Monday, November 30, 2009

Good Debt, Bad Debt

The latest statistics from the Central Bank (table B2.2) show a continued contraction in lending to businesses (or should that be borrowing by businesses?) Should we worry? As I've noted before, sometimes the wisest thing in business is not to lend/borrow - even when the money is available.

But it begs the question: are we in danger of over-shooting as we swing from credit bulimia to debt anorexia? It's happening in the UK too, as reported in the latest Bank of England report on individual lending showing that consumer credit is now contracting.

We can learn lessons about business lending from the UK as well. Take the recent (and excellent) CBI report on The Shape of Business - The Next Ten Years. In relation to the banking crisis it has this to say about business banking:
The legacy of the credit crunch is expected to have significant implications for the cost and availability of bank finance for a considerable period. There are a number of reasons for this:

• There will be increased scrutiny and regulation of the financial services industry. Such regulation is likely to constrain banks’ ability to take as much risk in their lending practices as they did prior to the credit crunch, which will impact businesses’ ability to access credit.

• The capacity of the banking sector has reduced considerably as foreign banks have withdrawn from the UK corporate lending market. During 2007, they accounted for around 60% of the growth in lending to UK businesses. These lenders are not expected to return in such significant numbers, so the aggregate supply of credit available to businesses will remain constrained. While foreign banks were more frequently used by large businesses compared to small and medium size enterprises (SMEs) (85% of which use one of the big four banks), the impact of reduced capacity in the banking sector is likely to affect all businesses seeking finance as lending to large businesses by UK banks will displace some lending to SMEs.

• Bank lending will also be constrained during the lengthy process of balance sheet repair, with capital diverted for some time.

• Finally, the mis- and under- pricing of risk which characterised the period leading up to the recession has already been reversed, and is unlikely to be repeated by the next generation of market participants who were witness to these mistakes. Tighter due diligence requirements and higher borrowing costs for businesses will be the result.
Ditto Ireland. This can only mean less business lending/borrowing for the foreseeable future. As the CBI report notes:
Given these trends, the coming decade will see companies operating in a climate in which the availability, cost and degree of freedom to use capital is more constraining than in the recent past. This is expected to have an impact on companies’ finance strategies and may lead them to seek alternative sources and types of capital.
Worse for Ireland, too much of the commercial borrowing that was undertaken during the boom was to acquire assets that are not only worth a great deal less than the monies borrowed, but are failing to generate any revenue whatsoever to fund borrowing repayments. Dirk Bezemer has written brilliantly about this, here he is in FT:
Lending to the real sector is self-amortising: it creates a debt, but also the value-added to repay principal and interest. Such loans enlarge the economy in proportion to the debts created and are financially sustainable. By contrast, loans to create or buy financial assets and instruments are not, by themselves, self-amortizing. In a credit boom, successive owners may sell the asset at a profit, but their buyers will have to shoulder proportionally more debt in order to acquire the asset, balanced (for the time being) by the asset’s value. Asset trading may be individually profitable; but it is a zero sum game, sustainable only if the real economy furnishes enough money to support the rising debt burden. Beyond a point, the lure of capital gains diverts funds from real-sector investment, and households’ rising debt-service cuts demand for real-sector output. In both ways, excessive growth of financial asset markets is self-defeating.
He argues in his paper This Is Not A Credit Crisis that part of the solution to the overhang of malinvestments we now face is to shrink the financial sector. Here he is again:
Not all that long ago, the US economy did well with a financial sector only a third of its present size. Do we really need all of the other two thirds?

We should move away from supporting finance in toto. The new policy should be limit support to banks that serve the real economy. If some of the other financial firms specializing in asset price manipulation go bust, this will not the end of the world. This, after all, is what bankruptcy is for. It is a legally acknowledged and orderly debt workout mechanism and the natural consequence of commercial overexposure. Inevitably, there will be collateral damage to investors among firms, households and pension funds. To the extent that this has real-sector repercussion via falling demand and incomes there should be provisions to compensate. This may be financed out of the liquidity withdrawn from today’s blanket bank support, so it need not come at an extra cost. Most importantly in the longer term, this policy will allow the debt overhead - and the speculative part of the financial sector - to shrink back to more normal levels. This latter objective is important and is not achieved under present policies.
Eventually Irish businesses will identify new opportunities for the profitable production of goods and services that will justify borrowing money to invest in their realisation. Let's hope the banks have recovered sufficiently from their bad lending decisions of the past so as not to stymie good lending opportunities in the future.

Friday, November 27, 2009

Crushing Consensus

The Taoiseach is worried that 'overwhelming negativity' is bad for the economy and bad for the nation. And now I'm worried. The last time a Taoiseach fretted about people talking down the economy it was followed by the worst recession in living memory. And we're still in it. As leading indicators go this one is pretty scary.

It's in the nature of politicians everywhere to take credit for success and to blame others for failure. Ireland is no exception in that regard. But what is exceptional in Ireland is the political and cultural energy that goes into maintaining a consensus. Not so much 'cosy' as crushing. I think it's symptomatic of the deathly inertia of the Irish political system. Don't rock the boat and all that. Dan O'Brien has written eloquently about this - I'm enjoying his book Ireland, Europe and the World: Writings on a New Century very much at the moment. Here he is in The Irish Times recently:

What explains Ireland’s slump-slump-soar-slump record is not bad government, but a governance vacuum; it is not what government gets wrong, but what successive governments have neglected to do. This is to be seen in each of the three periods of chronic economic underperformance suffered since the middle of the 20th century.

After the second World War, the Atlantic democracies took the difficult decision to abandon 1930s protectionism. Uniquely, Ireland did not. It took 10 years of misery for government to act.

Again, in the 1980s, what marked Ireland out from most of its peers was its inability to take action, this time in dealing with its budgetary woes.

