19/2/20: Facebook becomes another Ireland Inc's reforms test case

First the 'anti-American'  EU Commission's moved against a wonderful U.S. company washing tens of billions of tax free money through Ireland (see: https://www.reuters.com/article/us-eu-apple-stateaid/apple-says-14-billion-eu-tax-order-defies-reality-and-common-sense-idUSKBN1W1195) and now, the U.S. IRS ('anti-American' as they are) have moved against another wonderful U.S. company washing billions of tax free money through Ireland.

The latest case is, of course, the anti-American IRS suing Facebook over its shenanigans in Ireland: https://www.reuters.com/article/us-facebook-tax/facebook-faces-tax-court-trial-over-ireland-offshore-deal-idUSKBN20C2CQ. Per report: "The IRS argues that Facebook understated the value of the intellectual property it sold to an Irish subsidiary in 2010 while building out global operations, a move common among U.S. multinationals."

It is worth noting that this intellectual property redomiciling to Ireland has dramatically increased since the irish Government 'tax reforms' of 2014. Whilst the CSO does not fully account for such transfers in its GNI* measure, the gap between Irish GDP and GNI* has accelerated to historically new levels in recent years, as highlighted here: https://trueeconomics.blogspot.com/2020/02/9220-ireland-more-of-reformed-tax-haven.html.

The case is yet another hammer blow to Ireland's reputation in international economic policy circles and a testament that Ireland's famed compliance with the OECD BEPS rules is a fig leaf of decorum, to be stripped publicly by the EU and the U.S. (and probably other G20) authorities in years to come.

15/11/18: BIS on payments systems and cryptos / blockchain

On November 1, Agustín Carstens, General Manager, Bank for International Settlements delivered a pretty punchy speech on the topic of payments systems evolution in modern age of digital technologies. Punchy, in the sense that much of it is focused on, indirectly, enlisting the evidence as to the lack of the markets for the blockchain and cryptocurrencies deployment in the payments systems at the wholesale and retail levels.

Take the following:  "One of the most significant developments in the evolution of money has been its electronification and, more recently, digitalisation. ...Realtime gross settlement (RTGS) systems for interbank payments, ...emerged in the 1980s. ...RTGS systems allow banks and other financial institutions to send money to each other with immediate and final settlement. They are typically operated by central banks and process critical (read: high-value) payments to allow for the smooth functioning of the economy. Today, the top interbank payment systems in the G20 countries settle more than $17.5 trillion a day, which is over 50 times a working day’s global GDP. ...Given the technology cycle, many central banks are currently looking at next-generation RTGS systems to offer more robust operations and enhanced services."

What does this imply for the world of cryptos? In simple terms, there is no market for cryptos as platforms for interbank payments settlements - the market is already served and the speed of services, cost and security are underpinned by the Central Banks.

Next up: retail payments systems.

Starting with back office: "For retail payment systems, ...in Mexico consumer payments operate at the same speed as interbank payments... The beneficiary of a payment is credited money in near real time. That is, if I were to send you money from my Mexican bank account, you would see the funds in your Mexican bank account in 15 seconds or less. ...Based on a BIS analysis, fast payment systems are likely to become the dominant retail payment system by 2023."

Again, what's the market for blockchain systems to be deployed here? I am not convinced there is one, especially as payments latency and costs are, to-date, more prohibitive under blockchain systems than using traditional payments platforms.

Front office: Carstens notes the progress achieved in delivering what he describes as "payments ... made using bank account aliases" in Argentina that are instant in time, and the ongoing trend toward development of the front-end payments interfaces, based on "cashless systems – no cashiers, no lines, no cash, no physical payment devices. Amazon and others envision a future where you walk into a store, take what you want, and are automatically billed for the items using facial recognition and artificial intelligence. Though this approach may seem a bit scary, it is less so than having microchips implanted inside us, which some firms are also piloting! To be frank, though, neither of these options – facial recognition or microchip implants – are particularly appealing to me."

Carstens presents the evidence that shows current Advanced Economies already carrying more than 90 percent of wholesale payments via cheap, lightning fast and highly secure centralized RTGS systems, with 75 percent of payments via the same occurring in the Emerging Markets:

Given this rate of adoption, coupled with the evolving technology curve (that enables similar systems to be deployed in smaller settlements), one has to question the extent to which cryptocurrency solutions can be deployed in the payments systems.

Beyond the not-too-optimistic view of the market niche size, cryptos and blockchain are also facing some serious pressure points from already ongoing innovation in centralized clearance systems. "Although much attention has been focused on cryptocurrencies as the “it” innovation in payments, there’s much unheralded innovation going on" in the Central Banks and elsewhere (read: legacy providers of payments). "Central banks have been pushing the boundaries of what technology can achieve for operational robustness, including switching seamlessly between data centres at short notice and synchronising geographically dispersed data centres."

Carstens notes the potential for the distributed Ledger Tech (aka, blockchain based on private, enterprise-level blockchain) in this space, where innovation is also a domain of the centralized players, as opposed to decentralised crypto markets. "One interesting development in the central banking community is ongoing experimentation with distributed ledger technology (DLT) as a means to enhance operational robustness. People often use DLT and Bitcoin interchangeably, but they are not the same! ...DLT is simply a set of processes and technologies that enable multiple computers to maintain collectively a common database. DLT does not mean mining of coins, public ledgers and open networks. And no central bank that I’m aware of is contemplating these properties in its DLT experimentation."

There are some problems, however, for DLT enthusiasts:
1) "...a Bank of Canada study noting that a DLT-based payment system meeting central bank requirements would be similar to what we have today (ie private ledgers, closed networks and a central operator). The difference is that a network of computers would be used to settle a transaction instead of one computer." In other words, there is a case, yet to be proven, that DLT offers anything new to the payments systems to begin with.
2) "The second is an ECB and Bank of Japan study concluding that processing times would be three times longer using DLT versus current systems." In other words, DLT/blockchain cannot deliver, so far, on its main premise: higher processing efficiency than legacy systems.

Carstens sums it up: "My take is that current versions of DLT are not any better than what we already have today."

In other words: DLT/blockchain solutions appear to be:

• Not necessary: the technology is attempting to solve the problems that do not exist in the payments systems;
• Inefficient with respect to its core tenants/promises: the technology is inferior to existent solutions and the pipeline of ongoing improvements to the legacy systems.

Which begs two questions that the DLT/blockchain community needs to answer: What niche can blockchain occupy in payments systems going forward? and Is there a sustainable market within that niche that cannot be captured by alternative technologies?

But there is more. Carstens explains: "Cryptocurrencies, such as Bitcoin, Ether and Tether, do not serve the core functions of money. No cryptocurrency is a true unit of account or a payment instrument, and we have seen this year that they are a poor store of value. This then raises the question: what are they?" The answer should be a wake up call for anyone still long cryptos: "From my perspective, cryptocurrencies are, at best, an asset of some sort. Perhaps an asset comparable to a piece of art for those who appreciate cryptography. Buyers of cryptocurrencies are buying into nothing more than a software algorithm. Some firms are trying to back cryptocurrencies with an underlying asset, such as cash or securities. That sounds nice, but it’s the equivalent of making art from banknotes or stock certificates. The buyer is still buying an idea or a concept or, if you will, an asset that is the equivalent of art hanging on your wall. If people want the underlying asset, they might be better served just buying that."

