‘backroom’, completely anonymous in his homeland.

I thought it might be interesting to readers to learn about Norman, but in passing I can’t help but think that as we face up to the consequences of terrible decisionmaking in economic policy over the past 15 years or so, and how little evidence there is of clever thinking in economics within the Irish civil service, one of the most important figures in policy decision making and in creating the infrastructure for economics in Government in the UK system, was an Irish economist.   Knowing Norman, I suspect he would have found that funny too!

Political Science Fights Back

There is a consensus that the practitioners and discipline of economics have been key beneficiaries of the financial and fiscal crises.  The views of leading economists as to where we are and what we should do are widely sought across the media and within government. A conference organised at TCD earlier this week on the issue of political reform was part of a deliberate effort by political scientists to demonstrate the relevance of their discipline and the Irish Times has been publishing opinion pieces and articles drawing on the conference . Earlier in the week UCD’s John Coakley argued that informal institutions (in the form of political culture) have significantly shaped (and restricted) the state’s capacities. Today’s piece by Neil Collins of UCC argues that there has been a striking neglect of the potential of formal institutions in shaping effective governance. He concludes that ‘It is time for a rebalancing of academic attention from the economic to the political agenda.’

As an outsider to both disciplines it is striking that both have a good deal to say about the way that institutions matter in shaping both expectations and capacity for action. I am led to think that if a rebalancing is required then it might be towards thinking more about the way that formal and informal institutions limit what can be achieved (and deliver unintended consquences), but that a better understanding of those limits might support modest reform proposals which more effectively link the specification of desirable outcomes to the mechanisms through such outcomes might be reasonably be expected to be achieved.

Nineteenth century Irish economics

Brad gives Mountiford Longfield the nod.

You might view the accolade as underwhelming, but I suspect most of us would be both delighted and astonished if anyone were still reading us more than 170 years from now.