Tuesday, December 30, 2008
2009 is going to be a year of Exit or Voice for many of us. Take the issue of competitiveness. I was talking to a business man today who owns a manufacturing company with factories in Ireland, England and Eastern Europe. He reckons his English manufacturing costs are 30% lower than his Irish costs. His Eastern European costs are about the same percentage lower than his English costs. He made these calculations before the recent weakness in sterling against the euro. Expect parity any day now. The recent Global Competitiveness Report 2008-2009 ranks Ireland 22nd in the world for competitiveness, by the way - the UK is ranked 12th. We're a long way behind.
How do we become competitive again? Remember, firms compete - not nations. So it is the individual response of thousands of businesses that will determine how effectively we cope with our worsening competitiveness. The short run response will be to source cheaper inputs if you are a manufacturer or retailer. Cross-border shopping is not just for consumers. But more and more private employers are going to offer their own form of 'Exit or Voice' to their employees, i.e.: ask them to take a pay cut or to find employment elsewhere. It won't be pleasant, but it might be good for the economy overall, as anticipated by John Fitzgerald.
Like I said in my previous post, the size of the private sector relative to previous recessions means that we now have 'built-in-destabilisers' which means a far faster response to deteriorating economic circumstances in the past. And hopefully a faster recovery as things improve as well.
Longer term it boils down to productivity: investing in the hardware, software and employee skills necessary to deliver more for the same or less. The problem then is the medium term: a lot of employers might just decide to exit rather than voice their anger at our political masters - and bring the work to Poland, Lithuania etc rather than wait for them to come here looking for it. The bottom line: it isn't any business owner's 'patriotic duty' to go bankrupt waiting for our political masters to get their house in order.
Monday, December 29, 2008
What about 2009? I'm with Philip Stephens who suggests we need to peer into the present, so unique are the changes we have experienced and continue to experience. So here I go again:
Nice Place: last year I noted that Ireland enjoys an extraordinary degree of freedom and peace relative to too many other places in the world, and that remains the case - despite our economic dowturn. For example, we rank 12th in the world in the EIU's recently published Democracy Index (pdf). I don't expect that to change much - one thing the Irish are not afflicted with (yet) is the Anglo-American predilection for turning every crisis into an assault on civil liberties.
New Irish: the continued smooth integration of many immigrants via naturalisation as Irish citizens is a welcome development - as is the flexibility of the EU labour market to accomodate the departure of tens of thousands of earlier immigrants into Ireland who now seek better opportunities elsewhere. We might just have survived an unprecedented experience of mass immigration without the social disruption it has caused in other countries.
Europhilia: though our membership of the eurozone is a huge burden for exporters to the UK right now, our membership has also prevented us becoming the next Iceland. To that extent, we should be grateful we will be spared the economic implosion affecting that other island, and for the degree to which we remain somewhat sheltered by the euro in the ongoing financial storm. The second Lisbon Referendum will receive a resounding Yes vote for that and other reasons.
Recession: it's going to be a bad one in Ireland - the massive expansion of the private sector workforce during the boom period, on the back of a consumer credit surge, means that we now have 'built-in-destabilisers' operating in the economy. Just note the speed and scale of layoffs in reaction to the recession so far: expect all records to be broken in 2009.
Government: okay, the Government has resisted an assault on our civil liberties, but it still continues to insult our intelligence - we have a Government that is unfit for purpose: our Achilles Heel in terms of getting through the year ahead without irreparable damage to the economy and society.
Competitiveness: we are one of the world's most open economies - which means we'll feel the full brunt of a collapse in global trade in 2009 (now gathering pace, as indicated by the Baltic Dry Index). Our lack of competitiveness guarantees wrenching changes to the Irish economy without the analgesic benefits of a currency depreciation to ease the pain.
... and The Ugly
Depression: I don't think there's any prospect of a global 'return to normal' for the foreseeable future - more like a rapidly worsening situation as the collapse of the candy-floss financial economy trickles down into the implosion of our globalised, trade-based economy. Something wicked this way comes ...
War: what have humans traditionally done when resources are scarce, trade isn't an option and leaders are under pressure to deliver the goods? You only have to think of the Middle East.
Weather: and just to make matters worse, it looks like we are only at the start of a worrying period of Global Cooling.
This is my fourth recession and I have to say I haven't seen one with so much potential to turn even uglier than this one. Last year, I was on balance optimistic even as the storm clouds of pessimism were gathering. Well, the storm is upon us and it's very hard to see any obvious end in sight. All that said, I am grateful to be living with my family and friends here on our damp, dull island than to be living in many other parts of the world right now. We are a small country, and we are a resilient people when we have to be. We can come through this together - wiser though poorer - if we pull together. I'm not going anywhere else so I guess I'll have to do my part in the year ahead.
Wednesday, December 24, 2008
There's a delightful interview with Studs over at Speaking of Faith about this book, and his reflections since its publication. At one stage he observes that death is a full stop at the end of the sentence - it's what comes before that counts. I'm inclined to agree.
Of course, his book about Death is really all about Life. And it did make me realise that life goes on: even in recessions or depressions. People will fall in love, become parents and bury loved ones in 2009 no matter what happens to GDP or the global economy.
So on that note I'm taking a break from blogging, twittering, Google reading etc for a couple of days. I wish all of you - Catholic/Protestant, Jew/Gentile and Dissenter - a very Happy Christmas.
Monday, December 22, 2008
The question is: will it work? The proposed recapitalisation probably falls into the category of what Patrick Honohan calls Too Little, Too Late (pdf) in a useful summary of the crisis so far. The amounts seem small relative to the potential liabilities - and the announcement only covers three of the six original institutions. Presumably there's more to come - which is the problem. The level of uncertainty now facing shareholders, debtholders and other banks tied into syndicated lending with the three just 'recapitalised' is not what is needed right now.
Worse, as the little €300 million euro eco-fund indicates, once governments get used to directing things themselves they're liable to experience a certain amount of 'mission creep'. We've seen it with the car bailout in the United States - even our own pigmeat industry. I sense a slippery slope, anticipated by the authors of How Not To Solve A Crisis (pdf) when they observe that:
The better solution to the problems that continue to plague the financial system would be to reduce regulatory burdens that contributed to the crisis. If financial markets were governed by simple, clear rules, there would be less incentive for regulatory arbitrage and more incentive to generate innovations that create genuine benefits for people.But the genie is out of the bottle, and we should be worried. Willem Buiter is too - he has this to say:
Finally, to the extent that fiscal measures might help solve the current problems faced now not only by financial companies but also by the majority of participants in the global economy, we caution against any direct intervention by government. Governments are terrible at allocating resources and their attempts to boost our economies will almost certainly backfire. Economic growth is the result of entrepreneurs identifying and filling niches by developing better products and production processes, thereby boosting production and productivity. In contrast, when governments throw money at the economy, they divert resources away from their most efficient and effective uses, undermining innovation and growth.