Carstens previously (February 2018) claimed that the #cryptos are “combination of a bubble, a Ponzi scheme and an environmental disaster.”

Nice perspective. If you are an observer. For a holder of cryptos, this is a serious risk. Playing cards in a casino is fun, but it is not investing. Playing investing in the cryptos world is probably the same.


Note: for an even more 'in your face' assessment of the #Bitcoin and #Cryptos, there is ECB's Executive Board member, Benoit Coeure, who called #BTC the “evil spawn of the [2008] financial crisis, per Bloomberg report of November 15 (https://www.bloomberg.com/news/articles/2018-11-15/cryptocurrencies-are-evil-spawn-of-the-crisis-for-ecb-s-coeure).

The reality of #cryptos investments is that they are, empirically, a massively overvalued bet on the largely undeveloped and unproven (in real world applications) technologies that have only tangential relation to the coins currently traded in the markets. It is, in a way, a derivative bet on a future contract.

8/4/18: U.S. economy: entrepreneurship is not 'the new thing' outside Academia

These days, every business school on every university campus is sporting a burgeoning post-graduate program in Entrepreneurship. And this trend is driven by the perceived - and often hyped up by the media and by business futurists - rise in entrepreneurship in the modern society. Apparently, allegedly, an increasing proportion of today's business students want to start their own businesses (despite the fact the vast majority have never worked in a start-up and have no expertise to run one). The new dynamism of the economy, the college-to-start up model of business education, the 'can do' attitude (or aspirations) are all part and parcel of the mythological creature that is the New Economy.

In reality, of course, brutally put, there is no evidence of rising demand for entrepreneurship. And, worse, in fact, there has been a dramatic decline in entrepreneurial rates in the U.S. economy:

Source: http://rooseveltinstitute.org/wp-content/uploads/2018/03/Powerless.pdf.

Now, consider the two data series above, together: firm entry (new firms creation) and firm exist rates. As the blue line trended down, rapidly, without a pause, the green line remained relatively flat. Which means that the ratio of entries to exits has fallen over the time, pretty dramatically. In the 1970s and 1980s, firms entries had, on average been more frequent and less likely to be associated with higher firm exits. In the 1990s,  both relationship deteriorated. In the 2000s, both literally went down the drain.

So as the rate of new businesses additions went down, the rate of old businesses exiting did not change that much. So much for dynamism and for 'entrepreneurial spirits' of the young. The start ups mythology is strong. But the reality of the U.S. economy is that of concentration, market power, monopolization and decline of entrepreneurship. Funny thing, how Silicon Valley propaganda works, right?

How do we know the bit about monopolization? Why, look at profit share of output:

Still want to build up that 'entrepreneurship program' in the University? Because students want to learn about starting their own businesses? Should you really think twice?

8/4/18: Talent vs Luck: Differentiating Success from Failure

In their paper, "Talent vs Luck: the role of randomness in success and failure", A. Pluchino. A. E. Biondo, A. Rapisarda (25 Feb 2018: https://arxiv.org/pdf/1802.07068.pdf) tackle the mythology of the "dominant meritocratic paradigm of highly competitive Western cultures... rooted on the belief that success is due mainly, if not exclusively, to personal qualities such as talent, intelligence, skills, efforts or risk taking".

The authors note that, although "sometimes, we are willing to admit that a certain degree of luck could also play a role in achieving significant material success, ...it is rather common to underestimate the importance of external forces in individual successful stories".

Some priors first: "intelligence or talent exhibit a Gaussian distribution among the population, whereas the distribution of wealth - considered a proxy of success - follows typically a power law (Pareto law). Such a discrepancy between a Normal distribution of inputs, suggests that some hidden ingredient is at work behind the scenes."

The authors show evidence that suggests that "such an [missing] ingredient is just randomness". Or, put differently, a chance.

The authors "show that, if it is true that some degree of talent is necessary to be successful in life, almost never the most talented people reach the highest peaks of success, being overtaken by mediocre but sensibly luckier individuals."

Two pictures are worth a 1000 words, each:

Figure 5 taken from the paper shows:

• In panel (a): Total number of lucky events and
• In panel (b): Total number of unlucky events 

Both are shown as "function of the capital/success of the agents"

Overall, "the plot shows the existence of a strong correlation between success and luck: the most successful individuals are also the luckiest ones, while the less successful are also the unluckiest ones."

Figure 7 shows:
In panel (a): Distribution of the final capital/success for a population with different random initial conditions, that follows a power law.
In panel (b): The final capital of the most successful individuals is "reported as function of their talent".

Overall, "people with a medium-high talent result to be, on average, more successful than people with low or medium-low talent, but very often the most successful individual is a moderately gifted agent and only rarely the most talented one.


Main conclusions on the paper are:

• "The model shows the importance, very frequently underestimated, of lucky events in determining the final level of individual success." 
• "Since rewards and resources are usually given to those that have already reached a high level of success, mistakenly considered as a measure of competence/talent, this result is even a more harmful disincentive, causing a lack of opportunities for the most talented ones."

The results are "a warning against the risks of what we call the ”naive meritocracy” which, underestimating the role of randomness among the determinants of success, often fail to give honors and rewards to the most competent people."

27/7/17: Work or Play: Snowflakes or Millennials?

Snowflakes or Millennials? Flaky or serious? Careless or full of determination? Attitudes or aptitudes? Well, here’s an interesting study on the younger generation.

“Younger men, ages 21 to 30, exhibited a larger decline in work hours over the last fifteen years than older men or women.” In other words, average hours of labour supplied have fallen for the younger males more than for the older cohorts of workers. Which can be a matter of labour demand (external to workers’ choice) or supply (internal to workers’ choice).

One recent NBER study (see below) claims that “since 2004, time-use data show that younger men distinctly shifted their leisure to video gaming and other recreational computer activities.”

So we have two facts running simultaneously. What about a connection between the two?

“We propose a framework to answer whether improved leisure technology played a role in reducing younger men's labor supply. The starting point is a leisure demand system that parallels that often estimated for consumption expenditures. We show that total leisure demand is especially sensitive to innovations in leisure luxuries, that is, activities that display a disproportionate response to changes in total leisure time.” Economics mumbo jumbo aside, the authors “estimate that gaming/recreational computer use is distinctly a leisure luxury for younger men. Moreover, we calculate that innovations to gaming/recreational computing since 2004 explain on the order of half the increase in leisure for younger men, and predict a decline in market hours of 1.5 to 3.0 percent, which is 38 and 79 percent of the differential decline relative to older men.”

Some data from the study:

So it looks like this data suggests that attitude beats aptitude, and choices we make about our recreational activities do cramp our decisions how much time to devote to paid work.


