Can we heal the nation's social and infrastructural ills?
In 1997, the futurist Kevin Kelly wrote: “Wealth is not gained by perfecting the known, but by imperfectly seizing the unknown”.
The Irish economy is the fastest growing in Europe, rebounding after the 2009 to 2013 period of austerity. The year ahead promises to be a belter, with unemployment set to fall below 8 per cent for the first time since 2007, campaigns being launched to woo our migrants home, negative equity going the way of the Dodo, and parts of our nationalised banks being moved back to the private sector.
But how real is all of that? 2006 looked pretty good too, and like a marble rolling off a table top, the fall caught everyone by surprise.
How do we seize 2016? It’s looking like we might end up almost as wealthy as we thought we were in 2006. How should we think about that? Ireland is a different place in some respects, but a lot has remained the same.
The class divisions, the inadequate social services, the pre-election promises to cut taxes, the dearth of infrastructural investment, the country’s small number of banks overcharging customers relative to the European core – all of these existed in 1996, in 2006, and now in 2016. What is different?
One big difference between then and now is the language we’re using these days. This year, a computer icon representing an emotion made it into the Oxford English dictionary. The ‘emoji’ was called ‘tears of joy’. (The word of the year in 2006, by the way, was ‘bovvered’.)
It seems only right we look forward to 2016 by educating ourselves on the internet’s new terminology at the same time as we look at the key trends which might make us rich or humble us before our international creditors, yet again.
It is a truism. We need to speak the future before we can be within it. A note of caution though. Depending on the ratio of non-grey hairs to grey hairs on your head, trying these phrases with teenagers may well invalidate the word’s usage on the internet. You may sound really stupid. You may cry tears of joy, but at least you’ll be able to tell the world about crying them in a one-symbol tweet.
You have been warned
The reason the public listens to economists in the first place is their supposed ability to stare into tea leaves and read the future. Keynesian (rhymes with ‘brains-ian’) economics is celebrated for its ability to predict the future, and, in an irony filled sandwich every economist has to swallow, Keynesian economics is fairly rubbish at prediction.
Economics in general is quite good at understanding the past, but nobody particularly cares about understanding the past except other economists. Even more annoyingly, economics gives us one reason why predicting the economy’s behaviour is hard: the economy is composed of people.
People are not only unpredictable – sometimes stupid, sometimes brilliant, sometimes downright weird – they can also change their behaviour today based on their expectations about the future. If we all decided that Microsoft’s salad days were behind it, we would all sell the stock, the stock would tank, and we would have our expectations fulfilled. Highly suspect, readers, I know, but it also happens to be the truth.
And 2016 will be the year the rebalancing of the international economy begins in earnest. The US economy has now returned to its pre-crisis growth, unemployment and inflation rates. The US Federal Reserve increased interest rates from zero, signalling a return to interest rate normalisation of around 3.5 per cent by the end of the decade, as well as the roll out of brand new monetary policy tools like the overnight reverse repo programme, which helps to manage its balance sheet and liquidity in the market.
The spillover effects of this move away from the Zero Lower Bound on interest rates will be negligible in the short term. That’s the point of effective central bank communication.
In the medium term, by the end of 2016, further rate rises will increase long-term rates, increase prices of government and corporate bonds, strengthen the dollar, change prices in equity markets, as well as making loans like credit cards, car loans and mortgages more expensive for debt-hungry US consumers.
Closer to home, expect the Bank of England to raise interest rates in line with the Fed in 2016, while the Chinese and European Central banks work harder to stimulate their economies by continuing to do everything in their power to keep the monetary show on the road. The central banks of developing economies, particularly those getting whacked with China’s slowdown of industrial production, may end up cutting their interest rates to stimulate their flagging economies.
Countries like Brazil, which over decades has specialized in the production of raw materials like iron, soybean, and coffee, are finding international demand just isn’t there.
They have external surplus because demand is falling, so their policy makers have a little room to manoeuvre externally – but not that much.
A large recent devaluation may help in the short term, but cannot heal the structural issues the economy has built up over the longer term. Inflation there is reaching 10 per cent, and any further devaluation will perforce hurt more in terms of prices for imported goods and services. Brazil is a lesson to Ireland that the stars of last year quickly fade when exchange rate movements don’t go their way.
