Friday, February 19, 2010

Tackling Unemployment

Unemployment is truly a great scourge in economic and social terms.

It is welcome therefore to see that the main motivation of some of our most popular analysts (such as David McWilliams and George Lee) has arisen out of a genuine desire to deal with unemployment ills.

The present statistics however are certainly not encouraging. The official figure (for standardised unemployment) has risen from 4.8% in Jan. 2008 to 12.7% in Jan 2010.
However this does not convey the full story regarding worsening unemployment conditions. According to the methodology by which standard rates are assessed, 1 hrs. paid work a week would exclude one from the unemployed statistics!

However, we have also many others - still listed as employed - who may however have suffered a significant drop in working hours or in temporary contract work that may not be continued.
And even for those not yet directly affected a much greater degree of uncertainty exists with respect to the security of their employment.

While readily accepting that the recession poses special problems in terms of dealing with unemployment, much more imaginative measures could be taken by Government to help alleviate the situation.

The official line aims at a return to economic growth as soon as possible and then hope that employment will slowly rectify itself in the process. Thus with current concerns so much devoted to budgetary arithmetic and bank rescue measures, little attention has been focused directly on job creation.

In the modern economy, the bulk of employment - and especially new job creation - is in the services sector (accounting for close on 70% of total).
What would worry me however about the Irish situation is that a high proportion relates to "soft" employment in locally traded services that are very high cost compared to other jurisdictions. By their very nature little competition exists for such services. Though still requiring an appropriate level of domestic demand to remain viable, during the Celtic Tiger years this was substantially generated through artificial wealth creation in other sectors (speculative property development and multinational companies locating here for tax advantage purposes).

It is now slowly being realised that the Irish economy had in many ways become very uncompetitive during the boom years and that these problems will need to be addressed if we are to restore exports (especially for indigenous companies). However it is not really feasible to reduce costs for export firms while ignoring the problem of high costs in the locally traded economy. So as the artificial high incomes of the Celtic Tiger are reduced, the fall in demand in local discretionary services (e.g. restaurants and hotels) is likely to force down costs leading to a further increase in unemployment. However providers of essential services (e.g. energy, communications, financial, medical and pharmaceutical) in the absence of tough regulation, will still collude to maintain excessively high charges.

We are thus facing a Catch 22 situation at present. Though the Government is paying lip service to the need for improved competitiveness to retrieve the economy, instinctively it knows that any serious attempt to achieve this will create considerable further unemployment in the short-term. Though the recession will indeed force such competitiveness in certain sectors, costs for essential services are likely to significantly increase. And without such reform, adjustment to the recession will be somewhat uneven with overall competitiveness difficult to achieve.

Measures to deal with unemployment must therefore be realistic and consistent with the need to maintain - and indeed significantly improve - overall competitiveness. This clearly creates a considerable problem in the short run where an increase in present figures may prove inevitable.
So the following suggestions relate to measures that 1) relate more specifically to better management in the short-term and 2) creating more sustainable employment opportunities in the long run.

Apart from the adverse social consequences, dole payments to unemployed workers make little sense from an economic perspective (involving financial commitments by the Government with no productive return). Indeed there are likely to be further opportunity costs in a recession with loss in tax revenues, downward multiplier effects on economic activity and also possible additional costs due to rising crime levels.

Much more should be done therefore by Government to preserve existing jobs through a degree of subsidisation in appropriate cases.
Now this would require a greater degree of intervention in the day to day management of firms with every option explored for keeping workers (or at a least a proportion of them) in employment through a measure of state financial assistance. And if this entails a 4-day or 3-day week, surely this would be preferable than the alternative of the dole!

In the present climate, the problems of these firms would be in many cases be compounded through an inability to raise finance from existing banks. Therefore I would propose that a state bank - on the lines perhaps of the former ICC - should be set up to deal with the financial requirements of supported firms.