The current crisis is deeper in Ireland than elsewhere for the same reasons: inaction during the good years on modernising the management of the public finances; inaction on reining in the rogue bank; and inaction on dealing with the steady and sustained erosion of competitiveness. These failures to act have deepened, respectively, the fiscal, banking and jobs crises beyond those of peer countries.

But it is not only on economic issues that inertia rules. It is in evidence across the spectrum: on the teaching of the Irish language; on energy policy; on planning issues; on a range of foreign policy matters; and much else besides.

As undermining the economy and the nation goes that's a fairly consistent track record.

But the Taoiseach needn't worry. As a citizen, a taxpayer and an employer I don't need pep talks from politicians who have mis-managed our country into disaster. I don't need to be told about the consequences of actions - verbal or otherwise - because I deal with them all the time. And I certainly don't need 'leadership' or 'vision' from people who plainly lack either. What I need, along with my fellow citizens, is for the people who created this mess to get out of the way so that we can get on with our lives and get on with making a better future for our country, for ourselves and for our children.

The sooner he concedes that the better.

Wednesday, November 25, 2009

In Denial About Alarmism

One good thing that should come out of the Climategate scandal is a more sober, more open-minded discussion about the causes, consequences and 'cure' for climate change. Though there'll probably be a little more gloating by those traditionally labelled as 'denialists' for a while yet.

But once they've done gloating the task in hand will remain the same: filtering out actual trends in climate from the chaotic and noisy background of weather. Possibly one example of this new rapproachment is The Global Warming Policy Foundation, launched recently. Nigel Lawson is one of the founding figures, and he has been regularly labelled a denialist by those leaning more towards the alarmist wing of the climate debate.

But he is joined by an impressive academic advisory council - including our own Richard Tol. Richard is firmly in the camp of those who worry adverse climate change is happening and will worsen. But he is decidedly against the more alarmist responses proposed by some. As he notes in a recent VoxEU contribution:
At the same time, estimates of the impacts of climate change do not support the often-dramatic language of the media. Estimates suggest that the overall impact of a century of climate change is equivalent to losing up to 2% of income. The impact of a century of climate change is of the same size as a year of economic growth. In the worst case, impacts may be ten times as large. Still, a deep recession wreaks as much havoc in a year as climate change would do in a century. Climate change is therefore not the biggest problem of humankind.
So a proportionate response to a highly uncertain threat is that of a carbon tax - something he has consistently supported. It is important to adopt policies that are themselves adaptive - with some potential for reversal if they prove unnecessary or to have unforeseen and negative consequences. Human society is also adaptable, as Francisco Capella has noted in a more philosophical piece on climate policy:
There is no optimal climate, and conflicts for the climate's determination may arise if humans achieve partial control over it. Even if humans are adapted to the present climate, this does not imply that it would be difficult to adapt to different climates if the changes are not excessive.

... For almost all human problems associated with global warming, the influence of climate on them is usually small if compared with other more important factors that can be more easily and efficiently dealt with. Climate change alarmists seem to ignore relatively simple solutions for the problems they raise. Humans are proactive, they do not passively submit to natural influences, and the avoidance of climate change is not necessarily the best option.
Climate change, like the weather, has always been with us - and always will be. To the extent we better understand our role as a species in influencing change then the better we can respond to it - including mitigating strategies. A more open, more modest approach by those like the East Anglia CRU, who allowed their politics to get in the way of their science, will also help.

Tuesday, November 24, 2009

No Future for Trade Unions?

On a day when most public sector workers have gone on strike, it might seem perverse to wonder about the future of trade unions. Or maybe not. There are 370,000 people working in the public sector - the vast majority of whom are members of trade unions. Public sector workers comprise just one in five of the 1,939,000 in employment overall: so four out of five workers are in the private sector. The vast majority of the latter are not members of trade unions.

This pattern of a unionised public sector and a non-unionised private sector now seems fairly well established in most developed countries, with trade union density overall declining sharply outside of Scandinavia. As it happens, Irish trade unions have not represented a majority of Irish workers since the mid-1990s. Now as few as 3 in 10 workers in Ireland are union members.

You can look at this in two ways: either trade union membership is increasingly ghettoized among public sector workers; or, the trade union movement has been captured by public sector workers. Or maybe both. Ireland's prolonged dalliance with Catholic Corporatism aka Social Partnership has undoubtedly exacerbated these trends. Not least because one party to the partnership - the Government - also happens to have the largest, most unionised workforce in the country.

It is hard to be optimistic about the future of trade unions in their current form. They are failing to connect with younger employees (and not just in Ireland as noted by Michael Skapinker), a situation that can only get worse due to the shocking rise in youth unemployment and the prospect of fewer new labour force entrants (and hence fewer new union members).

The hospital pass by the banks to the Irish government (and Irish taxpayers) can only mean a decade or more of severe constraints on the capacity for the public sector to expand. Therefore the main source of trade union membership looks set to stagnate if not contract.

Where does that leave trade unions in Ireland? An increasingly flexible, more mobile workforce will simply not see the point of trade unions. But workers will still have critical needs in relation to protection, information and securing their future. In that scenario, trade unions might be better advised to return to their roots and become organisations dedicated to the long term welfare of their members - friendly societies if you like.

And with impoverished governments unable to employ people directly to provide the education, health and social services our ageing society will need then we might all be glad to join the union.

Image cred: In Male Fide

Monday, November 23, 2009

Not Ready for Take-Off

An old friend of mine once served on the aircraft carrier HMS Ark Royal. Any time I was going to catch a plane he would 'helpfully' remind me that "take-off is far more dangerous than landing". Something to do with heavy airplanes full of fuel, fixed length runways, the laws of physics - that sort of thing. He'd obviously seen more than a few ditch in the sea in his time. For some reason I always think of him when I'm on a plane taxying to take-off ...

