Tag: economics

Categories
politics

Knowledge Economy needs the 9’s

I quite like the movie the 9’s but this post has nothing really to do with that movie. It’s not a wide critique of the budget either. Although I do believe that there’s an emphasis on keeping banking lines of credit going that will prove unsustainable unless economic growth returns rapidly.
This post is to do with a knowledge economy. The problem with economies is that they’re made up of people. This is something that many commentators, journalists, politicians and, indeed, economists don’t seem to understand. That broad stroke economic measures occur in a social context.Beyond obvious financial effects, they affect lives, motivations, purpose and hence economic productivity.
Indeed severe economic measures of the kind we saw last Wednesday are similar to waging war. During Lenihan’s budget speech I was reminded of Sun Tzu’s Art of War and his description of the 5 factors that affect the outcome of a war.


These are: (1) The Moral Law; (2) Heaven; (3) Earth; (4) The Commander; (5) Method and discipline.
The Moral Law causes the people to be in complete accord with their ruler, so that they will follow him regardless of their lives, undismayed by any danger. (moral authority)
Heaven signifies night and day, cold and heat, times and seasons. (future worldwide economic climate)
Earth comprises distances, great and small; danger and security; open ground and narrow passes; the chances of life and death. (our realistic financial context)
The Commander stands for the virtues of wisdom, sincererity, benevolence, courage and strictness. (the government)
By method and discipline are to be understood the marshaling of the army in its proper subdivisions, the graduations of rank among the officers, the maintenance of roads by which supplies may reach the army, and the control of military expenditure. (society – including the public sector)
These five heads should be familiar to every general: he who knows them will be victorious; he who knows them not will fail.

The Chinese and Japanese still teach the Art of War in their business schools as they clearly understand that it’s a concise and highly insightful book about crisis management and leadership. It may be the best ever written. Consider that it references “moral law” in a time where the punishment for diobedience was swift execution.
In the 2010 budget Lenihan imposed a pay cut based on salaries within the public sector employees, across all grades. Apart from the cuts there was reference to investment priorities including science and technology. From his speech.

“Other key investment priorities in 2010 will include science, technology and innovation; promotion of environmental sustainability; implementation of green enterprise initiatives; housing and urban regeneration; the health sector; public transport and finishing the inter-urban motorways.”

This echoes the Taoiseach’s Smart Economy comments after the budget. “We need to settle the public finances with a view to developing a model for sustainable growth through the Smart Economy, going forward”
So you’d think that those in R&D in Ireland working on the so-called Smart Economy wouldn’t be attacked in the budget? Well you’d be wrong.
As the story points out that only R&D grants to foreign companies will be increased under the 2010 budget. Indeed when we take the cuts into account the overall investment in Science and Technology next year will be cut by 22 Million Euro. So we’re going to achieve the Smart Economy by spending less on Science and Technology than we have been spending, much less as a % of GDP than the Scandinavian countries, Israel, Korea and other genuinely smart economies? Thinking back to the 5 factors, the conditions on the earth suggest we won’t win this battle.
Heaven and Earth suggest that future savings required to pay billions of NAMA + national debt (same thing effectively!) interest next year will squeeze S&T funding more and lead to further cuts in our smart economy spending. We’re also helping to create a climate whereby the intellectual property smarts of the smart economy is more likely to be owned by foreign companies than indigenous ones. A dumb incentivisation programme is unlikely to produce a smart outcome.
So what about moral law and the commander? Well here comes the 9’s. By this I mean those on grade 9999 in the public sector. I’m one of these so I know a bit about this. Us 9’s negotiate our contract directly with our employer. Every contract researcher in a 3rd level university or research institute is on this grade. I’m not aware of any exceptions anyway.
Why do we negotiate our salaries directly? It’s because they’re based on project funding. The funding is approved by national organisations like Enterprise Ireland and European organisations like the EU’s 7th Framework Programme. Indeed as David McWilliam’s would probably point out I’m paid by German and French pensioners, mostly! We’re employed to work on specific projects. If the project ends and we don’t have future funding then our contracts aren’t renewed. This has happened to people I know. A fact of life which is dramatically different to our other PS counterparts.
So when considering the moral law it’s necessary to understand that an economic measure designed to cut the pay of public sector workers (again) will unfairly cut the pay of a group with the following characteristics:

