It might be economics, but it's not science

No sooner do I coin a well-received definition of economists, to wit: 

 “…the study of economics is not a science. Note that I did not write “exact science”.It is not a science at all. It is a set of beliefs that are held by individual practitioners and invoked under any and all conditions. Economists are Keynesians, Monetarists or follow the Austrian School in the same way as the devout adhere unquestionably to Mohammed or Christ or L.Ron Hubbard. Economists cannot agree among themselves on the right course of action under any given set of circumstances and they most certainly cannot predict what will happen in the future”. (See "Vincent Browne and the Euro) 

than a group of them comes along and seems to make every effort, in the pages of The Irish Times, to support my thesis.

An article in the paper of record on Friday 6th April and signed by no less than 43 academics, many in economics positions, is entitled “Austerity without growth a guarantee of stagnation”. It points out that a subset of the same group argued, two years ago, against spending cuts and tax rises as a means of dealing with the economic crisis on the grounds that it would kill growth and create high unemployment and debt. The current article seems to be claiming that this prediction has been proved correct, 24 months later. But two years is a mere blip in terms of the time required to create the economic conditions that would come close to being defined as normality.

“The evidence is clear”, they say, “contractionary fiscal policy does indeed restrict economic activity and employment”. This is an example of the kind of wooly thinking that's indulged in by those who have misappropriated scientific terminology. The statement is certainly reasonable, and one could even be persuaded to base policy upon it in certain circumstances. There is however no evidence, never mind clear evidence, in this opinion piece to support it.

The article is unscientific in that it never addresses other, feasible, hypotheses. For example, the proposition that taxes on high income groups actually reduce the tax take because they make it economically viable for the rich to simply remove themselves to another tax jurisdiction. Or that the EU / ECB / IMF solution to current woes - austerity now (but nothing like what the global financial markets would impose on countries like Greece and Ireland if they were to have a disordered sovereign default) to repair and consolidate Euro-zone peripheral economies so that the E-zone as a whole can prosper and grow in the future – might be the correct course of action.

The article could conceivably contain contradiction. At the start it is arguing against tax increases on low and average earners as the means of raising the funds for growth in infrastructure and other labour intensive projects. Less than 800 words later it’s calling for …”taxation targeting high-income groups, property assets, unproductive activity and passive income…”, “…stronger local taxation…”, “…the potential of social insurance and local taxation to broaden the tax base…” and claiming that “…PRSI [another form of taxation] can be expanded and combined with general taxation to provide free (sic) universal healthcare and earnings-related pensions”.  Many hold that all these measures simply trickle down as costs to middle and low earners through market forces.

Definitely not science. The scientific method has no room for ideology, for expediency or for plain, old fashioned, wishful thinking.

Vincent Browne and the Euro

Vincent Browne is one of Ireland's most venerable journalists. He and I will agree on some things and not on others. One area of accord is probably (based on Vincent’s writings to date) the belief that the study of economics is not a science. Note that I did not write “exact science”. It is not a science at all. It is a set of beliefs that are held by individual practitioners and invoked under any and all conditions. Economists are Keynesians, Monetarists or follow the Austrian School in the same way as the devout adhere unquestionably to Mohammed or Christ or L. Ron Hubbard. Economists cannot agree among themselves on the right course of action under any given set of circumstances and they most certainly cannot predict what will happen in the future.

Vincent doesn’t claim, of course, to be an economist although I understand he has standing as a lawyer. His piece (Irish Times Wed Jan 4th 2012), on the possible upcoming referendum on fiscal measures that have been mooted in the context of resolving the debt crises of certain members of the Eurozone, seems to rely on a legal interpretation of the relevant treaties, especially when he claims that no country can be expelled from the Euro zone, and also when he implies that Ireland can veto the proposals and thereby do a “service to all the people of Europe”.

Taking the last point first, we need only look back a short number of weeks to when the British attempted to use their veto to block EU Tobin tax proposals. In short order they found themselves completely circumvented by the other EU states and at the same time pushed noticeably closer to the EU exit door than even the most rabid Euroskeptic could have wished for.

With regard to the existing treaties not allowing a state to be expelled from the Euro, no nations have better illustrated, through history, the adage that there are many ways to skin a cat than the Germans and the French. In the limit, both of these (along with other fiscally responsible states such as Finland and The Netherlands), could themselves opt to leave the single currency and put in place an alternative that would satisfy their requirements. For those left in the rump Euro the effect would be just as devastating as if they were expelled from the original. I cannot tell the future any more than Vincent or an economist can, but history has indicated a high probability that they would be subjected to very high interest rates, including on home mortgages, speculative attacks on the currency that they would not be in a position to defend, an inability to borrow internationally to repay either the amounts owing as a result of the bailouts or for current requirements, and a fall off in Foreign Direct Investment (FDI) due to uncertainty and a lack of confidence in the currency. The rump Euro would also be subject to significant devaluation, which Vincent and others would probably welcome as an aid to exports and tourism, but this also carries a price, and that price is excessive inflation. We would be back, at best, to the situation that pertained in Ireland in the 1970s, when savings and pensions were destroyed and when profiteering was rampant.