Though it would not be practical to have such a bank attempting to generally service business needs, it could however play a special limited role in cases such as this i.e. where jobs could be reasonably saved through additional financial assistance by the state. (Also additional temporary placements of young people with firms providing valuable work experience could also be facilitated in this manner!) Remember that the failure to preserve such employment in a recession would require extra expenditure by the State in any case! So the alternative option of using this money to actually save many of these jobs represents a much more sensible strategy.

Even with such a policy, unemployment unfortunately in the immediate future is likely to rise. However much greater imagination however could be used to provide community based work activity for those presently unemployed.
I am not of course suggesting this as an ideal answer as the loss of employment has major implications in personal, financial and social terms.
However I would still propose however that when this happens, that a much better strategy would attempt to maintain an affected individual active and involved in some alternative work capacity.

Our current notions of work are unduly influenced by the needs of the market based economy. Meanwhile however it is glaringly obvious that many community based tasks - that can serve a valuable role in their own right - are not properly serviced. Alternatively when they are provided, their value is not adequately recognised.

For example, carers in our society give a huge commitment in time and energy to looking after the needs of others. However most of these (tending to loved ones in their homes) would be deemed as unemployed, though the opportunity cost of replacing such care with paid employment through health and social services is considerable.

However there are many other activities in communities - not carried out by the market economy - which are inherently of significant value.

Therefore I believe that an enormous opportunity is being lost during our recession in not seeking to mobilise the unemployed to carry out such activities.

Of course a great deal of attention would need to be given to appropriate ways of organising this work.

My own suggestions would go something like this. Each local community - perhaps based on traditional parish lines - should be asked to come up with suggestions as to the kinds of work that could be usefully provided (not presently being offered on a market basis). These could range from tidying up operations such as removing litter to calling on old people in their homes, helping with sports based activities for young children, community based neighbourhood watch schemes, providing time relief for carers etc. Now many of these may already be provided to a certain extent on a voluntary basis. However incentives could be deliberately provided to mobilise the resources of unemployed members of local communities to enhance their provision.

For example a tiered kind of unemployment relief could be structured with a basic payment (for those opting out of such participation) that would be less than the current rate. However for those opting in, the basic payment could be progressively increased depending on the level of commitment.

The financing of such a scheme could come from a number of different sources.

With the cut in the basic rate, some financial resources would thereby be freed for supplementing payments to "active" unemployed. Also a concerted effort should be made to tighten up on present abuses in the social welfare system where over 10% is paid out on fraudulent claims. Savings made here could then be available for these other purposes. Also I can see no reason why the EU could not include such schemes in payments for its Social Fund. Indeed if schemes were in place the Government could perhaps have already achieved a commitment from Brussels for funding!

Some of the proposed initiatives would perhaps overlap with community based employment schemes promoted by FAS. So it would make sense therefore to promote greater liaison as between local based community promoters of work schemes and FAS representatives, with perhaps some of its financial resources diverted to fund viable proposals.

Finally once the positive benefit of such schemes becomes more apparent, it would then be possible perhaps to raise further money through voluntary contributions from participating communities.

One of the negative side effects of market based activity - based on quantitative criteria amenable to monetary measurement - is that qualitative considerations can thereby be easily devalued. Thus the all important social "glue" that cements communities through a shared common purpose can become significantly lost.
So from this perspective proper recognition of this non-market activity could even help to revitalise communities thereby lessening the alienation and futility that can sow the seeds for serious crime and social disturbance.

Also through focusing on the inherent value of work - presently accepted as non-market - that opportunities to convert many of these later into market form would thereby arise. In other words an alternative type of enterprise culture could be fostered.

Realistically however even with the support (that presently is so greatly lacking) these could only hope to ameliorate some of the problems caused by unemployment. They are not meant to replace existing approaches but rather to supplement them to a certain extent.

In a time when employment opportunities are few, work sharing practices again make sense with the hope of spreading out what is available in a more equitable manner.
Again too much should not be expected an in any case they are already taking place to some extent.

