Thursday, April 30, 2009
The problem is that too many people (buy-to-renters, developers, bankers, finance ministers) thought otherwise. We are now paying the price for their misperception. As the recent NIB report on the (former) wealth of the nation points out in figure 9 on page 15, some 52% of the the wealth of Irish households is still tied up in owner-occupied housing. Another 16% is tied up in farmland. We are still fixated on roofs and rods.
As reported by the Central Bank yesterday, most of the increase in Irish household debt in recent years was attributable to mortgages on properties. And the problem, as I've noted before, is that debt is a fact, wealth is an opinion. What we owe and what we're worth are two very different concepts unfortunately. The decision by the Department of Finance to remove mortgage interest relief from tens of thousands of households will make that stark reality even clearer for many.
We're going to get a lot poorer before we figure out how to get wealthy again. And it won't be through borrowing to buy unproductive 'assets' like houses. Which won't be a bad thing either, come to think of it.
Wednesday, April 29, 2009
If, like me, you've managed to survived SARS, bird flu, mad cow disease, the Ebola virus, and Legionnaire's disease then you're probably taking this latest crise du jour with a pinch of salt (or a shot of whiskey or an aspirin). After all, just how bad can the future be? Okay, here's one, fifty year long scenario:
In this ﬁfty year period, a massive depression, coupled with the collapse of a key resource, undermines traditional economic models. Even as the global economy recovers, a global war erupts, a horrifying accident triggered by political systems overwhelmed by increasingly rapid communications, a tragedy multiplied by the almost casual use of chemical weapons. The end of this war coincides with the emergence of a pandemic the likes of which the world has never seen, killing millions upon millions -- and, combined with the war, almost eliminating an entire generation in some parts of the globe.
After the pandemic ebbs, a brief, heady economic boom leads many to believe the worst has ended. Unfortunately, what follows is a global depression even more massive than the previous one, causing hyperinﬂation in some of the most advanced nations, and leading directly to the seizure of power by totalitarian, genocidal regimes.
What follows is perhaps predictable: an even greater world-wide war, nearly wiping out a major culture and culminating in a shocking nuclear attack.
Scary, eh? And it was: because that was the 'future' from the vantage point of 1900 (ht Jamais Cascio). Kind of puts things in perspective, don't you think?
Postscript: maybe the first half of the 20th century wasn't all that bad? Stephen Hume puts the infamous 1918 Spanish Flu pandemic in context:
So, even if we had a repeat of the 1918 flu, the chances were seven out of 10 that you wouldn't catch it and if you did, the odds were better than nine out of 10 that you'd survive.
This is probably better for their home countries as well. As Harvard economist Lant Pritchett points out in this compelling presentation, the benefits to the world's poor from emigration vastly exceed the benefits from foreign aid and even from free trade. So if Irish Aid really wants to help the world' poor it should campaign for an open borders policy ...
But it won't happen, obviously. Firstly, the most successful idea of the past two hundred years is not socialism or capitalism but nationalism. We think of ourselves and of others in terms of nationality. Moreover, many of the social innovations of the past hundred years have been national in their nature and implementation. Like the Welfare State. It was Milton Friedman who once observed that "It's just obvious that you can't have free immigration and a welfare state." The very same debate will be conducted in Ireland and throughout the rest of the EU in the coming few years, exacerbated by the recession.
Christopher Caldwell has elaborated on Friedman's observation recently in the Sunday Times:
Immigration also weakens welfare states by making native taxpayers less willing to fund them. Five years ago David Goodhart of Prospect magazine warned that social programmes arise out of a sense of obligation to fellow citizens, which gets harder to maintain when fellow citizens have a different culture.
This seems to be true empirically: Alberto Alesina and Edward Glaeser, the Harvard economists, have shown that roughly half of Americans’ antipathy towards European-style socialism can be accounted for by the ethnic diversity of the United States. This view is given support by the recent work of Robert Putnam, the sociologist, who finds that people living under conditions of diversity “hunker down”. They trust their neighbours less – even neighbours of their own kind. They are less philanthropic, less social and less inclined to pay taxes.
Such tensions may, of course, be short lived if the economy here and elsewhere recovers. No more Londis queues. I don't think the Irish have any real antipathy towards immigrant workers: but quite a few (actually, a growing number of those I speak to in focus groups) are antipathetic towards so-called welfare tourists. No doubt there are some foreign nationals abusing the Irish social welfare system (and even a few Irish citizens doing the same in other countries) but I have no real sense of the scale of the problem. Nor do I think it is especially material in terms of overall social welfare spending.
When it will become material will be when the Government is forced in the next Budget (and probably a few more after that) to radically restrict the level of and entitlement to social welfare payments as it struggles to balance its finances. Then we will face what Charles Murray considers to be a uniquely European dilemma, namely the risk that the Welfare State will undermine the Welfare of the State. He has a classically liberal aversion to welfare as follows:
Put aside all the sophisticated ways of conceptualizing governmental functions and think of it in this simplistic way: Almost anything that government does in social policy can be characterized as taking some of the trouble out of things. Sometimes, taking the trouble out of things is a good idea. Having an effective police force takes some of the trouble out of walking home safely at night, and I'm glad it does.
