Open For Business?

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

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

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

Horse, Stable, Bolted

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

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

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

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

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

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

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

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

The Economics of Deferred Gratification

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

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

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

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




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

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

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

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

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

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

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

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

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

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

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

Slaughtering Sacred Cows

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

The following cows are put through the IAE abattoir:

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

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

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

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

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

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

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

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

Just The Business

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

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

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

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

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

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

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

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

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

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

One Day Like This

Never mind the IMF and OECD, one day like this a year would see me right ...

The Silence of the Sheep

I'm back on the theme of Bye Irish again. IBEC today published a useful paper on the Irish Food & Drinks Industry (pdf) focusing on competitiveness indicators. Or rather, the lack thereof.

The paper laments the concentration of retailers and their dominant position vis-a-vis Irish food manufacturers. It also notes the comparatively high cost of doing business here versus just-about-anywhere-else. All verifiable and useful analyses. However, there is one thing the report is curiously silent about, and that is the Common Agricultural Policy. Which is a bit like discussing Ireland's monetary policy without mentioning the European Central Bank.

Luckily the CSO has helped flesh out IBEC's analyses with its publication of Output, Input and Income in Agriculture 2008. Among the more disturbing aspects of the analyses in the report is the fact that subsidies net of production taxes make up 82% of the entire operating surplus of Ireland's agriculture sector. This has prompted Constantin Gurdgiev to wonder why we still have "a Department of Agriculture in this country if the net and gross value added by this sector is smaller than the net subsidies the sector receive."

The problem for IBEC and the wider food sector that it represents is that we have an indigenous agricultural production system hopelessly distorted by the perverse incentives of the Common Agricultural Programme. Take sheep, for example. The numbers of other livestock in Irish agriculture (cattle, pigs, chickens) have remained broadly stable over the past five years. But the number of sheep have fallen by 17% from their peak four years ago. Could it be due to a virulent ovine disease perhaps? Or a sudden collapse in the demand for woollen jumpers due to global warming? Well no, the answer is in Table 5 - Subsidies to Products. The value of subsidies to sheep fell from €106.6 million in 2004 to zero in 2007. The farmers were responding to prices all right - but they were the artificial prices created by CAP subsidies. I have often thought that if the CAP offered subsidies for camels then Ireland would end up with the biggest herd outside of Saudi Arabia.

Still, the good news is that farmers will respond to prices (and to the demise of subsidies). In the long run this can only mean a healthier food and agri sector driven more by consumer demand and less by vote-buying subsidies. The sooner the better - and then we might see an Irish food sector thriving despite the issues identified by IBEC.

The Abysmal Science

When did the recession start? Curiously, the recession - as far as housing is concerned - seemed to set in around Q2 2006 - almost two years before it showed up in negative GDP data. The chart shows the year-on-year growth trend in residential volume production. There was a brief (albeit spectacular), positive blip in Q1 2007 (the peak of Irish housing and stock market valuations) but thereafter the trend (re)turned negative. And then some: a 56% volume decline in residential production in Q1 2009 on the year previous - according to today's CSO report.

And yet nobody was calling it a recession in 2006 (or 2007), though a few did see it coming thereafter. What does this say about economics and its analytical/forecasting skills? Here's one take on the 'abysmal science', from Thomas Naylor - a professor of economics as it happens at Duke University:

No academic discipline has ever been so thoroughly discredited in such a short period of time as has economics over the past year. Virtually no business, government, or academic economists foresaw what may prove to be the greatest economic meltdown in history. Even though all of the evidence points to a major recession, many economists are still in denial as to the downside risk.

Naylor accuses the profession of having been 'blind-sided' by an ideology that preached unregulated markets and low/no taxes. Government was an innocent (though too easily duped) bystander in this version of history. On the other hand, David Simpson's analysis for the Adam Smith Institute of what went wrong observes that:

Governments and their central banks contributed to the boom by: (1) keeping interest rates too low for too long, allowing asset-price bubbles to build; (2) giving implicit guarantees to the banks and other borrowers; (3) failing in their functions of prudential supervision and financial market regulation; and (4) encouraging borrowing by those least able to afford it.

