Wednesday, October 31, 2007

Reduced to Sell

I got this from a loyal TA reader (thanks Jimmy!) – proof, if proof was necessary, that the laws of economics have finally caught up with the estate agents, construction companies and house sellers of Ireland.

I have noticed a growing number of estate agent signs mentioning price reductions. Though the headline figures suggest only modest house price reductions in Ireland (-1.9% year-on-year in August according to the ESRI), news from the United States shows how things might develop if ‘reduced to sell’ catches on.

So there you have it: if you push the price up then demand will fall; if you reduce the price then demand will rise. Economics 101 as the Americans would say.

On a related matter – the Consumer Confidence Index for Ireland took a dive over the past month (see panel opposite): from -5 in September to -12 in October. Published by the European Commission, the key findings are that consumers are worried about the general state of the economy, and particularly about unemployment. Though their concerns have not translated into any immediate behavioural changes (savings intentions and general purchase intentions remain broadly unchanged), bigger ticket purchases such as houses and cars look set to be (even more) adversely affected than they have been recently.

For example, the index of ‘Intentions to Buy a Car’ for Q4 2007 is close to its all time low reached in Q3 1993. So car dealers take note and remember your basic economics: ‘reduced to sell’ works.

Tuesday, October 30, 2007

Is Obesity Our Destiny?

Those of you who like two dimensional, four quadrant graphs (and I am one of those sad people) will enjoy a new British government report on the fat future that awaits more and more of us. The report - Tackling Obesities: Future Choices - is one of the best examples of social trends analysis and forecasting that I have come across in a long time.

In Section 6 of the report they look at a number of different scenarios (to 2050) for the future of obesity in the UK using the model illustrated in the chart (which I have copied from the report). As with all scenario generation, the critical issue is what dimensions you choose to work with in anticipating different future outcomes. The report explains the choice of dimensions thus:

The project scenarios are based on two critical uncertainties identified through analysis of the drivers for change: first, uncertainty associated with people’s values and behaviour – ranging from a more individualistic society to one where greater community responsibility is taken; and, second, uncertainty over what strategic approach should be taken to meet challenges – ranging from a nation that takes a long-term approach to prepare in advance and reduce anticipated risks to one that has a shorter-term approach that emphasises the ability to react to definite challenges and problems as they arise, focusing on managing the impact.
What is interesting is that the same dimensions effectively apply to all policy choices and related social scenarios (not just to a debate about policy on obesity). Furthermore, though in theory all scenarios are valued 'equally' in terms of likelihood, the choice of dimensions (and their alignment) points to a strong (though possibly sub-conscious) bias towards collective, state-driven intervention (the top right hand quadrant in the graph). In my experience of working with scenarios for businesses and government departments, usually the 'desirable future' is the one in the top right hand quadrant - psychologically we associate the direction of the future with a movement from the bottom left to the top right: hence the importance of how you align your two dimensions.

Of course, reducing a subject as complex as obesity to two dimensions (and just how complex is illustrated in Figure 8.1 on page 121 of the report) can be limiting. Moreover, setting out the argument so that the inevitable conclusion is that our political masters must 'do something' should make us even more cautious. This is true of Ireland as well as the UK. As Jennifer O'Connell has written in her excellent weekly column, personal responsibility is still the key determinant of any individual's weight - and unless you begin there and end there then you open the door to all sorts of draconian infringements of our freedom as citizens and consumers.

The point was put most eloquently by Chris Field, the Western Australian Ombudsman, in an insightful paper on why imperfect markets are generally better than imperfect government policies:

... liberty matters, because a life worth living is one that you are able to author yourself – brilliant decisions and costly mistakes, silly risks and unnecessary caution and everything in between. You grow and learn from the mistakes you make – and these mistakes can make subsequent decision-making all the stronger. Correcting mistakes before we make them is to change fundamentally the nature of autonomous living and remove from our lives one of the means that individuals, and for that matter, societies throughout history, have used to develop and improve. ...