Vincent Browne, and all the rest of us, should be very concerned that he might just get what he has wished for.

18 yo boy racers get control of Ferrari

A piece by John Waters in today’s Irish Times seems to claim that Ireland’s acceptance of the Maastricht treaty, which gave us Euro entry along with low interest rates and which tied our economy to those of Germany and France, is the root cause of the fiscal and monetary problems we suffer from at present.

This is a nonsensical, disingenuous argument. France still enjoys triple A ratings on its government debt and Germany has one of the strongest economies on the planet. For a while Ireland, too, had money to burn. Unfortunately, burn it we did.

John is right, though, when he talks of collective amnesia. If we didn’t suffer from it we would remember that, at the time of Euro entry, each country joining had to convince the EU that it had its finances in proper order, by having national debt and budget deficits within set boundaries. It is reasonable to presume that they were meant to stay that way. That the common currency meant we no longer had the ability to devalue our way out of high inflation is not new news. It was drilled into us, over and over again at the time, that this was going to be the case.

It seems central Europe took it for granted, or was convinced by our negotiators, that the Irish government, its Finance department and their economic advisors understood these fundamental economic principles. But it appears they did not.

What happened in practice was that the good old Republic of Ireland went ahead and took advantage of all the nice things that Euro entry had to offer, such as significant trade benefits, defense against speculative attack on our currency, very low mortgage rates (which we abused), elimination of currency exchange costs and risk for travelers to the rest of the Eurozone, pricing transparency for same, an additional incentive for US foreign direct investment into Ireland - and ignored the responsibilities it brought, the most important of which was to control our inflation.

To illustrate the point, imagine what it might be like if a group of eighteen year old boy racers were given control of a souped up sports car, for example a Masarati or a Ferrari, after having convinced the provider that they were actually mature, fully trained, experienced professional drivers.

The sports car in this analogy is the highly tuned European economy that German (and Dutch, and Nordic) prudence and efficiency had nourished over the years since the last war, and which was well known to be predicated on the control of inflation so that it is positive (deflation is also bad) but low.

The supplier is the European Union and you can work out for yourself who the boy racers are.

We broke every rule in the book. 120% mortgages, lending for everything from property development to foreign homes to whatever you’re having yourself. Spending went completely out of control. State capital projects routinely came in so far over budget that the numbers were shocking. We had a banking compliance system that became a global joke. We had a government that bought its way through successive elections without any regard for, and it seems now, no understanding of what an inflation differential between us and central Europe would eventually lead to.

All is not lost, however. We do seem to have woken up and, as everything is relative, we actually now start to look good by comparison to the most errant Euro member, Greece. With a bit of luck this present crisis will allow us to learn by bitter experience.

With a bit more luck we will be allowed to stay in the Euro, despite our demonstration of an embarrassing immaturity when it comes to the most basic economic principles.

And by the way - entering into a mutually beneficial multinational, legally binding agreement, that the other parties expect your country to adhere to, does not constitute loss of national sovereignty, no matter what the venerable Olivia O'Leary says, as quoted in John Waters’s article.

Democratic deficit - what democratic deficit?

In the beginning there were 17 separate currencies where there is now only one, the Euro. This currency unit was set up as a result of the Maastricht treaty, which was democratically tested in Ireland by means of a referendum. The agreement, voted on and passed by the Irish people, included that the common currency would be monitored by the European Central Bank, now known as the ECB.

Monitoring means, and was always understood to mean, ensuring as far as possible the continued viability of the currency and the setting of the interest rate that would be attached to it, which affects most particularly the rate of inflation in the Euro zone and the exchange rate of the Euro against other global currencies.

Sixteen other states of the European Union have a stake in all of this. They were, and are, entitled to assume that ratification of the Maastricht treaty would mean that all member states would abide by the rules by which the common currency was set up, and that all members would accept the oversight of the ECB, which was specifically charged with that task in the Maastricht treaty.

In the olden days if a country found it had allowed its inflation rate, and therefore its competitiveness, to exceed what was prudent, its currency could be devalued either explicitly, or stealthily by market forces. This solution was not available, and was never going to be available in terms of their economic relationships with the other Euro zone states, to those countries that had signed up for the Euro.

All this was known at the outset. It was understood, or should have been understood, by the economists whose job it is to advise the finance ministers and compliance agencies in the various countries. And the same economists would not exactly need to have been qualified to the level of Nobel Prize winners to be able to come to grips with this principle.