Not quite the 'regulation-free' picture painted by Naylor. Add in the Principal-Agency Problem in relation to bank shareholders vs. bank trader/employees and you get the perfect storm that is still blowing (albeit less forcefully than at the start of the year). I find Simpson's analysis more convincing, even if it lacks the hand-bagging force of Naylor's reasoning. I also find myself convinced by Simpson's take on the when and how of economic recovery (in the UK, but also by extension in the USA and Ireland):

Most Western economies are now in the middle of a painful but inevitable process of de-leveraging debt. Some of these economies are more resilient than others, but nowhere is it possible for an economist to predict exactly when this recession will end. If the present recession in the UK were to follow the pattern of the recession of the early 1980s, as it has done so far, it would take another year to bottom out, and a further two years before returning to pre-recession levels. But there is no reason why it should follow the earlier pattern.

What one can say with confidence is that it will come to an end, because recessions always do. They do so because the market economy is a continuously self-adjusting process of growth and change. There may be political constraints placed on this process, for good reasons and bad, but the satisfaction of both individual and collective wants in the future, as well as developments in technology, provides unbounded opportunities for investment and therefore for the resumption of growth in the aggregate as well as in the particular.

That doesn't mean a recovery in the Irish housing sector any time soon however. Then again, the recession in housing was well underway before a full blown recession set in. Therefore could it lead the recovery? The economic consensus is that it will lag recovery rather than lead it - which I'm inclined to agree with this time.

But it isn't all 'dismal' news from economics. Anti-Dismal reminds us that economics affects political fortunes as well, for good or bad, citing research by Andrew Leigh which shows that:

voters commit systematic attribution errors when casting their ballots – tending to oust their national leaders when the world economy slumps, and retain them when it booms. In the preferred specification, a 1 percent increase in world GDP growth is associated with an 8 percent increase in the probability that an incumbent leader will be re-elected. To put this into perspective, national leaders are re-elected, on average, 57 percent of the time. An extra 1 percent of world growth raises this probability to 65 percent.

Maybe Cowen, Lenihan et al just need to hang in there until a real recovery is underway ...?

A (Bicycle) Accident Waiting to Happen

I spotted a row of unusual grey metal columns in Dublin's Exchequer Street yesterday. I eventually figured they were part of the imminent 'bike-rental' scheme to be launched in September by the Council and JC Decaux. Dublin City Council is getting 450 bikes for 'free' from JC Decaux in return for the latter having use of advertising space around the city.

The bikes are the same as those used in a similar scheme in Paris. Which is why we should be worried. Here's Division of Labour on the Parisian experience:

Parisians have clearly taken to Vélib'. They are also taking the bicycles, and wrecking them, at an unanticipated rate.

Since the program started in July, 2007, 8,000 of the bicycles have been stolen, and nearly 1,400 people were arrested for Vélib' theft just last year.

Police have retrieved about 100 of the purloined bicycles from the depths of Paris canals and the Seine River. Some have been spotted on balconies. There have been reports that a few turned up, mysteriously, on the streets of other European cities. But the fate of most of the missing bicycles is unknown.

At the same time, 16,000 bicycles have been vandalized.

It seems half of all the bikes have had to be replaced by JC Decaux. No big deal for Dublin County Council surely - after all the deal is that JC Decaux must have 450 bikes available at all times? So they, and not the Council, are financially liable for replacements. Problem is: the same deal was done in Paris, but it turns out the city council there is now having to pay for replacements themselves - at a cost of €1.6 million a year.

On yer bike I say to that kind of deal. Though preferably not one subsidised by the taxpayer/rate payer.

Avoiding Futuricide

The chart shows what happened to births in Ireland the last time we had a prolonged increase in the unemployment rate. It's a from a timely post by Brendan Walsh over at The Irish Economy blog. Brendan wonders, as do I, whether the current recession will precipitate a collapse in Irish birth numbers, reversing the baby boom previously underway.

