Birth of The Recession

Literally? Does the trend in births indicate (albeit at a lag) the outlook for the economy? Brendan Walsh thinks so as he has shown a strong 3-quarters lag between the numbers unemployed and the number of births. That's using quarterly data. But what about other factors such as consumer confidence: given that the decision to have or not have children can be based on a mental image of the future?

I recently got hold of data for the monthly number of births in the National Maternity and Rotunda Hospitals here in Dublin. Kindly supplied by their respective information departments. The chart shows the trend in the combined total number of births since January 2007 (lefthand axis), overlaid with a three month moving-average of the percentage change (year-on-year) in birth numbers.

The first thing you notice is the seasonal pattern - see the separate analysis of this pattern here by my own company. Also it is evident that there has been a levelling out in birth numbers, clearly shown by the sharp decline in the growth rate. The rate of increase peaked in December 2007, though the actual number of births peaked in July 2008. From the summer of last year, the rate has fallen sharply - even turning negative. Though there is some evidence of a recent recovery (though the growth rate is still in low single digit percentages).

Given that Ireland's recession started early last year, could we attribute any of the recent fall in births to the recession? One, albeit simplistic exercise is to look at the correlation between the ESRI consumer confidence index and the rate of change in births. What I have found is that there is a significant correlation of 0.46 between current confidence and current birth trends; and a correlation of 0.51 if we use consumer confidence lagged nine months.

This doesn't make life any easier for those running and planning maternity services of course. If birth numbers are seemingly influenced by psychological/economic factors then forecasting future demand for maternity services (say 2-3 years out - after that demographic factors are probably more important) becomes an exercise in economic forecasting. Another reason why we might want to tread carefully with mooted changes to child benefit lest we risk futuricide.

At the end of the day, the invisible hand of population control will hold sway, but we don't need to increase the opportunity cost of becoming a parent any further surely?

Indexing Recovery

One thing we can be certain about in relation to the current recession is that it will be the most measured, analysed and studied recession ever. A veritable cornucopia of economics Phds for generations to come!

And to add to the data stream, my own company has just developed an Economic Recovery Index that uses the opinions of 1,000 adults answering an online survey every month to try and guage where we are on the economic cycle (recession-trough-recovery etc).

We've been running it since April. The chart shows the shift in the percentages of the sample selecting each of five potential statements about the current economic situation. Like a number of other measures recently it suggests that people think things are 'getting bad more slowly' than recovering per se. Nevertheless there has been an across-the-board improvement in sentiments about the economy across all demographic groups between April and June. That said, older adults (over 50) tend to be more optimistic than the average, as do women more than men.

We are not seeing economic optimism translate into greater consumer activity yet - only 16% of adults in June agree 'I am more relaxed about spending money than I was a few months ago', unchanged since April. But a slight majority (53%) agree that 'now is a good time for young people to buy their first home' (also unchanged since April as it happens).

It's early days - I'll keep you posted if anything interesting happens in future waves.

Should We Envy Albania?

You know things are bad (as in, off the scale horrendous) when a new study compares Ireland less favourably to Albania. But before you go buy your one way ticket to the people's paradise of Tirana, it might be worth drilling into the numbers a little more first.

The study - The Happy Planet Index - is from the New Economics Foundation. They have created a composite index (the HPI) that is derived from measures of life satisfaction, life expectancy and a measure of a country's ecological footprint. The HPI is then derived from a combination of these three variables. The higher satisfaction/expectancy the better - and the lower the ecological footprint the better.

As with all such indices - derived from data not originally gathered for the purpose of generating any particular index - you do tend to get some strange anomalies. Like Costa Rica topping the list (and there isn't a single European country in the top 20), and Albania scoring much better than Ireland (along with Eygpt, Saudi Arabia, Cuba and a few other surprise 'winners').

Somebody once said about the United Nations' Human Development Index that it is a measure of how 'Scandinavian' your country is. In other words, what gets measured gets compared. Still, it is reassuring to see Sweden coming out ahead of Ireland on the HPI ranking (even if it ranks a lowly 53rd in the world!) given how the natural order of things is to always compare us unfavourably with Scandinavia ... ;-)

A lot of the messages that NEF take from their HPI ranking are harmless enough. Their Manifesto for a Happier Planet on page 48 of their report identifies the role of alleviating poverty and improving the environment in terms of making people happier. Though their nostrums about 'the evils of consumerism' might date somewhat as the recession bites.

But I would suggestion one possible improvement to their index: add in net migration statistics for each country - immigrants minus emigrants. Those with negative scores (more emigrants than immigrants) would presumably be countries that are not such great places to live? I'm guessing that Cuba might not retain its position at number seven in the world, for example.