What has now happened is that a number of member states of the Euro zone have taken their eyes off the ball to the extent that they have allowed inflation to increase well beyond the rate that has been achieved in some other Euro countries, most notably Germany, so there is now a serious imbalance in competitiveness within the Euro zone. Not only that, but a number of these same countries have either borrowed more than they can afford to repay or have allowed their banks, as in the case of Ireland, to lend too much, cause a property bubble which has burst, and then have their unsustainable wholesale loans guaranteed by the state.

These developments have a direct and serious bearing on the viability of the Euro. Default on sovereign debt by a Euro member state would be devastating for it. However, those Euro zone countries that have been able to keep their inflation rates and borrowings at acceptable levels, such as Germany, France, The Netherlands and Finland, and are now clamouring for the ECB to do its job and bring pressure to bear on these errant members to rectify the situation by living within their means and in other ways acting responsibly, are being accused of contributing to what has come to be characterised as a “democratic deficit”.

I’m afraid I don’t see it, this democratic deficit. Even when Nicholas Sarkozy lashes out at politicians in Italy and Greece in his frustration at seeing some of their number playing local political games with the Euro crisis, it hardly qualifies as an all-out attack on the sovereignty of that state. It might be a call for all concerned, even at this late stage, to live up to their legal and moral obligations as representatives of a country that freely, and democratically, signed up to the Maastricht treaty, and were happy indeed to take advantage of the very significant trading, foreign direct investment inflow, low interest rates, elimination of currency exchange overhead, reduction of exchange rate risk and the pricing transparency benefits of the monetary union that have been there since its inception, and which the prudent and compliant members would like to see continue. Instead of castigating them, we might take a leaf from their book.

Mr. Fintan O’Toole, c/o The Irish Times newspaper, please take note.

Reports on abuse, and The Separation of Church and State

The Irish Times - Thursday, September 8, 2011

Sir, – Many commentators claim the abuse of children and vulnerable adults in the past was as much the responsibility of the State as it was of the churches that managed the various institutions. Thus Dermot Keogh (Opinion, September 6th) writes: “There were many so-called bystanders when crimes were committed against the weakest and most vulnerable”.

It’s not that simple. Because the professions and the wide section of society mentioned by Dr Keogh, including, most notably, the political establishment and the civil service, were in thrall to the Catholic hierarchy, to a level that seems incredible today, there was really no distinction to be made between church and State. There were, therefore, very few bystanders, and none with any power.

Now that we seem to have an appreciation for democracy and the rights of the individual, we should reasonably expect a long overdue separation of church and State. In particular, we need to reclaim our national schools so that children can, at the level of State involvement in their education, learn how to think, rather than what to think, and thereby avoid the possibility of them being subjected to the disastrous indoctrination that was the lot of their recent forebears. – Yours, etc,

SEAMUS McKENNA,

Book review: Anglo Irish Bank as it was going down the tubes

The essential elements of the Anglo Irish Bank story and the rapid transformation of the man who personified it, Sean “Seanie” Fitzpatrick, from a perceived banking genius and darling of the business press to something of a pariah among his compatriots, are well known by all who have even a passing interest in matters financial in Ireland.

It is, however, as always, fascinating to be able to wallow in the gory details of such a tale. Simon Carswell is a Financial Correspondent with the Irish Times. He seems to enjoy access to the means of providing the kind of inside stories which, when linked together, provide a good account of what happened in Anglo, particularly towards the end.

“Anglo Republic” is reminiscent of the book produced some years ago by Carswell’s colleague at The Irish Times, Fintan O’Toole, on the Beef Tribunal and Larry Goodman called “Meanwhile Back at The Ranch”, although the new book somewhat lacks the literary poise and the finely turned phrase of O’Toole’s work.

The book is a page turner when we arrive at what might be described as the heart of the matter, the behind the scenes activities which became more and more fraught as FitzPatrick and his successor as CEO, David Drumm, found they had to deal with massive capital outflows, a rapidly sinking share price and, above all else, the severe problems caused by Sean Quinn’s ultimately disastrous decision to build up a very large secret holding of Anglo shares using Contracts For Difference (CFDs). Here Simon Carswell comes into his own and his confident knowledge of the details is impressive. Whatever faults David Drumm has, it comes across from Carswell’s material that he at least has a sense of humour.

Of course, in order to make a real contribution, a book such as this must offer some insight into the mechanisms that brought about the catastrophe that was the recent Irish economic collapse. There is a general acceptance that the culprit was reckless lending to property investors and developers, which was initiated by Anglo, who were then copied by other institutions when it became the perception that Sean Fitzpatrick’s operation was earning profits that "properly" belonged to the more established banks. This, however, does not deal with the detail, where the devil lies.

