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Analysis/Comment Last Updated: Nov 19, 2010 - 3:44:57 PM


Analysis: Irish Economy - Cowen and the 100 days' milestone - a Political Pygmy amongst the Oireachtas Lilliputians
By Michael Hennigan, Founder and Editor of Finfacts
Aug 16, 2008 - 3:03:03 AM

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President McAleese presents Taoiseach Brian Cowen TD with the Seal of Office of Taoiseach at Áras an Uachtaráin

Analysis: Irish Economy: Taoiseach Brian Cowen has passed the milestone of his first 100 days in office and at a time of crisis, he has failed to show credible political leadership. Simply, the Irish political system that produced Cowen is a broken one and is the biggest impediment to preparing Ireland for the challenges it faces in the post-Celtic Tiger period. When looking at the political landscape, it is striking that from the total of 216 members of the Oireachtas (Irish parliament - Lower and Upper Houses), there is no apparent Gulliver amongst so many Lilliputians, who is prepared to challenge conventional wisdom and also dare confront an electorate on the choices that have to be made to engineer a sustainable Celtic Tiger economy.

The 100 day milestone may have Napoleonic connotations but in modern political history, it refers to the period from March 4, 1933 when the new US President Franklin D. Roosevelt galvanised Americans with his massive programme of reform to save the US economy from impending collapse.

The Irish economy is not facing a comparable crisis to that confronting Roosevelt who in his first executive action, closed every bank across America. However, in recent times, Irish ministers have resembled Roosevelt's predecessor Herbert Hoover, who saw the remedy for recovering from the economic slump as just restoring confidence.

Critics of the out-of-control construction boom, were repeatedly accused of "talking down the economy" and last February, Minister for Defence and Sunday Independent columnist Willie O'Dea wrote: "The actual risk to our economy now does not come from fluctuating world markets, but from talking down our strengths and effectively talking ourselves into a crisis.

This isn't the "the glass is half-full" argument. It's hard to make that case when your glass is full almost to the brim. This is about jittery and nervous commentators shaking the glass until some of it slops out."

This in fact is a disciple of Herbert Hoover, who had billboards placed along railroad tracks in 1930 with uplifting slogans such as : "Wasn't the Depression Terrible?"

Political and Public Sector Reform -- this is simply the sine qua non for progress in everything else.

Rather than pointless whining about Irish prices being higher than for example in the UK, address the issues that have made Ireland the fourth most expensive economy in the world; Why for example is the site cost as a proportion of total cost, of an Irish house, typically double that in other developed countries? Baby steps have been taken to introduce competition in the sheltered areas of the economy but most of the Competition Authority's sectoral reports on competitiveness have been binned. During a time of plenty, the vested interests won and the now almost-defunct and impotent Progressive Democrats during their first 10 years in government, were left with bragging rights for cuts in personal and capital taxes. However, the overall tax burden didn't change and today for example, the price of a new car is about 30% above the Eurozone average. The land rezoning system, which transfers huge sums from property purchasers to farmers and in the past developer speculators, has remained the biggest sacred cow. For further information see:

Irish Farmers and Sacred Cows

World Bank study says 12 economies account for more than two-thirds of world’s output; Chinese economy size cut by 40%; Ireland is fourth most expensive world economy

A related issue to the high cost of living in Ireland, is the still out of line cost of housing compared with other developed countries. Various proposals have been made on restarting the housing market to get potential first-time house buyers back. In the US this week, former Fed Chairman Alan Greenspan told the Wall Street Journal:“US home prices will stabilize only as the current huge 800,000 excess of vacant single-family homes for sale is dramatically reduced andprices deflate to the level consistent with the historical rate of return on owning a home that prevailed before the price surge in the US and elsewhere.

“Public policy can hasten this process by not prematurely propping up housing starts and by expanding the underlying demand for homes generally. The most effective initiative, though politically difficult, would be a major expansion in quotas for skilled immigrants. Skilled immigrants tend to form new households, by far the most important source of new home demand. The number of new households in the US is increasing at a rate of about 800,000 a year, of which about a third are immigrants. Perhaps 150,000 of those are loosely classified as skilled. A double or tripling of this number would markedly accelerate the absorption of unsold housing inventory for sale — and hence help stabilize prices,” Greenspan added.

