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Irish economic news, in summary and context.
Poorer Than Our Parents?
When she became leader of the Social Democrats, Holly Cairns included in her first dáil speech the observation that she is “a member of the first ever generation who will be worse off than my parents”
It was a striking sentiment. It echoes a wider trending belief among the under 40s which is either anti-Capitalist or, at the very least, anti “the-current-system”.
Cairns highlighted a paradox at the heart of our current economic system: as a country we have never been richer, yet young people are putting their lives on hold, stuck living with their parents or spending all of their spare income on rent.
This sparked great debate last week.
“Even if Cairns is right, and our financial circumstances are worse than our parents, the young in society have still reaped huge benefits from modernity. This remains inconveniently true no matter how unfashionable it may be to suggest in a climate of rampant inflation, a housing crisis and the fallout of a pandemic.”
I’m not sure why her piece (praised by Conor Pope as “simply excellent”) is framed “in opposition” to Cairns, rather than exploring the disturbing divergence between the noted wider societal progress and financial precarity of a generation.
Ciarán Casey (of University Limerick) explores the data in his piece for the Journal, noting the conflicting stats that
“Irish people enjoy access to a range of consumer goods that would have been unimaginable a generation ago. Of course, almost all of this technology has been developed elsewhere, but as a richer society we are much better positioned to benefit from it. This is as true of medicines as it is of smartphones.
But the obvious and immediate way that the assertion is correct is when looking at housing so it is hard to disagree with Cairns in this area.”
In the Irish Times, David McWilliams has his own reflections on the paradox that “many people are wealthy on paper but live without security. Irish people can be rich and poor at the same time.”
While I share the desire to be optimistic, I don’t want to be blindly so. The problem Cairn’s pointed to is a very real one.
Even though social and technological progress is a tide that raises all ships, a disproportionate share of the gain has gone to older generations and continues to flow from young to the old through rents and house prices. It’s a political challenge worth ringing the alarm bells on.
- Irish Times: “Holly Cairns is Wrong, Our Generation is Much Better off Than Our Parents” Link (€)
- The Journal: Is Holly Cairns correct about her generation being worse off than their parents? Link
- Independent: Holly Cairns’s comments begged the question – will the next generation ever be able to afford to retire? Link
- Irish Times: In Ireland, People Feel Rich and Poor at the Same Time Link (€)
- Irish Times: Lifting the evictions ban, coupled with a failure to get to grips with the housing crisis, will make it tough to win votes from anyone aged under 40 Link (€)
More Tech Layoffs
In the last two weeks large layoffs have been announced at Indeed, Workhuman, Amazon and Meta. Una Fitzpatrick, director of Technology Ireland, told RTÉ’s Morning Ireland that “the expectation is that around 2,000 to 3,000 people who work in technology in Ireland will be laid off”.
Accenture CEO Julie Sweet described the cuts as an “opportunity” to deal “with the challenges of compounding wage inflation”
- RTE: Tech sector in a ‘state of flux’ as job cuts continue Link
- Irish Times: Accenture CEO says the quiet part out loud Link
Mortgage Applications are Still at Historic Highs
A small silver-lining to the story above, for non-tech workers, is that the number of tech workers applying for mortgages is down to ‘a trickle’, as many hold off during a period of increased uncertainty.
Given that one mortgage brokers estimates that one third of all first time mortgage applications were by tech workers in 2022, this should give other buyers less competition.
This isn’t showing in the figures yet, however, with overall mortgage applications and approvals still incredibly high. There was a spike and subsequent drop in the number of switcher mortgages, as people moved from Ulster Bank and KBC as they exit the market, or moved to lock-in fixed rates as rates began to rise, so many media outlets reported February’s numbers as ‘big falls’. But the underlying numbers [PDF] from the BPFI show only a small decrease in mortgages for home purchases – about 5% lower than this time last year.
