The housing crisis is all about the politics of debt.

Everyone agrees Ireland has a huge housing crisis. The housing “market”, if one can call it that, is completely dysfunctional. There is a massive shortage of supply, particularly in Dublin, and growing demand. Competitive firms are losing mobile workers by the day. Homelessness is on the rise. Rents are sky rocketing. Dublin house prices are back to silly-levels. The price-quality dynamic is totally out of kilter. Yet there is absolutely no reason why housing “supply” should be restricted.

There are literally thousands of empty properties around Dublin, loads of green and brown field sites, and tons of opportunities for housing development. Dublin is not San Francisco, where there is literally no where to build. The problem is that the banks are not lending. The government is intervening in a belated and piecemeal way. The fundamental question, therefore, is why? This is where economics meets politics. Constrained supply means rising prices. Rising prices makes it possible to manage the debt dynamics of the state. Supply is being restricted. It’s not a coincidence. It’s an outcome of incentives.

Yesterday’s “rebuilding Ireland” report is obviously welcome. However, all the policy focus on social housing and homelessness, whilst important, completely misses the core problem, which is that the banks control the market. The banks control the supply of mortgages and the supply of loans for development. In a housing market, if you control mortgages, property and builders, then you control the outcomes. It’s not in their interest to see a rise in supply. A rise in supply would reduce prices and expose the underlying debt dynamics of the bank’s balance sheets.

This is the real structural constraint facing government.

The banks don’t want anyone to sell under the asset (house) price to ensure that they can maintain their debt problem. If they can’t manage their mortgage debts, then the taxpayer has to step in and bail them out again, which clearly the government does not want to do. The structural problem underpinning the housing crisis is the bank-state nexus.

If NAMA or the banks fire sell housing assets to solve the housing crisis, then all those under performing loans/mortgages will be exposed. The debt dynamics of the banks will be exposed. The government will be exposed. Then the ECB is exposed.  It’s a house of cards and the only thing holding everything together are rising rental and house prices. Those renting (and those who don’t own mortgages) are ultimately picking up the bill for the last crisis, of which they had no part.

Hence, the structural constraint underpinning the housing crisis is a convergence in the incentive structure to maintain sky-high rents and rising house prices. It’s not in the interest of the Department of Finance, the banks, NAMA, and mortgage holders to see a rise in supply and a potential fall in prices. This is not to suggest that all these actors are sitting around a table conspiring to restrict supply. But all these actors are clearly aware that rising house prices means lower debt and more wealth. The politics of debt is about the politics of housing capital.

The real policy solution is radical intervention to fire sale the assets.

Compel the banks to lend for real development. Compel builders to borrow. The objective should be to bring down rental prices and house prices. Let the banks take the hit, then let them pass it on to the government, then let the government pass it on to the ECB. In the end, Ireland will be back to where it started: in a one-to-one negotiation with the European monetary system. Except this time, the Irish government should say to the ECB, tough shit, you pay. Our public policy priority is ensuring proper housing for our citizens as a social right.

This policy response is obviously dreamland. But you get the point.

This blog entry is based on two research papers I am working on: “Housing Capital is Back” and “House of cards: the real politics of the Irish housing crisis”. Most of the data to empirically corroborate the claims I have made can be found either at the Central Bank (the “Financial Summary” statistics pack), and/or in the Ratings Agencies of the Irish banks.

Property development

The farce of Ireland’s national accounts: let’s go plane watching!

Wow! Exports are up 34%; Investment is up 27%; imports are up 22%. Wham, bam, the economy grew by 26%. Sensational. Per capita income per person in employment has increased from a whopping 88k in 2010 to 130k in 2015. I’m sure you can feel the booming economy in your pocket? Of course you can’t, the national accounts are a sham.

So what’s really going on?

The increase in investment, although you can’t see it in the national accounts, is being driven by airline leasing. My hunch is that this has increased by about 110%. Airline companies of the world are effectively transferring their financial activities (as new aircraft machinery) into Ireland for tax purposes. As a student of mine nicely put it: imagine all those massive Boeing planes flying around the world, then imagine them in Ireland, and hundreds of people working on them. Where are they?

In truth. We couldn’t even fit these planes in Ireland. It’s just around 20 people managing a financial fund for tax avoidance purposes. Then using the generated money for profit redistribution. That’s what’s really go on.

The increase in exports, although more real, and somewhat more complicated, is a result of a similar dynamic. It’s large corporations transferring assets and IP patents into Ireland – with no real connection to employment – and then booking it as real investment, for tax purposes. There can be no doubt Ireland has an export-led economy, and this is being driven by US FDI. But these massive jumps in growth are not linked to real goods/services. They shouldn’t be in the GDP figures.