I suspect it will, but the cohort effects are probably different from the 1970s/1980s and it might not be as severe. At least I hope not - if we are to avoid the fate of Latvia. And we certainly don't need child-unfriendly changes to tax and social welfare policies that dis-incentivise couples having children. A mistake now being made in Latvia: leading one commentator to accuse the powers-that-be there of national futuricide.

Inconspicuous Consumption

Are you sick and tired of being sick and tired? Sounds like Recession Fatigue. I first came across it in the early 1990s (that's two recessions ago for our younger readers). One psychologist writing about the UK recession back then described the symptoms as follows (pdf):

• a growing sense of frustration, uncertainty, disappointment and ineffectiveness, often described as a sense of losing control.
• increasing tiredness, confusion, and malaise, feeling punch-drunk with too many problems to solve.
• a feeling of personal isolation from family and friends at home and work.
• a sense of inadequacy in family life due to lack of time/money to maintain former lifestyles.
• a personal dilemma between the temptation to quit or give in to despair, and the courage or “bottle” it takes to hang on and keep trying.

I suspect more than a few of us have experienced some or all of these symptoms in recent months. But there comes a time - for the vast majority of people still in jobs, and still receiving regular salaries and wages - when you can only take so much of the constant mood music of doom and gloom and you need to escape ...

Which is why I am beginning to suspect that Irish consumers might just play a bigger role in Ireland's economic recovery than we are giving them credit for. A lot of the analyses of the Irish consumer assume:

a) they are all up to their neck in debt, and
b) consumer spending will be the last thing to recover until unemployment has fallen.

Both assumptions are wrong. In fact, the majority of adults in Ireland have no debts: 60% according to a recent report on Financial Capability from the Central Bank. The problem of private sector debt is actually a problem of developer debt: a small number of individuals have enormous debts, alongside a small minority with debts arising from second mortgages. The majority have no debts, not even credit cards. If anything, it appears that consumers save too much, rather than too little.

Regarding the second assumption, my own analysis shows that consumer confidence picks up when spending levels off - it doesn't have to fall back before confidence rises. Simply put: once unemployment levels off, those in jobs assume they have 'dodged the bullet' and start spending again.

Moreover, some research by my own company has seen a sharp fall between April and May in the percentage of adults who think that 'the economy is bad and getting worse' (though they're still the majority), and a commensurate increase in the percentages thinking 'the economy is bad but stable/bad but showing signs of improvement'. It doesn't amount to a field of green shoots, but it might just suggest that a growing minority of consumers are tired of recession fatigue and starting to loosen the purse and wallet strings. And maybe it's because they realise that this time is not different.

Of course, in the current climate, we won't see too much conspicuous consumption, but maybe some of the inconspicuous type (though 'seeing' it will be a challenge).

Tax the Tall, Not the Fertile

The leaks have started. We are being prepared for the forthcoming recommendations by the Commission on Taxation. The Sunday Business Post has given us a flavour, including:

• the introduction of a tax on residential property
• tax on child benefit payments
• restriction on pension tax relief and
• new tax treatment for retirement lump sums

The property tax is clearly the big one: Ronan Lyons estimates such a tax could raise €4 billion for our cash-strapped government. Ronan is a fan: I'm not so sure myself - I think taxes, if we must have them, should be based on flows (income/interest/inheritance etc) rather than assets. Especially assets that might not even provide a flow of income (such as family homes).

The Commission's terms of reference note the Government's commitment in its programme to "increasing the fairness of the tax system". Fair enough - but why stop at property? If we want to tax assets that do provide significant income advantages to the asset holder then we should tax tall people and beautiful people. One recent, somewhat tongue-in-cheek analysis of the impact of height on earnings capacity suggests that optimally set taxes on tall and medium sized people could lead to transfers of up to 13% of their income to short people. But why stop there: some have suggested that human growth hormone should be given to the siblings of short people as a matter of social policy designed to reduce income inequality. And not just income inequality: there is a significant, negative correlation between the height of Irish women and the incidence of depression.

