Sunday, May 31, 2009

Spirit of Eire

I like big thinking - small countries should indulge in it every once in a while. It's one of our competitive advantages. I think this is one of the reasons why there has been such a positive response to the Spirit of Ireland initiative. Amidst all the doom and gloom, here's a big idea that promises to get us back on track to a better future. Who could object? Even if it will cost €10 billion according to today's Sunday Business Post.

The Spirit of Ireland concept ticks all the right boxes all right: job creation, investment, CO2 emissions, energy independence, regional development. But a big idea isn't necessarily a good idea. As Richard Tol has observed in a recent post at the Irish Economy blog (worth reading the post and the comments), the Spirit of Ireland plan is unrealistic in almost every respect (reliance on wind, employment projections, planning permission timeline assumptions etc).

Their ambitions for Ireland to become 100% reliant on wind (backed up by pumped hydro) and completely independent of the rest of the world for our electricity generating needs is straight out of Official Sinn Féin's Irish Industrial Revolution written way back in 1977. Like I said, big ideas aren't necessarily good ones.

I've noted before that the Government's target of up to 40% of electricity generation from renewables (mostly wind) by 2020 is borderline insane. We have an installed base of some 920 MW of wind power generation (WPG) capacity already. Yet, at 3.45pm on Sunday 4th January this year, the total amount of electricity generated by all of Ireland's wind turbines combined was just 9MW - that's 1% of capacity. It shocks me how the media still report the installed capacity of wind generation as if it was the actual generated output. Take the RTE news earlier this week reporting on the announcement in relation to the West Clare Renewable Energy company and its plan to construct 30 3MW turbines. Or as RTE breathlessly tells us (quoting verbatim - I suspect - from the relevant press release), that's a generation capacity that "will be capable of meeting the energy needs of all of Clare and half of County Limerick". But not on Sundays in January I suspect. And only if you drive electric cars.

The tragedy as I see it is that the vital importance of the energy issues facing our country and our entire global civilisation have been hijacked by those elements of the green movement who prioritise responding to global warming over economic growth. Which is why enthusiasm for renewable energy sources trumps all other, more effective solutions to our energy challenges. A recent essay at The Oil Drum site - a group not exactly hostile to renewable energy - nevertheless points out that the cost of wind relative to the energy sources it would replace are enormously high. The author quotes a report on the actual as opposed to theoretical performance of WPG thus:
For two decades now, the capacity factor of wind power measuring the average energy delivered has been assumed in the 30–35% range of the name plate capacity. Yet, the mean realized value for Europe over the last five years is below 21%; accordingly private cost is two-third higher and the reduction of carbon emissions is 40% less than previously expected.
RTE please note. Now don't get me wrong: I'm all for energy innovation - and for energy big thinking. Including renewables. But we can't defy the laws of physics - or meteorology. As David MacKay has made clear in his excellent book Sustainable Energy - Without the Hot Air, renewables won't solve our energy problems alone. Nuclear must play a part, as well as energy efficiency and future innovations. There is though no magic bullet (and anyway, physicists like Professor MacKay don't do magic!).

Yet there is an unfortunately element of magic realism about the Green Party's commitment to 40% renewables (now foisted on the nation by its larger partner in power, Fianna Fail). And I fear it has contaminated the thinking of many of those supportive of Spirit of Ireland. The idea of energy independence is a bit like that of self-sufficiency: and self-sufficency is the road to poverty. If that's what you want, fine. Just be up front about it, and please ask everybody else is that what we want before we set out on the road to an Amish-style utopia.

Friday, May 29, 2009

What Is the Point of Anglo Irish Bank?

This from today's interim results from Anglo Irish Bank:
New lending in the period was solely to the Bank's existing customer base, primarily in Ireland and confined to amounts which were previously committed or approved to protect asset quality and reduce risk.
In other words, no new customers welcome. Would you invest €4 billion in a bank that's shut for business? Too late: if you're an Irish taxpayer you already have.

As Willem Buiter once eloquently put it, banks that won't lend money are utterly useless, like tits on a bull. Nor are Anglo alone: today's Central Bank statistics show total bank lending to households and non-financial businesses to be down by €2 billion in the year to April. If you separate out the value of outstanding loans to non-financial corporations, i.e.: businesses (table B2.1), the combined value is down 1% in March from February, and up an anaemic 1% on March 2008. The bank strike continues it seems.

Which does rather beg the question: why invest €4 billion of taxpayers money in an utterly unproductive asset, when it could be invested in a new bank which could then lend the money to businesses with the potential to grow, repay their borrowings and contribute to job and wealth creation? Or simply give the money back to the taxpayer and let them spend it more wisely and productively?