The problem is this: Every time the government takes some of the trouble out of performing the functions of family, community, vocation, and faith, it also strips those institutions of some of their vitality--it drains some of the life from them. It's inevitable. Families are not vital because the day-to-day tasks of raising children and being a good spouse are so much fun, but because the family has responsibility for doing important things that won't get done unless the family does them. Communities are not vital because it's so much fun to respond to our neighbors' needs, but because the community has the responsibility for doing important things that won't get done unless the community does them. Once that imperative has been met--family and community really do have the action--then an elaborate web of social norms, expectations, rewards, and punishments evolves over time that supports families and communities in performing their functions. When the government says it will take some of the trouble out of doing the things that families and communities evolved to do, it inevitably takes some of the action away from families and communities, and the web frays, and eventually disintegrates.
Personally I prefer to weight the balance more towards immigration than towards the welfare state. Though I don't favour completely abandoning the latter, at least until a robust network of voluntary, community based support networks for workers and dependants are in place. As existed in many towns and cities in the 19th and early 20th century.
But hopefully economic recovery will come soon enough for us to avoid either ethnic tensions or real hardship due to welfare cuts for those with no other options.
Postscript: I just came across this interesting analysis over at VoxEU about the historical relationship between the economic cycle in host countries and attitudes to immigrants. No major surprises - though they point out that the unemployment rate in the host country is a much stronger influence on decisions to 'stay or go' than unemployment in an immigrant's home country.
Tuesday, April 28, 2009
The only significant challenge will be water management: dealing with the risk of flooding in the winter and the risk of drought in the summer. We've got a little time to learn how countries with mean temperatures 1.4-1.8°C above our own right now cope with the same issues (that's the EPA's range of projected temperature increases for Ireland by 2050 by the way). The graph from the report shows mean seasonal projected temperature increases out to 2080.
But overall, the outlook is sunnier - a lot sunnier. Now that's something to look for to. Okay: maybe something for my (as yet unborn) grandchildren to look forward to.
Monday, April 27, 2009
Which brings me to the Tánaiste Mary Coughlan. Unfortunately. As it happens, I'm a fan of John McGuinness TD, ever since his rage against the machine about the 'permanent government' aka the civil service. Another reason I like John is that he has actually worked in business - as a managing director of a courier company. A qualification nearly as rare as a PhD amongst our elected representatives. But he is the exception rather than the rule, alas. His replacement - Billy Kelleher TD - was a farmer. His former boss, Mary Coughlan TD, was once a social worker.
In Irish politics it seems that the winning formula for electoral success is to a) have a genetic relationship with the previous incumbent (preferably patrilineal), and b) be very good at running election campaigns. The ability to actually do the job you're elected to do is, well, immaterial - as some of our senior political figures are proving exhaustively.
But what's especially galling about the current poverty of governance in Ireland is that, economically speaking, we should have the world's best politicians. A recent paper by Ferraz and Finan entitled Motivating Politicians: The Impacts of Monetary Incentives on Quality and Performance (ht Anti-Dismal) finds evidence that:
... improving financial incentives can improve the quality of government, at least in a local context. Higher wages attract better politicians, induces more effort, which ultimately leads to more public good provision. This occurs even in an environment where agents are motivated by other aspects of the position they hold: ego-rents, ideology, intrinsic motivations ... However, whether this increase in performance is due to the positive selection of politicians or the incentive effects of higher wage is difficult to identify. The effects of wages on politicians’ performance are robust to changes in the composition of the observable characteristics of the legislature, suggesting that the effects are not exclusively due to selection.The problem is, Irish politicians are amongst the highest paid in the world. So surely we should have the best politicians money can buy - sorry - motivate? Maybe Garret Fitzgerald's suggestion that politicians should be paid 'less' than they're worth might be an interesting, contrary experiment to run instead? Could the results be any worse than what we've got already?
Saturday, April 25, 2009
Some - such as BTs, where I took this photo - are showing some 'Blitz Spirit' and reminding shoppers that 'great clothes will always outlive bad times'. True enough. As I stood there in the sunshine (okay, there was the occasional shower as well), it struck what a great thing consumerism is: to provide such a delightful array of wonderfully creative artefacts for sale - which I could choose to buy or not buy as took my fancy. Or anyone elses.
And it struck me that those who rail against consumerism usually mean other people's consumerism. Not their own, modest tastes in, say, mobile phones, laptops and GMO free, organic, fair trade t-shirts. Though even these are available at 'recession prices' in Dublin today ...
Making things better rapidly defaults into: increased taxes, increased spending (and/or borrowing), and favouring the public provision of services over private provision. To be fair, there have been islands of near achievement in this regard (geographically as well as historically), but they usually ended badly for the same reason: the Left can't say NO.
As Stephen Horwitz observes, the Left are trapped in a world in which 'ought implies can':
One of the most common objections to free markets is that they ignore ethical considerations. In particular, critics argue that there are many things we “ought” to do that they believe will make people’s lives better off. We ought to “redistribute” income to the poor, they say. We ought to make health care a right. We ought to fix the economy by bailing out the financial industry.
