Are we about to enter a winter of discontent? History would suggest that we are. The reason is simple. The end of an economic cycle tends to be characterised by industrial unrest as the workers and company owners try to grab as big a share as possible of the declining spoils.
The strikes at Dublin Bus and Aer Lingus are probably just the start of it.
If we examine economic cycles throughout the past few decades, we see a number of distinct phases.
Initially, as an economy emerges from recession, there are loads of unemployed workers looking to be hired.
Wages are low, so too are expectations and there is a golden opportunity for companies to hire good workers for a song.
Typically, house prices have fallen rapidly in the preceding years, debts have mounted and people are in no mood to borrow. The banks having taken a hit on bad loans in the recession are reticent to lend. But at this stage in the cycle, stock markets are traditionally quite strong as forward looking investors are “pricing in” a strong recovery.
It is crucial to understand how differently investors and workers negotiate. Investors negotiate today based on what is likely to happen tomorrow. Workers negotiate today on what has happened yesterday.
Workers are constantly trying to claw back cash for themselves, while investors are always thinking ahead. As long as the future looks relatively rosy, workers can normally claw back enough to be happy, while investors can factor in these costs and, if they are optimistic, even forecast a profit.
They calculate that as long as demand is buoyant, they can “pass on” these costs to the customer in higher prices.
If we look at our own recent economic history through the prism of the economic cycle, we can see why this week’s industrial unrest might mark the beginning of a process.
Our cycle started some time around the early 1990s when the previously moribund economy began to register a pulse.
Interest rates were low, so that anyone who could get their hands on capital would see a decent profit on an investment.
In the recovery phase, wage costs are typically low and companies will make significant profits as sales grow, but costs are kept down by cheap labour and low interest rates.
As the recovery continues, unemployment falls leading to upward pressure on wages. But employers are doing well and are investing heavily, so the wage demands are given.
Economy-wide, the tolerance of wage demands is dependent on the level of unemployment. The quicker unemployment falls, the smaller the window for higher wages. When unemployment falls to its lowest level, wages tend to pick up strongly.
But in Ireland this did not happen, because mass immigration meant that the supply of labour expanded rapidly.
So, instead of Irish wages rising in the second phase of the recovery, the number of people employed here soared.
Rather than wages rising, tax revenue rose instead, giving the Government a huge windfall which allowed it to expand the public sector enormously.
In economic terms, the “normal” windfall that would have gone to workers in wages as a result of the boom found its way into the coffers of the State.
Typically, as the recovery matures, people start spending and stop saving. This drives up the price of houses and will also push interest rates upwards.
Both these factors, particularly the latter, put brakes on the pace of economic growth. However, in the Irish case, by joining EMU we got interest rates that were priced for a German recession rather than an Irish boom.
So, the economy grew as more and more cheap money was borrowed. This prolonged the boom. German interest rates and mass immigration undermined the built-in, self-regulatory nature of the economic cycle. This implied a longer and more effervescent boom than would normally be the case.
But as Irish workers — and, to an extent, immigrant workers — tried to keep up with a world of rising house prices, they were constantly trying to “claw back”.
What is not clawed back is borrowed, because the average worker tries to keep up. This is why we have seen an explosion in borrowing in recent years as workers try to bridge the gap between the cost of their lifestyle and their restrained income. The huge windfall that goes to the Government as a result of greater tax revenue explains why we have had so many cost overruns on everything from hospitals to roads.
This fiscal incontinence is tolerated in the face of overflowing coffers. As the cycle peaks, however — years after it would have, had we to rely on our own resources — the subsequent and apparent downturn comes as a surprise to many. (It’s worth noting that the same stockbrokers who this week, are falling over themselves to forecast a downturn next year, were suggesting six months ago that all was hunky dory.)
As costs rise, firms can’t pass on the outlays in higher prices and state companies’ budgets are cut by a central government who find that their tax revenues are drying up. And so, a monumental struggle ensues between workers and employers over their slice of the diminishing pie. The workers realise if they don’t “claw back” now, they will never get the cash.
The employers figure that if they “give in” now, they will see a drop in profits and miss budget targets or both.
In good times, such rigidity is rarely a problem because there is always a bit of leeway, now the wriggle room is narrowed.
Both sides harden their positions and a scrap follows. This tends to accelerate the downturn as employers hold off on investment until the strike is over and the industrial problems are sorted. In turn, poor industrial relations knock confidence, denting spending. The isolated strikes become part of a larger picture whereby falling house prices are compounded by these industrial tensions.