The best way to stimulate the economies of the world would be to reduce the number of overbearing taxes and regulations that currently inhibit the development and delivery of all manner of products and services.
Even if the government could do something about individual cases of unemployment or small business failure, God forbid that they should try. The responsbility of government is not to provide security at all cost - to keep us safe from all harm. It is to defend and safeguard our freedom. The main threat to our freedom is not Al Queda, other mad terrorists or the acknowledged totalitarian threats of the past and the present. It is government itself - the well-intentioned, paternalistic, we-know-what’s-good-for-you, we’ll-ram-your-happiness-(as-we-see-it)-down-your-throat apostles of benevolent despotism that are in the ascendant throughout what I used to think of as the free world.He's absolutely right. The only way to stop this is to demand tax cuts rather than spending increases. US experience shows that the multiplier impact on GDP growth of tax cuts is three times that of infrastructural spending. Moreover, the Government could even secure a double whammy benefit through tax cuts: by saving the Irish retail sector. The Forfás Report published today shows massive differences in the costs of doing business in Dublin versus cities in the UK and Belgium. Not of all of it is down to input cost differences (implying some 'rip off' behaviour) - but enough to make a meaningful difference if it could be narrowed.
So, I'm off to form an orderly queue at the Department of Finance - it's the consumers' turn now.
Sunday, December 21, 2008
I think that every one of us would have to say, with our hands on our hearts, that we were all consumed by that same element of consumerism... Somewhere along the line, we began to think that we weren't happy with deferred gratification... We had to have it now and in this moment, and I think that we have paid a very, very big price for that very radical shift. And now the balance presumably is going to swing the other way, and it will be no harm... We clearly have come from from quite unbalanced times, and they have not been able to secure for us the kind of peace of mind, peace of heart, contentment, we would have wished for. Now we're trying to find our way back to a more rooted and possibly more modest time.It isn't in her official speech, but it hasn't been denied, and she has said much the same thing before. Her speech struck a chord, though probably not the one she intended. Even The Irish Times was moved to condemn more 'finger wagging from the Aras', and the Sunday Independent has suggested she takes a €200,000 pay cut just to show the rest of us what 'modest times' really mean.
There is something extraordinarily irritating about clergymen, politicians and academics lecturing the rest of us hoi polloi about our crass materialism and rampant consumerism. Apart from the fact that they never have to worry about where the money is going to come from to pay their bills every month, I do wonder about the Amish-like utopia they want us all to enjoy. I walk past empty shops and restaurants and see the shattered dreams of the people who started them, and the death of their ambitions to build successful businesses that met the needs of their customers. Still, at least they can now secure "the kind of peace of mind, peace of heart, contentment, we would have wished for". It seems to me that the people who decry 'rampant consumerism' are actually filled with contempt for real people.
But not all clergy are that idiotic. As the Reverend Robert Sirico observes:
The Catholic Church in Ireland could do with a few more advocates of 'compassionate consumerism' like Father Sirico - they might even play a more useful part in getting us through the difficult times ahead.
This is the time of the year when almost everyone has gift-giving (if not gift-getting) on the mind. We also hear the usual series of warnings against making Christmas too materialistic. That is, of course, completely appropriate when animated by a desire to remind us of the belief that "veiled in flesh" it is the Godhead we see -- as one of the more theological carols teaches us. But when some people imply that buying or giving gifts is somehow sinful and goes against the spirit of Christmas, this is another matter all together...
There is another, perhaps more practical aspect of the giving of gifts that is worth pondering which was brought to the fore by Arthur Brooks, author of the 2006 book "Who Really Cares: America's Charity Divide - Who Gives, Who Doesn't and Why it Matters." ... Among his findings was that the general profile of the gift-giver is one who has a strong family life and who attends church regularly.
Yet, there is another aspect to Mr. Brooks' research worth noting, especially at this time of the year and in the midst of these troubling economic times. At a recent conference in Rome, Brooks said that his research revealed that "when people give they get happier, and when they get happier, they are more productive and become richer." ...
... to have a general spirit of gratitude for the innumerable gifts which surround us, yes, even in these difficult and uncertain times, is to increase a positive sense of the world. In this we see a hopefulness of spirit which in turn enables us to look about us and see the great potential that the world holds in store if we will only keep our eyes open...
This is not merely mind-over-matter thinking. On a merely economic level, we know that the very nature of enterprise and entrepreneurship is the ability to see what others have not yet seen and to be able to discover what others have not yet discovered. And all of this requires a belief that there is, indeed something out there that can be discovered.
Saturday, December 20, 2008
My driver talked about the choices he faces in terms of moving away from Bangladesh, his own economic situation (he has a wife and two children to support here in Ireland), his progression from catering to taxi-driving and his hopes for the future here in Ireland. He has a social science degree - and I don't seem him driving taxis for the rest of his working life.
As it happens, one of my colleagues announced later at the party that she has this week become an Irish citizen. She describes herself as a 'child of the former USSR': with parents from Russia/Ukraine, growing up in Lithuania, and grandparents from Estonia and Latvia. And now she and her children are Irish. I'm delighted for her.
In fact, she told me there were some 250 people like her at the citizenship ceremony this week. And she heard there were 25o there the previous week. You can apply for citizenship after living in Ireland for five years - you may have to wait another two years before your application is accepted (if at all). There's something that should be broadcast live by RTE every week (drop the Dail coverage if there's any scheduling bottlenecks ...)
I think this is one of those trends with long-term, positive potential for Ireland. We are becoming a more culturally open country at a time when we need - more than ever - to rethink our place in the world and reshape our global economic relations. And the energy, enthusiasm and - yes - patriotism of these new Irish citizens will ultimately be part of the new narrative about Ireland and our future. We are blessed to be chosen by such people.
Moreover, the Irish people are cool with immigration. The recent Eurobarometer survey asked people all over Europe about the two most important issues they felt faced their individual countries. Needless to say the economic situation and unemployment predominate - in Ireland as well as throughout the EU. And only 4% of adults in Ireland think that immigration is one of the two biggest issues facing Ireland. Down from 5% a year ago. The sooner we start talking about new Irish citizens and not just immigrants (many of whom are EU citizens and won't ever become Irish citizens) then the sooner we can start crafting our new story.
Finally, another insight from the same survey: asked what should be the main objective of the European Union, 26% of Irish citizens said the main priority should be developing the economy and boosting growth in the EU. This was the highest percentage of any country in the EU27 survey. Organisers of the Yes Campaign for the Lisbon II Referendum please take note ...
Friday, December 19, 2008
The conference was mostly about the efforts by various regulators and agencies to affect consumer behaviour, especially with regard to financial services. Some of the papers even offer insights into the origins of the credit crunch, i.e.: the sub-prime lending bubble that morphed into financial dioxin for the global monetary system.
