Central Banks are Doing the Right Thing for the Wrong Reasons

January 17, 2023 in Essays

Imagine you’re planning to start a new small business. You’re going to open a gym to serve your local town. Before you can start charging clients, you’ll need to get a premises, to paint it and fit it out with equipment and then fill it with trained staff.

Eventually you plan to pay the staff and the landlord with the money you make from membership fees, but you won’t have many members while you’re just starting out, so you need to find other ways to bridge the gap between starting-up and breaking even.

With all new business, some of this happens through sheer force of will – convincing a landlord to give you a space for a few months for free, or for people to volunteer their time and energy to the cause. But it’s rare for this to bring you all the way to breakeven.

For most new businesses they get some sort of “credit” to bridge the gap – an overdraft or a term loan or investment.

A good model for thinking about the role this credit plays is that it helps new businesses pull resources from their existing employment and put them to new use.

You might use your credit to outbid other tenants looking to put the premises to different use, like a bakery or a café. You’ll pay wages to convince people to switch from being a barista, or an accountant or a self-employed personal trainer to becoming a trainer in your gym.

The big unknown here, for both you and the bank, is how likely your gym is to succeed? Will you use the money to assemble people, property and equipment in a productive way that earns you money and pays back the loan?

You care about the absolute answer here – will the business succeed, yes or no? But in some ways you also care about the relative answer – will my gym make MORE productive use of the inputs than a bakery or a cafe – because (in part) the rent and the wages you pay needs to outbid those other businesses, and you can only do that over the long term if you can put them to more productive use.

The same question can be asked at a wider, more macro level too. Is the general level of credit in the economy encouraging more productive uses of our land, time and equipment?

Central Banks try to influence and manage the answer to this question. They think about the availability of credit broadly within an economy, for businesses to start, grow and increase productivity. This is a key role Central Banks play in economic progress and productivity growth.

It’s not that simple, of course. The problem is that not all new or expanding business make *more* productive use of people’s time, our land and available technology. Capitalism is a game of trial and error, much like evolution, where new business models are created and tested and those that make the best use of the factors of production can scale. 

While your new gym faces the risk of not getting to break-even, the risk the Central Banks face is that people are put to work in equivalent or less productive businesses and industries. Are they making credit too easily available for chocolate teapot factories and NFT exchanges?

In times of low employment, like we faced after the global financial crisis, that risk was very low. The “current use” of property was vacancy. Diverting people from unemployment to any employment was likely to be a more productive use of their time.

Nobody was worried about the risk of funding too many stupid businesses, because anything was better than nothing. So Central Banks used the tools at their disposal to make credit more freely available. Lots of good businesses were given credit to start and expand, and probably some bad ones too.

This post-recession reality didn’t last forever, and by the time we entered 2022 we found ourselves in the exact opposite situation. Rents are exploding from competition and workers are (almost) all employed. We have staff shortages in almost every sector. Commodities are in short supply and prices are high and climbing.

So this is definitely a time that Central Banks can afford to foster more discernment. If we remain in a low interest rate world, with a higher tolerance for risk and a lower level of discernment, it is more likely that more and more worker hours would be spent in unproductive businesses.

So the central banks are tightening up. They are making credit more restrictive.

You could think of this as a sort of a stress test which less productive businesses will fail. It’s not a very precise test, many productive business who are over-reliant on borrowing or going through a short-term rough patch might also fail too.

In my opinion, this is largely positive. If you believe that too long of a period of loose credit can lead to the creation of jobs that shouldn’t really exist (and I do), then you should want that period to end before the impact from tightening gets too big. The longer it runs, the bigger the eventual job losses will be when it ends.

There is no better time to do this than the present. In most developed countries, unemployment is low and commercial rents are high. Every business I visit can’t find staff. We don’t have enough teachers, nurses, truck drivers… you name it.

So if the European Central Bank is restricting credit to make it harder for a crypto startup to raise a big round of funding, so that some people it might have recruited might instead go an become teachers … I don’t think that’s a bad thing.

The problem, however, is that this isn’t how some Central Bankers are describing why they’re doing this.

Many Central Bankers (but not all) and economic commentators are expressly aiming to *increase unemployment* to reduce aggregate demand. Sometimes with comical lack of self awareness: Here’s Larry Summers, former United States Secretary of the Treasury, saying the US Central Bank (Fed) “recognize that there’s going to need to be increases in unemployment to contain inflation”…. from a sun lounger on a tropical island?


As a civilisation, we’ve still very early into figuring out how to manage economies, so it feels easy to predict that our descendants will consider this approach barbaric in the not-too-distant future. Like the way we look back on the medical practice of blood letting.

When faced with times where all our resources are being put to full use and our productive capacity is stretched, our Governments and Central Banks should want to reduce employment in unproductive businesses (e.g. Bitcoin startups) and increase employment in productive businesses.

This is a more humane approach than trying to reduce the burden on our productive capacity by making a chunk of people unemployed and unable to afford things. It also makes more common sense. Selfishly, we don’t want people idle and twiddling their thumbs all day, we want them to have the opportunity to be active and doing their bit to increase the productive capacity of our shared economy.

Luckily, so far, and despite the intentions of some, that’s what’s happening!

Is 2023 the Year of AI?

January 5, 2023 in Essays, Weekly Newsletter

In 1987, economist Robert Solow famously said that the computer age was “everywhere except in the productivity statistics.” While computers were clearly becoming more prevalent in the economy, their effects on productivity were not yet showing up in the data.

The problem wasn’t that computers were inherently unproductive, but rather that it takes time for businesses and organizations to adapt to new technologies and figure out how to use them effectively. This is true for all new technologies, not just computers.

Some technologies are transformative, but many are just useful, or interesting or fun. It’s difficult to predict where new technologies will fall along this spectrum.

Electricity was a revolutionary technology that became widely available in the late 1800s, but its impact on productivity took decades. Edison built his first power plant in 1881, but 20 years later less than 5% of mechanical drive power in American factories was coming from electric motors.

For factory owners, swapping their factory’s single, big steam engine for a big electric engine had a high cost, but not a huge benefit. One big engine at the core of a factory powered all movement, and switching the source of that energy wasn’t hugely beneficial.

It wasn’t until they started rethinking their processes and business models that they were able to truly take advantage of the new technology and boost their productivity. Steam was very inefficient at small scales, but electrical motors could be any size you wanted. Electricity allowed power to be delivered exactly where and when it was needed, and the use of multiple small electric motors allowed for the organization of factories around the logic of a production line, rather than being centered around a single drive shaft. This allowed for more efficient and flexible production.