Where is the silver bullet in Ireland at a time when there is widespread fear of unemployment in the private sector and the departure of migrant workers will ease pressure in the rental market?

The CSOreported  from the Census 2006, in August 2007, that there were 266,000 vacant dwellings in 2006 representing 15% of the total housing stock. Of these, 175,000 were houses, 42,000 were flats and 50,000 were classified as holiday homes. County Leitrim had the highest percentage of vacant dwellings (29.3%) while 11.7 per cent of dwellings in Dublin City were vacant at the time of the census.

The Census 2002 had estimated that 140,000 homes were empty.

There is a big overhang on the market from investors who thought that they could make a quick profit and avail of the 20% capital gains tax. The impact of the  "oil on the fire" property tax incentives dramatically extended by former Finance Minister Charlie McCreevy as the boom was taking off, are back haunting the market.

So assuming that property investors wouldn't be bailed out, that leaves potential first time buyers and social housing. But for people who were encouraged to buy by Government Ministers and now face negative equity, how should they feel if unemployment forces them to sell at a loss?

Savills's current Property of the Week is a terraced red-brick Victorian house in Ranelagh, South Dublin. The asking price is €2.3 million and it does not even have a parking space.

International house price comparison index for 2007 ranks Dublin, Ireland and Beverly Hills, California for world's most expensive comparable management level family homes

William Manchester (1922 – 2004), author of popular biographies on Winston Churchill and Douglas MacArthur and the controversial chronicler of President Kennedy's assassination, had his bookThe Glory and the Dream: A Narrative History of America 1932-1974, published in 1974.

It's an excellent read and presents a sense of the times starting with the Depression, through extensive use of contemporaneous newspaper and magazine reports, combined with sharp analysis. Here is a sample on President Herbert Hoover:

Riffling through Hoover's papers, one sometimes has the strange feeling that the President looked upon the Depression as a public relations problem -- that he believed the nightmare would go away if only the image of American business could be polished up and set in the right light.

Faith was an end in itself; "lack of business confidence" was a cardinal sin. Hoover's first reaction to the slump which followed the Crash had been to treat it as a psychological phenomenon. He himself had chosen the word "Depression" because it sounded less frightening than "panic" or "crisis."

In December 1929 he declared that "conditions are fundamentally sound." Three months later he said the worst would be over in sixty days; at the end of May he predicted that the economy would be back to normal in the autumn; in June the market broke sharply, yet he told a delegation which called to plead for a public works project, "Gentleman, you have come sixty days too late. The Depression is over."

Already his forecasts were bring flung back to him by critics, but in his December 2, 1930, message to Congress -- a lame duck Republican Congress; the Democrats had just swept the off-year elections -- he said that "the fundamental strength of the economy is unimpaired."

At about the same time the International Apple Shippers Association, faced with a surplus of apples, decided to sell them on credit to jobless men for resale at a nickel each. Overnight there were shivering apple sellers everywhere.

Asked about them, Hoover replied,"Many people have left their jobs for the more profitable one of selling apples."

Reporters were caustic, and the President was stung. By now he was beginning to show signs of the most ominous trait of embattled Presidents; as his secretary Theodore Joslin was to note in his memoirs, Hoover was beginning to regard some criticism "as unpatriotic."

Nevertheless, he persevered, pondering new ways of waging psychological warfare. "What this country needs," he told Christopher Morley, "is a great poem." To singer Rudy Vallee, he said in the Spring of 1932, "If you can write a song that will make people forget the Depression, I will give you a medal."

Cowen is no Sean Lemass

On May 4th, I wrote that Brian Cowen has no record of challenging conventional wisdom unlike his hero Sean Lemass (Taoiseach - Prime Minister - 1959/1966). I had also referred to the OECD report on the public service, which was published last April and had suggested that Irish parliamentarians had shown very little interest in using the reviews sent to them to hold public sector management to account. The same politicians have since 1997, headed the pay rankings in the Irish public sector and they have had more pay adjustments than any other group in the sector. To put it simply, despite the provision of research services in recent years, the "messenger-boy" syndrome of local clientism still dominates Irish politics and selecting 35 ministers - some with titles but no real jobs -  from just over half the Dáil membership of 166, produces managers who have had no experience of management.