Full citation: Aguiar, Mark and Bils, Mark and Charles, Kerwin Kofi and Hurst, Erik, Leisure Luxuries and the Labor Supply of Young Men (June 2017). NBER Working Paper No. w23552. Available at SSRN: https://ssrn.com/abstract=2996308.

16/5/17: Technology: Jobs Displacement v Enhancement

Technological innovation is driving revolutionary changes across the labour markets and more broadly, markets for human capital. These changes are structural, deep and accelerating, and, owing to their nature, are not yet sufficiently understood or researched.

One theoretically plausible aspect of the technological innovation in terms of human capital effects is the expected impact of technology on demand for (and therefore supply of) different occupations. For example, we know that technology can act as a complement to or a substitute for labour.

In the former case, we can expect advancement of technology to create more jobs that are closely linked to enhancing technological innovation, deployment and productivity. In other words, we can expect more geeks. And we can expect - given lags in education and training - that as demand for geeks rises, their wages will rise in the short run before falling rather rapidly in the longer term.

In the latter case, there is a bit less certain, however. Yes, technology’s primary objective is to lower costs of production and increase value added. As a result, it is going to displace vast numbers of workers who can be substituted for via technological innovation. However, not all substitutable workers are made of the same cloth and not all technological innovation is capable of achieving unambiguous returns on investment necessary to sustain it. Take, for example, an expensive robot that costs, say, USD 600.000 a pop, but can only replace 3 lower skilled workers in a laundromat, earning USD16,000 per annum. So with benefits etc factored in, the cost of these 3 workers will be around USD70,000 per annum. It makes absolutely zero sense to replace these workers with new tech at least any time before the tech systems become fully self-replicating and extremely cheap. So, for really lower skills distributions, we can expect that jobs displacement by technology is unlikely to materialise soon. But for mid-range wages, consistent with mid-range skills, there is a stronger case for jobs displacement.

All of which suggests that we are likely to see a U-shaped polarisation process arising when it comes to jobs distribution across the skills segments: higher wage segment rising in total share of employment, as complementarity effects drive jobs creation here; and the lower wage segment also rising in total employment, as robots-induced increase in value added across the economy translates into greater demand for low-skills jobs that cannot be efficiently displaced by technology, yet. In the middle, however, we are likely to witness a cratering of employment. Here, the workers are neither complementary to robots, nor are they earning low enough wages to make expensive robots non-viable as a replacement alternative for labour.

Interestingly, we are already witnessing this trend. In fact, we have been witnessing it since the early 1990s. For example, Harrigan, James and Reshef, Ariell and Toubal, Farid paper titled “The March of the Techies: Technology, Trade, and Job Polarization in France, 1994-2007”, published March 2016, by NBER (NBER Working Paper No. w22110: http://ssrn.com/abstract=2755382) looked into “employee-firm-level data on the entire private sector from 1994 to 2007” in France.

The authors “show that the labor market in France has polarised: employment shares of high and low wage occupations have grown, while middle wage occupations have shrunk.” So the story is consistent with an emerging U-shaped labour market response to technological innovation on the extensive margin (in headcount terms). And more, the authors also find that inside margin also polarised, as “…the share of hours worked in technology-related occupations ("techies") grew substantially, as did imports and exports.”

However, the authors also look at a deeper relationship between technology and jobs polarisation. In fact, they find that, causally, “polarisation occurred within firms”, but that effect was “…mostly due to changes in the composition of firms (between firms). [And] …firms with more techies in 2002 saw greater polarization, and grew faster, from 2002 to 2007. Offshoring reduced employment growth. Among blue-collar workers in manufacturing, importing caused skill upgrading while exporting caused skill downgrading.”

3/9/16: Innovation policies scorecards: Euro Area and BRIC

An interesting, albeit rather arbitrary (in terms of methodology) assessment matrix for innovation environment rankings across a range of countries, via EU Commission.

Here are the BRIC economies:

All clustered in the “Above Average Harmful Policies” (negative institutional factors) and “Below Average / Average Beneficial Policies” (positive institutional factors). Surprisingly, however, India sports the worst innovation policies environment, followed by China (where “Beneficial Policies” are, of course, skewed by state supports for key sectors). Russia comes in third (where the beneficial policies are most likely skewed to the upside by so-called strategic sectors, also with heavy state involvement). You might laugh, because with Brazil being fourth 'least detrimental' environment for innovation, the EU rankings are clearly at odds with actual innovation outcomes (https://www.globalinnovationindex.org/userfiles/file/reportpdf/GII-2015-v5.pdf) where

• China = rank 29
• Russia = rank 48
• Brazil = rank 70
• India = rank 81

Looking at the contrasting case of key advanced economies with strong supports, one wonders how much of Ireland’s policy environment is due to multinationals’ accommodation and just how on earth can such an ‘innovation-centric’ economy be so ‘average’ in terms of its innovation policies despite hundreds of millions pumped into supporting indigenous innovation. 

Then again, look at Finland with its stellar innovation policies culture and… err… economy in total coma

Makes you think… 

17/4/16: Start Ups, Manufacturing Jobs and Structural Changes in the U.S. Economy

In the forthcoming issue of the Cayman Financial Review I am focusing on the topic of the declining labour productivity in the advanced economies - a worrying trend that has been established since just prior to the onset of the Global Financial Crisis. Another trend, not highlighted by me previously in any detail, but related to the productivity slowdown is the ongoing secular relocation of employment from manufacturing to services. However, the plight of this shift in the U.S. workforce has been centre stage in the U.S. Presidential debates recently (see http://fivethirtyeight.com/features/manufacturing-jobs-are-never-coming-back/).

An interesting recent paper on the topic, titled “The Role of Start-Ups in Structural Transformation” by Robert C. Dent, Fatih Karahan, Benjamin Pugsley, and Ayşegül Şahin (Federal Reserve Bank of New York Staff Reports, no. 762, January 2016) sheds some light on the ongoing employment shift.

Per authors, “The U.S. economy has been going through a striking structural transformation—the secular reallocation of employment across sectors—over the past several decades. Most notably, the employment share of manufacturing has declined substantially, matched by an increase in the share of services. Despite a large literature studying the causes and consequences of structural transformation, little is known about the dynamics of reallocation of labor from one sector to the other.”

“There are several margins through which a sector could grow and shrink relative to the rest of the economy”:

1. “…Differences in growth and survival rates of firms across sectors could cause sectoral reallocation of employment”
2. “…differences in sectors' firm age distribution could affect reallocation since firm age is an important determinant of growth or survival behavior” 
3. “…the allocation of employment at the entry stage which we refer to as the entry margin could contribute to the gradual shift of employment from one sector to the other.”
4. “…because the speed at which differences in entry patterns are reflected in employment shares depends on the aggregate entry rate, changes in the latter could affect the extent of structural transformation.”

Factors (1) and (2) above are referenced as “life cycle margins”.

The study “dynamically decomposed the joint evolution of employment across firm age and sector”, focusing on three sectors: manufacturing, retail trade, and services.