But I thought of his observation in a different light recently. You might remember all the talk before the recession about a 'soft landing' versus a 'hard landing'. Instead we got a crash landing. Could recovery be subject to some of the same 'aeronautical challenges'? A 'smooth take-off' versus a 'stalled take-off', for example?

Bear with my analogy a little longer. Take the Central Bank's latest credit data showing that lending to every single sector of the economy (except for the financial sector) was down substantially in September on the year before. Think of credit as kerosene for the jet engines: we're low on fuel.

Then there's the recent pan-EU Enterprise Finance Index, which reported on the availability of finance for Europe's businesses and their commercial performance at present. As you can see from the chart, Ireland scored worse than any other EU country in terms of turnover, profitability or pricing power. Think of this as red warning lights flashing on the pilot control panel.

So as Ireland Inc taxis to the runway a few more things strike us. We're carrying too much excess baggage relative to our engine size in the form of commercial and personal debt. What's more, the aircraft's tyres are nearly flat thanks to weak domestic spending and rising taxes. But we need to take-off anyway and so we keep going, desperately trying to build up velocity as we head down the runway, seat belts on.

But what's that? The European Central Bank is planning to raise interest rates. So the runway is getting shorter, and the excess baggage heavier.

Should've taken the train ...

Sunday, November 22, 2009

Losing a Generation

Are Irish youth turning their backs on Europe? I've just read the Eurobarometer survey on Irish voting behaviour during the recent, second Lisbon Referendum (an update of a similar survey at the time of the first referendum). Two things struck me: the No vote was highest among 18-25s than any other age groups in both referenda; and opposition to Ireland's membership of the European Union increased in the same age group even as the percentage voting No fell.

Of course we could dismiss this as 'youth sounding off' behaviour, and blithely assume they'll 'grow out of it'. I'm not so sure. Firstly, as the chart shows, opposition to Ireland's membership of the EU increased in all age groups between the two referenda. Of course it's still a minority opinion (and not one that I share). But it isn't too difficult in these turbulent times to imagine one, two or more developments that might lead to a surge in opposition.

Take the announcement by our newly unelected EU President Herman Van Rompuy that he supports the idea of a 'euro tax' to fun the Commission's expanding operations in Brussels. Try selling that to the mass unemployed youth of Europe (now experiencing an average 20% unemployment rate). And try selling it to Ireland's depressed taxpayers (they'd demand their Yes votes back). Still, at least we didn't get Tony Blair as president; I wouldn't be too keen on sending Irish soldiers off with their EU counterparts to invade countries containing imaginary weapons of mass destruction.

Nevertheless, Van Rompuy's appointment sends a powerful signal that Europe has gone as far as it's going to go. The leaders of the main member states want to keep the balance of power between member nations and the European Union more or less as it is. To my mind this suggests that a period of circling stagnation lies ahead for Europe, a situtation hardly likely to assuage the concerns of Irish youth, and more likely to exacerbate them.

Which is a pity. Europe faces a triple economic, demographic and democratic challenge in the years and decades ahead. The Van Rompuys of this world lack the political will to secure real changes that will benefit Europeans (e.g.: scrapping CAP, delivering a real Single Market); and they lack the imagination to inspire us with a vision of Europe's place in the emerging future (beyond the now moribund climate change agenda). Helping Africa join a world of free market democracies would be one such vision in my book.

Ireland's youth will likely carry their less than enthusiastic feelings about Europe into middle-age and beyond. The job of any future referenda organisers is going to get a whole lot harder.

Saturday, November 21, 2009

Power to the Statisticians

This is another entry in the 'praise where praise is due' category. Admittedly a limited category on this blog ...

I was recently pointed to the HSE's Healthstat facility on their website, which I had completely missed. It provides an excellent, up-to-date guide to the performance of our hospitals - and in some detail too.

Take, for example, the recent furore over sick leave in the public sector. Healthstat shows the monthly incidence of sick leave in each hospital and whether it is certified or not. Intriguing to see that Sligo hospital a) has an above average level of sick leave (though not the highest), and b) the sick leave is overwhelmingly uncertified in contrast to all other hospitals.



It might be an aberration - but if it's not then it's the kind of thing that can focus a health service manager's attention on the priority problems that need fixed. Which can only be done if you have the statistics to support your decision-making.

I never thought I'd say it but - well done HSE.

Friday, November 20, 2009

Impoverished by Poverty Thinking

Responding to yesterday's SILC 2008 report from the CSO, Fr Seán Healy was moved to observe that, without social welfare payments, 43 per cent of our population would be in poverty. Indeed. And if everyone stopped eating 100% of the population would die of starvation. I'm sure there's a point there somewhere ...

I think we all get the importance of social welfare payments to the wellbeing of recipients. In fact, we have been so generous with our social welfare payments in Ireland that the incidence of 'poverty' (using the elastic definition of 60% of median incomes) has fallen massively and consistently since 2005. Moreover, the standard measure of inequality - the GINI coefficient - has also fallen: to the point where Ireland is 'equal' with the average EU level. So less poverty and more equality.

Something to celebrate surely? Not if you're Social Justice Ireland (a better name, I admit, than 'Continuity CORI' now that the latter is synonymous with sweetheart deals costing the taxpayer hundreds of millions of euro in abuse compensation). Fr Healy's worried that the much touted cuts in social welfare payments in the forthcoming budget might lead to an increase in poverty. But he needn't worry. Those who insist on the ludicrous definition of 'poverty risk' as equal to 60% of median incomes are about to see poverty levels plunge as median incomes fall: leaving those on even modestly reduced social welfare payments comparatively 'well off'.