For example many college students - rather than seeking to directly enter the labour market on obtaining a primary degree - are staying on to do postgraduate work. Likewise early retirement schemes in the public sector and the threat of possible pension reductions in future years are enticing many to retire before the mandatory retirement age. In addition facilitating those who might be happy - say for family reasons - with a 3 day or 4-day week - could also reduce the pressure to cut costs in the public sector through better deployment of labour.

In the current circumstances therefore the Government should further facilitate such practices through modest additional financing of extra college courses, further early retirement options and encouragement of more flexi-time in the public sector.

However though in theory work sharing seems a very simple concept, in practice there are many difficulties with its implementation (especially in the private sector).
So though possibly making some contribution, in itself it does not offer a solution to the problem.

Though I am well aware of the perilous financial situation of the country at the moment, I would also recommend some special purpose investment by the Government that would stimulate economic activity while providing much needed jobs.

I have suggested before an acceleration of the school building programme as one appropriate way of achieving this goal.

Unemployment is particularly high in the construction industry. Also favourable social and political benefits would arise from decisively tackling the issue, where lack of sufficient action in the past has caused widespread frustration.
Also the Government would be in an ideal position to enforce very strict terms ensuring that such work would be done at very low cost.

Now one could argue that this would increase Government expenditure. However there would be several compensating benefits to the exchequer from additional economic activity, associated multiplier effects throughout the economy and reduced unemployment. So the net cost of such investment could be surprisingly modest.

Meanwhile it would make a valuable contribution in terms of social infrastructure, providing much needed hope at a difficult time.

Though performance here did indeed appear very impressive during the Celtic Tiger years, it was built on artificial conditions that cannot be repeated.

Unfortunately the legacy of the Celtic Tiger years is that we have now created a high cost economy with unsustainable work practices (where unions still enjoy considerable power).

Though of course it may not appear popular (or even compassionate), the key guiding principle for long term recovery should be the desire to restore a level of competitiveness (stronger than most of the developed economies with which we deal).

This indeed involves much more than wage costs. However the fiction - still unconvincingly maintained by union leaders - that wage costs are somehow not important with respect to sustaining competitiveness, needs to be challenged. Hopefully, the present testing environment in the economy will bring about a much needed conversion in mentality.

Workers of course have rights that need to be respected by employers. However the long term interests of both are in fact best served through a mutual commitment to competitive work practices.

Just to give one example. SR Techics who employed more than 1100 skilled aircraft maintenance personnel at Dublin Airport - left in the end largely due to the high costs that pertained here. It also did not help that this strongly unionised group of workers had been involved in the past in damaging industrial disputes leading to the loss of valuable contracts.

Now suddenly in the changed environment Michael O'Leary - formerly the "bete noir" of unions - is receiving total support from these now unemployed workers in his attempt to create 300 jobs at Dublin airport!

It is not alone high costs but also frequently the poor quality of service delivered that constitutes a major problem. Again this is a legacy of the madness of the Celtic Tiger years when for example in construction, demand was so buoyant that little attention was often given to acceptable quality standards! So this is another horror that is likely to surface in the coming years as more and more residents experience fundamental structural problems with their expensively acquired properties! Another recent example of the same problem is provided by the dreadful state of so many roads that are now full of dangerous pot holes following the freeze up in January! Though the cost of building these these roads was excessive to start with, councils are now faced with heavy bills in the attempt to provide a temporary patch-up solution. So even when recovery begins to take place in the Irish economy, it would make eminent sense to deliberately maintain cost increases below growth for some time so as to enhance competitiveness. Indeed this should be the real boast of the Government in years to come in being able to sell Ireland as the most competitive place to do business (in Western Europe)!

As regards more specific suggestions, while accepting that the multinationals will play a considerable role here for some time to come, we need to develop indigenous strengths that will give us an international competitive advantage.