Mind you - Ireland might not do too well on that measure either come to think of it. I wonder will Ryanair be opening a route to Tirana any time soon?

Praise Where Praise Is Due

Having recently cast aspersions on Dublin City Council's bike rental initiative, let me also give praise where praise is due. I have recently signed up to the Council's mobile Parking Tag service, operated by Payzone. You first register your mobile phone number, car registration and credit card details. Then they send you a small barcode sticker for your windscreen and thereafter, whenever you park in the city centre, you simply send a short text to Parking Tag that includes the zone you are in (colour coded) and the number of minutes you want to stay. No need to feed the meter ever again.

This is a godsend to me since I never have enough coins for the meter (especially on days when I have two or more meetings in different parts of the city centre). And it also means I don't have to use the awful MPark service anymore, which is being phased out at the end of this month anyway (awful because the meters were out of order at least 50% of the time in my experience).

I've already used the service several times and it works flawlessly. Whenever you text your parking details to Parking Tag you get a text message reply noting when your time is up. They even send you a text 10 minutes before your time is up just as a reminder. This is one of those technology-driven advances that really does make life a lot easier and a great deal less stressful.

I'm with Kevin Kelly - the smartest commentator on big picture technological trends on the planet - when he observes that:

In our ceaseless collective generation of new technologies, we technology boosters can invent more appropriate tools for minimalism, even though they are not doing that for us. Nonetheless, the Amish and minimites have something important to teach us about selecting what we embrace. I don't want a lot of devices that add maintenance chores to my life without adding real benefits. I do want to be slow to embrace technology that I can back out of. I don't want stuff that closes off options to others (like weapons). And I do want the minimum because I've learned that I have limited time or attention.

I think I can put it this way: What we are seeking is the minimum amount of technology that will generate the maximum number of options for all.

Parking Tag is just that: an ideal combination of technological simplicity, efficiency and liberty. Well done.

Scéal Eile

I've been meaning to write about the subject of 'stories' or 'narrative' for some time. I think one of the fundamental challenges we face in Ireland right now is that of shaping a shared, compelling narrative or story about our nation's future and the path to it.

We once had a story but we lost it. Watching RTE's broadcast about Lemass last night, it struck me that the story we once told ourselves had an outline something like this:

We are the young Europeans, with an ancient history behind us and an exciting future ahead of us. And our time has come to take our place in the modern world; to reap the benefits of modernity and to bequeath a much better country to our children and grandchildren.

I don't think that that's the story we tell ourselves now. Optimism, modernity and even the future have become tarnished by cynicism and despair brought on by the hyperbolic boom-bust we are now experiencing. But it will pass. And a new story will emerge/converge around new realities and possibilities.

What that story might be is something I want to come back to it in a future post, but in the meantime I want to share with you some quotes from a delightful book I have just read (and re-read) called The Healing Power of Stories by Daniel Taylor. It's out of print, but Amazon's brilliant used book service will source it for you if you are interested.

Here's a flavour of Taylor's wisdom - firstly on why stories are so compelling:

We are drawn to narratives because we experience our own lives as a narrative, as story.

... The human brain is so constructed that it actually processes experiences in narrative form. It seeks to integrate separate actions, actors (characters), sequence, cause and effect (the primary link between actors and actions) into a meaningful whole.

... Seeing our lives as stories, rather than as an unrelated series of random events, increases the possibility for having in our lives what we find in the best stories: significant, purposeful action. We all want very much for it to have mattered that we were here.

... Understanding my life in this way gives me better reasons than I otherwise have to live life with optimism and courage.

And here he is on why stories matter (for individuals, groups and nations):

The inability to imagine a variety of future stories for ourselves in which our lives are rich and meaningful diminishes on the everyday level the actual possibilities for our lives.

... Stories multiply our possibilities.

... This power of the imagination links the past and present to the future, and gives us the possibility not only to know things, but to create whole new realities.

... Story understands that if we do not know something emotionally we do not know it completely.

... Story is a vessel for carrying meaning. ... Detach meaning from story and both die.

... A genuine story will not leave us alone. It insists, sometimes in the most impolite terms, on changing us. Not necessarily cataclysmic, life-redirecting change, but change notheless.

Here he is on what stories do to us:

A good story is one that makes you good, or at least better. I mean this in the widest sense. Good stories don't simply make you a nicer or more ethical person - though some can; they draw out of you more of what makes you a feeling, giving, thinking, creating, laughing, curious human being.