I found the paper by Botond Koszegi on Time and Decision: The Taste for Instant Gratification particularly helpful in this regard. Koszegi argues convincingly that consumers suffer from Present Bias. Simply (and obviously) the present is more important to us than the future, so pleasure today matters more to us than pain tomorrow - even if pain tomorrow matters more to us than pleasure tomorrow. And of course, tomorrow never comes.
So Koszegi notes that:
- That is, the decision making environment completely favors the consumer's short-term preferences at the expense of her long-term ones.
- Similarly, a consumer with present bias will consume and borrow too much, exercise too little, etc. from her own point of view.
- Policies that tilt the balance more toward her long-term preferences can be welfare-improving.
He points out that the sub-prime mess came about because the offer - initially cheap mortgage repayments followed by more expensive payments later - played to the Present Bias of many of those who took them out. Regulation to avoid such a thing in future (though I can't see a big rush back into that market for some time/several generations to come) will raise the upfront price of the transaction in order to overcome Present Bias.
Freakonomics makes a similar point about credit cards and the fiendish genius of minimum repayments. By giving people with strong present bias the opportunity to have the pleasure now and the pain tomorrow they lock consumers into unhealthy patterns of behaviour, which is why most repayments are 'anchored' by the amount of the minimum repayment.
All well and good, but what about those now 'under water' with their debts? In the United States, one in five mortgages exceeds the value of the home it was used to purchase. Niall Ferguson has a thoughtful piece in today's Financial Times about the issue of debt 'forgiveness'. He proposes that it may be necessary to convert part of the mortgages into (very) long term, low interest rate loans to the home owners (not tied to the properties), who can then pay off the now smaller mortgages by selling their houses and restoring some liquidity to the housing market.
It's a good idea - fiendishly genius enough for Irish banks to consider perhaps?
Thursday, December 18, 2008
But has sentiment 'gone too far'? As usual in Ireland we tend to be more 'emotionally volatile' when it comes to these kind of surveys than in other countries. It's usually 'boom and bloom' OR 'doom and gloom' with little hanging about in the middle. I wonder sometimes if it is in the nature of smaller countries - perhaps we have a more shared 'zeitgeist' than in larger countries, and so we absorb and share the same mental model, especially about the future. We also have a more homogenous media - so perhaps if the media paints reality to be a certain way (mainly negative recently) then we reflect that back in opinion polls and our behaviour? Maybe not, for as Tim Harford observes about the influence of media on consumer confidence:
It is true that the media can set the economic mood. Two Federal Reserve economists, Mark Doms and Norman Morin, have found evidence that media reports of economic distress (pre-credit crunch) have always tended to knock consumer confidence, even if the economy is doing well. Thankfully, it is a long way from the survey to the high street. Researchers at the National Institute of Economic and Social Research have concluded that surveys of consumer confidence do not provide much help in predicting what consumers subsequently do. In other words, if Peston tells us it’s bad, we repeat his incantations when someone with a clipboard asks us how we’re feeling. Then we pull out our wallets and hit the shops.Peston is the BBC's equivalent to our George Lee, in case you were wondering.
But as I was saying at a discussion recently about the re-running of the Lisbon Treaty, we have to remember that people are voting about the future. The future - deep intake of breath - doesn't actually exist. It's a mental construct. More precisely: it's an emotional construct. The future is emotional. And the two predominant emotions we bring to our imaginings about the future are Fear and Hope. Right now, Fear is in the ascendent. The No Campaign on the Lisbon Treaty was and is a campaign based on fear about the future.
But what about Hope? As psychologist George Weinberg once said: "Hope never abandons you; you abandon it". Ireland has abandoned Hope - but we can get it back. We need to; and we can. We need a new story about our country - to replace the one we told one another and the world until very recently. The Celtic Tiger story was one of suffering and success. Our new story will be one of regret and renewal. We need to start telling that story in the New Year - to have the hope to 'hold out its hand in the dark' as another George (Iles) once put it. We cannot let the grip of fear tighten.
Tuesday, December 16, 2008
The primary audience for the report is the Government. This is possibly its biggest flaw. Government in Ireland is more of a barrier to realising the full potential of our digital future rather than a catalyst to achieving it. That said, government can't be ignored (nor can most barriers) so it is wise to at least try and get them to raise the barriers. I wish the authors well (genuinely) for they have set themselves a mighty task.
How great a task is evident from the fiasco that is the Reach Project (a kind of one-stop-shop for citizens to access public services). As reported in the Irish Times today (citing an earlier report from the Comptroller and Auditor General), the Government's attempts to get its own digital strategy in place have been characterised by poor management, long delays and massive budgetary overruns (I know, what's new?). To quote the C&AG report:
Government approval for the development of the Broker was given in May 2000, but neither a budget nor a timetable for the project was set at that time. Reach began to organise and staff up for the revised mandate, and to plan how the Broker might be delivered. It moved through software development stages designed to test the Broker concept (completed by August 2001) and then to develop a prototype of the proposed system (completed by April 2002). At the same time, work was underway to find a partner to build, deploy and operate the Broker. The invitation to tender for provision of those services was issued in July 2002.I was part of a group tendering for Broker Version 1 late in 2003. Even then we could smell turkey, and it wasn't because Christmas was coming. Developing a service that nobody wanted and couldn't be delivered sort of seemed like a bad idea at the time. €37 million later my instincts (and those of most everyone else exposed to the project) were confirmed.
The Broker project was reviewed in late 2002, in the light of the responses received from bidders. This led to a scaling back of the proposal. A revised and less ambitious first phase (Broker Version 1) was approved by the Cabinet Committee on the Information Society in May 2003. At that stage, the cost of development of the proposed Broker Version 1 was estimated at around €14 million.
A contract to develop and service the Broker Version 1 was signed in February 2004, with a target to have the system operating by August 2004. Delays in completing the project occurred for a variety of reasons, and the project was finally completed in December 2005. The final expenditure was of the order of €37 million, when all the costs associated with development of the system are included. Ongoing costs are expected to be in the region of €14-15 million a year.
And that was the outcome in relation to a simple portal. How anyone expects the Government to actually deliver a joined up digital strategy is beyond me. Okay, things have changed since 2003 but not that much - the C&AG report came out in January this year.
I think the Government (any government) needs to take a Hippocratic Oath before it embarks on any policy initiative: 'first, do no harm'. Maybe then some good will come of their efforts, at a slightly lower price than heretofore. I wish everyone involved in the IIEA initiative every success - and I will try and add my tuppence worth from time to time on the blog they've now set up to move their discussions forward.
Monday, December 15, 2008
I subsequently read the article in yesterday's Sunday Business Post explaining that many restaurants are now closing on Sundays due to efforts by the National Employment Rights Authority (NERA)'s to enforce 1980s legislation. This legislation requires restaurants up to double the standard hourly rate on Sundays.