This pattern can be seen throughout history. Whenever a new technology emerges, it takes time for businesses and organizations to figure out how to use it effectively. We’re slower to adopt new technologies at first, until we get the hang of it. Once we do, however, the benefits can be enormous.

So how should we think about current AI technologies and the path they will take to becoming felt in the productivity statistics?

Machine Learning, a subset of AI, had its first big breakthroughs in the early 2010s, but it hasn’t yet made noticeable impact on general productivity.

So far, most of the benefits of machine learning have been seen in consumer-facing applications, such as auto-predict to complete sentences, vastly improved voice recognition, and better digital recommendations. This was Predictive AI. But in 2022, we saw some quantum leaps in another branch of Machine Learning – Generative AI.

The first wave of Predictive AI took large amounts of data, analysed patterns and used them to make predictions – the next word in a sentence, the next song on a playlist, if an image contained a cat, if a mole was cancerous. The next wave of Generative AI is using the same analysis to generate new patterns. Patterns of text (i.e. sentences and paragraphs), images, music and more.

For example, Large language models (like GPT-3) are AI systems that are trained on vast amounts of text data, which allow them to generate patterns of text which match the patterns of real-world text.

Generative AI is already helping developers write code, assisting lawyers in drafting basic legal documents and producers generate music.

So how long will it take before we see the effects of Generative AI in GDP numbers, if at all? And how should we think about the impact it might have on jobs and the future of work?

To answer that question, we need to understand the inherent capabalities and limitations of both Predictive and Generative AI.

Currently, there are certain tasks that Generative AI is decent-but-not-great at, but it is likely to rapidly improve over time. It writes like a 16 year old, but soon that will be college student, then intern, then junior employee. Any area where humans can set a goal, the AI can generate a pattern or a prediction, which can the be rated against that goal. Defined fields like coding, law, medicine or translation all seem like prime candidates as code either works or it doesn’t, a diagnosis is either correct or it isn’t.

On the other hand, there are certain tasks that Predictive and Generative AI may never be able to do as well as humans, or may never be able to do at all. It can draft a legal document, but we still need humans to review and approve it, and of course to set it the right task in the first place.

Once we have a better understanding of what Generative AI is capable of, we can then think about the jobs and tasks within those jobs that it may be able to do better than humans. This will help us think about the potential impact on employment.

Lastly, we need to get an accurate idea of the time horizons we’re looking at. Not just of when the technology will be capable, but how long it will take before new, more productive models of work are built around it. Technological capability looks set to advance dramatically over the next five years – will the widespread productivity impact take a further 5, 10 or 20 years to materialise?

All of this thinking might also help us generate some ideas about how we can speed this process up. What if someone in 1881 had done the analysis and developed conceptual frameworks to show that modularisation was a key benefit of electricity? Could it have pulled the electric age 10 years forward? Can academics, business and policy makers make that same acceleration for AI?

That’s a key topic I’ll be exploring in the newsletter in 2023, alongside the usual political economy topics. I’m excited. Happy new year!

Newsletter #6 – €1 = $1

July 21, 2022 in Weekly Newsletter

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?

    Newsletter: I write a weekly newsletter, picking several developments from the world of economics, with notes and analysis on the context. It is intended to be informative for people interested in economic policy making.

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    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

    Newsletter #5 – Who is Help to Buy Helping?

    July 1, 2022 in Weekly Newsletter

      Subscribe to this weekly newsletter:

      In “Economics 101”, there’s a general sense that demand and supply have an ebb and flow to them. The general understanding is that if demand is high and supply is low, prices rise. But this price rise, in turn, encourages more suppliers to come meet that demand.

      What this simple model fails to account for, however, is how dramatic differences in outcome are depending on how flexible the supply is.

      When supply is flexible, increasing demand can result in an increase in supply. So if a government has a policy goal of increasing supply, they can take steps to increase demand. They can place big advanced orders for solar panels, for example, so that producers have the confidence to ramp up production. Or they can provide subsidies to households to buy them, again with much the same effect.

      When supply is in-flexible, however, increasing demand just makes everything worse. Direct purchases, as we discussed two weeks ago, just reduce private supply. Governments often give subsidies, or worse, give or guarantee loans for things with in-flexible supply. In the US, for example, top-tier college places are limited (almost by definition, if exclusive status is part of what they sell), but the Government provides loans to prospective students, and prices have spiralled. Letting people get into debt to compete with each other, or giving subsidies, when supply is in-flexible, usually translates into price increases roughly equal to the loan-limits or subsidies.

      To try counteract this phenomenon in the housing market (which has very in-flexible supply right now), the European Central Bank makes it harder for buyers to compete with each other by going deeper into debt, with lending limits and minimum deposit requirements.

      In 2016 the Irish Government introduced a Help-to-Buy scheme, which sought to skirt the deposit requirements for some first time buyers by having the Government pay half of it. Despite criticisms you might expect based on the logic above, they expanded the scheme to cover (up to) the entire deposit in 2020.

      The Parliamentary Budget Office has just published an analysis of the scheme, finding that it caused house prices to rise (a small amount), cost 43% more than planned and mostly subsidised expensive houses, where a third of recipients didn’t even need the cash to meet the 10% deposit, but got it anyway.

      Will it be renewed in the upcoming budget? Expanded is my guess.

      📰 News

      Selling AIB | The Irish State emerged from the global financial crisis owning much of the country’s retail banking system, after having to rescue it. I had hoped someone would come up with proposals to do something fun or interesting with even one of the banks, like an infrastructure bank or a strategic investment bank tied to an ambitious industrial policy. Alas, since no such plans materialised, I guess the second best option is to sell the bank and use the cash where we do have ambitious plans.

      After a pause during COVID, the department of finance has resumed selling our two thirds ownership of AIB, with the minister explaining that “the Irish Government believes that banking is an activity that should be provided by the private sector and that taxpayer funds which were used to rescue the banks should be recovered and used for more productive purposes.”


      Peak Employment | Under the category of good news phrased as bad news, “Economist Kieran McQuinn of the ESRI has warned that the national unemployment rate will fall to 4% next year, fuelling sharp wage increases.”