Agriculture and the food industry have traditionally been extremely important to the economy. With consumers increasingly fussy regarding health standards, we should trade in on our traditional "green" image, guaranteeing quality food produced to the highest standards available. In particular we could greatly enhance the role of the organic sector (which has been comparatively neglected).
Considerable opportunities also exist perhaps for activity abroad with Irish food companies offering financial support to organise food production in less developed economies. For example the Ukraine at present offers great opportunities here, so potentially this route could lead to a much greater role for Irish food multinationals.

Tourism likewise has been an important industry historically here (with high employment potential) that unfortunately has suffered a relative decline in recent years.
Much of the problem here is due to the high costs that now pertain. So cost competitiveness is vital in terms of restoring this sector.

And Michael O'Leary is right! The present Government policy on air travel is very misguided. As an island economy on the fringe of Europe it makes eminent sense to encourage more visitors here through an especially low airport cost regime. Indeed I see no reason why we should not aim to market the economy on the basis of the lowest airport charges in Europe! However achieving this would require a major sea change in current policy and its protection of high cost operators (such as the DAA). So easy and cheap access with respect to air (and sea) travel could significantly enhance both tourism and business flows alike.

The most prominent high tech sectors in Ireland are IT and chemicals/pharmaceuticals. It is perhaps here that the best possibilities in future years arises for generating employment. In fairness the indigenous IT sector has already achieved notable successes. However opportunities are still being missed. One obvious problem is the slow pace of broadband provision. Again this is an area that should have achieved priority years ago. However even at this late stage much could be done to quickly improve the situation. Another problem is the lack of sufficient IT skills generated through the educational system (reflecting a lack of emphasis on science and mathematics at the earlier secondary school stage).

One interesting example of what could be done was raised on Frontline last night where we were told that Ireland has already - unknown to most - acquired a prominent position with respect to online gaming. The suggestion was that some major tax incentive such as total remission on profits generated in this area here could help to greatly increase such activity and consolidate our pre-eminent position.

And the varied opportunities provided by internet related applications are unlimited.

Here is a suggestion that I would make. At the moment we have far too many overpaid special advisors to Ministers (essentially acting as spin doctors). The number here should be greatly reduced and replaced by a mixture of advisors and travelling ambassadors with respect to new employment opportunities that could be opened up by the Internet and other technologies.

I was reading last week that Ireland is now the largest exporter of medical products in the world (though the figures here may be somewhat artificial). So once again it makes sense to specialise at an indigenous level in medical research and development. Indeed there have been several impressive research breakthroughs here already with potentially huge commercial implications. So it seems to me that this is an obvious area of specialisation in future years (with enormous potential).

Though Ireland is a member of the EU, indigenous trade with EU countries (apart from the UK) still remains quite limited. Indeed it is no accident that our strongest ties are with the UK and the US (two English speaking countries).
So in many ways we are limited by our inability to speak other languages.

Therefore I think it should be a goal of policy to encourage from an early age in school studying at least two other European languages. Personally I would suggest removing any compulsory requirement for Irish. Present policy has not worked with negative consequences for further language involvement. Paradoxically with a more open approach, genuine commitment to Irish could actually be strengthened! With better language skills we would naturally better assimilate ourselves with other European countries (and cultures) which could greatly enhance trade and employment opportunities. Even in the most direct sense, many jobs in the call centres require multilingual skills which at present cannot be provided by Irish workers.

A major change with respect to traditional energy policy is now required in Ireland. At present we are greatly dependent on both oil and gas for the great proportion of our energy needs (most of which is imported).

A significant opportunity now presents itself therefore with respect to the development of alternative energy sources (especially with respect to renewables such as wind and water). Again if we truly committed ourselves to this, there is no reason why we should not aim at becoming market leaders in the future (in at least some of these energy market niches).