Insanity. What kind of demented bureaucracy sets about doubling the cost of employing people as the unemployment rate itself is in the process of doubling? There's usually 4-5 people in the kitchen and 4-5 floor staff in the restaurant on Sundays - now, instead of earning double their hourly rate, they are earning nothing. Economics for slow learners I guess.
I love the NERA website, by the way. It has two links: one for employers and one for employees. The one for employers says 'What are my responsibilities?', the one for employees says 'What are my rights?' Don't you just love it: employers have responsibilities but no rights; employees have rights but no responsibilities. Like the rest of the panjandrum of labour market meddling bodies, NERA seems trapped in a Celtic Tiger time warp - Irish Ferries redux. In case they haven't noticed, the workers whose rights they are so anxious to protect are starting to leave on the self-same ferries.
And what is with the insane idea in this day and age that anybody should be paid extra for working on one day of the week rather than another? It's a wild guess, but I doubt if any of the 10 workers who used to work in the restaurant are devout Christians, wrestling with the ethical problem of working on the Lord's day. For that matter: shouldn't we extend the same double time to Jews working on Saturday or Muslims working on Friday? That last one was a joke, by the way, just in case someone from NERA thinks it's a great idea ...
Of course, economic reality will eventually dawn - even in the sheltered sector of state quangos. As Lucy Kellaway observes in today's Financial Times, 'money is the new secret of a happy job':
Over the past decade, the rich, professional classes have developed an increasingly unhealthy attitude to their jobs. We took our jobs and our fat salaries for granted and felt aggrieved if our bonuses were not even bigger than the year before. We demanded that the work be interesting in itself and, even more dangerously and preposterously, that it should have meaning.
The result of all these demands was, of course, dissatisfaction. We had climbed to the very top of Maslow’s hierarchy of needs and discovered that, at the top of the pyramid, the air was very thin indeed. As an agony aunt, I found that by far the most common problem readers submitted came from rich and senior professionals who had all their basic needs more than catered for, leaving their souls in torment. Help me, I’m bored, they cried. Or, worse: what does my work mean?
In the past few months, anguish of this sort has vanished. When one’s job is at risk and one’s savings are a shadow of their former selves, the search for meaning at work is meaningless. The point of a job becomes rather more basic: to feed and house (and, at a pinch, to educate) one’s family and oneself. If we can do this, then anything we manage over and above this is a bonus. Once expectations have fully adjusted to this new reality and we see earning money as the main reason for work, greater satisfaction will follow.
The bottom line is that we need to rapidly dismantle the straightjacket of partnership-inspired labour market madess: while we still have 'responsible' employers willing to hire staff and meet their customers' needs.
Sunday, December 14, 2008
The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.Is this Brian Lenihan's Lehman Brothers moment? Should he let Anglo Irish Bank fold or should he rescue it? Anglo has lost nearly 97% of its shareholder value since July 2007, leaving its share price at 38c on Friday. The market seems to have priced in a very, very bleak future for Anglo. Seems reasonable.
Since Anglo's shareholders have lost most of what they ever owned in the bank, their interests are secondary at this stage. Savers are already protected by the Government's guarantee scheme, so that just leaves employees and borrowers. The former are, I'm sure, already circulating their CVs to alternative employers. A wise course to follow. As for the latter, the question really is one of contagion. What happens to Anglo's borrowers and to the wider economy if Anglo goes under? To the extent that some of the loans are undoubtedly collateralised with other Irish (and non-Irish) financial institutions then there is a real risk of contagious defaults. Financial dioxin, if you like.
Certainly that tends to be the consensus on Lehman Brothers: in hindsight it would have been cheaper to prop them up, given the astronomical cost of the clean up once they went under because of the intricate linkages between Lehman and other institutions. Does the same apply to Anglo Irish Bank? Does Brian Lenihan feel lucky? Worse, because the Irish government has effectively underwritten Anglo and the other banks the international markets now see Anglo's difficulties as Ireland's difficulties. Here's David McWilliams in today's Sunday Business Post:
... in the past two months, the market’s perception of a sovereign default by Ireland has increased twenty-fold, while the banks individually have seen their default risk collapse. So, rather than the sovereign state bolstering the credibility of the banks, the banks have contaminated the creditworthiness of the sovereign! Had Lenihan moved quickly to recapitalise and had he swiftly fired the culpable, this might not have happened. Because we dithered, the market now sees that the guarantee was nothing more than an underwriting of bad bank behaviour and has reacted by transferring the liability of the banks onto the state.This really couldn't come at a worse time for the Irish Government. Global markets are increasingly wary of sovereign debt default risks and this in turn is limiting the room for manoeuvre of countries like Ireland. We don't want to be the next Iceland. Here's Willem Buiter's analysis:
Make no mistake about it; this trend is going to get worse, not better. If the minister prevaricates, he will simply undermine the ability of the state to borrow for hospitals, because he is trying to protect the banks’ boards and senior management most of whom are millionaires.
For the first time since the German default of 1948, a number of countries in the north Atlantic region (North America and Western Europe) face a non-negligible risk of sovereign default. The main driver is their governments’ de facto or de jure underwriting of the balance sheets of their banking sectors and, in some cases, of a range of non-bank financial and non-financial institutions deemed too big to fail. Unfortunately, in a number of cases, the aggregate of the institutions deemed too large, too interconnected or too politically connected to fail may also be too large to save. The solvency gap of the private institutions the authorities wish to save exceeds the fiscal spare capacity of the sovereign.
The clearest example of the ‘too large to save’ problem is Iceland. Iceland’s government did not have the fiscal resources to bail out their largest three internationally active banks. The outcome was that all banks went into insolvency. The government then nationalised some key domestic parts of the three banks out of the insolvency regime, decided (under massive pressure from the British, Dutch and German governments) to honour Iceland’s deposit guarantees and left the rest of the unsecured debt to be resolved through the insolvency process.
Other countries face the problem of the inconsistent quartet ((1) a small open economy; (2) a large internationally exposed banking sector; (3) a national currency that is not a major international reserve currency; and (4) limited fiscal capacity). They include Switzerland, Sweden, Denmark and the UK. Ireland, the Netherlands, Belgium and Luxembourg have all but the third of these characteristics.
What is to be done? Curiously, none of the Irish banks wants to be 'rescued'. Not even Anglo. The state guarantee has bought them time to (sort of) get their house in order and to keep going until the economy improves in a few years' time. Sure, they won't have any money to lend, and their shareholders can kiss retirement goodbye, but their agenda is survival - not growth.
I am, frankly, of the opinion that it is not the job of the Irish government to save Irish banks from the consequences of their own mis-management. Moreover, if the banks don't want to behave like banks and lend money then they are, to use Willem Buiter's colourful phrase, as useless as tits on a bull. Keeping with the agri metaphors, I now reckon the Irish pigmeat industry is more important than some of the individual financial institutions in question.
