Buckets of Spare Cash, But the Wrong Time to Spend

One model for thinking about Government spending is to consider how it redeploys resources, like workers, property and machinery, from one purpose to another. A machine digging for a new public road can’t also be digging a private garden. A person employed as a teacher can’t also be employed as a banker. An increase in Government spending causes resources to be redeployed from private sector use into public sector use.

At times of recession, when machinery lies idle, land is underused and unemployment levels are high, this redeployment almost always a very good thing, and the underpinning of “countercyclical” economic policy.

On the flip side, when the economy is near the limits of its capacity – when almost everyone who wants a job has one, when very few buildings are lying empty – then an increase in Government spending will struggle to attract those resources and redeploy them. Workers will need higher wages to attract them away from their current jobs, contractors and builders are all busy, rents are high and climbing.

That describes the situation we’re in now. Unemployment is at a 21 year low. Inflation is above 7% as we outbid each other for still limited resources.

This is the background against which we find out that the Irish exchequer is getting, to use the technical terms, boatloads of extra cash from Corporate Taxes, which have now overtaken VAT as our second largest source of tax revenue, behind only income tax.

Image source: Irish Times

The temptation will be very high to find new, interesting and often very worthy ways to spend this money, but there is never going to be a more expensive time to try spend more Government money than now.

The fix for this is to dramatically increase our country’s productive capacity – by importing workers with attractive immigration policies, building them (and everyone else) houses and continuing our growth, to unblock key bottlenecks in An Bord Planeala.

But that fix doesn’t seem likely in the near term. The department of housing, for example, wasn’t even able to spend its current budget in the last two years – underspending by €1.5bn. So the less ambitious, but more achievable plan should be to run a high budget surplus over the next few years, sitting on the extra cash until investment is affordable. This could be coupled with tax increases on the highest earners and reduced spending in some areas, with exceptional spending increases for things that are so badly needed (i.e. housing) that it’s worth getting the expensive version now rather than the cheap version later.

• Irish Times: Surplus of over €16bn estimated for State for next year Link
• Business Post: Ireland’s budgetary watchdog warns against unbalancing economy Link (€)
• Irish Times: State needs to stop cost of living supports for better off families Link
• Business Post: The bottlenecks choking progress in housing, transport, planning, energy and water Link

More Local Buy-In = More Houses?

Robert Tolan, currently studying Irish housing supply at Trinity has written a suggestion for “Street Votes”, a form of hyper-local referenda on new housing. This seems quite counter to my priors, which imagines NIMBY-ism as a default and common position, which is why I found it such an enjoyable read.

• The Fitzwilliam: A Simple and Elegant Response to Ireland’s Housing Crisis Link

Stagnant Interest Rates

As we discussed before, the European Central Bank has been raising interest rates rapidly, but the interest rates on Irish mortgages haven’t risen nearly as fast. This is true for the interest Irish banks are paying on deposits too. Central Bank governor Gabriel Makhouf said that “One of the implications of the judgments [banks are making] is that lower rates that they are paying for deposits are subsidising the lower rates that they’re charging for mortgages.”

It seems that Irish banks have a uniquely high ratio of deposits to mortgages, so it makes more financial sense for them to keep interest rates on savings low, even if that loses them the chance to raise interest rates on mortgages.

• Irish Times: Low Irish deposit rates ‘subsidising’ mortgage holders, Makhlouf says link

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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.

Finn McRedmond, writing in the Irish Times, argues that Holly’s line of thinking is “defeatist”.

“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

Inflation Struggles

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.

💡 What’s the New Idea?

New and notable progressive economic ideas from around the world.

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.

• Bloomberg: “Companies Are Telling Us the Real Reason They’re Still Raising Prices” Link ($)
• Podcast 🎧:  Spotify | Apple

💡 What’s the New Idea?

New and notable progressive economic ideas.

The Housing Crisis is an Anglosphere Phenomenon

In Ireland we find it very easy to fall into the trap of thinking that the troubles we face are uniquely Irish in nature. I’m sure we’re not alone in this. When we discuss the crises in Housing or Healthcare, the temptation is always to blame this minister or that one, a specific policy or a cultural attitude that is uniquely Irish. “The HSE is uniquely inept” “After colonialism we all tell our kids that rent is wasted money”.