... For all our individualism, we seem to have a fear and loathing of true freedom. Growing from the deterministic seeds embedded in Darwin, Marx, and Freud, and egged on by the radical scepticism of postmodernism in the humanities, the view has spread that we are powerless to shape the character of our lives.

... Stories tell us otherwise. They insist on the link between character and plot.

... What is a character? A character is a bundle of values in action.

... Everything that happens in a story has the potential for revealing and forming character. The essence of plot is characters choosing. Like it or not, story tells us we are free and therefore responsible. We may be failures but we are not robots.

... Characters in stories much choose, and are responsible for the consequences of their choices. With choosing comes significance.

... Every choice a character makes is a vote against the chaos of infinite possibilities. In a random world everything is possible but nothing significant is likely. ... Story transforms the useless freedom of chaos into the invaluable freedom of responsibility, and it does so by insisting on the significance of choices.

... By truly choosing, a character both limits freedom and gives it value. Each choice limits subsequent possibilities in a way that increases the likelihood of significance. ... Each choice in the middle [of the story] reduces the possible endings, but without those choices the end would have no meaning.

And why stories are our only true guides to the future, and not statistics or forecasts:

Stories engage both the heart and the head and move people to action. Statistics elicit counterstatistics and move people to argue. Stories demand a response (that is, responsibility); statistics encourage a rebuttal.

Finally:

The power of an imagined end, and it literally can only be imagined, lies in its ability to influence present choices.

I hope these few lines extracted from the book (and there were many, many more I could have chosen) give you a sense of why I think stories are so important. The stories we tell ourselves about our future as a nation - and the choices they 'make' us make - will do more to shape the country we will become in five, ten or even fifty years time than anything else we do. As Sean Lemass proved.

Like I said, I'll come back to this topic again (and probably again) in future posts.

Open For Business?

Today's Central Bank statistics add more to fuel to the fire about bank lending to Irish businesses. The latest data are for March and April 2009. I have taken Table B2.2 new business lending volumes to non-financial corporations and I have combined the monthly 2009 data and the equivalent 2008 data to determine what the year-on-year trend is. Note that Easter was in March last year but in April this year - so combining the two months offsets any potential seasonal influences.

Nevertheless the picture is quite disturbing: overdraft facilities are up on last year - just (by 1.1%). But smaller loans (under €1 million) are down: by nearly 18%. And larger loans (over €1 million) are down by over 19%. In the case of the latter there appears to have been a collapse in longer term loans of over 5 years duration between March and April 2009. I have no idea why.

I used to wonder what is the point of Anglo-Irish Bank: now I'm beginning to worry about all the rest of them ...

Horse, Stable, Bolted

Consumers are becoming more price conscious and thereby forcing retailers to cut their prices - shock, horror! That's just about the conclusion of today's Retail-Related Import and Distribution Study from the Competition Authority. It examines the grocery, clothing and pharmaceutical sectors in Ireland for evidence of 'anti-consumer' practices and abuses. Though as the word cloud I've created from the text of the report shows, consumers don't actually get much of a mention in the report ...

The report has rather more to say about the role of government in preventing consumers from getting a better deal. Take pharmaceutical products - the study notes that:

The prices of the vast majority of medicines in the Republic of Ireland and the UK (and thus Northern Ireland) are determined by State policy. Approximately 80% of the value of all medicine sales in the Republic of Ireland is recouped from the State, effectively making it the single largest buyer of pharmaceutical products in the Republic of Ireland.

As part of the tight controls on the sale of medicines in the Republic of Ireland, retailers and wholesalers are legally restricted from going outside the Republic of Ireland for supplies of pharmaceuticals - with the exception of a very small number of specially-licensed importers who, typically have less than 5% of the Republic of Ireland wholesale market.

The impact of the sterling depreciation has been negligible in terms of reducing sales or lowering prices of medicines in Republic of Ireland. Demand for medicines is always relatively stable, even the recession has had only a small impact. The sterling depreciation has given a boost to licensed importers but they are such a tiny part of the supply chain that there is little or no benefit to consumers.

Which might explain why prices in most categories are falling except in those dominated by state pricing decisions (pdf) - namely education and health (and, indirectly, alcohol and tobacco).

Nevertheless, there is a sense from reading the Competition Authority report that it's analyses are already rather dated. Much of the sterling/euro exchange rate anxiety that vexed so many late last year has partially abated. Moreover, recent efforts by retailers to avail of more efficient international buying processes (Tesco and now Dunnes) have ensured further gains for Ireland's cash strapped consumers.

Let's hope their next study takes a more detailed look at the impact of Government policies themselves on consumer welfare (and harm). I suspect there's much, much more room for improvement in that regard. And maybe the forthcoming report from An Bord Snip Nua might go some way to delivering said improvements.