  • No benchmarking
  • No increments
  • No bonuses
  • No over-time
  • The guarantee of weekend work without payment
  • No job security

The government has dispatched a memo through the dept of education in true jobsworthian fashion stating that legislation will be enacted to enable 9999 workers to have their terms of pay reduced without legal recourse. To be crude about this, we’re being screwed by association!
Perhaps we were all getting paid too much. I doubt it though as most researchers I know are paid less than their friends in industry and never got bonuses. Indeed, it’s a source of some annoyance to me that some friends who used to boast about their bonuses are leading the clamour for PS salaries to be reduced. The main reason why many of my colleagues have stayed or joined a research group is because there’s only 1 other tech employers in the Waterford area. ArcLabs and TSSG are a tech oasis in a region that successive governments have ignored. A high-tech economy won’t be built exclusively on call-centre jobs. What difference a University upgrade may have made, I don’t know…
Everyone recognises the need for Method and Discipline given our dire economic circumstances. Most PS workers I know are not suggesting PS reform wasn’t necessary but that its been done in a poor way. In a way that punishes the most dedicated as much as those who are less so. It’s reasonable in the current climate for my PS sector colleagues to work harder, get paid less for overtime, have less holidays and not get extra pay for doing tasks directly related to their job. Teachers getting paid for marking their own exams and supervising students are a particular irritation of mine but many of these payments were introduced in the context of extravagant expenditure and bonuses throughout Ireland. Let’s not demonise one group for being exuberant when everyone was.
That’s what’s been done however. Moral law should deliver unity of purpose. It further undermines moral authority when any measure is implemented through a strategy of division. Genuine and fair public sector reform was possible.This should have been tackled first and there’s much evidence to suggest that PS unions were willing to do so.
Back to the 9s. The 9s I know were deliberately conservative about their pay as overhead charges are our only way of building a buffer between us and the dole queue following the end of a research project. This isn’t a gravy train. Most 9s are paying a pension levy while some are not actually paying into the PS pension fund. Again the victims of an inequitable implementation of economic measures.
How are we contributing to the knowledge economy. Well, in Waterford alone the expertise and research helped sustain, at peak, another 60 tech jobs in campus companies on top of 150 research jobs, bringing millions of funding into Ireland and the South East region. When we started in research in 1996 there wasn’t any in the IoT sector.
There’s a lesson for the Innovation Task Force here too. Measures to incentivise innovation and growth MUST be sensitively implemented. Innovation, more than anything else, is historically produced by smart and driven individuals. It’s unlikely to be produced by disheartened individuals looking to emigrate and I now know plenty of those.
I addressed my concerns to the “commander”. Whatever bitching I’ve done about him I believe Lenihan to be an intelligent and courageous man who has found himself with a difficult brief in a party that must bear significant responsibility for the woes that have befallen Ireland Inc.
Therefore, I wrote the department of finance at the time of the pension levy explaining some of these concerns. The response was that our research jobs were attractive and we’d have to do our bit in these tough economic times. Actually, we don’t. We can follow the Irish tradition of leaving the country to find a better quality of life elsewhere. Our diaspora is an Irish social tragedy.
Whatever about the Economist magazine’s opinion on the austere budget I feel Sun Tzu would slash the smart economy claims to ribbons. The Smart Economy will only be achieved through smarter contextually-nuanced policies that are cognizant of his 5 simple rules. He who knows them not will fail…

Categories
economics

Saving the country

Between twitter and facebook it’s difficult to find the time to update this blog. An update is due however and a full redesign will happen soon, I promise. In the meantime here’s a colletion of “5’s” I’ve posted to the the McWilliams blog where he’s developing an your ideas section.
I’ve broken the list into short term changes which need to be made immediately and longer term changes which should be implemented over 5 years to help improve the balance and robustness of our economy. This is currently our major problem as we’ve a shallow economic base relying on a few tricks such as construction (gone) and multi-national FDI. Some of my suggesitons are controversial and some are tongue-in-cheek.
Short term list