But if taxing tall people is not to your taste (nor that of the Commission), then why not tax beauty instead? A long term study (pdf) by Harvard University has shown that attractive people enjoy higher incomes - other things being equal - than less attractive people. Robin Hanson has suggested that the logical extreme of such findings would be to tax beauty products as they provide unfair advantages to users by way of enhancing attractiveness.

Isn't it weird where you end up when you start thinking about tax and fairness?

Don't worry, I'm not really suggesting a tax on make up. Anyway, as the picture above shows, our concepts of beauty (in women) have changed markedly over the past fifty years - as noted by Roissy in DC (n.b.: his are witty and very explicit musings on the life of the single male in Washington DC - personally I'd rather be helicopter-dropped into the middle of the Serengeti with nothing but a catapult than take that on ...)

But on a more serious note, we should think long and hard about the second and third order effects of measures such as taxing child benefit payments simply to reduce expenditure (rather than as part of a coherent set of child-centred policy measures). Countries like Latvia (and Iran as it happens) are in demographic freefall due to collapsing birth rates. In the case of Latvia, the economic crisis appears to be the main culprit - and recent decisions there to cut child benefit are likely to make a disastrous situation catastrophic. We have been warned.

Immaculate Recovery

Where will growth come from? That's the question bugging me and quite a few of my clients. Wolfgang Münchau puts it well in today's FT:

Instead of solving the problems to generate a recovery, the political strategies have consisted of waiting for a recovery to solve the problem. The Europeans are relying on the Americans to generate growth. The Americans are relying on the Chinese, who in turn are waiting for the rest of the world.

At this rate, any recovery will be an immaculate recovery as it seems none of the necessary conditions for it are actually in place. But at least it looks like a re-run of the Great Depression has been avoided - though at a price. This week's Economist paints a bleak picture of the growing indebtedness of the consumer, corporate and government sectors. A situation now being exacerbated by demographic change in countries like the United States that are facing huge payouts for medical and social welfare payments for their ageing populations. And the only way of making such payments will be to foist more debt on future generations ...

The huge level of debts that now constrain governments mean that traditional fiscal and monetary policies no longer have the same multiplier impact on the wider economy. As noted in this recent guest post on Willem Buiter's blog:

Yet the decision to use monetary policy to keep alive an economy drowning in debt turns also fiscal policy incapable of stimulating the economy, as noted by Irving Fisher. As long as excessive debt is not digested, both monetary and fiscal policies are inefficient. There is not much of an alternative. Either to let the economy collapse, in order to reduce debts, and then use fiscal policy to revive it, or inundate the insolvent economy with public credit, to avoid the collapse, and loose the ability of fiscal policy to pull it out of a prolonged lethargy. Either a horrible end or an endless horror.

So which way is out for Ireland? Exports and trade generally will have a limited role in generating growth so long as the global economy remains stagnant. Investment has collapsed due to the housing crunch, and will keep falling so long as the banks absent themselves from the business of lending. That leaves public spending and consumer spending. Unfortunately the government's insistence on fuelling the former via tax increases means that the latter is falling rather than rising. Worse, we have an inflating state weighing on a deflating economy: not exactly a recipe for success ...

But it doesn't have to be that way. We should be demanding more bang for our buck from public spending: in particular through a focus on public sector productivity. The UK publishes regular updates on its own public sector's performance (not great), and by bringing a similar focus to bear on Irish public sector performance we should be able to get much more for a great deal less. And no, I don't know where or how - but by empowering managers throughout the ranks of the civil and public service (including the power to hire and fire) we will tap into the knowledge that is already there about where real efficiency gains can be made.

This needs to be done quickly: otherwise we are going to have the one possible engine of growth - consumer spending - put on hold because of a political unwillingness to make significant changes to how taxpayers' money is spent. However, if politicians can grasp that particular nettle, the prize will be a surge in consumer spending if taxes are cut. Indeed, I suspect the Irish consumer will play a more important part in the coming recovery than most give him or her credit for. And I'll explain why in a future post.

