Saturday, 30 August 2014

The Generic Irish Coalition v. Club Med: Part V

(See The Generic Irish Coalition v. Club Med: Part I , Part IIPart III and Part IV)

In my last post, I used the counter-intuitive example of San Francisco's economic growth to demonstrate the paradoxical ability of bad public policy to generate superficially desirable outcomes. As I explained, San Francisco owed its success to a sort of "Crazy like a Fox" failure. The legendary entertainer Bob Hope once said of his golf club, the exclusive Cypress Point in Pebble Beach, California: "One year they had a big membership drive at Cypress. They drove out 40 members." So too did the San Francisco City Government make their metropolis so expensive and difficult a place in which to live that those who couldn't afford to live there were driven out. 

So was San Fran's "membership drive" a success? Well that depends upon who you are. If you're an economist or a social scientist for whom populations represent interchangeable generators of statistics, it worked quite well: high per capita incomes; low unemployment; low poverty rates; low crime rates; low illiteracy rates and excellent quality of life indices. On the negative side, the soggy population growth underpinning this transformation put a tether on the amount of nominal GDP to count. But hey, work with the statistics you've got. Excellent per capita indices combined with mediocre aggregations can be readily spun into "social justice" memes: "Our growth is modest but ecologically balanced", or something like that - frankly, who cares, as long as the bars all serve Sierra Nevada instead of Budweiser. If you were one of San Francisco's citizens in 1970 who had to leave or whose children had to leave so that the city could demographically conform to what its rulers preferred, it didn't work out so well. And of course, if you're from places like LA, San Diego, Stockton or San Bernardino, the demographic spillover of refugees from San Fran has made your city more crowded and its write-up in Forbes or Fortune 500's best places to live segments has been tarnished irreparably - in the case of Stockton and San Bernardino, the San Francisco exodus has no doubt contributed to those cities' bankruptcies. The secret to San Francisco's success is thus a form of elaborately disguised social dumping, with progressive lefties dumping onto less regulation-protected cities the unbeautiful masses who might spoil their utopia.

Let's set aside the moral dimension for a moment. This kind of policy works for a city - if it has the right demographics to start off. Detroit didn't. The results were not pretty. But can it work for a whole country? The only example I can think of is Singapore, where Prime Minister Lee Kwan Yew represented a majority Han-Chinese population with a large Ethnic Malay underclass working in textile industries near the Malay border. Lee jacked up the minimum wage and when his office was besieged by textile magnates warning him that this policy would drive them to Malaysia, he told them that this was precisely what he was trying to achieve. I can't think of a single other country where such a policy has worked. For reasons I'll explain later, social dumping normally only works within national borders. 

Back to the US though. San Francisco is just a very extreme microcosm of a bigger American trend. "Blue" states preserve superior economic and social indices whilst lecturing the rest of America on their failure to discharge their moral obligations to the poor and working class. Meanwhile, the Blue State poor decamp to the more favourable, low cost environments of the Red States. How do we know this? The population migration patterns tell us, with the populations of the so-called "Red States" growing and the "Blue" ones shrinking. Conservative economists like Art Laffer harp on about the superior growth numbers that the more business friendly Red States enjoy. That's fine as far as it goes, but the analysis ignores the thorny issue of whether Blue State population drainage is a feature or a bug - i.e. do they know what they're doing when they drive out their poorer populations? Don't look now, but in his weekly syndicated column for the New York Times (printed in this week's Irish Times), progressive leftist and Nobel Prize winning economist Paul Krugman more or less gives the game away in a "too clever by half" piece in which he massages the statistics to support his agenda, but still manages to make his enemies' points for them.

Per Krugman:

"[Texas Governor Rick Perry's presidential appeal] if any, will have to rest on claims that he knows how to create prosperity. And it’s true that Texas has had faster job growth than the rest of the country. So have other Sunbelt states with conservative governments. The question, however, is why."

The answer, says Krugman, has nothing to do with the superiority of the Sunbelt business environment, whose low taxes and light regulations, he assures the reader, have nothing to do with the Texan success story. He goes on to look at population trends, where things start to get interesting:

"To see the problems, let’s tell a tale of three cities.

One of these cities is the place those of us who live in its orbit tend to call simply “the city” [New York, in case you wondered]. And, these days, it’s a place that’s doing pretty well on a number of fronts. But despite the inflow of immigrants and hipsters, enough people are still moving out of greater New York — a metropolitan area that, according to the Census, extends into Pennsylvania on one side and Connecticut on the other — that its overall population rose less than 5 percent between 2000 and 2012. Over the same period, greater Atlanta’s population grew almost 27 percent, and greater Houston’s grew almost 30 percent. America’s center of gravity is shifting south and west." [Emphasis mine.]

This is the San Francisco effect writ large, with Krugman admitting that people are moving to the states whose economic models he despises. But he keeps laying it on:

"If that were the case, we’d expect all those job opportunities to cause rising wages in the Sunbelt, wages that attract ambitious people away from moribund blue states."

That doesn't necessarily follow Professor Krugman. If the demographic profile of the state were changing, the average wage levels might be flat, while a survey of individual earners (i.e. flesh and blood humans) could reveal rising (or, indeed, falling) wages - all disguised by demographics. For a Nobel Prize winner, Krugman's purported grasp of mathematical concepts is shaky. But wait, as they say on the late night infomercial channels, there's more:

"It turns out, however, that wages in the places within the United States attracting the most migrants are typically lower than in the places those migrants come from, suggesting that the places Americans are leaving actually have higher productivity and more job opportunities than the places they’re going."

Alfred Nobel must be spinning in his grave. The fact that wages are lower in the Red States than in the Blue States has no intrinsic bearing on whether they are rising or falling. For example, I'd wager that Chinese wages are growing faster than Irish ones. However, Chinese wages are (self-evidently) far lower than Irish wages. The logic here is so transparently faulty that it is hard to believe that Krugman's obtuse mistake isn't deliberate. No doubt, he could find evidence of stagnant Red State wages if it existed. The fact that he didn't and instead obfuscated is of itself telling. However, he goes on:

"So why are people moving to these relatively low-wage areas? Because living there is cheaper, basically because of housing. According to the Bureau of Economic Analysis, rents (including the equivalent rent involved in buying a house) in metropolitan New York are about 60 percent higher than in Houston, 70 percent higher than in Atlanta.

