How Paternalistic Should Policymakers be?

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May 3rd, 2015

The literature on behavioural economics has set off a very interesting debate on the extent to which policy-makers should intervene to improve outcomes in cases where individuals are potentially harming themselves but not others.

A paper by Camerer et al in 2003 put forward the case for asymmetric paternalism whereby policy could potentially help individuals who are not making rational decisions, while not infringing on others. An example is pension auto-enrolment whereby individuals procrastinating on pensions decisions are helped in the process of saving while those who genuinely do not want to take out a pension are not forced to.

Sunstein and Thaler added the idea of Libertarian Paternalism to the literature whereby policy-makers strive to improve outcomes (paternalism) while also placing a high weight on freedom to choose (libertarianism). The now-famous book Nudge is an expression of this philosophy and has had a dramatic impact on policy-makers in the US, UK and to some extent Australia and is being discussed at least in the Irish policy environment.

A big debate is ensuing around Nudge with some claiming the philosophy is too interventionist (see Sunstein’s Storr lectures for a list of these critiques and also his responses – see also a reading list I put together here).

Another line of argument is that Nudge artificially restricts the application of behavioural economics to non-mandated policy interventions. A recent Harvard Law Review piece by Bubb and Pildes examines three areas of policy (financial regulation, fuel pollution and consumer credit regulation) and makes the case that the behavioural evidence does not support soft-paternalist policies but rather a more interventionist approach. In particular they argue that there is a large tension between the evidence provided by behavioural economics and the political position being advocated by many of its adherents. In their view, the bounded rationality displayed by citizens leaves them far more open to exploitation and also far less likely to respond to soft-policies to improve their welfare. They cite an extremely interesting article by Lauren Willis in the University of Chicago Law Review, who argues that Nudges are insufficient in cases where large corporations have incentives to counteract them and she gives a detailed case-study from US financial regulation where financial companies quite easily ran around various default options embedded in consumer protection regulation. She argues that mandates and generally more active regulation is needed in many cases due to the degree of control that the regulated firms have over how to implement “nudges”.

Sunstein’s response to this is available here where he argues that it is important to respect people’s freedom of choice and that it is unclear yet that nudges are ineffective in the face of counteracting moves by vested interests. He argues that, while in some cases mandates may turn out to be neccesary and more effective, this should at least partly be an empirical question and should not ignore the importance of autonomy.

This debate is important in the Irish context. There are many areas of policy where policy objectives lead to tensions between implementation of effective policies and the autonomy of individuals to choose. In cases where individual actions lead to costs to others then traditional economics and regulation is on more solid ground. But when there is active debate about how to reduce health-damaging diet and consumption patterns, promote greater pension coverage and other policies effectively aimed at improving individual welfare through changing their behaviour then this debate is very important and interesting. It also hits against the idea that behavioural economics is an attempt to individualise wider social and economic problems. In this debate, there is a clearly interesting tussle between the interests of large companies, the decisions of boundedly rational households and the political factors that lead to the mandates of regulators. It provides an interesting and realistic way of debating policy and regulation.

Podcast on Spring Statement

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April 29th, 2015

I discuss the government’s Spring Statement with Cliff Taylor and Arthur Beesley in this Irish Times podcast.

Iceland’s Crisis and Recovery: facts, comparisons, and the lessons learned

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April 28th, 2015

Audio and slides from IIEA presentation by Icelandic Central Bank Governor Már Gudmundsson are available here.

Stability Programme Update

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April 28th, 2015

Available here.

Reminder: Tuesday event (A New Start for the Eurozone: Dealing with Debt)

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April 26th, 2015

I will present the CEPR Report on April 28th, 9am-10am

A New Start for the Eurozone: Dealing with Debt

Thomas Davis Theatre ( Room 2043), Arts Building , 9.00am – 10.00am on Tuesday 28th April 2015 . All welcome

New DCU MSc in Public Policy

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April 25th, 2015

DCU School of Law and Government have launched a new MSc in Public Policy:

The global financial crisis has exposed flaws in the policy making system in Ireland and elsewhere. Part of this relates to the technical capacity of policy makers to do effective public policy analysis. This is something recognised by the Irish state and the European Union as well as other international bodies as they attempt to increase the number of professionally qualified policy specialists working for them.

In response DCU is offering a bespoke, interdisciplinary course designed to suit the needs of a new generation of policy makers. It will be hosted in the School of Law and Government, but builds on links across the University and is a key part of a new Institute for Innovative Government (IIG).

This is a new type of professional degree – in many ways a parallel for those in the policy/government sector to an MBA in the commercial sector. It will have an intellectual base and methodological rigour that reflect the needs of a sector facing more nuanced and complex challenges.

