Saturday, February 28, 2009

Irrational Despondency

There has lately been a disturbing surge in Pessimism Porn in Ireland. I was discussing this recently with Landon Thomas Jr for an article he has written in today's New York Times. People are mesmerised by the seemingly endless stream of bad news, scandals and shocking developments. Worse, it is becoming addictive: newspapers are full of advice on how to slash your spending, even when you don't have to (and even if it results in newspaper advertising falling, duh). In America, gun sales have gone through the roof as everyone hunkers down and waits for Mad Max to meet Dawn of the Dead.

Sometimes the bad news, like pornography, is hard to ignore. But beware the warning signs of porn addiction:

1. Time - looking at porn is taking up more time and more time. It is no longer just a means to an end.

2. Cost - looking at porn is beginning to cost you because you are neglecting other areas of life (for example, you're not doing your job properly or your relationships are deteriorating.)

3. Objectification - after a porn session you're looking at everyone in a sexual, porn-filtered way. (In the Friends episode The One With The Free Porn, Chandler realises [sic] he and Joey have to turn off their free porn channel when he goes to the bank and is surprised the teller doesn't ask him to 'do it with her in the vault.' Funny but it reflects the truth.)

4. Desensitisation - in some cases, people find themselves looking at harder and harder porn, even at material which conflcits [sic] with their personal values.

5. Acceptance of the message - wanting to take what you have seen in the fantasy of porn into the reality of your life. (For example, wanting to suggest it to your partner or wanting to join a club or chat room could well be warning signs.)

Now, to turn this around, the signs that someone has a problem with pessimism porn are:

  1. Spending a lot of time reading and talking about the bad economic news.
  2. Focusing on bad economic news is interfering with other parts of life.
  3. Surprise that others aren’t quite as obsessed with the bad economic situation as they “should be”.
  4. Worse economic news is rush.
  5. Acting on the bad economic news when there isn’t need to.
Where are the Catholic Hierarchy with their condemnations when you need them? Right now in Ireland we are experiencing what Keyne's aptly described as the Paradox of Thrift. People are fearful about the future and their jobs: so they cut back on spending, thereby leading to reduced consumer spending which ultimately causes their employer to make them redundant ... We are victims of irrational despondency - just as crazy as the irrational exuberance that got us into this mess in the first place.

Remember one thing: the future doesn't exist - it is a (mostly emotional) mental construct. So be careful what you build. And don't forget that we never reach the future: the end is nigh is one of those threats that keeps receding over the horizon.

I'm with Will Wilkinson - let's lose the austerity chic:
I doubt people really think it’s better to leave yourself and everyone else worse off. My diagnosis is that most people either don’t get the idea of periodic downturns and recoveries and so tend to suspect with each serious recession that this time everything may go to shit permanently (which is true, it might, but what are the odds?) and to infer that prudence demands hoarding.
We need to be positively prudent: those without debt (47% of all Irish adults in a recent survey by my company) have money to spend and there are great bargains to be had in shops, retaurants, hotels, theatres and car showrooms. They should buy what they need and can afford - without going into debt obviously. Those in debt need to pay down their debts: sorry - there's nothing else you can do really (and don't do what Americans did after 9-11 and go shopping at the behest of their President: he meant 'go borrowing' - and we know how that ended).

Nevertheless, by being positively prudent we can avoid turning a recession into a depression: even if the former doesn't provide quite the same prurient appeal as the latter.

Friday, February 27, 2009

Reasons to be Cheerful

I was on Newstalk this morning, debating the question "are we talking ourselves into a depression"? The short answer is 'yes and no'. 'No' if you consider, say, the drivers of consumer confidence (still at low levels according to the latest ESRI index). My own analysis, illustrated in the chart, is that the biggest influence on consumer confidence is not the level of unemployment but rather the year-on-year percentage point increase or decrease in unemployment. The recent sharp increases in the unemployment rate have coincided with a sharp decline in consumer confidence. So to that extent, people's gloomy outlook is warranted by the trend in unemployment.

On the other hand: a delightful new study from the always excellent Social Issues Research Centre on Optimism shows that people tend to calibrate their mood in terms of personal/domestic factors through to external economic/environmental factors, as this chart illustrates:

And they do seem to blame the media for adding to the gloomy mood music:

All of which suggests that the 'mee-ja' can indeed 'talk us into a depression' - or at least make a bad situation worse. So we might as well follow this lady's advice:

Thursday, February 26, 2009

Crush the Poor

Finally the proletariat have thrown off their shackles, got up off their knees and struck a fatal blow to ... social welfare recipients. The CPSU's one day strike today was an utter disgrace: a sickening spectacle of people in secure, pensionable, state-guaranteed jobs denying access to benefits to the most vulnerable groups in society. And our supine, spineless, gutless politicians didn't so much as raise a peep about it.

Is this Social Partnership's legacy: civil servants beating up on the unemployed whilst purse-lipped politicians look the other way? Seriously: did a single elected representative condemn this? Or are they all, miraculously, from constituencies that don't have social welfare recipents? For that matter, where are CORI Justice when you need them? There should be a revolution all right: by those same sad people now dependent on the whims of sinecured civil servants for the money to get by one week to the next.

Still, RTE did report that not all social welfare recipients were affected:

The department said the strike closed all 62 local social welfare offices that serve cities and larger towns.

However, the 64 branch offices operated by private contractors were open, allowing the unemployed who normally use them to sign-on and to avail of other services.

I wonder can I persuade CORI to demand the privatisation of the remaining state-run social welfare offices? In the name of social justice for welfare recipients of course. Or are they too tightly held by the shackles of Social Partnership? Think I know the answer to that one ...

Wednesday, February 25, 2009

Grow Your Own Bank

I was speaking to an accountant recently about an initiative in Munster. Apparently one of the larger US finance houses has withdrawn a 'fee payment loan' facility that accountants could previously offer clients to spread audit fee payments over twelve months. Some accountants in the region got together to set up their own credit service (investing some of their own capital). Then it struck them: why stop at fee payment loans - why not go the whole hog and become a commercial bank?