In other words, what the facts really suggest is that Americans are being pushed out of the Northeast (and, more recently, California) by high housing costs rather than pulled out by superior economic performance in the Sunbelt."

For an economist, Krugman has a remarkable ability not to understand obvious linkages between different phenomena. For example, are the costs of living low, precisely because wages are low and regulation (like those on land use) light? Cheap housing is a huge driver of Red State growth, but it is classic reductio ad absurdum to pick a single phenomenon and use that (without citing evidence) to dismiss other concerns. In any event, it is all very well for cheap housing to attract migrants, but it doesn't explain how and why there is gainful employment waiting for them when they get to it. For example, in Detroit, you can buy a detached house for under US$10,000 (cheaper than Houston or Atlanta by a country mile), but there are no jobs there, so it doesn't attract migrants.  Be that as it may though, is there not, perhaps, an argument that pro-business policies such as those of Governor Perry are part of the cheap housing matrix? In this regard, Krugman makes a startling admission:

"[H]igh housing prices in slow-growing states also owe a lot to policies that sharply limit construction. Limits on building height in the cities, zoning that blocks denser development in the suburbs and other policies constrict housing on both coasts; meanwhile, looser regulation in the South has kept the supply of housing elastic and the cost of living low…

So Rick Perry doesn’t know the secrets of job creation, or even of regional growth. It would be great to see the real key — affordable housing — become a national issue..."

This is an incredibly revealing and contradictory comment. On the one hand, Krugman admits that the free use of land without zoning restriction causes housing to be more plentiful and thus cheaper. Then he (again, without gracing his readers with an explanation) proceeds to divorce this admission of regulatory dysfunctionality from the workings of the entire rest of the economy, in which excess regulation supposedly has no negative consequences. Bizarre. Bizarre also that he then goes on to endorse the housing policies of New York's impeccably progressive mayor, Bill de Blasio, whose policies consist not of less land use regulation but of the traditional left wing preference for more subsidised housing.

Corollary: Krugman is quite happy for the exodus from the North East and the Left Coast to continue, because the American elite has the bases covered, so to speak. The rich like Krugman will happily pay a premium in living costs and taxes to live in politically correct gated communities (where the gates are invisible and made of money) like Manhattan, San Francisco and Greenwich, Connecticut, leaving economists with pristine numbers to count, while states like Texas (which actually create jobs) will lag behind in key indicators like wages, precisely because of their ability to offer a better life to blue collars. If the price of this social cleansing is the need to ritually squeeze out some crocodile tears about the inability to (a) keep more blue collars in the Blue States; and (b) to force Blue State governance on the whole country, then so be it. Hipsters love hypocrisy.

How does this relate to Ireland? The answer is that our Irish Times reading elite class, which worships coastal Americans, reads Krugman's work and believes that a country with a lower population than Manhattan and a highly centralised governmental system can somehow turn itself into San Francisco. The first problem is that Ireland is a country, not a city. The second is that Ireland's demographics are much more like those of Texas (i.e. a normal place whose population spans a proportional sweep of the low functioning and high functioning, the normal and the brilliant and every other flavour in the demographic ice cream parlour) than those of San Francisco (median family income in excess of US$87,000 in 2012 - enough said). The second problem is not, of itself, insurmountable. The object of Blue State policy is to elect a new people. If your main industries are in secular decline and the underclass is too big for the city elite to comfortably carry in the short term (like Detroit), the monied decamp to the outlying suburbs and the city collapses. However, if you start in a better place and you don't go too far, too fast, there are plenty of examples of places which have achieved more modest (but also probably more replicable) success - like Pittsburgh, which incidentally has its own Los Angeles into which to dump its less beautiful citizens, namely Philadelphia.

The first problem, though, probably is insurmountable. Countries have a problem that cities do not - citizenship. Citizenship is a right to reside anywhere in a country. San Francisco works precisely for that reason. It exports blue collars and the underclass, who can travel as far north as Seattle, WA, as far south a Corpus Christi, TX and as far east as Charleston, SC, without entering a place to which they can't transport their Federal entitlements, in which people don't speak English, or in which they are in danger of suffering foreign exchange costs. Ireland has no such hinterland. A displaced Paddy can go without restriction to the UK, but will suffer foreign exchange costs on his savings and will not be able to asport his welfare or pension entitlements with ease - and in any event, the UK is governed along much the same lines as Ireland. He can go somewhere else in the EU, but good luck with the language. He can go to somewhere else in the Anglosphere but there are immigration restrictions, and the fewer marketable skills he has and the more his government wants him to leave, the more difficulty he will have in getting another country to admit him. This, ladies and gentlemen, is the economics of blocked drainage. When a pipe that was supposed to release water is constricted, it compromises every other pipe in the system.

San Francisco works because there is no blockage. Commuting out-of-towners can travel into the city to work in service industry jobs and return to cheaper housing markets in the evening where San Fran wages can be spent in poorer (and thus cheaper locales). I don't see the same arrangement working on such land borders as Ireland has. Secondly, San Francisco imports lots of ambitious (mainly Asian) workers to run the 7-11s, dry cleaners etc. They either move up the value chain, save up to go home to India or Pakistan, or they take their savings to somewhere like Bowling Green, Kentucky, where cheap land and low levels of regulation afford them a nice home and a business of their very own. The point is that the displaced native worker leaves. The city has a transient lower class that comes and goes, a disappearing middle and an influx of software engineers and patent attorneys queuing up to buy $800,000 apartments to share with there shih-tzus. The same strategy doesn't work here. When Paddy is displaced, he can't just up-sticks to Poland to take the job that Witold would otherwise have got. Hence the blockage. As the economy is constricted in such a way as to eliminate gainful employment for the bottom two quintiles of the population distribution, those two quintiles stick around. The country doesn't turn into Detroit overnight, as our more enterprising folk cannot cross the borders as easily as they can city lines.