This process has already started. Households headed by an employed person saw their disposable incomes rise by 1.1% between 2007 and 2008 (average inflation, by the way, was 4.7% during the survey period). Households headed by an unemployed person saw their disposable incomes rise by 25.2% over the same period (Table 1.3). The ratio of equivalised disposable incomes of unemployed to employed rose from 56% to 65% in just one year (Table 1.4).

We've had deepening deflation since the start of this year, coupled with falling nominal wages and salaries for many. So don't be surprised to see less 'poverty', a lot more equality and an even narrower income differential between the employed and unemployed (and also between the employed and the retired: a ratio of 77% in the case of the latter in 2008).

Nevertheless this is bad news for the Poverty Industry. Their problem is that we have been spectacularly successful at eradicating a great deal of poverty in Ireland thanks to the blessing of economic growth in the past ten years. Those traditionally most vulnerable to poverty - the elderly - have effectively been freed from poverty, as the chart above shows (from the same SILC report). This is something we should be justifiably proud of in Ireland. But the remaining problem isn't one that can simply be fixed with higher social welfare payments (real or nominal). We've taken that as far as it will go (and probably a lot further in the case of some recipients).

There is, though, one group that remains especially vulnerable to poverty - and it's rather obvious from the chart. Now you might think that this would lead to loud and persistent calls from likes of Social Justice Ireland/CORI to do something about the problems arising from the incidence of lone parent families in Ireland. On every measure presented in the SILC report - disposable incomes, relative poverty, deprivation etc - households comprising one adult with children consistently and persistently score highest on all the wrong indicators. So whom does SJI/CORI fret about? That's right, the working poor and people living in the Midlands. Go figure.

The Poverty Industry simply prefers to ignore the blindingly obvious for the politically correct. Hence the likes of NESC fretting more about the impact of pets on children's welfare than lone parenthood. Like I said, this isn't social policy so much as phrenology. Luckily such fashions come and go and eventually (though probably not soon) we'll get serious about eradicating childhood poverty (now much more prevalent than poverty in old age).

The United States is ahead of us in this regard. A recent study from Brookings on Creating An Opportunity Society has examined the drivers of upward social mobility around the world. The authors conclude that the transition to the middle class is all but guaranteed for poor children in the United States if they do three things: finish high school, work full time and marry before having children. Reviewing their book, Clive Crook in the Financial Times observes:
At this many liberals will bridle, as they will at the claim that the “success sequence” of school, employment, and children after marriage requires firmer pro-family suasion and incentives. “To those who argue that this goal is old-fashioned or inconsistent with modern culture, we argue that modern culture is inconsistent with the needs of children.” So there.
Sadly I can't see any of our poverty advocates in Ireland (not even those belonging to the Catholic Church, God help us) going there just yet. Not even challenging the insane plans to extend the same legal protections afford to married couples to cohabiting couples, creating even more instability for children in families.

Perhaps they will after they've sorted out the Midlands. Pity the children.

Thursday, November 19, 2009

Man Up

Happy International Men's Day everyone (or should that be every other one?) I was alerted to the day that's in by the wonderful Dr Elizabeth Celi (most definitely not a man, but a brilliant commentator on the health and other inequities facing men nowadays).

Treat yourself to The Art of Manliness as a reminder of the things our fathers and grandfathers knew (and we'd do well to remember). And enjoy this, typically Australian take on the, er, task in hand:

Wednesday, November 18, 2009

Smarter Schools

The Government's Smart Schools initiative is a missed opportunity. That's a pity. Yes it's good to see schools finally catching up with late 20th century technologies (laptops and overhead projectors): but what about leapfrogging to the 21st century and giving every child an ebook?

I've blogged about this before, and I'm not the only one thinking this way - so is Arnie. The idea has been around a while. Indeed, some Irish schools are experimenting with this - including several in South County Dublin. So I was staggered to find that the Department of Education's/ICT Ireland's Smart Schools = Smart Economy report doesn't contain a single reference to ebooks. Not even one. Surely the smarter thing to do would be to align ourselves with the next generation of pedagogic technologies and to enable a cluster of supporting Irish businesses to grow up around them? Laptops and projectors won't do it.

Of course there's the cost issue. The Government's €150 million spend over the next three years will equate to just €179 per child in first and second levels combined (498,914 in the former, and 341,312 in the latter according to the Department's statistics). On the other hand, giving every child the latest Amazon Kindle (or equivalent) would currently cost $259 - that's about €173 at today's exchange rate. I'd imagine the Department might even get that price down a bit if they were to order, say, 900,000 (just to have a few spare) ...

Moreover, we then have to factor in the savings: parents spend a fortune on school books every year (an average of €100 per primary child and a great deal more per secondary child according to Barnardos). By my rough reckoning, if we assume €100 per year per first level child and €150 per year per second level child then that's €101 million spent on books EVERY YEAR.

We can be certain that the prices of ebooks will fall rapidly as sales take off. I believe we need to adopt a smarter schools strategy than the one proposed (incorporating key elements of the current strategy). And as a parent a smarter strategy would certainly get my vote (and taxes).

Tuesday, November 17, 2009

Taxed and Spent

We don't have a Taxpayers' Alliance in Ireland - more's the pity. Mind you, if we did, the No vote might have won the Lisbon Referendum if they had produced this sort of stuff:



Sure it panders to the perennial anti-EEC/EC/EU prejudices of the English, but I do like their have-a-go attitude towards our 'betters'.

Monday, November 16, 2009

The Nuclear 'Debate'

Tom McGurk called for a debate about nuclear power in yesterday's Sunday Business Post. On the same day the Sunday Tribune lead with a story reporting that the proposed design for new nuclear power stations in the UK is dangerously flawed. All of which is a useful reminder that when someone in Ireland says something needs to be 'debated' it usually means either a) that the matter is so contentious that there's no way it's going to be debated; or b) there is no point in debating the matter as everyone has made their minds up anyway.

