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?

You Know You're Old When You Have a Job (The Advantage of Being Over 25 in the Labour Market)

In a previous post I noted that Ireland, with an unemployment rate of 13.4%, is faring almost 4 percentage points (in some cases more) worse than Portugal, France, Greece, Germany, Finland, Poland, Italy, Bulgaria, the Czech Republic, the United Kingdom, Denmark and Romania. At the time I wondered why there was a difference between the unemployment rate on the the graph (generated using Google Public Data) and the official figure from the CSO. For those who are interested, the question is still open. Let's begin by looking at the seasonally adjusted monthly unemployment figure for Ireland; as calculated by Google Public Data (shown below).



We can see that a figure of 13.8% is provided for January 2010; almost 14%. However, how does this stack up with the current official figure for March: 13.4%? (The recent revisions in the calculation have been flagged by Karl Whelan). Google Public Data directs to Eurostat for details about calculation: this is where the link leads. Unfortunately, the Eurostat monthly figures (seasonally adjusted) are different to the Google series; and the official CSO figures on seasonally adjusted standardised unemployment rates are a different series yet again. However, the differences are not massive between Eurostat and CSO; I suspect that Eurostat may be using some sort of harmonisation technique.

Here we are told by Eurostat that "quarterly LFS data are combined with monthly registered unemployment data by using a temporal disaggregation Denton model. For the most recent months (for which the LFS data are not yet available), the monthly benchmark factors are forecasted using seasonal ARIMA regression models. The provisional estimates are calculated by multiplying these factors by the available registered unemployment figures." Here Karl Whelan describes how the CSO's seasonally adjusted standardised unemployment rate extrapolates from the most recent QNHS data using Live Register figures on the number of people claiming benefits. Whelan also addresses the issue of whether the unemployment rate may be stabilising: "The most recent Live Register release reported an unemployment rate of 12.6% in February. A simple extrapolation from the QNHS release would suggest that this would be revised up to 13.3%. Overall, the picture has changed somewhat from one in which the unemployment rate appeared to be flattening to one where it still seems to be rising." He also notes that a decline in male participation may reflect discouraged former construction workers leaving the labour force. Also, by 2009:Q4, one third of the unemployed had been out of work for more than a year.

Nothwithstanding long-term unemployment becoming a more important factor, there is an advantage to being "over 25". It has already been suggested (in the States) that the recession is "causing much more job loss among the less educated than among college graduates... The brunt of the layoffs in this recession is falling on construction workers, hotel workers, retail workers and others without a four-year degree." This indicates that there is a general advantage (or greater chance of being "somewhat immune to the recession") in being more highly educated. There seems to be a similar effect for those who are aged 25 years and over. As I noted before, 1 in 3 men under the age of 25 are currently unemployed in Ireland. It is also helpful to look at the historical picture. First however, a data series must be chosen: based on the table below. Recent declines in the labour force, and broader measures of labour market distress, which would push the number higher than 13.4%, are ignored for now.


The Status Ireland visualisation of the seasonally adjusted standardised unemployment rate corresponds to the table above. However, I am drawn back to the Google visualisation, due to the flexibility of graphing options. By availing of the option to the restrict the age-group to less than 25 years, we get the graph shown below. We can see that the under-25 unemployment rate is currently *approximately* 32.4%, higher than it has ever been since data has been available. (Brendan Walsh shows that the national unemployment rate fluctuated in a band approximately between 5% and 10% from 1961-1981; subscription required for access). In the 1980's recession, the Google graph shows that the under-25 unemployment rate was previously in the region of 26.3%, at peak level. It seems that there is indeed some advantage to being "over 25" in the labour market; and now more than ever.



For completeness, it is shown here: in another Google graph, that the over-25 unemployment rate was previously in the region of 14.3%, at peak level during the 1980's recession. Now, it is in the region of 11.3% (three percentage points lower than its peak level during the 1980's). Finally, it is interesting to note that under-25 males are more affected by unemployment now than they were in the 1980's (compared to females).

The Sentiment on the US Economy from Twitter

The Analytic Bridge blog describes an exercise conducted by Life Analytics where 10000 tweets containing the word economy were collected with the purpose of finding out what people think and how they feel about the US Economy and the economic crisis. The exact details of the methodology don't seem to be documented, but the following are some results:

- US President tells that the economy gets better but people don't feel the same.

- Economy cannot be getting better while at the same time there are layoffs.

- People expressing very negative feelings after losing their jobs.

Growing Up in a Recession: Beliefs and the Macroeconomy

This is the keynote at the 11th IZA/CEPR European Summer Symposium in Labour Economics that starts tomorrow:

Growing Up in a Recession: Beliefs and the Macroeconomy

Do generations growing up during recessions have different socio-economic
beliefs than generations growing up in good times? We study the relationship
between recessions and beliefs by matching macroeconomic shocks during
early adulthood with self-reported answers from the General Social Survey.
Using time and regional variations in macroeconomic conditions to identify the
effect of recessions on beliefs, we show that individuals growing up during
recessions tend to believe that success in life depends more on luck than on
effort, support more government redistribution, but are less confident in public institutions. Moreover, we find that recessions have a long-lasting effect on individuals’ beliefs.

Paola Giuliano (UCLA) & Antonio Spilimbergo (IMF)

Graduates willing to settle for lower pay?

Of 338 final-year undergraduate and postgraduate students at UCD, Trinity, Dublin City University and Dublin Institute of Technology, over two-thirds are worried about graduating into a recession, according to a survey from last month by the Michael Smurfit Graduate Business School. Story here.

Insight on U.S. Unemployment Trends

Tomorrow (or today, Irish time) sees the release of U.S. employment figures, which are expected to show a marginal increase in unemployment. Readers may be interested in visualising U.S. unemploymnent trends (by state, since 1990) using the new offering by "Google Public Data", as shown in the chart above. "Google Public Data" is discussed on the Google Research Blog here. The chart (above) shows Michigan, California, Louisiana, Vermont, and the U.S. average. (Misissippi is not shown though it follows a similar trend to Louisiana).

Of note, both Louisiana and California had above-average unemployment before 2000; but Michigan has fared relatively worse over the last decade. How did it go so wrong for Michigan when Louisiana (and Misissipi) and California previously suffered from the highest unemployment rates? This is a question that may see labour-economists swopping notes with trade-theorits and geographers.

Though Louisiana-State trends closely to Califorinia, Louisiana has a notable unemployment spike in 2005-2006, which corresponds to Hurricane Katrina (see some notes on Louisiana here). Despite an employment boost since Hurricane Katrina, Louisiana trends towards the national unemployment rate since summer 2008 (i.e. financial crisis). (Misissippi was also affected by Katrina but is omitted from the chart for reasons of parsimony).

Michigan's situation over the course of the last year is quite striking; the slope function of the state's unemployment increase is very steep. The outstanding (policy) question is: what is to be done about unemployment in Michigan; right now? From a research perspective, what can we learn from the 2005-06 unemployment shocks in Louisiana and Misissipi?

Visualisation of the Live Register Gender Gap in Ireland

Here is a visualistion of the gender gap in the Live Register (right up to May '09), courtesy of Status Ireland. Males are shown as the blue line, coming onto the register at a much faster pace than females since last summer.