At a general level a lot more needs to be done in Ireland to foster a true enterprise culture. Though significant strides have been made in recent years unfortunately the bulk of such enterprise was associated with unsustainable property development. If more of this enterprise was directed at providing necessary infrastructure it would have helped better with future development. Unfortunately - greatly assisted by misguided Government incentives - we have created a huge surplus of unwanted commercial and housing development leaving enormous negative financial implications.

I have no doubt that the Irish have inherent entrepreneurial abilities well suited for imaginative new proposals.
The secondary school curriculum needs to be revised in a more practical direction with entrepreneurial studies introduced at an early stage. Also competitions that foster and regard new ideas should be increased. In this respect I welcome very much the recent presidential initiative "Your Country your Call" which is creating a nationwide competition to come up with entrepreneurial ideas that have the potential to create significant numbers of jobs. Finance and assistance will then be made available to bring the two best ideas to commercial reality. And perhaps others ideas not considered as potential winners will in fact provide the real success stories of the future.

Monday, February 15, 2010

Michael O'Leary - again in the news

A major issue has arisen at Dublin Airport with Michael O'Leary once again centre stage.

It appears that 200 aircraft maintenance jobs have been lost to Prestwick Airport due to the inaction of The Minister for Enterprise Trade and Employment (Mary Coughlan). Cleverly, by highlighting that these jobs have already gone with a further 300 still up for grabs he has considerably raised the political stakes with respect to the Government's response.

The background to the dispute is as follows. For many years a large skilled base of aircraft maintenance engineers existed at Dublin Airport formerly known as Team Aer Lingus and more recently as SR Technics. However due to the pressures in the airline sector SR Technics (a Zurich based firm) announced in early 2009 that it was to cease operations in Ireland with the loss of over 1100 jobs (citing the high costs of doing business at Dublin Airport as a major factor).

The Dublin Airport Authority (DAA) which is responsible for the running of the airport is a state owned monopoly lacking any true business initiative. Michael O'Leary for years has been looking for the opportunity to open up an alternative terminal at Dublin that would have offered just the kind of competition for the DAA that was needed. But the Government - operating from no sensible commercial logic - persistently refused the idea.

Then when former head Willie Walsh acted decisively to rescue Aer Lingus from imminent collapse he was so frustrated by the then Taoiseash Bertie Ahern regarding his (i.e. Walsh's) future plans for the airline that he decided to leave. Then more recently the Government in a deep recession has imposed a nonsensical travel tax (which can only act to further reduce airline traffic at a difficult time).

Unfortunately the DAA if anything is even worse. In its previous incarnation as Aer Rianta it had a stranglehold over the decisions taken at the other major airports (Cork and Shannon) until Seamus Brennan, who in fairness was always supportive of competition, ended this practice.

However things have not improved much at Dublin Airport with the DAA acting as a typical monopoly always ready to take the easy option in making decisions. So rather than properly tackling costs and inefficiency it has simply sought to raise revenue initially through their "Customs Free" Operation, then from excessive parking fees and from rapidly increasing airport charges. Even their attempt to build a second terminal (in preference to facing competition from one financed by Ryan Air) has proven a largely botched affair with significant delays and increased costs during the construction process. And now when it has come on stream, airline traffic has dramatically fallen off due to the recession.

And of course DAA's high cost strategy is hardly likely to boost business. Rather it will seek to keep raising airport charges even higher in future years so as to recover the cost of its investment.

Since the loss of the SR Technics operation, apart from Ryan Air there have been various proposals as to how perhaps some of these skilled jobs could be saved. At present Hangar 6 (which Michael O'Leary considers ideal in terms of his proposal) is leased on to Aer Lingus for line maintenance on their aircraft with somewhat vague proposals for the creation of about 250 jobs over 5 years. However one could hardly be excited at this prospect, as Aer Lingus' heavy maintenance is already carried out abroad and given the present state of the airline market one could validly question whether Aer Lingus will even still be in existence in 5 years time!