      💡 Interesting Links


      Team Transitory  | Some good signs on inflation which would indicate that major supply constraints are getting resolved. Rates for shipping containers are falling (but still a long way off pre-pandemic levels) as are some commodity prices. Could be a blip though, still too early to spot a trend.


      Whiplash | If you feel like we’re living in bizarre economic times, the Bank of International Settlements’ Annual Economic Report might help you understand why (or at least confirm that your feelings are accurate). Adam Tooze writes:

      “In the last 18 months we have seen the fastest global growth in 50 years, followed by the most rapid slowdown, creating what is in the BIS’s view, a global economic configuration unprecedented in history. 

      Specifically, we have never seen such a combination of already rapid inflation and rapidly slowing growth with elevated financial vulnerabilities, notably high indebtedness against a backdrop of surging house prices.

      The BIS remarks that “(t)he absence of historical parallels makes for a highly uncertain outlook”.

      In the current conjuncture, if you aren’t puzzled you don’t get it. This isn’t your common or garden slowdown. Admitting to disorientation is a sign of honesty and realism.”


      Childcare Costs | The economist published this chart showing the amount an average couple spends on childcare, as a percentage of their disposable income. Look at Germany! The last numbers I saw on this in Ireland (in 2019) put us at 29% for a couple and 42% for a single parent. 

      They also share this tidbit – “Compared with other countries, Britain has a relatively high share of mothers in part-time work. One recent study estimated the gains from shuffling men and women according to aptitude, pulling productive women into work and kicking unproductive men out. Astonishingly, it calculated that Britain’s average output per worker could be as much as 30% higher.

      Newsletter #4 – What Do People Mean When They Say They Hate “Capitalism”?

      June 24, 2022 in Weekly Newsletter

      If you were to design a country’s economic model from scratch, there’s a few different places you could start. You might, for instance, start by broadly thinking about the society you want. You’d consider your values and goals, and those of your fellow citizens. You then consider what economic tools and practices have the best track record for achieving those goals.

      If you’re thinking about how your economy should deliver healthcare you’d start by saying, for example, “fairness is a key value and a top priority of ours”, and so your goal is probably to provide healthcare on the basis of those who need it most, or where treatment provides the biggest improvement, rather than to those who can most afford it. So you might decide that the state should build and run the hospitals. 

      On the other hand, “liberty” or “freedom” might be an important value of yours. You might try to express these values by giving people within your society a good range of personal choice, so you might want to create a price-based market for chemists, or non-essential healthcare like orthodontics.

      If I was to sketch that approach as a simple framework, it might look something like this:

      You start with your values and goals at the top level, then pick the tools and practices that help deliver on them. I’ve highlighted in green where I think “Capitalism” sits in this model – a collection of Tools & Practices, like ‘price-based markets’, ‘free movement of capital’, ‘stock markets’, ‘corporations’, etc..

      I think this framework describes broadly the approach of modern progressives, or Democratic Socialists or Market Socialism.

      Another place to start when designing your new economy is to say that the tools of Capitalism provide economic growth and prosperity, but it needs a complimentary political system to moderate it’s excesses and redistribute it’s wealth, or to fill in the gaps that Capitalism can’t address. We have Economic issues (the realm of Capitalism) and Social issues (the realm of Government)

      In this framing, “Capitalism” is both the tools and the goals. It is the underpinning of all things in the realm of the economy and wealth generation. A social system runs alongside it. Your values might dictate the interaction between the two pillars, even if the contents in each pillar are constant:


      This is the framing I believe most of the political centre in Western countries take. Politics is framed as a balancing act between the two. I mostly think this is what “liberals” mean when they talk about Capitalism. A finance sector can earn globs of money, pay some tax, which can fund an NHS. The thinking comes from “the right”, but Bill Clinton and Tony Blair and Barack Obama were electorally very successful operating within this framing.

      A third approach to designing an economy might be to start with Capitalism as your overall ideology and value set. “Capitalist” is what a country should be. Competition is a core value. Those who have more (because they earned it), get more. Government should be subservient to, and act in service of these values, to defend them with police and armies and rule of law, with enforcing contracts and paying for schools to educate future workforces. Social benefits happen when the Government gets out of the way.

      I’m not sure that any modern country operates in this way, but I do believe that it has been a very dominant narrative about how Western countries do (or should) operate. To me, this is the “Capitalism” definition of Regan and Thatcher – something more than just a set of tools or goals, it is a value system and an ideology that must underpin everything.

      In many ways, I think “Capitalism as an Ideology” is a powerful framing if you want to shift the balance of power, in the second model, away from the Social pillar and towards the Economic pillar. It makes the question of how you govern Capitalism difficult to ask, and makes a question like “when should you use Capitalism?” seem nonsensical. This is what Regan, Thatcher and others did in the 80s and they were very successful at it. 

      They shifted the meaning of Capitalism up the value chain, from just a set of tools, to a set of goals and their underpinning ideology. This frame shift was so successful, and so dominant that I think it’s coming back to bite.

      It is the framing used by the strongest critics of Capitalism, which leads to a very common debate these days where people are shouting past each other. Someone, who uses “Capitalism” to mean the dominant economic and political ideology, criticises some element of market failure, or regulatory capture, or inequality and gets a lot of support for this view. Then others, who think of Capitalism as either of the first two definitions, are dumbfounded! To them, this is exactly the opposite of what Capitalism is!

      Speaking about the baby feeding formula shortage in the US, for example, author Bess Kalb tweeted recently that “The formula shortage is an example of how free market capitalism does exactly what right wing fear-mongers think socialism will do.

      65 thousand people (and bots, I guess) liked this post, but it (and the many other similar statements), also drove some people crazy, pointing out that Capitalism is about “free markets”, and this is not one!

      This is how I think about the competing definitions of Capitalism, and how I try navigate conversations with people when I agree that the current system is badly in need of a change (Capitalism as an ideology), but also that many of the same economic tools (Capitalism as a set of tools) will play an important part of any prosperous future we might build.

      📰 News

      The (mini) resurgence of unions | This week my various newsfeeds have been full of videos of Mick Lynch, the General Secretary of the UK’s National Union of Rail, and his very effective communication style. If you haven’t seen any, here’s a good sample. This level of social media support and virality echoes the successful labor movements in the US earlier this year, with both Amazon and Starbucks workers unionising for the first time.

      The new energy in unions is translating into results too, with Unite having won 75% of disputes since their new leader, Sharon Graham, took over eight months ago, according to a great profile in the Guardian.