And why not? I agree with Michael Lafferty in today's London Times, that we need banks who just do banking - regardless of the endless good bank/bad bank/nationalisation debate about our seemingly comatose incumbents:
So politicians and regulators may come to realise that far too much attention has been given to salvaging the failed universal bank model and not enough to finding a better retail banking model for the future. That model should be the standalone and highly disciplined retail bank. It could be a private company or quoted on the stock market, or it could be based on the building society model or some new form of mutual. By definition, it should not be owned by a bank holding company within a group that includes corporate and investment banks, because in this new system there would be no so-called synergies between different types of banking activity.
Banking is a fundamentally simple business. PIMCO's Paul McCulley explains it thus: banks leverage the money they receive in deposits, relying on the 'stickiness' of depositors who are unlikely to want to withdraw all their money all at once:
Indeed, from time immemorial, fractional reserve banking has been built on the simple proposition that the public’s collective ex ante demand for at-par liquidity is greater than the public’s collective ex post demand for such liquidity.

Accordingly, the genius of banking, if you want to call it that, has always been simple: A bank can take more risk on the asset side of its balance sheet than the liability side can notionally support, because a goodly portion of the liability side, notably deposits, is de facto of perpetual maturity, although it is de jure of finite maturity, as short as one day in the case of demand deposits.

Thus, the business of banking is inherently about maturity and credit quality transformation: banks can hold assets that are longer and riskier than their liabilities, because their deposit liabilities are sticky. Depositors sleep well knowing that they can always get their money at par, but because they do, they don’t actually ask for their money, affording bankers the opportunity to redeploy that money into longer, riskier, higher-yielding assets that don’t have to trade at par.

... Thus, the genius of modern day banking, again if you want to call it that, has always been about exploiting the positive spread between the public’s ex ante and ex post demand for liquidity at par, in the context of levering the two safety nets – the central bank’s discount window and deposit insurance underwritten by taxpayers – which provide comfort to depositors that they can always get their money at par, even if their bankers are foolish lenders and investors.

Nothing special there: it's only when you have weak regulators, compliant politicians and naive board directors that you get the kind of malignant abuse we are now learning about on a daily basis. That and bankers who forget they're running a utility, not a casino.

Instead of merely 'rescuing the banks' (however that's done, and for whom?) we should be encouraging everyone to grow their own bank. Like the accountants in Munster. But we don't need to stop there. We should be looking to the emerging potential of the web to create Banking 2.0. If we have crowdsourcing and crowdfunding then why not crowdbanking? The credit unions could do very well in this scenario I suspect.

And it goes even further. Why let the European Central Bank have all the fun: what if we could develop our own currencies while we're at it? Local currencies, as they are sometimes known, did well in the Great Depression: this might be their time again. As people like Richard Douthwaite and Bernard Lietaer have imaginatively argued, the potential to rethink money in light of both the economic crisis and the tools now available such as the web could unleash extraordinary new and innovative means for a better life for millions. And it might even mitigate the need to tie the nation's fortunes to those of banks who brought all their troubles entirely upon themselves.

Think I'll run that one by my accountant next time I see him ...

Tuesday, February 24, 2009

Long Way Down

It keeps going from bad to worse for the Irish stock market. Yesterday saw the ISEQ close at levels last seen in July 1995. Twelve years of gains gone in 24 months.

And to put it in context, I've taken this chart from dshort and added in the ISEQ for comparison. Not only are we deeper into a market crash, we're further ahead since we started first. And just ten percentage points short of how far the Dow Jones fell during the Great Depression ...

Sunday, February 22, 2009

Back to Basics

Have we over-invested in third level education in Ireland? I'm beginning to think so, and the recession might be a good time to rethink our educational priorities as a nation. The debate about third level fees masks the real debate, namely: is paying for so many young people to go on to third level (and fourth level), as currently structured, the most effective use of their time and our money?

Arguably not. After all, the intention behind taxpayer funding of an educational system is to meet the nation's ongoing needs for suitably educated adults and workers. Achieving that outcome doesn't necessarily require the education system that we currently have; let alone the disproportionate share of taxpayer funding versus private funding or self-funding. But the issue goes much further - as Wilk Wilkinson notes in relation to the US debate about the value of college education:
The issue isn’t “quantity of educated citizens,” it is the “quantity of citizens with economically remunerative skills,” which just isn’t the same thing. The pre-schooling distribution of ability to acquire economically-valued skills may put a pretty hard limit on the usefulness of pushing people to spend ever more time in college. ... You can think of this in IQ terms, like Charles Murray, or in early childhood development terms, like James Heckman. But it remains that inequalities in skill-acquisition abilities may not be ameliorable by getting more kids to spend more time in college.

... I think there’s a huge amount of wasted potential out there, and bad policy is to blame. I think inequalities in the quality of primary education are very important, and that policies that would improve the quality of primary instruction promise both large gains in equality and overall economic performance.
Measures such as the proportion of Leaving Cert students going on to third level may actually be irrelevant to the task of maximising 'the quantity of citizens with economically remunerative skills'. Which in turn is only one (albeit an important one) of the outcomes that should be inherent in an effective education systems. Especially one I'm obliged to pay for as a taxpayer. Another such outcome is that of social mobility and the chance to escape from poverty. The problem here is that work by James Heckman and others (read this 221 slide opus if you have the time) points to the formative influences of early education (pre-school and primary) and parenting on subsequent lifetime earnings and career success. Influences that cannot be 'made up for' through easier access to third level education later on.

Which is why I find the 'random' nature of the government's education policies to be quite disturbing. Take the recent decision to cut special teacher support for children with mild learning difficulties in 119 schools. The 'savings' from such measures will pale in comparison to the costs of those children falling further and further behind their peers and then entering a workforce without 'economically remunerative skills'.

We need to take the government out of primary and secondary educational provision as far as possible. Let individual schools decide how best to allocate budgets, and let headmasters and headmistresses be empowered to hire the best teachers they can afford and fire those who are not up to the job - and pay them by results. Also, let religious, secular, charitable and private enterprises be the providers, subject to sensible quality standards.