This writer saw a presentation by an Anglo Irish banker some years ago, back when they could do no wrong. The attitude of the presenter was that safe and profitable lending was really very straightforward – three things were required: security, the ability to repay and recourse. The irony is that the cocky presenter was probably correct. The real problems arose afterwards in the execution of the strategy when the principle was compromised, in particular by neglect of the third element, recourse, which means that loans should only have been given to those individuals who were prepared to give personal guarantees and who had a net worth sufficient to cover the repayment in the event that the asset which was the subject of the loan, and which normally provided the security, lost its value, and the ability to repay, for whatever reason, disappeared.

What happened in practice was that the usefulness of recourse was lost in two ways. Firstly, it was not insisted on at all in many cases in the later stages of the operation of Anglo and the other banks and secondly, it fell prey to an insidious development which came about because, over time, when it was in place, it depended more and more on a net worth statement that was itself totally made up of only one asset class, property. Then when all property values were destroyed, so were the means by which recourse could be exercised.

Like many publications of its kind, “Anglo republic” could have benefitted from a bit more editing. Certain parts are overlong, such as that dealing with the genesis of Anglo. And do we really need another meticulous, words-of-one-syllable explanation of how contracts for difference (CFDs) work? At the very least this part could have been confined to a notes section at the back of the book. When tables start appearing in the text it becomes reminiscent of a business report rather than a work of history. There is a charming editorial oversight in chapter 12 when the sentence “Horan also spoke to Morgan Stanley himself” appears, referring presumably to a representative of the financial services firm that was founded in the 1930s by two individuals, now long-dead, whose surnames were Morgan and Stanley.

The conclusion arrived at by Carswell is also probably the right one – that the Anglo lenders were lucky for so long that they began to believe that what was really a flawed business model was actually a gilt-edged strategy. And how many of us are guilty of eventually coming to believe our own propaganda? How many times is it necessary to characterise each lucky break, as Lucy Kellaway once wrote, as a strategic master stroke before the next one becomes for the person responsible something that, somehow, was not luck at all but the working of an inherent, subconscious, natural acumen?

Primo Levi, and my belief

The success of the World Atheist Convention, held at the start of this month (June 2011) in Dublin, makes it appropriate to consider the nature of belief. Thanks to a recommendation by Claire Keegan in the book section of the Irish Times, I read the account by Primo Levi of his time in Auschwitz concentration camp during World War II, called “If this is a man” or, in the USA, “Survival in Auschwitz”. It’s a short book and, although it tells a story of incredible cruelty, both in terms of its scale and of the suffering that was inflicted in individual cases, it’s written objectively, with some humour and with no trace of self-pity on the part of Levi. He was a young man at the time, in his 20s, and he only survived because, apart from possessing a high degree of resourcefulness and luck, he was Italian by birth and residence and was taken by the Nazis late in the war. At that point in time they were, temporarily at least, more interested in slave labour than in genocide. He had been born into the Jewish tradition. His survival is fortunate for us too, because the book is one of the most important accounts of what happened during this infamous period in human history when so many, many others did not live to tell the tale, in any form.

After his liberation by the Russians at the end of the war Levi eventually returned to his native Turin, to the apartment where he had been born and in which he was to live out the rest of his life. He had qualified as a chemist and, as well as writing, practiced his profession in his home town. There is evidence that he suffered from time to time with depression, and this is hardly to be wondered at given his experiences.

Controversy exists over his death, which was as the result of falling from a landing in his apartment block, in 1985. Nobody saw what happened to cause the fall. Even though no suicide note was ever discovered, an inquest found that he died by his own hand. The whole question is discussed in detail in an article that was written for The Boston Review by Diego Gambetta. This is a long, closely argued and well written piece. At the end of it one is left with the clear understanding that there is no definitive evidence either for suicide or against it.

That brings us into the realm of belief. Those of us who would seek inspiration in the triumph of the human spirit, for example as demonstrated by Levi’s accounts of how he dealt with his travails and his determination not to allow them to leave him all bent and twisted afterwards, would want to believe that he did not kill himself. I contend that we are, under the circumstances, entitled to have this belief. For me, then, the reality is that Primo Levi died as the result of an accident. But there are caveats: I can only hold that as fact for as long as no irrefutable, or even strong, evidence to the contrary appears. Apart from anything else, a failure to acknowedge evidence against what I might like to perceive as truth would mean that I was fooling myself, and that realisation would be far more unsettling than the demolition of any ideal I might like to hold on to.

I do not have the right to insist that any public behavior that depends upon my version of unverified events is written into the laws of the land. Above all, it would be terribly wrong of me to attempt to impose this belief on others, or to present it to children or impressionable adults as an indisputable account of what happened.

Belief in anything in the absence of direct evidence is, truly, a private matter. Authority figures who insist otherwise are doing a great disservice to the people they are in a position to influence and, because we have a democratic system and said influenced people have votes, by extension to the rest of us.