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Analysis/Comment Last Updated: Aug 23, 2010 - 8:24:15 PM

Irish Economy: Three Irish economists each have an opportunity to make a difference of consequence during the financial crisis
By Michael Hennigan, Founder and Editor of Finfacts
Jun 7, 2009 - 12:06:22 PM

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Fine Gael Party members and supporters hoist up George Lee at the moment his victory in the Dublin South by-election, on June 06, 2009. Lee won 27,768 first preference votes and was declared elected. The last time a candidate won a by-election on a first count was in 1984 in Laois-Offaly, when Taoiseach Brian Cowen was elected a TD.

Irish Economy: Economists have been the focus of a lot of attention during the current world recession, as people struggle for answers to the rapid change from the sunny scenarios, which  politicians claimed full credit for. In Ireland, three economists each have an opportunity to make a direct difference of consequence, in the aftermath of the shock news for the Irish, that the free lunch hadn't been invented, after all. George Lee's stunning by-election triumph, gives the former economics editor at the State broadcaster RTÉ, an opportunity for contributing to policymaking of consequence, in a parliament largely made up of nonentities, who are vastly overpaid compared with the jobs they are capable of doings; UCD economist Colm McCarthy, who has had many years of work experience in the private sector, is for the second time in two decades, trawling through the dim recesses of Ireland's Byzantine public spending system for savings' proposals and NUI Galway economist Alan Ahearne, a past critic of the out-of-control property boom, is currently an adviser to the Minister for Finance. 

During the boom, the warnings of academic economists were drowned out by the economists/PR men of the financial services sector such as Bank of Ireland's Dan McLaughlin, Austin Hughes of the then IIB Bank and the slaves to the demographic dividend theory  - - Dermot O'Brien and Eunan King of NCB Stockbrokers.

They provided the intellectual underpinning to the ignorant politicians and their developer friends. As the economy headed for a crash, media economist Marc Coleman, joined the cheerleading with his book The Best is Yet to Come.

Unlike President Nixon'a press secretary Ron Ziegler, who famously termed past statements on the Watergate scandal as "inoperative," the cheerleaders like Taoiseach Brian Cowen, haven't seen the need for revisiting their past. Also like Cowen, who recently predicted a "rapid" recovery of the Irish economy in 2010, they will soon rise from the long grass to proclaim new golden dawns. This is why, a blueprint for serious reform, is so crucial.

SEE: Finfacts report 1) The 2001 economic consensus that paved the road to economic ruin

Finfacts report 2) State bank guarantee tolls the death knell of the Celtic Tiger; Fairytale ends debunking the myths and exposing the reality of foundations built on quicksand

Just an example of what is ahead, is provided by Coleman today in the Sunday Independent, in his criticism of the central bank governor John Hurley for saying this week, that Irish house prices have further to fall.

Brian Cowen, John Hurley and the chief executive of the Financial Regulator Patrick Neary, were guilty of monumental incompetence during the boom and in a just system, they should have got their P45s, with the decency to surrender severance bonanzas. However, to criticise Hurley now for speaking honestly and when Irish house prices are still out-of-line with every region of the world, is plainly ridiculous.

SEE: Report says Irish Financial Regulator’s failure to control property bubble contributed to economic crash and consumer wealth losses

Coleman wrote: "With house prices back to levels prevailing in 2004 and 2005 -- before the Financial Regulator allowed the market to get out of control -- they have returned to a stable floor. The trouble is that some people don't think so. Using facile and irrelevant comparisons with the completely different US housing market, Alan Ahearne and Morgan Kelly predicted house price falls of between 50 and 80 per cent. Now Ahearne is a government adviser and the fact that the Central Bank governor has joined in the chorus would lead you to believe that running the housing market down is official government policy. This seems to fit the fact that, in spite of yielding virtually no revenue, stamp duty has not been abolished. Its removal won't guarantee a recovery, but the fact that this isn't being done as a vital first step could be deemed incompetent."

Every other market besides America's, is also different?

Running down the housing market? Remember former Taoiseach Bertie Ahern wondering why "cribbers and moaners" didn't commit suicide?

As for stamp duty, the campaign to abolish it, which began in late 2006, was surely surreal, when there was silence on the official estimate of 28 per cent in taxes levied on each new house built and the mother of all stealth taxes, thanks to the corrupt rezoning system, which managed to make land scarce in a country that is 4 per cent urbanised.

There was also silence on the poor quality of Irish housing.

According to the European Housing Review 2009, published by the Royal Institution of Chartered Surveyors (RICS), despite the Irish housing boom, Ireland still has worse housing conditions than other countries with similar living standards, with floor areas per person of around a fifth less than the western European average, even though a large number of dwellings (45 per cent) are detached houses.

UCD Economist Colm McCarthy.

In a January 2008 review of Coleman's book, Colm McCarthy wrote: "Echoing a report from economists at NCB Stockbrokers back in 2006, he argues that rising population stimulates economic growth in and of itself: " ... as Ireland's population rises, demand for a wide range of goods and services also rises, lifting economic output in the process". The recent rapid population growth has in some manner created the Celtic Tiger. "A tidal wave of demand is washing over the economy", and this is set to continue for decades.