As I read it the main danger facing the UK is not the design of their proposed new reactors but the fact that they have left it so late to build them. Which is dangerous for us as we'll be increasingly dependent on UK electricity to make up any shortfalls in our own generating capacity in the decade ahead. Though our economic collapse may have postponed that requirement for some time (there, I knew I'd find a silver lining ...)

But there is a bigger prize for Ireland in Britain's new found nuclear ambitions. In the short run, Irish construction companies should ensure they play their part in what will be the biggest construction programme on these islands for the next thirty years. Certainly a less belligerent, less ideological stance by the Irish government with regard to the UK's nuclear practices might help in that regard. However, the real opportunity lies in the medium to longer term as Irish construction and engineering specialists have the chance to learn a great deal about building and operating nuclear power stations before adopting an appropriate nuclear solution to our own energy needs in the next few decades.

That's if we're still not 'debating' it, of course ...

Sunday, November 15, 2009

Indebted to Feminism

Is negative equity the ultimate legacy of feminism? A movement that began in Ireland as elsewhere desiring that women should be free to participate fully in society ended up fetishising paid employment over all other choices. And one consequence of this fetish has been the explosion of household debt now gripping hundreds of thousands of Irish families.

I've charted the trend in total mortgage lending outstanding (from Central Bank data) against the participation rate of all married women (from the CSO). One consequence of the unprecedented and rapid increase in married women's participation in the workforce (passing the 50% mark in early 2005) was the ability of households to borrow money. Instead of borrowing against one income they could now borrow against two. And the banks, God bless 'em, were only too eager to lend. Way too eager as we all realise in hindsight.

This rapid increase in women's participation in Ireland's workforce is addressed in yet another Equality Authority report on the plight of Irish women - A Woman's Place: Female Participation in the Irish Labour Market. Oddly enough, nowhere in its 102 pages does debt, borrowing or mortgages get mentioned. Instead we are treated to the usual bromides about pay gaps and unequal household divisions of work. All of which are, if you read the text carefully rather than the press coverage, almost entirely explainable in terms of the choices women - working or otherwise - have made for themselves (and with which the vast majority of women are happy).

You might think then that the authors would propose leaving well enough alone. But of course not: what would the Equality Authority be left doing if that was the case? So instead we get the usual political shopping list of better pre-school provisions, more flexible employers and less selfish husbands (or partners as we say nowadays). They want to increase the participation rate of women in the workforce not because it's what women want (it's simply assumed) but "for Ireland to achieve and maintain the targets set for female employment within the EU" (last line of concluding text). Whose 'target'?

The small matter of the economic depression now gripping the country is acknowledged by the authors. But not the debt binge that preceded it. They wonder if rising female unemployment might lead to a regression in female participation as women give up hope of getting work. But they shouldn't worry: the legacy of family indebtedness left behind by fetishing paid employment over all other choices a woman might make will ensure that hundreds of thousands of women will have no choice but to keep on working. Slaves to debt, and slaves to the consequences of a flawed ideology.

What a legacy.

Saturday, November 14, 2009

Levez Les Bleus

What's the French for 'surreal' ...?

Our taxes at work: Levez Les Bleus

(apologies for blatant heightism, gallo-phobia, etc etc)

The Economy, Only Smaller

I've had Work-Blog Balance issues lately, but I'm sorted for now. One task on the work side involved a fascinating conversation with several public servants about the pricing of a state monopoly service. The discussion turned to how future price increases might be calculated. Someone suggested a tried-and-trusted formula: use an adjusted measure of CPI minus a few percentage points, the latter to encourage efficiency ...

It wasn't too long before we all saw the problem. In an age of deflation a minus plus a minus equals an even bigger minus. Not a lot of incentive there. It also reflected a wider issue: the inflationary mindset of the public sector. Governments don't do deflation as a rule. Inflation is much more attractive simply because it creates the illusion of an expanding economic cake - to be divided among contesting interests - even if the real size of the cake is barely increasing.

Deflation works the other way: it focuses attention on the real size of the cake and who precisely is getting what. Not surprisingly then it is the public sector that is now the main source of price inflation in Ireland (witness health and education prices highlighted in the table) according to yesterday's CSO data. The private sector is the main source of deflation: witness the retail sales data also published yesterday which showed that most retail sectors are now only fractions of their size in 2005 never mind at their peak in 2007.

The European Commission's latest economic forecast projects that Ireland will be the only eurozone country to experience deflation in 2010. This means that real interest rates will remain high for Irish businesses (see The 5 C's of Contraction) and that the nominal and real size of the Irish economy will continue to shrink. Nor is it just business borrowers who will face a higher interest rate hurdle, so also will the Government with it's borrowing capacity severely constrained by the NAMA gamble.

If we are lucky, global recovery will drag us along with it, driven in turn by a more competitive private sector in Ireland due to lower costs of doing business (one benefit of deflation). Still, by the time it's over, all of us - public and private sector alike - will have had to permanently adjust our 'inflation-adjusted' mindset.

Tuesday, November 10, 2009

If You're Gay, Black, Disabled Come Into the Parlour ...

... but not if you're from Moyross or Darndale. We Irish are a tolerant lot it seems: we can tolerate everyone except our neighbours. That's my read of the latest Eurobarometer report on Discrimination in the EU in 2009.

Only one in ten Irish people have experienced discrimination in the past year, or if you prefer, 9 in 10 haven't. That's discrimination based on gender, age, disability, ethnicity, sexual orientation or religion.

