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The Boom: We all went crazy? December 19, 2013

Posted by WorldbyStorm in Economy, Irish Politics.

There’s a piece in the IT which locks right into the narrative of Irish excess in the 2000s. It starts:

Things could hardly have looked sunnier for Irish consumers in the summer of 2006. The savings scheme introduced by former minister for finance Charlie McCreevy in 2001 to encourage people to put cash aside for a rainy day – like that was ever going to happen in an economic powerhouse like Ireland – matured and poured more than €2 billion into the economy.

And there’s no end of anecdotes:

Adrian Shanahan is a consulting engineer from Kilkenny. At the height of the boom he employed seven people and had a lifestyle typical of the times. “We went skiing and took a summer holiday as well as a few weekend breaks. Planning them was never much of a concern, even though we were quite frugal.”
As a mortgage broker Karl Deeter spent 2006 riding the property wave. “I remember the day we cracked open champagne in the office after we closed Ђ1 million worth of loans every day for a whole month.”

Still, how many of us are consulting engineers or mortgage brokers?

Dr Pete Lunn is an economist, neuroscientist and former journalist who has worked at the Economic and Social Research Institute since 2006. He spends his working days trying to understand our economic decision-making processes.
“We collectively fell for an economic illusion,” he says. Irish consumers were neither greedy nor stupid but relied too heavily on “extrapolation bias”. By this theory, people operate on the basis that the “best guide to the future is what has just happened, and back then all we had to look back on were boom times. It went on for so long that people stopped paying attention to past trends. There was no memory, either institutional or personal, warning us about what was happening.”

Again I suspect this is an overstatement. We ‘collectively’ probably did no such thing. Yes, there were increased expenditures, and how could there not be, with tax cuts remaining a feature of political policy throughout the period. But everyone?
And then there was the crash, and the Irish Times thundered:

“There is the shame of it all. The true ignominy of our current situation is not that our sovereignty has been taken away from us, it is that we ourselves have squandered it.”

But again, did ‘we’ squander it?

There’s something expedient about trying to spread the blame in that way.

On remarkable aspect of our current situation is this underlying assumption that everyone took a bet on the housing market or everyone spent until they could spend no more. It’s some stretch to believe that is the case, to build an edifice of Irish ‘shame’ on top of it less plausible again. And even if one argues that people purchased goods that they couldn’t afford – which is true in some cases, it still is an assumption, and this is one one sees time and again in the media, that everyone was doing that or was until the boom went off the rails.

Sometimes, it is true, this is modified to all spent, except those who were on welfare but they were living it up too.

Consider that first paragraph quoted above from the most recent IT piece:

Things could hardly have looked sunnier for Irish consumers in the summer of 2006. The savings scheme introduced by former minister for finance Charlie McCreevy in 2001 to encourage people to put cash aside for a rainy day – like that was ever going to happen in an economic powerhouse like Ireland – matured and poured more than €2 billion into the economy.

It’s interesting to see that, as noted in this NYT report:

About 1.1 million Irish savers — or 40 percent of the adult population — amassed €16 billion, or $21 billion in savings, a sum that is about 10 percent of the country’s annual gross domestic product.

So, 60% did not.

Moreover, according to a survey carried out by Bank of Ireland in 2005 and referred to here:

Bank of Ireland again called on the surprising 53% of SSIA customers not contributing the maximum of Euro254 per month to increase their level of SSIA savings as a priority. Although two-thirds of customers stated that their SSIA contribution presented them with no financial difficulty, the average amount saved per month remains at Euro171.14 (cash Euro161.61 and equity Euro207). On a positive note, 44% of customers said that they do intend to increase their contributions before the scheme ends.

A Goodbody Stockbroker survey noted that:

The study … finds that 45% of the accounts are held by people earning less than €20,000 a year.

Whatever way one cuts it those weren’t massive wages, which might explain the fact that the average regular amount saved was €171.14.