As for third level education, I wonder will young people vote with their feet? The re-introduction of third level fees will have several consequences. Students (and their parents) will look much harder at the costs and benefits of 3-4 years in full-time education: more if you throw in post-graduate study. Right now, a lot of students look on third level as a form of 'sheltered employment' - an adult daycare scheme that postpones their inevitable confrontation with the real world (aka: the labour market, especially one in recession).

But I have spoken to a number of quite bitter trainee solicitors and accountants recently who have found themselves booted out of graduate recruitment programmes in the big legal and accounting firms for failing various professional exam stages. If they had had to borrow to pay their third level fees before even beginning their training then they would be in an even worse situation than they find themselves: victim of the great college hoax as it has been called in the United States.

And yet the demands of a 21st century economy like Ireland's requires that we do produce people with the right mix of education, training and skills to meet the changing labour force needs of businesses. But there is no reason why that task needs to be channelled through institutions little changed in a thousand years. Initiatives such as iTunes University have been shown to get better results than the plain old lecture hall and notes variety. Tie that into changing workplace practices (look out for a surge in internships, apprenticeships and sabbaticals) and you can begin to see how third level education could be more effectively delivered in the workplace rather than on the campus.

And it might even cost me less as a taxpayer. Though I suspect I'll be paying a lot more as a parent. As it should be.

Saturday, February 21, 2009

Eastern Threats

I was chatting to a waiter from Latvia in a coffee shop last week. Business was slow so I asked him: "any plans to go back?" He laughed: "go back to what?" Latvia, as it happens, is the one EU country that does make our own dismal situation seem, well, less dismal by comparison. But it isn't just Latvia: practically all the EU accession states (EU15 to 27 in the jargon) are now facing truly horrendous economic prospects as the financial crisis washes up on their shores. The Daily Telegraph's Ambrose Evans-Pritchard (admittedly not the most optimistic of commentators as a rule), noted recently that:
  • Austrian banks have loaned the equivalent of 70% of Austria's GDP to Eastern Europe - and the growing likelihood of a defaults could threaten that country's stability even more rapidly than our own banking shenanigans (it was the collapse of Austria's Creditanstaldt bank in 1931 that globalised America's Great Depression by the way - just thought I'd share that).
  • The Governor of Latvia's Central Bank has declared the economy to be 'clinically dead' after a 11% fall in GDP in Q4 2008.
  • 60% of all Polish mortgages are denominated in Swiss Francs - but the Zloty has just depreciated 50% against the Franc raising the prospect of massive defaults (which is bad for Poland but potentially catastrophic for Switzerland - darn, there goes yet another bolthole when the Revolution comes!).
It nearly makes our own parochial problems here in Ireland seem quite manageable by comparison don't you think?

So what to do? The answers range from calls on the ECB and European Commission to put together a rescue package to save the accession states - to something far more radical, namely: let them all join the eurozone right away before the EU is torn assunder by the crisis.

Ireland is the focus of a lot of negative commentary right now about the eurozone and about the risk of sovereign defaults. Something tells me the focus is about to shift east very, very quickly. Nor do I expect many of the 205,000 others like my Latvian waiter who are living and working here in Ireland to be moving back home any time soon.

Living in Collapsistan

There are some things you only ever realise in hindsight: your success in your chosen career say, or the number of children you have, or your peak net worth. The same goes for countries. And so today is the second anniversary of our peak wealth as a nation: 21st February 2007.

The chart shows the summary ISEQ indices for yesterday and for two years ago. The contrast is extraordinary. In just 24 months the total value of Irish equities (owned by you and me directly or indirectly through our pension funds etc), fell by 77% - wiping out nearly €100 billion of wealth in the process. Most of that has come from the destruction of the banks: they have lost 98% of their value in the past two years.

As of yesterday the ISEQ was back to the value it last had in 1995: fourteen years ago. We have witnessed a scale of wealth destruction that could only be exceeded by a military invasion. In truth, I don't expect to see the levels of the wealth we had two years ago again in my lifetime - nor that of my children. Welcome to Collapsistan, we are all Collapsitarians now.

Friday, February 20, 2009

Be Like the Ferengi

Innovation is overrated. Entrepreneurs don't really matter. I know: blasphemy, blasphemy. But ... it's true. Most innovations fail - so do most entrepreneurs. The vast majority in fact. It gets worse: most (97.8%) of the gains from innovation accrue to others, not to the innovators.

Which is why I think initiatives such as the Government's to build the Smart Economy are deeply flawed. The idea that the source of our future wealth and wellbeing lies in more Phds and more patents is utter nonsense. As Amar Bhidé pointed out in a recent interview, I am more likely to gain from innovations in China or India than I am from any in Ireland. The tools that I use in my work have been invented elsewhere - but so what? The value that I create with Dell computers manufactured in China and software designed in Seattle vastly outweighs the costs of those particular inputs.

Nowadays, really valuable innovations are those with a high 'Innovation IQ' or Interoperability Quotient. In other words, it is the ability to make new connections between existing systems, platforms and networks that unlocks massive new business opportunities than any isolated inventions. Google could not have come into existed without the world wide web. Nor the iPhone without mobile phone networks. We Irish should become more like the Ferengi (who had 178 words for 'rain' we're told) - using innovations invented elsewhere to create new businesses and entire economic sectors. Though I'd like to think we'd, er, pay for them first.

It is this insight that is at the heart of what Havas Media Lab's Umair Haque calls The Smart Growth Manifesto - with its focus on outcomes, people, connections and creativity. Bhidé says much the same thing: it is people who determine the 'innovativeness' of an innovation - not the inventors.

I think most people intuit this nowadays. I recently ran a workshop in county Louth, looking at business opportunities arising from its age friendly county initiative. What was encouraging was the instinctive grasp of the need to "use what we've got, together" - rather than to be the first to ever do something or to invent some new technology or something. They are very much focused on their Innovation IQ: and I have no doubt will benefit accordingly.

Likewise, initiatives such as the Irish Recovery resource are about forging connections and raising our collective Innovation IQ. Much smarter than fretting about R&D shares of GDP and other such distractions.