But the discrimination that dare not speak its name - at least within the 228 pages of the Eurobarometer report - is class discrimination. Though we do get an inkling in the above chart that I've created from the findings. Asked on what grounds an equally qualified candidate might not get a job compared to another, 31% of Irish respondents chose 'the candidate's address' as a factor: easily the highest in the EU. In fact, having the wrong 'accent' in Ireland is more likely to see you on the wrong side of a job offer than being black (36% vs. 33%). Maybe it's a small country thing (the Danes and Swedish are even more obsessed about a candidate's accent than any other European nation, whatever that's about).

Of course 'address' and 'accent' are simply code words for social class. Strangely though it's a form of discrimination that is never addressed directly by the Discrimination Industry (in Ireland or the EU). Perhaps it's a demarcation thing with the Poverty Industry? But fear not, the introduction of Post Codes in the Republic of Ireland in 2011 will change all that. Mind you, I remember the furore back in the 1980s when An Post had the temerity to propose splitting the Dublin 6 postal district into two more easily managed Dublin 6/Dublin 26 districts. Dublin 26 sounds alarmingly close to all those Dublin 22s and 24s on the wrong side of the M50. The compromise was Dublin 6W, and so the property prices of Terenure were preserved ...

I'm not holding my breath for 'all the children of the nation' to be 'cherished equally' by postal district just yet.

Monday, November 9, 2009

Happy Freedom Day

Today should have been a holiday across Europe, one celebrating freedom. What happened twenty years ago in Berlin was truly extraordinary: people power writ large - ordinary people writing history.

But it isn't a holiday, perhaps because we take our freedom too much for granted in Ireland; in Europe too, for that matter. And we take the material comfort and life choices provided by free market democracy too much for granted as well. Writing about the 20th anniversary of the fall of the Berlin Wall, Roger Scruton is less optimistic than he was back then:
I, in my naivety, believed that a whole society could come to see the folly of the socialist idea, and by jettisoning a project that inevitably led to the expansion of the state and the destruction of civil society, would put liberty instead of equality at the top of its political agenda. It was not to be. As my colleagues illustrated, the socialist idea, once in place, is immovable. Of course, it will change its name and moderate its methods according to the spirit of the times. But in the modern world, there will always be a section of society—not necessarily the majority, but the one with which the intellectuals identify, and upon whose inertia they rely—that puts equality first and regards liberty as a dubious asset benefiting only the few. Within a few years, I had picked up my pessimistic shield again; I no longer believed that people would try to rescue civil society from the state, or that they would see law, institutions, and national culture as the foundations of a free and prosperous social order. The same spirit of resentment that had animated the Communist Party, both as a revolutionary movement and as a dictatorial power, had returned in softer forms. People voted for equality, so as to help themselves to assets and powers that they could not obtain through merely honest means.
And it isn't just the economic crisis that has damaged people's support for free market democracy. A recent survey by Pew Research shows a worrying decline in support for the free market economy among central and eastern Europeans:



How could this happen? One word: corruption . Asked what are the top problems facing 'our country' (other than the economy), corruption dominates the list in almost all the countries surveyed. It is a pertinent reminder of what happens when free market capitalism is hijacked by crony capitalism.

John Kay makes a similar point in his recent Wincott Lecture:
I am going to argue that there are three elements to the triumph of the market economy. The first I will describe under the heading of ‘prices as signals’: the price mechanism is generally a better guide to resource allocation than central planning. The second element is ‘markets as a process of discovery’: a chaotic process of experimentation is the means through which a market economy adapts to change. The third heading is ‘diffusion of political and economic power’. The economic point here is that prosperity and growth require that entrepreneurial energy should be focussed on the creation of wealth, rather than the appropriation of the wealth of other people.

In what we teach, in what we say, in our economic research and most importantly in the policies we adopt – we put too much emphasis on the first of these elements – prices as signals to guide resource allocation – at the expense of the, possibly more important, second and third elements – markets as process of discovery, markets as mechanism for the diffusion of political and economic power.

The result is that both supporters and critics of the market economy have often confused policies that are pro-business with policies that are pro-market. That confusion has both undermined the social and political legitimacy of the market economy, and led to serious policy errors that follow from a mistaken, or at least incomplete, understanding of how a market economy works.
Kay is absolutely right: too many governments - in the East as well as in the West - have adopted pro-business policies in response to the crisis that simply propped up market incumbents to the detriment of potential new entrants (and to the detriment of buyers in the affected markets). And we're still doing it: just look at NAMA (which bizarrely entails the State buying €28 billion worth of dodgy assets from Anglo Irish Bank - which is already owned by the State). No wonder the people of Europe are less enamoured with the free market than they were twenty years ago.

What about the next twenty years? History did not stop in 1989, nor does it look likely to any time soon. One key challenge will be to ensure we do not lose all we have gained since the fall of the Berlin Wall. The disgraceful interference of the European Court of Human Rights in Italian cultural practices and preferences - demanding the removal of all crucifixes from Italian schools - is one illustration of how quickly freedom can be eroded. The price of liberty is eternal vigilance, as Henry Porter has noted:
Twenty years later, a European institution is busily enforcing secularism on the grounds that some kid belonging to a busybody Finnish-born atheist in northern Italy might have been momentarily put off his or her lessons, which I seriously doubt. It is enough to make you a Eurosceptic, but there again, Euroscepticism seems to me to be the only responsible stance of an intelligent democrat now that the Lisbon treaty is finally ratified. Scepticism is not reflex hostility, but, rather, alertness that assesses each new office, every new shadowy committee or opaque directive and asks: "Is this right for our society?"