The problem is that elite Americans have rational reasons to purport to believe asinine bromides about aggregate demand, Phillips Curves, stimulus and the like. It acts as a convenient cover for social dumping. Even in the US, this situation will end. This type of population churn is a Ponzi scheme and, sooner or later (and I suspect sooner), the low cost south and west will start to attract even the rich - 10,000 square foot houses on the outskirts of Dallas and Houston for under a million Dollars must seem pretty attractive to a partner in a New York law firm who can't afford the $3 million or more he needs to get a modest Manhattan Brownstone. In Ireland, where the worst of the outside world's fashions are followed slavishly by our elites, there is a real danger that they could start to harbour dreams of a big-government utopia, in which our underclass can be replaced with a better one and our working class can be replaced with a vast middle class that will have no need for such gauche activities as manufacturing, resource extraction, energy, agriculture, aquaculture and forestry. This is a dangerous fantasy. The other dangerous fantasy is that with ECB-led interest rate repression and deficit spending, we can "stimulate" our economy - ominously, Minister of State Ged Nash is talking about how higher wages (paid for how?) are needed to revitalise our economy. The key question is whether our establishment is cynical enough to believe the former or naive enough to believe the latter. One way or the other, the policy will fail spectacularly. Ireland does not have a Texas to absorb her surplus population.

The bad news is that the Irish political, civil service and commercial establishments appear to be no less cynical or simple-minded than the American ones. They will, in a heartbeat, commit to whatever policies that Brussels, Frankfurt, the Oval Office or the Eccles Building decree. Right now, the signals from these centres of power are that active Central Bank yield curve management and active fiscal demand management are not merely feasible but necessary, that "clever" technocratic fixes in education and R & D can bring outsize long term benefits relative to initial costs and that the ability to grab the earliest piece of action in the "Green" and "Knowledge" economies is the key to which western countries will be the next US and which will be the next Portugal. The most sensible politicians in Ireland today believe this naive and self-serving fantasy, and as for the ones who aren't entirely on board with the agenda, well... Fancy Mary Lou McDonald as Taoiseach and Mick Wallace as Minister for Finance? No? Thought not.

The good news is that thanks to the electoral system, the working class has saved our ass, for now. First, many of them still vote for parties in the Generic Irish Coalition (principally FG and FF) and they are not sufficiently miseducated in Krugmanomics to believe that the Irish government can spend its way out of debt and inflate its way out of a bubble. For those who are simple minded enough to fall for the vacuous posturing of Sinn Fein and the other Club Med parties, the electoral system allows for the sectarian striation of anger into compartmentalised segments of opposition, unlike in the American first-past-the-post system which requires a plurality to win seats. The result is that the demagogic politicians who profit from this rage have no particular reason to forge compromise platforms. It is thus that the underclass and periphery coalition that underpins Sinn Fein, the ULA and the dissident left cannot cohere into a single group, never mind team up with the wealthy plutocratic uptown progressives. Even if they did, the demography and history of Ireland are too different from the US's to give such a coalition the numbers, all of which means that the plutocrats are stuck with Middle Ireland for the foreseeable future. But...

There's an old expression that where there's a will, there's a way. Well the reverse holds too: where there's a way, there's a will. In other words, where something can't happen, there will be no ready catalyst behind a movement to make it happen. Whereas, when the possibility of its happening becomes real, the desire to make it happen is more likely to find political expression. Remember that demographics are not static. They change in time. So what worries me?

Firstly, the churn effect of recessions involves changes in social status, some of which are temporary and others permanent. Some people who fall out of the labour market never fall back in. Half of the country's unemployed have been out of work for a year or more. There are good reasons to believe that this recession will have more long term victims than recessions past. Bottom line: In twenty years' time, many of the children of the so-called working poor will have transitioned to non-working poor. Many children of the middle class will be driving taxis. Many of the children of the prosperous blue collar class (e.g. brick layers) will be reduced to the so-called "McJobs" economy. On the other side of the ledger, with a public sector which will have to shrink in any scenario which could conceivably emerge, with the private sector thrown into a generation long deleveraging wringer and with a chronic oversupply of graduates, it is hard to see how the number of countervailing upward mobility stories will even be sufficient to preserve our existing demographic base, let alone improve it.

Secondly, this factor will be worsened by the aging of our population. With the over-65 population on a secular upward trend, the young are going to be caught between two emerging clamps. If the retirement age stays at 65, the young will face an intolerable tax bill to pay their pensions. However, once the grey lobby bows to the inevitable and extends its working life, young people will inevitably find themselves having to wait longer for promotions and other forms of professional advancement. Even before the crash, it was taking lawyers and accountants years longer to make partner and executives years longer to join boards of directors than in the halcyon days of yore. This problem is only going to get worse, with a growing population of young people enjoying lower status than their parents did at the equivalent age.

Thirdly, the recession has accelerated the long-term secular trend of public sector radicalisation, which has seen the starchy and conservative public sector of a century ago give way to a larger and more left wing one, which is growing more overtly hostile to capitalism with every passing generation. The inevitable erosion of completely unviable pay scales. pension entitlements and job security has made public servants angrier than ever before - both with the GIC politicians for imposing austerity on them and with hard pressed private sector workers, for not sympathising with their plight. Because of the terrible decision made in the postwar era to allow unions to operate in the public sector, these angry workers have a publicly subsidised network of political action groups, which can make their votes count more than their (considerable) numbers.

Fourthly, more than one in ten of our population are immigrants. Because of their relatively low rate of citizenship, they are thus under-counted in today's electorate. This will change. Many will obtain citizenship. Even those who don't will have children. Those children will become citizens. This will change the demographic base. How, nobody yet knows. My guess is that with the upward trajectory of our taxation and the ridiculous levels of public spending baked into the fiscal cake during the Celtic Tiger era, the most modest reductions to which result in regular outcries on the RTE phone-in shows, the Google and Ebay executive-type immigrant will leave and the nightclub bouncer/short order cook-type immigrant will stay.

