Nov 18th: IMF Arriving at Terminal 2, Dublin Airport

(HT: Cathal G)

How would you like it done Sir? Harsh or Severe?

The UK government announced its austerity package today; it’s harsh. But how does it size-up to Irelands plans-in-the-making? Opposition members in the HOC were quick to point to Ireland and our governments belief that we could cut our way out of the economic problem; Brian Lenihan’s we’ve turned a corner speech last year was the focal point of their ridicule.

Such ridicule, if heeded, may be good for Ireland; it is becoming clear now that Ireland's "misguided austerity" could actually be a key thing that helps Ireland grow! albeit indirectly via less severe global austerity. In any event, I think it is interesting to place the newly announced UK austerity plan in an Irish perspective. In simple capita terms the UK is just shy of being 14 times bigger than Ireland. We can compute some basic figures off this fact to make some quick comparisons. I also think doing so will help put the fairly animated debates in the UK over their cuts into some perspective for us here.

I’ll just run some of today’s headline figures –

UK Public sector four-year austerity package in Irish terms: €7bn

UK Public sector job cuts in Irish terms: 35,000 jobs

UK Welfare cuts in Irish terms: €575m

UK Extra social care in schools in Irish terms: €165m

UK Axing quangos in business, innovation and skills sector in Irish terms: ~ 2 quangos; €30m

Looking Forward to a Speedy Recovery..

I went to Dr. Alan Ahearn's talk last night about "Economic Firefighting". Dr. Ahearn is the special advisor to the Minister of Finance and is probably the main architect of the government response to the crisis, NAMA, and the on-going recovery efforts of the State. A serious job, to say the least.

The talk was interesting and largely positive about Ireland's prospects as we emerge from recession. Dr. Ahearn concurred with growth and employment forecasts and indeed with the views expressed by Mr Lenihan late last year - that the "worst is now over". He also attempted to dispel misconceptions about the "bank bailout" -- debunking the idea that the government are bailing out bankers and developers and arguing that the government are in fact bailing out the country and in doing so securing it's future viability and prosperity. The issue of NAMA for the "small-guy" was also convincingly dispelled as an illogical move. (aside: I think a temporary extension of the current '12-month foreclosure rule' for domestic homes is an area worth considering).

In general, I was in agreement with the arguments presented. There is, however, one thing that I want to pick-up and throw out there -- and it relates to the banks.

To me there are three distinct issues muddled up in our thinking about the banks here. The first issues is that the banking system needed to be salvaged to save the country from ruin. The second is that the banking system needs to be recapitalized in order to function. And the third is that the banking system needs to lend and take risks in the future to secure the country's future stability and prosperity. To date the main analysis and discussions have been about the first two issues. However you like it, NAMA is now a shut case; the deal is done and further energies debating its merits or otherwise are a waste. I think the issue that now needs to come into focus is HOW the banks will operate once they are recapitalized and what role the State can play in regulating and directing their operations.

At present we seem to be content with the notion that "if the banks have funds they will lend and all will be well!" This assumption is the height of our sophistication on this issue to date. I would argue that we're being foolish here, at best, and certainly missing an opportunity. I don't think anyone want banking as it was, or anything close to that and we're assuming that the banks will have learned their lesson -- they probably have to some degree but they will also have learned that they are invincible which isn't fortunate for the state. We know that need prudential banking, and we now know that we need banking to operate with some awareness of the macro environment and their role with in it. They certainly need to be willing and able to take risks again but they also need to remain civically responsible.

So what's happening on this issue? Well it appears that the Financial Regulator/Central Bank has been seriously reinvigorated and they are taking clear steps like increasing capital reserve requirements and sharpening their monitoring and intervention functions. This is all sensible, expected, and welcome. But is there room for some innovation here? One suggestion I would make is that we discuss this.

In particular, I think we should discuss whether the government could issue directives (or similar) to the banks, based on the macro-realities of the day, that would guide the types of lending and risks they take. In the current short/medium, such an ability would ensure that banks aren't taking misguided risks from their new knowledge of invincibility (moral hazard!) and, moreover, that they can actually facilitate real prosperity by lending to productive-enterprises rather than speculative-enterprises for example.

Here are two specific ideas that I think should be discussed further:

One, Ireland needs export-led growth yet Irish enterprises struggle to get credit lines open... Can the government do anything new to ensure that our re-capitalised banks will actually lend to Irish companies and enterprises that are seen as being of particular importance to the recovery and real and sustainable growth in the future?

Two, levels of personal debt in Ireland are some 220% of disposable income! This ratio is amongst the highest in the world. Do we want the re-capitalised banks to extend credit along these lines further and just do retail business as usual? Is there any sense, or legitimacy, in capping this level of debt? what is a sustainable and reasonable level for the country?

Harvard Business Review: Breakthrough Ideas for 2010

Fascinating article (link here - requires subscription though a free pdf version seems to be available if you google the title). HBR's ten breakthrough ideas include Romer on Charter Cities, Mullainathan on spotting bubbles, Amabile and Kramer on worker motivation and Dixon on simple technologies to revolutionise healthcare. It is hard to look at our situation in Ireland and Europe and not have some optimism that we are so far from the frontier of human potential that breakthroughs in healthcare, the nature of work, innovation policies and related areas in 2010 could usher in an area of real progress in human welfare. There is no doubt that our debate in Ireland will be intense this year as the government strategy of promoting economic progress through funding university based inter-sectoral research clusters rolls out in the backdrop of looming problems with public finance. Much of the breakthrough ideas in the HBR article are simple ideas for operation at the ground level. Hopefully, the 2010 debate in Ireland will see a greater appreciation of the role that such innovation plays in promoting human welfare.