      These developments are very welcome, in my view, because they come at the end of a decades-long decline in the power of organised labour. In Ireland, for example, the CSO Labour Force Survey found 26% of employees were members of a union in 2021, compared with 33% in 2005.

      Within this decline is a notable difference between men and women. Both were at 33% in 2005. In 2021, only 22% of men were union members but 29% of women still were, a number that has remained fairly constant over that period. A UCD Smurfit School report published in the Irish Times last weekend found similar

      Government Housing | Last week we looked at the economics involved in the state building houses alongside the private market, rather than purchasing housing from within the private market. This week the Land Development Agency has announced a start date for work on 600 state-built houses near the Dublin/Wicklow border. They announced that “on completion, this will be the largest public housing scheme in the State.” More of this please.


      💡 Interesting Links

      Cassandra | If you’ve watched The Big Short, Michael Burry was played by Steve Carell in the movie that showed him predicting the crash and great recession of 2008. He’s still quite an active commentator and in the last year or so he has been ringing the alarm bells again. He argues that, because the economy was dramatically inflated beyond its actual, underlying productive capacity, we are only just getting started on a large market drop and ensuing recession. This video is a good summary of his arguments, and a good articulation of the worst case scenario.

      Engineering Unemployment | Inflation is high because lots of people have spare money, but due to COVID in China, Russia’s war and other supply issues, the world economy isn’t able to make stuff fast enough to meet their demand. It’s possible that even without the supply issues, there would still be more money (and demand) than the global economy is equipped to meet. So too much money and not enough capacity to supply lead to inflation. 

      One way to solve this is to fix all of our supply chain problems and invest in our productive capacity but a) that will take some time and b) it’s not something central banks have the power to do. Something they do have the power to do is make people have less money.

      Because of this, many central banks have been calling on Governments to do the first set of those things – fix supply constraints. In turn, people have been calling on central banks to make people have less money, by raising interest rates and causing a recession. Larry Summers, the former Treasury Secretary (finance minister) in the US, for example, has called for it quite explicitly:

      “We need five years of unemployment above 5% to contain inflation — in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,”

      I think this is a very grim thing to call for, but I don’t underestimate the number of people who might find it appealing. Inflation is broad and hurts everyone a little bit, but unemployment only hurts a small number (a lot). I’m sure the Larry Summers of the world never envision that they’ll be part of the 5% unemployment rate that they’re calling for, and so it could be an argument that gathers steam. 

      Luckily, I don’t see either the US Fed or the ECB signalling that they’ll go this far. There’s a big difference between bringing rates up a bit from zero, and deliberately engineering a recession. Let’s hope they don’t succumb to the pressure.

      Newsletter #3 – How Do We Stop The Government Outbidding Renters?

      June 17, 2022 in Weekly Newsletter

      A simple way to think about the job of Minister for Housing is that their primary objective is to ensure all people in the country have a home. For a portion of the country, they’ll own that home (or a family member will), and for a portion it will be rented. In both types of housing – owned and rented – the vast majority of provision will be through private actors in a regulated housing market. People and companies sell and rent housing to each other. Some portion, however, will need to be provided by Government. In every developed country that I’m aware of, Governments either fill this gap, or there exists large amounts of homelessness (or low quality private housing, like trailer parks). 

      If you’re the housing minister, what are your options for filling this gap? One model is direct provision. Your housing ministry or department pays to build houses. Either by directly employing builders, or subcontracting it out, or through local Government. The burden of financing falls to you, but you get control of the housing at the end. The second model is by buying or renting them through the housing market.

      I’ve illustrated these two options below (with illustrative numbers), where in the first option Government supply of housing sits alongside the private supply of housing, whereas in the second all supply is driven by the private housing market, and Government acts within that, through several of these schemes.

      In Model 1 you, as minister for housing, have to find the money to build this housing up front (often by borrowing it), which is why Model 2 is often more appealing. Private actors finance the housing supply and then the Government buys it directly, or subsidises its purchase/leasing.

      In the past, the Irish Government operated something that looked more like Model 1, with the old Corporations building huge volumes of housing over the last 100 years. Although the cost was more upfront, this approach had very many benefits. By sitting alongside the private market, as an alternative source of supply, Government Housing (a.k.a. Social Housing) acted as a competitor and an anchor for pricing. It used the same pool of resources, but ultimately increased supply to the benefit of renters and purchasers.

      Model 2, however, has been the primary model since roughly 2010. One of the main “acting within the market” programmes is the Housing Assistance Payment (HAP). From the HAP website:

      “Under HAP, local authorities will make a monthly payment to a landlord […] on a HAP tenant’s behalf. In return, the HAP tenant pays a weekly contribution towards the rent to the local authority.”

      This means that, at a time of very limited housing supply, people who are trying to find a house or apartment to rent are actively competing against the Government. Instead of acting as an anchor to drag prices downward, Government policy is bidding up prices and reducing market supply.

      So should we stop this policy? It’s been over a decade since we did direct supply (model 1) in any meaningful numbers, so there is no alternative way to house the current recipients. We’re stuck paying €0.9bn in rent subsidies per year to house 100,000 people, with no ambitious plans to dramatically increase supply.

      In many ways renters are paying much higher rents to subsidise Government housing. A tall burden on a small and generally less-well-off portion of the market, which should ideally be funded by broader general taxation instead. But to stop it now would be to pull the rug out from underneath an even more vulnerable population. This is the HAP conundrum.

      All of this is to say that last week the minister decided to increase the HAP payments by about 40% in some areas. Some politicians have said this is not enough, others have said it’s too much. The tragedy is they’re probably both right.


      💡 Interesting Links


      Unreal GDP | This chart is a great illustration of the how disconnected Irish GDP figures have become from the lived economic experience of the average person. Our GDP went up far more than our peers, but our individual consumption dropped. (via John O’Brien)



      Who Do Colleges Make Richer? | The Parliamentary Budget Office have done some very interesting analysis on higher education in Ireland. They have borrowed a model from the UK which looks at the socio-economic status of people before and after attending each college to assess which ones drive the most economic mobility within the country. So an institution will score well if a) it accepts more people from poorer backgrounds and b) it helps them earn more after graduating.


      This feels like a good metric to help measure bang-for-our-buck when looking at the €2bn in annual Government funding of higher education. Obviously money isn’t the only benefit of a good education, but it sure helps. Trinity and UCD graduates tend to earn more than the average, but neither score highly on this rating because, while about 15% of leaving cert students are from disadvantaged areas, only 5% of students in either university are. This applies to courses too, for example, “only 4% of both medicine and economics undergraduate students come from disadvantaged areas”.