- Independent: Number of tech workers applying for mortgages down to ‘a trickle’ as uncertainty over the future bites Link
- Irish Times: Mortgage approvals fall sharply as higher borrowing costs curtail buyers Link
- RTE: Decline in switching activity leads to drop in new mortgage approvals in February Link
In a recent Credit Union survey, over 55% of respondents said inflation has caused a worsening in their financial circumstances, but they are managing to cope. An alarming 35% said they are struggling to cope. Irish Times. RTE.
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This Ain’t Industrial Policy, It’s A God Damn Arms Race
In response to China’s growing economic strength, the United States, under both the Trump and Biden administrations, is pursuing an economic agenda that combines robust industrial policy with a worrying amount of protectionism and import substitution.
The mammoth Inflation Reduction Act, for example, seeks to drive innovation and development in climate technologies that would otherwise suffer underinvestment or delay (this is good), but with a significant risk that the funding just ends up providing subsidies and tax breaks to existing technologies already on their way to scale.
For example, Volkswagen are being tempted with $10bn to locate battery factories in the US instead of the EU. This wouldn’t get the world more batteries, just change where they’re produced.
Europe is now deciding how to respond to this. Should we respond in kind with our own suite of subsidies? That is the prevailing mood in Brussels says yes, but 11 of the smaller countries, lead by Ireland, are trying to curtail many of the proposals.
This is one occasion where I think the conservative economic approach can be better suited – leaving some potential upside on the table in favour of minimising risk (and no better man than Varadkar for that). The fact that this perspective isn’t being championed by a large country highlights what a loss Brexit is for the EU too.
The EU’s long-standing ban on “state aid” has at times been overly restrictive, but on the whole kept protectionist instincts at bay and supported the fair, open single-market. As the US dabbles with protectionism, it will be interesting to see how the EU manages to thread the needle of being open without being naive, and being supportive of industry without becoming beholden.
- Economist: The battle for Europe’s economic soul Link
- FT: VW puts European battery plant on hold as it seeks €10bn from US Link
- Irish Times: Ireland leads rebellion against EU ‘industrial subsidies race’ with US Link
Corporate Greed Drives Inflation
As mentioned here before, “Corporate Greed is Causing Inflation” has become the most cohesive narrative to counter the notion of a “Wage Price Spiral”. It lacks some nuance – some corporations have always been greedy, but supply constraints allow them to exercise that greed through price hikes – but is still an effective counter-balance to the notion that wages are the leading cause of inflation.
Supporting this narrative, The Financial Times have published data from Professor Isabella M. Weber showing that “profit margins of US companies have reached levels not seen since the aftermath of the second world war.”
“Having made windfall profits on the back of commodity price fluctuations and supply bottlenecks, large companies have been emboldened to raise prices further to increase profit margins. They found that there was little evidence that the models used to explain the inflation of the 1970s — such as excess aggregate demand, money supply expansion or increased wage costs that prompted a spiral — applied to this recent rise.”
Price Rises in the Fog of War
Samuel Rines has another explanation for this inflation narrative – not only are corporations using supply constraints as their lever to raise prices, some companies are also using the “fog of war” to raise prices. As he explained on a recent odd lots episode, using Pepsi as an example, there are two overlapping factors:
When western sanctions were placed on Russia, companies could no longer sell there and instantly lost about 4% of their revenue. Not wanting to report a loss to their shareholders, they decided to increase prices everywhere else, to make up for the sales shortfall in Russia. They could do this with some confidence, knowing that all their competitors also had Russia-sized holes in their sales and would likely increase prices to close this gap too.
In an environment of high inflation, consumers tend to get less price sensitive. You notice the price of pepsi has increased, but instead of shopping around for an alternative, you just shrug and assume it’s the same as everything else. In the “fog of war” of high inflation, we find it very hard to tell if one brand has become more expensive than their competitors, because we don’t remember what anything costs any more.
The evidence for this comes directly from the earnings calls of many of these companies, who have found a surprising (even to them) ability to increase prices without a decrease in sales volumes.