A major problem with this analysis is that it isn’t always supported by the data. On housing, for example, the pattern we see in Ireland – home building dramatically trailing population growth and house and rent prices far outstripping wage inflation – is repeated in many other countries too.

This same pattern is present in *some* countries, but not others. So instead of wondering what we’ve been doing wrong on this island, we should be asking what we have in common with countries who face the same problems as us. To me, the most coherent group seems to be the “Anglosphere”. The US, UK, Canada, Australia, New Zealand and us.

John Burn-Murdoch published a great piece of analysis in the Financial Times this week, offering some suggested reasons why the anglosphere might be struggling with housing policy.

He places much of the blame on our distaste for apartment living. The cultural significance of the standalone family home and the facilitation of objections to new apartment buildings across the anglosphere.

“Across the OECD as a whole, 40 per cent of people live in apartments, and the EU average is 42. But that plummets to 9 per cent in Ireland”

I’m not sure if his focus on apartments tells the full picture, but his framing of the problem as an “anglosphere” one is spot on. Here are some additional hypotheses on why the anglosphere stands apart:.

Seán Keyes at TheCurrency.ie: “My pet theory is common law derived planning in Anglophone countries (more uncertain) vs Napoleonic planning in Europe (less uncertain)“

Many, including Venture Capitalist Brian Caufield noted the “Differential in net immigration between Anglophone and other countries“. We have strong economies that need to pull in workers, causing population growth to outstrip housing growth.

Twitter user Gok pulled together a graph showing the different rate of population growth in Anglosphere vs. other developed nations.

Twitter user firebrand Dove shares her theory that there are two, separate drivers in different parts of the anglosphere” “US/Aus/Can went for low density because so much land was available. The UK suburbs and the greenbelt were the opposite: a reaction against Victorian era slums. ”

And for balance, there are some who feel this is a positive and correct attitude to have towards apartment living. American houses are dramatically larger than Italian apartments. James Morrow of Australia’s Daily Telegraph captures this view as “God forbid people don’t want to live in high-rise human filing cabinets.“

Lots of good hypotheses for testing and a good reminder that the solutions we’re looking in housing for are broad and systemic, not local or personal.

📰 Trending News

Irish economic news, in summary and context.

Have We Done Enough to Prevent a New Credit Crisis?

Over-simplistically, a bank takes in deposits from businesses and households, keeps a small amount in reserves (~10%) and lends the rest out (~90%). They remain in good shape as long as the value of the loans they’ve made combined with the money that they keep to one side is higher than the deposits they’ve taken in.

One way that this can go wrong is when the value of the loans they’ve made drop. For example, if most of their lending is through mortgages and the price of property falls by 10%. They might have only had a 10% buffer, so things can start to get dicey.

This is what happened to bank in Ireland (and elsewhere) in 2010.

Since then we (the EU, US and others) have built up a series of new rules and regulations to try to stop banks from getting in this sort of trouble. Broadly speaking, the more systemically important a bank is, either to the local economy or the global financial system, the larger the “buffer” of reserves they have to maintain.

Smaller regional banks in the US (such as Silicon Valley Banks) successfully lobbied to get themselves excluded from these rules by being designated as not-systemically important.

So in a way we have a bit of a test case to see how well the design and application of these new rules are working at preventing credit crises like we experienced a decade ago. We get to see if the rules applied to “systemically important” banks help prevent another credit crunch. And we get to see if the line for “systemically important” was drawn at the right place.

This time around, the focus is less on mortgages and more on bonds. Instead of lending out it’s deposits as mortgages, another thing a bank might do is lend money to governments. This is done by buying government bonds.

If you bought a 10 year Irish government bond this time last year, it would have had a fixed interest rate of 1%. Since then interest rates have been rising. Now if you buy a 10 year bond it comes with a fixed 3% interest rate! Triple the return!

So if a bank bought €1bn worth of government bonds last year and is forced to sell them today, they won’t get €1bn for them. Who would pay full price for a 1% bond when you can get a 3% one for the same price?

The rules and regulations we put in place should account for this sort of thing, so how are they faring?