      Newsletter #2 – Are House Prices About to Fall?

      June 3, 2022 in Weekly Newsletter

      When you apply for a mortgage, the bank needs to decide how much they might lend you. To do this, they’ll look at your income and decide what size of a loan repayment you could afford each month. These payments will be a combination of the house price (divided into monthly payments over 30 odd years) and the bank’s interest.

      This pretty much dictates the price of the house you can afford, with only three ways to increase that number:

      1. You could have savings in addition to your deposit, maybe through a gift or inheritance.
      2. Your income changes. If it goes up, the bank will lend you more.
      3. The interest rate changes. If it goes up, your monthly payments go up and so the total mortgage they will lend you comes down.

      An interest rate change can have a significant effect. €1,500 per month would get you a €360k mortgage at 3%, but it would only cover a €319k mortgage at 4%. 

      That’s a €41k lower mortgage for you if the interest rate increases by one percentage point.

      When you start bidding on a house, the upper limit the bank is willing to lend you feels like the most important factor at play, but equally as important is the upper limit faced by the people bidding against you!

      This is why the lending restrictions (of 3.5 times your annual salary) are of benefit to every new buyer. If a bank let you borrow 5 times your salary, they’d also do the same for the people bidding against you. The houses wouldn’t get any better, but we’d all end up paying more for them.

      The same logic is true for interest rates. If the central bank raises interest rates, and the banks pass that on, then everybody’s upper limit comes down. (Or at least everyone using a mortgage to buy).

      This is why people are predicting that house Prices might fall – or at least stop rising so fast – if the ECB raises interest rates. Christine Lagarde has said they’ll raise their rates half a percentage point by September. If Irish banks pass that on (and it’s possible they wouldn’t), it will be half as drastic as my example above.

      House prices need to stabilise, and 85% of Irish people want them to fall, but interest rate raises are the least fun way to do that. On paper they fall, but your mortgage payments are still the same (or higher) due to the higher interest payments.

      📰 News

      Housing Poll | I mentioned above that 85% of Irish People wanted house prices to fall, but the same amount also want first time buyers to be able to borrow more than 3.5 times their salary, which would of course just raise house prices. All this according to a RedC Poll in the Sunday Business Post.

      Dublin Airport | Last week we talked about the car rental market and the crazy inflation it’s seeing. They made a very knee-jerk decision to sell off half their fleet in the early stages of the pandemic, things are rebounding faster than expected and they are unable to rapidly undo their mistake. I think this is pretty much the same story with Dublin Airport. They made 248 staff redundant at the start of lockdown and are now struggling to re-hire 300. In car rentals, which is a price-based market, the limited supply went to the highest bidder – a.k.a price inflation. The service of getting your bags x-rayed for a flight isn’t a price-based-market, so provision is on a first-come-first serve basis. Inflation here manifests as queues, which is a good way to think about what might happen if we try to tackle inflation in other areas with price controls.

      Inflation | The CSO released their latest inflation figures, broken down by household type. While inflation was 6.1% for higher income households, it was 7.6% for lower income houses. The gap seems mostly driven by fuel and heating (which is a bigger percentage of your spending if you’re poorer) and rents. Coupled 

      💡 Interesting Links

      Capitalism isn’t very good at restraining resource usage. It drives great efficiency in the amount we can squeeze from a natural resource, but that usually results in us using more, not less. So it’s great to see that, after millenia of expansion, we seem to have gone past the peak of using land for agriculture.


      Newsletter #1 – Why are Car Rental Prices Skyrocketing?

      May 30, 2022 in Weekly Newsletter

      During lockdown I wrote a weekly email covering the important news from the tech sector, summarised and placed in the Irish context. It kept me sane during lockdown, but I paused in 2021 once I started a new job (writing tech policy at TTC Labs).

      I’ve missed it dearly, so now I’m resuming the newsletter but with a different topic – the Irish Political Economy. In a similar format as before, I’ll be looking at the week’s major stories in the Irish and Global economy, trying to put them in context and exploring how government policy can help.

      If that’s your cup of tea, you can subscribe here. I hope you’ll enjoy!

      Why are Car Rental Prices Skyrocketing?

      Maybe you’ve seen this tweet from CNN’s Donie O’Sullivan, being quoted almost €2k for renting a car while he’s home in Ireland for a week.

      Or you’ve heard stories like this one from my friend Eoin Hayes, whose brother was quoted €10k for a 3 week rental.

      €10k is approximately the same price I paid for my Volkswagen Polo, only I got mine for keeps!

      To put it mildly, this is wild. It will also potentially have some knock-on effects on the number of tourists who can afford to visit the island this summer.

      It’s presumably all COVID related, but what exactly is going on? Why is it more acute in Ireland than other areas? What are the options for getting it fixed and how long will that take?

      Is it Price Gouging?

      Some of the initial public comments have been to accuse the car rental companies of price gouging. In most other areas of pandemic-related-inflation it is true that many businesses are using the current supply constraints to increase their profits. Still, I don’t think it’s accurate to say that corporate greed *caused* the problem. Many businesses have always been greedy, and they’re certainly *exploiting* the current situation, but their greed didn’t cause it.

      There are 13 large car rental companies in Ireland. If greed alone would let them raise prices, they would have done it years ago. Something fundamental has changed to allow them all do this in unison.

      A good rule of thumb with inflation is that price rises are the symptom, not the cause.

      Answer: They Sold All Their Cars

      The standard way to run a car rental business is to borrow some money, use it to buy a big fleet of cars, then earn money by renting those cars out to companies and individuals. Say your monthly loan repayments on a Fiat Panda are €250 per month, but you charge a rental price of €100 per week. As long as you’re renting it out for 3 weeks of the month, you’re in business. Across your whole fleet, the difference should be big enough to pay staff, buildings and other costs, and some profit for yourself too.

      In 2020, as the pandemic hit and almost all international travel ground to a halt, this model became very unviable. As long as you owned the cars, you had to make the monthly repayments, but there were no more Americans coming to discover their ancestors, so your Fiat Panda was rented for zero weeks in a month. So you’d have to borrow more money, work out a deal with the bank or sell the car to cover the loan.