Based on data from the Longitudinal Business Database (LBD) and Business Dynamic Statistics (BDS), the authors found that “…at least 50 percent of employment reallocation since 1987 has occurred along the entry margin.” In other words, most of changes in manufacturing jobs ratio to total jobs ratio in the U.S. economy can be accounted for by new firms creation being concentrated outside manufacturing sectors.

Furthermore, “85 percent of the decline in manufacturing employment share is predictable from the average life cycle dynamics and the early 1980s distribution of startup employment across sectors. Further changes over time in the distribution of startup employment away from manufacturing, while having a relatively small effect on manufacturing where entry is less important, explain almost one-third of the increase in the services employment share.”

Again, changed nature of entrepreneurship, as well as in the survival rate of new firms created in the services sector, act as the main determinants of the jobs re-allocation across sectors.

Interestingly, the authors found “…little role for the year-to-year variation in incumbent behavior conditional on firm age in explaining long-term sectoral reallocation.” So legacy firms have little impact on decline in manufacturing sector jobs share, which is not consistent with the commonly advanced thesis that outsourcing of American jobs abroad is the main cause of losses of manufacturing sector jobs share in the economy.

Lastly, the study found that “…a 30-year decline in overall entry (which we refer to as the \startup deficit) has a small but growing effect of dampening sectoral reallocation through the entry margin.”

These are pretty striking results.

The idea that the U.S. manufacturing (in terms of the sector importance in the economy and employment) is either in a decline or on a rebound is not as straight forward as some political debates in the U.S. suggest.

Reality is: in order to reverse or at least arrest the decades-long decline of manufacturing jobs fortunes in America, the U.S. needs to boost dramatically capex in the sector, as well as shift the sector toward greater reliance on human capital-complementary technologies. It is a process that combines automation with more design- and specialist/on-specification manufacturing-centric trends, a process that is likely to see accelerated decline in lower skills manufacturing jobs before establishing (hopefully) a rising trend for highly skilled manufacturing jobs.

25/5/15: Immigration and Entrepreneurship: Major Unknowns

A recent CESIfo study looked at the role of immigrants in driving entrepreneurship.

Per authors: "Immigrants are widely perceived as being highly entrepreneurial and important for economic growth and innovation. This is reflected in immigration policies and many developed countries have created special visas and entry requirements in an attempt to attract immigrant entrepreneurs. Not surprisingly, a large body of research on immigrant entrepreneurship has developed over the years."

Couple of interesting statistical summaries:

 Striking feature of the above data is low level of entrepreneurship within Indian and Philippines diasporas.

Key conclusions are: "Overall, much of the existing research points towards positive net contributions by immigrant entrepreneurs. The emerging literature on these contributions as measured by innovations represents the most convincing evidence so far."

Interestingly, distribution of entrepreneurship across educational categories, as exemplified above, is rather uniform, although this does not adjust for quality of entrepreneurship.

Caveats are: "First, there is little evidence in the literature on how much immigrant-owned businesses contribute to job growth. Although data exists on employment among immigrant-owned businesses no data are available showing the dynamics of employment among these firms."

Second, "...immigrant business owners are more likely to export, but we know little about how much they export in total dollars and how many jobs are created by these expanded markets for selling goods and services."

Lastly, there is indeterminacy as to the "....the contribution of immigrant businesses to diversity. Although the contribution of immigrant firms to diverse restaurants, merchandise and services is apparent in any visit to a major U.S. city, we know less about the contribution to diversity in manufacturing and design of innovative products."

Full paper can be read here: Fairlie, Robert W. and Lofstrom, Magnus, Immigration and Entrepreneurship (April 23, 2015). CESifo Working Paper Series No. 5298: http://ssrn.com/abstract=2597992

23/4/15: Where the Bad of Deflation Looks Good...

You know the theory of the 'Bad of Deflation' - I wrote about it before... the story goes as follows: if prices fall, and consumers expect them to continue to fall, then rational consumers will withhold their demand, delaying their purchases in anticipation of lower price in the future. The result will be: reduced demand today, lower investment by the firms in future production, lower investment in innovation, stagnation, layoffs, recession... locust... fire balls falling from the skies and pestilence of the kind that only Central Bankers can save us from.

You also know my response to this, especially in the current macroeconomic conditions: falling prices support household real incomes and increase households' ability to finance debt and debt deleveraging, while sustaining at least some semblance of civilised demand.

But don't take my word for this. Here is a handy chart plotting... deflation in the price of hard drives:

It's source is here: https://www.thatdatadude.com/interactive-chart-hard-drive-prices-1950-2010

Do let me know if you know of any evidence that demand for hard drives has been 'delayed' by consumers or that innovation has 'stopped' in fear of lower prices/returns by companies, or if you have seen locust swarming around...

19/7/2014: Global Innovation Index 2014: Ireland vs 'Periphery'

In the previous post I gave detailed breakdown of Ireland's performance in Global Innovation Index 2014. I used small open economies and Switzerland (the world's highest ranked economy) as a reference group.

Here, primarily for the reason of convention, are the comparatives of Ireland's performance relative to the Euro area 'peripheral' states:

Clearly, Ireland is a much stronger performer in Innovation than all other 'peripheral' states. This is neither surprising nor unexpected. Crucially, the gap is wider today than in 2007-2008 and the gap is rather persistent over time. Average ex-Ireland 'peripheral' state rank was 34st in 2014 against Ireland's 11th, this is a very significant gap. This gap increased from 16-19 points on average for 2007-2010 period to 32 points in 2012 and 23 points in 2014.

Furthermore, it appears that even if we are to abstract away from the metrics very heavily influenced by the tax optimising MNCs, Ireland (under such a metric closer to 20th-23rd position in the World rankings) would still post a stronger performance than any other 'peripheral' state (best - Spain at 27th).

19/7/2014: Global Innovation Index 2014: Ireland's Performance

Global Innovation Index is out this week and the 2014 edition focus is on Human Capital (here) a topic close to my heart (see my TEDx talk on this here).

Here are some interesting comparatives taken over the Index history for Ireland and its core peers.

Firstly, in 2014, top 20 ranks are:

Ireland shows good performance, with 11th place in 2014, slightly down on 10th place in 2013 and significantly down on 7th place in 2012 rankings, but still better than historical average of 16th rank.

Here is evolution of Irish rankings over time, compared to other small open economies of Europe that rank in top 25 this year:

Not a bad performance for Ireland, I must say, though we should be aiming for a place in the top-10.

However, over longer time horizon our performance is second best in the group of peer economies:

The above chart highlights top 3 performers in terms of rankings dynamics (green bars) and worst 3 performers (red bars).

It is worth noting that Luxembourg is, in my view, an economy that simply should not be ranked due to massive distortions in its rankings induced by large share of the companies operating in the country only as post-box offices and due to huge proportion of its workforce not being residents of the country. In Ireland, there are some distortions as well, and these are very significant, but of magnitude they are much smaller than those in Luxembourg.