Drowning in Hyperbole

I'm thinking of having a barbecue weekend after next. I went to the Met Eireann website for the weather forecast for eight days hence. There isn't one.

So you can imagine my surprise when I read in yesterday's Irish Times that Prof John Sweeney from NUI Maynooth is predicting that (in the absence of a climate change plan) "If we do not implement a plan over the next decade or two, we will run out of water". Met Eireann can't tell me what the weather will be like in seven days' time but John is predicting the weather with complete certainty for twenty, forty and even one hundred years time.

Upping the hyperbole stakes even further, Oisín Coghlan of Friends of the Earth is quoted in the same article as saying that the summit on climate change in Copenhagen this December will be the “most important meeting of world leaders since World War II”. All if which is a bit odd because the EPA's recent report on climate change and its impact on Ireland paints a far, far less alarming and more manageable picture.

But I guess that doesn't make for interesting headlines, does it? Still, here's one forecast I am certain of: expect a disturbing rise in the level of alarming claims about climate change over the next six months - far in excess of any rise in sea levels over the next sixty years.

And for a more sober and sensible read on the climate challenges we face (and the far more pressing energy challenges) check out this fascinating interview with Prof Ian Plimer. He brings an earthy, Australian perspective to the climate debate.

Fianna Fáil – The Culchie Party?

I was at the launch this morning of a new report on the future of Dublin. The report is by The Futures Academy at DIT called Dublin at the Crossroads. As with previous reports by the Academy, it doesn’t pull any punches in terms of the difficulties facing our capital city. Its powerful use of scenarios brings the reader face-to-face with a range of possible futures for the capital. Indeed, it paints a picture of a Dublin metropolitan area coping with the legacy of benign and not so benign neglect that has characterised successive national governments – including the previous one led by a Dubliner.

But while Fianna Fáil-led governments have failed to notice the consequences of their neglect of Dublin, the people of Dublin have noticed. And they’re not happy about it: as witness the recent elections which saw Fianna Fáil lose its MEP in Dublin and its support contract to make it just the third largest party in the capital.

As I've noted before, the extraordinary pattern of Irish regional development ('Anywhere But Dublin') seems driven by a parochial, atavistic culchie versus townie antipathy. But the townies have had enough. As Conor Skehan, a fellow of The Futures Academy, has noted, the demographic destiny of the country is for the greater Dublin metropolitan area to form a growing share of the country's population. And when the capital gets allocated the number of TDs it deserves then the political boot will be on the other foot.

Now that'll be an interesting scenario to contemplate.

Bye Irish

Barely a week goes by without one foreign-owned company or another announcing it is shrinking or closing its Irish operations due to costs. Especially those serving the Irish retail sector (the most recent example is Coca-Cola). Their rationale is that meeting retailer demands for equivalent prices to what they pay suppliers in the UK and elsewhere makes it too expensive to have a separate, dedicated operation in Ireland.

Of course, it isn't just foreign-owned suppliers to Irish-based retailers who are facing the pressure. Irish brands selling into chains like Tesco are likewise under pressure to reduce prices and reduce costs - or face shrinking sales as they are replaced by cheaper, non-Irish brands on the supermarket shelves.

What is driving this? For operators like Tesco it's simple: if they don't provide Irish consumers with the same value-for-money offers that cross-border shoppers and shoppers at discount stores like Aldi and Lidl are demanding then their business will also be threatened. Irish consumers want their diminishing incomes to go further: and old nostrums about buying Irish are increasingly ignored. Tesco and others are simply responding to these new realities - as they always have. That's good news for Ireland's hard pressed consumers - even if it makes life more difficult for hard pressed suppliers.

So where will it end? For the profession I know best - marketing - things look challenging. A lot of managers of fmcg companies that I have spoken to in recent months are now under ferocious pressure to deliver on price reductions to their retail customers. Taken to its logical conclusion this could see the mass closure of the Irish operations of a great many fmcg brands - with Ireland becoming part of their UK sales divisions. A region once again.