The combination of these four demographic trends will gradually increase the size of the Club Med coalition. Indeed, in the ultimate Catch-22 scenario, even doing worthwhile or necessary things like cutting spending or de-unionising the public sector will worsen the country's demographic base in the short term. If this situation gets better, it will have to get worse first. By 2030, the elites will have become heartily sick of the Generic Irish Population - there are signs that they already are. If the Club Med coalition becomes large enough to coalesce with elite money, we could well see the emergence of a coalition rather like the one constituting the Democratic Party. In the US, the plutocrats and the public sector have made a calculation that sharing the machinery of state with the underclass allows them a much better deal than sharing it with the lower middle classes, small business people and upstart entrepreneurs. If the numbers stack up the right way in Ireland, even our electoral system might not be sufficient to save us from such a coalition.

Some of the more elite, Dublin 4 Fine Gaelers and Fianna Failers might well find the notion of going the way of the old Rockefeller Republicans in the North East and California and folding into the Club Med coalition rather attractive, but the distinctly non-Metropolitan majority of those parties will find themselves in the current unenviable position of the US Republicans, of being increasingly divorced from the money associated with Wall Street and Silicon Valley, whilst its demagogic beneficiaries like Barack Obama and Harry Reid denounce them as the party of the "rich" for advocating (minimal) public sector spending restraint. All of this means that it is in the great self interest of Fianna Fail and Fine Gael to use the time they have productively. Quite simply, the parties of the Generic Irish Coalition - less the Greens, who are irrelevant and Labour, which, if it survives under Burton, will become a Club Med party - need to use the remaining years of their dominance to aggressively block the channels which could be used in the future to form this Club Med-D4 alliance.

In this regard, there is a model and Professor Krugman has unwittingly drawn attention to it - the Texan solution. In the Lone Star State, the Republicans have largely preserved the political alliance between the plutocrats and the middle classes, by fostering a business environment in which blue collars can still find jobs. However, Krugman's simplistic insistence on ascribing the entire Texan miracle to cheap housing obscures the fact that housing costs are  probably a much bigger slice of the Texan pie than appears on the surface. Remember that if Texas did not have such cheap housing, there would likely be a much greater political clamour for welfare increases, living wage laws and housing subsidies. My hunch is that cheap housing - and cheap land - opened political doors to constructive free market policies which would otherwise have remained shut. My advice to Enda Kenny and Michael Martin is to focus on unlocking cheap land as a means of breaking Club Med before it becomes politically unstoppable.
  1. Devolve powers to local government. Make local authorities responsible for raising the money to fund their own services, thus eliminating the cost socialisation game of Parish Pump Politics, whereby national resources are politically horse-traded by local politicians and enjoyed  in their home patches. Rather than engaging in the futile nonsense of trying to make our politicians behave more responsibly, it's time to bring the government back to the parish, so to speak. Dublin County Council and the Commuter Belt counties would never have been able to go on their crazy re-zoning frolics if they had had to pay for the infrastructure and services that made the construction model they chose financially viable. Likewise, Dublin City Council would never have gone on an orgy of social housing construction if they'd had to pay for it with taxes levied against locals for that specific purpose. This policy is a prerequisite for my second recommendation.
  2. Abolish all national planning laws. Let planning become an entirely local matter, with local authorities in charge not merely of zoning and planning permission, but of actually setting the rules. The voters in wealthier urban locales will be much less keen on adopting New York-style high density housing in their own communities than they are on imposing it on other people. Current planning laws incentivise irresponsible behaviour among voters, with communities voting for housing to be built "somewhere else" and central government using the County Manager system and the Planning Board to mediate between different regions, resulting in a chronic lag between residential and commercial real estate requirements and the ability to actually deliver it. It has long since dawned on people that economies cannot be "planned". It is time to admit that development can't be either. Forcing local authorities and voters to take responsibility for their own land use is the key to allowing residential and commercial development to follow real market demand, rather than this antiquated "GOSPLAN" style approach to land management. At the end of the day, you can't buck the iron rule of supply and demand.
  3. Abolish listing. Good heritage preserves itself. If those who designed and built Mountjoy and Parnell Squares had operated on the same prudential principles as today's conservationists, those squares would never have been built in the first place. If people want to preserve Georgian, Edwardian, Regency or Art Deco architecture (and I'm partial to all of them), let them buy it. Listing is a form of invisible social welfare for the well heeled, which allows them to socialise the cost of keeping aesthetic standards to their liking, whilst not having to compensate the owners of land and buildings for the loss of amenity. However, the macro effect is even worse. Conservationists have forced the preservation of decrepit period buildings, which have a fraction of the use or amenity of more modern structures whose construction their preservation forestalls. The result is that the buildings can only be profitably used in low value activities like frowsy B & Bs whose patrons rent rooms by the hour. Let the South Side of the City stay in the hands of wealthy landowners who can afford to preserve period architecture and use it in an economically viable fashion. Allow the entire North Inner City to merge into the South Docklands-IFSC complex to form Dublin's commercial district. No doubt residents of other cities could apply similar ideas to their own back yards.
  4. Abolish national housing subsidies. Schemes like rent allowance have the effect of increasing rents and subsidising private landlords. So called "affordable" housing policies are designed to preserve excessive property values whilst providing a safety valve for some of its victims. Even social housing creates unintended consequences. Proponents say that social housing encourages private landlords to cut rent. Maybe, but remember that the social housing comes out of the overall housing stock, meaning that the supply of non-social housing suffers an automatic abatement. Any potential depressing effects on rent are offset by the inflationary effects of lower supplies of private rental accommodation. Again, if local authorities want housing subsidies, let them do (and pay for) it themselves.
  5. Cut the red tape. The supply of rental and owner-occupied accommodation is heavily constricted by excessive regulation (especially landlord and tenant laws), which leads to low value properties falling into dereliction, properties lying vacant which could otherwise be rented and empty sites. 
  6. Release NAMA properties. There is no point in NAMA making money for the taxpayer, which the taxpayer then has to spend on subsidising cash-strapped home buyers, building social housing and subsidising rents. The only beneficiaries of such a policy are existing property owners. The government could eliminate the need for vast swathes of housing subsidy and pop the emerging new property bubble by releasing all of its unused residential property inventories onto the market. The resulting fire-sale would leave the government and local authorities in a position to move economically inactive recipients of rent supplement and social housing who are currently living in expensive metropolitan housing markets like Inner Dublin, where they often live in some squalor, to ghost estates in the countryside and exurbs, leaving the current tenants with superior quality housing, opening up vast new supplies of housing and land for families and professionals in the inner city, finding a use for otherwise useless exurban housing and eliminating the need for wasteful government spending.
  7. Introduce a tax on land value, which taxes land ownership and does not penalise productive land use. Revenues from such taxes could be used to ease the income tax burden.
  8. Finally, do something about the lending problem. While dealing with housing prices will, in the long term, revolve around monetary reform, a move like the reconstruction of the international gold standard is not a matter within our own government's control. However, the interim solution is also Texan. After their 1980s property crash, the Texans brought in a 20% money down rule, which prohibited the lending by banks to home buyers of more than 80% of the price of the house - Lucinda Creighton has recently been talking about just such a policy. It's a crude measure, but judging from the Texan experience, it seems to work. 
For this Texan manifesto to be implemented, one of two things has to happen. The first is for Fine Gael and Fianna Fail to go into a grand coalition, as a precursor to an eventual merger. My own gut feeling is that much of our political dysfunctionality flows from the two parties of the right monopolising the Taoiseach's office. Contrary to the left's constant whinge, FG/FF control over the elected government has worked out rather well for them. The leftists have gravitated to centres of power like RTE, the Civil Service, the education system and the unions, which are impervious to the ballot box and can thus enjoy pristine continuity of policy, without the regular defenestrations which occur in politics. They can thus incentivise the right-of-centre parties to enter into an auction for their support, meaning that the left has always been able to have its own way on the fundamentals of Irish public policy without ever having to take responsibility for the state of the nation. A merger ends this politics of appeasement once and for all. Let the left coalesce around its own party and win the old fashioned way. Fianna Fail and Fine Gael voters should be under no obligation to lend their votes to Labour and Green Party policies. Of course, this means that there will eventually be a left-led government in Ireland. But there's a price for everything.