Regional US banks gained exemption from the rules by being placed below the threshold, and some didn’t prepare properly for the rise in interest rates. The week before last one of them (Silicon Valley Bank) collapsed and last week another (First Republic) needed rescuing from peers, and is still very unsteady. Generally, billions of dollars of deposits are moving from the regional banks to larger ones (which are covered by the new rules).

Last week Credit Suisse also got into trouble, but being a large Swiss bank, not a small US one, they were above the threshold, considered to be globally systemically important and therefore bound by the new rules. So does this mean the rules are weak?

Credit Suisse claim that they were well prepared for the rising interest rates and had a strong balance sheet. It seems that Credit Suisse was a multi-year, slow motion train wreck and this time of turbulence just tipped it over the edge. The kind of thing that any amount of rules can’t (and probably shouldn’t) prevent. So it’s demise isn’t a very reliable test of the rules.

We can certainly see that banks which weren’t bound by the rules aren’t holding up well, but it remains uncertain what this means for the larger banks. 6 banks in Ireland are bound by a version of these higher rules.

This isn’t causing widespread panic yet, but as house prices continue to fall and the ECB continues to raise interest rates (another .5pp this week), people are still looking around nervously.

• Matt Levine: UBS Got Credit Suisse for Nothing Link
• Video: The End of Credit Suisse Link
• Irish Times: Lagarde insists there’s no conflict between higher interest rates and financial stability link
• Financial Times: Silicon Valley Bank is a very American mess Link

Our Economy is Strong But Unsteady

After a wave of layoffs in the tech sector (disclaimer: including at my employer, Meta) the Central Bank recently published an article on “The Role of the ICT Services Sector in the Irish Economy” as part of their March Quarterly Bulletin (p86).

“To date, the scale of the downturn affects a small proportion of overall ICT employment in Ireland. Nevertheless, the dependency of the sector on a small number of large firms illustrates the wider structural vulnerability of the Irish economy to firm or sector-specific downturns.”

Laura Slattery in the Irish Times reports:

“Ireland’s reliance on the international tech sector poses risks to growth, employment and tax revenues in the event of a severe or prolonged downturn, an article published by the Central Bank of Ireland warns.

The authors of the report recommend that the risk is lessened through policies that increase investment and productivity in indigenous tech firms, while they also say the negative effects of any future sectoral downturn will be reduced by the Government’s recent policy of saving corporation tax bonanzas in the National Reserve Fund.”

This is our perennial first world problem. An Irish person who works for a multinational company (e.g. in Pharma, medical or tech) is dramatically more productive than one who works for a domestic company. We benefit from this, but precariously so.

As I mentioned before, closing this productivity gap is our big economic opportunity. It will take our current position (very good but out of our control) and cement it as predictable, generational prosperity.

Disclaimer: I write this newsletter as a hobby, in a purely personal capacity. None of the writing expresses the views or opinions of my employer.

📰 Trending News

Irish economic news, in summary and context.

Lifting the Eviction Ban

In a crisis of housing supply, there is a general level of “pain” in the housing market. One way you can think about eviction bans is that they shift this pain from the most vulnerable group, renters (at the highest risk of homelessness) to a less vulnerable group, landlords (those with spare houses).

In this model eviction bans don’t actually lessen the quantity of pain in the market, they just shift it around. You need other policies to reduce the total pain – massive social housing construction, land value taxes, zoning regulation reform etc.

If anything, eviction bans probably slightly increase the total amount of pain over time by adding stasis to the market. The housing needs of tenants and landlords change over time, households grow and shrink, but everyone is stuck.

So eviction bans should ideally have an end date, which begs the question – how do you decide to end it?

If you’re the housing minister, I think it depends on your level of optimism. If you have an array of policies in place, like the ones mentioned above, which are going to lower the overall level of pain in the market, then you wait. The longer you can hold out, the more rental properties will be available, the less pain you’ll eventually be shifting back onto renters.

If you’re not confident that anything will change by this time next year, that your policies won’t make a dramatic improvement, then you might as well rip the band aid off now.

An incredibly bleak appraisal of your confidence in your current strategy or your ability to make the situation better any time soon.