The sceptic does not follow dreams or "lightly surrender a known good for unknown better". That phrase comes from the Conservative philosopher Michael Oakeshott, but I stress that scepticism is not being a little England Tory or any of the other nonsense spouted by French Euro-enthusiasts last week; it is sounding a note of caution, reserving judgement and not being carried away by ideas and political structures which may not be in the interests of the common good.
We must never take our freedom for granted, nor forget the unique powers of free market democracy to meet the needs of human beings; both of this and of future generations. I'll leave the final word to John Kay:
The world is uncertain: not just risky, but uncertain, in the sense used by Keynes and Knight. Not only do we not know which future outcomes will happen: we are unable to specify at all fully what these possible outcomes will be. If we could predict or anticipate the invention of the wheel, we would have already invented it. Market economies do not predict the future, they explore it. That is a fundamental – perhaps the fundamental – difference between a planned and a market economy.
Happy Freedom Day.

Sunday, November 8, 2009

Thank God It's ... Sunday?

Today is the happiest day of the week: that's according to nearly six thousand Irish people interviewed over the past six months. I presented the findings from my company's research at the recent Economic Psychology Ireland Conference. It was great to see so much interesting (and innovative) behavioural economic research going on in Ireland's universities nowadays. Well done Liam Delaney and the rest of the crew at the Geary Institute and NUI Maynooth for organising it.

Enjoy the presentation below - or better still, leave it until Wednesday when you'll be at your most stressed and in need of something for the weekend!

Saturday, November 7, 2009

A Better Future for Men

One of the things I keep noticing about the blogosphere is the extent to which it is predominantly male. Now I know this is due to the 'double shift' suffered by women the world over, raising children AND propping up the economy (not true, I know, but I thought I'd say it to avoid a visit from the feminist mutaween). Still, this peculiar male bias has got me thinking ...

We are used to thinking that the modern economy is one better suited to the cognitive skills of women than those of men (as argued recently by Arnold Kling and others). We know that women are doing better in our schools and universities and that the recent economic downturn has been worse for men than for women. But what if all this is merely a phase? What if the next shift in the economy is better suited to men? Seems unlikely I know, but let me tease out why it might happen anyway.

We are undergoing an extraordinary expansion of authorship right now. As note recently in SEED magazine:
Since 1400, book authorship has grown nearly tenfold in each century. Currently, authorship, including books and new media, is growing nearly tenfold each year. ... Today, at 0.1 percent authorship, many people are trading privacy for influence. What will it mean when we hit nearly 1 percent next year and nearly 10 percent the year after as the current growth predicts?
The chart above illustrates the pace of change. The authors suggest that we may fret less about illiteracy in the future and more about dysgraphia if such trends continue. Now arguably this should bode better for women than for men. Higher points in the Leaving and all that. But I don't think so and here's why: we are moving to a post-literate society which will demand a very different set of cognitive skills as argued by Patrick Tucker:
How can the written word — literary culture — survive the advent of the talking, all-knowing, handheld PC? How does one preserve a culture built on a 6,000-year-old technology in the face of super-computation? According to many of the researchers who are designing the twenty-first century’s AI systems, the answer is, you don’t. You submit to the inexorable march of progress and celebrate the demise of the written word as an important step forward in human evolution.

... In the coming decades, lovers of the written word may find themselves ill-equipped to defend the seemingly self-evident merits of text to a technology-oriented generation who prefer instantaneous data to hard-won knowledge. Arguing the artistic merits of Jamesian prose to a generation who, in coming years, will rely on conversational search to find answers to any question will likely prove a frustrating, possibly humiliating endeavor.

If written language is merely a technology for transferring information, then it can and should be replaced by a newer technology that performs the same function more fully and effectively.
The cognitive skills that will be more valuable in future won't be reading and writing (at which women are, on average, better than men), but instead will be visual-spatial skills at which men are, on average, better than women (to one standard deviation). That's one scenario anyway ...

Still, perhaps it is just as well we're moving beyond reading and writing. As The Onion reported recently, America and the English-speaking world are facing a crippling idiom shortage ;-)

And let me leave you with a stunning example of how the image is worth a thousand words (or should that be 1,000th of a word?) ht andreascon.

Thursday, November 5, 2009

Innovation Islet

Setting targets for creativity is a bit like setting a target for how much you're going to enjoy the weekend. You can come up with a number - but usually you 'know' creativity (and a good weekend) when you see it, whatever the 'score'.

But if you are going to commit taxpayers' money to an innovation policy then I guess some kind of targets are necessary - such as those set out in the recent Forfas report on Skills in Creativity, Design and Innovation. It's actually a good primer on current thinking about innovation, creativity etc, and the suggested targets are fair enough as far as they go.

But we need to go further: the real issue at the heart of creativity and innovation is the issue of risk. Doing nothing is often safer than doing something - in the private sector as well as the public sector. Right now Ireland is reverting to a more traditional 'risk averse' mode of thinking and doing. And who can blame us? Ireland is a country that imprisons people for not paying their TV licence; as well as having an exceptionally high level of personal guarantees demanded by banks from their business borrowers. Is it any wonder that demand for business loans has fallen off a cliff in Ireland even as it picks up elsewhere?

We are not alone our new found risk aversion - but that doesn't mean we are safe. A recent report from Deutsche Bank (Your Country Needs Innovative Minds!) laments how Germany is falling behind many other countries in terms of its investment in innovation and creativity (whence the quote above). Though it would be nice to have their 'problems'. The report also warns against being too specific about targets relating to innovation (including things like the spending on R&D as a percentage of GDP). Fetishising numbers is a highly uncreative thing to do. Moreover, fetishising 'Innovation Island' type targets is no guarantee of economic success - just take a look at Finland.

Still, even if setting measurable targets for creativity is a challenge, measuring it's impact is perhaps more straightforward. Take the work of IDEO, explored in a fascinating article in Wired:

Another example is the work IDEO did for Bank of America. Asked to help attract new customers from a specific target market - middle-aged women with children - the firm, along with a team from the bank, conducted interviews with potential customers across the US. They observed that some of them rounded up their bill payments for speed and ease of mental arithmetic: if an electricity bill came in at $42.23, they found that many would pay, for example, $45, knowing the difference would go towards the next bill. It meant household accounts were simplified, and also that the customer's psychological relationship with the utility company was subtly changed. Other potential customers they met had difficulty saving. These insights led the IDEO team to develop not an advertising campaign nor a set of branding guidelines, but instead a whole new bank account: one in which any money spent on the accompanying debit card is rounded up to the nearest dollar, and the difference automatically placed into a separate savings account.