Our much-vaunted partnership model is like a marriage in good times — a match made in heaven. It is likely to be reasonably strong initially, but as the interests of employers and workers diverge, the jury on partnership is out.
Ironically, commentators will jump to the conclusion that the boom came to an end because of the strikes. In reality the opposite is the case: the strikes came about because the boom came to a cyclical end.
Yes, employers and employees are both seeking the same thing, stability or a fair measure of predictability. However as we have seen over the last while, these conditions are not available at the moment. And the hope that the arse falls out of the housing market seem to be the one hope. BTW, how does that once off bankrupt system work in the USA, I suspect that the quicker that or something like it is installed here the better. Something to dress the wound, once the boil is lanced, may be needed.
“(It’s worth noting that the same stockbrokers who this week, are falling over themselves to forecast a downturn next year, were suggesting six months ago that all was hunky dory.)” I agree about the onset of a generic U-Turn in the opinions of not just stockbrokers, but corporate Economists too (I have personally experienced several cases of that bi-faceted fraudster in the past three to four years,) and you can bet your bottom Euro that the press will follow suit, but only once the Government has already publically admited that things are on a decline (don’t hold your breath) and… Read more »
If it follows the historical pattern in other countries, it will be long, drawn out and gloomy for half a decade at least.
Joe soap, The market should bottom about 2013-15. There will probably be an attempt for a recovery around 2011-12 (what is currently happening in Japan but they have yet to witness the death blow) . If we study the Tulip mania in Holland in 1600s, The South Sea Bubble or The 1929 crash (to later become the “great depression 1932 (the rise of Hitler and all that negative and dangerous leadership). We can identify certain things. Those manias and busts all had one thing in common! Where the booms(or manias) began and eventually ended they all collapsed lower then where… Read more »
Anto D,
Thanks for the answer, I appreciate it. I missed getting on the property ladder in the UK n the Eighties, and here I was already chasing a departing train, so I’m looking at this from the point of view of a lot of people that can’t afford to buy property and feel that I’ll never be able to get on the ladder at this rate. Though I can’t see house prices ever dropping by 90%, do you really think that this size of price collapse is a possibility?
Official Announcement
Bertie Ahern today announced that he is changing our national emblem from a shamrock to a CONDOM because it more accurately reflects the government’s political stance.
A condom allows for inflation, halts production, destroys the next generation, protects a bunch of pricks, and gives you a sense of security while you’re actually being screwed.
Damn, it just doesn’t get more accurate than that!Â
So much for it actually working!
Ahern is going to be roasted and sliced to pieces being the pig he really is!
We all saw what happened to Napoleon on “Animal Farm”!
The governments only really have two options: Firstly, they can let the bubble pop, enormous numbers of companies and people would go bankrupt, unemployment would rocket, and the economy would effectively come to a screeching halt. Alternatively, they can inflate, and inflate, and inflate, the effect will be much worse in the long run, but in the short run, people just get poorer in terms of buying power, things get harder for everyone, every year, the deserving, and the undeserving. Those who thought they were rich, find that they aren’t, houses are still worth $2m, but people find that $2m… Read more »
Would it be correct to say that the Irish government surely can’t do that as they have given up control of the treasury, through the back door, to Brussels? Perhaps going into the ERM means it’s less likely you’ll see massive inflation, unless Germany wants interest rates to go up a lot further. And that’s not too likely unless the German public go on a spending spree (which is even less likely.) I would imagine that it’s more likely the market here will collapse under a complete lack of faith. “Those who thought they were rich, find that they aren’t”… Read more »
You’re probably right on the first point given the status quo, I was considering David’s ‘leave the Euro’ argument. Even ignoring that, areas such as banking capital requirements in tthe Euro zone may allow (I really don’t know, although I doubt it) a government to effectively increase the money supply by making it easier for a bank to lend money. I believe that one of the major contributory factors in Japans 15 year depression was caused by the banks being allowed to count as part of their regulatory capital, shares they held in companies to whom they’d lent money. This… Read more »
If you want to avoid inflation, stick with the ECB because they will keep a strong currency and highish interest rates. If you want to accept inflation, leave the euro – but don’t expect any help from the EU when the trade wars start in the big test of globalisation.