The problem with all these “oughts” is that they eventually confront the principle ought implies can. Can the desired end (improving the welfare of the poor, for example) be achieved by the chosen means (income “redistribution”)? If not, then what does the “ought” really mean? “Oughts” without “cans”–ethical pronouncements without economics–are likely to lead to disastrous public policies.
The converse also applies: just because you can do something doesn't necessarily mean that you ought to do it. But what has this got to do with the crisis facing the Left over the next twelve months? Quite simply, it looks like we are going to have an undreamt off expansion of the state and of government spending in most major economies, but with little in the way of demonstrable benefits for normally left-leaning constituencies, especially lower income workers. Indeed, the rapid collapse in the private sectors in countries like the UK and Germany will mean that the state will soon (if not already) account for the greater part of economic output.
Add to that the de facto and de jure nationalisation of banks in many parts of the world (including the United States and Ireland) and it all might look like the achievement of Marx's call for the "centralization of credit in the banks of the state": now supported by many thoroughly pro-market economists, as noted in this month's Foreign Policy. And yet, and yet ... the Left does not appear to be benefiting from such developments. A recent FT article by John Lloyd discusses the failure of the Left across Europe to capitalise on the so-called 'crisis of neoliberalism', and quotes Olaf Cramme, director of the UK-based Policy Network, a centre-left global policy forum as believing that:
... “despite the scale of the crisis of neo-liberalism, leftwing proposals about how to remake capitalism aren’t being received well. The centre left finds it difficult to offer a credible alternative to how to ensure wealth and security. In fact, in many countries, the conservative parties have been less enthusiastic about the growth of finance capitalism and tougher on regulating the financial sector than the left”.
And there's the rub: most Leftwing parties such as Labour in the UK (and Fianna Fáil during its "we're all socialists too" phase), happily rode the waves of neoliberal, global financial capitalism during the boom, simply plucking a few feathers by way of taxes to fund their favourite boondoggles. But now that the hyper-leveraged ponzi scheme that hijacked the global financial sector has collapsed, the Left are dusting off their copies of Keyne's General Theory in order to figure out how to maintain their favourite boondoggles even as the goose has started to hiss loudly.
The problem is that they should have been reading their Keynes (and better still, their Hayek) during the boom. Keynes would not have approved of the grossly pro-cyclical bloating of the public sector during the boom years that we witnessed in Ireland and elsewhere. But now the finance ministers and chancellors are quoting Keynes in their defence in order to assuage the anxiety of the international bond markets they so depend on. But as Willem Buiter points out (he's one of those pro-market/pro-nationalisation economists referred to in the Foreign Policy piece):
To be an effective Keynesian in a slump, you have to possess a reputation as a fiscal conservative.
A label you would most definitely not apply to our current Taoiseach when he held the finance reins.
All of this means that the Left are painted into a corner mainly of their own making. They supported the "no pain/all gain" expansion of the state during the boom on the back of unsustainable tax flows. And now they are desparately trying to sustain an inflated state even as the real economy is deflating. It can't go on, and it won't.
They are learning the hard way that ought doesn't actually mean can: they will learn how to say 'No' after they figure that 'taxing the rich' is a mere prelude to 'taxing the working poor'. Hopefully they will quickly learn that Big Government cannot be Redistributive Government. I really hope so, for all our sakes. Because history tells us that the failure of the Left doesn't necessarily mean the restoration of healthy, free market principles. Rather it can lead to something much, much worse than well-intentioned Leftwing utopianism: namely to a resurgent fascism, fuelled by xenophobia and ethnic hatreds.
From ought to nought in a few too-easy steps.
(Image from Ads of the World)
Friday, April 24, 2009
Thursday, April 23, 2009
- hit the middle class with tax increases
- make modest reductions in public spending
- load up on borrowings for our grandchildren to repay.
Not waving but drowning. The results look set to be much the same for both countries: the nastiest recession since the Great Depression - with a bank bailout thrown in for good measure. Below is the now infamous IMF table showing Ireland and the UK with the highest exposure to the banking crisis in terms of the final bill: nearly 14% of GDP in our case (ht Burning our Money).
However, it doesn't look like we'll be keeping company with the UK for much longer. The IMF's latest World Economic Outlook contains quite shocking forecasts for Ireland, as shown in the table below (I've underlined the Irish stats - click on table to enlarge):
According to the IMF, Ireland will experience the most severe recession this year of all the countries they survey, except for Singapore and Iceland. Then it gets worse: Ireland is expected to experience the most severe recession of all the countries in the IMF forecasts - period. Even Iceland is expected to do better next year than Ireland.
Our forecast contraction in GDP of -3% in 2010 is the price we are paying for our government's curious ambition to put the economy in hock in order to bailout the banks. I hope they're worth it.
Tuesday, April 21, 2009
The same is happening in Ireland: I extrapolated the most recent declines in male and female employee numbers from the CSO's Quarterly National Household Survey (tables 2A-2B). In the most recent wave, men make up 55% of all employees in Ireland. If the current rate of job losses by gender continues then men will make up just over 49% of all employees by October 2011. That's 30 months from now.
Back in the USA they are talking about a seismic shift in gender relations and roles as a result of these trends. Trends that are not expected to be reversed even as the economy recovers. Add Ireland's demographic trends to economics trends and pretty soon the fastest growing social network will be 'dads-n-toddlers' groups.