What this means is that the government should not risk our credit worthiness on propping up worthless financial institutions. Let those that fail fail. Let the others (most likely AIB and Bank of Ireland) get on with surviving (and acquiring others that make sense - such as Irish Life & Permanent). But let's not pump taxpayers' money into businesses that have limited capacity to contribute to the growth of the economy for the foreseeable future.
Instead, I propose the government launches a form of the SSIA. In return for a guaranteed, tax free return over five years, Irish citizens would be invited to save regularly into SSIA type accounts. The money would then be used as a state-guaranteed fund for the purposes of business lending, especially to those in internationally traded goods and services. It should even be used to resource Irish businesses seeking to acquire businesses in the BRIC economies. The government should put the management of the fund for these purposes out to tender (all of it, or tranches) to the banks for a fee. Banks do know more about lending to business than politicians - a skill they will need to brush up on now that the property pawn broking model is finished. Loans would be repaid, of course, back into the fund. Any defaults (there would inevitably be some) should be made good by the government.
Just an idea: but one more likely to give Irish taxpayers (and future generations) a better return for their investment than what is being contemplated by Minister Lenihan right now.
Saturday, December 13, 2008
Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.I'm worried about Britain. Our neighbour is at the centre of the global financial storm that is still blowing and may not survive it intact. Admittedly it is a bit rich to be making this observation from Ireland, which managed to go into recession several quarters before everyone else thanks to our property ponzi scheme. Still, I am worried.
John Stuart Mill
A number of UK analysts and commentators have begun to fret about where Gordon Brown is leading their country. A deadly mixture of a toxic financial sector, collapsing currency, exploding budget and underfunded sovereign liabilities may prove beyond the capacities of the UK economy to weather the storm intact. The chart is from an analysis by Standard and Poor's delightfully entitled: In The Long Run, We Are All Debt. It projects the sovereign ratings for the UK and other countries, assuming no change in current fiscal policies. UK debt is projected to be rated 'speculative' by 2035. I know, hardly imminent you might think. But here's the thing, the S&P report was written in 2005 ...
Fast forward to last month's UK budget and things have gotten worse - much, much worse. The recent measures announced in Chancellor Darling's budget are set to ramp the UK's national debt up to 57% of GDP in just a few years, assuming a return to growth in 2010. This extraordinary borrowing binge couldn't come at worse time: recent estimates show that the real level of total UK government debt is closer to 276% of GDP when unfunded pension liabilities are included. A great deal of this comprises an estimated £1 trillion in unfunded public sector pension liabilities.
What are the UK's options? On the debt issue they are brutally limited, as noted by the Institute of Economic Affairs in the report linked to above:
Going forward, if the government acknowledges its true debt level, it will have to behave as any highly indebted person, institution or government does – with extreme prudence and the introduction of austerity measures; it will be forced to cut spending, increase taxes, possibly print money, and almost certainly look to break its pensions promises. While none of these options are at all appetising, the situation will keep on getting worse the longer the government delays paying off or reducing its debt. The options available will decline with time, and those that are left will be increasingly painful.Easier said than done. But the UK government may have no choice - the rapid depreciation of sterling could play havoc with the UK's abilities to raise funds in international markets. As its sovereign rating threatens to drop from AAA the UK may actually be forced to raise interest rates, or face the prospect of being the next Iceland. And all because a Labour government decided to bailout the City of London ...
Referring to the Mills quote at the head of this post, here's how the brilliant blogger London Banker sees things unfolding:
The extent to which capital has been betrayed in the past quarter century under Bretton Woods II, bank deregulation and the Basle Capital Adequacy Accords is unrivalled in the history of fiat banking. The bankers, lawmakers, regulators and academics who collaborated in the betrayal still hold power, like the well-armed brigands in the fortress, and their continued collaboration to prevent accountability must inevitably discourage honest savers from risking further loss. Even so, it is the savers/peons who hold the ultimate power as they can starve the brigands.The depredations are well under way in the UK, and our cousins across the water are paying a high price for their government's determination to "apply every available resource to underpinning failure, misallocation and executive excess." We do not have to follow in their footsteps - even if, for economic, geographical, cultural and political reasons we will, unfortunately, be caught up in the vortex of the state failure next door.
Some day soon savers will revolt at financing further depredations. They will refuse to buy even government securities, gagging at the quantities of issue forced upon them under terms of only negative return. When that final massive bubble bursts, deflation will follow its harsh corrective course and clean out deficit-financed “unproductive works”.
Thursday, December 11, 2008
To add to their woes, the Government's ability to 'top up' the funding of charities (domestic and third world focused) is even more severely constrained. As I've suggested before, one way to get people more engaged in supporting charities is to give them a direct say in who gets what. Especially in relation to the dispersal of Irish Aid. I have personally found that to be the case through my involvement in Kiva.
Now is the time to support those charities focused on local needs. But rather than give the money directly to the charities, why not take a leaf out of the book of the Japanese and Taiwanese governments? They have decided to directly stimulate demand by giving their citizens billions of euro worth of shopping vouchers. Though in the case of Taiwan, citizens can give their vouchers to charities instead.
It could work here: though all the evidence suggests that the more religious among us will be a lot more generous. Could be an interesting experiment though: and a chance to talk about something other than the recession for a change ...
Wednesday, December 10, 2008
A democracy is always temporary in nature; it cannot exist as a permanent form of government. It will only exist until the voters discover they can vote themselves largesse from the public treasury. A.F. Tytler, 1747-1814Fuse Recession with Depression and you get Repression. It isn't going to be easy for business folk to make money in 2009 and beyond, nor for investors to benefit from their efforts. Worse, the nature of the reaction to the Credit Crunch means that - even as conditions return to 'normal' - things will simply not be the same for stockmarkets. As the always perceptive Bill Gross has observed, recent trends have pointed to the necessity:
to view current changes as not only non-cyclical, but non-secular. They are, in fact, likely to be transgenerational. We will not go back to what we have known and gotten used to. It’s like comparing Newton and Einstein: both were right but their rules governed entirely different domains. We are now morphing towards a world where the government fist is being substituted for the invisible hand, where regulation trumps Wild West capitalism, and where corporate profits are no longer a function of leverage, cheap financing and the rather mindless ability to make a deal with other people’s money. Welcome to a new universe stock market investors! In this rather “sheepish” as opposed to “brave” new world, here are some considerations that may affect Q ratios, P/E’s, and ultimately stock prices for years to come ...
... The benevolent fist of government is imperative and inevitable, but it will come at a cost. The champion of free enterprise, Ronald Reagan, knew that growth of the private sector was in no small way dependent on deregulation and the lowering of tax rates. Now that those trends have necessarily come to an end, no rational investors should expect innovation and productivity to be unaffected. Profit and earnings per share growth will suffer.