  1. Accept we’re near bankrupt.The world’s dominant lending institutions are either not lending to Ireland or are issuing very short term credit believing we’ll be bankrupt within 6 months. Therefore we’re in an emergecy situation which will affect the lives of everyone living and working here. We need to stop pretending that budget band aids can fix this. It’s patent nonsense. We need to come clean on our financial situation as some builders are currently doing and start negotiating with our bankers to restructure our debt. We’ll also have to flog some of our assets, with all serious offers considered. To aid the flogging we need to end the legislated secrecy regarding house sale prices and start auctioning off unsold houses with no reserve.
  2. Nationalise and consolidate our banking sector into a rebranded good and a nationalised bad bank. The state would maintain a significant interest in the ordinary equity of the good bank and appoint new management with assistance from some of the better members of the current management.
  3. Create an all party government, taking the better of our current TD’s. If anything good could come out of this crisis it would be an interruption in the never-ending cycle of FF led and FG led coalitions. Appoint a council of our top economists and international financial experts with, perhaps, some prominent disapora figures to create policy for the dept. of finance and run the good and bad bank.
  4. Call the ECB’s bluff. Demand a bailout from the ECB on the grounds our bankruptcy will set of a chain reaction that will implode the EMU. Greece seems to be in the same boat. Demand emergency legislation to achieve it. If/when they refuse pull out of the Eurozone and reconstitute a punt pegged against the dollar. Whatever we do, we shouldn’t vote for Lisbon unless the EMU is empowered to bail-out nations in trouble rather than take action against them for running deficits by imposing sanctions/fines. The current situation is farcical!!! Our government is telling us to vote for a treaty that copper fastens a collection of laws which are actively hindering us from dealing with this crisis. The EMU is a joke in it’s current form. If you don’t think so then read this quite reasonable opinion piece in the telegraph
  5. Create the publicly traded recovery and innovation bonds I’ve described before. In a sense this is happening in an ad-hoc manner as we’re seeing consolidation in our research sector and we’ve already had a major national bond issue. The idea of this bond is that the coupon is redeemable as cash at a particular rate of as income or corporation tax relief at a more generous rate.

Long term list (implement over 5 years).

  1. Reform our tax system. Reduce taxes on labour and employment. Eliminate employers’ PRSI. Remove all tax reliefs on property rental income, effective immediately. Don’t make this mistake again. Remove tax relief on house purchases for first time buyers. Lower stamp duty and VRT. All these taxes just contribute to individual debt and are bubble promoting. Use some of the recovery bond income to aid this transition if possible. Increase corporation tax to 15% but keep reliefs on patent income.
  2. Identify wealthy diaspora figures to repatriate using our “ireland bond”. Using these, Create a tax haven for technology investors and investment, partnering with US VC firms. As part of this create research centres which are NOT directly associated with individual academic institutions. Take the largest and leading research groups in particular areas (Biotech, Pharma, IT, Telecoms, Alternative Energy) and give each 5 years of baseline funding for all staff. Consolidate groups from different colleges. Set hard commercialisation targets to gain future funding for another 5 years. These centres should then be separated from their current academic institutions (if applicable) with no budgetary overlap. Inter-college rivalries are mucking up research in Ireland IMHO. Ensure some decentralisation in this process.
  3. Scrap the pension levy and the defined benefit (based on time-served) pension for anyone not in the scheme more than 25 years. Implement a version of the EU regulations regarding pension fund protection regardless of whether we’re in the EMU or even EU.
  4. Reform the public sector. Introduce proper performance related pay. Delegate budgetary control and reward thrift with bonuses. Currently it’s nearly impossible for many PS workers to be thrifty as they don’t control their own budgets. This is a MASSIVE PROBLEM in the health service. Sack employees who get consistently poor reviews. No more jobs for life. Give many senior civil servants early retirement and replace them with new managers on perf-related pay.
  5. Reform the political system. Reduce the number of dail seats by around 20%. Require all political donations exceeding 500 Euro to be on a publicly searchable database. Reward local government for saving money rather than punishing them by reducing budgets for the following year.

