On the Exponential Growth of the Irish Economist

Ah, the Irish Economist.  In the current climate, ask the average man on the street to name a full team of national soccer players that might tog out against Georgia next week and he would struggle.   Sure there is Keane, Duffer, Shay Given, and that guy with three grannies who won’t play, Stephen Ireland.   But the rest of the squad is not very visible, and wouldn’t slip off the tongue of Joe public.   However, ask him to name his economist dream team, and he would have no shortage of names to throw on the team sheet – Jim Power, David McWilliams, George Lee, Morgan Kelly, Alan Ahearn, Austin Hughes, Dan McLauglin.  These guys and their brethren get an enormous amount of face-time and print-line in our media, both back during the boom and now even more during the recession.   Do other countries have such an array of high profiles economists?  I doubt it.  Americans would generally know whether Greenspan or Bernanke are in charge of the federal reserve, but that would be as far as it goes.  Likewise in the UK.  But over here, these guys are borderline celebrities.  And they come in so many different flavours.


In retreat - Austin "Comical Ali" Hughes and "Desperate" Dan McLaughlin

There are the bank chief economists, the paid shills for mortgage banks who constantly predicted during the property bubble would never end and interest rates would never go up.  Austin Hughes at IIB and Dan McLaughlin of Bank of Ireland were the too most shameless mouthpieces here, constantly predicting interest rates would drop while in the real world they clicked up every month.  Finally, with the the house crash barbarians at the gate, they talked of a “Soft landing”, then a “Soft-Hard landing”, and finally gave up and retreated back into bank headquarters.    There hasn’t been a peep heard out of either in months.  A closely related species was the estate agent chief economist.  Again not sighted for some time, they may also be in hiding but more likely extinct.

Then there are the academic economics. These are a more recent media phenomenon, slowly coaxed out of the wood work as the clouds began to darken, with all sorts of doomy predictions that were not really predictions at all since the crash was apparent.  Morgan Kelly and Alan Ahearne seem to be the two main players in this grouping.  In fairness to Mr Kelly, he made a very strong if somewhat late call on the direction of the banks and the housing market, while his academic economic brethren kept their eyes closed.  A particularly rare species is the trade union economist.  I know it sounds like an oxymoron, but they do exist, and occasionally someone like Paul Sweeney from SIPTU will turn up on the radio waves to argue the economic benefits of communism.


Who is number one? - David "McDreamy" McWilliams or Jim "Max" Power

 And of course, who could ignore the freelance economist like David McWilliams.  Tied to neither boom nor bust, this guy has been a constant presence , coining the phrase Celtic Tiger, and predicting a house-price crash for over 15 years.  However, I think it would be cruel to say a stopped clock is right twice a day.  Despite the ginger Hugh Grant look ,and an awful habit for gimmicky stereotypes like the increasing extinct “Breakfast roll man” and the Asbourne inhabiting “Decklander”, I actually have quite a lot of time for him.  He stuck to his guns while others threw muck at him and called him a crackpot for ten years.  He even proposed the idea of a bank guarantee in the Sunday papers just before the government brought it in.  And while a scary thought, it wouldn’t be a stretch to imagine one of the Brians got the idea by idly reading the Sunday Business Post over breakfast.  In recent months, I think even McWilliams might have been overtaken as number one all round media economist by Jim Power.  He seems to be on Questions and Answers, Primetime, Newstalk, and writing newspaper editorials all day, every day.   Representing pension product operator  Friends First as their chief economist,  I can only surmise the company’s current sales strategy for flogging PRSAs is to put him on the airwaves 24/7 to whinge about public sector pensions and pile on uncertainty over the future of the masses.

Economist is a title that has been muddied and devalued over the years, particularly in this country.  It seems like any old hack with a business degree can now use the title.  And while the shameless exploits of the bank mouthpieces have done much damage to the profession’s reputation, the main reason I have little time for them anymore is that they are just not very good at their job.   As a social science, economics is always going to be a bit fuzzy, lacking some of the harder laws and certainities of the physical sciences.  But as current climate shows, none of them really have a clue what is going on.  They never agree and their predictions seem to change on a daily basis.   I would would have more faith the Eamonn Dunphy’s prediction on whether Ireland will qualify for the world cup finals than when Jim Power predicts we will climb out of recession. 

The reality is the global economy is a vast, interconnected, non-linear system, and any prediction you hear on the radio from any economist, a shill or a genuine academic, should be first dipped in a tub of margurita salt.  We simply do not understand the system we have created.  And while economists never have a concensus on whether we are going to shrink or grow, because their simplistic models make accurate predicitons impossible, they are unified in believing that economic growth is a good thing that should be pursued at all costs.   Indeed, all economic theory revolves around the idea of growth.  In my opinion, that is the biggest problem.  And modern economic and monetary policy doesn’t just require linear growth, it needs to be exponential.  Unfortunately we live on a finite planet with finite resources.  Until the  economic theory moves to a model where things don’t go haywire when economies stop growing, it is doomed to failure.  And not just the failure of repeating cycle of recessions but the complete destruction of the planet.

However, I  am not asking the world’s economic theory be upended immediately.  The planet should survive my lifetime.  But what I do want is an exponential decline in the amount of Irish economists fighting for room in our media.  I’m over you guys.  Yes, we are in a recession.  Yes, you didn’t really see it coming.  Yes, I know, you have no idea when it will end.  But get off the TV, the matches are starting.  Did Andy Reid make the squad?