What’s telling is that it rather undercuts an underlying assumption of the piece which suggests that:

Extensions were planned, cars bought, holidays booked. By the end of August nearly 170,000 cars with 06 registrations were crisis-crossing the State’s motorways. This was an increase of 4.9 per cent on the previous year, which itself had been a bumper one for car sales. As the year progressed we spent €5 billion on six million trips overseas, which was an increase of almost 40 per cent in just five years.

Sure, all of those things were acquired by some people who had SSIA’s (and of course by some who did not) but in light of the quantities that were being saved and the fact that it was a minority of the population and with an average of €13,673 being paid out perhaps it wasn’t quite as extravagant as has been suggested in retrospect.

Also fair to note that that Goodbody’s report found that 37% ‘of the money in SSIA accounts [would] be spent with the remainder being invested. The biggest investment [was] expected to be in property’. S

Storing up trouble there – no doubt, but again… not quite the extravagance that is sometimes painted.

Of course SSIA’s were only one part of this. There were increased wages, lower tax rates, mass employment with the ability for people to move from one reasonably well paid job to another. There was state expenditure in a range of areas that also kept the economy buoyant (I have too many friends for whom 2009 was a disaster because although private sector they saw 60% or more of their income vanish as state spending vanished). And so on.

But if one part of this points to less excess then surely it might be useful to examine other parts. And perhaps think of the fact that of those who did have SSIAs near enough half were on low enough incomes, while a good 60% had none at all. Some did indeed lose the head, both in relation to SSIA’s and in other areas. But many many clearly did not.

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1. Richard - December 19, 2013

I guess commercial property lending had nothing to do with the bank bailout and subsequent ‘loss of sovereignty’, then. Or perhaps ‘we’ are all either construction magnates or bankers.

2. 6to5against - December 19, 2013

Good piece. I find this narrative really dubious too, and I find it particularly irritating that it is presented as received wisdom.

The aspect I find really galling is the idea – explicitly stated in the IT and quoted above – that we should feel some national shame about the high spending of the period. The implication sems to be that a ‘mature’ country – like Germany – would never have made such a mistake. It seems that many in the German establishment are happy to push this line too.

But why did Germany set up their central bank to maintain low inflation through the use of interest rates if they could rely on their maturity to avoid high spending? Is it not the case that they have simply followed mainstream economics for decades – as we generally did here prior to the euro, and moved interest rates up to depress spending, and moved them down when they needed to encourage spending.

The high inflation in Ireland of the early 2000s was an inevitable consequence of the design of the euro. And an entirely predictable one. In essence, we had the wrong interest rate. And despite the rhetoric we have all heard , most wages in that era rose only alongside GDP and inflation, as will always be the case. Even in Germany.

The solution to the inevitable bust was a sharing of the fiscal burden across Europe, particularly in the area of borowing. That this has not happened is shameful.

But it is not irish workers that should be ashamed

Johnny Forty Coats - December 19, 2013

Indeed. Those who should feel shame are the Leinster House lemmings who obediently jumped off the euro cliff without a thought as to negative consequences of surrendering a national currency.

3. richotto - December 19, 2013

I think the development of the credit bubble, credit as a way of life has to be acknowledged in this. Ireland together with the Uk seem to be at the exteme end of credit card use. In Germany for example major supermarkets I heard on Rte radio don’t accept credit cards. You can hardly make the smallest of purchases here without being forced to wait behind a couple of people using credit cards. I believe Europe is progressing a measure to transfer the cost of a credit card transaction from the vendor to the purchaser. Personally that can’t happen soon enough. On a larger scale the aquisition of debt came to be seen as a positive and desirable means to improve ones standard of living in the long run. Whether thats due to clever marketing by business or a genuine demand from people or whatever combination is disputed of course. But the availability and take up of such a huge amount of credit to the general population was what us “going crazy” means to me. Even today we have injunctions for banks to lend more, to start the whole thing again?

WorldbyStorm - December 19, 2013

There’s some truth in that, but it would be more useful to have some statistics on credit card credit, the profile of customers. Age, income etc. more pertinently let’s not ignore that these are massive industries pushing product. If you have little no surprise that you’ll go for credit, and we don’t generally tend to weight the blame for those who are taken in by loan sharks too heavily in their direction.

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