Tuesday, February 17, 2009

Pity the Landlords

We Irish have always had a bit of a 'hate-hate' relationship with landlords down through the centuries. When they weren't busy extracting what little surplus impoverished tenants could generate from meagre crops, they were of squandering their ill-gotten gains as absentee landlords back on the mainland. We're barely over it, come to think of it.

That's why it's easy for the likes of the Labour Party to demand that landlords contribute the bulk of the tax increases necessary to close the Government's budget deficit. Who could object - sure haven't they been bleeding the country dry for neigh on 700 years and more?

Unfortunately it's not that simple. As I point out in a commentary on the latest quarterly rental market report, a great many more of us are about to become tenants due to the fall out from the recession. And most won't be going back to home/mortgage ownership for some time to come. The 'mort' in mortgage is from the French for 'death', and we are now seeing just how deadly an obsession with home ownership can be for families, economies and entire nations.

Not all nations share the same obsession. I was struck by the reference in one of the guide books during my recent trip to Zurich that some 95% of city inhabitants are in rented accommodation. Even though house and apartment prices appear to be considerably less than in Dublin. No wonder their economy looks set to get through the global recession relatively unscathed.

Most comparative analyses (such as this pdf) show that the two (obvious) drivers of housing tenure profiles in most cities and countries are 1) the relative price of renting versus owning, and 2) the impact of regulation on rents and house prices. The continuing uncertainty in this country about the future environment for renting (especially if you are a landlord) does not bode well for any kind of smooth transition from a nation obsessed with owning homes to one with better things to spend their money on (before they die, that is).

Monday, February 16, 2009

Gnome Hunting

I'm in Zurich for a couple of days, looking for gnomes. It is a fascinating city: about twice the size of Cork and twice as wealthy as the whole of Ireland. It's the only city I have ever been in that didn't have beggars. Literally none. A sign of affluence or a sign of strict policing - I'm not sure (though I haven't seen any police either, come to think of it).

It is a quintessentially bourgeois, European city - I had coffee earlier in the delightfully old world Cafe Odeon, a regular frequent of comrade Lenin in his day. He had good taste, I'll give him that.

One thing Switzerland brings home is the difference between income and wealth. On a GDP per capita basis, Ireland enjoys a higher income than Switzerland. On a wealth per capita basis we don't even come close. A short stroll along the shoppers' paradise (for those who follow that, er, 'faith') of the Bahnhofstrasse quickly brings home just how much wealth there is in this city. Even Celtic Tiger Ireland as its most bling could not come close to the range of designer shops on display, with the occasional, far more subtle private bank mixed in for good measure. This is the product of many centuries of hard work, capital accumulation, free markets and smart institutions.

The result is that Switzerland looks set to enjoy a 'good recession': GDP is expected to contract slightly this year by -1.2% and grow next year, whilst consumer spending is expected to continue to grow (just as well for the Bahnhofstrasse). It is a country relatively insulated from many of the world's troubles: whether financial (the Swiss Franc remains relatively strong, thanks to all that gold in the vaults I suspect), or environmental - with 95% of its electricity coming from hyrdo and nuclear power they needn't worry too much about oil prices either.

That's enough for now: I feel a coffee and chocolate from Cafe Sprungli calling. Auf wiedersehen.

Sunday, February 15, 2009

The Economics of Envy

The Labour Party have finally, finally told us how they'll sort out the Government's budget shortfall. They're going to make the landlords pay for it. As reported in yesterday's Irish Independent, the single largest element of their alternative scheme to the pensions levy is to abolish the €800 million interest relief on rental properties availed of by Irish landlords. The rest is window dressing (tax the 'tax exiles' etc).

As always with such ideas, the intention is to imply that "we just need to tax the greedy rich folk who got us into this mess" and all will be well again. The Irish Congress of Trade Unions are at it as well with their 10 Point Plan for National Recovery:
The failed policies of letting the wealthy off the hook, while forcing working families pay for the crisis, has already led to a slump in consumption unparalleled elsewhere in Europe. Retail sales in Ireland have been falling at an annual rate of 8 percent, as compared with the EU average of one to two percent. Recent VAT increases have exacerbated the problem.
What the first sentence means, let alone what it has to do with the second sentence, is beyond me. Sadly we are being treated to the same sorry spectacle of people with vested interests wanting to hurt other people's interests rather than face up to their own part in the crisis. Take the landlord solution from Labour. Only a tiny minority of people live off rental properties - I reckon as few as 5% of the adult population. If you end up making it more expensive to be a landlord (on top of the tax on second homes recently introduced) then they're going to cease to be landlords and just dump their properties on the market. One of those 'unforeseen' consequences I guess, just like the recent collapse in tax revenues from the sale of cigarettes (which plunged as smokers reacted to the October budget increase in taxes by shopping across the border).

The same goes for 'taxing the rich'. The problem is: there just aren't enough of them. The latest Revenue Commissioner statistics on incomes (pdf) from 2005 - they'll have risen somewhat and fallen back somewhat since - show (page 6) that 4% of adults earn over €100,000 - and they already contribute 39% of income taxes.

The economics of envy now being touted by people who know better simply won't get us anywhere in terms of solving the real economic problems that we now face.

Saturday, February 14, 2009

Love in Time of Recession

This is National Marriage Week in the UK. It couldn't have come at a better time: recessions are testing times for families, not just for economies. Families are a vital bulwark against the vicissitudes of economic life, and their role is all the more vital when jobs are at risk and state/taxpayer resources are severely stretched.

As a recent editorial in the Daily Telegraph puts it:
... children raised in stable two-parent families have demonstrably better outcomes in terms of mental and physical health, educational attainment and the likelihood of leading law-abiding lives than those who are not, and secondly that married couples are twice as likely to remain together as co-habiting ones. So the importance of marriage as a means for rearing healthy, well-adjusted, and successfully functioning children is beyond argument.

But the contribution that marriage makes to social life does not end with the intensive period of raising a young family. When a couple marry, they are not simply legalising their sexual relationship – a step which few couples might think necessary given the relaxed mores of contemporary society. They are making a public declaration of their commitment to one another which joins their two families. It is the interconnecting network of all those conjoined families that constitutes a community. Marriage is not simply a testament to the present feelings of a man and a woman but to their readiness to accept responsibility for the future. So the stability of a long-standing marriage can offer emotional security not only to the first generation of children it produces, but to grandchildren, extended family and friends.