There is a better idea - which is for an entirely new force to arise and take the Generic Irish Population by storm. This option is attractive; but is it realistic? I have my doubts. Firstly, of the currently elected figures capable of leading such a movement, only Lucinda Creighton has the characteristics of a leader. However, every passing day that she continues to sit on the political shelf, she loses more and more of her half-life. Shane Ross has never demonstrated the discipline to capitalise on his undoubted ability. Stephen Donnelly's views are a mixture of the sensible and the daft. Michael McDowell has no seat and no realistic chance of one in the near future. But the bigger problem is that 2014 is not 1984. Back when Des O'Malley was planning the PD venture, party funding laws were not as strict as they are now, the funding of incumbent parties by the State was nowhere near as lavish and regulatory hurdles like gender quotas didn't exist. No party of significance has come into existence since our current generation of party political funding came in. Ultimately, I'm sceptical that any new party can. Even if it did though, would the party just end up being another Fianna Gael?

I'm open to persuasion on either strategy. Before reaching a conclusion on which course is best, I want to give Lucinda Creighton a chance to make her first serious and concrete move. The ball is in her court.

Wednesday, 27 August 2014

The Generic Irish Coalition v. Club Med: Part IV

(See The Generic Irish Coalition v. Club Med: Part I , Part II and Part III)

In the aftermath of the Local and European Elections, I wrote a series of posts, which I will now at long last complete, in which I analysed the electoral landscape left in the wake of the 2008 crash, the meltdown in Fianna Fail, the massive destruction of Labour's voting base and Enda Kenny's death by a thousand cuts. This year's elections heralded the emergence of what I termed the (Fine Gael/Fianna Fail-led) Generic Irish Coalition (or GIC) representing the country's traditional Northern European demographic aspirations and the Sinn Fein-led Mediterranean Coalition (or Club Med), representing Ireland's disenchanted Southern European resembling periphery. I estimated a roughly 2:1 split between the GIC parties (FG, FF, Labour and the Greens together with gene-pool independents) and the Club Med forces (Sinn Fein and assorted hard left). I see little reason to revise these very rough figures for now. 

In the second of the three posts, I identified the key characteristics of the Club Med voters as follows:

  1. They have few children.
  2. They have low marriage rates.
  3. They have low labour force participation rates.
  4. They suffer from high rates of ill-health and legally defined incapacity.
  5. They live in high density housing with low land acreages per household.
  6. They live in housing markets where prices and rents are expensive relative to average and median incomes and often live in publicly subsidised housing.
  7. They are disproportionately reliant on benefits and, when not, tend to be disproportionately employed in the public sector.
  8. They are more likely than GIC voters to live amongst immigrants and compete against them in the job market.    
In the third post, I identified the Genesis of Club Med's growth as having lain in policies which retarded business development, labour utilisation and affordable family formation and which promoted elevated land prices. 

What follows now is a closing miscellany of thoughts about how the GIC can fruitfully use the electoral window it has in order to reclaim Ireland's destiny and save her from becoming a Mediterranean country, in which our politics degenerate into the litigation of ugly resource wars between a gerontocratic pro-incumbent right and a disorderly adolescent left. I propose that in order to understand what can potentially go wrong, we must look to the United States, where, in the form of the Democratic Party, that country's equivalent of the Club Med coalition has taken (for now at least) default control of the executive branch of government. In the US, Club Med has won because the demographic groups constituting that coalition merged with a subset of the old Generic American Coalition (to coin another phrase). That subset consisted of what I loosely term plutocrats - the elite power-brokers of Wall Street, K-Street, Silicon Valley, the chartered professions and the hugely powerful and influential educational complex. The result is an upstairs-downstairs coalition in which the elites and the periphery have banded together against the vast middle in between. 

This expresses itself both demographically, with Senator Obama (as he was in 2008) taking 56% of voters earning in excess of US$200,000 per year (Michael Dukakis won a paltry 32% among those earning the equivalent number of 1988 Dollars 20 years previously) and geographically, with the famous maps showing the coastal strips coloured blue and the vast (but sparsely populated) interior coloured red. Read between the lines and it becomes clear that many in Ireland secretly yearn for the construction of just such an electoral coalition. What has stopped it to date has been our electoral system. In the US first-past-the-post system, you need (give or take) 50% to govern. The cash-strapped masses of the Obama coalition don't have the money or the institutional wherewithal to bring out their numbers. The plutocrats have lots of money, but few voters. The synergy was obvious and natural, as the coalition came together under Obama's Colorado tent in 2008 and formed an electoral mass which, for the first time, obviated the nettlesome need to attract support from so-called "Middle America". 