The 26.3% makes for a great media headline. But if the media want to go find this growth, they might as well go plane watching at Dublin airport. It’s a farce. There is simply no credibility to the national accounts. Most serious observers looking in at Ireland, know this. And this is what should really concern the government and civil servants.

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The rise and fall of social partnership: do governments need trade unions?

During the 1980’s one of the core economic problems facing the Irish government was minimising strikes and controlling wage inflation. The rise in inflation was widely attributed to individual trade unions using their collective bargaining strength to push up wages at the expense of competitiveness. This policy continued despite the rising unemployment crisis. Over 50% of the workforce was unionised, and 70% of it was covered by some sort of collective bargaining agreement. Crucially, unions were organised in the core export sectors of the economy.

From 1981 to 1986 the Fine Gael/Labour government employed a simple strategy: they ignored unions. They excluded them from policymaking and promoted firm-level wage setting. This was fine in theory, but in practice, it meant chaos. It meant that a fragmented union movement, with little or no coordination from the ICTU, continued its strategy of wage militancy. Unemployment soared. Spending on social welfare increased by over 200%. In the decade from 1980 to 1990, there were over 400,000 days lost to industrial action, one of the highest recorded in the OECD at the time. The government responded by raising income taxes. These were followed by a series of mass demonstrations, initiated by the ICTU, leading to one of the largest public mobilisations against an elected government in the history of the state.

Eventually, through engaging with the ICTU and the employer associations, the new Fianna Fail government of Charlie Haughey brokered a new centralised political deal with ICTU – key to this, was the unions’ acceptance of wage restraint in the interest of national competitiveness (to complement the gains of the 1986 currency devaluation). In return trade union leaders would only end their strategy of wage-inflation and industrial militancy if they were granted political access to the public policy levers of the state (particularly fiscal policy). The unions were off the streets, and it was the beginning of twenty years of national ‘social partnership’.

What ICTU could offer a weak government during this period was stability. It could refrain from industrial action, negotiate reform and get its members to comply with wage restraint. All of this, however, was dependent upon the ICTU having the legitimacy to be considered a representative of working people. In the 1980s, this legitimacy was generated from having a broad and inclusive membership in both the traded and non-traded sectors of the economy. But throughout the late 1990’s and 2000’s, trade union membership was increasingly narrowed to the public sector, with the implication that ICTU became a weakened social partner.

From 2008-2009, during the economic crisis, FF eviscerated social partnership and cut public sector pay twice. ICTU attempted to mobilise public opinion against government austerity. The strategy backfired. All attention focused on the rise in public sector pay from 2002, as part of the benchmarking process. Public distrust in unions jumped from 30 to 55%. Unlike 1987-1992, trade unions were increasingly perceived as a public sector interest group, lobbying government in defence of overpaid civil servants, and labour market insiders.

The weakened ability of ICTU to be considered a social partner is intimately bound up structural changes in the labour market, which have affected all western economies. Collective bargaining coverage (the percentage of workers covered by a negotiated agreement) declined from approximately 71% in 1981 to 40% in 2010. In the late 1980’s, most of the Irish export sectors, and the commercial semi-state sectors, were highly unionised. In 2011 the 400,000 days lost to industrial unrest had dropped to 3,700, the lowest ever recorded.

What does all his mean? ICTU has lost the stick of protest to threaten government and the carrot of problem solving. Overall trade union density has declined from 35 per cent in 2007 to 27 percent in 2015, an all time historic low. In the private sector, density has declined from 24 per cent to 16 per cent. In the public sector, density has remained strong at over 60 per cent, whilst collective bargaining remains at least 85 per cent. Unions in the public sector are simply too strong to be ignored.

Outside the public sector, it has been assumed that the government no longer need private sector unions to guarantee national competitiveness, or to ensure industrial and political stability. The recent LUAS strike, however, challenges this assumption. Previously this strike would have been solved within the institutions of social partnership. SIPTU shop stewards would have been brought into line for breaking a national agreement. Much like the 80’s – in the absence of a strong ICTU, and a national process to solve wage and labour market problems, individual unions are now free to pursue their own self-interest without constraint.

This creates a strange paradox. In the context of EMU currency constraints, the only policy instrument left to government, aimed at coordinating cost competitiveness, is wage and labour market policy. During the crisis, collective bargaining was re-centralised in the public sector and de-centralised to the market in most of the private sector. But contrary to a lot of neoliberal market assumptions, it was the centralised institutions of collective bargaining in the public sector that made possible a coordinated “internal devaluation”. In the absence of the public sector agreements (Croke Park and Haddington Road, in particular), it is highly questionable whether the government could have implemented their fiscal adjustment policies whilst retaining social peace.

This observation complements a large body of research in comparative political economy, which suggests that coordinated wage setting, rather than the market, is better placed to generate the conditions for national competitiveness. Think Germany.