Individual liberty, combined with freedom of markets, leads to the lowest prices, greatest choice and greatest quality of consumer goods and services. Moreover, our markets left to work, without unnecessary regulatory intervention, leads to the greatest productivity and prosperity for all consumers. To the extent to which we harbour some residual concern that some consumers are making mistaken decisions – mistakes that do not otherwise justify regulatory intervention into markets - we can remind ourselves, in the words of Professor Ross Parish: the better off we are, the more we can afford to make some mistaken buying decisions.

Obesity is a problem - but it is hardly up there with global warming and international terrorism. We need therefore to get the problem in perspective - and perhaps the most important one is that of the responsibility of each individual adult for his or her own choices and well being.

Sunday, October 28, 2007

A Waste of Competition

Today's Sunday Business Post carries a fascinating article on the growing alarm among local authorities throughout Dublin City and County about the impact of competition in waste collection services.

Now you might think that their concern relates to falling standards and unfair practices - the kind of thing that might legitimately concern our elected representatives where competition is seen to be having undesirable consequences. But no, this time it's just about the money - the local authorities are worried that private sector waste collectors are doing too good a job, leaving fewer and fewer customers for the authorities' own waste collection services.

The eye of the hurricane right now is where I happen to live myself: in Dun Laoghaire Rathdown. Here the local authority is struggling to respond to the impact of new private entrants on their revenues from waste collection: something local authorities have previously monopolised for themselves in the past. The Sunday Business Post article tells us that the different councils in Dublin have gotten together and commissioned a joint study called: "Uncontrolled fracturing of the Dublin household waste collection market - environmental and technical report".

I have to take my hat off to the authors - the title is pure genius. Instead of 'competition' (which to most of us sounds like a good thing) we get the word 'fracturing' instead. Now who could possibly be in favour of 'fracturing' and all the bad things the word implies? The choice of word is straight out of Sir Humphrey's top drawer of evasive, political euphemisms. A weasel word if ever there was one.

What is at stake here? Private waste collectors (and for the record, I myself have switched to one of them) are providing a better service (more frequent collections and collection of a wider range of materials) for substantially less than the cost of the local authority's service. Surely our local representatives should welcome this improvement in the waste collection choices of local citizens? But of course they don't: what is really at stake is the amount of money local authorities have to spend on the 'vital' services they provide local citizens (festivals, art exhibitions, committee meetings, overseas conference delegations, that kind of thing). Or make that the money available to spend on the staff and councillors they employ to provide the aforesaid vital services.

Hence all the concern about 'fracturing'. The biggest fracture of all that concerns our local authorities is the one emerging between how much they want to spend and how much they have available to spend. As for the quality and cost of waste collection services to local citizens and local businesses, why that's way, way down the list of what really concerns them.

Saturday, October 27, 2007

I was blind, but now I see

I went to see the Blind Boys of Alabama the other night in Vicar St. What an extraordinary performance.

Jimmy Carter - with the band since its foundation in 1939 - had the energy of someone a fifth his age, and a voice like gravel in a cement mixer.

Receiving their fourth Grammy, Carter once said that:

"We've been together for six decades but we're still going strong. We're going to continue until God says it's enough."

I sure hope the Good Lord gives them another decade or two before time's up. Hallelujah!

Thursday, October 25, 2007

The Future has already arrived ...

it's just not evenly distributed. So says William Gibson. One attempt to re-distribute the future more fairly is the wonderful collection of 'prediction tools' gathered together on one web site by Ian Ayers, author of the book 'Supercrunchers: Why Thinking by Numbers is the New Way to be Smart'.

There you will find predictive tools for everything from predicting your baby's due date (if you find yourself in that particular predicament); to predicting your future income to predicting the success of a book just by the title alone (apparently 'Turbulence Ahead' would have a 22% chance of being a best seller!).


PS: you can listen to a recent interview with Ayers as part of the always excellent EconTalk podcast series.

Wednesday, October 24, 2007

The Pensions Cluster Bomb

We hear a great deal these days about the 'pensions time bomb' - the idea that too few workers are putting aside too little (or no) savings towards the pensions they will need when they retire, with dire consequences for the next few generations entering old age.

