Posts from — August 2008

• Natural Language meets the browser. So very, very clever. http://tinyurl.com/5lf7n7 #
• Everything you need to know about economics in 21 pages from a Nobel Laureate writing in Socratic Dialogue. http://emlab.berkeley.edu/users #
• love this: http://www.acer.com/aspireone/ #

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David McWilliams, echoing Martin Feldstein in the FT earlier this week, suggests a Central Bank refinancing of banks to introduce liquidity into the system using the fact we are in an economic and monetary union. McWilliams’ sense of social justice ensures the developers, whom he blames for the present mess (and he’s not too far wrong there) will get short shrift from this deal. This is an excellent idea from McWilliams.

The key insight of the post is that EMU is not just a set of constraints on monetary policy—it is also an opportunity to provide free liquidity, at least on the relatively small scale Ireland would require.

McWilliams tells us, in a lovely turn of phrase:

Monetary union is a two-way street. While we can’t affect our interest rates, we can engineer liquidity.

A longer post on this when I start teaching Economics of EU Integration in a few weeks.

Related articles

• The Dossing times accuses McWilliams of Abuse of Statistics
• McWilliams incorrect on the Return to 1980’s levels of Emigration
• Joaquín Almunia: The euro is a triumph
• The Irish Blog Awards - Best Blog from a Journalist

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Not entirely sure how I missed this, but my colleague Dr Tony Leddin has a piece called How wage agreements eroded competitiveness in the Irish Times describing the recent history of Ireland’s attempts to get to grips with the spiral of wage increases following inflation following wage agreements. It seems clear from the article that what Tony feels we need is quite severe wage moderation, to reduce inflation and make us more competitive relative to our export partners. We are told right away that

THE MOST comprehensive indicator of price competitiveness - the real effective exchange rate index - indicates that the Irish economy is now at its most uncompetitive since the early 1970s.

This is serious stuff, and the mechanism to get us out of this position of ever-increasing wage demands coupled to inflation is not entirely clear, because right now, I can’t see any government calling for further wage restraint following the collapse of the pay talks earlier this summer. No other actor in the system has an incentive to change the status quo either.

What is clear is that we did achieve a deflationary, policy driven inflation moderation for a few years, so this has happened before—when Ireland wanted to gain entry to the European Monetary System, the precursor of the Euro system. Tony shows we did actually achieve inflation and wage moderation targets for a few years.

As Tony rightly points out, now we’re in the Euro system, we can’t devalue our currency and get out of the inflationary spiral that way. The only way to slow things down is to use fiscal policy—the government budget—and this will be unpleasant, because it means cutbacks.

On whether such an action is politically feasible, I’m not sure. On whether it is economically necessary, I am sure.

Check out the article itself for more information on this topic.

Update: the Irish Time server seems to be down. I’ve copied the text from my RSS reader below, just click on the ‘read more’ link to get access to the article.

[Read more →]

• Merlin Mann is right, this Kirsty McColl song is the best thing on the internets: http://tinyurl.com/5g9hla #

Here’s the third of the `teaching’ papers series I’ve been writing recently. First, I was interested in exploring problem based learning in advanced monetary economics, then I fiddled about with software to get large classes to interact. In this paper, written for the workshop `Pluralism in economics: rethinking the teaching of economics’, October 18, 2008, City University, London, I spend some time thinking about the relation between differing approaches to teaching macroeconomics. 

Here’s the abstract of the paper:

Pedagogical pluralism is difficult to implement in practice, but when overlaps between competing approaches are considered, the benefits for the students exceed the costs. An example is given contrasting two approaches to the modeling of money in macroeconomics: the stock-flow consistent macroeconomic modeling associated with Godley and Lavoie [1] and Barro’s [2] more mainstream neoclassical dynamic general equilibrium modeling. I argue students can only contrast and compare approaches effectively when thematic overlaps are significantly large to make these comparisons obvious. Only then should a pluralist approach be considered desirable.

The paper is below. 

A quick update on this post. I’d like to give an example of what I mean by a rebate program to help stimulate the housing market.

Example. Adam and Barbara are a thirty something couple with a combined income of 48,000 euros per year. They have two children, and want to buy a house for their growing family. This family will pay approximately 14,000 euros in income tax this year.

If we allow them to offset the cost of mortgaging a new property against these (already paid) taxes, the government effectively increases Adam and Barbara’s incomes by, say, 10,000, and only in the direction the government wants: funneled through the housing market. The tax rebate does not apply for other purchases and at other times.

August saw the release of the National Income and Product Accounts for 2007. A few choice graphs for y’all this morning. First, we’ve got the Gross Domestic Product (GDP) graph from 2002-2007, valued at different prices.

GDP is really the sum of the price, , of final goods and services, , in a given period, times the quantity of those goods and services, , so if there are goods in the economy,

.

GDP is based on prices, which change all time, so the number is chain weighted to take account of those price changes. That’s why you see two bars in the figures below from page xvi of the CSO’s NIE report. 

Two things should strike you reading the graph from left to right. First, just look at how rich we are. Think about how this statistic translates into tangible differences in people’s living standards. It’s a remarkable thing, when you consider, say, our European neighbours. Here’s a graph of GDP per capita (dividing total output by the number of people in the economy to take account of different population sizes) for the OECD countries.