Monday, April 20, 2009
I like the analysis of the story over at the Psychology Today blog. Their conclusion:
Don't judge a person's physical attractiveness based solely on his or her physical attributes.
That's right - it seems second impressions are more lasting than first impressions. And yes, even as superficial a species as men do actually change their opinions about some attractive women even after very (very) positive first impressions. Which is kind of reassuring after all the neuroscience that was telling us you've got 0.5 seconds to make an impression or its too late.
But the Susan Boyle story points to a wider issue. That's the issue of how we judge talent. I read a delightful research paper recently called Superstars and Mediocrities: Market Failure in The Discovery of Talent. The author Marko Terviö explores why so-called 'talent' gets so highly rewarded in many sectors of the economy, when objectively it would be quite cheap to replace the incumbents with equally adequate workers for a fraction of the cost (bank executives anyone?) Terviö concludes that:
... any profession where the ability of inexperienced workers is subject to much uncertainty, and where performance on the job is to a large extent publicly observable, is a likely candidate for market failure in the discovery of talent. This market failure would manifest itself as a bias for hiring mediocre incumbents at excessive wages. Markets for lawyers, fund managers, advertising copywriters, and college professors are among other possible cases not explored in this paper. It can be argued that differences in talent that are only discovered on the job are in fact the main source of talent rents in the economy. If that is the case, then much of observed superstar incomes could be, instead of a rent to truly scarce factors, a symptom of inefficiencies in the discovery process of talent, largely resulting from limitations to legally enforceable contracts.His solution appears to be fixed term contracts all round - that way new talent will have a better chance of making itself known in time to replace under-performing incumbents. Mind you, they have that in politics don't they (elections and all that), but you wouldn't exactly say it has, eh, ensured that the cream has risen to the top?
Maybe instead we need a political version of Ireland's Got Talent? Susan Boyle for Taoiseach anyone?
Sunday, April 19, 2009
The Government still claims that Ireland will still be the sixth largest aid donor in the world on a per capita basis after the cuts. But so what? A look at where Irish Aid goes points to a range of NGOs and international bodies receiving small, medium and large sums of money, much of which gets added to the pot of larger overseas development aid programmes rather than going directly to end recipients.
Many of those involved in aid are compassionate people anxious to help those in need. But many others are motivated more by the inevitable desire for self-justification that all bureaucracies are subject to over time. And too much aid-giving merely subsidises the Vampire States that African economist George Ayittey sees as the biggest barrier to ending African poverty.
Perhaps the pause to the onward expansion of Ireland's aid programme will provide space to discuss the purpose of aid, and the most effective way of providing it (or not - as is sometimes the better solution). As William Easterly points out in a post on his excellent blog Aid Watch about one effective aid initiative he recently visited:
This kind of aid project is based on a lot of personal, face to face interaction, developing trust and a shared vision, so it is small scale, it has to let things proceed at their own pace, it can’t meet rigid pre-set output targets, it could never be judged by a rigorous “randomized controlled trial” methodology. In short, it involves the kind of tacit knowledge and individual adaptation that could never be converted into a routinized project implemented by the official aid bureaucracies. It breaks all the rules, and it works.Perhaps if we set ourselves the target of spending Irish Aid wisely - rather than simply spending in order to meet a random target for aid as a percentage of GNP - then the recent cut will, for once, have better consequences than intended. And if we're really wise, we might even play a part in creating a world in which aid becomes history. Now there's a target to aim for.
Friday, April 17, 2009
Christian has now edited and published a book on the different experiences of artists, neuroscientists and psychogeographers (new one on me) with the technologies he has helped develop. It's free to download - well worth a look.
I have always found maps fascinating, and to see them fused in such innovative ways with the rich world of data now available is amazing. If you share my fascination then check out Strange Maps and see how some people really do take their interests to extremes ...
But for a more down to Earth but equally inspiring example of the emotional power of maps check out the World Freedom Atlas. And count yourself blessed that you can do just that.
Thursday, April 16, 2009
As Paul Craig Roberts recently noted, the modern taxpayer has no more claim over their own income than a medieval serf. In fact we taxpayers pay ourselves second - the state gets paid first (next time you get your pay slip just compare the gross figure to the net figure). Tax is in essence a moral issue: there is a social contract between the tax taker and the tax payer whereby the former is supposed to provide benefits to the latter out of the proceeds of taxation. The debate in every democratic society is over what 'benefits', and at what cost (relative to the tax payer buying the benefits directly from private suppliers of same). A debate that has, historically, lurched between sheer stupidity and revolutionary anger.
Who will defend the tax serf? David Quinn is right to identify a major political opportunity for whomever is up to the task. The Irish Left on the other hand are reverting to form unfortunately - James Wickham dismisses concerns about taxpayers with the thought:
the belief that taxpayers give ‘their’ money to the state ignores that ‘their’ money could only have been acquired thanks to the state and the wider society.Ah yes, the State: that font of all beneficence, source of all wisdom, origin of all providence. All hail our new lords and masters. A pity the Left don't take the advice of Marxists like Chris Dillow and remember that 'the state is not your friend'. Today's retrospective grab by the state on the incomes of those who earned them in the first place is merely another lesson in what happens when you give power to people who do not exercise it in the interests of the power givers. And as the United States celebrates Tax Freedom Day, our own freedom gets postponed.