Enough with the 'transgender' banks I say.

Thursday, May 28, 2009

Speaking Truth to Power

Sometimes you see something on the television that changes your understanding of an issue entirely. Like the issue of the Ryan Commission Report. The turning point for me was Michael O'Brien's contribution to RTE's Questions & Answers.

I'm with Barnardos' Fergus Finlay: bankrupt the Christian Brothers - and the other religious orders that sheltered and defended child rapists - and shut them down. Then let people of good will start again to provide the services of care and education that such orders purported to be about.

Monday, May 25, 2009

Better Than Happy

It is social aptitude not intellectual brilliance or parental social class, that leads to successful aging ... the only thing that really matters in life are your relationships to other people.
George Vaillant

Unforeseen consequences again: it seems one result of achieving equality between the sexes is that women are now just as miserable as men. Worse, women appear to be in danger of overshooting this new found equal status by becoming less happy than men. Thirty years ago it was the other way round: women repeatedly described themselves as much happier than men - that's according to a new paper on the Paradox of Declining Female Happiness (pdf - ht UCD Geary Institute).

Tim Worstall has a simple, economic explanation for this so-called paradox:
However, there shouldn't really be any surprise at this finding, not amongst those who have absorbed the second thing everyone needs to know about economics: that there are always opportunity costs.

It's true that women were restricted in the life choices that they could make only a few decades ago. A serious career was incompatible with marriage not all that long ago, a generation or two, and while that did get milder, it's only recently that the wider society has believed that children and a career were both possible. That all such choices, career or no, children or no, are seen as socially acceptable (even if the combinations might not be all that easy to carry off) this is an advance in the choices open to women and thus their liberty.

... However, no one has ever said that such will make us happier. For with more choices comes a problem: there are more things that we cannot do. One cannot be both a childless career woman and a stay at home mother. One cannot be a career woman with children and simultaneously be a career woman without. As the number of possible paths increases so must the number of paths not taken. And as we all know, the true cost of something is what you give up to get it.
But as Worstall points out, nobody wants to remove the freedom of choice brought about by increasing gender equality, even if it appears to make some people unhappy. Which suggests that we value freedom more than happiness. Of course the cynic might suggest that women being unhappy when they get what they want is hardly a new phenomenon (not that I would suggest such a thing, tut tut). Though oddly enough women's expectations of men do appear to change over time. And, not surprisingly, this makes it more difficult for men to know what women want. Which may be why we look to handy guides like how to be a man in 2009.

But if there is any consolation in all these sexual tensions it is that all of us - women and men - tend to get happier as we get older: though first we become unhappy. A recent paper on Happiness & Age Cycles - Return to Start ... shows that happiness (or subjective well being: SWB) is distributed U-shaped by age. The young and the old are happy: the middle aged are quite miserable by comparison. The good news (if, like me, you are over the age of 45) is that you have passed the trough of unhappiness (usually between the ages of 42 and 45), and you can look forward to rising happiness until the age of 83 (when reported happiness equals that of 26 year olds).

As we all know, increased happiness is not guaranteed. In a magnificent essay on the Grant Study of students at Harvard University in the 1930s (and its long term director, George Vaillant) we get some clues as to what makes for a healthy and happy old age. I've quoted Vaillant at the top of the post: it seems that while hell is other people, happiness is other people too. Do read the full essay - it is a delightful combination of social science reporting, literature, philosophy and biography.

That's if you're not too busy juggling your work and family responsibilities of course ...

Sunday, May 24, 2009

Have Ireland's Banks Gone on Strike?

I've been talking to a lot of small and medium sized business owners and directors lately at various conferences. The story is virtually the same whomever I talk to: business is tough, but getting finance is even tougher. It's as if Ireland's banks have gone on strike: they might be 'open for business', but the answer is still 'no'. Or worse: a 'slow no'.

Many businesses are managing to trade profitably - or at least to breakeven - by cutting costs to levels appropriate to reduced turnovers. But cash flow is killing them: debtors who used to pay in 50-60 days (it's not done in Ireland to abide by 30 day credit terms) are now paying in 120-150 days, if at all. The result, of course, is that businesses have to stretch out their payments to creditors - resulting in a vicious cycle of delayed payments that threatens the viability of many businesses. Inevitably many are then forced to seek support from their banks in the form of increased overdrafts or invoice discounting and similar measures.