But to my mind, a more appropriate analogy (or inappropriate, depending on taste) is that of the 'pensions cluster bomb'. I thought of this when I read a recent OECD working paper on the risks associated with the future of pensions provision.

The authors identify not one risk but six risks associated with the future of pensions provision, as follows:

Myopia risk: many individuals are short-sighted and so they consume too much when of working age and save too little for later, especially for retirement. This would lead to low pensions and costs for taxpayers and contributors if these retirees were entitled to old-age safety-net benefits. This is the classic 'time bomb' risk.

Life-expectancy risk: as life expectancy continues to grow in the future, there is a risk that the cost of this will be borne by individual retirees in the form of reduced benefits or later retirement.

Social and labour-market risks: life events such as persistent low earnings, long-term unemployment, caring for children or older relatives, divorce, widowhood mean that workers may build up little in the way of retirement income. Again, the risk could be borne by individual retirees, by governments or by the contributors to pension systems.

Purchasing-power risk: changes in costs and standards of living may not be adequately reflected in adjustments to pensions in payment, leaving older retirees particularly vulnerable. If pensions in payment fall under the poverty threshold, old-age safety nets would be activated.

Policy risk: the political process may result in unanticipated changes in pension entitlements before or during retirement, perhaps leaving individuals with little or no time to respond by changing their labour-market or savings behaviour.

Investment risk: pensions that are financed on a funded basis that is, where assets are accumulated to pay income during retirement involve risks related to the performance of the underlying investments.

The recent green paper on pensions published by the Department of Finance seems mainly pre-occupied with the first three risks, and somewhat less concerned with the latter three risks. It also skirts around a possible 'seventh risk' not foreseen by the OECD authors, namely:

Crowding out risk: whereby the cost to private sector taxpayers of funding the extraordinarily generous pensions of retired public sector workers will leave the same taxpayers with less money to fund their own pension.

This, of course, is one particularly explosive element of the pensions cluster bomb threat. Understandably, politicians will be wary indeed when trying to defuse that one. So perhaps the green paper is an example of the government following Sir Humphrey's timeless advice:

"It is axiomatic in government that hornets' nests should be left unstirred, cans of worms should remain unopened, and cats should be left firmly in bags and not set among the pigeons. Ministers should also leave boats unrocked, nettles ungrasped, refrain from taking bulls by the horns, and resolutely turn their backs to the music."

Tuesday, October 23, 2007

Gratefully Invented Elsewhere

There is a fascinating interview with Joachim von Heimburg, Director of Corporate R&D at Proctor and Gamble, in a recent 'In Business' podcast from BBC Radio 4. Von Heimburg explains that Proctor and Gamble has set itself a goal of generating 50% of its innovation lead growth from innovations that come from outside of P&G. Instead of a 'not invented here' syndrome, P&G encourages a 'gratefully invented elsewhere' approach to innovation.

This struck me as a very sensible - though surprisingly innovative - approach for P&G to take. I've been involved in numerous 'innovation projects' with clients over the years, and the thought has often struck me that many of them would be better off approaching a few venture capital companies and offering to provide seed capital for any relevant new ideas. Rather than laboriously trying to 'invent it first here' (usually with little or no commercially valuable success).

Innovation has become an 'apple pie' word with a lot of policy makers in Ireland - who could possibly be against it? But their model appears to be firmly rooted in a bygone age of five-year plans and white coated laboratory technicians, beavering away in the bowels of corporate head quarters. Yet if mighty P&G recognises it cannot meet the majority of its future requirements for innovation from its own internal resources then it seems unlikely that 'Ireland Inc' can do much better.

For a far more convincing (and inspiring) read on the 'future for innovation' (and much else besides) check out the recent special feature on 'The Future'. In particular, read the article by Nassim Nicholas Taleb - to my mind one of the most original thinkers on the planet today (and someone truly deserving of the label 'genius'). Here's Taleb on the American way of innovation:

America's primary export, it appears, is trial and error, and the innovative knowledge attained in such a way. Trial and error has error in it; and most top-down traditional rational and academic environments do not like the fallibility of "error" and the embarrassment of not quite knowing where they're going. The U.S. fosters entrepreneurs and creators, not exam-takers, bureaucrats or, worse, deluded economists. So the perceived weakness of the American pupil in conventional studies is where his or her very strength may lie.