On the other hand we had the Ryan Air proposal to create 500 jobs immediately (now 300) with the prospect of further growth in future years (through continual expansion and other airlines perhaps switching their maintenance requirements back to Dublin).

So from this perspective it seems a no-brainer. However with Michael O'Leary things are never quite that easy. For one thing he refuses to deal directly with the DAA (which is responsible for addressing any such proposal). Now this is a clearly deliberate tactic by O'Leary whose business approach would represent a total polar opposite to that of the DAA.

In fact in this regard I would support O'Leary. If he negotiated with the DAA, while pretending to be supportive, it would probably attempt to tie him up indefinitely in red tape before pleading that it cannot accept his plans in their present form. And then a weak Minister, afraid to overrule the Authority, would meekly accept its decision. So by appealing directly to the Minister, he is removing this convenient line of cover and highlighting what he sees as the central issue i.e. in a deep recession with unemployment so high, that the airport's needs would be better served by a highly competitive company like Ryan Air than a self serving monopoly such as the DAA!

But in the world of crony politics, which still infects the way decisions are taken at every level in Ireland, O'Leary knows quite rightly that the issue will never be addressed unless he can cause considerable embarrassment for the Government.

Another possible barrier that has been raised with respect to O'Leary's proposals is the fact that Hangar 6 (which clearly is his favoured site for operations) is already leased out to Aer Lingus. However this is perhaps a red herring. One must remember that Ryan Air and the Government are the two principle shareholders in Aer Lingus. Therefore if they both agree that it is now preferable that Ryan Air take control of Hanger 6 (with Aer Lingus being adequately facilitated elsewhere), there really should be no issue.

However there are other problems that are likely to arise. Michael O'Leary is notorious for driving a hard bargain. So even if in principle a decision is taken to go along with his plans, the aircraft maintenance workers may be in for a rude awakening with respect to their new work conditions.

This was a continual problem in the old days both with Team Aer Lingus and SR Technics. Though in fairness the quality of their work was recognised, the heavily unionised approach under which they operated led to a high cost operation and disastrous industrial stoppages. In a cut throat business this was certainly not geared to ensure their long run survival. Even Aer Lingus, who one might of thought would have been most anxious to remain at Dublin, had already under Dermot Mannion moved abroad to carry out its heavy aircraft maintenance.

Indeed listening to Live Line yesterday, it was remarkable to hear what seemed like 100% support from former SR Technics workers for the Ryan Air proposals. One would have imagined that these same people would have been bitterly opposed to Michael O'Leary (and everything he stood for) under the old unionised regime. However faced with the loss of skilled jobs and no realistic prospects of future employment their attitude has changed utterly.

And there is a lesson here! For the very same plight facing these now could well face Aer Lingus workers in the not too distant future. So perhaps they may recognise that O'Leary probably offers them the best chance of maintaining their jobs in the long run.

Of course if the Government does finally bow to the strong public pressure over the possible loss of these 300 jobs, the DAA will indeed have every reason to be concerned. For one thing is certain. Michael O'Leary's campaign against it is likely to greatly intensify once he gets a foothold in Hangar 6. I would imagine the decision to maintain these jobs on an on-going basis at Dublin will be made dependent on all sorts of changes at Dublin Airport that will be anathema to the DAA.

So Michael O'Leary might get his wish and end up effectively running an airport terminal in Dublin after all.

Then again, we cannot be quite sure that he is even truly serious about these maintenance jobs. He is very shrewd and might have already judged that there is no realistic prospect of his plans now being approved. Meanwhile however he can score a wonderful public relations success posing as the worker's champion while causing acute embarrassment for both the Government and the DAA.

And who would have thought it for if this current trend continues he could wind up even more popular than George Lee!

Sunday, February 14, 2010

Bank Despair

Attempting to follow the litany of problems faced by the banking system here in Ireland would lead one almost to despair!