Fortunately, married family life is still the ambition of the overwhelming majority of young adults around the world. Some 69% of American adults in a recent poll (pdf) agreed that 'marriage is the eventual purpose of a relationship, providing stability and security'. I expect that the current global crisis will cause many to re-evaluate their values in relation to marriage and family life - just as they are re-evaluating their values in relation to money and economic success.

That said, it would be naive to argue - as a ridiculous few do - that recessions are somehow 'good for the soul'. I think Tom Keane puts it well:

I would dare say the critics damning rampant consumerism would not level the critique at themselves. It's always everyone else they deem crass and shallow, yet I have no idea who those people really are. Up until the market crash, for example, charities were predicting the largest infusion of giving ever from the high-income baby boom generation. That's hardly selfish. Yes, people with extra cash like to buy things, but they also spend more on education and other opportunities for their kids. Again, that's not selfish.

Economic growth is good for families: not only does in provide more resources for parents and children, it opens up greater choices for those able to make them. But on St Valentine's Day I don't want to reduce married life to mere economics. Today after all is a day synonymous with love, sex, romance, sex, courtship and, er, sex ... So it is some relief to learn from the same US survey mentioned above that nearly half of all respondents (46%) say that sex takes their minds of worries such as the recession. And it is well known that the physical and mental health benefits of sex tend to help people cope more effectively with stress.

Add to that the finding that married men report happier sex lives than single men and you get to see how 'promoting marriage' might not be so difficult a task as it sometimes seems. Happy Valentines.

Thursday, February 12, 2009

Two Cheers for Deflation

Good news today for Irish consumers, workers and pensioners: Irish prices fell last month (pdf) for the first time since 1960. This is as good an increase in incomes - your money now goes further.

Unfortunately the good news is not evenly distributed. In fact, practically all services provided by the state - education, health, public transport - continue to see very strong (5-6%) inflation, with the private sector accounting for most of the fall (including food, clothing, fuel and communications). I'm sure it's just a coincidence mind.

So deflation is good for us, right? Yes and no. As George Selgin notes, there is good deflation and there is bad deflation:
“Bad” deflation happens when demand shrinks; “good” deflation happens when supply expands.
The latter is what we are used to in relation to technologies such as mobile phones and laptop computers - their prices fall thanks to innovation, the emergence of mass markets and the resultant economies of scale (and competitive pressures). Bad deflation is what we saw during the Great Depression:
Between the October 1929 stock market crash and FDR’s inauguration in March 1933, the general price level fell 25 percent, while wholesale prices fell a whopping 37 percent. As prices dropped, so did employment: by the time prices reached bottom around March 1933, a quarter of the U.S. labor force was out of work. Nor did falling prices help the economy to right itself. Instead, the deflation only seemed to make things worse, in part by increasing the burden of debt. The lower prices went, the more the real value of every dollar owed went up. Defaults piled up, causing more banks to fail, making credit even scarcer, which meant that there was even less money around, so prices had to fall further. Economists call this a debt-deflation spiral, and they agree that it’s the last thing an economy needs.
So which type of deflation are we witnessing at the moment in Ireland? My guess is that it is a mixture of the two: 'bad deflation' in the housing sector and motor trade (think second hand car prices); good deflation in clothing and electronics sectors (which I have commented on before). Then again, if you are in the market for a house or second hand car falling prices seem like a 'good thing'.

Expect to see more deflation headlines over the rest of this year, especially as last year's boom and bust in oil prices works through the indices. And pray we don't see the emergence of a debt-deflation spiral: we might even be grateful for a spot of public sector inflation to head that one off at the pass.

Tuesday, February 10, 2009

Turning Japanese

The latest CSO Indices for Industrial Production and Turnover (pdf) are especially grim. Production volumes in the 'Modern' Sector have fallen back to levels last seen in 2006. Production volumes in the 'Traditional' Sector (predominantly Irish owned) have fallen back to levels last seen in the late 1990s ... The overall production index was down -13% year-on-year in December: turnover was down -7.7%.

It has got me worried that we might be 'turning Japanese'. Japan's industrial output also contracted sharply in December, by -10%. Moreover, listening to a podcast on the situation in Japan by Peter Day, it is striking how strong the parallels are between Japan's property bubble-fuelled boom and bust in the late 1980s and our own in just the past few years. And despite frantic efforts by Japan to reflate, inflate and do-just-about-anything to get their economy going again, it simply hasn't worked. Here's Bill Bonner with an update:

Public spending was so aggressive, it boosted Japan’s government debt to 180% of GDP – more than two times the current U.S. level. But did all that cement buy Japan out of its slump?

You be the judge. Housing prices in Japan are now back down to where they were in 1975 – nearly 90% below the late-’80s peak. And stocks? The Nikkei index is back down to where it was a quarter century ago. Stocks sell for half their book value – and they’re still considered too expensive for beaten-down, hyper-fearful Japanese investors. The downturn began in 1990. Over the following 19 years, it did more property damage than the Great Tokyo Fire of ’23 and the Enola Gay combined, wiping out wealth equal to three times the country’s GDP. This was despite interest rates at zero…and a heroic effort at Keynesian stimulation

The average Irish new house price in 1975 was €13,254, by the way. No, I didn't have a nice feeling in my stomach after reading that either ...

Maybe this will cheer you up:

Monday, February 9, 2009

Bank Robbery

What on Earth are the Government thinking with their half-a-solution approach to the problems of the Irish banking sector? As David McWilliams points out: the €7 billion now being mooted as the value of the taxpayers' 'rescue' of the main banks will not cover the bad debts.

Worse, it rules out other, potentially viable options and paints us into a corner. Here's Buiter's perspective:

The US, the UK and several other continental European countries are at risk of emulating Ireland, where the government first guaranteed all the liabilities of the banks (other than equity) and only after that began to nationalise the banks. This leaves the Irish government today in the not too enviable position of having to choose between sovereign default and bleeding the tax payer and the beneficiaries of normal public spending to make whole all the creditors of the banks.