It is unlikely that any government minister is going to admit that Ireland's science, technology and innovation strategy is based on 'trial and error', and yet that is how so much (indeed most) innovation happens. This is one deluded economist who thinks Taleb is on to something, and that much of our future success will depend on those things that are 'gratefully invented elsewhere' - especially by our American cousins.

Monday, October 22, 2007

Homage to Adam Smith

I was in Edinburgh for the weekend, and naturally I had to pay homage to the grave of the greatest economist of all time: Adam Smith. (Admittedly it seemed 'natural' to me - whereas my other half was humouring me I suspect ...).

Smith's most famous insight - 'the division of labour is limited by the extent of the market ' - is the cornerstone of the wealth and economic growth that we now take for granted in free, capitalist societies. Yet before Smith, most observers were of the opinion that craftmanship was the optimum form of labour, i.e.: one person acquiring and performing all the necessary skills to produce clocks, shoes, guns, boats and much else besides.

Smith's genius was to observe (in his case that of match manufacturing) that the optimum form was to divide up the production task so that those with better skills in one task could specialise in just doing that. Out of that came the leaps in productivity and capital accumulation that (a few historical events later) lead to our modern, specialised societies.

But there is a limit to specialisation, i.e.: 'the extent of the market' as Smith observed. I have acquired some of the skills to produce this blog, for example, but twenty or even ten years ago they would have been totally redundant because there was no 'market' then (in terms of large numbers of people with computers and internet access). But Adam Smith (and Google and eircom and Dell and the ESB) have created a sufficient space in which people like me can specialise (as well as doing the day job, ahem!).

Smith currently adorns the back of the Bank of England £20 note: and should the UK ever join the euro (though I'm not holding my breath) then I do hope there'll still be a place somewhere for him.

Wednesday, October 17, 2007

'Tis far from sushi they were reared

The new sushi bar in Dundrum shopping centre. Snapped with my N95. Isn't globalisation wonderful?!

Monday, October 15, 2007

Nanny State or Au Pair State?

I signed a petition in my local health store the other day. Citizen democracy in action and all that. It is part of a protest by the Irish Association of Health Stores (IAHS) to stop the government removing our right to buy higher dosage vitamins and minerals - something we have been able to do as free citizens for many decades now.

The government's decision is a classic example of the 'nanny state' in action - one in which anonymous experts decide to 'save' us from our inability to fend for ourselves. And because 'nanny knows best', we don't really get to discuss the matter. Instead, the excuse is that we must do it in order to be 'compliant with EU regulations'. Democracy not in action and all that.

Worse, the government's action in removing our rights as consumers is (another) example of 'evidence-free' policy making. Check out the Department of Health & Children web site (or the CSO statistics on causes of death) for data on mortality and morbity relating to vitamin overdoses in Ireland - you won't find any.

And the scary thing? The 'experts' are probably wrong about the dangers of vitamins and minerals just as it now seems they have been wrong all along about the idea that fat is bad for you.

So let's have policy making for grown ups. Let's have an 'Au Pair' state in Ireland - one where we (the taxpayers) pay the au pair (the government) to help out when we need help, otherwise we can manage fine by ourselves thank you.

By the way: eDemocracy in action - you can fill out the IAHS petition online if you wish (nanny says it's okay ;-).

Sunday, October 14, 2007

So good I bought it twice

I finally downloaded the new Radiohead album (their website was having problems so it took a while). Maybe something to do with the 1.2 million others who had the same idea in the first two days of its release ...

As I mentioned previously, this is an interesting innovation - you pay what you want (or nothing) - in other words, a kind of 'digital busking'.