And there's the problem: the banks have their own issues and frankly aren't that interested in lending to businesses - especially SMEs. Unfortunately it is extremely difficult to get detailed information about bank lending to businesses. The preliminary results published last week by Bank of Ireland repeatedly combines SME and corporate lending as one category. Except on page 51 of the accompanying presentation which informs us that business loan volumes were up 1% in March 2009 on the previous year; corporate loans were up 10%.

The latest Central Bank data on sectoral developments in private sector credit does not shed any more light unfortunately. Though it does inform us (via Table 1) that the largest and fastest growing sector for bank lending is ... to other banks. Or 'financial intermediation' as the Central Bank calls it. Real estate and mortgages are the other sectors experiencing year-on-year growth (though wasn't that what got us into some difficulty before?). Only the smallest scraps are left for non-construction related businesses. The bulk of them SMEs.

But fear not, the Government is on the case and has responded in its usual efficient way by setting up a committee. Or the Credit Supply Clearing Group to give it its full title. Reading the remit of the new group it is clear that they will be a talking shop and not much else unfortunately. For example, there is no commitment to publish better or more up-to-date data about the true status of bank lending to businesses in Ireland. I have a simple suggestion to make to the new Group: have every bank receiving taxpayer money to bail them out from their past mistakes publish information every month about the number and value of loans to SME customers. Plus their average terms (timing of repayments) and interest rates. The Central Bank should co-ordinate the data gathering (as it does for its own statistical purposes). Better still: publish the data on a bank by bank basis - it will then be clear to Ireland's SMEs which banks are truly 'open for business'.

We may need to go further. Jim Stewart, writing on the Tasc blog, proposes setting up a new bank specifically to provide finance to Irish businesses. I agree with his view that business lending is a vital and pressing issue right now. I disagree, however, with his view that meeting the banking needs of SMEs is best addressed by a not-for-profit organisation on account of the likely losses incurred by lenders to businesses. As I noted above, the issue facing many businesses is not losses so much as cash flow. Business banking has been, is and will continue to be an extremely lucrative source of profits for Irish banks and for any other providers entering the market.

By providing information on the volume and value of lending to SMEs it will be clear to existing and new banks just how much money is to be made from business banking by those with the resources to lend. And a resultant surge of new lending to viable businesses will be one sure way to get us back on the path to wealth and job creation.

Postscript: I've just come across an article in this week's Economist making much the same point - SMEs are vital to growth and job creation but universally stymied by banks trying to sort out their own problems and those of their largest corporate customers.

Saturday, May 23, 2009

Youth's Turn

Every election introduces a new generation of voters to the responsibilities of representative democracy. It is their turn to step into the Agora of deliberation and debate, as countless generations have before them.

And so, for the first time, young people have the opportunity to voice their hopes and ambitions, to influence and determine their future, to take hold of the reins of responsibility for our national destiny.

Then again, maybe not ...





(ht my daughter for the image, she is - alas - too young to vote this time)

Thursday, May 21, 2009

I'm a Marksist

You know deflation has a firm grip on the economy when prices are back to levels last seen in the Eighties: that's the 1880s. Marks & Spencer have a special promotion on in their branch nearby in Blackrock (where I snapped this picture): buy up to five items for '1p' each: prices last seen in 1884. There was a queue forming as I took the photo: unfortunately I had to be somewhere else or I might have joined it!

My advice to M&S (and its customers) is: make the most of it while you can - the Government will probably impose a 7000% vat increase to ensure it still gets its pound of flesh (£ not LB). The behaviour of the Government in the last budget is a classic illustration of the economic concept of rent seeking. When the market drives down fuel prices and interest rates, the Government pockets the savings for itself rather than letting the consumers enjoy the benefits. For example, with the removal of mortgage interest relief for non-first time buyers, and the smash'n'grab hike in the fuel duty on diesel. In the free market, prices go up and down. When the government gets involved they just go up and up.

So when profit seeking capitalists like Marks & Spencer offer you a good deal, make the most of it before the Government comes around demanding their slice.

I wonder will there still be a queue at lunchtime ...?

Wednesday, May 20, 2009

Negative Equity: So What?

Does negative equity matter? Of course the answer is an unqualified 'yes' for those individuals and their families living in properties worth less than they owe. But does the issue of negative equity matter for the wider economy? The answer, as usual, is that it depends. Firstly it depends on the incidence and scale of negative equity. Ronan Lyons has used a number of different data sources to suggest that one in five homes in Ireland are in negative equity. I think this is the upper limit: my own research has found that 15% of mortgage holders describe themselves as being in negative equity: but only about half of all home owners actually have a mortgage. So the lower limit could be 7-8% of all households.

