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The logic of the market… March 2, 2010

Posted by WorldbyStorm in Economy, Irish Politics.
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… can sometimes appear a little illogical to many of us. Take for example the situation, as laid out in the Sunday Business Post this weekend, and reiterated on Monday in the Irish Times.

Addressing the annual conference of the Irish Hotels Federation (IHF) in Galway today, Dr Bacon said the lack of “foreclosure against fundamentally insolvent hotel businesses” was now undermining the remainder of the sector, including businesses which are fundamentally competitive and sound.
“Hotels that are in receivership and are effectively run by banks, or where the ownership of the businesses has been taken over by banks or their nominees are, through their practices of deep discounting of prices, undermining the long term viability of an industry which employs about 54,000 people,” he told delegates.
Dr Bacon said there is excess capacity in the hotel sector of between 12,000 and 15,000 rooms. This was brought about by the construction of an additional of 27,000 new hotel bedrooms between 1999 and 2008, bringing to the total hotel bedroom capacity of the sector to 60,000.
Dr Bacon urged the banks to “fully recognise” bad loans within the hotel sector.

Even (even!) Brendan O’Connor has just about grasped the outline of the situation (as noted in a slightly different context by Hugh Green).

But… meantime, that champion of the ‘market’, Colm McCarthy begs to differ. In a remarkably sanguine piece he suggests that:

Hotel Stock: Hotels are a pure private good. Due to policy-induced capacity expansion, there are now too many. Some are bust, and face receivership/liquidation/NAMA.  Room prices are falling. This is the natural market response. Where is the market failure?

As if to answer that question he notes that:

It is true that some long-established hotels have seen their business undermined by State-subsidised competition, but this is a routine business risk in an interventionist political culture. Many of these long-established hotels enjoyed State grants for conference/leisure centres when the going was good. The industry is lobbying for some State-run scheme to take out capacity. Doing nothing will cost less and the industry will adjust. Intervening, yet again, will distort adjustment.

Now, I’m no economist, but I’d tend to doubt that what we’re seeing, as detailed by the SBP and Bacon is ‘a routine business risk in an interventionist culture’. Who, precisely, would have predicted this state of affairs in flexible, market led Ireland before now? Or is it that some market ‘players’, most particularly those effectively underwritten by you and me through taxation, are for who knows what reason more equal than others?

And surely the distortion is what happens in the first place, not the second. Or rather the second merely compounds the first. Or to be plainer still, it would be a lesser ‘wrong/intervention/call it what you will’ to intervene to right the first. I can imagine there are no end of investors of one stripe or another who in all good faith put money into enterprises in this area and are gobsmacked to see those taxes being channeled, directly or indirectly to propping up failing competitors. And that being the case wouldn’t we – collectively as a society – be entirely sensible to intervene to rectify the first wrong. Particularly since we’re already doing ‘something’ with the banks…

Or am I missing something here?

Comments»

1. Bartholomew - March 3, 2010

Quite right WbS. McCarthy recommends ‘doing nothing’, but the problem is that there’s no such thing as ‘doing nothing’. It simply means ‘carry on doing what you’re doing already’, which is never nothing.

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2. Ian - March 3, 2010

So the taxpayer will have paid builders to build hotels and now we will pay the banks to own these hotels. Why are we paying twice for buildings we never needed?

By the by, who was that ‘respected economist’ commissioned by Brian Lenihan to devise the NAMA formula last year. The Bacon Report rings a bell. It’s amazing how the same man gives out about the very solution he proposed!

I think it just proves how untrustworthy most economists are in this country. They just spout the analysis of their paymasters.

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WorldbyStorm - March 3, 2010

B and I, that’s it. What irks me is, and perhaps this seems an odd thought to come from the left, that this is a massive tipping over of the previously existing playing field that people have genuinely made their businesses (and hotel and catering is a nightmare at the best of times, particularly for workers) in etc. And to be honest if one uses those justifications expressed by McCarthy then any market however distorted is game ball…

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3. EWI - March 3, 2010

Or am I missing something here?

That ivory-tower laissez-faire economists really give a damn about anything outside of their own grandiose theories, perhaps?

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4. HAL - March 3, 2010

BANG ON.But it makes you think ,how is it possible to develop independent economists.?

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5. EWI - March 3, 2010

BANG ON.But it makes you think ,how is it possible to develop independent economists.?

