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Analysis/Comment Last Updated: Sep 12, 2010 - 10:28:00 AM


Irish Economy 2010: A year of freedom from fear?
By Michael Hennigan, Founder and Editor of Finfacts
Jan 4, 2010 - 3:35:29 AM

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From the Irish Independent's front page, Thursday, Oct 29, 2009: Tom Burke’s picture shows Patricia King of trade union SIPTU arriving at Government Buildings to present a démarche to the Government.

Irish Economy 2010: This year could be one of freedom from fear for many in Ireland after a half generation of the high or delusion of Ireland having invented the free lunch, followed by the bitter harvest of the crash. It could alternatively be another year of despair as the forces of conservatism resist change.

The Minister for Finance, Brian Lenihan, will make a statement this coming week on both his health, following a reported pre-Christmas diagnosis of cancer and on economic plans for 2010. Despite questions about the response to the banking crisis, the minister has shown political leadership in a balkanised system of competing vested interests. It has been a stark contrast with the blundering response of Taoiseach Brian Cowen to the crisis and the rest of the mediocrities in the Cabinet. We wish the minister well.

The forces of conservatism opposing the minister, are led by the trade unions. Ireland remains a very conservative country and while Catholic Church authority has imploded because the autocrats at the top, had focused on protecting their own positions and abusive officials, Irish trade union leaders risk ending up in the same boat. Trade unions have a purpose, particularly in representing staff in larger companies and organisations. However, the high earning leaders of Irish trade unionism, who had a role in policy making during the bubble -  - they focused like others on grabbing what they could, rather than on reform - - have decided to ignore the minority of their members in the private sector, who have either suffered unemployment or fear for their jobs. The earnings of the leaders are linked to senior public servants and they have opted to fight for those who have security of employment and one of the world's best pension schemes.

This week, the trade union leaders plan to announce a war of attrition and despite a public acknowledgement that "transformational" change can be provided in the public service, officials have made clear that the unions will stick to the Victorian era ways, unless the Government offers costly inducements.

"We'll be announcing the action that we propose to take next week," said Tom Geraghty, a member of ICTU's Public Services Committee and General Secretary of the Public Service Executive Union, according to the Irish Independent. "It will start off slowly this month but we will be building up to much stronger action from mid-February onwards.

"You would hope that the fact that we are gearing up to take action might prompt the Government to reconsider its position.

"It's hard to have a dispute where the public is not affected, but that is a by-product rather than something we are setting out to do."

The newspaper reported that another union source said the campaign will be a "slow burner" during January and the "serious action" will not happen until the following month.

These are the words of the comfortable, not people who experience the misery of unemployment.

Their priority is not to help to give people freedom from fear.

Economists

Since the economic crash, economists have been prominent in the media and this year is likely to be no different.

Minister for Defence and Sunday Independent columnist Willie O'Dea wrote in February 2008: "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."

During the bubble, academic economists largely left the media arena to bank economists and economists making a living from newspaper columns and broadcast appearances.

In the past year, Prof. Philip Lane of Trinity College has launched the Irish Economy blog for discussion of economic issues, while academic economists have also been prominent in other media outlets, in particular on the establishment of the State agency for toxic property loans, NAMA (National Assets Management Agency). They have had some influence on some aspects of the NAMA framework and Philip Lane's colleague, Patrick Honohan, was appointed governor of the Central Bank.

Nobody is right all the time and we pointed out last month that columnists Fintan O'Toole and Bruce Arnold were less than reliable, when they strayed into economics.

Beyond issues of facts, while the credibility of bank economists has been damaged by their cheerleading of the bubble, public caution is also useful in respect of proposals and analyses from media economists.

In the current issue of Newsweek, columnist Robert Samuelson writes on why journalism is increasingly shortsighted, unreasoned and selfish.  
 
The imbalance between self-interest and common interest has been at the root of many current Irish problems and it's also present in the media.  
 
Samuelson says
"reporters and editors have become multimedia self-promoters."