• Independent: “Lifting eviction ban next year ‘would have clashed with elections” link

Our Future in Friend-Shoring

The shift in the West’s relationship to China is causing a big rethink in the globalisation narrative and strategy. “Get it where it’s cheapest” is being replaced with “Get it where it’s most secure”. Or at least “Get it where it’s cheapest, but have a plan b.”

An element of this is certainly prudent. COVID-19 showed us the vulnerability caused by a single point of origin in our supply chains.

As we move past the simplistic 1990s narrative that “all globalisation is good”, there are two policy narratives vying for dominance:

Onshoring: Bringing manufacturing back home.

Friend shoring: Bringing manufacturing to your country OR to a political ally.

Ireland is poised to be a natural beneficiary from this trend, but it’s not a sure thing. Microprocessor chips are identified as big risk, with the most advanced chips being mostly made in one place – Taiwan.

As the EU and US ramp up big industrial strategies around microprocessor production capacity, our government agencies will be vying for much of it to be based here. The big set-back is that we lost the bid to host Intel’s first 2nm fab a year ago. It’s honestly one of the biggest industrial strategy misses of the decade.

• Independent: Kildare can be the EU’s ‘chip hub’ if new funding secured Link
• Science Business: [EU] Chips Act heads into negotiation phase Link
• Guardian: “From near-shoring to friend-shoring: the changing face of globalisation” Link
• Irish Times (last year): Failure to secure new Intel plant a ‘tragedy’ for State Link

House Prices Are Falling Everywhere, Except Here

Here’s a snapshot of housing graphs from across the western world. In almost all markets, as interest rates rise, house prices are starting to fall.

This trend is replicating almost everywhere, except here.

Partly this is because, as we discussed last week, mortgages aren’t becoming more expensive here. Irish banks so far aren’t passing interest rate rises on to borrowers, and the Central Bank increased its loan to income ratio in January.

Last week the Taoiseach told his party that we are short about 250k houses. Economist Ronan Lyons thinks this is closer to 300k.

With the cost of mortgages unchanged and so many buyers chasing so few houses, it is understandable why Ireland hasn’t followed the trend yet.

However, there are some signs that Ireland might follow the broader trend. Commercial prices are starting to falter and some investor numbers indicate a diminishing optimism. From the Business Post:

“Irish Life has blocked withdrawals from its €500 million Irish property fund for the next six months following a recent spike in the number of requests by investors seeking to get their money back, the Business Posthas learned.

The insurance and pensions company confirmed to this newspaper that it has closed the fund until at least the end of August as it seeks to liquidate some of its property portfolio in order to pay for future investor withdrawals.”

• Business Post: Irish Life blocks withdrawals from €500m property fund as investors rush to exit Link (€)
• Business Post: Irish property funds book writedowns of €240m as commercial market turns Link (€)
• Independent: Number of house completions this year set to remain ‘substantially below’ estimated need Link

Digital Innovation Hubs

As part of an EU backed network, Ireland is going to have four “Digital Innovation Hubs”, two of which were announced recently. Although this announcement comes through Enterprise Ireland, which is tasked with creating new, high growth exporters, they are best understood as improving the technology of small domestic companies. This is less sexy sounding, but given the large productivity gap between domestic companies and multinationals, it’s very important for us that initiatives like these succeed.

• RTE: Government announces two new European Digital Innovation Hubs (link)

Silicon Valley Bank

SVB, a large regional bank in the US, suffered a bank run late last week. It didn’t manage its risk well, and as interest rates rose throughout the year last year, the market value of some assets it held dropped. This meant that the value of the things it owned/was owed were less than the total amount of money it owed (including to depositors). When people realised this, they got spooked and withdrew their money. The US Government, in a very professional and orderly manner, took over the bank, burned the bondholders, managers and shareholders, but promised to make all depositors whole.

The prompt and confident response by the US Government should stop the spread of panic and contagion, but it does beg the wider question of what exactly a deposit bank should be in our modern economy and what level of risk they should take on.

• Irish times: Collapse of Silicon Valley Bank will be watched closely Link

📊 Public Opinion

Research and Data on people’s economic beliefs.