That's the incidence - but what about the scale of negative equity? Bank of Ireland's preliminary results contain some sobering statistics about negative equity (reported in the 'accompanying presentation': slide 18). The bank estimates that 12,200 of its mortgage holders are in negative equity. The precise basis for the calculation isn't clear (though obviously it involves what was originally paid for the properties involved - adjusted for the trend in house prices since then - less the amounts outstanding). The Bank's analysis reckons that the 'negative' value of the negative equity (i.e.: what these 12,200 mortgage holders would be left owing if they all sold tomorrow for the estimated current price) is a total of €355 million. That's a lot of money but ... it works out at €29,000 per mortgage holder. Not quite the end of the world or the road to financial ruin for life: more like the cost of a family car loan that could be repaid over 5 years.

I knew many people caught in the negative equity trap in London where I lived in the late 1980s when house prices collapsed and did not recover until the mid 1990s and later. How did they manage? They either stayed where they were until prices came back to a level that could clear their mortgage (up to ten years later in some instances); or sold and paid off the remaining negative balance with a personal loan. Or handed back the keys and walk ...

So in thinking about the consequences of negative equity we need to keep several things in mind:
  • only a minority of Irish mortgage holders (and an even smaller minority of home owners) are experiencing negative equity at present
  • the numbers in negative equity will go up if house prices continue falling (as I think they will), and then go down as house prices eventually pick up again (as I also think they will)
  • almost all mortgage holders - including those in negative equity - are a great deal better off in relation to the affordability of their homes due to falling interest rates over the past year
  • negative equity only becomes a financial liability if and when the home owner sells: up until that point it is a matter of opinion rather than fact.
So what could be the wider implications for the economy of negative equity? Obviously in the first instance it will slow down certain parts of the housing market - especially the sales of properties that would be the 'natural' next purchase by, say, first time buyers now 'stuck' in smaller properties than they would like (for example when they start to have children). But not all mortgage holders in negative equity are living in one bedroom apartments. Many are in perfectly adequate family homes that should suit their accommodation needs (if not their lifestyle ambitions) for the foreseeable future. Long enough, indeed, to see house prices come back to a level that offsets their diminishing mortgages (as they continue paying them down).

So the negative impact of negative equity will, at worst, be confined to those unfortunate few who have no choice but to sell their properties for less than they owe and, probably, take out personal loans to pay off the shortfall. Such loan repayments will add nothing to the economy as such (unlike, say, loans taken out to buy a car or furniture): but nevertheless we are talking about a marginal impact on aggregate consumer demand.

One thing we can be grateful for in relation to the behaviour of our banks during the boom (make that the only thing) is that we never got to treat our homes like ATM machines, the way US and even UK home owners did. There, negative equity is a far more serious issue in terms of both its incidence and its wider economic impact. Especially as US consumers seek to deleverage their domestic balance sheets at a record rate.

For those Irish mortgage holders experiencing negative equity, the best solution may simply be to wait - especially if their homes meet all their genuine accomodation requirements for now. And in the meantime, just don't lose your job, become ill or get divorced ... which probably goes for all mortgage holders come to think of it.

Tuesday, May 19, 2009

The New Emergency

I promised the guys in Feasta that I would give their forthcoming conference a plug. Check out the details here.

The speaker line up includes two of my favourites: Richard Douthwaite - consistently one of the most original thinkers in the country - and Dmitry Orlov. Dmitry is a leading exponent of what has been jokingly called 'pessimism porn': you can get a sense of his style from his recent talk at The Long Now Foundation. Scary and funny (in a Russian black humour sort of way).

I'll be going along myself - hopefully see you there.

Fetishizing Entrepreneurship

I've often wondered if we fetishize entrepreneurship? I enjoy business success stories as much as the next capitalist, but too often it seems the only 'true' successes - in the eyes of some commentators - are those involving start ups. That doesn't seem right to me. Not least because the overwhelming share of jobs, output and wealth are generated by established (sometimes long-established) businesses, whose start-up days are a distant memory.

Yesterday saw the publication of the Global Entrepreneurship Monitor 2008 by Forfas. It doesn't contain any great surprises: some one ten adults are thinking about setting up their own business (same as most years); but for every adult who has set up in the past 3.5 years there are two that have been going for longer than this. There are no details about the methodology or sample used to do the study - but it contains comparisons with previous years which implies the 2008 study used the same national survey method as before.

The report also feels obliged to comment on the lower incidence of entrepreneurship among women: as if there is some kind of 'proper' level of entrepreneurship denied to women. Utter nonsense of course: there are excellent women entrepreneurs and an even greater number of women with no interest whatsoever in the sacrifices entailed by starting up a business. Especially when you have young children to rear.