Here are some Ireland vs Switzerland comparatives in specific sub-indices:

Institutions:

The above shows relatively strong performance for Ireland, except for:

• Political Stability and Environment
• Government Effectiveness

Ireland leads Switzerland strongly on

• Business Environment metrics

Human Capital and Research:

Overall, we have a strong lead compared to Switzerland in:

• Education, when it comes to Spending on Education and on School Life Expectancy (so we spend more and our students stay in school longer, on average)
• Tertiary Enrolment (we have more student-age people in tertiary education)

We significantly lag Switzerland in:

• Tertiary Inbound Mobility (ability to attract students into Ireland)
• R&D
• Researchers
• Spending on R&D
• University Rankings (quality of education)

 Infrastructure:

We outperform Switzerland in nothing, save for GDP per unit of energy use, which is of course consistent with the fact that a larger share of our GDP accrues to tax optimisation than in the already low-tax Switzerland.

We lag Switzerland in everything else...

Market Sophistication:

We lead Switzerland in Credit, thanks to allegedly greater ease of getting credit in Ireland (I am not sure what the Index analysts mean by that, given that our credit supply is negative). Despite beating Swiss in 'credit' we lag them in Investment, which, presumably means that while we borrow more and easier, we do not invest what we borrow... may be it is because our businesses are buying BMWs and Mercs instead of machinery and technology? I have no idea...

Business Sophistication:

Remember that Ireland beats Switzerland on Ease of Doing Business. But with all that 'Ease' around, we are really not that far up on Switzerland in actual Business Sophistication... and if we strip out FDI inflows and imports of high tech equipment and inputs (a proxy for how many ICT MNCs we have 'operating' from here), we are probably actually ranked lower than Swiss.

Knowledge & Technology Outputs:

When it comes to actual Knowledge & Tech outputs, all of the above 'advantages' of Ireland over Switzerland vanish. Just as Savings vs Investments, we are good on inputs, but much less good on deriving anything meaningful from them. Control for tax optimisation activities of ICT services MNCs in Ireland and we sink even further below Switzerland.

Creative Outputs:

We are keen on painting Ireland as a Creative Land, while the Swiss are, as we often note, boring and 'Germanic' - aka not creative and too stringent. Right? Not really. Swiss beat us hands down on Creative Output metrics. We only outperform them in terms of Wikipedia edits and YouTube uploads - presumably due to the need to control our reputation by editing out unpleasant references to our social and industry and politics 'stars' from the public domain and down to our 'craic' in pubs and bars that get mistakenly posted on-line... I am, of course, being slightly sarcastic.

So net conclusions (on serious note):

1. We are getting better and are strong performers when it comes to many 'inputs' into Innovation; but
2. We are not that great in deriving 'outputs' from the 'inputs' we commit.
3. Much of the performance upside for Ireland is down to distortionary activities of a handful of MNCs trading from Ireland; and
4. Much of the performance downside for Ireland is down to indigenous activities of the rest of our economy.

15/5/2014: Innovation, Employment & Growth: Ireland's Human Capital Dilemma

This is an unedited version of my article for Sunday Times, April 06.


From jobs programmes aiming to boost employment creation to entrepreneurship strategies and to solemn promises to unlock credit supply and investment for indigenous innovation-based enterprises, Irish SMEs have been basked in the public policy sunshine.

Much of this attention is cross-linked to another public policy fad, Ireland’s long-running obsession with innovation and R&D. In 2013, amidst continued borrowing for day-to-day operations from the Troika, Irish State spent EUR773 million on supporting research and development activities in academia and industry. Of this, a good portion was targeted to fund R&D and other innovation activities linked to Irish indigenous SMEs.

There are three basic problems with all this policies activism. One, we have no idea as to what sort of financial returns this public investment generates to the taxpayers. Two, we have virtually no coherent and independently verified evidence that the innovation-focused SMEs are delivering any serious economic returns in terms of real jobs creation and income generation. Three, we have no proof the state-funded innovation is a right model for SMEs growth generation in the first place.


Enterprise innovation is a weak spot for Ireland. Indigenous patent applications reported in July last year by the Patents Office and covering full year 2012 stand at decades low. Monthly data from the New Morning IP – an Irish consultancy dealing with issues of intellectual property – shows that in 2013 indigenous patents applications fell even further, down by almost 3 percent year on year.

Back in 2006, the national strategy for science set 2013 as the target date to deliver a 'world class knowledge economy'. Since then, numbers of indigenous patents filed under the Cooperation Treaty and to the European Patent Office have declined.

And the problem reaches beyond our SMEs. For example, per IDA own figures, only 28 percent of agency clients have spent more than EUR100,000 per annum on R&D. In other words, nearly three out of four MNCs had, de facto, nil research activity here.

The university sector is the cornerstone of Irish Government's vision for delivering an innovation-focused SMEs culture. Sadly, our best universities are barely visible on the radar of international rankings. Ireland’s top university currently ranks only 61st in the QS Top University league table and 129th in the Times Higher Education (THE) rankings. Trinity ranks 55th in Arts & Humanities – an area that receives absolutely zero attention from the likes of IDA and Enterprise Ireland and is firmly placed outside our economic development policy umbrella. TCD ranks 81st in engineering and technology, 83rd in life sciences and medicine and 136th in natural sciences. All of these areas are focal points for R&D spending and feed into state enterprise supports systems. UCD is no better: ranked 139th in the world under QS criteria and 161st by the THE rankings.

By pretty much every possible metric, our innovation engines are not firing.


Meanwhile, enterprise formation, an area that should be a core priority for the Government that is allegedly focusing on entrepreneurship and jobs creation, is lagging. Irish start-ups rates, relative to the economy size, are low today and have been low even in the days prior to the Great Recession.

Based on the OECD statistics, despite years of booming ICT services and substantial growth in the IFSC, Ireland today shows relatively static number of enterprises trading in market services, and declines in the number of enterprises working in manufacturing and industries, excluding the construction sector.

Late last year, OECD published its Economic Survey of Ireland. The document recommended empirically founded approach to enterprise and innovation supports. OECD noted that over-proliferation of funding agencies and programmes is yet to be scaled back. Per OECD, Ireland has over 170 "separate budget lines… and 11 major funding agencies involved in disbursing the Science Budget". Meanwhile, the Government continues to add new ones, seemingly with little regard for their effectiveness. Not surprisingly, there is no evidence on systematic and independent evaluation of these programmes effectiveness. And there are no continuously reported return metrics relating to state investments in enterprise development and innovation.

Instead of real statistics, often misleading and highly aggregate numbers are being put forward as markers of success. Jobs commitments and gross jobs additions are presented as signifiers of major breakthroughs, without independent audits. Companies’ registrations rates are reported as being equivalent to start up rates and no central data reporting is provided for actual enterprise formation. Take for example a jump reported in new companies registrations in Q1 2014 when 10,741 new companies were entered into the register, marking a 6% rise year on year. This number included 3,989 limited companies - the third highest rate of new limited companies registrations for the first quarter over the last 10 years.