      According to the Car Rental Council of Ireland, there were about 21,500 rental carsin Ireland as the pandemic hit. By the start of 2022 there were 10,000. They sold over half of the national fleet.

      I don’t know much about the rental car market, but I assume a level of buying and selling to match your fleet size to seasonal travel trends is normal, so this might have seemed precarious, but not crazy, at the time.


      They Can’t Buy New Cars

      As the summer of 2022 approaches, tourism numbers are returning to pre-pandemic levels, but the car rental companies are struggling to replenish their fleet. They bought 697 new cars in Jan 21, for example, but only 369 this January.

      The main cause here is that, ironically, the car manufacturers also took an over-sized reaction to the start of the pandemic. When they closed their factories in March 2020, they cancelled all of their orders for microprocessor chips. Or, more importantly, they cancelled their place in the queue for microprocessor chips. Consumer electronics companies jumped in and took their place in the queue, and the queues got longer as chip production itself was also slowed by the pandemic.

      All this meant that once car manufacturing plants re-opened, they were at the very end of a very long queue. Add in Brexit and other pandemic supply chain issues, and Ireland imported only 63,317 cars in 2021, compared with 113,926 car imports in all of 2019.

      There are other potential compounding factors, such as reports that car dealerships are preferring to sell their limited supply of cars to retailers (at full price) rather than to rental companies (in bulk, at discount), or that so few cars got purchased during the great recession a decade ago, there there is now far fewer second hand cars on the market than normal.


      What Next?

      As always with inflation, price is the symptom, not the cause, so price caps or price control won’t solve the underlying problem. Or, more accurately, they will just switch the situation from “highest bidder gets the car” to “first in line gets the car”, but it won’t increase the number of people able to rent cars this summer. It would reduce the profits of the car rental companies and keep money in the pockets of tourists, which is fine if that’s your goal, but that could hamper the ability and incentive to rapidly replenish supply.

      With no obvious way to quickly increase the rental fleet, the prices are likely to remain high this year and probably next year too. I’m not sure if Government could have stepped in two years ago to provide credit to prevent this – the specifics of the bottlenecks were probably to hard to predict. Alternative supply will be key – including public transport, taxis, tour busses, all of which will feel extra strain from tourism this summer. In some instances, travel bloggers are even renting delivery vans as cheaper alternatives.


      💡 Interesting Links


      The Market for Electricity Production

      In the UK, during the ad break for Deal or No Deal, or at half time in an England game, so many people go to boil the kettle at the same time that the national grid needs to plan for huge surges of energy demand. Spikes like this (called TV Pickup) make it very difficult to balance supply and demand in an energy market, and present challenges as we move to sustainable (but less consistent) sources like wind and solar.

      Fergus McCullough has an interesting writeup on the market for electricity production in Ireland. Renewables came from almost nowhere in 2008, to 43% of production in 2020 (image below), but gas still acts as the backbone of supply, able to ramp up and down for every ad break of the Late Late.


      Why Income Taxes Were Unexpectedly High

      The top rate of income tax in Ireland is 40%. Higher actually, when you include USC and others, but I’ll stick to the simple numbers for this example. If you earned €50,000 last year you didn’t, however, pay 40% of that as tax. This is because we have a progressive tax system, so you pay different tax rates on different portions of income. In this example, you would have paid 20% tax on your first €35k – which is about €7k. You’d only pay a 40% tax rate on the remaining €15k – which is about €6k.

      So even though your top rate of tax is 40%, you’d only pay about €13k in tax, which is a  26% effective tax rate. (No more maths after this, promise!)

      However, if you got a €5k pay rise last year (congrats!) all of that extra €5k would be taxed at the top rate of 40%. By definition, all salary increases are taxed at your highest rate.

      If somebody on a €20k salary got the same €5k tax rate, they would only pay the lower rate of 20% on that raise, as their new salary is still under the threshold.

      In 2021, the Irish state collected €4 billion (17%) more in income taxes than was planned for in the budget. Caoimhín Ó Tiománaigh has done some great analysis on this, published in a full report and as a tweet thread, but the summary is that, like in our example above, lots of people got salary increases (and new jobs) and paid the highest available tax rate on them.

      This was unexpectedly high, and because all salary increases happen at the margin, the level of income tax collected rose even faster than wages did. Most of this increase happened in higher earning jobs, at the higher rate of tax, so the effect on taxes collected was even more amplified.

      As recovery continues into the future, however, it might happen mostly in lower wage sectors (i.e. service industry getting back on its feet), so the report cautions against banking on this outsized effect on income taxes to to continue.


      Continued Spiral or Soft Landing?

      David McWilliams makes a fairly stark, and grim prediction that inflation will continue at pace in Ireland, followed by a recession. In the US the Federal Reserve is raising interest rates, which will raise the cost of borrowing (including mortgages) and many economists predict this will soften the growth in house prices. McWilliams doesn’t believe the same will happen here, with Ireland’s inflation decoupled from mainland Europe and the ECB unwilling to raise rates because of high energy costs. He predicts house prices (and prices more generally) will continue to soar. It’s 2004 all over again.

      Noah Smith is predicting the opposite for the US – a soft landing with a small recession. He shares a few reasons which I thought would be interesting to list below and contrast with McWilliams’ predictions for Ireland:

      1. As mentioned above, the US Fed is raising interest rates, and the property market is already showing signs of cooling. Since McWilliam’s article was published, the ECB has signalled potential interest rate increases, but small ones, so that’s a small plus for the “soft landing” column here.

      2. In the US, The COVID stimulus has stopped and people are finished spending the money they saved during lockdown. In Ireland, PUP ended in March, and savings levels have dropped in half, but they’re still much higher than the US and spending shows no sign of slowing down. + 1 for McWilliams.

      3. Central bank lending in the US is down and the government ran a surplus in April (a.k.a “implemented austerity”), both of which remove inflationary pressure and neither of which are true here.

      Comparing both sets of logic, I think McWilliams’ prediction is directionally correct, but the ECB rate increases might (hopefully) soften the blow.

      🎧 Podcasts

      This week I’ve started listening to Hot Mess, on the Climate Crisis in Ireland, by Philip Boucher-Hayes and RTE.

      Newsletter 30 – Breaking Up Is Never Easy

      December 11, 2020 in Weekly Newsletter

      Hello friend!

