September 7, 2011
ESRI has been getting its forecasts wrong for yearsPosted in Irish Independent · 129 comments ·
In Irish economic circles, you tend to take much more stick from having been right than having been wrong. Those economists who got it wrong in the boom and believed the hype about the soft landing, such as the ESRI, still manage to grab front-page headlines. In contrast, those who called it right are put under constant scrutiny and are still being dismissed by the establishment as cranks, celebrities or, at best, lucky opportunists.
The “insiders” rally round each other even when they are wrong and the “outsiders” are denigrated. In the economics world, for what it’s worth, the outsiders’ crime — the crime of being right — is particularly dangerous precisely because it exposes the limitations of the insiders. This type of insider/outsider prototype is commonplace in Ireland.
Yesterday, we saw more of this type of behaviour where the establishment insiders carry on with their forecasts despite their appalling records.
I woke up yesterday to hear the ESRI on the radio telling us that things would be grand in the next three years provided we just keep ploughing the same austerity furrow. Someone very clever, not sure if it was Albert Einstein or Roy Keane, once said the definition of stupidity was doing the same thing over and over again and expecting different results. This is what is happening right now.
Unemployment and emigration are rising, mortgage arrears are up all over the country and yet we are supposed to believe that after three more years of this, all will be hunky dory.
The interesting thing about the ESRI is that it has been getting things wrong for years, with apparent impunity.
For example, back in the boom, as late as 2007, one of the chief bottle-washers at the ESRI dismissed the chances of a property crash. This was picked up by a property editor who said: “If he believed there was a crash coming then he would sell his house and rent it back. Tellingly, he is not doing this because he believes, as I do, that if (and that is a big ‘if’) the market is going to crash, it will do so in a patchy, selective way which will not impact to any great degree on many of the existing homes in Ireland.”
Yesterday, the ESRI published its medium-term forecast and it was taken as gospel. But why is this? Why does no one take the ESRI up on its record? Look at some of the other forecasts it has made in the past.
For example, in December 2005 — when the odd non-establishment maverick was saying the economy would crash — the ESRI produced a long-range forecast (similar to the one it produced this week), which was supposed to tell us where we would be by 2010.
According to its “worst-case scenario”, Irish GDP would be â‚¬196,876m; in fact, it is â‚¬166,345m. At worst, according to the ESRI, our debt-to-GDP ratio would be 16pc; by 2010 it was actually 66pc and rising rapidly.
It forecast that the 2010 Budget deficit would be, at worst, 0.3pc GDP; it was, in fact, 14.3pc of GDP.
So, to use the vernacular, the ESRI, writing in December 2005, hadn’t really got its eye on the ball.
Remember, I’ve used their “worst-case” scenarios here.
The “high-growth scenario” in 2005 said that GDP would be at â‚¬208,718m, the debt/GDP ratio would be 15pc and unemployment in 2010 would be 123,000. Unemployment was three times that.
Even by 2008, when fellas in pubs could feel the heat, you would expect the dozens of well-paid economists in the ESRI to be twigging that something was going pear-shaped, but no, the ESRI released a forecast for the Irish economy, predicting that for the next seven years Ireland would “grow by 3.75pc on average per annum”.
It went on to say that, after a blip in 2009, “the economy would continue to outperform its EU neighbours”. Consistently since 2005, it said that a “soft landing” in the property market was the most likely outcome, with a collapse a “possibility” . . . but just that.
The point here is not to have a go at the ESRI — we all make mistakes — but to show that trusting an institution like that, which hasn’t exactly covered itself in glory, might not be the cleverest thing to do.
If this recession has told us anything, it is that the experts know nothing. Yet some sections of the Irish media are still respectful of institutions that are not up to the job. Why is this? Why do we pay for people like this? After all, they are on the public payroll, which means your taxes pay for these guys who call themselves professors, even though they don’t have any students to profess to.
It is time for an audit of these types of outfits to see what they do, whether they should be on the public payroll and maybe ask Colm Mc Carthy to have a gander at them to see where the value is to the taxpayer. If these types of public organisations — where the salary scales are close to the top range given the amount of professors working there — are not up to the job, it undermines other public services that are.
It is easy to lump all public-sector employees into one heap, the well-paid ones and the not so well-paid ones because of the conspicuous failure of those at the top.
A similar argument goes for the retirement package of the head of the civil service, who trousered more than â‚¬700,000 yesterday as part of his golden handshake. Anyone who knows about how this country works, will know that the real power lies in the “permanent government” — the head bucks of the civil service.
Yet, in terms of economic management, the Department of Finance and Central Bank, for example, have been worse than useless in the past 10 years.
Contrary to popular belief, the Irish banking and housing crisis did not start in 2008; it started in 2000 when the banks were allowed to go mad and the government used this credit windfall to fatten itself up and fuel the nonsense. All the while, the establishment bleated the “soft or softish landing” mantra while paying themselves fortunes.
The slump in the economy should lead to a clearout of those in positions of power who didn’t do their job. This is what is meant by getting value for money. The more prominent the person, the more responsibility they should take.
Politicians have been humiliated, so too have bankers — and some of them should go to jail. In Iceland, they put their politicians on trial; here we put them on TV3. But they are taking flak.
Yet, all the while, behind the scenes, secure with their bullet-proof contracts and their gold-plated pensions, the real establishment continues to draw huge salaries in the shadows.
They answer to no one, are threatened by no one and continue to operate with impunity while they tell the rest of us to tighten our belts.