Bailing out the holders of existing bank debt and other bank creditors would be outrageously unfair: they did the lending and made the investments, they should eat the losses. In addition, many of the creditors are likely to be much better off, even after they write down/off their claims on the banks, than most of the tax payers and public expenditure beneficiaries that pay for the bail out. Bailing out the existing creditors would also create dreadful incentives for excessive future risk taking by banks.
A kind of 'pay lots now, pay even more later' solution. Why is this happening? A 'consensus' that leaves all the original parties to the catastrophe in situ without consequences is an extraordinary outcome. Perhaps Robert Higgs is right when he laments that we are witnessing the emergence of participatory fascism:
The hallmarks of this system are, on the political side, the trappings of democracy (parties, elections, procedural niceties, etc.), and, on the economic side, the form of private property rights (though not much of the substance that characterizes the real thing).

The beauty of this system is that the political system can easily be corrupted so that the power elite retains a firm hold on the state, despite the appearance that they rule only with the consent of the governed.
I can't help feeling we've been robbed.

Sunday, February 8, 2009

Now is the time for all good men to come to the aid of the Recovery

I am writing this short post using the free wi-fi in McDonalds on Vaclavske Namesti in Prague. It is my first time in a post-Communist country (I was in Russia when it was the USSR), and I'm impressed.

Twenty years after the collapse of the Berlin Wall it is wonderful to see the prosperity, diversity and opportunity now open to the Czech people. I wish them every success - given their penchant for electing Nobel Prize winners and people with PhDs in Financial Economics as President then I think they're going to do very well for themselves. We Irish tend to look for other 'skills' in our leaders. That might explain one or two things recently ...

Anyway, I've a plane to catch so let me just point you to a brilliant initiative by the UCD Geary Institute and others called Irish Recovery. Now is time for all good men (and women) to come to the aid of the Recovery. Capitalism gives us the tools to make better lives for ourselves - but we have to use them wisely. Maybe we should ask the Czechs for some advice?

Friday, February 6, 2009

A Middle Class Recession

If you're not at the table, you're on the menu. Anon
A friend recently predicted that up to half of all the architects that he knows will be redundant by the summer. We are in the grip of an equal opportunity recession: no sector, region nor social class will escape it. Especially the middle class: if anything, they are the ones who will take the brunt of this recession, especially (make that exclusively) those working, or previously working, in the private sector. This is Ireland's first middle class recession - which is why it is going to be a deep one.

The middle class is the economic, cultural and moral backbone of any nation. They also pay most of the taxes. That is why Russia and China so earnestly want their societies to become middle class. But the great weakness of the middle class is their lack of a shared identity and voice. They are not represented in the social partnership talks (we don't have a Taxypayers' Union in Ireland).

But they will find their voice. The United States is wakening up to the one thing that is worse than a sub-prime mortgage crisis, i.e.: a middle-class mortgage crisis. Here in Ireland are we witnessing the unprecedented destruction of the wealth of the middle class in terms of their home equity values, pension values, and lifetime earnings capacities. Just as the Government has been caught off guard by the speed and scale of the rise in unemployment (throwing all their social welfare spending projections out the window); so also will they (and the banks) be caught off guard as the same banks they are putting taxpayers money into face widespread mortgage defaults by former members of the middle class.

It is a tragic outcome: gross mis-management of the nation's government and economy have destroyed more wealth than any other event short of war. Over the years, the kleptomaniacs in various governments and financial institutions have become parasites that are now eating the host. Here's Willem Buiter on what has happened in the USA and UK:

During the decade leading up to the crisis, current account deficits increased steadily and became unsustainable. Strong domestic investment (much of it in unproductive residential construction) outstripped domestic saving. Government budget discipline dissipated; fiscal policy became pro-cyclical. Financial regulation and supervision was weak to non-existent, encouraging credit and asset price booms and bubbles. Corporate governance, especially but not only in the banking sector, became increasingly subservient to the interests of the CEOs and the other top managers.

There was a steady erosion in business ethics and moral standards in commerce and trade. Regulatory capture and corruption, from petty corruption to grand corruption to state capture, became common place. Truth-telling and trust became increasingly scarce commodities in politics and in business life. The choice between telling the truth (the whole truth and nothing but the truth) and telling a deliberate lie or half-truth became a tactical option. Combined with increasing myopia, this meant that even reputational considerations no longer acted as a constraint on deliberate deception and the use of lies as a policy instrument.
He might as well have been writing about Ireland, so close does his analysis follow our own sad demise. The nature of the middle class is to sacrifice now (deferring consumption, paying for their children's education, investing in a pension) in order to enjoy a free and independent life in the future. Those who have stolen that future will pay a savage price for their thievery.

Thursday, February 5, 2009

Irish Jobs for Irish Workers

With the unemployment rate now back to where it was in late 1997, there is one thing we can be sure of: a rising demand for foreign workers to leave Ireland. The ugly genie of xenophobia is being unleashed across Europe - as evidenced by the recent protests against foreign workers in the UK.

Nearly one in five unemployed workers in Ireland (18.6% in December pdf) are foreign nationals. Over half of these are EU accession country citizens (Poland etc), while the second largest group are English. Fewer than a fifth of foreign nationals signing on the live register in Ireland are non-EU citizens. Bottom line: they are mostly entitled to be here under EU law.

Even if that wasn't the case, would a demand for 'Irish Jobs for Irish Workers' (paralleling Gordon Brown's disgraceful call for the same for British workers) make a difference? Absolutely not. As socialist commentator Chris Dillow has noted about the UK protests:

1. A survey (pdf) by Christian Dustmann and colleagues shows that there is no evidence that immigrants reduce British wages on average. Yes, there’s pressure on unskilled wages. But this is offset by higher wages for more skilled workers.
2. David Card estimates (pdf) that the effect of recent immigration upon relative US wages has been “small”.
3. A survey of the impact of migration from new EU member countries to older EU countries finds that “any negative effects in the labour market on wages or employment are hard to detect.”