So, man the barricades ... or head for Liechtenstein?
Wednesday, April 15, 2009
Our nearest nuclear site will be Wylfa, close enough to where the East-West Interconnector will land in North Wales. From the UK's perspective, moving ahead with the renewal of its nuclear power generation capacity could not come soon enough. In fact, they've probably left it too late. With UK oil production plummeting, and today's FT anticipating another bull market for oil as non-OPEC production falls, it is vital that the UK expands its alternative energy sources.
Britain's ability to export electricity to Ireland will be vital to our future energy security. They also have their own EV ambitions too of course, but if the Irish Government's aims of having 10% of the transport fleet fully electric by the year 2020 (equating to approximately 230,000 vehicles in today's fleet numbers), then we will need all the electricity we can get. And wind won't do.
Tuesday, April 14, 2009
Sunday, April 12, 2009
Turner is eloquent about the relationship between humanity and nature, and is rightly dismissive of the modernist nihilism that now pollutes too much Western thinking. He believes that the tide of nihilism is ebbing and that we are witnessing the re-enchantment of the world. He's a poet and English professor, yet he has more insight into the workings of the economy than some of the economists I have read. Here's what he has to say about the role of poets in creating the new economy of the 21st century:
Perhaps the greatest artistic challenge for the new generations of artists and poets who are now growing up in the ruins of modernism and postmodernism will be to build upon what the artists of the past have done, listen to the scientists, learn - as did our mythical predecessors Solomon and Orpheus and Taliesin and Vyasa - the language of plants and animals and stones, and create a grand channel of metaphorical and narrative commerce between ourselves and the rest of nature. No enterprise could be more enriching to both the human economy and the divine.As he reminds us in a recent podcast interview, both the word 'market' and 'mercy' come from the name of the Roman god of messengers and commerce, Mercury. As do 'commerce' and '.com' for that matter. Turner challenges the traditional Marxist critique of the market as impersonal, rather he argues - through his interpretation of Shakespeare - that the market is a place where we create value through our interactions with strangers, interactions that demand a level of trust and reciprocity in order for them to be sustained. And in creating value we perceive ourselves as valued. The tragedy of the current crisis is that it was the result of the financial sector moving away from the trust and reciprocity that are essential to a healthy economy.
If the credit crunch marks the high water mark of crony capitalism, I suspect the New Atheism represent the high water mark of the wider postmodernist venture. As writers like Madeleine Bunting have pointed out, the in-your-face stridency of the New Atheism is, hilariously in my opinion, straight out of the bible-thumper's handbook of communication. I prefer the gentler, more enchanting secularism of writers on Doubt like Jennifer Michael Hecht - another poet as it happens.
Easter for me is about new beginnings: a re-enchantment with being alive in this wonderful world. There is a similar strain of thought in the writings of Turner and others who recognise, as one reviewer puts it, that "philosophical reflection need not end in fashionable nihilism or pragmatic utility. Nor, above all, must it deny the 'desire for eternity' that animates and elevates the human soul".
The challenge for this century is to find that path to re-enchantment that builds on our extraordinary achievements so far, and that avoids the pitfalls we are all too familiar with. Creating an economy that, ultimately, makes us all rich. In a way we are already re-enchanting the world - as Kevin Kelly points out, even our technology now has the capacity to create 'minds' and embed them in the world around us: minds already superior to our own at specific tasks (like search engines). I think the poets will lead us along that path, aided and abetted by the enchanting insights of science that help us re-perceive ourselves and the world that we live in.
Saturday, April 11, 2009
But as the government's own macroeconomic analysis points out (pdf), the risks to its projections are on the downside:
The main identifiable risks include:You don't say. But that being the case, why has the government relied on the unpredictable path of tax increases to close the budget gap rather than the more certain one of spending cuts? Politics presumably. But the tax-and-cut approach only works if the rest of the world recovers soon and drags us out of our home grown depression. That's a really big IF.
• A steeper or more prolonged downturn in our main trading partners;
• The possibility that global financial market problems persist for longer than expected;
• Further exchange rate appreciation, particularly against sterling;
• The possibility that declining price levels (in Ireland and possibly in our main export markets) feed into expectations and lead to a more prolonged deflationary environment;
• Further out, there is the possibility that cyclical unemployment may become structural, thus limiting the ability of the economy to achieve growth above trend.
I hope someone in the Department of Finance is doing some scenario modelling in relation to radically different futures to that set out in the Budget. Take the second last of the downside risks listed above, namely 'a more prolonged deflationary environment'. Paul de Grauwe has set out a compelling analysis of the four deflationary spirals we are now caught in. He describes them thus:
There are four deflationary spirals presently at work in the world economy, i.e. the Keynesian savings paradox, Fisher’s debt deflation, the cost cutting deflation, and the bank credit deflation. Each of these deflationary spirals can be dealt with when they occur in isolation. They become lethal when they interact with each other.