Of course, President Obama, who is, in many ways, a man too smart for his own good, imagined that he had finally achieved his party's holy grail of  constructing a European social democratic voting bloc, ready to turn Boston into Berlin - to invert Mary Harney's formulation. Strangely enough, it didn't quite work out that way. His country isn't solvent, and he has thus managed to create a North American equivalent of the Justicialist (aka Peronist) Party in Argentina or the Institutional Revolutionary Party in Mexico. In Ireland, such a coalition (for now) offers little attraction to Club Med voters. Why? With PR, they need only single digit support to form their own forces and their ability to elect representatives without forming grand coalitions leaves them free to indulge in their sectional struggles. Imagine for a moment that the US adopted PR-STV. The likelihood is that what we call the Democratic Party would consist of a number of underclass parties, operating largely along ethnic lines, a public sector/municipal workers' party, an urban centrist socially liberal party that might govern a few uber-wealthy progressive municipalities like Manhattan, San Francisco and Santa Barbara and the more demographically cohesive Republicans would win three out of every four elections. That is Ireland today and, for now, the chances that Dessie Ellis voters in Finglas will team up with the residents of Sorrento Terrace is far-fetched. Far fetched indeed, but not impossible to envision, for now...

Why is such a thing possible? The first point one needs to understand is that, all things being equal, free market policies, when adopted, work well relative to more dirigiste ones. In Ireland, the twenty years traversing 1987 to 2007 prove this point. Between 1987 and 1999, we adopted spending restraint, tight monetary policy, one of the least regulated labour markets and lowest non-wage labour costs in Europe and tax cuts. The result: an industrial expansion unprecedented in the history of the State. From 1999 to 2007, we almost doubled spending, introduced a minimum wage, engaged in de facto currency devaluation and cheap credit goosing via our membership of the euro, retarded our economy through the slow addition of new labour market regulations, engaged in a binge of public sector hiring and increased social welfare payments. The result was an economy which effectively couldn't grow without a property bubble, which when burst, reduced Ireland to virtual mendicancy. The case is pretty well open-shut. However, to close the book at this point is to miss the second  point that one needs to understand, which is that not all things are always equal. In other words, when economics combine with politics and institutions, they create public policy paradoxes, which allow both fools and dissemblers alike to claim that up is down and black is white. However, those who apply linear economic rules to complex political topographies may not understand why, on the surface at least, improbable things may seem to be true.

To understand this paradox, compare the cities of Los Angeles and San Francisco. The former was settled by freewheeling libertarians and conservatives from the Midwest and South and had developed, by the 1970s, a pro-business polity governed by old-line conservative Democrats and suburban Republicans. San Francisco, in contrast, was settled by more progressive, social engineering-oriented North Eastern migrants, who, by the same time, had built a progressive majority in city government. All things being equal, the freewheeling Los Angeleans should have prospered, while the San Franciscans should have stagnated into a sort of Pacific Portugal. But of course, all things weren't equal. Los Angeles, which had a higher per capita income than San Francisco in 1970, had, by 2012, a per capita income of US$27,954, whilst the much more Scandinavian San Francisco had stormed ahead to a per capita income of US$46,777. With no discovery of some hitherto untapped source of mineral wealth, the logic of history is turned on its head. How did San Francisco succeed? The answer: by failing.

The clue lies in population numbers. In 1970, San Fran had a population of just north of 700,000, LA, just south of three million. In the forty years that followed, the huge influx into California from Mexico and elsewhere had increased California's population from under twenty million to over thirty five million. Pro-business LA saw its population rise to just under four million, with San Francisco's population rising modestly to just 800,000. How did they achieve this? Firstly, they brought in planning and zoning laws that made it extremely difficult to put one brick on top of another, resulting in the price of homes rising in the face of constantly insufficient supply to meet demand. Secondly, they adopted an expensive, unionised municipal government which raised the city's tax burden, driving larger families out of town. Thirdly, tough labour and minimum wage laws made it extremely difficult for the low or semi-skilled to find work. Fourthly, tough environmental and land use laws made it prohibitively expensive to engage in traditional blue-collar economic activities like manufacturing, energy, warehousing and logistics, making San Fran's labour market increasingly unattractive to blue collars, whilst having no effect on jobs in technology, finance, venture capital or professional services. Fifthly, by driving up regulatory burdens and taxes on everything from fast food to taxi rides, the cost of living was increased to such an extent that if a low skilled, semi-skilled or blue collar worker was lucky enough to get a job in San Francisco, the benefit of a higher wage packet would be gobbled up by a higher cost of living. For those in such jobs, commuting from outside was the only viable option.

In 1953, after a workers' uprising in East Berlin was brutally put down by the Red Army, Berthold Brecht wryly quipped: "The people have forfeited the confidence of their government. Would it not be easier for the government to dissolve the people and elect a new one?" Little did Brecht realise that his bitter barb was to become actual government policy. The San Franciscan political establishment decided that by making it extremely expensive to live in their city and making it well nigh impossible for blue collars to find work there, they could simultaneously make the place more attractive to the rich and talented and encourage the poorer and less talented to leave. After several iterations of the policy, it would become self-perpetuating. Higher costs driving out the unsightly average American. Higher earnings attracting the beautiful people. Large concentrations of talent making the city attractive to tech investors. A lovely coastal climate sweetening the whole deal. It turns out that the San Francisco magic involves social cleansing of the poor and the working class from the city.

If the Irish establishment (or even just rogue elements thereof) decides to employ a San Francisco strategy here in Ireland, an alliance between plutocrats and Club Med could happen. In my next post, I'll go into some more detail of why this is a danger.   