As he goes on the explain in a subsequent post:
The global recession is raising demands for protection against free trade. This is illogical. The question: does free trade hurt workers relative to some set of protectionist policies? can be answered independently of the state of the business cycle; it’s not the case that free trade is good in a boom but bad in a recession. The recession is just raising the salience of the gross losses from free trade; it’s not systematically affecting the net gains.
In other words: a rush to the protectionist doors in labour markets as in trade will damn us to a far longer and deeper recession than would otherwise be the case. Moreover, foreign workers are by definition more mobile than their indigenous counterparts - here in Ireland Constantin Gurdgiev estimates that two foreign workers are leaving for every one signing on the live register. The 'problem' of unemployed foreign workers is self-correcting in the main.

Sadly this has not stopped the Party of European Socialists demanding greater labour market controls in the EU, aided and abetted by trade unions. They really should know better, but there you go.

Wednesday, February 4, 2009

What Would Hayek Do?

The problem with socialism is that you eventually run out of other people's money. Margaret Thatcher
The Government is running out of money. Yesterday's Exchequer Returns for January were grim. Overall tax returns were down nearly 20% year-on-year: while some categories - such as Capital Gains Tax and Stamp Duties - were down 72%. Today's shocking rise in unemployment towards 10% means that the Budget deficit is threatening to become a chasm.

There has been lots of discussion about what the Government should do - whether through tax increases, borrowing or spending cuts. Or all three. David McWilliams proposes in today's Irish Independent that the Government should engineer things so as to 'force people to spend'. Keynesianism in one country, if you will. I think David has called it right more often than he has called it wrong, but I think we're beyond the point of just reflating spending to get us back on track. The economy doesn't have a flat tyre: the wheels have been removed and it's now resting on bricks.

One of Keynes fiercest (though respectful) critics was Friedrich Hayek. Hayek understood that the microeconomics of prices, risk taking and productivity were at the heart of economic growth - and economic recovery from recessions. The latter were the consequences of monetary mismanagement and malinvestment during speculative booms funded by the wrong monetary policy (think German savings being channelled by tax relief chasing Irish property developers to build apartment blocks in Leitrim).

As I've said before: recessions are a macroeconomic phenomenon; recoveries are a microeconomic phenomenon. The genius of Hayek was to understand that the only path to sustainable economic growth is one in which economic decision making and actions are distributed widely throughout society, with a limited role for central government (who in turn could never possibly know more than the distributed wisdom of the crowd - that was his main criticism of Keynesianism as it evolved to become an excuse for politicians to spend other people's money).

A Hayekian response to those calling on the Government to borrow (even more) money to spend now is best captured in this essay by Dick Armey:
The problem with government attempts to manipulate the economy through fiscal policy -- spending that takes resources away from those who are productive and redistributes it to politically favored interests -- is that it is audacious. It assumes that government knows better how to spend and invest than individuals acting in their families' best interest.

"The real question," according to Hayek, "is not whether man is, or ought to be, guided by selfish motives but whether we can allow him to be guided in his actions by those immediate consequences which we can know and care for or whether he ought to be made to do what seems appropriate to somebody else who is supposed to possess a fuller comprehension of the significance of these actions to society as a whole."

In reality, no one spends someone else's money better than they spend their own.
We are now living with the consequences of a massive malinvestment of resources in property in Ireland, exacerbated by the global economic downturn. There is no magic wand (aka: government spending) to get us back to the status quo ante. There is no going back to 'normal' because what we have experience over the past 7-8 years was grossly abnormal.

It will take some time to unravel the damage done by the speculative binge we all lived through. What we do not need are actions that make things worse by massively inflating public debt to add to the grotesquely high level of private debt. We owe it to future generations not to lumber them with the consequences of the mess we have made in this generation.

But there are things the Government can do to enable and empower individuals and firms to use their resources more wisely and more productively. Among these I would include:
  • Suspend employers PRSI: it is insane to tax jobs by forcing employers to pay out 11.5% on top of the costs of their employees wages and salaries.
  • Suspend the DIRT tax on savings: record low interest rates mean that those dependent on interest receive next-to-nothing minus tax.
  • Suspend the minimum wage in order to price the 71,000 young men and women aged under 25 now rotting on the dole back into work.
  • Go beyond yesterday's pensions levy and 'benchmark' public sector wages down to their private sector equivalent values in order to drastically reduce the weight of tax now being imposed on a shrinking economy (and avoid massive public sector redundancies before it is too late).
We are a small country, with a genuine sense of our collective identity, history and future. Ní neart go cur le chéile as Hayek didn't say - but he would have understood the sentiment of letting the distributed genius of the people work for the greater good of us all.

Tuesday, February 3, 2009

The New Poor

If you started contributing to an Irish pension in the past ten years then I offer you my commiserations. As the chart shows - from data published today by Rubicon Investment Consulting - the average Irish pension fund has, on average, lost 0.4% per annum since January 1999. They have lost 31% in just the past twelve months. Listen out for the howl of anger as the pension contributors of Ireland - the New Poor - read their annual statements arriving in the post over the coming weeks. Nor will there be much consolation in knowing that the present crisis has destroyed 40% of all the world's wealth so far - and it isn't over yet.

For all that, today is a good day for Irish workers. The belated demise of Social Partnership (Ireland's unique experiment in Catholic Corporatism) is to be very much welcomed by workers and taxpayers. The end of Partnership is good for both private sector workers and public sector workers (though the latter may not be so appreciative right now). For private sector workers the decision by the Government to impose a pension levy on public sector workers is a small but significant step towards fairness and equity between both sectors.

Though many will see the levy on the public sector as - effectively - a pay cut of up to 10% for those on the highest salaries, it pales beside the 100% pay cuts being imposed on thousands of private sector workers every week in the form of redundancy and unemployment. And that's the good news for public sector workers: no redundancies - the right decision in the circumstances (and one I predicted last July).

Nevertheless today's announcement by the Government still leaves the public sector with index linked, taxpayer guaranteed pension entitlements that are striding in the opposite direction to that of private sector pensions right now. The debate on how best to resolve what some in the UK are calling Pensions Apartheid (pdf) has still to be addressed. It won't be this year, nor maybe next, but social justice for private sector workers demands that it eventually must be addressed.