... The four deflationary spirals that we described have the same structure. The actions by economic agents create a negative externality that makes these actions self-defeating. This spiral is triggered by a collective movement of fear, distrust or risk aversion (animal spirits; see Akerlof and Shiller(2009) for a fascinating analysis). Individuals (savers, firms, banks) are unable to internalize these externalities because collective action is costly. There is thus a failure to coordinate individual actions to avoid a bad outcome.
... Cyclical movements in optimism and pessimism (animal spirits) have always existed. Why do these now lead to such a breakdown of coordination?
The four deflationary spirals we identified, although similar in structure, are different in one particular dimension. The savings paradox and the cost deflation can be called “flow deflations”. They arise because consumers and firms want to change a flow (savings and profits). The other two involve the adjustment of stocks (the debt levels and the levels of credit). We call them “stock deflations”. Problems arise when the flow and stock deflations interact with each other.
The biggest threat is that of bank credit deflation. De Grauwe makes a compelling argument for bank nationalisation, also argued compellingly by Karl Whelan in recent posts over at The Irish Economy blog.
The irony is that our membership of the eurozone has deprived the Minister for Finance of the one sure 'solution' to our current difficulties, namely engineering massive inflation. Some, such as Richard Douthwaite, have even argued that we need to engineer inflation in order to smooth the transition to a more sustainable economy, but the ECB seem to have other plans for now.
The government appear to be the last ones to have grasped that we have entered a new age - one in which inflation and growth may not return for a lot longer than their tax projections assume. A new age in which businesses and households focus on restoring their balance sheets rather than return to the normal expansionary activities (borrowing, dissaving etc) that drove recovery in the past. And this is assuming there are no more black swans out there, driving us even further into our bunkers: like another stomach-churning fall in stock markets in the coming days or weeks.
Most citizens and businesses I talk to assume we're at the start of a process of painful adjustment that may run for another 3-5 years before things get back to 'normal'. The government, as ever, appears to be following reality at something a lag. I hope it catches up soon.
Thursday, April 9, 2009
It seems to me Ireland is experiencing the most extraordinary destruction of wealth of any developed country in the post war period. Okay, with the exception of Iceland. There's always Iceland. Nevertheless, our get rich quick obsession with property has now turned into a get poor quick contraction of depression-like proportions.
In his analysis, Constantin reminds me of Rule No. 6 of the 7 new rules of financial security:
Rule No. 6 DiversificationI'd suggest you familiarise yourself with the other rules. One thing is for sure, the path to future wealth will be a whole lot different to the path we were on. Bill Gross puts it neatly:
Old thinking: A diversified portfolio lowers your risk.
New rule: Diversification won't always save you - and you need more of it than you think.
In a sense, we are all children of the bull market, although some of us are more mature than others – a bull market of free-enterprise productivity and innovation, yes, but one fostered by a bull market in leverage, deregulation and globalization that proved unsustainable in its excesses. We now must view ourselves as chastened adults, forced into acknowledging a new reality that is dependent upon bear-market delevering and debt liquidation to deliver us to our new and ultimate restructured destination – wherever it lies. Thus, while historians might describe these years as an evolution, for those of us living it day-by-day it most assuredly has the feel of a revolution. Much like Irving Fisher’s “permanently higher plateau” of prosperity that was quickly turned on its head in 1929, those who would forecast a “permanently lower valley” of despair might similarly be off the mark. Yet there should be no doubt that the bull markets as we’ve known them are over and that the revolution is on. Investing is no longer child’s play.Of course, the delevering and liquidation isn't over yet. Who knows what the fall out will be from the bank bailout mark 2 (or is it 3 or 4, I'm losing track). Perhaps instead of calling it the National Asset Management Agency (NAMA) they should have called it the Mostly Assets Management Agency - MAMA sounds so much more reassuring don't you think?
But I think Bill Gross is right: we are experiencing something more akin to a revolution than an evolution - globally and nationally. Which is why I think we'll see a lot more ideas in future like the Finance 2.0 Manifesto. Or growing your own bank. The path to future wealth may not be as rapid as the previous one, but hopefully it will be much more enduring.
And if all else fails there's always, er, this weekend's lottery: €10 million tax free (an endangered concept if there was one). And if you won you could borrow another €70 billion against it and buy some property in ... no, no stop! Oops, I guess the baddest habits die hardest ...
Wednesday, April 8, 2009
... a credible response to the current difficulties in the public finances. It sends a clear and positive signal that the Irish government is taking effective remedial action over the next five years ... Unpleasant though it is for all of us, the increases in income levies announced today are the most effective means of raising revenue with the urgency and simplicity required.But what about the Budget's impact on businesses? Not a word from IBEC. I find it extraordinary. The above statement could have been issued by ICTU, CORI, Sinn Féin or just about anyone with no concern for the interests of business.
I've been asking myself, as have others throughout the day: what has the budget done for businesses? What has it done to:
- make it cheaper to retain or hire staff?
- to control or reduce operating costs?
- to achieve or increase profits?
- to expand and export?
- to invest or innovate?
- to acquire or merge?
In a word: nothing. Oh, I forgot: there's the Enterprise Stabilisation Fund - a grand total of €50 million this year. Let's work it out: say there's 1,000 companies eligible for support (about par with the numbers Enterprise Ireland works with every year). That equates to €50,000 in support - or stabilisation - for each company. Jaysus lads, this time next year we'll be millionaires ...