Monday, 25 August 2014

Albert Reynolds RIP

Once again, Ireland has entered into a week-long orgy of revisionism that only the death of a former Taoiseach or President can bring, with the customary queue of Albert Reynolds' former enemies lining up to lather false praise upon the man. Or maybe I'm being a bit unfair - maybe in the moment in which the tribute is delivered, it is genuinely felt, a flicker of thoughtful contemplation soon to be quenched by the usual tidal wave of business-as-usual that will surely follow. I'm not a politician, so I don't consider myself enjoined to say only nice things, so I shall instead say the three most prominent things that come to my mind about Albert.
  1. He was the last Taoiseach to have significant (and successful) private sector experience prior to his entry into politics. He has been succeeded by four professional politicians, all of whom entered politics in their twenties and I can't help but think that the state of the country is not wholly unrelated to this fact. Reynolds had a hinterland that modern politicians don't have and it served him well.
  2. As Finance Minister, he ably and honourably continued the work of Ray McSharry and John Bruton in righting the country's finances. It was a sad irony that his successor in Finance, Bertie Ahern, undid all of the work that Reynolds' much less blessed generation of politicians had to do to build the wealth base that the likes of Ahern squandered.
  3. When he stood outside Downing Street with John Major in 1993 after signing the eponymous declaration, I'll never forget the air of careworn solemnity with which he said: "It is better to have tried and failed than not to have tried at all." Such a line would have been self-serving after a failure that had already occurred, but for a man commencing a risky process, it represented an honest appraisal of the fact that gloomier scenarios than those which came to pass could have unfolded. He honourably continued the work commenced by Sean Lemass in 1963, of slowly appraising mainstream nationalist opinion of the reality of unionist self determination and the collision course on which dogmatic opposition to "partition" would bring this country with it. While he denounced the more overtly Redmondite John Bruton as "John Unionist", he showed no qualms about adopting a similar approach to Bruton in substance - if not in form. How many lives this approach has saved in the 21 years since is a question whose answer we shall never know. 
So I too had nice things to say about him after all. I suppose that having watched the mess that his successors have made, his faults seem rather less important than they once did. He had his share of scandals. However, when compared to his immediate predecessor as party leader (Haughey) and his immediate successor (Ahern), any damage he did to the dignity of his office was minimal. Unlike the former, he did not threaten executives of the country's largest bank when they sought repayment of a large loan. Unlike the latter, he didn't preside over an orgy of government spending and property speculation that brought the country to its knees. The one area of Irish life where Albert Reynolds left a seriously negative legacy was on Europe, where his policy of trading Irish sovereignty for German aid showed a lack of long-term vision and foresight. However, realistically, who else in Irish politics at the time would have done anything significantly different? In my view, he can't be held solely to account for sins he shared with the wider body politic.

What strikes me most about his genuine supporters is the lack of pompous grandiosity in their tributes - in marked contrast to the nauseating eulogies which followed Charlie Haughey's death. One theme that both sets of fans have in common, however, is the view that that their respective idols were poor lads made good who could never gain the respect that they deserved from the patrician denizens of the permanent establishment. The difference, though, lay in the authenticity of the two men. While Haughey adopted ridiculous pseudo-aristocratic affectations like the private island, the tendency to brown-nose the artistic community, the Kinsealy estate and the horse-riding, Reynolds always looked comfortable in his own skin, equally at home among the grassroots from whom he sprang and the elite circles into which his fame and fortune catapulted him. Haughey wore his humble origins with an ostentation matched only by the lengths to which he went in his personal habits and mannerisms to distance himself from them - playing the class card on Garrett FitzGerald when the latter spoke of his "flawed pedigree". By contrast, Reynolds (with the unfortunate exception of his ill-judged libel action against the Sunday Times) bore Metropolitan Ireland's contempt with good humour. Most important though were the realities behind their respective rags-to-riches stories. Whereas Reynolds had genuinely pulled himself up by the bootstraps from his humble origins in Roosky, Co. Roscommon to making millions in businesses spanning show-bands, cinemas, meat-packing and petfoods, Haughey was a mendicant, whose apparent wealth was an illusion based on his panhandling of wealthy businessmen, a man who, in truth, despised commerce and sought blandishment as a substitute for the inherited wealth and status that his humble beginnings had denied him.

With Albert Reynolds gone, we have only one living former Taoiseach left born before World War II (Liam Cosgrave) and as that generation makes its inevitable journey out of our lives and into the lifeless pages of the history books, taking with them the institutional memory that they possess, it falls to the present generation of political leaders to take inventory of their own achievements and how they project forward to the legacies that they will leave when they pass the same finishing line that Albert Reynolds has just crossed. As of the writing hereof, the signs are not good. Like the Roman beholding the oncoming advance of Alaric, when I look to the past, I see glorious daylight and when I look to the future, I see cold and unforgiving darkness. Perhaps I will live to see the sun rise again, perhaps...

Goodbye Albert. The country was that little bit richer for having had you, and that's as good a legacy as most can boast.

Thursday, 14 August 2014

Public Sector Pay: Here We Go Again...

The late John Connally had a political career in which his allegiances could best have been described as flexible. In November 1963, Connally, as Governor of Texas, was regarded as a sufficiently loyal Democrat that he was seated beside John F. Kennedy at the moment that a deranged ex-Marine by the name of Lee Harvey Oswald single-handedly brought to an end the era of US Presidents travelling in open-topped limousines. Less than a decade later, Connally was a Republican and Treasury Secretary in the cabinet of Kennedy's arch rival, Richard Nixon, a role in which he persuaded his boss (a man of similarly flexible loyalties) to abandon the Bretton Woods monetary accords in 1971. In the aftermath, Central Bankers and Finance Ministers around the world watched in horror as the machinations of Arthur Burns' infernal printing press laid waste to the value of their Dollar reserves. It was during this time that the ever pragmatic Connally faced an assemblage of G7 economic policymakers. Addressing himself to the non-American contingent in the room, he summed up his economic policy thus: "The Dollar  may be our currency, but it's your problem." So did Connally signal that there was to be no question of a symbiotic quid pro quo between the US and the rest of the world in regard to monetary affairs. The Treasury and the Fed would do what suited them and the rest of the world would have to deal with the consequences.