As I've noted before, luck is a far more important influence on entrepreneurial success than any of the usual bromides about skills, technology, training etc that reports like GEM tend to focus on. This may be one reason why - by some measures - start ups are net destructive of jobs and resources. Most would-be entrepreneurs would be better off pursuing a career as a wage slave: it might not be terribly fulfilling, but it leaves you and your family a lot better off financially speaking.

Of course, we are now in a deep recession and these may not be the most auspicious times to set up a new business anyway. So I suspect that a GEM 2009 study would show a sharp decline entrepreneurial aspirations in Ireland. Though we'll never know as the authors inform us in the Acknowledgements that "Due to budgetary constraints on the part of our sponsors, Ireland will not participate in the GEM research cycle in 2009". Maybe there are more important things to focus on after all?

Monday, May 18, 2009

The Economics of Politics

I've been wondering about the point of politics: or political parties to be precise. Walking about Dublin and seeing all the election posters got me thinking about the ways in which politicians communicate with voters. Each poster usually comprises four elements:

- a photograph of the candidate
- their name
- a slogan
- the logo of their political party (if they're not independent)

And occasionally a reference to other candidates from the same party. At one level it seems like an arcane way of communicating with a general audience. But at another the purpose of the posters and such like seems to be to exploit the recognition heuristic: if one of two categories appears more frequently then the more frequent category is deemed more 'valuable' (according to relevant criteria). There's a fascinating interview, by the way, with Gerd Gigerenzer - co-developer of the recognition heuristic - in a recent interview on the BBC's More or Less programme. It gets more complicated, of course, when it's more than a two horse race.

Association with a political party also serves the purpose of reassuring the voter that the candidate - even if they look ridiculously young to us, er, more mature citizens - has the right mix of values, policies and predictable behaviours for the voter to risk giving them their vote. this might make economic sense for candidates as well who otherwise have to win over every voter one at a time. But the question I've been thinking about is what sort of future can we anticipate for political parties? If their main purpose is one of signalling the values, policies, behaviours etc of individual politicians then surely there are other means of doing this? Increasingly so I would have thought. Facebook, blogger and twitter to name a few. This may be why the share of independent candidates is (slowly) increasing in Ireland - especially in local elections.

But the slow pace shouldn't fool us: I would not be surprised if we experience a Cambrian Explosion in new forms of government and political parties in the coming decades. One driven by the cultural consequences of declining traditional authorities, and the capabilities of the internet and similar tools to drive a process of democratic subsidiarity through local, national and international political entities.

And if I can be indulged a grumpy old man moment, let me also add that I would welcome a change to the law which says any citizen can stand for election at the age of 21. Personally I would like to see the lower age limit raised to 30 years of age. That way we might get more candidates who have actually lived and worked in the real world, rather than the genetic offspring of incumbents who go straight into politics with little ability for anything else. Rant over.

Thursday, May 14, 2009

A Worthwhile Investment

Over the next few weeks and months, tens of thousands of graduates will enter the workforce for the first time. Only the door will be locked. In America they're calling it the worst year to graduate from college ever. Though for once I think the hyperbole applies more to Ireland than to the US.

I've talked to a number of senior business people over the past few weeks and many of them are thinking about this issue themselves. Not least because quite a few have children precisely in the 'about to graduate' category. My own take on it is that almost all those businesses that would have normally taken on 1-2 or even 10-20 graduates are simply putting the decision on hold. This is not good news for graduates nor for our much vaunted ambitions to be a knowledge economy.

So what to do about it? As ever, the price mechanism has a role to play. One idea I have been discussing with others is that of giving every business in the country a 'graduate voucher'. It would work as follows:
  • every business in the country that is up to date with their tax returns receives a graduate voucher, which they must start using between now and the end of 2009.
  • if they choose to use the voucher, they have to employ a graduate (third level or plc) who is not already in employment or has graduated in the past year and been unemployed since.
  • the company can then use the voucher to offset, say, 50% of the graduate's salary, up to a limit of, say, €24,000.
  • the offset would take the form of a straightforward tax rebate: in other words, the employer would submit their normal monthly PAYE tax return, deducting 50% of the graduate salary for that month (€1,000 at maximum level).
  • the voucher is valid for one year from the date of employment of the graduate.
  • it would be a policy decision whether to extent it for, say, another year - after that, recovery should have set in and thus the scheme is no longer required.
The value of this approach is that it allows companies to employ graduates 'on the cheap' without having to find savings elsewhere (i.e.: firing more expensive employees). Ideally the vouchers should be tradable, in other words, if I don't want to hire a graduate I should be able to sell my voucher (presumably for anything up to €12,000) to those eligible employers who want to take on more than one graduate.