We're assuming, of course, that public sector workers will simply go along with the Government's plans without recourse to industrial action. Perhaps - though I wouldn't bet on it. The reality is that the public sector in Ireland lives in a world in which there are effectively no economic consequences for their actions - one reason why ICTU (and especially the public sector unions that dominate it) preferred to say 'no' than reach a deal. Ironically I expect that the biggest victims of the demise of Social Partnership will be the trade unions. Only 20% of private sector workers are members of trade unions (a proportion probably declining as the industries in which there are organised are among those contrasting fastest). It looks like the Left will have to figure out a new role for unions - and fast.

There is one that I see for them (genuinely): as lifetime coaches, trainers and income insurers for employees who will have to change jobs more often. They might even do a better job as pension advisers and managers. But that may be a 21st century bridge too far for organisations sadly moribund in 19th century practices.

Monday, February 2, 2009

Ireland's Agency Problem

Daniel Kahneman (the man Nicholas Taleb says was the only man who ever deserved a Nobel Prize for Economics), explains the Credit Crunch partly in terms of the Principal-Agent Problem, or 'Agency Problem' as it is usually know. He points out that the incentive structure in investment banks etc led traders to take huge risks from which they stood to gain but never lose. The result, when the losses rolled in, was that they headed to the beach to spend their bonuses while their employers filed for bankruptcy.

The Agency Problem is not exclusive to investment bankers of course. Whenever you are required to 'employ' others to act on your behalf (brokers, estate agents, politicians) you are massively vulnerable to the Agency Problem. As most pension holders are discovering as the dismal news about their funds arrives through the letter box.

Plainly the Agency Problem is not just a private sector phenomenon. After all, a Representative Democracy is - by definition - one characterised by a Principal-Agent relationship. You're the Principal, just in case you were wondering. Our elected representatives are our Agents - there to act in our interest, not their's. And therein lies the problem. Most Agents (private or public sector) generally know more about their specialism than the Principals: which is why we entrust our pension contributions to the experts (or used to).

The same applies to our TDs - they understand the political system way better than any private citizen, who simply doesn't have the time to figure it out for themselves. The problem is, you often end up with political representatives who are good at politics: but not especially good at running the country. As John Crown put it eloquently in yesterday's Sunday Independent:
At the core of our public governance is a dysfunctional interface between inexpert ministers and senior civil servants who have generally risen to the top of their departments on the strength of their adroitness at navigating its bureaucracy. The ministers are unfortunately drawn exclusively from a cohort of generally mediocre, frequently nepotistic TDs, whose entree to national politics was based not on a grasp of the big issues of state, but on their ability to manipulate a local constituency party machine. These observations explain the now-exposed incompetence of our Government, an incompetence which was obscured from our view by the Celtic Bubble. Please contrast this with the Obama cabinet. Current energy policy will be one of the key determinants of the future of our society. Who did the President appoint as energy secretary? A Nobel Prize winning physicist! Given the pool of talent available in the Dail, that could never happen here.
Ireland is now suffering spectacularly from the Agency Problem. The people we have put in government to act in our interest over the past fifteen years or so have plainly failed to do so. We are now reaping the consequences. Worse, they have even proceeded to sub-contract huge swathes of their responsibilities to other Agencies in turn. An Irish solution to an Irish Agency problem indeed.

The response on the Left tends to be: 'if only our guys were in power then we'd implement the right policies'. The dismal failure for this rosy scenario to materialise anywhere, ever does not dissuade them from their utopian ambitions. I wonder then could we reach a Left-Liberaltarian compromise and go for a form of small government egalitarianism? Short circuit the Principal-Agency Problem by giving more power to the Principals (i.e.: the electorate, taxpayers, citizens etc), and significantly less to the Agents (politicians, civil servants, quangos etc). Let's concentrate limited, taxpayer funded resources on those end recipients who need them most, and empower citizens to look after their own affairs as best they can when they can.

As Aristotle observed (taking an oblique swipe at Plato):
What is common to the greatest number gets the least amount of care. People pay most attention to what is their own: they care less for what is common; or, at any rate, they care for it only to the extent to which each is individually concerned. Even when there is no other cause for inattention, people are more prone to neglect their duty when they think that another attending to it . . .
Looks like the Agency Problem is a very old one indeed.

Sunday, February 1, 2009

Zero-Based Banking

A Pessimist is a well informed Optimist. Old Russian Saying
Maybe it's the cold turn in the weather, but I have found myself wondering a lot more about the 'what if?' type of scenario that could unfold this year and next. The bad variety rather than the good. The chart - from Calculated Risk - shows that the current bear market (as measured by the Dow Jones) is nearly down to where the Great Depression was at this point after the start of the decline. Worrying that.

I've been reading some of the analyses of Gerald Celente from the Trends Research Institute lately, and he makes Noriel Roubini seem like a Panglossian on Prozac. We're talking rationing, riots and revolution in that particular order. Best not taken before going to bed ...

Also in the Cassandra camp is Nassim Taleb. In a fascinating Edge @ DLD discussion with Daniel Kahneman last week he both savaged economists ('econometrics is a form of entertainment' - 27 minutes into the talk) and bankers. Worth watching the whole thing in glorious hi-definition if you have the time (for Kahneman's contributions, not just Talebs). On the bankers, Taleb wants them nationalised and run as boring utilities. Let the hedge funds do the risky stuff - they can keep all the profits AND incur all the costs (not the taxpayers) if they blow up.

Willem Buiter has gone one better - instead of going down the route of the 'bad bank' idea, he wants Governments to create a 'good bank': and let the rest muddle through or collapse under the weight of their bad decisions. It would certainly be the least worst solution if the banks don't start lending again, storing away any taxpayer financed capital injections as not intended. A kind of zero-based banking if you like. Ireland looks like going down a hybrid route of nationalisation, re-financing, insurance and whatever-you're-having-yourself. It doesn't exactly inspire confidence and the international markets appear to agree for now.

Mind you, if the worst comes to the worst, we the taxpayers could always write to the banks demanding our money back 'or else': as suggested in this delightful letter to the Western banking establishment by Tim Price. Might be useful to have a draft ready just in case.
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