Would that things were so straightforward. Population growth can just as readily be seen as a consequence of economic success, a far more plausible take on the Irish story than this demographic version of Say's Law, the venerable notion that supply creates its own demand. If rapid population growth were the key to economic prosperity, sub-Saharan Africa rather than East Asia would be the current Wirtschaftswunder.

The big swing factor in Ireland's recent demographic history has been migration, and there can be little doubt that migration is driven by economic factors, not the other way round. Poles do not flock to Ireland in order to stimulate aggregate demand."

McCarthy said on the education system: "There is no doubt that Ireland's achievements in expanding access to secondary and tertiary education over the past four decades have been spectacular. Participation rates are now in line with, or ahead of, those of the world's most advanced economies. But having devoted the past couple of years to teaching undergraduates (and grading their essays) for the first time since the 1970s, I have to report that there has been a decline in literacy across the board. Every secondary school-teacher and every university lecturer of my acquaintance agrees.

I hear repeated complaints from employers on the same issue. One such makes the interesting point (he runs a software business) that communicating with the world-wide market over the web, in English, is more demanding than communicating with the domestic market, since these people know English as a second language, and have learnt it properly!"

And added: "In line with many recent commentaries, Coleman sees the current slowdown as a pause for breath on the part of the Celtic Tiger; rapid economic growth has only recently slowed down, and will resume sometime soon...the return of the eight and even 10 per cent GNP growth rates of the mid- to late 1990s is a pipe dream."

The Irish Economy: Housing not the Engine of Growth, Eunan King's last report for NCB Stockbrokers, was published in March 2008. King said the housing market was not central to the boom in Ireland.

In the aftermath of the second period of monumental mismanagement in a generation and the clear evidence of a broken political system, there is not much evidence from the main political parties in the Oireachtas, of a willingness to consider major reform of a governance system, where the buck stops nowhere and which only responds to a serious crisis, after years of prevarication.

If George Lee wishes to have a serious impact, he will have to push for serious reform, not only in the fiscal rules, which allow a government to go on a spending binge during an upturn in the growth cycle, to be followed by a bare cupboard in a downturn but radical changes in the 1920's era governance system and the assumption of responsibility at different levels in public administration.

The usual pattern of being one or two reports away from a decision will have to end.

SEE: New approach needed to fix broken Irish political system

The sacred cows in the Oireachtas will also have to be tackled as part of this process and there must be much greater transparency.

SEE: Irish Public Spending: Pre- IT/Web official policy prevails - hide as much information as possible from taxpayers

Colm McCarthy's public spending review group, known as Bord Snip Nua, must also push for transparency as the system of a hodge-podge of  Freedom of Information Act requests and parliamentary questions is absolutely inadequate.

"Sunlight is said to be the best of disinfectants," Louis Brandeis said in 1914 - two years before he became a justice of the United States Supreme Court. He wasn't referring to a brand of soap.

Why does the head of a small State agency, the National Consumer Agency, earn more than the chairman of the US Federal Reserve?

The NCA issued a €200,000 PR contract, to mainly handle the issue of press releases.

Another small State agency, the office of the ombudsman for financial services spent €147,000 in three years on "travel and conferences," according to last week's Sunday Independent. Last year the head, Joe Meade is reported to have led a trip to a Manhattan conference costing over €10,000. Partners were not taken. Previous excursions had seen him travel to conferences on the Gold Coast of Australia.

In Saturday's Irish Times, Dr. Garret FitzGerald wrote on the issue of TDs' mile allowance: "I raised this issue six years ago in a book of essays on the Irish State*, where I pointed out that at that time the Dublin-Cork return car mileage rate for an Oireachtas member was €355.23, whereas the return rail fare was €62.70 first class or €44.40 standard class.

So, a TD or Senator travelling by train for 90 sessions of the Dáil (never mind committee meetings) could have secured an extra €28,000 a year tax-free, and in the absence of any checks on his actual travel method he or she could have been reasonably certain of getting away with such fraud. By sharing a car with a colleague and taking turns, with both claiming mileage allowances such public representatives could also have saved €14,000 a year free of tax."

Colm McCarthy and his Bord Snip Nua now know more about the breakdown of Irish public spending than any government minister.

The public knows very little.

Add up the FAS-style spending across the public service; IT contracts monitored by computer illiterates; "fact-finding"missions and the multiplicity of Joe Meades on other overseas trips, it would add to a pretty penny.

In December 2004, 3 Irish ministers and 21 civil servants travelled to trade talks in Hong Kong, which were being led by the EU trade commissioner.

When it comes to the Irish Exchequer, parsimony seems to be a rare commodity.

The prevailing attitude for the Insiders, seems to be to grab as much as  possible while they have a grip of the purse strings.

And finally to Government adviser Dr. Alan Ahearne, who has joined the disorganised crew of a listing ship. He may or may not have time to influence some change for posterity amidst the firefighting by the arsonists. One of the areas of huge significance is the evolving "bad bank" - - NAMA: the National Assets Management Agency. Long-term reform is also very critical. If Ahearne doesn't achieve anything of consequence, he will surely have many gloomy days in some university, to contemplate the missed opportunities.

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