Or take Saudi Arabia, not everyone’s favourite place. An almost monoline oil exporter, the collapse in oil prices to nearly $36 per barrel of Brent crude, and their continued aggression in Yemen, are harming the Saudi economy. The government is currently experiencing a budget deficit of 16 per cent of GDP and deficits are expected to grow in the next few years. There are discussions around privatisation of state assets. The government may sell stakes in ports, railways, utilities and airports to make ends meet.
The Saudis peg their currency to the US dollar. Their economy is weak, and so their currency should weaken. Currency pegs stop this from happening, and the US dollar is getting stronger. Interest rate moves by the US are harming them further. A break of the currency peg would increase the political and economic volatility in the Middle East, a region experiencing more than enough violence and volatility without this kind of turmoil.
Exchange rates: frenemies masquerading as besties
A frenemy is a rival you really don’t like, but still pretend to be good mates with, typically to make social gains. Right now the basket of currencies of countries we trade with is treating us very well indeed, so well that we might think they are part of our best friend group.
The cheaper the euro is relative to these currencies, the more competitive our exports are. A stronger dollar thanks to someone else’s monetary policy moves? Happy days – we reap the benefits of increasing demand for our goods and services without the kind of wage repression previous years have required to generate changes in competitiveness.
Net exports kept the country solvent in the bad times of 2009 to 2013 especially, but the country’s coffers can only swell if our exports are cheaper each time a revaluation happens.
You can stop thinking the current exchange rate nirvana might keep going by looking at a chart of past values of the real effective exchange rate for Ireland, Britain and Germany (see illustration).
The real effective exchange rate measures the value of a currency against a weighted average of 12 foreign currencies divided by production costs in each country. It takes a value of 100 in its index year.
A value for a country below other countries’ exchange rates typically means the country is relatively undervalued. An excessive price level when prices are higher than justified by economic fundamentals affects competitiveness and results in lower output and employment.
When you are selling stuff you really want that, because it makes you cheaper in relative terms.
From the 1990s to the early 2000s, Ireland was about 90 per cent of its competitor countries in terms of purchasing power, or cost of production – a real competitive advantage.
This competitive advantage eroded as the boom got boomier (ahem), reaching a value of 114, and fell sharply after the crisis took hold here, until by November 2015, the real exchange rate was back where it started, in 1994, at around 90.
Britain, by contrast, experienced a sharp appreciation of its real exchange rates right throughout the boom, at around 130, then collapsing sharply in 2007 from values around 127 to 95, before returning to around 118 by November 2015 under the influence of interest rate cuts and quantitative easing.
The US followed the same pattern as Britain. Note how solid the German real exchange rate has been, fluctuating much less than either Ireland, the US, or Britain, and moving with Ireland in the latter half of the graph, as the effects of the Euro area’s monetary and fiscal efforts took over.
Be sure of your besties, folks. The real effective exchange rate shows us that, like it or not, our competitiveness, and probably our prosperity hinges on our ability to sell high quality stuff relatively cheaply to others. That fact is not going away.
What might very well go away are the favourable terms under which this exchange rate is based: a lower cost of production in Ireland, and some one’s monetary policy doing most of the work for us.
Elections: sipping on the thin gruel of soundbites
In addition to the beatification of everybody’s granny who made tea for an IRA man (the good kind of IRA man, of course) thanks to the centennial celebrations, we will also see a change of government in 2016. The pre-election promises are thick in the air, with tax cuts, new homes, roads, health services and every other thing being promised by everyone.
None of these tax cuts or spending promises is costed in a standardised way. Typically, the figures are assembled by party hacks piecemeal through parliamentary questions, so dynamic effects of tax cuts on other areas like government spending and private sector employment can’t be put into calculations.
The opacity this creates suits some parties more than others, but it does lead to some outlandish claims, each of which saps a little more confidence from the electorate about the veracity of these and other claims on fiscal policy made by parties.
The internet has a phrase for this too, folks: crazy AF, where AF is a an acronym for “as fuck”, if you’ll pardon the language. Distributional analyses of who might be impacted by different policies don’t get done, and the public is left sipping on the thin gruel of the odd soundbite on the radio or power point slide off a policy presentation to figure out what it all means for them.
In such a low information environment, where everything reduces down to slogans shouted across at one’s opponents, the natural inclination is to promise too much. This is a core reason why, in a country barely paying its way in terms of the European Union’s macroeconomic imbalance procedures we must adhere to, with high levels of debt, we get promised tax cuts for all with spending increases for all. The politicians are then abused by the public when they can’t deliver, and trust is further eroded.