Sadly, these headline statistics tell us preciously little about the underlying dynamics of companies formation. For example, how many business restructurings completed in 2012-2013 are now leading to companies re-registrations? How many of the businesses launched in previous years survive? How many of businesses launched are actively trading in the real economy? We simply do not know.

Focus on top-line reporting metrics, such as aggregate numbers of companies registered, VC funds disbursed, R&D budgets spent, obscures the woeful lack of coherent policies supporting indigenous enterprises formation and growth. As the result, beyond the areas of ICT services, biotech and medical devices, we neither foster formation of micro enterprises nor help smaller companies to reach 'medium' size. And, via tax and compliance measures, we actively penalize self-employment – the source of much of the early-stage entrepreneurship.


Promoting real innovation and enterprise cultures requires supporting investment ecosystem and entrepreneurial risk-taking. These goals can only be achieved by lower taxation, especially via lower CGT and income tax, and a benign and highly efficient personal and business insolvency regime. These are not priority areas for the Government.

However, tax policies mix is a necessary, but not a sufficient condition for success. To further promote real enterprise growth, we need to stop fetishising scientific R&D-driven enterprises and ICT and refocus public funding toward more evidence-based enterprise development projects.

International research shows that ordinary and traditional sectors SMEs drive growth in jobs and income. Where traditional sectors are put onto exporting paths, these SMEs can drive exports growth as well. In contrast, high performance start-ups in ICT services, usually focused directly on exports markets, are less employment and income-intensive. ICT does contribute strongly to productivity growth and is a nice niche business to have on offer for investors, but as McKinsey recent research pointed out, tech innovation business is unlikely to fulfill the economy-wide hunger for jobs, especially jobs for the indigenous workforce.

Focusing on active training for entrepreneurship and mentoring of new companies is another necessary addition to the policies mix that is currently being sidelined in favour of populist drive for state investment and R&D funding. One key area where we are lacking in supports is access for entrepreneurs to legal, tax and financial advice. Costs of tax and legal compliance and structuring are unbearably high for younger companies and for smaller enterprises considering growth strategies. These costs crowd out funding available to companies to finance further development, hiring, as well as cap companies growth potential.

On investment side, we have a thriving culture of VCs chasing the 'next Facebook'. Over 90 percent of all VC funding extended in Ireland goes to finance ICT start-ups, with more than two-thirds of this going to ICT services companies, as opposed to physical technologies.  We also have over 75 incubators and accelerators, with the vast majority of these being state-owned and/or state-funded. These too focus almost exclusively on companies working in ICT, biotech and other lab-linked innovation sectors.

But we have no idea as to the effectiveness of this strategy. Numbers employed in core ‘knowledge economy’ sectors have grown by about 4,900 from the onset of the crisis through 2013. All of this growth was down solely to ICT jobs which added 9,125 new employees, while professional, scientific, and technical activities employment, excluding education sector, is down 4,225 on 2008. Adding up jobs creation reported by the MNCs from 2008 through present, it is highly likely that indigenous employment in professional, scientific, technical, and information and communication sectors has probably shrunk.

Looking at the overall landscape of enterprise formation here, we do know that with exception of Ryanair, CRH, Paddy Power and a handful of other flagship companies, no Irish SME has grown beyond the 'medium' level threshold. The magic target of exceeding EUR20 million in annual sales - set in the Enterprise Ireland 2005-2007 strategy plan has vanished, unmet.

Put simply, Irish indigenous companies are not getting smarter with billions of public funds invested in SMEs-targeting R&D activities and ventures over the years. At the same time, Irish SMEs are not growing in size either. Micro enterprises show some progression toward becoming small firms, but small firms show little dynamism upward and medium-sized companies are stuck with no capacity to break into the big firms league. The system is broken and incremental policy adjustments are not holding a promise of a solution. We need to go back to the drawing table on enterprise policy in Ireland.

Box-out: 

Recent research from the US, published by the National Bureau for Economic Research looked into sell-side equity analysts' ability to predict equity prices and the impact their predictions have on market valuations over the period of 1983-2011. Controlling for a wide variety of factors that routinely influence forecast errors, the study has found that at the times of the crises sell-side analysts forecasting accuracy deteriorates by up to 50 percent relative to normal. And just as analysts’ errors explode, their influence rises as well. In particular, forecasts that upgrade outlook for companies amidst the falling market tend to carry the greatest weight of public attention. Optimism pays, even if only for analysts’ employers. Which, of course, creates a powerful incentive for sell-siders to ‘talk up’ equities just around the time of the worst bear market. Lastly, the study found that at the time of financial crises, marketing efforts by sell-side analysts tend to increase, in part due to greater pressure on them to perform, in part due to expanded opportunities for being ‘heard’ by investors.

John Kenneth Galbraith thought that "The conventional view serves to protect us from the painful job of thinking." In the case of sell-side analysts musings on the crises, that might be not a bad alternative.

23/1/2014: Insatiable Innovation - IBM's View on End-of-Growth Hypothesis

For some months now I've been meaning to post on the topic of the IBM's recent report on global development in Innovation markets, titled "Insatiable Innovation: From sporadic to systemic".

The paper is a sizeable response to the popular theory gaining ground that the world is past innovation capacity peak. I covered this topic on this blog (see for example http://trueeconomics.blogspot.ie/2012/08/2882012-challenging-constant-growth.html).

IBM folks, obviously disagree: "Is innovation dead? Numerous press reports seem to indicate so. A view is emerging that innovation is no longer the driver of growth it once was, as evidenced by a January 2013 cover article in The Economist. Pundits point to declining growth in global productivity as further proof that “The Big Idea” is a thing of the past (e.g., global per capita GDP 10-year CAGR, which topped 4 percent in the 1950s, fell to nearly 0.5 percent by 20102)."

A note of caution is worth putting forward here, IBM authors do not do literature analysis. This makes their paper weaker. They could have benefited from directly challenging the evidence and analysis presented in the likes of Gordon's work on the topic, rather than dismissively waving arms at it.

But what IBM authors do do is solid review of their own experience coming from the real economy and own IBV studies:

"Our view, based on analysis of past IBM Global CEO studies, as well as practical, hands-on experience, is that innovation is far from dead. It is, instead, thriving among those outperforming companies that apply product, operational and business model innovation to truly differentiate themselves from their competition. The ability to generate, control and exploit innovation can become a major source of strategic advantage and economic benefit, as demonstrated by the growth in value of those companies deemed “most innovative"."

This is not the evidence that can undermine the core thesis put forward by Gordon, but rather an argument that incremental innovation is alive and well.

Interestingly, the evidence presented by the paper seems to reflect well on the thesis of slowdown in revolutionary innovation and the diminishing returns to innovation. At the top level, here's what IBM are saying: "Innovation has been constantly evolving in its complexity and impact. Beginning with the industrial revolution in the Nineteenth Century and continuing through one technological milestone after another, economic activity has become more global, opening up new markets, new businesses and new business models (see Figure below). These models have evolved to the extent that, in today’s age of “universal customization,” customers are empowered to affect product attributes in real-time, with products and services becoming hypercustomized to meet the needs of individual customers."