What worries our neighbours? In the UK, the Economy and Inflation remain the top concerns for voters, replacing the NHS after a winter spike in January. Link (IPSOS)

As the graph above shows, “Economy” has been consistently high since the outbreak of COVID-19, but inflation climbed steadily throughout 2022, peaking in the winter. Zooming in and zooming out, worries about the economy are at the highest sustained levels since the great financial crisis.

Worries about inflation haven’t been this high since the 70s, though they seem to be on a downward trajectory.

Interestingly, the worries about the Economy and Inflation are roughly equal within all demographics (e.g. rich people care equally about both, but at different levels to other demographics) except in voting preference, where Labour voters care 10pp less about Inflation than the Economy.

Disclaimer: I write this newsletter as a hobby, in a purely personal capacity. None of the writing expresses the views or opinions of my employer.

💡 New Ideas

New and notable progressive economic ideas.

1) Taxing Land. Martin Wolf at the FT argues that “The Case for Land Value Tax is Overwhelming”. This is a great read, arguing that Land Value Tax is a morally just and economically efficient way to raise revenue, but its implementation has been hindered by the political power of landowners.

It will remain a deep tragedy that in 2013, when we had the opportunity, Ireland chose to tax property instead of land.

2) Technocratic Ideas. Some interesting questions from Chris Dillow intended to promote policy discussion in the area of state capacity.

“How much state capacity is there? Can we reform the police/NHS etc for the better, or do we lack the political/management ability? Smith said there’s a great deal of ruin in a nation – but how much, & where?”

“Which errors should govts make? Should it err on the side of generous benefits/liberal migration policy/loose fiscal policy (etc) or the opposite?”

“Are our policies/institutions as resilient to human error/venality as they could be? How could such resilience be increased”

“If we want more care workers/nurses/people to decarbonize the economy, where will they come from? Is unemployment high enough, or do we need to destroy other jobs? If so, are higher taxes enough, or do we need policies to cut (eg) bullshit jobs?”

3) A welcoming Economy. Both David McWilliams and Fintan O’Toole mark the arrival of The Windsor framework (the Northern Irish Protocol 2.0) by comparing the economies of north and south. McWilliams compares the fortunes of both over the last 25 years, with the Republic overtaking a receding North. “This deal provides the chance to reframe what the North stands for. Is it an enterprising part of the global economy, focused on raising the living standards and conditions of its people or an atavistic backwater, preferring flags over fortune?” Link (€).

O’Toole, on the other hand, focuses on how we frame the vision for the Republic for the coming years. Noting, as McWilliams did, that the “single great idea” of attracting American capital and importing our export sector has been profoundly successful, he says we’re desperately in need of a social democratic vision for what the state and economy should look like for the next phase. Large state capacity, long term planning and capacity to take in workers from all over the world is not only vital, but also possibly the best strategy for making a united Ireland something our unionist cousins would want to be a part of. Link (€).

📰 Economic News

Trending Irish economic news, in summary and context.

The Numbers Don’t Feel Right

Eoin Burke-Kennedy captures well the sense that many of our economic indicators seem to be conflicting both with each other and with the broad public sentiment. “At no time in the last four years has there been more confusion, more mixed signals about the future direction of the global economy.” We’re in a cost of living crisis, but sales figures are robust. The central bank has dramatically hiked rates, but the corresponding recession has not arrived. The Minister for Finance and employers’ group Ibec predict inflation falling faster than expected, but CSO data shows it still rising.

• Irish Times: “Irish consumers get mixed signals on inflation as ECB gears up for more rate hikes” Link
• Irish Times: “Surprise increase in inflation runs counter to forecasts” Link

We Aren’t Not In a Recession

In January the CSO estimated that Irish GDP had grown by 3.5% in the previous quarter. This week it revised that number to just 0.3%. However, given the predominance of multinationals and aircraft leasing, we all use the much better “modified domestic demand” figure (or GNI*) for a more accurate measure of the real domestic economy. Modified Domestic Demand fell by 1.3 per cent in the fourth quarter, which means the Irish economy (and possibly the entire eurozone) had negative growth for the second half of 2022. This means, by one key measure, we’re technically in a recession. But employment is at an all time high, consumption is up, as are exports, so nobody really believes that we’re in a recession.