In fairness, IBEC did complain that the fund was ridiculously small - or 'regretably modest' in Stockholm Syndrome speak. That said, personally I'm not a big fan of corporate welfare. It still doesn't do anything for the 30,000 plus other businesses not eligible for a little slice of stability. Hairdressers are rarely in the internationally traded services business - though they employ a lot more people and have many more satisfied customers than most corporate residents of the IFSC I suspect.
In fact, the Budget has made it more expensive to employ staff (most accountants and financial managers are unpaid employees of the Revenue Commissioners these days - they'll be busy ensuring the businesses that do pay their salaries are 'tax - and levy - compliant'). The Budget has also sucked money out of an economy that is already contracting at depression rates leaving less to spend on the products and services provided by businesses; higher capital gain taxes provide a disincentive to invest; and the cost of diesel has gone up for those dependent on transportation for delivery of products to customers.
I would like to have seen a budget that made it cheaper to retain and hire staff (e.g.: through a moratorium on the minimum wage for 3 years and an end to employers' PRSI); that reduced the price of goods on sale to consumers (lower VAT); and that incentivised companies to acquire profitable businesses in the BRIC economies to ensure an Irish foothold in the next wave of global growth.
We need organisations like IBEC, the SFA, Chambers Ireland etc to put businesses first - and to not be ashamed about it. It's time to set the hostages free.
Tuesday, April 7, 2009
Nevertheless, his bravery is foolhardy. The families that will be hurt the most by this budget - working couples in their thirties and forties with dependent children, mortgages and insurance policies - will be confronted with a nasty reality: it isn't worth their while financially for both spouses to keep on working for sharply reduced net household incomes. So they won't.
We are embarking on a real world test of the Laffer Curve hypothesis: that above a certain level of taxation, employees withdraw their labour causing a collapse in government revenues from income taxes. Nor is the Laffer Curve some throwback idea from the 1980s: recent experiments in behavioural economics show the existence of a behavioural Laffer curve.
One consequence of the more flexible and fluid, predominantly private sector labour market that we now have in Ireland is just that: individuals and households are flexible - they make adjustments to the new circumstances that face them. Including decisions about whether to work, and for how long. I'm guessing Irish working couples will look at their paychecks this month and next and act accordingly.
Ireland is unique among OECD countries in responding to the global economic crisis through a policy of tax increases. Indeed, we appear to have a government that is living in a world more familiar to Sir Humphrey than to that in which most of us live. They are gambling the nation's future on the hope of a shortlived recession that will see us growing again in twenty months time. If they are wrong, and the Minister for Finance has to go to the IMF next autumn for the money to pay teachers' and nurses' salaries, then the decisions made today will seem not so much brave as reckless.
I suspect Laffer will have the last laugh.
Monday, April 6, 2009
Once we purge ourselves of blaming others, we free ourselves to take command of our own lives again.Liam Delaney has started an interesting discussion over at the Geary Behavioural Economics Blog on the theme of 'what is good about recessions? I think it is an interesting issue because I'm surprised at how many times recently in focus groups and surveys I have found evidence that a lot of Irish people think the recession isn't all bad. In some respects it might even be a good thing. Not just in terms of falling prices and mortgage repayments, but also in terms of people feeling under less pressure to 'keep up with the Jones'. And, more positively, there's an emerging sense that "we're all in this together" and we'll only fix it by re-connecting with the traditional strengths of the Irish people: openness, friendliness, trust, compassion.
Sure, there's a certain amount of 'survivor guilt' about still being in employment if your friends and colleagues have lost their jobs - though maybe not as much as there used to be. Moreover, I don't sense the same compulsion to point the finger of blame at certain individuals or groups that was there back in November and December. It's as if people have gotten over the fact that we're in a recession, and rather than get busy blaming they've gotten busy dealing with it instead.
The Irish people are not alone in seeing a possible silver lining around the cloud of recession. The Great Depression in Britain is recalled by many who lived through it as a time of solidarity and, well, fun. Coming back to the present, The Economist notes a seismic change in consumer psychology in relation to shopping. Conspicuous consumption is out: now you prove your 'sophistication' by what you don't buy, instead of what you do buy.
The nearest analogy to some of the sentiment I see in Ireland today is that of people during wartime. Ireland didn't participate in World War 2, so we never needed to develop the Blitz Spirit. Perhaps now is the time?
Sunday, April 5, 2009
And here are some of the things I have been reading on the subject:
Why it is still politically expedient to continue the criminalisation of drugs.
A new Cato Institute report on lessons from Portugal's de-criminalisation of drugs.
Will Wilkinson on the 5,000 violent deaths in Mexico in just the past year from the war on drugs.
The Opium Economy by Jeremy Berkoff on the global economic cost of the war.
Jennifer Michael Hecht's The Happiness Myth, especially its chapters on the history of drug usage and criminalisation in (mainly) English speaking countries over the past two centuries.
Some recent research by my own company on drug consumption in Ireland.