What do you see? You see a very rich Irish nation, compared to its peers. We know this, but it’s important to be reminded. 

Next up, we’ve got personal expenditure. Again, notice the increases over time, since the end of the Celtic Tiger period around 2002. 

What is the bottom line? The national income accounts show a robust and wealthy economy, which has some overvalued assets, and is undergoing a revaluation of those assets by 2007. The wealth created in the previous years, however, doesn’t go away—it’s all still there, on our backs, on our roads, over our heads, in our bank accounts. We’ve just decided the economy’s heading for another recession. 

Number to watch: personal expenditure 2007 as compared to 2008. This will tell you what households are spending, how much, and what on. It’ll make for some interesting reading. 

• Less driving means less dying. http://www.worldchanging.com/archives/008410.html Great pedagogical piece for EC4004. #

Related articles

• Rebates: Who might be left out
• Tax cuts or welfare spending?
• Economy: Eurozone teeters on brink of recession after output drops for the first time

• Ten Web Trends to Watch: http://tinyurl.com/49njnx #
• Over 100 years, food prices have fallen by 82%. http://tinyurl.com/5whxxo #
• Jeff Sachs: Hoard food now, human rodents. Malthus was riight! http://tinyurl.com/5f76mn #

Several news outlets report consumer sentiment in Ireland lifted slightly over the summer months[1, 2], mainly due, they say, to price drops because of the summer sales. Fair enough. What they don’t mention is the impact of an unchanged ECB interest rate on people’s mortgages, a fairly stable economic environment once one controls for rising oil prices (see the chart opposite for more details, just click through), and the implosion of the housing market, and the slashing of prices for goods in many areas of economic life.

(I’ll have another post tomorrow going through the wholesale price index numbers—the price of bread went up 14% this year!.)

None of the newspapers I’ve read download the report itself and take a look at the numbers, relying on copy and paste quotes from Dr Duffy and Mr Hughes from the ESRI website. The numbers, as they usually do, tell a more nuanced story.

Here’s the chart, compiled by Austin Hughes of IIB bank and David Duffy of the ESRI. It’s an index, and it shows, from left to right, a worsening of consumer sentiment over the year to date, followed by a decrease in the decrease, and then a slight uptick from 63 to 69. Click the figure to get the ESRI’s report in full.

More interesting is the figure buried in the text about consumers’ expectations about the next 12 months. What does the man in the street think? He thinks it’s going to get better. This measure, again an index, went up from 23 to 26. The dramatic decrease in consumers’ expectations over the year is shown in the figure below:

Again, what could account for the dramatic drop off in expectations, which are just opinions about the future, in the Irish economy? Well first, the slowdown in the housing market, second, rising oil prices, and third, high relative prices for almost every good in Irish commerce at the moment. The government will act to stabilise the housing market in the next budget, and perhaps before that, for political survival. The price of oil is dropping again, but won’t drop back to pre-2006 levels—the supply just is not there. The price of goods in Ireland is something only Irish consumers can effect: stop buying expensive stuff, but buy its cheaper variant. Retailers get the signal through increased inventories that people either want other stuff or cheaper stuff. They drop their prices to get rid of the stuff they have now, in a sale, which is what we saw over the summer. The prices of everyday commodities have to moderate to change people’s perceptions of the future, which is based mainly on how their incomes are coping with their consumption choices, so if people shop around more, and our retailers begin getting the point that lower prices correlates to stronger demand (ala Lidl), then we will be in pretty good shape.

The only person who can make a change like that is the Irish consumer—the government can’t make the spending choices for them.  People will adjust in a year’s time, and as long as the US economy doesn’t physically implode, which no-one wants to see happen, things should stay more or less on course for a return to moderate growth in 2009/2010, as the ESRI predicts in its recent quarterly report. 

Related articles

• Celtic Tiger’s economy shrinks
• Gas hits national average of $4 for the first time
• Oil price down as dollar rebounds
• Irish housing market in slowdown
• Are you better off?
• German confidence at 15-year low
• Ireland fears recession as unemployment rises
• US consumer mood at 16-year low

• http://tinyurl.com/5t439s #
• screencasts of the nobel laureates: http://tinyurl.com/6boceb #

Reading this classic article by George Stigler, one could be forgiven for thinking he’s talking about Ireland’s doom and gloom merchants.

From pages 19 and 20 (I have the original 1980 working paper (U.Chicago 1980, WP No. 011) version rather than the book chapter):

The main lesson I draw from [economists'] experience as preachers is that we preach what the society wishes to hear. Perhaps all preachers achieve popularity by this route.

The degree of popularity of a preacher does not necessarily measure his influence as a preacher, let alone as a scholar. In fact, one could perhaps argue that unpopular sermons are more influential, —certainly if the opposite is true, and preachers simply confirm their listeners beliefs, pulpits should be at the rear of congregations.

I’m very interested in Problem Based Learning. I’ve written about it, presented papers on it, written case studies about PBL, and I’m on the Steering Committee (by which I mean I manage the website) of the Irish PBL network, facilitate. 