SEE: OECD Irish Public Service Report: The Buck Still Stops Nowhere; Brian Cowen has no record of challenging conventional wisdom

Now that even some of the gullible amongst the electorate can see that while the US-led tradable goods and services sectors with some of the world's biggest companies being responsible for 90% of Irish exports, made a significant contribution to Irish economic growth, the rest of the surging Irish economy was built on quicksand.

 

SEE: Irish full-time employment in manufacturing and internationally traded services fell 10,297 in the period 2000-2007 while the total workforce expanded by 605,000

Nevertheless, the modern Herbert Hoovers, who showed neither courage or vision during the good times, are expected to provide a credible response to the current crisis.

In the past week, a four-part series in The Irish Times : Beating the Downturn, Ireland's leading entrepreneurs explained what needs to be done to turn the economy around. Focus on the infrastructural programme and the management of big public sector projects, reigniting the housing market, privatisation of commercial state enterprises and public sector reform have been among the issues raised.

SEAN QUINN: Government can act to use downturn to its advantage

DEREK QUINLAN: Government must give lead on economy

PHILIP LYNCH:Initiatives need social dimension

DENIS O'BRIEN: It's all about restoring our confidence and self-belief

I proposed some years ago that the Government should centralise responsibility for its IT function and hire a manager with an international track record to run it. Surely, it's amazing that computer illiterate ministers and senior civil servants would approve multi-million euro IT projects?

Denis O'Brien proposed in The Irish Times that the key twin objective should be:

  • To continue to attract sustainable foreign direct investment; and

  • To expand and grow export opportunities for Irish companies, both goods and services.

To achieve this, a range of long-term initiatives including the following need to be embarked upon:

A radical overhaul of the Leaving Certificate curriculum with an increased focus on those skill sets that will be required for Ireland's future economic growth. In this regard, a review of subjects and options for students should be undertaken involving interests external to the Department of Education - eg the IDA should have a major say in this.

Concentration of funding on one or two of our universities with a serious amount of research money dedicated to the creation of world-class facilities. Peter Sutherland is 100 per cent correct in this. There has been a race to increase the number of third-level institutions in the last 15 years and while that was worthwhile, the focus now needs to be on one or two fourth-level institutions that could make their way into the world's top 25 universities list over the next two decades. Batt O'Keeffe was brave this week the way he opened up the debate on third-level fees. This is a welcome development.

Continued focus by the Department of Foreign Affairs in securing increased investment for Ireland by our embassies and opening doors for the IDA, Enterprise Ireland and private companies.

Department of the Taoiseach
So so much depends on a political process that essentially has remained unreformed since the 1930's. Brian Cowen or nobody else in the Oireachtas is proposing significant reform even though the consistent issue that has arisen in every major case of public service delivery failure in the past decade is
that the buck stops nowhere- there simply is a lack of accountability, that breeds incompetence.

For example there is a goal to become a world-class knowledge economy by 2013 and a budget of €8.2 billion is provided by the National Development Plan. However, the Government has been very vague about its goals while the Opposition has failed to highlight the holes in what is called a "plan."

Forfás the policy advisory agency, reported last year that the numbers of researchers working in the higher education sector, increased by almost 1,150 since a previous survey in 2004, to over 10,000. Since many researchers also teach, this equates to approximately 4,670 full-time equivalents (FTE's)- a similar level to Ireland's largest industrial employer Intel, the US computer chip giant.

According to a study carried out by two economists from University College Cork (UCC), the policy to promote innovation through interaction between businesses and third-level institutes is having a disappointingly limited effect.

The study hardly caused a ruffle and the sale of the biggest home-grown tech company IONA Technologies and Xsil's transfer of much of its operations from Ireland, seemed not to matter either.

The development of an R&D competence is an important long-term goal but it's not "unpatriotic" to say that Ireland will not be a world class knowledge economy on January 1, 2013.

What are the criteria?

Last month, Forfás told me that they do not track the issue of commercial patents to the beneficiaries of the public spending largesse.

SEE: The Irish Mind and the Knowledge Economy: Should we bank everything on fuzzy leprechaunic political dreams?

In looking at the challenges, the first priority should be to end the bullshit and bragging about apparent export successes in for example Asia - the region with the biggest growth potential for European exporters.

Most Irish exports to the region are made by US firms in Ireland and decisions regarding the destination of such exports, are not generally made in Ireland.

What benefit is there for Ireland in claiming that growth of exports to China reflects Irish entrepreneurship when it's the likes of firms such as  Microsoft are mainly responsible for the growth?