The Economics of Deferred Gratification

A famous experiment in the 1960s involved a group of 4 year olds who were given a marshmallow. They were then left alone in a room having been told they could have a second marshmallow if they just waited 20 minutes before eating the first one. The story goes that those children who did wait 20 minutes then went on to do better at school, be more successful in their careers, report greater levels of happiness, and be less likely to divorce (I exaggerate only slightly!)

The experiment was all about deferred gratification - that quintessentially middle class virtue. Deferred gratification is what gives us the savings that are in turn loaned by banks to businesses who create jobs and wealth; the pension funds that keep us comfortable in our old age; as well as the willingness of parents to invest in their children's education. Without it we would all be a great deal poorer. Deferred gratification may well be the most powerful force operating in the economy: though perhaps the least acknowledged.

The bad news is that deferred gratification isn't what it used to be. Indeed, it appears that the demise of deferred gratification may have been partly responsible for the credit crisis (deferred gratifiers don't max out their credit cards nor take out sub-prime loans). Another consequence of this demise has been the collapse in birth rates in many developed countries and a growing number of developing countries. As The Economist reports this week in a brilliant Survey of Ageing Populations, fertility is now below replacement levels in over 70 countries, which together account for nearly half the world's population.

But surely falling birth rates are the ultimate indicator of 'deferred gratification'? Yes and no: 'yes' in terms of the conscious decision by millions of couples to postpone having children - or not to have them at all (as in the case of a quarter of all German women now in their 40s). 'No' because the decline in birth rates has nevertheless been accompanied by a massive increase in pre-marital sex - reversing the practice in most societies before the invention of effective contraception. As illustrated in the graph below:




It comes from a fascinating paper on Social Change: The Sexual Revolution by economists Jeremy Greenwood and Nezih Gunery. They note that:

Technological progress affects society's consumption and production possibilities. It therefore changes individuals' incentives to abide by social customs and mores. As people gradually change their behavior to take advantage of emerging opportunities, custom (an aggregation of individual behavior) slowly evolves too.

This notion is applied here to the rocket-like rise in premarital sex that occurred over the last century. Now, a majority of youth engage in premarital sex. One hundred years ago almost none did. This is traced here to the dramatic decline in the expected cost of premarital sex, due technological improvement in contraceptives and their increased availability.

... Improvement in contraceptive technology may also partially explain the decline in the fraction of life spent married for a female from 0.88 in 1950 to 0.60 in 1995. This is due to delays in fi…rst marriages and remarriages, and a rise in divorce. Historically, the institution of marriage was a mechanism to have safe sex, among other things. As sex became safer, the need for marriage declined on this account.

The contraceptive pill will be fifty years old next year (it was approved for use in the United States by the Food & Drug Administration in 1960). Nearly half a century later we are still coming to terms with the consequences of a remarkable technological innovation and its wider social, cultural and economic impact. Including the fall in birth rates (not all attributable to the pill obviously), and the huge problem this is creating in terms of supporting ageing populations around the world.

Sticking with the economic impact, we are faced with a growing debate about the role of personal consumption in driving global economic recovery. The argument goes that high saving, high exporting countries (Germany, Japan, China in particular) need to save less and consume more in order to facilitate a 're-balancing' in the global economy. But it isn't going to happen: these countries are ageing faster than many others and - if anything - have an incentive to save even more and spend less. Deutsche Bank's Norbert Walter has argued recently in relation to Germany's imminent labour shortage due to its ageing population that:

In order to create a cushion for that period we should continue to generate current account surpluses and use the corresponding savings now to specifically finance infrastructure investments in emerging markets and developing countries, so that the recipient countries become more productive. They can then help us to finance our import surplus from 2015 onwards via dividend payments on these high-yielding investments. Germans should not indulge in overconsumption now and then have to endure poverty in old age.

So he's calling for more deferred gratification - not less!

Here in Ireland the forthcoming Commission on Taxation looks set to reduce the incentive for deferred gratification by reducing tax relief on pension contributions. It may even go further and compound matters by taxing child benefit without any compensating measures to encourage married couples to have children via the tax system. It might make sense in the short term ... but in the long term it will only accelerate our convergence with demographically-challenged countries like Japan and Germany.

Are there any silver linings in all this? Well it seems from another economic study that older people adopt more of a 'live for today' attitude as they get older - increasing their marginal propensity to consume (ht Geary Behavioural Economics Blog). So with a bit of luck the demise in deferred gratification that gave us the ageing population problem in developed countries might at least partially solve itself due to the 'spendthrift' nature of the generation now retiring.