Wait, but this is exactly what the thesis of diminishing returns to innovation is about. As returns are reduced, complexity (and associated costs) rise. The chart above, perhaps inadvertently, but nonetheless correctly, shows that acceleration in economic returns to technology from the current plateau can only happen if/when we move to Universal Customisation. This is fine, except we are not yet there. Thus IBM top-level view that innovation is about to raise the gear of productivity growth is reliant on assuming that what we envision already occurred. It has not. Hypercustomised has not yet met any of the needs of individual consumers and we have no idea when it will do so.


"Growing complexity has intensified competition, providing an ever-greater impetus for:

• Product innovation that has broadened the competitive playing field. Products today increasingly face non-traditional competitors.
• Operations innovation that has generated efficiencies and decreased cost for organizations and customers. Many organizations, for instance, now source production from specialists.
• Business model innovation that motivates creation of sophisticated ecosystems of products, services and experiences. Emerging technologies are fundamentally changing business and scale economics."

Let me discuss couple of points, not subtracting from the graph, but rather adding to the picture of complexity in innovation it attempts to capture.

While at the first stage of Mass Industrialization, production lines started to replace farmers and artisans and new industries fueled economic growth, in more individualised world, empowered by what IBM terms "Mass (robotic)automation", Miniaturization and subsequently Universal Customization do not only lead to the increased functionality within a reduced size, improved speeds and performance and computerisation, but also to re-introduction of atomistic / artisan producers back into demand chain.

The reasons for this are two-fold:

1. With advanced production technologies, execution of production becomes secondary to innovation and design. Speed to market becomes key differentiator of successful innovations from failed. Here, larger systems, including corporate systems, can be and will be successfully challenged by smaller producers;
2. As demand becomes more individualised and more atomistic, satisfying this demand will involve more atomistic products and designs. Here, artisans can deliver significant value added to the market.

Universal Customisation, thus, is a stage where artisans, atomistic designers, consumers-producers evolve to regain markets from corporate, vertical structures of command and control.

Which means that the only way the system does not dissolve into entropy is by assuring that Global Connectedness stage delivers seamless access to the markets. In other words, Global Connectedness will require not only revolution of data flows (Internet), but revolution in logistics.

Or put differently, unless there are some yet-to-be-mapped breakthroughs in a number of areas, the age of Big Innovation is eclipsing. Gordon's thesis still stands...

26/12/2013: Ireland's Technical Recovery: Sunday Times, December 08

This is an unedited version of my Sunday Times column from December 08, 2013



In his address to the Rogers Commission investigating the explosion of the Space Shuttle Challenger, Nobel Prize-winning physicist, Richard Feynmann outlined the birds-eye view of the causal relationship between the man-made disasters and the politicised decision-making. Per Feynmann, "For a successful technology, reality must take precedence over public relations, for nature cannot be fooled".

The laws of reality apply to social sciences as well, independent of PR.  Recent events offer a good example. While lacking longer-term catalysts for growth, Irish economy did officially exit the recession in Q2 2013. Yet, the real GDP remained 1.2 percent below the levels attained in Q2 2012. Glass is half-full, says an optimist. Glass is half-empty, per pessimist. In reality, final domestic demand, representing a sum total of personal consumption of goods and services, net government expenditure on current goods and services, and gross fixed capital formation, fell in the first half of 2013 compared to the same period of 2012. This marked the fifth consecutive year of declines in domestic demand. Recession might have ended, but we were not getting any better. The only consolation to this was that the rate of half-annual declines in demand has been slowing down over the last four years.

Data since the beginning of the fourth quarter, however, has been more encouraging and, at the same time, even more confusing. However, as in physics, in economics every action generates an opposite and equal reaction: an economy battered by a recession sooner or later posts a technical recovery.

Thus, the reality of Irish economy today suggests two key trends. One: a build up of demand on consumer side has now reached critical mass. Two: jobs destruction has now run out of steam. Some real jobs creation has started to show through the fog of official statistics. With this in mind, let me make a short-term prediction. While in the long run we are still stuck in the age of Great Stagnation, over the next year we are likely to witness some robust spike in our domestic economic growth.

Consider the data. Based on National Accounts, during the period from January 2008 through June 2013, and adjusting for inflation, Irish households cumulated shortfall in consumption spending compared to pre-crisis trends from 2000 stood at around EUR1,600 per every person residing in Ireland. Over the same period of time, shortfall on fixed capital investment by Irish firms, households and the State amounted to EUR16,400 per capita. In other words, some EUR83 billion of domestic economic activity has been suppressed over the duration of the current crisis. Even if one tenth of this were to come back, Irish GDP will post a 6.75 percent expansion on 2012 levels.

And, at some point, come back it must. Durable goods consumption has been cut back down to the bone over the last five years, as were purchases of household equipment, furnishings and cars. Depreciation and amortisation of these items are cyclical processes and we can expect a significant uptick in demand some time soon. That said, volume of retail sales was still down 1.4 percent year on year in October, once we exclude motor trades, automotive fuel and bars sales.

At the same time, purchasing power of consumers is not increasing, despite some positive news on the labour market front. Deposits held by Irish households were down at the end of September some EUR1.22 billion compared to the same period a year ago. And they were down again in October. Credit to households is continuing to shrink: in 12 months through October 2013, total credit for house purchases was down 3.1 percent, while credit for consumption purposes fell 9.3 percent.

The good news is that we are now seeing some increases in total employment in the economy. As of Q3 2013, some 58,000 more people held a job in Ireland than a year ago. Excluding agricultural employment, jobs growth was more moderate 33,000. These are the signs of significant improvements in the jobs market. However, three quarters of new jobs created were in average-to-low earnings occupations.

On another positive, however, jobs are being created in the sectors that previously suffered significant declines in employment. Key examples here are: accommodation and food services and construction.

In contrast to the employment news, earnings data offers little to cheer about. Average weekly paid hours across the economy have stuck at the crisis low in Q2 and Q3 2013. Average weekly earnings are down 2.4 percent on last year. These pressures on households’ incomes are exacerbated by hikes in taxes and charges imposed in Budget 2014.

Overall, consumption reboot is still being held up by continuous decline in after-tax incomes.

However, pockets of growth in our polarised and paralysed economy are feeding through to the aggregate statistics. This process is aided by the fact that as the rest of the economy has flat-lined, isolated growth in specific sectors and geographical areas became the main driver for national aggregate statistics.

One example of this process is visible in the property markets, where a mini-boom in residential and commercial properties in parts of Dublin is driving restart of the markets in a handful of other cities, namely Cork and Galway. Dublin residential property prices are up 18 percent on crisis period trough. In commercial markets, 2013 is shaping up to be the best year for transactional activity since 2007. On foot of this, construction sector Purchasing Manager Index, published by the Ulster Bank, stayed above the expansion line in September and October.