The latest mantra on rising service exports should also be treated with caution. The two biggest  Irish-based companies by revenues are owned by Microsoft and operate out of the offices of a Dublin law firm; they have no direct staff!

The manufacturing sector supports many service firms while export service firms may have big headline figures but a small number of staff based in Ireland.

SEE: IBEC and understanding the world East of Suez

The windfall profits from the boom were invested in commercial property overseas and the preference over investment in indigenous firms with an export potential is unlikely to change. In our globalised world, there will always be markets with good potential.

SEE:Irish investors were the second biggest net investors in commercial property across Europe in 2007

For the foreseeable future, we will remain dependent on US companies.

TheAmerican Chamber of Commerce in Ireland said this week that the scientific literacy of Irish second level students lags behind our EU counterparts and is falling in the OECD rankings. In 2006, we had fewer computers per student than the EU-15 average and the European Commission ranks Ireland 19th out of the EU 27 in terms of broadband for schools. The Chamber believes specific funding must be ring fenced to address this need. “Stronger support is required for information and communications technologies (ICT) in schools if we are to yield new workers who are satisfactorily equipped for the future”said Joanne Richardson, CEO of the Chamber.“A world class economy and society needs to be underpinned by a world class education system. It is imperative that the State’s commitment to education is preserved and expanded in the years ahead. The Government has made impressive investments in education over the course of the National Development Plan and a further €13 billion has been budgeted for this sector in the second plan. However, in the past decade, spending levels on education have not kept pace with the rate of economic growth experienced in Ireland.

We are ranked 26th of 28 OECD countries for which education spending data is currently available. The figures indicate that Ireland invests some 4.6% of GDP annually on education compared to an OECD average of 5.8% and an EU average of 5.4%. The Government has pledged to increase its investment in education including higher level research where Ireland is ranked quite highly at 15th of 27 OECD countries for the number of students with advanced research degrees. But one would have to ask if there is a need to ‘go back to the basics’ and start from the ground up if we are to reach these goals and underpin current and future investment in this country.”

Political Reform

In a paper at a Central Bank of Ireland conference in 2006, Dr. Frank Barry who was then at University College Dublin, highlighted some of the issues that require attention, including the"structural flaws that give zoned land an artificial scarcity value and that continue to offer strong incentives for corruption. The failure to tackle these issues seems ascribable, in part at least, to the failure to introduce international best-practice measures with respect to the financing of the political process. The failure to address cost and time overruns in infrastructural provision over the boom period represents a further weakness in Irish governance."

Barry highlighted the detrimental effects of the localist and clientalist nature of the Irish political system. The shelving of the Buchanan Report of the 1960s on regional policy, for example – in response to localist pressures – is now widely recognised to have had highly adverse consequences for the country as a whole.

Barry said that the imminent end to EU supervision of national investment policy will strengthen the scope for localist pressures. A move from the present national electoral system towards the kind of list system frequently encountered elsewhere in the developed world would help insulate against such pressures and would also serve to raise the quality of Irish political representation.

The list system, which allocates parliamentary representation proportionately to parties but lets parties choose the members of parliament, was recommended by a commission on electoral reform in 1996.

A number of countries, and not just those new to parliamentary democracy, have changed their electoral systems in recent times. Most – including Italy, Japan and New Zealand for example – have switched to "mixed systems" of the German type, which combine national lists (where political parties offer lists of the most capable people willing to serve) alongside constituency representation. This would dilute the stranglehold of localism on the system and allow governments to devote more attention to difficult longer-term issues.

The Constitution Review Group (1996) was chaired by Dr T.K. Whitaker

Pay Policy

Taoiseach Brian Cowen is on holidays and in the absence of a clear lead from the Government during this time of crisis, the trade unions have filled the vacuum with their pay demands. Why wouldn't they I suppose, when up to last month, the politicians were acting as if they had invented the free lunch?

Brian Cowen deserves a family holiday but so do business owners struggling to keep their businesses afloat in these challenging times and the private sector workers who have lost or fear losing their jobs. The fear of running out of money in the modern economy has to be experienced to really understand it. Cowen maybe feeling the heat but his safety net is well secured - a chauffeured car for the rest of his life and a gold-plated pension.