Though we knew more than a year ago that they faced horrendous difficulties, the continually evolving situation reveals them as much worse than originally anticipated.

In September 2008 following the Lehman crisis the Government took the unprecedented step of guaranteeing bank deposits to the sum of €400 bl.

At first we were assured that this move was due solely as a result of a temporary liquidity crisis in the banking system (triggered by the international financial upheaval at the time).

However it quickly emerged that one of the banks Anglo Irish - with no branch network - had accumulated huge losses on loans mainly to the commercial property and would need to be nationalised (costing the taxpayer countless billions).

Then it became apparent that the other banks were all very much under capitalised (thereby requiring the State to pour in additional billions of taxpayers money).

Next when it became clearer regarding the extent of the bad loans extended to the property sector by all of the major banks, the Government proposed a highly expensive rescue plan NAMA (National Asset Management Agency) whereby it would buy up the larger loans on the banks' books at a discount. However this discount of about 1/3 was still much higher than current market value with once again the taxpayer funding the difference.

However we were assured at the time that this step was indeed necessary to get the banking system lending quickly again.

It now appears that the banks will also be suffering large losses on many loans not included in NAMA (e.g. on mortgages that were being thrown like confetti at unsuspecting house purchasers during the height of the boom).

Also it is already apparent that the losses on NAMA loans will in fact be much greater than originally anticipated.

This therefore means that the Government will now have to put in large additional sums in fresh capitalisation into the banks.
Meanwhile it is being slowly conceded - in what was apparent to many of us all along - that in fact there is no realistic chance of the banks being in a position to restore liquidity for some time.

So with respect to the banks we seem to be getting the worst of all possible worlds.

Then last week it was announced that Bank Of Scotland (Ireland) was closing down its Halifax Bank operation entirely here with loss of 750 jobs (in an opening move that seems to herald an eventual total close down here).

Now it was this Bank in particular that offered a breath of fresh air when it entered the Irish market in that it - perhaps for the first time - stimulated some real competition in the consumer banking market.

However since the crisis it appears that all the overseas banks are rethinking their commitment and likely therefore to significantly scale down operations with every likelihood of further job losses.

Also the domestic banks (such as AIB and BOI) who are desperate to cut losses are likely to reduce job numbers to a significant extent. So the banking sector will contribute hugely to the already very high unemployment figures in the coming months.

Not alone is this very bad news for the workers employed but likewise for bank consumers.
As the market inevitably contracts (with fewer institutions remaining) the degree of competition will fall. Therefore again with a view to repairing large losses, the surviving banks are likely to operate effectively as a cartel whereby they will extract high profit margins from consumers. So not alone do we face the prospect that many firms and consumers will be unable to obtain credit but bank charges could steeply rise steeply with those successful in obtaining credit paying excessively for the privilege.

And this understandably is likely to lead to further disillusionment and anger among the wider public who have already contributed massively to to cost of cleaning up the banking mess.

There is a deeper problem here which goes to the very heart of the capitalist system in that it fails to properly recognise a collective aspect to all profits.

During the good times bank profits are narrowly associated with shareholders. However during recessionary times, such as we have now, losses are associated more widely with the general public. Though not directly responsible therefore for the bad decisions taken, in effect it is required to substantially bear the losses (resulting from such decisions)

Market Economics as we know it has been built on an unduly limited individual notion of identity. However rightly, there is also an irreducible collective dimension involved in all economic decisions.
So ultimately this whole crisis is pointing to a need to redefine our economic ideas at the most fundamental level.

Tuesday, February 9, 2010

Exit of George Lee

So George Lee has left Fine Gael after just 9 months in the party.

How much things have changed since the heady heights of his sensational by-election triumph last May! In the eyes of many he was seen as the new political messiah for Fine Gael bringing the promise of fresh economic thinking and future electoral success. However it has all turned sour so very quickly.