But what about Irish brands? Here I am more optimistic. Patriotism might well be the last refuge of a scoundrel - and initiatives like Guaranteed Irish may have run their course - but many consumer markets are still remarkably local. Parochial even. Moreover, the Irish consumer market is a lot bigger than it was back in the 1970s and 1980s when 'Buy Irish' was a matter of government policy. Consumers will spend an average of €88 billion this year and next, even allowing for the worst of the recession.

That's a big enough market for many Irish brands, entrepreneurs and innovators to get started: and from which to expand into the UK and further afield. As they often have in the past. Irish businesses need to learn from one of the most successful Irish businesses of all time: Ryanair. Who in turn learned much of their trade from Southwest Airlines. And as a new report from the Economist Intelligence Unit - Taking Advantage of the Pitstop - reminds us, businesses that respond effectively to recessions (like Southwest) often go on to be significant global players in their own right.

But back on the ground, retailers are in the business of selling consumers what they want at a price they are prepared to pay. And so the Irish suppliers who will succeed will be those who demonstrate a better understanding of what Irish consumers want and that can meet their needs at a price they will pay. It isn't 'Bye Irish' yet. Not by a long shot.

Happy Monday

I've just read a fascinating essay on The Economic Problem of Happiness: Keynes on Happiness and Economics by Anna Carabelli and Mario Cedrini. It is a meditative piece on one of Keynes' own essays - the famous Economic Possibilities for Our Grandchildren. The one where he expresses the hope that economists might become like dentists! Here is one, famous passage:

I see us free, therefore, to return to some of the most sure and certain principles of religion and traditional virtue‑that avarice is a vice, that the exaction of usury is a misdemeanour, and the love of money is detestable, that those walk most truly in the paths of virtue and sane wisdom who take least thought for the morrow. We shall once more value ends above means and prefer the good to the useful. We shall honour those who can teach us how to pluck the hour and the day virtuously and well, the delightful people who are capable of taking direct enjoyment in things, the lilies of the field who toil not, neither do they spin.

A passage that reflects the earlier, philosophical leanings of Keynes, as noted by Carabelli and Cedrini. But what struck me - reading both essays - was how negative Keynes was towards the worlds of business, markets and capitalism as a source of personal satisfaction and fulfilment. Even though he was writing in the depth of the Great Depression, Keynes saw the long term goal of economic growth to reduce the need for people to work (sharing out what little work there remained among those still willing to do it).

This meme of 'work makes you miserable' (not least because it induces other bad habits such as buying things you don't really need) is as virulent as ever: hence the success of psycho-babblers like Oliver James, and the nonsense-on-stilts of Work Life Balance Days. Admittedly the recession is causing more than a few to rethink the role of work in their lives. Moreover, the daily experience of work for most people is that it is a source of considerable fulfilment and satisfaction. Not all the time in every regard - but enough to make most people quite content with their working lives and determined to make the most of them.

Some readers of Keynes' essay have since quipped that his vision of the future was akin to one in which everyone was member of their own Bloomsbury Set. The point being, I guess, that one person's idea of the good life might be another person's of the tediously dull. Which maybe goes to show that there's no pleasing some people, like this chap ...

Secondary Colours

Green is a secondary colour: it's what you get when you combine yellow and blue. Right now, the Greens are going through the political prism and it looks like they're separating out into blue (Fine Gael) and yellow (independents). Though a bit of red seems to have gotten into the original mix as well somehow ...

Take my own local constituency of Dun Laoghaire Rathdown. Last time round we elected four Green Party councillors - this time we elected none. Not a one. The Greens benefited in previous elections from what I think of as the 'fashion vote'. It was the vote that boosted the PDs back in the days when taxpayers wanted their voice heard; once heard they were duly dropped (I appreciate there were a few other factors involved). Likewise with the Greens, when taxes were low and we didn't even mind a plastic bag tax then the 'fashion vote' was on the side of the eco-angels.