Irish Economics and Psychology Annual Workshop

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April 25th, 2015

The eight annual one day conference on Economics and Psychology will be held on November 27th at the ESRI in Dublin. The purpose of these sessions is to develop the link between Economics, Psychology and cognate disciplines in Ireland. A special theme of these events is the implications of behavioural economics for public policy (see detailed reading list on this area here) though we welcome submissions across all areas of intersection of Economics and Psychology. We welcome submissions from PhD students as well as faculty and also welcome suggestions for sessions on policy and industry relevance of behavioural economics. Abstracts (200-500 words) should be submitted before September 30th to Liam.Delaney@stir.ac.uk. Suggestions or questions please send to Liam.Delaney@stir.ac.uk and/or Pete.Lunn@esri.ie Further details of wider network activities will be added here shortly. Details of the previous seven workshops are available here.

Mody on Creditor Impunity

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April 25th, 2015

I am surprised this has not received more attention.

http://www.bloombergview.com/articles/2015-04-21/imf-needs-to-correct-its-big-greek-bailout-mistake

The original sin of Eurozone crisis mismanagement was the May 2010 ‘bail-out’ of Greece. As Karl Otto Pohl noted at the time, the beneficiaries were German banks, even more so French banks (as always, you gotta hand it to the French!), and rich Greeks. Yanis Varoufakis agreed at the time with Pohl, for which he will not be forgiven.

If you subscribe to the view that careless lenders should face haircuts, the official lenders to Greece should take a belated bath.

All of them, including the IMF, which means its shareholders, including us.

The alternative is an international financial order built on a doctrine of official creditor impunity.

Geary Policy Peer Review Series

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April 24th, 2015

The Geary Institute at UCD has initiated a Policy Peer Review Series.  This involves members of the Geary Institute reviewing research/evaluation reports which have significant implications for public policy.  The authors of the evaluations/reports are then invited to reply to the review.  The first two such reviews (and responses) are on (a) an evaluation of the School Support System under DEIS and (b) an evaluation of  FAS training programmes where the participants exited in 2012.  The reviews and responses are available here:

http://www.ucd.ie/geary/publications/policypeerreviews/

Dublin Economic Monitor

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April 23rd, 2015

here.

World Happiness Report 2015

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April 23rd, 2015

here.

The Science of Scarcity

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April 23rd, 2015

Profile of Sendhil Mullainathan and progress in behaviourial economics (especially vis-a-vis the problems facing low-income households) here.

Miriam Hederman O’Brien Prize 2015

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April 23rd, 2015

The Miriam Hederman O’Brien prize for 2015 is being awarded by the Foundation for Fiscal Studies to recognise outstanding contributions in the area of Irish fiscal policy. The aim of the prize is to promote the study and discussion of matters relating to fiscal, economic and social policy, and the prize will be awarded to a piece of completed research or analysis in this area.

Details of the prize, entry criteria and submission details are available here. The closing date for submissions is Friday 22nd May.

It is hoped for this year’s prize that submissions will come from a wide range of policy areas.

Expert Commission: Increasing Investment in Germany

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April 21st, 2015

English summary here.

TCD Policy Institute Event: Philip Lane : ‘A New Start for the Eurozone: Dealing with Debt’

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April 18th, 2015

I will present the CEPR Report on April 28th, 9am-10am

A New Start for the Eurozone: Dealing with Debt

Thomas Davis Theatre ( Room 2043), Arts Building , 9.00am – 10.00am on Tuesday 28th April 2015 . All welcome

61st Economic Policy Panel: Riga

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April 18th, 2015

The Economic Policy Panel met this weekend at the Bank of Latvia in Riga.

Papers here.

Update on Greece

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April 18th, 2015

FT Big Read here.

Bulow and Rogoff here.

Peter Doyle here.

Roy Geary: Father of Statistics in Ireland

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April 18th, 2015

This radio programme looks back at the remarkable career of Roy Geary, featuring interviews with Brendan Whelan and Dermot McAleese: here.

Thomas Kirchner on Europe and the Euro

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April 17th, 2015

Eurointelligence alerts us to this article by Thomas Kirchner, and speculates that we may hear more along these lines in the months to come.

A New Start for the Eurozone: Dealing with Debt

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April 15th, 2015

The CEPR has published a new report on the eurozone (I am one of the co-authors).

Outline: This report, the first in the Monitoring the Eurozone series, addresses the measures Eurozone countries need to take to guard against returning financial instability that could threaten a sustainable recovery. The authors consider stock operations, lending structures and regulatory changes in protecting sovereign debt on a national and Europe-wide level.

 

Report is here.

VOX summary is here.

New Working Paper on the Restructuring and Recovery of the Irish Financial Sector

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April 2nd, 2015

Tom Flavin, Brian O’Kelly and myself have a new working paper on the restructuring and recovery of the Irish financial sector, covering the period late 2008-2014. Helpful comments (cautiously) welcomed.