Frankly I was surprised when Lee left his influential post as RTE's revered economics correspondent, a role for which he was clearly designed and in which he excelled. Apart from correctly alerting listeners regarding the flawed nature of Celtic Tiger policies, the reports gained additional credibility through his communication skills and a sincere emotional engagement with the issues involved. So in this respect he did not fit the stereotype of the detached economics observer and was all the more loved for that very reason!

However on the negative side, Lee's reports rarely displayed great detail or originality. Rather, they were of the "broad brush" variety which was very effective in communicating economic matters to a non specialist audience.

I would be more impressed with Richard Bruton in terms of ability to forensically investigate the details of economic policies. Then in relation to imagination and originality - though I do not always agree with his proposals - I would find David McWilliams to be a much more interesting commentator.

Due to the failure of politicians in 2008 to foresee both the financial crisis and property slump, people were looking for a new type of hero among those economic commentators who had correctly warned of the crisis. And chief among these was George Lee who thereby enjoyed enormous popularity.
And I am afraid George began to bask somewhat in this warm glow, developing perhaps an exaggerated view of his political potential. And when the main rival party came hunting for him he couldn't resist the invitation believing that somehow he had the magic formula to cure the country's ills.

Even at the time I thought that his decision did not make any sense.

For one thing Fine Gael were in opposition and despite the very low political ratings of the Government likely to remain there for some time.

Secondly, the most talented people in Fine Gael already filled key economic positions in the shadow cabinet. Richard Bruton as the Finance spokesperson is a highly respected and able politician of 30 years experience whereas the Enterprise Trade and Employment spokesperson Leo Varedker is the most promising of the younger generation. So there was no obvious economics position that George could immediately fill and he was always likely therefore to be used as a "poster boy" offering an invaluable marketing opportunity for the party.

Then on a few occasions when he did engage in debate he displayed his political naivete and - perhaps - lack of detailed economic understanding of policies. In a couple of exchanges in the Dail and at a Summer School (attended by the Minister of Finance) he came out badly when his "sound bite" approach was exposed as inadequate in the light of more comprehensive questioning on issues.

It is all very well railing against the deficiencies of the political system (which indeed are many), but surely he should have been aware of this before entering politics. For once that line is crossed, he no longer was representing just himself, but also the party and the many people who gave him support and voted for him in the by-election. And of course his political neutrality, so valuable in an economics commentator, has been forever sundered.

It is very mistaken in any case to think that one must enter politics to have a real effect on economic policy.

In fact in the present climate the, opportunities have never been greater for outside commentators (such as George Lee) to exercise a marked influence.

I mentioned already another popular economics contributor of the moment David McWilliams who has had a key impact on recent economic debate through his books, newspaper articles and many radio and TV performances.

The most important economics decision ever taken in Ireland was the bank guarantee scheme undertaken by the Government in September 2008 where the State decided to underwrite bank assets to the value of €400 bl. Well that was a scheme that was being proposed at the time - among others - by David McWilliams. And as he recounts in his latest book, McWilliams was consulted in his home by Brian Lenihan, the Minister of Finance shortly before it was implemented.

And then another respected economist Alan Ahearne, who likewise had warned about the dangers of Ireland's property bubble, was subsequently appointed as special advisor to the Minister of Finance.

And finally yet another very respected economist Patrick Honohan was recently appointed as the new Governor of the Central Bank. So if one is interested in influencing current economic policy, surely these examples suggest better options than as a backbencher with an opposition party!

Thus George Lee was perhaps in a more favourable position than any other economist here in Ireland to potentially influence current economic events. He may have been required to eventually vacate his position as RTE's economics correspondent in order to speak out more freely. However he would have remained greatly in demand by the media, with ready access to any important figure he wished to consult with a view to disseminating his economic viewpoints.

However for me this is really the nub of the whole issue for I have seen little evidence that George can truly offer fresh thinking on contemporary economic issues.
He was privileged to be filling the very post which maximised his talents and influence but somehow failed to properly recognise that very important fact.