Not no more. Harsh economic reality puts fashionable frills in perspective. The Greens will be buried at the next general election: and if they get (to be seen) to introduce extra taxes such as a carbon tax then they will be buried very deep indeed (hopefully in a recyclable coffin ;-) Their demise is inevitable as they were always a single issue party ('the environment') and they were always going to stumble when economic issues came to predominate the political agenda. Ironically it was economic affluence and all that rampant consumerism that made the Green Party appealing. But now recession is doing more to reduce our carbon footprint than replacing any number of light bulbs the appeal of their agenda has disappeared faster than the queues outside show houses.

Nevertheless I will regret the demise of the Greens. Mainly because - of all the political parties - they are the only ones to ever seriously addressed Ireland's energy agenda. Unfortunately energy is subservient to their climate change agenda and so the latter drives responses to the former. Hence the lunacy of proposing that Ireland passes a Climate Change Law similar to the UK. One that will require us to shut down the economy to avoid to what increasingly looks like mild and manageable climate change, should it eventually happen. As such, an Irish Climate Change Law will go down in history as the longest suicide note in history - or at least the second longest.

Though I doubt Fianna Fail will want to be co-signatories after last Friday's results.

Pump It Up

My recent post about Spirit of Ireland drew some flak. Richard Tol has been batting away in the comments with those more enthusiastic about the SoL concept than him (or me).

It is interesting to look elsewhere for examples about combined wind/hydro electricity initiatives. New Zealand is especially interesting, not least because it shares some of the same energy characteristics as Ireland in terms of wind generation capacity (though there are some key differences: New Zealand has active volcanoes and the geothermal power opportunities that go with them!)

The free market energy blog MasterResource has a very pertinent post by New Zealand energy engineer Bryan Leyland. Bryan reflects on New Zealand's own potential for a combination of wind power and pumped storage to substitute out non-renewable electricity generation capacity. His analysis shows that you would need wind and pumped storage generation capacity of 1.55 times the likely level of generation demand to allow for wind capacity operating at a factor of 37% and for losses of 25% of pumped storage capacity due to evaporation and conversion losses. Wikipedia suggests the latter can even be as high as 30%. Hence his conclusion:

The conclusion is that wind power is very expensive and large-scale power supply from windpower (and other new renewable technologies) cannot be contemplated until an efficient, low-cost method of storing large amounts of electricity for long periods is discovered. I am not aware of any technology that comes anywhere near to meeting this requirement.

None of this is to say that the Spirit of Ireland initiative is wrong or fraudulent. Though maybe it's just a tad ambition given the worldwide (though very limited) experience of similar initiatives. Perhaps in going for scale they can solve some of the problems (technical and - most importantly - economic) that beset such ambitions elsewhere.

And of course, unlike New Zealand, we at least can tap our next door neighbour for some spare electricity should we run low ourselves - at least we will when the East-West interconnector is finally (and once again belatedly) in place.

Keep It Clean

When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.
P J O'Rourke

The problem most people have with representative democracy is the representatives. Tomorrow's your chance to change that of course (okay, not where it matters, but you know what I mean).

Despite the many (many) inadequacies of our public representatives, the one thing we seem to have been spared is widespread corruption. The revelations of various tribunals aside. Yet one of the amazing things about the problem of corruption around the world is how highly correlated it is with ... public representatives, public employees and the power of the state. For all the nasty, horrible, selfish things businesses and their capitalist apologists get up to, it is always politicians, cops and judges who figure in the world league of dodgy people to deal with.

Just look at the 2009 Global Corruption Barometer published today by Transparency International. I've copied the table showing the institutions/sectors perceived to be most corrupt by people in their global survey (which excludes Ireland unfortunately). Businesses hardly get a look in, and when it comes to the actual experience of corruption, businesses don't even figure except in the case of utilities (which are mostly state owned anyway in the most corrupt countries).