There will be a net cost to the Exchequer, even allowing for the savings in no longer having to pay social welfare to unemployed graduates. But the net gain to the economy in terms of engaging graduates in the workforce and not letting their skills atrophy should outweigh such costs.

I'd certainly be prepared as an employer to use the graduate voucher myself: and so would many others I've spoken to.

Clarification: just to clarify, I've assumed a maximum fulltime annual salary for a graduate of €24,000 of which €12,000 would be rebated via the voucher scheme.

Tuesday, May 12, 2009

Banking on Time

Recessions are good for innovation. And not just commercial innovations: social innovations thrive too. I remember reading Bernard Lietaer's book The Future of Money and his description of various experiments with new types of currencies that took place during the Great Depression. Some of the currencies were based on units of time rather than units of money, and many were very successful. At least until the various tax authorities started to fret about them ...

Which is why I am intrigued by the idea of setting up a time bank in Ireland. I think its an idea whose time has come. And so does Trinity College's Michael Daly, who has put together this excellent presentation on the nature and operation of a time bank. Michael and I would be happy to hear from anyone out there - individual or organisation - interested in developing this idea further. And don't worry about the Revenue Commissioners: better to seek forgiveness than ask permission ;-)

Monday, May 11, 2009

Zombie Government

The marvel of all history is the patience with which men and women submit to burdens unnecessarily laid upon them by their governments.
William H. Borah


The government consists of a gang of men exactly like you and me. They have, taking one with another, no special talent for the business of government; they have only a talent for getting and holding office.
H. L. Mencken

You will find that the State is the kind of organization which, though it does big things badly, does small things badly, too.
John Kenneth Galbraith
Sorry for the surfeit of quotations - but there's something reassuring about people reaching the same conclusions as you've reached yourself. We've heard a lot about zombie banks in recent months, but the even scarier sight is that of a zombie government. In other words, a government that appears to be staggering aimlessly from one crisis to the next, taking large bites out of the economy to feed its insatiable hunger for taxes.

Ironically, the current crisis - which has been heralded gleefully by some on the Left as a crisis of capitalism (or neo-liberalism or whatever pejorative you fancy yourself) - is turning into a crisis of the state. And not just in Ireland. Look at the UK and the palpable disgust provoked by the abuse of expenses by MPs. Slowly but surely it is dawning on intelligent, responsible, productive adults everywhere that the people they have elected to run the country on their behalf are simply running it for themselves. It's the Principal-Agent Problem writ large.

Nor does it stop there. Any exposure to Ireland's health, education and policing services will leave you wondering 'is this all you get?' for the money you spend via your taxes. People's wonderment will no doubt increase further as the amount the government pays itself first out of their salaries and wages goes up sharply at the end of this month. Worse, our Zombie Government will likely be back for another bite as early as this July if tax revenues continue their free fall.

There is an implicit social contract between a people and their government in relation to taxation, and right now that contract is breaking down. Just as we learned that the banks did not have our best interests at heart as customers and shareholders after all, so also we are learning that governments are motivated by purposes other than those of the citizens who elect them.

So what to do about the zombies (in the absence of a shot gun ;-)? Just as people are figuring out how to manage without banks, they'll figure out how to manage without governments too. We're all a lot older and wiser than we used to be - most adults don't need a nanny Taoiseach or Tánaiste to tell them how to behave or what to do. The vast majority of us work in the private sector where we are used to taking responsibility and accepting the consequences of our own actions (be they success or failure).

That's why I like the Responsibility Project supported by Liberty Mutual. It makes the point that we are individually responsible for doing the right thing. It's not somebody else's job. I think the worst thing about government is that it destroys our innate capacity for compassion. Even, tragically, the compassion of those employed by the government. Though not always, as this compelling story by Jeremy Adam Smith relates.

But the inevitable demise of zombie governments everywhere will release us from their grip and free us to be fully human again. And if that doesn't work we can always vote for George Romero as Taoiseach ...

Thursday, May 7, 2009

Devaluation through Deflation

What will Ireland be like in a few years time? As it happens, I've been asking some senior executives from a number of Irish businesses this question lately. If I was to use one word to summarise their varied (and very interesting) answers it would be: smaller.