Connally's spirit is alive and well today and luxuriantly incarnated in Ireland's public sector unions. In late 2008, the de facto leader of Ireland's permanent government, ICTU Supremo David Begg, hitched his wagon to a horse called Keynes and pursued a policy he had the temerity to call stimulus. In so doing, he made it abundantly clear that, after a decade of extraordinary government largesse funded by a property bubble which he and his confederates now denounced but whose ill-gotten fruits they had never spurned when offered, he would fight tooth and nail against all and any cuts to public sector salaries, pensions or staff numbers, ensuring that the weak and opportunistic Irish political establishment faced a barrage of vitriol and protest in the face of even the immeasurably modest fiscal adjustments which have taken place since the tide went out on the Irish economy six years ago. In effect, the special interest coalitions constituting the Irish public sector made it abundantly clear that the government was their institution, but everyone else's problem. While Connally's Texan brazenness had a certain ironic charm, however, there is no charm or elegance or finesse to a public sector establishment which couches its blatantly self-interested cartelism in the unctuous, nauseating language of social justice, equality and opposition to "austerity".

Thus do six-figured plutocrats like David Begg and Jack O'Connor rail against the wealthy as if they weren't included in their number and claim that their refusal to take their lumps is somehow a philanthropic exercise undertaken for the sake of those who would kill for the security and luxury of a public sector sinecure. We live in extraordinary times. The once untouchable Seans (Quinn, Dunne and Fitzpatrick) have been humiliated in bankruptcy courts on both sides of the Atlantic. Whiz Kid David Drumm is left ignominiously seeking financial asylum in the arms of his long-suffering wife and of the Massachusetts judiciary. The once swaggering Jerry Beades has been reduced to an insolvent laughing stock, stalking the halls of the Four Courts defending himself against a multiplicity of legal proceedings by financial institutions. So reduced are the fortunes of the great Michael O'Flynn that it now qualifies as a good day to emerge from the High Court having managed to prevent an examiner from being appointed to his companies. The waves even buffett the walls of Tony O'Reilly's once-impregnable fortress. You might say these men deserve it - and what's more, you might have a point. But at least the wheels of accountability have turned to some degree. However, most of the victims had less to gain from the reckless financial bets that these gentlemen placed, bore less responsibility and suffered even greater personal loss. Ask the many professionals whose retirements have been indefinitely postponed due to the collapse in the value of their pension funds or the construction industry workers turfed out of their jobs after the property bust. And yet...

Somehow, our public sector trots along, largely unscathed. David Begg, who served on the board of the Central Bank during a period in which the lending standards of Irish banks sank to almost subprime depths and who was a Governor of the Irish Times Trust at a time when that paper gorged itself on revenues from estate agents' and auctioneers' advertising, smugly wags his finger at the private sector and delivers pious homilies about how important it is to the poor and oppressed that his members continue to enjoy generous salaries and gilt-edged pensions. What is most incongruous is that a man to whom sanctimony comes so naturally can watch the suffering in his midst and adopt a selectively amnesiac posture which ignores the profligate years of plenty during which his members gobbled from the public trough, with Partnership 2000, the Partnership for Prosperity and Fairness and the notorious "Benchmarking" giveaways providing his members with pay increases which bore no relation to productivity. His memory also doesn't seem to stretch so far as to remind him of the vast expansion in public sector numbers which underpinned Bertie Ahern's political popularity. Few now remember that, in 2006, approximately 60% of all net new employment for males came from the bloated construction sector. Fewer still remember that in that same year, circa 60% of net new female employment was in the similarly bloated public sector.  

The fact of the public sector's extraordinary boomtime expansion is bracing enough. What is most extraordinary and discouraging is what came next.
  • Taxpayers have been hit with an income levy, the universal social charge, narrowing tax bands, levies on pension funds, higher taxes on deposit interest and hikes in Capital Gains Tax and Capital Acquisitions Tax, not to mention increases in indirect taxes.
  • Deals concluded with the European Commission, ECB, IMF Troika have resulted in significant reductions in the interest coupon payable on Irish government debt.
  • Mario Draghi's (in my view, questionable) decision to backstop PIIGS sovereign debt has resulted in further relief of Ireland's fiscal burden, through further reductions in the rates payable on Irish Gilts and rickety adjustable rate mortgages.    
The cumulative impact of the above factors, together with such cuts as the Cowen and Kenny governments have succeeded in imposing on Ireland's deep state, has been so modest that in year-seven of our fiscal consolidation, our budget deficit is still comfortably north of 5% of GDP and more than double the 3% Maastricht threshold for entering the euro. With such favourable backup from external bailout mechanisms and with such sweeping tax increases, the government's spending adjustments look depressingly unimpressive. And yet David Begg et al would have you believe that our public sector (which still has a larger budget than in the go-go mid-2000s) is starving to death. Give 'em one thing - they have chutzpah.

In the last year, our "public service" has treated us to the following spectacles:
  • strikes in the bus and airline sectors together with the likelihood of imminent industrial action in the railway service;
  • Blair Horan, the General Secretary of the Civil and Public Service Union (who earns €120,000 a year in his role), announcing that there could be no reductions in taxation, until public sector pay cuts had been reversed - as if the taxpayers' opinions counted for nothing; and
  • an ASTI delegate using a megaphone to drown out the Education Minister's speech to his union's annual conference. 
After the contempt shown by the public sector unions to taxpayers and citizens, the Minister for Public Expenditure, Brendan Howlin, has responded by indicating that rather than giving them short shrift, he now intends to use money that the government does not have and will have to borrow to reverse such cuts as have been wrung out of them over six painful years. In this, Howlin shows that the Labour Party, like the Bourbons, forgets nothing and learns nothing. However, he may perhaps have gone too far this time. The Fine Gael backbenches, bruised by an unexpected local election humiliation, may belatedly be growing a spine. John Deasy from Waterford has denounced Howlin's political kite as "vote buying", while, with unusual forthrightness for an Irish politician, Eoghan Murphy (who has spoken sensibly about spending over the last three years) called for any budgetary relief available to be given in the form of tax cuts, which, as he correctly points out, would benefit both public and private sector workers. However, the public sector has demonstrated time and time again, that it regards the taxpayer's money as its own and has no interest in shared gains. It is time for Fine Gael's backbenchers to say what its clueless Garrett FitzGerald-era leadership won't - that where public servants turn their backs on the public they are enjoined to serve, the public must turn its back on them. And if they don't say it, someone else should. Over to you Lucinda...