June 3, 2014
Last week, there was lots of talk about individual politicians but, in truth, these people – although mostly well-intentioned – don’t actually matter in terms of the economy. All the main Irish parties believe in the same economic orthodoxy, so in a sense they are irrelevant. Remember, it was economic orthodoxy that got us into this mess, so it’s hardly the most likely route out of the crisis.
A politician’s fate is controlled by the economy, rather than the other way around. If they chose an economic vision and were prepared to do something about it, then things would be different, but they don’t have such a vision.
Amazingly, Irish politicians and the civil service have manoeuvred themselves into a position where the acid test for success or failure is whether the budget deficit goes up or down.
However, the budget deficit is an accounting residual – it has very little to do with economics. It is a figure that falls out of national accounting models. It is the end point, not the starting point.
As such, it tells you very little about what is going on. This figure’s irrelevance is made all the more compromising by the fact that the other target that political spin-doctors crow about is the bond yield. But the bond yield is only a momentary value judgment made by the same infallible financial markets that lent billions to Anglo, didn’t see the crisis coming and can’t price risk.
So what’s going on? Why do people vote for Sinn Féin if there is a recovery, and if there is a recovery, do you feel it? Or is this yet another chimera, driven by yet another entirely manufactured housing boom?
What I have decided to do this week is bring you four up-to-date separate charts, which tell us not so much what is going on in the Irish economy, but why it is happening.
In addition, these charts may explain why people voted the way they did last weekend.
Chart 1 tells us what is going on in the real economy. It reveals that, while inflation is falling, wages are falling even faster than prices, and this means that people’s purchasing power is actually falling, not rising.
The key figure to look at here is the real wage – the red bars on the graph. This is your wages minus the rate of inflation. The numbers show that, even though unemployment has fallen in the past two years, so too have real wages.
This is why you feel poorer, not richer, despite the fact that everyone says there is a recovery in place. For the economy to feel prosperous, real wages have to be positive – they are now negative, and have been since 2011.
Without real wage growth, there can be very little prospect of sustained demand. Without sustained demand, there won’t be a sustained fall in unemployment. We can see this development in Chart 2, which not only shows us the rate of unemployment but the amount of people drawing the dole.
What we know from the latest figures, published last week by the CSO, is that employment growth has stalled.
In the period from January to April, the number of people in work rose by just 1,700 or 0.1 per cent quarter-on-quarter, compared with a 10,600 gain in the fourth quarter of last year.
The lack of jobs and demand means that the rate of inflation has continued to fall. You can see this in Chart 3, which shows you the rate of change in general prices on the one hand, and house prices on the other.
This is very worrying, because it shows us that prices in general are heading downwards, but house prices are heading skyward.
Why is this a problem? It’s a problem because your wages are linked to general prices, so as wages keep moving downwards, house prices move upwards. We know from Chart 1 that real wages are falling, but house prices are soaring.
This means houses are getting more and more expensive, but the only way the average person can afford a house is to borrow and borrow as much as possible, because wages and incomes are not keeping up with house prices. We’ve been here before. Don’t you remember the madness?
You may now be starting to get the picture.
Let’s look at the final chart.
Chart 4 shows the impact of house prices on consumer sentiment. We can see that as house prices started to rise, so too did consumer confidence and this shows the phenomenal impact that housing wealth has on how people feel about the future. You can see that as house prices fell, consumer confidence fell in tandem. At some stage, one drove the other. Then in 2012, house prices started to move forward gently, so too did consumer confidence.
In the past few months as the property frenzy has taken hold again, consumer confidence has skyrocketed too.
But what else is driving this confidence?
Job growth is slowing down, so it’s not jobs. Real wages are actually negative and inflation – the price at which Irish small business can sell its products – is falling.
What is driving Irish confidence is the housing market. So here we go again. Seven years after a housing boom almost destroyed the country, we are at it again and there are enough people who benefit from the positive wealth effect of a mini-housing boom to keep the whole thing going.
This is not a sustainable economic model. We are heading back to the place where we Irish people buy and sell Ireland to one another with other people’s money and call it a recovery.
As prices rise in certain areas, the people who live and already own houses in these areas feel richer. They feel able to spend. Maybe they draw down savings that they squirrelled away and consumer confidence takes off.
But they are the already rich in the main. Also crucially, the rise in house prices does help those in negative equity, but unfortunately where house prices are rising are not the areas which are suffering from negative equity.
As houses prices rise in selected areas, and large parts of south Dublin become to Ireland what Knightsbridge and Chelsea are to Britain, the rest get left behind and feel that they are not included in this so-called boom.
The media hypes the thing up, because the papers and radio stations make money out of the property advertising, and this further reinforces the “us and them” division.
Is it surprising, in this context, why people reject mainstream politics?
If wages were rising and houses were affordable, there would be an entirely different political narrative playing out. But this is not the case.
As long as mainstream politicians and parties are happy to preside over such a lopsided economy, which in turn results in a divided society, radical politics will become mainstream . . . and mainstream politics will become redundant.