• Irish Times: “Irish economic growth revised downwards in fourth quarter” Link
• RTE: “Domestic economy in technical recession at end of 2022” Link
• RTE: “’Relatively low likelihood’ of recession this year” Link
• Irish Times: “The mysteries of measuring the Irish economy” Link
• RTE: “Leprechaun Economics 2” Link

The Plight of the Private Landlords

There is a trending narrative, and one I hear frequently through anecdotes, that despite record high rents, private landlords (who provide 94% of rental accommodation in the country) are finding the gig too difficult and costly and are starting to sell up. It’s hard to get a sense of the scale of this issue and, more importantly, if we should care.

On the scale question, a frequently cited stat from a Society of Chartered Surveyors’ survey says that 40% of residential property sales in Q4 were landlords selling their investment properties. This is just a stat about the composition of sales, it doesn’t tell us anything about whether this proportion is climbing or falling, high or low or, most importantly, if the quantity of landlords selling is on the rise or the fall. Nonetheless the Irish Times and Independent both reported it as a “Landlord exodus”.

Given that these numbers always come with a corresponding call for deregulation and tax cuts, I’ll treat them with a grain of salt until I see good stats. But even still, if we grant that the numbers are increasing by some amount, is that a big problem? The most obvious negative consequence is a reduction in the number of properties available to rent.

I think there’s a rough hierarchy of vulnerability in society that goes something like this:

Owners of multiple properties -> Property owners -> New buyers -> Renters -> Houseless

As such, in the middle of a property crisis with record homelessness, I won’t spend much time analysing the difficulties faced by folks at the top of this list. When private landlords sell rental properties at times of low supply, it benefits new buyers (by increasing supply of properties for sale) but disadvantages renters and the houseless (by decreasing rental supply and further driving up prices).

Policy moves to incentivise private landlords to retain ownership of their spare houses, like tax breaks, regulation changes etc. will just shift some burden from renters to new buyers, with significant benefit accruing to those at the top. It seems obvious that increasing the quantity of properties in the country should be the main goal, rather than shifting the ownership structures of the existing sparse supply. Building social houses, smart zoning and land value tax are all better options here.

• RTE: “Explainer: Why are private landlords selling up?” Link
• Independent: “Nine-out-of-10 Airbnb hosts would rather leave their units idle than rent it out to long-term tenants” Link

Why aren’t mortgage rates sky-rocketing?

As ECB rates surge and competition decreases, with KBC and Ulster Bank leaving the market, why haven’t the remaining banks raised mortgage rates significantly? Possibly because two (AIB & PTSB) are still majority owned by the state? Maybe their analysis shows rate hikes will push borrowers over the edge and cause a wave of defaults? We’ve gone from one of the most expensive to one of the cheapest mortgage markets in Europe. One to watch.

• Business Post: The curious case of the Irish banks and the non-rising mortgage interest rates” Link (€)

Phantom Exports. One of my favourite terms to describe our economic strategy is “Importing our Exporters”. Instead of growing exports by championing domestic firms, we incentivised foreign firms to locate here and export from here. It was a solid strategy, but the runaway success leads to some bizarre headlines. The Business Post reports that “Goods produced outside Ireland made up 38 per cent of Irish exports in 2022, as economist says numbers are ‘unusual to say the least’ considering size of the economy”. Link

Exchequer Surplus. On a twelve-month rolling basis, the Exchequer had a €1.5 billion surplus. Corporation tax is a big driver here, but numbers are up across the board. We put €4bn back into the pension reserve fund (which was drained to bail out the banks). Link

Inflation Drivers. In the US “Corporate Greed is Causing Inflation” has become the most cohesive narrative to counter the notion of a “Wage Price Spiral”. The first suggests that an imbalance of supply and demand gives companies the opportunity to hike prices to make high profits at a time of scarcity. The second suggests that the costs of inputs (including wages) are forcing companies to pass on price increases against their will.

Leaked discussions from the European Central Bank “showed that company profit margins have been increasing rather than shrinking, as might be expected when input costs rise so sharply”. The need to use interest rates to get wages and costs under control has been the dominant narrative, but the data suggest that “corporate greed” is the more accurate one. Link (Reuters)

If I want to redesign the look and feel of this newsletter, I might hire a freelance designer. If I find an excellent one based in New Zealand, how would I pay her? I live in a part of the world where we believe money is called “a euro” and she and her fellow Kiwis do business using New Zealand dollars. I get paid in euro, but she wants to get paid in NZ dollars. So I first need to find someone who has NZ dollars and is willing to exchange them with some of my euros. I visit a marketplace, called a foreign currency exchange, where many people are willing to trade with me. 