On Dead Rental Money

It’s a subject I try to avoid. But, at least once a month I will be berated by family, friends or work-mates for apparently throwing money away on rent. Being married with no home was greeted with quiet horror, but after announcing we now have a baby on the way and have still no plans to buy, people are beginning to shake their heads. “Would you not like to have your own place?”, “There is real value in the market now”, or the classic “Sure rent is dead money, you’d be better off with a mortgage”. Our decision just doesn’t compute for most people I meet. It’s like I am telling them 2+2 is 5.

I always want to defend my position, but an adequate defense is tricky for two reasons. The first is the difficult task of trying to dislodge the very fixed ideas Irish people have about the economics of buying house in a short conversation. And the second is not wanting to offend people who are generally heavily invested in the home-owning game with my estimates of what their houses are, and will be, worth. Schadenfreude is not an attractive characteristic to give off even if I bear none. Indeed I take absolutely no glee in the financial hell many people will find themselves in over the coming years because they followed the path of home ownership at all costs.

The Bank of Ireland Elf pondering getting up to her ears in mortgage debt circa. 2007

The Bank of Ireland Elf pondering getting up to her ears in mortgage debt circa. 2007

I can very easily see if you never left the country during the boom years, you could have got sucked into the great property cult. It was heavily reinforced by the media, the banks, parents and friends who had made a killing. Luckily, I left at the turn of the millennium, and headed to Los Angeles for a few years. Upon my return in 2002, I immediately noticed something very strange. Apartments in Dublin which friends very buying were going for 50% more than the equivalent in a flash neighborhood like West Hollywood, despite higher wages and lower taxes in Los Angeles. I was continually pestered into buying a 1-bedroom apartment anywhere despite the fact I had just started work and needed a mortgage in my early twenties like a hole in the head.  After a year back in the country, I ended up jetting off again for another few years, far from the house buying mania.  Upon my return in early 2006, things had got even stranger. People were going into 40 year mortgages with friends, or worse still, with girlfriends they had only known a few months. The numbers most definitely didn’t stack up in 2006 right before the crash, and after two years of tumbling prices, they still don’t.

Without belaboring this piece with too much numbers, I will go through a simple example of what I mean. Currently I am renting a two-bedroom house in Blackrock, and the current market rate is about 1,300 euros per month, and the only capital I have tied up is 1,300 euros deposit. The current asking price of a similar house in the neighborhood is about 500K euros. A regular mortgage for such a house, assuming I have 50K euros deposit, would be approximately 2,000 euros per month. While I could deduct interest relief from this, with all the life assurance and other things required in holding a mortgage, I will leave it at 2,000. Repairs, plumbers, things like broken washing machines and rates will easily add 200 euros to the monthly bill, and then there is the income the 50,000 euros could be generating had I not bought. Even at today’s meager interest rates, that comes to about 100 euros a month. So the monthly outgoing is easily 2300 euros per month to own.

Now it is not fair to compare the 2300 euros directly with the 1300 euros, as the former includes a capital repayment component, which is the equivalent of saving over in the rental world. Capital repayments average out at about 550 euros over the first five years. This leaves a real differential each month of about 450 euros between renting and owning. So 550 chips away at the capital each month, but what about the rest of the mortgage payment? Surely those 1450 euros each month wasn’t a waste? This is the very tricky bit for most Irish people. You see, interest repayments also follow their deathly cousin, the monthly rent, into the undiscovered country from which no traveling cash returns. In other words, it is also “Dead Money”, to use the term I hate.

So over the first five years, I will have saved 27K euros by renting the same house. But what about the value of the house? I think in the current economic climate of deflation, rising taxes, and falling wages, house prices will be lucky to stay level over that period. Feeling very safe in my assumption house prices will not increase over the next five years, I will be at least 27K euros better off, but probably more. In fact much, I believe much more. Revaluing the house by crudely letting the cost of owning it move in line with the rental it commands, I estimate the house is actually worth between 250K and 300K. And this is assuming rents are not falling, which they are. So we have a long way to go yet in this house price crash. In fact, we are only half way there. I expect this house to drop a further 40 to 50%

And there are multiple other benefits to not owning a home besides not being exposed to the downside risk that seems apparent in the Irish market. Having liquid assets could prove useful in the uncertain economic climate, as will the ability to be mobile should the need arise to find work elsewhere.

So that is why I am over thirty, married, soon to be a parent, and horror-of-middle-class-ireland-horrors, still renting. But I can never explain that to people directly when asked, as I outlined above. One particular colleague continues to advise me to move back in with the parents despite having outlined my arguments to him multiple times. So I don’t even bother anymore, as I always just end up feeling like some sort of Armageddon mongering conspiracy theorist, who lives in a bizarro netherworld somewhere between living his parents and living his own home, whose main hobbies are throwing away vast amounts of money.

And even if I did get all the points across, and all the points were digested without further responses involving rental money and its lack of vitality, I would still be asked the reasonable question, “But wouldn’t you just like us to have your own place?”. The answer to that is yes, of course I would. But it will happen when it economically makes sense to us, not when other people tell us we should. A while I would not mind paying a reasonable premium for home ownership, I don’t think it should be 450 euros a month and a heavy dose of risk. So we may try to buy a house in five years, ten years, or even next month. But right now, I firmly believe it is still financial madness, married, single, with or without children