So I paid, er, £0.00 the first time - and having listened and enjoyed the album I've gone and bought it again: for £6.98 (or approximately €9.99 - the going rate for albums in the iTunes shop). Plus the 45p 'handling fee'. For some reason the Radiohead website only gives you the option to specify a sterling amount.

By the way - this is not the album cover, it's from a blog on ideas for the cover as the 'hard copy' version of the album is not due out until next year, and so there's a competition to design the final version. This version of the cover is a play on the website.

Friday, October 12, 2007

Should we worry about oil?

With oil hovering on the wrong side of $80 a barrel lately, maybe it's time to plan for a different energy future to the 'business-as-usual' one we have all gotten used to.

In its forecast for 2008, the Central Bank of Ireland assumes an average oil price of $71.80 a barrel next year: almost 15% below its recent highs. What if they are (seriously) wrong? What if the price of oil moves towards $100 a barrel as some pundits have recently forecast? We will be faced with a very different economic outlook, and consumers will be paying out a lot more for personal transportation (and electricity and gas to light and heat their home) than they have done so far this year.

I have worked on a number of studies and analyses before in relation to Ireland's vulnerability to an oil shock. The message is clear: part of the success of the Celtic Tiger over the past decade has been the extraordinarily low prices of oil and gas historically speaking - which in turn have fuelled economic growth and our trade-led success.

We cannot and should not assume that we will see a return to such low prices again, nor that the future will see only modest increases in energy prices beyond their current levels (as the Central Bank does). There are lots of smart people and smart companies in Ireland and abroad working on innovative new ways to get more from the energy we consume as well as to find new sources of energy.

Let's hope they succeed before we have to make some very hard decisions as individuals and as a nation.

Wednesday, October 10, 2007

Digital Caffeine

For those of you who like your intellectual stimulation in double espresso sized servings then you are going to enjoy TED.

Among other things, check out Steven Pinker on why the 21st century is the most peaceful time in human history, and African journalist Andrew Mwenda on why development aid is a bad idea (he got into a row with Bono - who was at the talk - over that one!).

It's not all heavy btw: there are some amazing artists, designers and performers for your entertainment.

One of those "isn't the internet wonderful" kind-of-sites.

Tuesday, October 9, 2007

Consumer Spending Crunch

The Central Bank has looked ahead to 2008 and doesn’t like what it sees. The worrying forecast for marketers is the one for consumer spending – the Bank projects a decline in spending growth from 10.25% this year to 6.25% next year. That includes inflation: but if you just focus on consumer spending volumes then growth will fall from 7.0% this year to 3.75% in 2008.

The key question then: are you in a sector that closely follows the trend in overall consumer spending, or not? I have analysed the correlation between overall consumer spending growth and growth in different sub-sectors since 1995 to get some clues (a full set of the data I used is available from the CSO - tables 13 and 14 are the key ones: note, opens as an Excel spreadsheet).

If you are in the clothing, footwear, alcohol, telecoms and tobacco sectors then watch out – in all likelihood your market will experience the same sharp downturn in its growth rate next year as total spending.

On the other hand, if you are in the entertainment, travel (abroad) and non-alcoholic beverage sectors then you may find yourself wondering ‘what slow down’?

Of course, it is important to note that growth is still growth – and when the consumer spending pie is as big as it is (over €91 billion this year alone), then 6.25% adds up to an extra €5.8 billion in spending next year. We'd all be happy with a piece of that extra pie.

Don't Marry for the Money

The recent Census report on household structures in Ireland points to a sharp rise in the numbers co-habiting either before marriage or instead of marriage. Does economics help explain any of these trends? Of course, you should realise that economists can be unsentimental when it comes to matters of the heart. For example, it was reported recently that:
"Researchers from Aberdeen, Bristol, Edinburgh and Glasgow universities discovered that high-IQ women saw marriage prospects fall dramatically, but men with high IQs had little trouble finding a mate. They found that for each 16-point rise in a woman’s IQ, her marriage prospects declined by 40%, but the man’s chances of marriage increased by 35% with each rise." Sunday Times
So if you don't marry for brains, would Ireland's singletons be better off marrying for looks and/or money? The infamous 'gold digger' comes to mind: usually an attractive young woman in pursuit of (or pursued by) an older, affluent man ('no fool like an old fool' and all that). But in these days of pre-nuptial agreements even that may no longer work. Economists and financial types are surely more immune to the calculated scheming of would-be spouses - aren't they? Though as this amusing exchange suggests, maybe marrying for love is a lot less complicated than any of the alternatives.