 

The EU Expenditure Benchmark: Operational Issues for Ireland in 2016

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April 1st, 2015

A new analytical note from the Fiscal Council. Here.

IEA 2015 Conference

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March 27th, 2015

The 29th Annual Irish Economic Association Conference will be held at the Institute of Banking, IFSC, 1 North Wall Quay, Dublin 1 on Thursday May 7th and Friday May 8th, 2015. The ESR guest lecture will be given by Professor Christopher Udry (Yale University) and the Edgeworth Lecture by Professor Giancarlo Corsetti (University of Cambridge). This year we have a very strong and expanded programme.

Registration for the conference is through the exordo site. Early registration costs 100 euros and includes dinner on the 7th. There is a much lower price for student delegates at 35 euros.

Bookings for accommodation should be made directly. We have negotiated some discounted hotel rooms at the Maldron Hotel, Cardiff Lane, which is close to the conference venue (mention the “IEA2015″).

I’m looking forward to seeing you there.

International Investment Position & External Debt – Q4 2014

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March 25th, 2015

The CSO have published the Q4 2014 update for these data.  As pointed out 12 months ago there is a lot of noise in the figures.

Ireland’s gross external debt was estimated to be €1,721.6 billion at the end of 2014.  On the other side of the ledger there are €2,623.8 billion of external assets in debt instruments.  This means we have a net position of -€902.2bn, i.e. assets exceed liabilities.  Of course, these figures are close to meaningless in any real sense as they are polluted by financial services sector.

Under the heading “IFSC” the CSO records total foreign assets of €2,757.5 billion and total foreign liabilities of €2,790.4 billion.  The gross totals are immense but the net position is small by comparison.  Here are the net international investment positions by sector excluding the impact of the IFSC.

Looking at the NIIP by sector is not the end of the story.  We equally have to account for the MNC effect that will impact the figures for non-financial companies.  For example in debt instruments alone there is €168 billion of external debt and €242 billion of external assets in debt associated with direct investment (outside the IFSC).  This is further muddied by foreign direct investment into Ireland and investment abroad by Irish domiciled (and sometimes foreign-owned) companies.  Part of the impact of this can be seen in the second panel which shows the NIIP by type of investment.

Ireland gross external debt (excluding the IFSC) is around €470 billion.  By factoring for external assets in debt instruments the equivalent net external debt is (just) €55 billion.  However, if we exclude the impact of direct investment in both directions (mainly MNCs but not exclusively foreign-owned MNCs) the situation is:

The gross external debt figure is just over €300 billion and has fallen around €100 billion over the past three years.  As more of the external assets in debt instruments are associated with direct investment the net external debt figure here is €130 billion (higher than the €55 billion figure including direct investment).  This has fallen by around €75 billion over the past three years.

If we look at the overall net international investment position we see the following (the chart begins in Q1 2012 as that is when the new BPM6 series start):

Note the subcategories are not the same.  In the external debt chart we were able to remove assets and liabilities associated with direct investment.  For the NIIP only a division by sectors is available.  Thus we can show the NIIP excluding non-financial companies which in the main will reflect the activities of MNCs but not exclusively so.  Outside of the IFSC and NFCs Ireland has a net external liability of €80 billion which is an improvement of €60 billion on the position at the start of 2012.

When is macroprudential policy effective?

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March 24th, 2015

BIS paper here.

Abstract:

Previous studies have shown that limits on loan-to-value (LTV) and debt-to-income (DTI) ratios can stabilise the housing market, and that tightening these limits tends to be more effective than loosening them. This paper examines whether the relative effectiveness of tightening vs. loosening macroprudential measures depends on where in the housing cycle they are implemented. I find that tightening measures have greater effects when credit is expanding quickly and when house prices are high relative to income. Loosening measures seem to have smaller effects than tightening, but the difference is negligible in downturns. Loosening being found to have small effects is consistent with where it occurs in the cycle.

Irish Journalism during the Celtic Tiger period

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March 24th, 2015

The Media Show on RTE Radio featured a debate between Harry Browne and Richard Curran -  podcast here.

Mortgage Debt Restructuring

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March 24th, 2015

Eamon Quinn writes in The Irish News here.

2 Lectureships in Economics at UL

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March 20th, 2015

The Department of Economics at the University of Limerick is looking to hire 2 tenure-track Lecturers below the bar, one in Macroeconomics/Monetary economics. The closing date is 10 April, 2015. All details are here. 

Macroeconomic Data Revisions

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March 19th, 2015

New analysis by Eddie Casey and Diarmuid Smyth here.

Cyprus and Greece

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March 18th, 2015

NYT review of Cyprus here.

FT editorial on Grexit here ;  op-ed by Greek cabinet ministers here.