So coming across this symposium in Singapore seems quite serendipitous. Click the picture to go through to the symposium website. Google analytics tells me there’s 100 or so readers of this blog in that part of the world, so if you’re interested, head along.

http://www.rp.sg/symposium

While I wouldn’t go as far as Simon from The Dossing Times in accusing David McWilliams of coming to “plain silly” conclusions which represent an “abuse of statistics”, I do think Simon has a much simpler (and less time and data intensive) method of discovering why the increase looked so big than mine: McWilliams just compared January 2008 with August 2008, and saw a huge increase. But there are seasonal effects here, as Simon correctly points out when you look year to year, which make this increase look more than regular.

So it’s more of a slight gaffe than a deliberate abuse of statistics, and McWilliams should know better, but he has shown us (or at least to me) data source when looking back at Irish emigration patterns. A more sophisticated analysis might be in order here. Anyone interested in helping?

Related articles

• McWilliams incorrect on the Return to 1980’s levels of Emigration

• Robert Solow on Obama’s economic policy :http://angrybear.blogspot.com/2008/08/robert-solows-fiscal-advice-to-barack_22.html. If I was O … #
• What a lovely idea: wonder if we could do it in UL? http://tinyurl.com/6mognj #
• @gerardoneill Try thinking about the WPI without gas-and-fuel-type inflations, I think you’ll see it’s not that much of a
  recession. #
• Tim Hartford: Nudge-type behavioural economics are for markets, not nations. http://tinyurl.com/6y5o28 #
• @ All: Offline for the next few days. #

• http://tinyurl.com/6kkjdw #

Irish economists are reaching for any evidence of an economic meltdown with which to terrorize the public. Commentator David McWilliams, echoing Prof. Kelly (see my previous post), gets medieval on the return of 1980’s style emigration. He references GAA transfer figures as representing

a huge increase in young men moving from Irish clubs all around the country to clubs in London and New York.

The idea behind the piece is very good, using a Freakonomics-style capturing of economic choices (in this case, whether to stay in Ireland or go somewhere else looking for work) through an unusual data set.

(If anyone wants to work with me on it, there is an important story to be told using this data, and it goes back many years, so get in touch if you like working with this type of stuff. I’ve obtained the data back to 2000.)

David is to be congratulated for looking under this particular rock for signs of our imminent economic disaster, because even though I don’t think he found much, the fact that this data exists at all is interesting enough to warrant a head nod of gratitude.

I do have some problems with his interpretation of the data. I didn’t believe his story, so I went and got the transfer data myself. They come from two GAA pages, here and here.

The data is monthly, and shows player movement from club to club. Some of the clubs are in London, and the UK more generally, the US, Australasia, and ‘Europe’. When you take the numbers leaving for foreign soil and divide them by the numbers of people actually moving in a given month, and compare the years 2007 and 2008, you get this picture below. Click on the charts to get the data I used to construct the figures.

Each bar represents a relative group in group ratio, so in January 2007, a figure of 0.09 means only 9% of the people moving moved abroad. We see a big increase in movement over the summer months, with July 2008 being a big (but not huge) increase.

Then when you look at the absolute numbers moving, the story changes again, as the figure below shows:

Now the way to read the figure is to just count up the numbers moving anywhere, not just abroad. It’s a straight summation. And do the numbers moving go up? They do not. They go down. Way down. So not an increase, but a decrease in movement over time from 2007 to 2008.

Here is the same figure as the one above, but this time just for people traveling abroad.

Again, the way to read the figure is just to add up the columns, so 101 people transfered to a club outside Ireland in April 2007. The only huge increase is in May 2007, well before the subprime crisis hit in August 2007, and not repeated through the economic doldrums we are in now.

Even looking at the raw numbers—total foreign departures in 2007 to August (to make the data ranges the same in both years) are 723 out of 2062 people transferring, so a ratio of 35%. In 2008, total foreign departures to August are 588 out of 1346, a ratio of 0.44, but still a decrease in the absolute amounts of people moving abroad to date.

So based on this simple exercise, I’d have to say David’s conclusions are incorrect about rising levels of Emigration. The data just don’t tell that story so clearly.

Related articles

• Prof. Kelly (or: Dr Faustus) on the House Price Decline
• When you have eliminated the impossible, whatever remains, however improbable, must be the truth.
• Memo to Yeats: Ireland Has Changed

Prof. Juan Miguel Gomez, who I worked with on some papers in computer science (here and here) at the DERI institute in NUI, Galway, has a blog about his life and work in computer science, specifically the Semantic Web. Check it out.

Yesterday I wrote a small piece about using Nudge-inspired policies to improve the experience of first time parenting. Today, Martin from the Geary blog tells us

“A London council is to pilot policies based on a new theory of behavioural economics in a bid to tackle litter, reduce carbon emissions and increase recycling rates, it has emerged. The London Borough of Barnet has been given a reported £100,000 by the Department of Communities and Local Government to try out new nudge economics policies.”

link, via Martin @ Geary

Related articles

• Barnet to experiment with reducing litter, recycling and lowering carbon emissions
• Parents paying for places at schools