Columnists may not even believe in the views and proposals they put forward.

"It is time to consign the lies and fairy stories about our fiscal downfall to the bin and focus on the positives for 2010," media economist Marc Coleman, recently wrote in the Sunday Independent.

Coleman was among the economists who had given comfort to Taoiseach Bertie Ahern during the bubble by seeing a "demographic dividend," as the progenitor of a permanent prosperity.

In a January 2008 review of Coleman's book, The Best is Yet to Come, UCD economist Colm McCarthy wrote: "Echoing a report from economists at NCB Stockbrokers back in 2006, he argues that rising population stimulates economic growth in and of itself: ' ... as Ireland's population rises, demand for a wide range of goods and services also rises, lifting economic output in the process.' The recent rapid population growth has in some manner created the Celtic Tiger. 'A tidal wave of demand is washing over the economy,' and this is set to continue for decades.

Would that things were so straightforward. Population growth can just as readily be seen as a consequence of economic success, a far more plausible take on the Irish story than this demographic version of Say's Law, the venerable notion that supply creates its own demand. If rapid population growth were the key to economic prosperity, sub-Saharan Africa rather than East Asia would be the current Wirtschaftswunder.

The big swing factor in Ireland's recent demographic history has been migration, and there can be little doubt that migration is driven by economic factors, not the other way round. Poles do not flock to Ireland in order to stimulate aggregate demand."

Coleman still promotes the benefit of an upcoming population surge and has written another book. It has been endorsed by former Minister for Finance, Charlie McCreevy. So, the bubble economy went off the tracks when McCreevy was moved to Brussels!

SEE: Finfacts report The 2001 economic consensus that paved the road to economic ruin

Coleman uses the Willie O'Dea analogy of the glass being almost full.

He wrote last week that next September, the economy will start settling back to where it was in early 2005. In 12 months' time there will be 1.9 million people working in the economy, a quarter-million up on 1999 and half-a-million up on 1997.

In December 2008, there were more than 500,000 employed than in 1999. Official figures show that 184,000 jobs were lost in the year to September 2009.

Coleman's search for silver linings is reminiscent of US Depression era President Herbert Hoover.

In 2005, there were 222,000 working in construction and 151,000 in September 2009.

Besides arguing away tens of thousands of jobs here and there, comparing a period like 2005 when interest on the national debt was very low to the coming years when related interest payments will preempt 25% or more of tax revenues, is engaging in the fairy stories, Coleman charges others for.  

This week, the ISEQ Index closed 2009 at the level it was in April 1997, signalling a huge fall in wealth.

As for where new jobs will come from, there is the handy factoid of 2 billion Asian consumers and all we need is a tiny portion and we're in clover.

Irish-owned firms account for about 7% of exports from Ireland to China. Decisions on the other 93%, are generally not made in Ireland.

As we recently pointed out, there were virtually no net new jobs added in the Irish exporting sector in the decade from 1999. 

So, extreme caution is required when armchair "experts" find easy markets for exporters to exploit.

Before the December Budget, the Department of Finance said that Irish tax revenues had reverted to 2003 levels, but day-to-day-spending on services had risen by 70% in the meantime.

Four days before the stock market crash in October 2009, President Hoover said that "the fundamental business of the country, that is, production and distribution of commodities, is on a sound and prosperous basis."

Despite the enduring myth, only 2.5% of the US population owned stocks and as economic conditions deteriorated, there was always the reassuring statistic that 75% of the population remained employed. However, it didn't tell the full story.

With the overwhelming impact of multinationals on Irish statistics, an optimistic but unreliable scenario can always be found while inconvenient truths are glossed over.

Besides, whether the economy is back to 2005, 2003 or 1999, policy was based on an unsustainable scenario.

So whether it's David McWilliams advocating abandoning the euro or Marc Coleman peddling his demographic dividend argument, have the salt cellar handy!

Happy New Year!

The following is a recording of a presentation on the economy by Marc Coleman, which comes from a thread on the Property Pin Forum:

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