Another example is continued expansion of ICT services and MNCs-dominated manufacturing sectors. This week's release by the Investec of the Purchasing Managers Indices for manufacturing and services showed that in November, both sectors continued to grow. The series are volatile, but the shorter-term trend since Q2 2013 is now clearly to the upside.

All of which begs a question: Are we about to witness a Celtic Tiger rebirth from the ashes of the Great Recession, or is this a recovery that simply compensates for a huge loss in economic activity sustained to-date?
My feeling is that we are entering the second scenario.

Firstly, Irish economy is not unique in showing the signs of recovery. Other peripheral euro area economies, such as Spain, Portugal and even Greece, are also starting to stir. And all of them follow the pattern of recovery similar to that which took place in Ireland: foreign investors are followed by domestic cash-rich buyers of assets; exports uplifts are slowly building up to support domestic activity.

Secondly, given the extent of economic losses during the Great Recession, we can expect a bounce and this bounce is likely to last us some time. As argued above, over the years of the crisis we have built up a massive backlog of consumer and investor demand for everything – from durable consumption goods to assets, including property. This build up can lead to a rush-into-the-market of consumers and investors in H1 2014.

However, beyond this bounce-back period, serious headwinds loom.
In particular, latest mortgages arrears figures suggest that banks are predominantly focusing on forced sales as the main tool for dealing with the problem. These forced sales are yet to hit the markets. The same data also shows that non-foreclosure solutions are far from being sustainable even in the short-term. Over the last 12 months, the percentage of mortgages that have been restructured and not in arrears remained basically unchanged.

Further into 2014, if wages and earnings continue to decline or stagnate, the next Budget will become an even harder pill to swallow than Budget 2014. This can translate into the renewed decline in investment and consumption in the economy.  Latest exchequer figures through November this year are encouraging on the receipts side, although the safety cushion relative to both 2012 and Budget profile is thin. Tax revenues for eleven months were only EUR214 million (or 0.6 percent) ahead of profile. One third of this ‘over-delivery’ is accounted for by November payments of 2014 property taxes. Meanwhile the expenditure side is also saddled with risks. According to the latest projections from the Department of Public Expenditure and Reform, Government’s total current spending in 2013 will stand at EUR 51.15 billion or EUR2.54 billion higher than in 2007.

In addition to addressing the above spending risks, budgets for 2015-2017 will also have to deal with squaring the circle on temporary public sector pay moderation savings. As these come to an end and as demands from the public sector trade unions rise once again, economy can find itself once again at a threat of renewed tax hikes.

On a greater scale, monetary policies around the world remain a major problem. In the euro area, money supply remains tight despite record low interest rates and unprecedented funding measures that injected over EUR1 trillion worth of funds into euro area banks in 2011-2012.  Irish banks might have received a clean bill of health this week, but they are not in the position to restart lending any time soon. In the US, Federal Reserve's tapering is on the agenda for 2014. If pursued aggressively, it can lead to a rise in the cost of borrowing world wide, potentially inducing a fall-off in the capital markets. For Ireland, this can spell a further reduction in investment as foreign investors continue exiting Irish Government bonds and shying away from Irish private sector assets.

For now, however, the above risks are still to materialise. Before they do, enjoy our technical recovery.


Note: the above article was publish well before the now-infamous The Economist piece calling Irish economic recovery 'a dead cat bounce'. My view, as expressed above is not that this is a 'dead cat bounce' but rather that it is a technical correction up, toward longer-term equilibrium trend. It is quite possible that the recovery will gain momentum and will turn out to be a full recovery, but it is not, in my view, a 'dead cat bounce' (or a recovery that is likely to turn to a renewed downside).

Box-out:

A recent research paper published by the Centre for Economic Policy Research studied interactions between large firms and SMEs in driving regional-level innovation in the US. As is well known, large firms generate spin-out ventures whenever innovations developed at the larger firm level are deemed unrelated to the firm's core activities. Thus, a concentration of larger firms activities in a region can be expected to increase the potential for small spin-outs formation. On the other hand, small firms generate demand for innovation, increasing spin-outs profitability and survival potential. The study finds that differences in innovation output across metropolitan regions of the US over 1975-2000 can be largely attributed to the co-existence of these effects. These findings offer us significant insights into the potential role for business partnerships between Irish SMEs and MNCs in driving innovation-focused growth. For one, the study shows that optimal innovation policies are dependent on the specific stage of innovation culture development in the economy. For example, an economy with a significant presence of larger firms, such as Ireland, should focus on policies designed to stimulate formation of new ventures and spin-outs instead of spending resources on attracting even more large firms. Last week, this column suggested using tax incentives for SMEs and MNCs to stimulate equity investment in entrepreneurial ventures and spin-out. The above evidence from the US suggests that we might want to give this a try.

18/11/2012: Innovation, Professionalization of Risk, Stagnation?

The recurrent theme in forward thinking nowdays is the decline of technological 'revolutions' cycle. I wrote about this on foot of earlier research (here) and in recent weeks there has been another - most excellent - article on the same topic from Garry Kasparov and Peter Thiel (link here).

Two quotes:

"During the past 40 years the world has willingly retreated from a culture of risk and exploration towards one of safety and regulation. We have discarded a century of can-do ambition built on rapid advances in technology and replaced it with a cautiousness far too satisfied with incremental improvements."

The irony has it that in our collective / social pursuit of certainty, we have surrendered risk pricing and risk taking to the professional class of the 'bankers' who proceeded to show us all that they are simply incapable of actual investing. The delegation of risk authority to them, compounded with over-taxing risk taking via tax systems and strict bankruptcy regimes, has meant that real equity and real investment have been replaced with financial instrumentation of debt and financial instrumentation of creativity.

"Many investors practise a fake form of long-term thinking. Portfolio managers see the returns of the 20th century and project those far into the future. Tomorrow’s retirees are betting their fortunes on the success rates of yesterday’s companies. But the vast wealth registered by modern capital markets came from technological feats that cannot be repeated. If nobody takes the risk to invent products that produce new industries and new profits, then analysing historical returns from the 20th century will be no better guide to our future than researching crop yields from the 10th century. Without innovation, faith in the stock market is a kind of cargo cult."

We are no longer thinking - as a society - in terms of risk as an input into production of new goods, services, value-added in the economy, but see it as both as a negative utility good (something to avoid and reduce) and as a fertile ground for taxation (a logical corollary in the world where risk is a matter of 'professional' fees collection, and not an input into innovation). The social structures of modern democracies in the West are now wholly committed to reducing risk impact on households - the Nanny State - and thus taxing risk returns.

"Above all the future will be created by individuals. Those with the most liberty to take on risk and make long-term plans, young people, should consider their options carefully. ...The coming generation of leaders and creators will have to rekindle the spirit of risk. Real innovation is difficult and dangerous but living without it is impossible."

Note: beyond 'professionalization' of risk, there also remains the issue of 'financialization' of risk. While Kasparov and Thiel clearly focus on the latter aspect, my comments focus on the former. But the two are not, in fact, separate - the financialization is impossible without professionalization, and vice versa.