After a long period of public spending indulgence with politicians getting the biggest pay hikes since 1997, it appears that many public sector workers believe that they are underpaid compared with the private sector  - and that's even ignoring the fact that more than one million private sector workers have no occupational pension.

The official position until recently was that anyone who questioned the sustainability of an economy powered by a construction boom; mainly US companies that are responsible for 90% of exports and leading public companies with foreign residents holding up to two-thirds of their equity, were guilty of national sabotage.

Many people bought the line that the cocktail of bookkeepers, small-town solicitors and teachers, had found the philosopher's stone to produce a permanent prosperity. Why should people listen to the Béal Bocht (poor mouth) now?

Government ministers were giving the impression to economically illiterate people until a few months ago, that housing was a one-way bet.

Former Taoiseach Bertie Ahern was the principal booster for housing:

In April 2006, he said that had listened for seven years to warnings and arguments about difficulties in the construction sector. "I think you have to look at the asset. This is the question: if you are borrowing 'x', if you sell the asset, if there's a bit of a downturn, will you get 'x' back in return? That's the issue. At the moment, there doesn't seem to be an indication [of difficulties].

"I mean quite frankly, if you had taken the advice a year ago you would have lost a lot of money. Everybody said we're going to see a huge downturn in 2005 linking into 2006 - they were entirely wrong.

"Really we should have an examination into why so many people got it so wrong. My view is there's not a great problem. Really, the bad advice of last year given by so many has maybe made some people make mistakes, that they should have bought last year."

In April 2007 he said: "On the other side of the election we'll get back to normality. And I think that normality will be the soft landing. The construction projections were that we will move from something like 93,000 houses to 80-something. Now that's not going to create any kind of a difficulty."

In July 2007 he said: "Sitting on the sidelines, cribbing and moaning is a lost opportunity. I don't know how people who engage in that don't commit suicide because frankly the only thing that motivates me is being able to actively change something."

In September 2007 he said: "But there is no place for negativity. No need for any pessimism. Above all, there is no place for politically motivated attempts to talk down the economy and the achievements of our people across all sectors."

Alan McQuaid, Chief Economist of Bloxham Stockbrokers held out the prospect of an ECB rate cut in September 2007 and wrote in the Irish Times:"I'm sick to death of people writing off the Irish economy and next year could easily see the "Celtic Tiger" roaring more loudly than many pessimists think."

With personal spending making up almost two-thirds of economic activity, Alan McQuaid said last month that the latest figures led him to believe that the economy could shrink by up to 3% this year -- which would be the worst recession since the 1950s. Pessimism indeed!

As to the impression that the private sector where more than 1 million workers have no occupational pension, are making hay compared with their public service colleagues, according to the CSO "Managers, professionals & associated professionals" in Manufacturing earn an hourly average of €28.38 compared with €44.66 in  Electricity, gas & water supply. The same disparities apply in Clerical, sales and service employees.

Does the typical private sector worker get free shares as has been agreed in respect of the Commercial State enterprises?

In 2004, economist Jim O'Leary who had resigned from the first benchmarking body because it was a farce, joined the Department of Economics at Maynooth University, and published with two of his colleagues, the results of six months' rigorous and painstaking research into public-private sector pay differentials in Ireland - Public-Private Wage Differentials in Ireland, G.Boyle, R.McElligott and J.O'Leary, ESRI Quarterly Economic Commentary, Summer 2004.

O'Leary and his colleagues wanted to discover whethersimilar people in similar employment circumstances were better or worse off working in the public than in the private sector. In order to do this, they had to control for attributes like age, experience, gender and education, and also for job characteristics like occupation, type of contract and size of establishment.

As the CSO data does not permit this kind of analysis, the dataset that they had to use is one based on a large-scale survey conducted by the Economic and Social Research Institute (ESRI) and used for much of its research into poverty and inequality.

The core finding was that on average, public servants earned 13 per cent more than their private sector counterparts on a like-for-like basis in 2001. Ministers, TDs and other public service staff and all retirees were subsequently awarded an average pay/pension hike of 9 per cent by the benchmarking body.

The researchers discovered that the size of this margin (the public sector premium) in 2001 was not significantly different from what it had been in 1994, suggesting that pay increases in the public sector had kept pace with the private sector throughout the Celtic Tiger period.

Another discovery was that the margin by which public service workers outearned their private sector counterparts tended to be significantly larger at the bottom of the income distribution than at the top.

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