Nuke the Smurfit School of Business from orbit. It’s the only way to be sure.

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HAL - March 3, 2010

Agreed, but that only gets rid, how do we go about developing/positioning free thinking economists, never mind Socialist minded.

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EWI - March 3, 2010

I’ve often heard it said that economists are “scientists” only in the loosest sense of the word, but that their profession is more more about philosophy – these days, of the sort paid for richly by our well-connected parasitic tycoons (especially the sort who get schools named after themselves).

Arguing the numbers just gets the channels switched. You need the basic research and analysis, yes, but then you *need* a good, aggressive commentariat to take the ball and run with it – which the present Irish media has a distinct lack of, since Madam Editor had her night of the long knives (and TCH started to assert themselves over at the SBP).

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6. DublinDilettante - March 3, 2010

McCarthy really is an absolute prize fucking prick. Another free-market fantasist living off the state while his Thatcherite wet dreams make tens of thousands suffer.

The best service the left could perform would be to mainstream economic debate again. The people of Ireland have absolutely 0% ideological commitment to the state religion of neoliberalism. They might get angry at the unions occasionally, but that’s the extent of their investment in the D4 consensus. It’s a pity the left’s contribution tends to fall between the trench-by-trench approach and idealistic broad strokes (nothing wrong with either, but I think a firm transitional programme would attract support and at least begin to challenge TINA.)

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Conor McCabe - March 3, 2010

Michael Taft has been putting out for years the type of stuff you’re calling for there, DublinDilettante. He’s been writing on the web consistently for about four years now, and previous to that in Irish left journals for well over twenty years.

His blog

http://notesonthefront.typepad.com/

Transitional programme of sorts

http://www.irishleftreview.org/2009/03/18/recession-diaries-revising-economic-narrative/

http://notesonthefront.typepad.com/politicaleconomy/2010/02/there-is-probably-no-one-who-really-believes-that-nama-will-succeed-in-its-core-mission-freeing-up-credit-for-the-economy-1.html

Michael’s work is mainstream left-wing, all of it sourced, all backed up with facts and analysis, and all but totally ignored by Irish media outlets – the occasional appearance on Prime Time notwithstanding.

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EWI - March 3, 2010

Michael’s work is mainstream left-wing, all of it sourced, all backed up with facts and analysis, and all but totally ignored by Irish media outlets – the occasional appearance on Prime Time notwithstanding.

Maybe that’s the problem right there – little or no diversity these days in the Irish media.

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7. CL - March 3, 2010

Colm McCarthy remarks are testimony to the dismal state of Irish orthodox economics; he’s expounding an obsolete, ideological doctrine for which there is no empirical or theoretical underpinning.
The world’s most cited economist, Jos. Stiglitz, has blamed orthodox economists, and especially followers of Milton Friedman, for the crisis of capitalism.
“It was not an accident that those who advocated the rules that led to the calamity were so blinded by their faith in free markets that they couldn’t see the problems it was creating…If the United States is going to succeed in reforming its economy, it may have to begin by reforming economcs.”
Stiglitz’s scholarly work showed that “there was no scientific basis for the presumption that markets were efficient…market failures were pervasive, and there were persistent differences between social and private returns”. Freefall, 2010, p. 243.
“blinded by their faith”-exactly. For McCarthy and his support group at Irisheconomy.ie, economics is a quasi-religious belief system which serves the material interests of the most powerful. This intellectual retrogression needs to be exposed and debunked.(again)

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8. sonofstan - March 3, 2010

I’ve often heard it said that economists are “scientists” only in the loosest sense of the word, but that their profession is more more about philosophy

As someone at least occasionally employed to do the latter, I’m a little insulted at the comparison : )

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EWI - March 6, 2010

As someone at least occasionally employed to do the latter, I’m a little insulted at the comparison : )

I didn’t claim that they were very good at it!

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9. dmfod - March 5, 2010

Interesting to see that mccarthy’s understanding of ‘market failure’ has nothing to do with thousands of people losing their jobs in the hotel industry & then ending up on the dole for indefinite periods due to ‘market failures’ in pretty much every other sector of the Irish and world economy as well. Surely current unemployment rates indicate a massive ‘labour market failure’?

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10. dmfod - March 5, 2010

addendum: by which I mean the failure of capitalists to invest in productive job-providing industries rather than the failure of workers to work for nothing by the way…

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