Faith versus evidence

Michael Hennigan continues the debate on research funding in today’s Irish Times.

Research funding is good, but so are decent primary schools, a decent health service, and many other things. From what we read in the papers, it seems likely that the state is going to cut social welfare payments this winter. Against that background, vested interests seeking state money need to carefully justify their demands for public funding. If the argument people are making in favour of university research funding is economic, then we are entitled to expect rigourous cost-benefit analysis of some sort from them, rather than the faith-based appeals we generally get.

(My own view, for what it is worth, is that academics are very foolish if they allow the argument in favour of university research to become an economic one. If that argument becomes generally accepted, then the most important research funding which any of us receives — that is, the portion of our salaries not related to teaching, which allows us to study whatever we want, including such arcana as economic history — will presumably come under scrutiny, in which case it will be time to pack it in.)

More generally, Ireland is a small open economy, and we are only ever going to make a vanishingly small contribution to pushing back the world technological frontier. Does it not follow that the priority here should be on innovation policy — helping companies apply best-practice technology — rather than on invention policy — creating the best-practice technology ourselves? In order to evaluate such a proposition, I guess you would need empirical evidence on inter alia the extent to which new technologies are geographically mobile.

As a final note, I am pleased that Michael picks up on the utterly embarrassing references to Stanford we heard earlier in the summer.

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.

Competitiveness Benchmarking Report

The NCC has released its benchmarking report (you can download it here).

The National Competitiveness Council (NCC), which reports to the Taoiseach on key competitiveness issues facing the Irish economy, today published its Annual Competitiveness Report: Volume I, Benchmarking Ireland’s Performance. The report provides an assessment of the competitiveness strengths and weaknesses of the Irish economy relative to competitor countries.

The Irish economy is experiencing a rapid and painful adjustment to the bursting of the property bubble, the international financial crises and the downturn in world trade. As a small, open and competitive economy, Ireland prospered from an export boom driven by globalisation and investment in the 1990s and early 2000s. In recent years, strong growth in the domestic economy, driven by housing and consumption, replaced exports as the key driver of growth. Though economic growth rates remained strong, our international competitiveness weakened as the domestic boom increased the costs of doing business here and as reforms to improve competitiveness were delayed.

Continue reading “Competitiveness Benchmarking Report”

Crass and Ill-Informed Opinion on Science?

Professor Luke O’Neill of TCD reckons that the recommendation of the Bord Snip report to cut €100 million from our state-funded scientific research budget is “crass and ill-informed”.

Professor O’Nell is obviously a man who only puts forward well-informed opinions. For that reason, I was interested in his statement that

it is also well known that investment in basic research, as well as being an investment in what economists prosaically call human capital, pays back on average three to one in the long run. What other sector that the Irish government funds can boast such a return?

Funnily enough, well-known facts are sometimes the trickiest to actually find evidence for.

I’m willing to be pursuaded that Professor O’Neill’s well-known fact is actually a fact. I’m even willing to be pursuaded that it’s well known. But I’ll need some help here—can people tell me the source of this well-informed opinion and whether this source applies well to Ireland?

Where are the Wage Cuts?

Q1 Earnings data were published by the CSO ten days ago, and I’ve only just got around to having a look at them. The data refer only to Industry (Manufacturing, Mining & Utilities) and Financial Intermediation; the new Earnings, Hours and Employment Costs Survey on which these data are based also collects for Construction and Distribution and Business Services, but data on these sectors haven’t been published yet, so the most up to date figures for these refer to December 08.

I went to look at the data because I had a hunch that earnings cuts were being driven by flat hourly pay and falling hours.

I was concerned about this as it seems to me that hourly earnings are more important than weekly earnings for competitiveness – where hours of work have been cut, and earnings have fallen only for this reason, we should see this being reversed if and when demand picks up again, so this won’t result in a long term improvement. (It is possible that the recession has allowed employers to reduce overmanning/featherbedding and that this will be a permanent effect on productivity, but I doubt if that’s the main story.) 

In any case, I was wrong: the flat pay just doesn’t seem to be there. In fact, the short answer to the question in the title is: in Financial Intermediation and Mining. Everywhere else, there are wage rises.

For industrial workers, average hourly earnings rose by 5.9% from Q108 to Q109. This figure includes bonuses and overtime payments. Weekly hours fell by 2.4%, though, so the increase in average weekly earnings was just 3.4%. Within industrial workers, weekly earnings of those in Mining fell by 8.1%, but this was entirely due to a fall in hours of work, with hourly wages actually rising by 1.5%.

Within Industry, a breakdown by occupational category is also given. Managers & professionals’ hourly pay rose by 3.5%, and their weekly pay by 2.9%; Production workers’ hourly pay rose by 5.2%, weekly by 1.2%; only Clerical workers’ pay has fallen – the hourly figure is down by 0.9%, and the weekly is down by 1.2%. Interestingly, the reason the headline figure – the +5.9% I mentioned above – is higher than any of these occupational category components is because of a pretty big shift in the composition of workers –  the number of Production workers has fallen by 12.3% whereas the number of Managers has risen by 2.1% and the number of clerical workers by 1.9%. So the proportion of chiefs has risen.

For Financial Intermediation, average earnings have fallen, and all the action is in bonuses. Hourly base wages have actually risen by 5.4%, but bonuses fell by 65% between Q108 and Q109. The average bonus was 30.6% of base salary in Q108 but ‘only’ 10.1% in Q109. Because of the collapse of bonuses (relatively speaking – the average industrial worker got a bonus of 7.4% of base pay in Q109), average total hourly earnings fell by 11.1% and average weekly earnings fell by 12.7%.

As I mentioned, CSO hasn’t published the Q109 figures for Construction or Services yet. But the figures for Q408 compared to Q407 showed that while average weekly pay in Construction was down 2.4%, average hourly pay was up 2.3%; and in Services, weekly earnings were up 3.1% between December 07 and December 08. No hourly figures are given.

It all seems a far cry from the heady days of April, when very large nominal pay cuts in the private sector were being discussed in the media. In a post on this blog, Colm McCarthy tentatively concluded, on the basis of some private surveys, that “[B]earing in mind the different periods covered, it looks as if the private sector pay cut overall, allowing for the small number paying increases and the larger number of freezers, has already reached 6 or 7%”. I was sceptical, but thought that 3% was quite likely.

Is it the case that Industry alone is escaping pay cuts and that when the Q1 figures come out for Construction and Services, the numbers will add up to substantial nominal cuts? Or were we just dreaming? Did we just want to believe that Irish workers were proving very amenable to the kind of cuts needed to improve competitiveness? Or is there some other detail of the data that I’m not appreciating that’s masking the truth?