And what is that? That is crazy AF, and no way to run a country. It seems the incumbents will be returned to power, buttressed with either a smaller party or a coterie of rent-seeking independents. Another acronym, this time OTP – one true pairing – is borne out as the incumbents pledge a vote transfer pact and promise to campaign together, but on separate platforms. If the OTP is returned, the sincere hope I have is that wise heads in the returned government prevail.
We are special snowflakes when it comes to Brexit
A special snowflake is someone who believes they are different and unique because of something they are or something they do. Special snowflakes almost always have a superiority complex.
Ireland’s special snowflake complex was on full display at the recent climate change negotiations, where we tried to get our agricultural policies exempted from the agreement, despite knowing that fines were en route for us by the end of the decade for not getting our house in order earlier on.
A referendum on Britain leaving the EU may well happen in 2016. Unlike the climate change fiasco, we are special snowflakes when it comes to Brexit. Other than our Anglo-Saxon cousins, Ireland stands to lose more than anyone else should a Brexit scenario come to pass.
A recent ESRI report estimated that trade with Britain could fall 20 per cent. Textiles and pharmaceuticals would be most affected, as would the regions in Ireland that produce them, such as Cork, Donegal and Waterford. Unemployment would jump and we might fall back into recessionary times. Foreign direct investment would not save us, nor would a terms of trade realignment.
Our workers would be stopped at the newly-installed borders, and our all- island energy market would be disrupted. It would not be a good day for Ireland.
We are lobbying British business, and particularly the financial services industry, making the case that Ireland is a special snowflake in any Brexit scenario. A raft of bilateral legal and political structures are, I’m sure, being put in place should Brexit go to a referendum.
Free movement of capital and labour are intrinsic to the functioning of these two islands. Ireland is not leaving the EU. So special arrangements will have to be made. The problem will be making sure the alignment we see in the new arrangement closely mirrors what we’ve got right now.
Given the complexities of negotiating these arrangements, a head start in recognising our snowflake status cannot be a bad thing, with more than 50 per cent of Conservative MPs reported as wanting a Brexit and at least one poll showing 50 per cent support for leaving the EU.
There’s no funny acronym for this one. Migration is the most serious change we will see in 2016. Refugees of conflict zones will begin arriving in our towns and villages in 2016, making the problem much more real for our citizens.
The international effort to stem the tide of migrants of all kinds is failing, caught between poor infrastructural support, inadequate policies, flagging public support and the sheer volume of people whose needs have to be met as they cross the borders.
More humans are on the move than France has citizens – 60 million or more – and this number will grow in 2016. Ireland needs to do its part. We are one of the richest economies on Earth, the fastest growing in Europe, and, lest we forget, we have been migrating around the world for hundreds of years, fleeing wars here and elsewhere. Our approach should be to welcome migrants with open arms.
But this will require planning, preparation, funds, political will and public support. They will enrich our economy and society, but we have to let them. This year will be about defining how this challenge gets met, or not.
Embraced or fudged, the refugee issue will not go away. Quite the opposite: it will get a lot closer.
The phrase I like the most from 2015 is Fomo: fear of missing out. Fomo defines a sort of wandering anxiety, where button-clickers stare at their phones to be told that their flatmate ate an orange for breakfast. It is then the duty of the button-clicker to ‘like’ that person’s orange consumption, but also check whether another, better thing is happening somewhere else, by clicking more buttons.
So, like a fly on a window pane, the hapless button-clicker just flits about, not really getting anywhere. Structural change happens when you’re not looking, when you are flitting about. The fly doesn’t notice the window being opened.
The Irish economy is changing its structure, moving from a predominantly agricultural economy in the 1960s to a light manufacturing economy by the 1980s, a service-based economy in the 1990s, a construction-based economy in the 2000s, and now we are something different. 2016 will reveal what this difference is.
We can see it in the kinds of problems the economy has: creaking water and housing infrastructure, lots of children with childcare needs, deprivation at the bottom of the income distribution, a political system which just does not want to change.
Our problems tell us that 2016 will have to be a year of renewal of some of these things. We will have to find a way to cut the cost of childcare, to reduce deprivation, to invest in the larger projects that matter, without corrupting these processes unduly.
A few gombeens don’t bring the system down. But what if there are more of them? That’s the fear I have of missing out: of missing out on using the potential the economy has to deliver living standard increases to everyone in the society. It can do that if properly run. Maybe I’m crazy AF for thinking that it might. But I do.