My transgenerational stock market outlook is this: stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future. More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to – that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner.
Bill's emphasis added. As if that wasn't enough, the opening of the spending flood gates by governments around the world means that we are increasingly exposed to serious currency volatility, including growing doubts about the value of fiat currencies themselves. Ireland is somewhat insulated in this regard because of the euro - though we have merely exchanged an exchange risk for a credit risk (as brilliantly argued by Martin Wolf in today's FT).
But beyond exchange rate issues lies the bigger issue of the value of the dollar as the World's reserve currency (hence the benchmark pricing of oil, gold and other commodities in dollars). Investors in gold (or 'gold bugs' as they are known) are looking to a return to some kind of gold standard as the inevitable outcome of the coming deflation/hyperinflation cycle. I've noted before the appeal of gold as a store of value in turbulent times.
What has got them in a flap recently has been the temporary replacement of contango in gold futures markets (i.e.: where the price of gold for delivery several months in the future is higher than the current price - the normal state of affairs) with backwardation (i.e.: future prices are lower than the current price). This has never happened before and is seen by some as a sign of co-ordinated manipulation by central banks to stop the price of gold skyrocketing as investors seek a safe haven away from fragile looking fiat currencies. Though others take a more sanguine view: seeing the incidence of historically low interest rates as the culprit in the appearance of backwardation in the gold market. As it happens, 'normality' has been restored, for now.
Nevertheless, I think Bill Gross has got it right: normality will never be normal again, and investors will be incentivised to look elsewhere for the returns that will provide for their pensions and those of others in the future. I wonder can I get Santa to leave a gold bar or two in the stocking this Christmas?
Tuesday, December 9, 2008
What is needed is a movement away from defined benefit pensions for public and private sector employees: starting now. Nor is the alternative some kind of tax payer funded Superfund: as Stephen Kinsella points out in his own critique of the Irish Times debate, we don't really want to put all our eggs in one managed fund basket given the recent performance of the National Pension Reserve Fund.
Where I disagree with Stephen is with the notion that a radical decoupling of public sector pensions from their current PAYGO arrangement is a 'race to the bottom'. As I see it, the requirement is for everyone to be on the same starting line at the race. And let's be clear about public sector pay and pensions: it is ALL met from taxes on the pay of private sector workers and the rest of the real economy. So protesting defensively about the 'contribution' being made by public sector workers to their own pensions sort of misses the point: private taxpayers 'pay' the contribution indirectly themselves anyway.
Getting to the same starting line means adopting best practices from around the world in relation to simplifying pension provisions, incentivising the right savings and contributing behaviours, and letting the market play a fuller role in providing for everyone's future, including public sector workers. As noted in a fascinating report from the IEA - Pension Provision: Government Failure Around The World - it is the state rather than the market that has generated the greatest failures in retirement provisions for older people, and so:
Governments should focus on ensuring that the legal and financial infrastructure exists to allow people to make proper provision for their retirement. PAYGO systems should be cut back, and people given the freedom to save for themselves as only they can decide the most appropriate vehicle for their own circumstances. So-called ‘market failure’ will always ensure that the result is imperfect. But, by comparison, government failure around the world has had catastrophic effects.Old age has always meant lower incomes compared to earlier stages in life. But it doesn't have to mean impoverishment. Nevertheless, the expectations of the next generation of retirees (and the one after probably) will have to be adjusted downwards, radically. Not least because the appetite for investment in riskier but more rewarding assets will be curtailed for a long time to come - to the detriment of future economic growth and pension fund values. Justice and equity demands that public sector workers share in the adjustment with those who taxes go to pay their salaries and their pensions.
Monday, December 8, 2008
The speed and scale of change in the oil price is breath-taking: I think the history books will look back on the second half of 2008 as the time all the charts went crazy, and not just for the oil market. Truly we are experiencing an unprecedented degree of volatility in indices across the board. Volatility isn't what it used to be.
The bottom line is that the global peak in oil production has been postponed, perhaps by five years or longer depending on the depth and longevity of the recession (or, worse, depression). As numerous forecasters have noted: calling the peak in global oil production is as much a function of the global economy as of geology. In the short run, economics trumps geology: in the long run we have to remember that 'nature owns the stadium, and bats last'.
Sunday, December 7, 2008
Unfortunately parenting has now become the last bastion of superstitious psycho-babble. Take stress, for example. I only learned recently that the concept of (emotional) stress was 'invented' in the 1950s, by Hans Selye. In other words, my grandparents lived through two world wars (even fighting in the first one) and a Great Depression without knowing they were experiencing stress! Fast forward a century or so and we've gone to other extreme: trying to spare our children any stress - especially the kind that comes from failure. The corollary is the obsession with self-esteem: praising the average as exceptional, and the ordinary as extraordinary. How else to explain the remarkable number of talentless people participating in the likes of the X-Factor? The result is the self-esteem trap:
By insulating our children from real life - now extending into 'adulescence' - we end up producing a generation of wimps. Which is why I admire Edenderry District Court Judge John Neilan for his recent observations about the laws on young people and work:
A growing body of research is finding that praise based on talent and intelligence -- as opposed to effort -- not only doesn't help kids achieve success, it actually backfires.Children who are praised as smart, special and talented stumble at school when faced with challenges that don't immediately reinforce the mantras they hear at home. They're also more likely to avoid tasks at which they may fail than children who are praised instead for their hard work. And they are more apt to lie and cheat well into their university years.
Stand on street corners, scratch your backside, take drugs but whatever you do, don’t go working. Young people in gainful employment even an hour over time should not be penalised. It’s far, far better to have them working than floating around, standing on street corners, insulting everyone who passes by.He's right of course. But our cultural obsession with 'only wanting our children to be happy' has gotten to the point where it seems we we don't even want them to work. Mind you, at least we haven't gone as far as the UK: where local government employees are spying on newsagents to make sure they're not 'exploiting' paper boys.
Worse, we're making it too expensive to employ young people. This is one reason why I am against the minimum wage: it is one more barrier in the way of employing young people in the kind of part-time, casual, unskilled work that gets them started (and for which they are especially qualified in the absence of qualifications). As it happens, we have the second highest minimum wage in the EU at €1,462 per month or €8.65 per hour. It is more important that young people work rather than earn a high income - for their own happiness, as it happens. This has been found in yet another study (pdf) of the sources of happiness and life satisfaction:
We have attempted to shed light on the determinants of global life satisfaction, by using both self-reports and responses to a battery of vignette questions. Although more work needs to be done, some preliminary conclusions can be drawn. It appears that the four domains job or daily activities, social contacts and family, health, and income provide a fairly complete description of global life satisfaction. Among the four domains, social contacts and family have the highest impact on global life satisfaction, followed by job and daily activities and health. Income has the lowest impact.Note, however, that family and social contacts are the greatest influence on life satisfaction. And that tends to be most people's experience. I reckon that happiness is one part pleasure to three parts contentment. The market is superb at looking after our needs for pleasure - whereas contentment comes from a rewarding family life, fulfilling work and the success that comes from engaging with the world around us. Which only goes to show that parents are responsible for their children's happiness, but not in the ways assumed by the nanny state and the nanny media.