Since its launch in 2005, the Keep The Change account, based on observation and developed through design thinking, has brought Bank of America up to ten million new customers, and has resulted in $1.8 billion of savings.

It seems the Icelandic government is now using IDEO to help innovate their way out of their present difficulties. I think we can be similarly innovative and creative in Ireland - but we should create a better environment for risk taking (of the non-economy wrecking kind), than setting spurious targets. And it'll be more fun as well.

Tuesday, November 3, 2009

In Praise of Inequality

Today's decision by the Supreme Court exempting Portmarnock Golf Club from equal status legislation is good news for Irish freedom. Freedom of association is a fundamental freedom in any democracy, and efforts by an arm of the state to prevent it should be strongly resisted. People should be allowed to associate together to meet the needs of people like themselves - regardless of gender, race or religion - if they so wish. It is generally healthy for any adult group or community to have time and space apart from the wider society to discuss their common interests and enjoy one another's company. Be it a book club, a golf club, a political party or an 'Irish wives of Polish husbands' club.

But what about equality: does the Supreme Court decision exacerbate gender differences in Irish society? Hardly. There are more fundamental forces at play shaping gender equality - and increasing inequality as experienced by men. Take Arnold Kling's analysis of how assortive mating is exacerbating labour market and global trends:

I think that perhaps the most important trend of the past thirty years is the increased importance of cognitive skills relative to physical labor. Obviously, this has been going on for more than just the past thirty years, but during the past thirty years we saw an acceleration. This has had a number of consequences:

1. It changed the role of women. Their comparative advantage went from housework to market work.

2. This in turn, as Wolfers and Stevenson have pointed out, changed the nature of marriage. Men and women look for complementarity in consumption rather than in production.

3. This in turn leads to more assortive mating, with achievement-oriented men looking for interesting mates rather than for good maids.

4. This in turn leads to greater inequality across households. It also fosters greater inequality among children. The children of two affluent parents are likely to have much better genetic and environmental endowments than the children of two (likely unmarried) low-income parents.

5. Inequality is exacerbated by globalization and technological change. If your comparative advantage is basic physical labor, you have to compete with machines as well is with workers from the Third World.

The net result is an economy that has improved considerably for people with high cognitive skills, but which has improved only somewhat for people with relatively low cognitive skills.

So what should the Equality Authority be doing about it? The obvious answer is to encourage marriage, for as Chris Dillow points out:

... rising inequality reduces marriage. This happens through three mechanisms:
1. As male poverty rises, poorer men cannot afford a wife. It is relative poverty that matters here, as a man’s marriage prospects depend upon what he can offer a woman.
2. Richer women will need a bigger share of the surplus from marriage to tempt them to wed. This means they’ll hold out for richer men, but…
3. They might lose out to poorer women, who can, in effect, out-bid them - perhaps by being more easily impressed, or less likely to nag.
The result is that rising inequality leads to a mass of poor unmarried men on the one hand and a mass of richer unmarried Bridget Joneses on the other.

There's a job for the Equality Authority - reverse engineer the trend towards greater income inequality by becoming marriage brokers. More fun than beating up on golfers. Alternatively, we could just close them down given the hopelessness of the task?

Monday, November 2, 2009

Too Clever By Half

Is race and intelligence the last taboo? Not any more, at least judging by the inconsequential ramblings of Channel 4's recent documentary on same. It pointed out the well established finding that European whites have, on average, a higher IQ than African blacks, but a lower IQ, on average, than East Asians. Which sort-of-suggests to me that IQ might not be that big a deal as it was the in-betweenie Europeans who built Western Civilisation. I guess there were a few other factors at play? And what about the Irish, apparently we have an average IQ below that of the rest of Europe, but we've done alright for ourselves. Okay, until fairly recently anyway.

Channel 4's documentary did make some attempt to explore the perennial problem of clarifying what it is that IQ tests measure. As the New Scientist reminds us, there is more to cognitive competence than IQ alone: George Bush has an IQ of 120 but some how he never did convince most people he was a man who had complete mastery of his brief.

But I did chuckle at Channel 4's Rageh Omaar as he tiptoed gently around the one remaining taboo he was definitely not going to talk about, namely the role of family structures in children's educational success (including higher IQs). As he went from one American expert to the next we learned that children - including black children - from 'middle class' type families (their phrase not mine) were more likely to do well at school, and get the kind of jobs associated with cognitive skills. 'Middle Class Type Families' - you understand - is now the politically correct code phrase for families where children are raised by both their married, biological parents. And with two thirds of all black households headed by a single parent (nearly three times the white rate and twice the Hispanic rate) then it is obvious whom Rageh and others feel are lacking in 'middle class' virtues. All of which is terribly insulting, of course, to black and white working class families that manage to practice the seemingly borgeoise habit of marrying and having children together. Though at least China and Russia have no qualms calling for a middle class future for all their citizens.

But it seems some taboos are easier to talk about than others. Race and intelligence - no problem. Families and marriage - what, are you trying to cause trouble?

Sunday, November 1, 2009

Clutching At Green Shoots

The majority of Irish consumers think that the worst is over for the Irish economy. In October, for the first time since my company started our monthly Economic Recovery Index survey in April, more respondents felt that the economic situation was 'bad but stable or improving' than thought it was 'bad and getting worse'.

A fragile green shoot to be sure, though responses to other questions in the survey suggest a combination of 'public confidence and private pessimism':

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