Some Extras

  • Put more effort into weeding-out social welfare abusers. Impose fines or deport foreign abusers.
  • Cap mortgage size based on a multiple of disposable income. Around 10 times.
  • Introduce legislation to force lenders to accept a percentage of a property back as part settlement for debt, at the value they accepted at loan time. This would help dissuade lenders from bubble behavior.
  • Force some jail inmates to do community service. In the US they have inmates making cadillac limousines & RV’s.I want an RV!!
  • Become the 51st state officially. Failing that join the Commonwealth 😀
  • Introduce restrictions to limit (not eliminate altogether) the number of unskilled immigrants from all countries including those in the EU
  • I’d love to ban political parties in this state but (like some other points here) it will never happen 🙂
Categories
economics

Blue swan with pink spots

Could perhaps be created using genetic engineering in the future 🙂 I’ve been reading Nassim Taleb’s The Black Swan. It’s an engaging book once you get beyond the pages and pages of insults directed against professional statisticians.
They key point could be summarised as follows. Professional statisticians have become obsessed with applying gaussian distribution models to real world phenomenon which don’t match the model for a range of reasons. Primarily the gaussian model attaches a lower probability to rarer events than is actually the case in many real world phenomenon such as degrees of wealth. When these models are used for prediction and risk management the results may be acceptable when making predictions about data close to the median but are hugely error prone about rarer conditions. The seeming success of the model in limited predictions promotes over-confidence and encourages further bad predictions.
Mr. Taleb goes on to point out that Mandelbrotian randomness more accurately depicts many phenomenon as it allows for greater deviations within a sample and more probable outliers. The point is made enthusiastically and in an idiosyncratic style. It’s accessible in a way that encourages most people to understand the contents and query current models for market analysis. It’s not an in-depth mathematical treatise and this is ultimately a weakness given some of the grand claims. However, Taleb’s rage at the amount of bullshit spouted by should-know-better financial and quantitative engineers is understandable. You only have to watch market analysts in programmes on CNN, MSNBC to figure out that, with a lot of jargon, there’s often not a lot of actual knowledge or understanding. Differences of opinion and rude/crude arguments abound but few of the experts called the current crisis. What’s the point of accepted financial models if they’re not just unsuccessful at predicting (a very hard task) but cause risk to be discounted (a very bad thing)? The Black Swan is essential reading for anyone who’s blithely applying statistical models to whatever economic, marketing or social science application they’re working on. It should give them pause for thought.
So, back to my headline. Mankind are great at producing huge inequalities and surprising outliers. History is littered with them! The more power we achieve over our environment and, indeed, our genetics the more probable the improbable becomes. I’d content that the number of potential black swans increasing (if that isn’t too wild any idea). Not in a linear way of course. More of a giant leap, black swan, kind of increments 🙂 We’ve found black swans on the moon, black swans in space, black swans in the earth, on the earth and with genetic engineering we can create human black swans. Scary.
So the current market models are deeply flawed. Indeed they don’t seem so much models as talking points for TV debates. Who predicted the crisis? Currently in the “Deep Financial Shit is Nigh” hall of fame are international players like Peter Schiff, Nassim Taleb and local players like David McWilliams, Alan Ahearne and Morgan Kelly. Very few economists correctly predicted the current crisis nationally or internationally.
I believe one reason for this is that it became fashionable for these most miserable of analysts to predict boom followed by a soft landing. Economists by their nature are supposed to be pessimistic and risk aware. They should be over-predicting recessions, which is the butt of the famous economist joke.

“An economist is a person who predicts 10 of the last 3 economic recessions”

In this case, there seems to have been an international fear of being caught out in predicting an end to this boom, fueled by financial innovations in the bond market. Many economists simply suspended disbelief even when scandals like Enron encouraged skepticism. Conversely this old joke gives the lie to the belief that economists create recessions. They make predictions and pass comments. Some may add to recessions and further despair but if they could really create economic turmoil then their predictions would never be wrong!