Our job as parents, then, is not to ensure that our children are happy, but rather to help them become adults who are capable of successfully negotiating the challenges and opportunities of life as a grown up. And who knows, they might even find happiness in doing so.
Saturday, December 6, 2008
Just as well really as I think we're going to need all the crass materialism we can muster to see us through the next 18-24 months. Unfortunately it's beginning to look like Irish consumers have gotten fiscal rectitude just when they need to be a bit more flaithulach. One measure of how consumers are behaving is the supply of money in the economy. And the worrying thing is the extraordinary contraction in the M1 money supply in Ireland since April this year - a contraction that seems to be accelerating, as illustrated in the chart.
M1 equals the total amount of currency in circulation combined with overnight deposits in banks - see table A3 in the Central Bank's monthly statistical bulletin. In October, M1 had shrunk by nearly 12% since a year previously. The worry here is that we may be entering a rapid period of deflation. It's all down to basic monetary economics, as explained here:
MV=PQ: Money (the quantity of money) x V (velocity, the number of times it changes hands within a time period) = P (the price of goods and services) x Q (the quantity of goods and services exchanged in the time period).The evidence from a number of economies is that consumers are holding onto their money rather than spending it: resulting in price (P) reductions (hence the sales in every shop in Ireland), and even in reductions in the amount of goods purchased (Q).
From that simple equation it's easy to see that if M stays even, then should V decline either prices must fall (deflation) or the quantity of goods exchanged in the economy must decline (recession) or both. In fact, even if M rises, should V fall by a more than offsetting amount, then either P or Q or both still must fall.
The worry now is that falling interest rates will not have the desired effect if the consumer strike continues. Although zero inflation or even deflation was the economic norm right up to the end of the 19th century, the expansion of consumer credit now means that deflation is more of a threat to the economy simply because it means that the real value of debt rises rather than falls, as it otherwise would when there is continuous inflation. Given that the Irish have the highest level of personal debt in Europe this is most definitely not good news.
Nor is deflation unique to Ireland: there is already substantial international evidence of deflation in different economies and sectors, some due to falling commodity prices but the rest is a response to striking consumers. However, not all economists think deflation is a bad thing - especially those from the Austrian School of economics. Here's a different perspective:
Deflation is not inherently bad, and that it is therefore far from being obvious that a wise monetary policy should seek to prevent it, or dampen its effects, at any price. Deflation creates a great number of losers, and many of these losers are perfectly innocent people who have just not been wise enough to anticipate the event. But deflation also creates many winners, and it also punishes many "political entrepreneurs" who had thrived on their intimate connections to those who control the production of fiat money.Hairshirt economics for sure. Either way, I think we're all going to be paying a lot more attention to monetary measures in the months ahead. The Credit Crunch may have made us all Keynesians; I suspect that deflation is going to make us all Friedmanites.
Deflation puts a break--at the very least a temporary break--on the further concentration and consolidation of power in the hands of the federal government and in particular in the executive branch. It dampens the growth of the welfare state, if it does not lead to its outright implosion. In short, deflation is at least potentially a great liberating force. It not only brings the inflated monetary system back to rock bottom, it brings the entire society back in touch with the real world, because it destroys the economic basis of the social engineers, spin doctors, and brain washers.
Friday, December 5, 2008
I recommend the report which is short and very readable: a great example of its kind.
It sets out four scenarios, and assesses what businesses and governments need to do in anticipation of their happening. My read: I'd love us to get to Scenario D: Me & Mine, Online but I fear we'll end up in Scenario B: National Interest.
A shame really, the future could have been so much better; just like, er, Microsoft envisage it:
Thursday, December 4, 2008
Growth and the pursuit of growth is the secular religion of the western world, and its dogma is gradually infecting every society on Earth via globalisation. Every cult needs its clergy, and the high priests of growth are our economists. Purporting to understand such magic as the "hidden hand of the marketplace", economists have been feted by presidents and parliaments as the new alchemists, with their dazzling theories suffused with the promise of technological transubstantiation that will somehow lift us beyond the mortal limits of our fragile blue planet.That's John Gibbons in today's Irish Times. Luckily we're more New Testament than Old Testament, otherwise John might be dodging thunderbolts ...
He's talking nonsense of course: last time I checked most Prime Ministers, Presidents and Taoisigh were non-economists - and wield a great deal more power than any banker, business man or economist I've ever met. If I had to pick a profession with undue influence on the ways of the world I'd opt for lawyers - do we really need so many new laws every year? Come to think of it, there's a lot of them in government: and isn't the Minister for Finance a barrister?
But back to economists: two papers caught my attention recently. The first is A Model of Religion and Death - catchy title. The gist of it goes as follows:
Fear of death is defined as an expected drop in utility at death. Those who believe that the probability of death being the end of existence is less than 1 can invest in religious capital to increase the subjective probability of going to heaven rather than hell. Heaven is assumed to give positive utility, hell negative utility and nonexistence, zero utility. Atheists have no incentive to invest in religious capital and fear death to the extent that life gives them positive utility.And he has the quadratic equations to prove it. Death, where is thy discount rate? The author is hoping to extend his model to an analysis of suicide bombing ...
Those who place a small probability on the existence of an afterlife, rationally invest little in religious capital. This results in a large subjective probability of going to hell rather than heaven. Consequently, they fear death more than pure atheists who only have to worry about the zero utility of nonexistence. Individuals who place a higher probability on the existence of an afterlife will rationally invest more in religious capital.
This increases the subjective probability of going to heaven rather than hell. This may result in a lower fear of death than less religious individuals and perhaps even lower than atheists.
So much for the micro-economics of religion: what about macro? Next up is The Economic Performance of Great Religions, which takes over where Weber and his Protestant Ethic left off. The author ranks the world's great religions in terms of their consistency with economic performance and identifies the following explanatory criteria:
... four direct consistency criteria (the preference for absolute wealth, the type of asceticism, the level of encouragement for productive saving and the level of prohibition of interest) and seven indirect ones (the kind of divinity, the kind of salvation, the encouragement of obedience, the power of men over women, the type of social justice which is encouraged, the level of separation of religious authorities from earthly ones and the type of organization of the church).Invest in Israel seems to be the message ... I jest of course - a God-Like Economist would not put all her investments eggs in one basket. Even if it would keep John Gibbons from fretting about all that horrid growth (and employment and wealth and leisure and innovation and democracy) that evil economists are responsible for.
... none of the rankings for each criterion seems to contradict the following general consistency ranking (in descending order): Judaism, Protestantism (Calvinism, Lutheranism), Catholicism, Orthodoxism, Islamism (Sunnis, Shi’a), Confucianism and Buddhism.