      I’ve really enjoyed writing these weekly emails since the start of lockdown, and I hope you’ve enjoyed reading them, but after today’s email I’m going to put the project on an indefinite pause. It’s been a wonderful exercise, giving me an excuse and a deadline to read, write and understand more deeply some of the ongoing debates and trends I find most interesting. It’s also opened up a few opportunities for me, which I’m going to invest more time in exploring.

      So thanks for all the support and kind words of encouragement!

      Speaking of break-ups, both Amazon and Facebook have recently become the subjects of unrequited break-up requests, with varying levels of severity.

      The European Commission formally opened an investigation into Amazon in what I think is the smartest approach they could have taken. Many were worried that regulators would focus on their “own brand” products. For example, is it unfair that Amazon Basics batteries are promoted above Duracell batteries?

      While it’s true that the move has been bad for Duracell, it’s hard to claim that cheaper batteries have been a worse outcome for consumers. If regulators had charged that Amazon Basics are anti-competitive, then surely that would have applied to Tesco own brand, Superquinn Sausages and St. Bernard Cola. (Those last two might be dated references….)

      The Commission hasn’t taken this approach and instead have focused on the fact that Amazon is both the host of their marketplace and an actor within it.

      To explain how that works, imagine a standard shopping centre, like the Ilac centre in Dublin. Dunnes Stores is the largest store in the centre, but there are also many other stores in the centre who also sell similar products. H&M, Argos, TK Maxx all sell items similar to what you can find in Dunnes, but this is ok. Dunnes might be the biggest store, maybe even the anchor tenant in the centre. Their lease agreement might stipulate that they’re the only supermarket in the centre, but probably not more than that.

      Now imagine that Dunnes also owned the Ilac centre. Not only that, but they also owned all the cash registers that the other stores had to use. This is similar to how Amazon works. When you buy a book on the Amazon website (what they call their Marketplace), you might be buying from Amazon the business, or a smaller, separate business who are selling through Amazon.

      The commission have charged that Amazon have been using their knowledge of the sales data of smaller businesses on their marketplace to compete with them unfairly.

      This would be like if Apple, because they own the App store, are using what they know about an app like Spotify to the advantage of their competing service, Apple Music. Or like Dunnes having knowledge of every item sold by other businesses in the rest of the shopping centre.

      Meanwhile, in the US, the Federal Trade Commission, who approved Facebook’s decision to acquire Instagram in 2012 and Whatsapp in 2014 have voted 3-2 to sue the company to undo these acquisitions.

      They have charged that Facebook “has used its dominance and monopoly power to crush smaller rivals and snuff out competition, all at the expense of everyday users.”

      This has many interesting angles, in particular because it challenges our traditional concepts of anti-trust. It’s clear how Amazon or Dunnes crushing competition would lead to higher prices, which is the usual standard applied, but how do you calculate consumer benefit when the product is free?

      The cost implications of lowered competition would be felt by advertisers through the price they have to pay to reach their target audience. In this case, the question of market dominance all depends on how you define the market. While it’s true that Facebook and Instagram combined have close to 100% of social media advertising, that’s probably closer to 50% of digital advertising, which in turn is 25% of overall advertising.

      If your target market is 25 year old college graduates, did the Facebook acquisition of Instagram make it more expensive or less expensive to reach them? From experience as an advertiser, the cost has certainly come down compared with press, radio or TV advertising, but it’s hard to know the counter-factual of how this would have run with an independent Instagram.

      More importantly still is the question of whether a break-up will fix any of the problems declared? I don’t think an independent Instagram has a more successful time fighting hate-speech, or election interference or bullying? Maybe they compete more aggressively with each-other on feature-sets, but significantly more so than they are already competing with Snapchat, Twitter, YouTube and TikTok?

      The US Governments success probably depends on their ability to paint a compelling “what if” vision for what an independent Whatsapp and Instagram could have become, as significant providers of consumer choice that doesn’t exist. This will be a tough challenge and one that is certainly made harder by the growth of TikTok, which is closing in on 1bn active users.

      The suit to break-up Microsoft in the early 2000’s had a similar challenge. Everyone used excel because everyone else used excel. Nobody wanted to use a competing spreadsheet, or word processor, or presentation tool, because they wouldn’t be compatible with Microsoft Office. Splitting Microsoft Office apart from Microsoft Windows probably wouldn’t have changed that – they would have just become two companies with monopoly positions in operating systems and productivity software, rather than one.

      More targeted rules to force interoperability and data sharing, to restrict specific anti-competitive practices rather than broad calls to “break them up” will have more positive effect, I would presume. The European approach rather than the US one.

      Even those are a difficult balance to strike. I’m old enough to remember when the worst thing social networks could do was share data with third parties for privacy reasons, but now the FTC wants Facebook to stop “imposing anticompetitive conditions on access to APIs and data.”

      New challenges and interesting times! This is certainly an interesting set of developments to watch unfold.

      📰 News

      The general scheme of the Online Safety and Media Regulation Bill has been published ahead of being brought to the house. The bill will look to replace the Broadcasting Authority of Ireland with a Media Commission, which covers both traditional TV and Radio and video-on-demand services. This will mean the RTE player and Netflix will abide by the same rules as TV broadcasters, including the obligation to create News and Current Affairs programming. We’ll also be implementing an EU rule that “video on-demand services to meet a quota of 30% European Works,” which sounds very French.

      This org will also have an Online Safety Commissioner, who works with online platforms to fight harmful behaviours. The bill aims to give it some teeth – the ability to criminally charge senior management and fines of €20m or 10% of turnover (which would be $16bn for YouTube, which seems steep!). Link.

      Vaccine Priority. The Department of Health have release their list detailing how people will be prioritised for the Covid-19 vaccine. Good to see that they’ve detailed the rationale and ethical principles used to arrive at each cohort’s position on the list. Link.

      Pornhub, the largest host of online pornography, updated their policies to further discourage abuse on the platform. Videos, which could previously be uploaded by anyone, can now only be uploaded by verified users. They’ve also beefed up their moderation efforts, licensing tools from YouTube and Microsoft to help identify and remove illegal content proactively. This is a positive move, if they implement it properly, with much room for improvement still left. I’ll stay sceptical until they publish results. It mirrors the broader trend away from a wild-west, laissez-faire internet. Link.

      Warner Bros have announced that their entire 2021 line-up of movie releases will each be released in cinemas and online at the same time. This is a dramatic move because of the pandemic, but it’s also the acceleration of a trend that had been happening long before this year. Link.