The Irish operation of Transparency Ireland run by John Devitt did publish a country report on Ireland earlier this year. The report details the numerous government run organisations designed to police businesses and make sure they don't misbehave. Ironically, it cites the Social Partnership process as one that could be 'potentially' subject to corruption, given "the way in which a significant element of national economic policy is effectively decided upon outside the Oireachtas." (page 140). So if we really want to minimise the potential for amoral businesses to corrupt innocent politicians and policy makers then Social Partnership should be ended. Sure if that's the argument that swings it, then it'll get my vote/brown envelope too.

Sadly corruption will always be with us so long as we have politicians and public servants with lifestyle ambitions above their station. I don't see Transparency International going out of business any time soon - nor would I want to so long as the problem of corruption remains.

But as the TI Global Barometer makes clear: the surest way to reduce corruption is to increase standards of living: affluent people don't need to buy the favours of public servants to get what they want because they can go straight to the market and buy what they need for themselves. That's probably why they call it the free market.

AVP Legal

Every once in a while you come across a money-making idea and you think: "why the hell didn't I think of that" - or something equally uncharitable about the inventor. That was my reaction when I read about Juridica Capital Management: they run a fund (originally in the USA, now in the UK) that invests in one side of a lawsuit in exchange for a share of any winnings. And its the lawyers that are coming to them for their support, according to today's New York Times.

Okay, there is a downside: sure the investors win, the lawyers win, one side of the lawsuit wins ... but what about the rest of us. Ultimately legal costs - like public sector spending - have to paid by someone at sometime, willingly (and wittingly) or otherwise. That's you and me folks.

Maybe PooterGeek is right: it's like the strapline from Alien Vs Predator - whoever wins, we lose. Unless you're an investor in the fund of course. Hmmmmm.

(Image c/o Brian Meehl)

Take the Plunge

A quick hat tip to Jack Murray and the rest of the crew at Mediacontact.ie for organising the MediaDive skydive last Saturday. That's yours truly with tandem master Rodger Killeen pointing out the sites from 11,000 feet above the Irish Parachute Club in Co. Offaly.

Good fun for good causes: everyone should do it at least once (and sure I might do it again next chance I get).

The Cycle Turns

The bottoming out of the ESRI/KBC consumer confidence index suggests we are near the trough of the recession. As I've noted before, consumer confidence tends to move contemporaneously with the trend in the unemployment rate. The chart - from the IMF's recent World Economic Outlook - paints a handy, stylised picture of the business cycle through expansion, recession, recovery and expansion again. Confidence ebbs and flows through the cycle of course.

But confidence is a psychological measure, not an economic one. And psychology is sometimes even more fickle than the economy. Perhaps the 'improvement' in the ESRI's measure is a sign of weariness rather than recovery? That's what Zero Hedge observed recently about a similar upturn in confidence in the United States:

Increases in consumer confidence during the past two months are indicative of desensitization. Consumers are becoming acclimated to weak economic conditions, poor stock market returns, and the continued accumulation of job losses. This desensitization has been emphasized by the mainstream media; particularly in the past few months. The take-home message of articles and news reports has shifted to ‘be happy things aren’t getting worse’ and people are doing just that. Bargain hunters have been lured into many areas including housing, stocks, and even retail products. Meanwhile, important fundamentals like GDP, unemployment, foreclosures, and household net worth go largely unmentioned and underanalyzed.

A curious case of blaming the media for exaggerating the good news rather than the bad for a change! But how useful is consumer confidence as guide to the economic outlook? Some argue it is a contrarian indicator, especially if you are buying shares:

But insofar as consumer confidence tells us anything about the future, it's that big rises and/or high readings are more negative than positive for the stock market. ... Low consumer confidence is followed by high stock returns more often than it is followed by low stock returns.

Coming back to the economy, research by my own company suggests that we're just to the left of the trough's low point (as reflected in consumer perceptions about the overall expansion/recession dynamic in the economy). This doesn't mean that the trough will be pointed like a V, rather it will be more of a U, with the pick up not much evident, in my opinion, until this time next year (i.e.: Q2 2010). Though a more widespread recovery should be in place by end 2010, but it won't be strong enough to prevent 2010 recording another year of contraction (just not as bad as this year).

Time, of course, will tell ...