Indeed, Colm McCarthy has reached the same conclusion today in a brief exercise in crystal ball gazing:
In three or four years time, if we are lucky, we will have an economy which needs to look very different from 2007, the final year of the first credit-fuelled bubble in the State’s history. It should look like this: (i) Government debt ratios stabilised and sovereign credit spreads back to low levels; (ii) competing banks strong enough to lend (a little); (iii) a competitive economy producing more exports, less houses, and (iv) a smaller and less leveraged balance sheet. This economy will inevitably be smaller than 07 for a while, have lower employment, a smaller construction sector, smaller aggregate bank balance sheet, bigger Exchequer debt, lower public spending, higher tax rates and possibly BOP surplusses for a few years.
He's channelling some of the same ideas I'm gathering from Irish business leaders. Interestingly, nowhere in Colm's prognosis is the prospect of Ireland leaving the euro and benefiting from devaluation. Just as the Finnish eventually did to rescue their own depressed economy in the early 1990s. David McWilliams certainly thinks leaving the euro is our only real option. He's right of course about the benefits of devaluation: our traded goods and services (and the workers who make them) suddenly become much cheaper relative to those from competing suppliers on the world's markets - even if import prices push up inflation - and so unemployment should fall back as a result.

So what's stopping us? We have left a currency zone before after all - that of Sterling - so we know how to do it. Nevertheless it would be fair to say that there is next to zero political appetite for such a move - neither among the political parties nor among the social partners. So it isn't going to happen any time soon (if ever).

The alternative plan (though nobody's articulating it as such) seems to be to use deflation to deliver the same benefits as devaluation - without the imported inflation as it happens. It is certainly an original and very brave plan. And it might even work. We are seeing wage freezes and salary cuts across the private sector. As the recession deepens (and don't let recent stock market rallies fool you into thinking it's over) we will see even further cuts in real and nominal labour costs for Irish businesses.

Ironically, the recent increase in income taxes through levies and the resultant higher marginal rates approaching over 50% for some households will make the net 'loss' of income from wage and salary cuts that much less painful. When the government's deflating your net income, so what if your gross income takes a hit? The government was taking most of it anyway. Expect to see a great many people working through such calculations as pay slips and pay packets arrive at the end of this month ...

The outlier in all of this, of course, is the public sector. Public sector employees don't do deflation: in fact, their entire remuneration structure assumes inflation. Such is the legacy of 'benchmarking', alongside older habits like annual increments for time served. Or long service increments for TDs. Money for continuous breathing - can we all have some please?

Paul Krugman is worried about wage deflation in the United States and the threat of a Paradox of De-leveraging. He may be right about the macro level costs: but the micro level benefits will outweigh the former as firms and exporters become competitive again. Precisely the same thing happens following a currency devaluation. Moreover, it is ultimately only the private sector that delivers increased productivity - and increased productivity that ultimately lifts wages and our standard of living. Lower input costs, ceteris paribus, will certainly increase productivity.

So perhaps it is time to see deflation as our next best option to leaving the euro - and a less risky one at that. Smaller may not be beautiful, but it will certainly be a lot more sustainable. At least, that's the plan.

Tuesday, May 5, 2009

Bankers: Ready, Aim, Fire?

This is what they do to bankers in Iceland - or at least to the ones who fled the country after the collapse. Now this doesn't mean I'm suggesting any Irish pub should do the same, tut tut. Perish the thought.

Still, it is an interesting example of behavioural economics at work: instead of doing something so unhealthy as drowning your sorrows why not, er, vent your feelings on those who caused them in the first place? You're happy, society's better off (less costly than rioting) and it provides the right incentives for bankers to behave themselves in future.

It's not quite where folks thought behavioural economics would end up after 250 years - but then it's the unpredictability that makes it such an interesting subject after all.

Monday, May 4, 2009

Stimulus ex Machina

Where will growth come from? The latest European Commission forecast for Ireland, published today, paints much the same dismal picture as the ESRI did last week. As the table shows, Ireland's economy is set to contract this year and next, with unemployment soaring to rates last seen in the early 1990s. All four textbook sources of demand in the economy - consumer spending, investment, government spending, exports - are shrinking. Full spectrum impotence.

The lessons from other countries who have been here before us are not very encouraging. As Jaakko Kiander pointed out in his recent ESRI presentation on Finland's Great Depression 1990-93 (pdf), there tends to be a lot of pain before there is any gain from measures to restore growth. And the main measure that solved Finland's problems was a 40% depreciation in the Finnish maarka. We don't have that option obviously. Moreover, even with depreciation it took several years before Finland crawled out of the depression it found itself in. He implies that without depreciation, and relying solely on deflation to achieve the same boost to competitiveness, it could take a decade or longer for Ireland to follow the same course. Not a pretty prospect.