      Privacy vs Security. It’s a painful reality that every time a company allows people to share files online, someone will use it to share child abuse images. Every service that allows people to message each other, someone will use it to groom or blackmail children. These companies actively scan messages and files for this content, but new EU privacy rules will make much of this scanning illegal as of Dec 20th. All policy involves trade-off, but this one is one of the most difficult ones we’ll face over the next few years. Link.

      Snapchat Lottery. YouTube pays video creators a portion of the ad revenue it generates on their videos. Most other social platforms don’t pay creators. Snapchat, in an effort to attract creators from TikTok, has announced a lottery. It will give $1m per day to the most popular video on the platform. It’s a very cool approach, I always love to see experiments like this. Link.

      💡 Interesting Links

      Cities in 2021. As the end of the pandemic slowly comes into view, a prediction that cities will bounce back — but they won’t look like the places we lived in before we’d ever heard of COVID-19. Link.

      Digital Charity. How Venmo and Cash App upended a century-old charity model. Link.

      Protein Folding. The way a protein folds is very important to the way it functions, or so I’m told. So to understand the fundamentals of that branch of science, I presume it’s important to be able to predict the way a protein will fold. This has been a known-impossibility for the last 50 years, so scientists seem excited that Googles “AlphaFold” AI project has cracked the puzzle. Link.

      Written for Robots. The National Bureau of Economic Research says companies are now writing their corporate filings in such a way that bots which scrape and summarise them will generate more positive summaries and conclusions. What a time to be alive. Link.

      Breakup Songs. In keeping with today’s theme of breakups, the song “rät” is Penelope Scott’s breakup love letter to Elon Musk and Silicon Valley. Listen on Spotify, YouTube.

      In South Africa the lotto numbers last week were 5, 6, 7, 8, 9 and 10! There were 20 winners. Link,

      Newsletter 29 – The Future of Banking

      December 3, 2020 in Weekly Newsletter

      Ten years ago no bank in Ireland had a mobile app. Getting set up for online banking required card readers and letters in the post and sacrificing your first born. The IMF had also just come to town too.

      Fast forward 10 years and there are now about 1 million Revolut users in Ireland, transferring rent money, splitting bills, buying rounds (although less of that of late) all as easily as sending a text. Our phones can tap to make payments and I genuinely can’t remember the last time I used an ATM.

      Quite a dramatic change from a decade ago, and most of that change has come in the last 3 or 4 years alone. When we think about how different our daily banking and money will be a decade from now, it can be hard to imagine what might change.

      The biggest changes to banking will most likely be similar to what has happened in many others – unbundling. The concept of a single, large institution that stores your savings, accepts your salary, allows you to make transfers, assess you for loans and mortgages and has a branch in every village, is possibly coming to an end. All of these various layers of services will be separated out and, if we do things right, each become marketplaces for many new, innovative companies to take their place.

      A good analogy is to think of your mobile phone network. It used to be the case that Vodafone built the network infrastructure, handled all the billing systems AND managed all the services, like SMS, phone calls, picture messaging, Vodafone Live etc.

      Nowadays the mobile networks are the only providers of the base layers – the infrastructure and the network – with hundreds of messaging, calling and other services on top. Like Whatsapp, Viber, Skype, Messenger etc. Vodafone still does messaging and voice calls, but with lots of competition. They never developed video calling.

      A similar trend will happen in banking. The big, core banking functions – namely holding everyone’s money, will probably remain with the large institutions. On the very top layer – the apps that people use on a daily basis – are already emerging, like Revolut and N26. Expect many more of these.

      It will be interesting to see if the middle layer – in particular loan making – can become a thriving market for companies too, rather than dominated by the big banks like it is now.

      Just like I can be a Vodafone and Whatsapp customer today, I could have my money in AIB, but my credit card, money transfer and loans from three different companies.

      This obviously poses some existential questions for the big banks. What do AIB and Bank of Ireland do when their lucrative fee-based services face much more competition. This could also open them up to competition on the other side too – if I use a Revolut-like app to manage my daily banking, do I really care if the funds are stored in Bank of Ireland or another large European Bank? Or even directly with the ECB? Maybe Europe only needs 5 big core banks like Danske and Santander, not 3 or 4 smaller ones in each member state.

      All of this is being enabled by European regulation and, as of yesterday, just got a big acceleration when Stripe, the payments company, announced their Treasury service (“Banking as an API”), which will let any young app development company to offer innovative, consumer friendly banking services, but without having to build the infrastructure of a bank.

      It’s like how Whatsapp didn’t have to create an entire mobile phone network to re-invent SMS.

      This is an exciting service launch, and an exciting few years for the re-making of the banking industry. Link. Link 2.

      📰 News

      Amazon‘s growth this year is astonishing. They hired 427,000 people in the first 10 months of the year. That’s an average of 1,400 people hired per day. Link.

      Google News. This is an interesting development. Google’s deal to pay publishers will include giving readers free access to articles are usually behind a paywall. Seems positive for papers, readers and Google. One to watch. Link.

      Microsoft announced an analytics dashboard for their corporate Office 365 suite of tools. This would let bosses see “productivity scores” for their employees. After wide backlash at the Orwellian nature of the service, they have correctly decided to roll it back. Link.

      EU/US Tech Strategy. I don’t think it should be surprising that Europe is leading the way in pushing regulations that define how the internet, which operates across all countries, can be shaped by the values and rules of individual countries. The EU by its very nature is an institution built to find common laws that can work across diverse countries and cultures. The ideal next step would be for an alignment between the US and EU, for which Marietje Schaake and Tyson Barker lay out a compelling roadmap. Link.

      💡 Interesting Links

      In Myanmar, Facebook created their first “country-specific” guidelines for policing hate speech, false information and malicious falsehoods ahead of their recent elections. Early results seem positive. Link.

      Captchas don’t prove you’re human, they prove you’re American. Link.

      Ikea are using drones in their warehouses to automate inventory checking. Pretty cool. Link.

      Stripe (run by the Irish Collison brothers) is creating and funding a market for carbon capture technologies. It’s great to see a company step into a much needed gap here. Much like Governments who agreed to pay-in-advance for Covid vaccines, they’re doing the same for technologies that will capture carbon from the air and sea, to help spur the development. Link.

      Anonymizer. Here’s a cool tool, designed to confuse facial recognition tools. Upload a picture of yourself and it’ll use AI generate fake people that look kind-of like you. Like computer generated cousins, which you can then use as a profile picture without compromising your privacy. Link.