My God, maybe that's it: the Devil is an economist - oops!
Wednesday, December 3, 2008
So what is to be done? The path to recovery can only come about if businesses in Ireland create and deliver products and services that others (home and abroad) are ready, willing and able to buy. Such businesses will create employment and wealth, as well as contributing taxes to the Exchequer. To get there we must lower the cost of doing business as well as the barriers to savings, investment and consumption now facing Irish consumers and businesses.
- reducing vat
- reducing all state controlled costs to business (rates, tariffs, red tape)
- getting rid of the minimum wage
- reducing all employment taxes (especially employers' PRSI)
- incentivising export oriented business development activities
- reducing all barriers to entrepreneurship and new business establishment
- supporting social entrepreneurship
- gradually restricting social welfare to the elderly, carers and the disabled (once the jobs are there for those who can work)
These should be short term measures. Longer term measures would include:
- boosting labour productivity through education and training, starting with pre-school
- supporting Irish businesses seeking to expand overseas, including through acquisitions
- making Ireland a European South Korea via massive investment in broadband and next generation communications technologies for businesses and households (though rather more that dongles from 3 mobile)
- ensuring a steadily expanding, secure energy supply (and inter-connections)
- making Ireland an even cheaper place to locate FDI-lead businesses in.
In the final analysis there is only so much the Government - any government - can do. And the thing it can do most is 'do harm'. But that is not a recipe for doing nothing. As the scenarios in the diagram from the latest edition of McKinsey Quarterly (subscription necessary) suggest: things could get much, much worse in the months and years ahead, especially if we enter the Long Freeze. In that case we will have to focus on our 'home' market which is the eurozone. We'll probably be too uncompetitive to compete in the UK, USA and certainly in Asia (unless more Irish businesses buy companies in those markets).
Think of it as the EMEA strategy: companies like Google, Microsoft and IBM have headquartered their European, Middle East and Africa management teams in Ireland. Mainly for the taxes, partly for the labour force. We need to make it more explicit: give EMEA headquarters locating in Ireland added tax write offs for providing accommodation for staff, special visa access for highly skilled foreign workers, English-language training, staff cars etc - like the diplomatic corp.
The net outcome, of course, will be further, substantial falls in tax revenues. Which means spending cuts (real cuts - not the now-you-see-it-now-you-don't nonsense we've been treated to since the budget). That means making many public sector employees redundant. Such a move should obviously be accompanied by measures including retraining, support for subcontracting, revised pension entitlements etc.
For if we don't do this, then we will steal the future from our children and grandchildren by burdening them with a bloated public sector debt used to fund short term pay rises, and spurious partnership agreements. They deserve better - so do we as citizens and taxpayers.
Tuesday, December 2, 2008
When breakthrough ideas have no borders, a nation's capacity to exploit cutting-edge research regardless of where it originates is crucial: "venturesome consumption"--the willingness and ability of businesses and consumers to effectively use products and technologies derived from scientific research--is far more important than having a share of such research. In fact, a venturesome economy benefits from an increase in research produced abroad: the success of Apple's iPod, for instance, owes much to technologies developed in Asia and Europe.What this says to me is that we may have got it backwards about innovation in Ireland - rather than trying desperately to be a place where leading edge innovation happens, we would be better off being a place where new innovations are rapidly adopted, assimilated and transformed into commercial success. Policy makers focused on 3rd or 4th level funding for PhDs as a route to a 'knowledge economy' or some such thing may be missing the point, as noted in a recent post on the Adam Smith Institute website:
So rather than focusing on the 2.2% we might be better off focusing on the 97.8% that goes to those business and their customers who see the real value in innovation. To do that will require a climate of regulation, patenting, ecommerce and low barriers to entry that favour new product and service adoption. Perhaps not as sexy as new campus buildings and, er, NASA space cadet training, but more likely to plug us into the next wave of global economic growth.
William Nordhaus, in what might be my favourite economics paper of all time, outlined this here.
We conclude that only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.
It's actually only 2.2 % of the value that goes to the innovators. The rest goes to the users of the products.
Monday, December 1, 2008
Marriage no longer possesses the cultural status or primacy as a gateway to family formation that it once had, since sex, childbearing and cohabitation outside of marriage now widely occur.Indeed: though the authors do acknowledge that marriage is more popular than it was ten years ago. Still, we must keep up with the times, as the authors explain:
It is now common to speak of partnership rather than marriage as the generic term for long-term intimate sexual relationships. At one level, this new term reflects the growing incidence of such relationships in various forms of cohabitation outside of marriage, but it also reflects an emphasis on the ideals of partnership rather than the external formalities of marriage as the core of intimate human relationships.Strange, because most of the people I know in 'long-term intimate sexual relationships' actually prefer to speak of marriage rather than partnership: considering partnership to be something lawyers and accountants do to each other (I don't mean ... well you know what I mean). I think the implied 'common' in the authors' observations refers to academics and PC-paranoid politicians and policy makers rather than to, say, the rest of the human race.
The partnership banalities continue through to the discussion of cohabitation. This is treated as if it is a widespread alternative to marriage by the authors (and numerous others) when it fact it is simply a stage before marriage for the majority of couples. The authors provide proof for this themselves in Table 2.1 of the report on page 19 which shows a fourfold increase in the number of cohabiting couples between 1996 and 2006 alongside a substantial increase in the percentage of such couples without children (from 59% to 64%). Hardly evidence of 'an emphasis on the ideals of partnership rather than the external formalities of marriage.'
In my experience people have a lot more common sense about family life than academics (and clergy for that matter) often give them credit for. A recent report by the European Commission on Family Life & the Needs of an Ageing Population (pdf) gives a fascinating insight into how people view their own daily experiences of family life throughout the EU. And the good news is that the family is in robust good shape in Ireland in 2008:
- 71% of Irish people are very satisfied with their family life (EU27 = 52%), joint second highest with the Netherlands (Denmark highest at 75%).
- Irish people see the high cost of housing (43%) and of raising children (37%) as the two main difficulties facing families nowadays.
- The majority (59%) consider it fairly or very easy to combine work and family life (EU27=41%).
- The most popular arrangement for combining work and childcare is for one parent to work full time and the other part time (45%), followed by one working full time and the other looking after the children full time (34%).
- In terms of pre-school children, the optimum caring arrangement is deemed to be a public or private creche (66%) followed by childcare by the mother (49%), n.b.: multiple choices possible.
- The majority of Irish people (50.1%) are living in households comprising married or cohabiting couple with one or more dependent children - the second highest percentage in Europe after Malta (54%) - EU27% average = 39%.
- The Irish have the highest proportion of adults sharing a household with a child under 6 years of age (21%) in the EU, and the 2nd highest sharing a household with a child aged 6-15 (25%).