There is a going rate for NZ dollars relative to euros, which we call the exchange rate. If many people like me are trying to buy goods and services from New Zealand, or visit there on their holidays, there will be a lot of demand for a finite supply of NZ dollars and so their value will go up. In this way, the strength of the NZ dollar is linked to how much the country is exporting.

But that’s only half the picture. This is a two-way exchange, so the strength or weakness of the euro is also an important factor. Is the euro in demand? Are people trying to get their hands on euros so that they can buy French wines and Dutch bikes and visit the Colosseum?

In this way, being a eurozone member can be strange. The ability of an Irish writer to hire a designer in New Zealand is deeply affected by the import and export activities in other European countries. In particular, it’s affected by the imports and exports of German industrial manufacturers, and they are not having a good time at the minute.

Russia’s invasion of Ukraine, and our subsequent sanctions, has meant that all of the energy needed to make cars and machines is significantly more expensive. Lots of manufacturers are trying to exchange away euros, to buy energy, and are making our euros less valuable.

People are also worried that Germany will have to start rationing energy and therefore be able to build (and export) fewer cars, trucks and machinery and so the demand for euros would fall further.

This, coupled with the fact that the US have slowed printing new dollars but the Eurozone has not, has meant that for the first time since 2002, the Euro and Dollar are now at parity. $1 = €1.

It’s cheaper for the Americans to come visit and for US MNCs to pay wages here, but it’s more expensive for us to buy things priced in dollars, in particular oil.

💡 Interesting Links

Political Central Banks | With the ECB raising rates yesterday for the first time in 11 years, Central Banks are back in the spotlight. Adam Tooze’s piece “The Death of the Central Bank Myth”, originally published at the start of the pandemic, is a timely read. He reminds us that the notion of a Central Bank as an non-political, independent building full of technocrats is a false one. The decisions of the Central Banks are inherently political. In fact, framing their choices as “merely technocratic” is a big political win in itself, for the supporters of their choices. The choice to fight inflation by raising interest rates is baked into the founding articles of the EU, and is correctly understood as a policy favouring savers over spenders, lenders over borrowers. As the ECB moves to raise interest rates (which helps savers) in an attempt to reduce inflation (high inflation benefits the indebted), we should recognise it as an action within a wider political philosophy, even if it’s one we agree with.

Vibe Shift | Is this the end of the era of Capital? Former hedge fund manager Russell Clark said this on a recent podcast:

“From the end of World War II to the 1970s […] you saw an emphasis on improving the experience of the worker, particularly relative to the corporates. So you saw rapidly increasing minimum wages and high corporate taxes. Pre-WWII was a period that preferenced Capital over labour, and the great depression was a period of falling wages, and the post-WWII period was one where we favoured labour over capital – look for full employment and rising wages when that happens. Then, with the Reagan and Thatcher Revolutions, the collapse of Communism, we then moved back to a period of favouring Capital over labour. In this context, you devalue your currency to combat inflation and make it competitive internationally. You have the exact same problem as we did in the great depression, but elongated over a longer period of time. […] Why do you see these regime changes? Because the votes aren’t there for the old one. After the 70s, when unions became to strong and that model stopped working, people voted for neo-classical policies. I would say, from 2016 onwards we’ve had a big shift [back towards labour].”

David McWilliams believes the same. “In short, labour is back and much of the inflation that we are likely to see over the coming year reflects this as workers try to claw back living standards in the form of higher wages. The pendulum which has swung far too much in favour of capital is swinging back towards employees and the future is likely to be one where profits are lower and wages are higher. It will take time before this is realised but the process is already under way.” 

These both feel true, but my worry is that the ideology of pro-capital and pro-saver is deeply embedded in the operating rules of our central banks (as mentioned above).

Fun Philosophy | This site gives you increasingly absurd versions of the trolley problem. Link

Windfall Taxes |