So back to the growth challenge. As I've noted before, recoveries are ultimately microeconomic phenomena. Even after a currency depreciation it is the decisions of hundreds of businesses, thousands of workers and millions of customers that work the real magic of recovery. But there are things that others can do to help microeconomics work its magic. Reducing the non-wage costs of retaining employees is an obvious place to start. Even ICTU has grasped this, with some sensible recommendations about making it easier for employers to flex up and down their labour inputs without being forced to make staff redundant: along with the potential for skills enhancement during down times. Mind you, I hate to think what the compliance and form filling requirements would be if every aspect of their €1 billion package were implemented.

Still, a focus on job preservation is a necessary but not sufficient response to the present crisis. There is the equally important challenge of job creation. Especially for graduates. Geary Institute's Liam Delaney has started a timely discussion about what can be done to avoid thousands of Irish graduates and post-graduates ending up on social welfare. UL's Stephen Kinsella is running a student poll to guage how big the challenge is for soon-to-be graduates.

Universities and third level institutions generally can play a part themselves of course. The UK's NESTA organisation has published a report recently on The Connected University. It demonstrates, with several detailed case studies, how universities have played a pivotal, catalytic role in energising the local economies in which they are located and creating a rich, sustainable flow of wealth and job creation opportunities. And bringing it right back to the job creation challenge, if Ireland's third level institutions start using their alumni networks less to raise funds and more to source internships and employment for their graduates (not just work experience placements for undergraduates) then they can play a key role too.

Without the textbook options of devaluation, borrowing or tax cut-funded stimulation, or good old fashioned inflation we must look to other sources to fuel the recovery. And as ever they will be found in the ambitions, decisions and actions of Irish businesses, Irish workers and Irish consumers. Such are the extraordinary circumstances that we now find ourselves in, there is no textbook to guide us as to what Ireland has to do in the years and decades ahead. As ever in such circumstances we must then be prepared to experiment, to learn from failed experiments, and to rapidly scale those that work. Kind of the way markets work come to think of it.

Sunday, May 3, 2009

Equal Isn't Fair

It can't be easy being Silvio Berlusconi. Sure he's worth a few billion euro, in charge of one of the most civilised countries in the world, and surrounded by beautiful women all time ... but still. He does seem to upset a lot of people a lot of the time. Including his wife Veronica Lario, who today announced she's divorcing him (just like his previous wife). Italian politics may result in the same waste and incompetence as Irish politics, but you have to admit it a helluva lot more entertaining.

And it doesn't stop with Berlusconi. Take Mara Carfagna (photo), whom Berlusconi appointed as Minister for Equal Opportunities. Or Mara La Bella as her fans call her. No argument there. Though I can't help feeling that it wasn't just her law degree that got her the job knowing Silvio was involved in the appointment process ...

But perhaps I am being unfair; and guilty of using information selectively to make a blatantly sexist point. A bit like the CSO's recent bromide on Women and Men in Ireland 2008 for example. Once again we are subject to the usual headlines about women earning less than men, women under-represented in politics, women under-represented on company boards ... and so on and so on. You could write the script yourself no doubt.

As usual, the minor facts that men still die five years younger than women; are doing significantly less well in our education system; and are vastly over-represented in our prisons just get ignored by the media (though the numbers are actually in the report). And already the report seems hopelessly dated: the biggest change since 2008 has been the shocking increase in unemployment; and men - you've guessed it - are disturbingly over-represented in that particular trend.

It seems the rush to make the world 'equal' for women means being unfair to men. I don't think Mara would approve - or even Silvio come to think of it.

Saturday, May 2, 2009

Dublin Beats Munster

Dublin beat Munster today in the semi final of the Heineken Cup. Okay, technically it was Leinster - but you know what I mean. It was one of those matches where most of Ireland hoped the Dubs would get beaten (as usual). Except this time I - Ulster born and bred - was on the side of the Dubs (as were my two Dublin born children). And it was glorious: somehow I don't think we're going to hear any more jibes about 'nancy boys' from our fellow countrymen in the south west any more after today's performance.

Sport, like war, is politics by other means. I don't know if the antipathy of the greater part of Ireland towards the capital is worse than in other countries. But it's certainly as unwise. Bear in mind that Dublin subsidises the rest of the country through its taxes, and yet is underpresented in the Dáil in terms of the number of TDs it elects.

That will change eventually I'm sure. But first things first: there is the small matter of winning the Heineken Cup to get out of the way first ...
Related Posts Plugin for WordPress, Blogger...