Read this and you know we’re stuffed
http://www.sbpost.ie/post/pages/p/story.aspx-qqqt=THE+MARKET-qqqs=themarket-qqqid=28289-qqqx=1.asp
When the economy does go bust! We need people in this country who we could count on and have a link to this country. It’s about time now that we have the calling of the diaspora in place so we can reverse the damage and become even stronger. The EU’s days are numbered, no-one supports the way it is going and let’s be realistic the “free movement of people” has screwed up our country because the migrants send back billions to their families at home. We’re losing money and they aren’t going to make their lands prosperous this way, so… Read more »
While I agree with you Donal, I can’t see the return of ex-pats happening in the foreseeable future. There is no justifiable reason for anyone to want to return to Ireland with the ship sinking at a great rate of knots each day. It would be akin to asking the crew of a passing ship to board the Titanic moments after she hit the fateful iceberg. A suicidal action, if not foolish in extreme. And while it may be an honourable deed, it would only serve to slow the gradient of the decline a fraction (such as the immigration of… Read more »
Donal, I’m Irish, I’m part of the diaspora – I was chased out of Ireland by a political and economic system that ensured that I could work in a middle class job, earn a middle class salary, but never have a middle class life – property simply cost too much. I looked around the world and saw better opportunities and the decision was easy – leave Ireland. Why would I go back? To support the very people that chased me out? Those who left in the 90’s and have created a life will not return to Ireland until they can… Read more »
Points taken fergal & Joe, the thing is that the government has relied too much on EU labour and migrants from external to the EU to fill vacancies that we could easily have filled ourselves. We don’t need non-nationals in the Garda because 7,000 applied 2 years ago compared to the 1,000 foreigners who did, the exact same applies in the army where there are more than enough recruits to serve in the UN peacekeeping duties. I admit it is sad that the Irish Government has focused more on accomodating strangers who have no sense of loyalty of any link… Read more »
Donal, I agree with the principle of what you are saying. But the reality is that a returning Irish diaspara is an idealism that won’t happen in any foreseeable future. Any incentive (though there are none) would be considered far too little too late. As far as I can see, the only thing that ‘might’ possibly encourage a very small percentile to return to Ireland is the thing that the wealthy (and unfortunately anyone who bought property in the last three years) dread the most, a massive property crash. Though those wealthy property speculators, developers, landlords, investors, thoroughly deserve to… Read more »
I understand Joe it is late, but it’s not too late. Of course this plan of calling the diaspora would occur once the property market has crashed and rebuilding the economic damage has commenced. We do have to try and make this ideal possible by any means hopeful or hopeless, however it’s interpreted but it is possible and we as a people are strong and no matter what adversity we face – we’ll always come out on top! We just need to keep the faith…. this is possible but it will take time (5+Yyears) and we can get this right… Read more »
I agree with Donal, we need to do more by pressurising the government to follow this idea. The Irish American Forum recently criticised the Government for not encouraging the diaspora to come home or provide them opportunities to work and settle here. I’m sick of the government trying to promote a scheme of multiculturalism that has only brought ethnic tension and social problems that has rocked europe over the last 50 years. It’s only a matter of time before we become like the rest of europe whom really don’t give a crap about minority ethnic groups, the fiasco in balbriggin… Read more »
I have been following the Irish Economic madness with great interest for some years now. I am a 31 year old Irish guy returning to college to begin a degree this year. I not only missed the property boat but i also missed the career boat too it seems. What amazes me about Ireland country is the complacency of the Irish people. Bertie Ahern is a gombeen and a sleiveen. The fianna fail dominated politics of the past ten years has shafted my generation. I know people my age who are up to their necks in debt. Some are couples… Read more »
Donal, I thought I was pretty clear. Ireland did not offer me the quality of life available. Ireland offered a tiny apartment in the city of Dublin, or a 3 bed house with a 4 hour daily commute. Ireland offered me the opportunity to pay twice over for my health care – through taxation and then paying my VHI or BUPA subscription. I won’t go on. The US offered me far more. A higher salary and a lower tax. Yes, I pay for health care, but only once. New York has a public transport system that actually works! Imagine –… Read more »
I’m starting to wonder the very same thing RB. I earned a good degree in an area which is in high-demand by the multinational companies in this country. I’ve worked very hard at my job, but what reward have I? My salary is decent and lets me live comfortably. But, what about my standard of living? – I have to go through commuter hell every day to get to work. – I am nowhere near buying a place to settle down in. – I have the double whammy of PRSI/Health levies and cost of private health care. – While my… Read more »