Economics: Smarty pants terminology is par for the course in economics. At the top of the pile of egghead phrases is ceteris paribus, which translates from Latin as "other things being equal". Understanding the phrase is vital in getting to grips with two economic questions in the news recently, writes Marc Coleman.
Why have house prices risen so high and why - despite the abolition of the Groceries Order - has the price of groceries not yet fallen as predicted by some?
Last week the astoundingly named Condoms and House Prices study examined the link between house prices and - wait for it - the legalisation of contraception during the 1970s and 1980s. According to Alan Ahearne of NUI Galway and Robert Martin of the US Federal Reserve Board, the link goes like this. Liberalising those rubber things in the 1980s caused the fertility rate in the Republic to fall. That, in turn, allowed employment to almost double as women entered the workforce. The number of two-income households increased with any corresponding increase in the number of houses and house prices went up. This is basic economic theory: Prices rising because of too much money chasing too few goods.
Another astounding link made last week was between the abolition of the Groceries Order in February and the subsequent rise in the price of groceries. The order prevented retailers from passing the benefit of bulk discounts to retailers. Its opponents claimed it kept prices high, its supporters the reverse. Some two months after its abolition, the latter now claim vindication. Are they right? Are Alan Ahearne and Robert Martin right to claim a link between condoms and house prices?
Amateur economists are the ones who got their degree while propping up the students' bar in UCD. Serious ones use scientific methods to study the relationship between the phenomenon they want to study - house prices for example - and the factors that influence it.
The latter we call explanatory variables and there can be tens, hundreds, or possibly thousands of them. The skill of the economist lies in knowing what to focus on and where to freeze, and that is where ceteris paribus comes in play. Using statistical techniques, economists can hold factors of remote or incidental interest in suspension.
So in approach to the question, "How has fertility affected house prices?", they would hold interest rates, income levels and other factors steady. In answering the question "How has the Celtic Tiger (higher incomes and lower interest rates) affected house prices?", they would take exactly the reverse approach. Using Ahearne and Martin's estimate that, ceteris paribus, the drop in the birth rate since contraception was legalised has, via its effect on household incomes, added €128,000 to the value of an average house price in the Republic.
Like the good economists they are, Ahearne and Martin have avoided two mistakes made by amateurs: careless statements about the evidence in hand and jumping to policy conclusions. In relation to the first mistake, they are not blaming astronomical house prices on the legalisation of contraceptives, but simply saying that a fall in the birth rate of the kind experienced by the Republic in the past two decades - and the commensurate rise in earners - will increase house prices by a certain amount if you hold other factors constant.
For instance, Ahearne and Martin's study does not - and did not set out to - ask why house prices in the Republic are higher than in other European countries. Contraception being also legal in mainland Europe, we cannot blame that for our high house prices relative to other countries. A study comparing house prices across countries, rather than across time in one country, would rightly take a different approach. This week Austin Hughes of Irish Intercontinental Bank made a useful contribution to this separate debate.
Freezing those variables that are the same across different countries, such as interest rates, he looks at factors that vary across them. For example, Ireland's population is growing faster than any other European country. So although both studies examine different variables, this is valid because they are looking at separate issues. The first at why house prices in Ireland have changed over time, the second why house prices at a given time vary across countries. Both studies avoid the mistake of jumping from empirical inference to stupid policy prescriptions.
Inferring from the first study that we should ban contraception to bring house prices down again would, for example, be ridiculous. Although we must hold them constant to precisely measure the impact of fertility, other factors were not constant. While set to rise, interest rates are and will remain far lower than before the economic and monetary union (EMU). Employment and income will likewise remain far higher than before the Celtic Tiger. More to the point - even were it politically feasible to ban contraception - attitudes have changed and women are in the workforce to stay.
The contrast with how grocery prices have been analysed could not be more different or depressing. Analysis of this topic has violated the central and sacred principle of ceteris paribus. The existence of price controls such as the Groceries Order is just one factor that can influence grocery prices. Growing demand caused by rising income and population, rising input costs, and the level of retail competition are others.
Very recent trends in grocery prices do not provide enough evidence to judge the impact of the Groceries Order's abolition. Over such a short period, the movement in other factors could easily be causing inflation in grocery prices. No thorough econometric study of the order has yet, to my knowledge, been conducted. But last year's Department of Enterprise, Trade and Employment report on the order did reveal that grocery prices rose by 30 per cent over a 10-year period in those EU countries with restrictions on grocery prices, but by just 13 per cent in EU countries with no such restrictions. In taking an average of countries with and without such restriction, this statistic smooths over variations in those "other factors" that can distort analysis and - in the absence of a more thorough econometric study - is the best summary statistic on this question.
The acid test of whether the abolition of the Groceries Order has been successful or not is whether grocery price inflation is lower than it would be accounting for other essential factors. If supporters of the Order wish to make a credible case for its restoration, this is what they must grasp.