Friday, October 5, 2007

The Future is Hi-Touch

Forgive the self-referential photo, but I wanted to show off my new iPod Touch - it comes with built-in wi-fi connection and naturally the first thing I did was check out my blog!

Quite simply it is the Jaguar XKR of mp3 players - in a word: Gorgeous.

Technology just doesn't get any better than this: design, feel and functionality. It makes my new Nokia N95 seem like something out of the Flintstones.

The iPod Touch also has an important economic lesson for Ireland and Irish businesses - future economic success will be about the ability to design, not the ability to manufacture (despite the doom and gloom prognostications of some commentators). The point is brought home powerfully when you open the box the iPod comes in. Printed across the front is: "Designed by Apple in California" - where it is made is secondary and not explicitly stated (China by the way, in case you couldn't guess).

As Dan Pink, author of the inspiring book 'A Whole New Mind' points out, the MBA of the future will be the MFA: Masters in Fine Art. Already, universities like Harvard are integrating collaborative work with designers into their MBA coursework. Design, and the whole creative process of innovation, is where Ireland Inc will secure its future wealth. The softer stuff, the hi-touch not just the hi-tech, will give Irish businesses a harder edge with which to compete.

And if you think I am exaggerating consider this: the maufacture and subsequent transportation of an iPod to Europe or the USA accounts for just 20% of the retail price. The other 80%? The gorgeous part of course.

Tuesday, October 2, 2007

Set the Music Free

God bless free-market capitalism: now even the music is (legally) free - that's if you're a Radiohead fan that is.
The band are bringing out the first album since (the less than critically aclaimed) 'Hail to the Thief' in 2003 - and have decided to invite fans to 'pay what they think it's worth' when the new album goes on release on 10th October.
In an age of digital downloads (and often illegal ones at that) this is a brave decision by Radiohead. They are relying on the 'honour system' to determine what fans will pay - which can be zero to €9.99 if you opt for the regular iTunes price for an album.
If, like me, you would happily pay the full price for another 'The Bends' - and would rather keep my money than buy another 'Kid A' - then this is an interesting development. Of course, you won't know until you have bought the new album how close it is to either previous recording. Maybe I'll just buy it twice: first for next to nothing and then for the full rate if it really is that good. Scout's honour I will.
Still, this does create an interesting precedent - and it will be interesting to see what other 'honour system' type pricing offers will emerge in the next few years. Certainly anything that can be digitised (music, software, market research!) may well lend itself to this approach.
So I guess I'll be watching (and listening) to Radiohead's next move with more than just a fan's interest ...

Monday, October 1, 2007

Confidence Tricked?

Something very interesting is happening to Irish consumer confidence right now. The chart shows the trend in the balance of 'intentions to save over the next 12 months' asked in a monthly survey of Irish consumers since January 1985. Over the course of twenty years, the balance of consumer savings intentions has switched from negative (more were planning to reduce savings than increase savings) to positive (more are planning to increase savings than reduce savings).

Despite our credit/debt binge over the past decade, as far as consumers in general are concerned they have become net savers, not borrowers.

More interesting still - the savings intention index for last month (September 2007) jumped to its highest level since the survey began back in 1985. The ESRI are currently forecasting a modest jump in the national savings ratio next year from just under 6% of disposable incomes this year to just over 6% in 2008. Perhaps we are in for something more dramatic if consumer intentions are our guide?

Marketers in the financial sector could well see a surge in demand for savings and investment products over the coming months and right through to 2008. Others, however, should note that a higher savings ratio than forecast will cause consumer spending growth to fall back much more sharply: think low single digit growth and plan accordingly.
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