Of course, if they leave nothing to their children then there might not be any grandchildren ...

Slaughtering Sacred Cows

The Irish Academy of Engineering are likely to upset most everyone with their latest report: Review of Ireland's Energy in the Context of The Changing Economy. There is hardly a sacred cow that left unslaughtered in their report. And like most engineering analyses it is precise, logical ... and quite convincing.

The following cows are put through the IAE abattoir:

• Electric vehicles - 'an unwise investment'
• East-West Interconnection (one of my favourites) - wait until the UK build more nuclear power stations
• Smart metering - 'postpone any major commitment'
• Gas/wind bias of current plan - country 'vulnerable to major supply interruptions'
• Additional electricity generation - better off 'focusing on energy efficiency'
• Renewables share of capacity - don't go beyond minimum EU requirement

It's a plan that assumes we will be a long time getting back to the type of growth trend that warranted a significant expansion of electricity generation capacity until quite recently. Engineers making economists look like raging optimists - who would have thought?

They sensibly call for the removal of the legislative ban on nuclear energy (so that it can be properly considered - not necessarily adopted if the economics don't make sense). And they have a robust focus on making sure the consumer/taxpayer does not end up paying for policy decisions by government in cahoots with the energy sector that are driven by ideology and lobbying rather than by what is robust and affordable.

One other sacred cow taken to the slaughter house is that of green jobs. In relation, for example, to ocean energy and jobs they note:

the Academy cautions against excessive optimism concerning the creation of long term manufacturing jobs associated with these technologies. Ireland is a small market with high labour costs and little tradition of mechanical engineering manufacture. It is always likely to be more successful in creating jobs with a high intellectual value.

Wise words, not least because of experiences elsewhere. For example, Professor Gabriel Calzada has analysed the impact of Spain's renewable energy drive on jobs and found that:

they often are temporary and have received $752,000 to $800,000 each in subsidies -- wind industry jobs cost even more, $1.4 million each. And each new job entails the loss of 2.2 other jobs that are either lost or not created in other industries because of the political allocation -- sub-optimum in terms of economic efficiency -- of capital. (European media regularly report "eco-corruption" leaving a "footprint of sleaze" -- gaming the subsidy systems, profiteering from land sales for wind farms, etc.) Calzada says the creation of jobs in alternative energy has subtracted about 110,000 jobs elsewhere in Spain's economy.

We need more sober thinking like that of the IAE if we are to avoid compounding the economic policy mistakes of the past decade with energy policy mistakes over the next decade.

Just The Business

By coincidence the latest trade data from the CSO points to a recovery in Irish export performance on the same day that the National Competitiveness Council tells us we've become too expensive as a location for exporters. It's probably more of an aberration than a contradiction: the NCC case is compelling (and familiar to anyone following the debate).

The collapse in imports rather than the mild recovery in exports is the truer indicator of domestic economic realities. Both the OECD and the IMF produced separate forecasts yesterday showing a collapse in Irish consumer demand this year, and a gentler reduction next year. It will likely take until 2014 for consumer spending to get back to where it was in 2007. Seven lean years indeed.

More importantly in the short term is the issue of bank lending to businesses. The NCC addresses the issue thus:

There are serious concerns that the turmoil in global financial markets and the exposure of Irish banks to bad loans in the declining property sector is affecting Irish firms, particularly small firms, in terms of their ease of access to finance and its cost. It is critical that the success of viable businesses is not hindered by the tightening of credit standards or the high cost of capital. The ongoing efforts to resolve the banking crisis should:

- Support viable businesses: ensure that the State uses its funds and influence to ensure that banks are lending to viable businesses;

But with the banks forecast by the IMF to lose up to €35 billion on property loans then their appetite for lending might just be a tad restrained. Both the NCC and ISME have drawn attention to this problem - with limited effect so far.

That's a pity because lending to businesses (as opposed to property and land speculators) is crucial to long term economic growth. Chris Dillow references new research which shows that:

a 10 percentage point rise in the ratio of bank lending to firms to GDP is associated with an increase in GDP growth of 0.2 percentage points a year. This controls for other influences upon growth, including stock market activity.

... The researchers also found that bank lending to households has no influence upon long-term growth. ... This has an important implication. It means that if policy-makers want banks to help the economy, they must do more than just ensure the banks are adequately capitalized and tolerant of risk. They must also get banks lending to firms.

It would be a pity if we went and got our costs down to make us more competitive, and incurred all the pain of adjusting taxes and public expenditure, only to discover that the banks are open for business but there's nobody behind the counter? That'll only lead to exporting people. And we know that that didn't work.