Friday, April 3, 2009
But what if the government is the externality? This thought struck me yesterday looking at the latest Exchequer Returns. We have an extraordinary situation whereby government spending is rising significantly in real terms, even as tax revenues are falling. Nor is this predominantly due to rising social welfare spending in response to unemployment. Which you would expect. No, as the table shows, spending by the Department of Social & Family Affairs accounts for only 38% of the total increase. The rest is due to increases in spending on agriculture, health, local authorities, gaeltacht affairs etc etc.
Any business or household whose income has plunged by 23% would not then go on to increase spending by 6%. But if you're the government you do apparently. And that's what's worrying ahead of next week's budget. Even in the teeth of the sharpest downturn in the post war period, our government can't even keep spending static (say, by increasing social welfare spending but cutting back spending elsewhere). Which means that the focus next week will be on increasing taxes rather than reducing spending.
The fallout from this political externality will be severe. Take entrepreneurship - something the government purportedly wants to encourage. Here's James Manzi on the new realities facing would be entrepreneurs in the United States, where the government is using current deficits to fuel the recovery, knowing it means higher taxes in the future:
If entrepreneurs had a higher success rate, then many more people would start companies (probably about as many as go into long-hour, high-stress, high-compensation work like investment banking, corporate law, and strategy consulting). But when you multiply the potential payoff by the low odds of success, the expected profit doesn’t look so compelling. The pot of gold has to be big indeed to get people to make such a risky leap. Today, we’re increasing the deficit as a percentage of GDP to levels not seen since World War II. Any prospective entrepreneur must realistically expect higher future tax rates or increased inflation (or both), which will substantially reduce the future payout from a successful start-up company. The pot of gold has suddenly gotten a lot smaller.In Ireland, we're not faced with the uncertainty of prospective taxes some time in the future, rather we are staring at very certain tax increases in the next few weeks and months. The pot of gold hasn't so much as gotten smaller as been taken away entirely.
Guess we're all going to have to get used to living downstream of the effluent from the policy mistakes now being made.
Thursday, April 2, 2009
My advice to her? She may book her place in Hollis Street or the Rotunda soon: there's a baby boom under way in Ireland and it's about to get 'boomier'. The chart shows the projected numbers of births in Ireland. That number is rising and won't peak for another ten years or so. We are a lucky country in that regard.
Countries with declining populations on the other hand (much of central and eastern Europe and Russia, for example) face horrendous problems as their populations age rapidly, driving down productivity and increasing demands on their taxpayers for pensions etc. Though some are not waiting for the inevitable: Georgia recently had a sharp upward surge in births when the head of the Georgian Orthodox Church, Patriarch Ilia II, promised to personally baptise any baby born to parents of more than two children. Clearly a man who understands incentives!
Nevertheless, the longer term outlook globally is for most countries to go the way of Eastern Europe - countries like Brazil and Iran have already seen their birth rates fall rapidly below replacement levels. The United Nations now projects that the world's population could start declining as soon as 2040: much sooner than previously projected.
Of course, we're in a recession - so arguably the CSO's projections should surely be revised downwards? I'm not so sure. We have a lot of women (like the manager I know) who are in their late twenties and early thirties who, frankly, have to have their babies now or never - biology being what it is and all. The fact that we have a large cohort of women in the child bearing age group is what is helping us avoid the fate of eastern Europe: and if couples begin to believe that the recession is going to go on longer than expected, then nature will trump the economy and take its inevitable course. And given the, er, popularity of the baby-making process it might even do something for the mood of the couples involved.
As Janice Turner notes, it's all about young couples' expectations. If the ever-upward career ladder has been removed by the recession then quite a few female and male professionals will wonder what it all for. Also with rising unemployment causing many two-income households to become one-income households, just as they often do during maternity leave, then why not take advantage of the occasion? Of course, as it is the men who are losing jobs faster, I expect to see a lot more stay-at-home-dads in the next few years.
Either way, Ireland's baby boom looks set to continue. And a good thing too.
Wednesday, April 1, 2009
The chart shows the extraordinary rate of increase in the live register based measure (updated with today's CSO report). It makes the 1980s seem positively sedate as rising unemployment goes. Right now the trend is like that stage in roller-coaster ride where you wonder if this is going to end horribly. The last time the measure was at 11%, by the way, was in November 1996, over twelve years ago. There then followed an extremely rapid fall in the rate - the mirror image of the extremely rapid rise now unfolding.
What is happening? It seems to me we are reaping the consequences of our conversion to a services-based economy from the mid-1990s onwards. Construction played a part too, of course. But the fallout from construction has (surely) worked its way through the live register trend. It's the wider services economy that is bearing the brunt of the fallout now. Moreover, in services companies, labour costs are a vastly higher proportion of total operating costs than in, say, manufacturing companies. The result is that a service companies have to respond quicker to a downturn in demand by reducing staff costs: reduced hours/reduced pay/reduced numbers.
The good news is that our services-dependence might well mean an equally sharp fall in unemployment when the recovery sets in. Though without the contribution of construction that we saw during the late 1990s the fall might be somewhat blunter. Calculated Risk makes the point that the different macro variables in the economy respond at different stages in the recovery, as summarised in this chart:
James Hamilton puts it more graphically (without the unemployment trend):
Either way, we're looking at double digit unemployment for at least another 3-4 years (if we are lucky), and it hasn't peaked yet, of course.