Globalization, Brexit and the prospect of European disintegration

Britain has voted to leave the European Union (EU), or more accurately, England has voted to leave. The majority in Scotland, Northern Ireland and Gibraltar voted to remain. The opinion polls, the bookies and the markets did not predict this outcome. The mood of the nation, it would seem, is becoming increasingly difficult to measure. Or is it?

There is a lot of data suggesting that ‘immigration’ was the dominant concern for those who voted to leave the EU. This should not be too surprising. In the latest Eurobarometer data, immigration was cited as the main concern of UK citizens, alongside Germany and Denmark.

According to YouGov data, which is more revealing, income was the best predictor as to whether someone intended to vote to leave or remain. Basically, the lower your income, the more inclined you were to vote leave. Some have referred to this category as ‘those with lower education’. But let’s be honest, it’s called social class.

Another predictor as to whether someone was more inclined to vote leave was age. Younger, more liberal voters, were much more supportive of remaining in the EU. The only problem with this category of voter, is that they failed to turn out en masse to vote. According to the data, electoral turnout among 18-25 year olds was fairly weak. Older conservative citizens were much more inclined to vote.

The precise data on how particular communities and constituencies across England voted is perhaps most revealing. The poorest twenty districts in England overwhelmingly voted to leave the EU. Or to get at it another way, according to this report, those areas with the most stagnant wages are the same communities with the most anti-EU attitudes.

What can we infer from all of this? What should EU policymakers infer from all of this?

The core inference is that England is a deeply class divided society, and that the poorest in England are increasingly venting their anger at immigrants and the EU. Further, and not captured in the Brexit data, right-wing political parties are now mobilising working class England.

Those same electoral constituencies most likely to vote leave, and with the most stagnant wages, are the same constituencies most likely to vote for the far-right populist UKIP party. In addition, they are the same people most likely to be discursively conscripted into the anti-immigrant lies of England’s infamous red-top tabloid press.

Class politics in England increasingly overlaps with enthno-nationalism, whereby identity and immigration, rather than economic self-interest takes precedence in shaping electoral behaviour.

In political science, there is a large literature on economic voting. One of the core findings of this literature is that in times of crisis and economic austerity, voters punish incumbent governments. This is partially what happened in the UK. Disenfranchised working class voters punished the Tories, liberal elites, the EU and the city of London.

However, the economic voting literature, whilst useful in describing why voters punish government, tells us very little about who these voters turn to, when expressing their social grievances.

In theory, those voters most affected by austerity, unemployment, underemployment and precarious work, would turn to parties on the left and those parties committed to reducing economic inequality. Most research, particularly within Europe, however, suggests, working class voters are turning to the ethno-nationalist right.

To put it simply, those affected by austerity and right-wing economic policies don’t necessarily vote in their class interest; they increasingly vote in their ethno-nationalist interest. UKIP’s economic policies are aggressively libertarian, not social democratic.

Economic liberalisation, rising inequality, and the complete free movement of peoples has social and electoral consequences. Societies will react to this disruption in different ways. Nationalism provides a sense of meaning, community and belonging, to those most affected by liberalisation. Far-right parties, such as UKIP, know this.

This realisation, however, does not seem to have seeped through to policymakers in the EU or  Germany, who, despite a near complete destabilisation of the parliamentary party system in Southern, Eastern and Central Europe, remain committed to their failed neoliberal economic adjustment of austerity induced cost competitiveness.

Most political science research in the aftermath of the great recession increasingly suggests that not only are electorates losing trust in the EU, but that the support for national democracy, in general, is in decline. When the politicians change, yet the policy remains the same, voters lose trust in the institutions of liberal democracy.

The question for national leaders in the European Council, and policymakers in the European Commission, is whether they need to wait for the election of Trump in the US, Le Penn in France, or the Five Star Movement in Italy, to realise that their economic policy response to the crisis has failed, and must fundamentally change?

Polities disintegrate when they begin to loose control of their external borders and their internal legitimacy. Or, as W.B Yeats poignantly wrote in 1919, “things fall apart; the centre cannot hold; mere anarchy is loosed upon the world“.  The UK and the EU are now faced with the potential for disorderly disintegration. Political scientists are accustomed to thinking that ‘more EU integration’ is inevitable. This is wrong.

Yeats wrote this after WW1, which coincided with the end of the first wave of free-market globalisation, when economic inequality peaked, much like today. In many ways Brexit can be interpreted as Europe’s Polanyi moment. It was a counter-reaction to a political economic system that is perceived to be designed in the interest of the comfortable elite.

It would be naive to assume that the popular reaction to rising inequality, precarious work, economic uncertainty, liberal elites and fear of immigration will lead to something politically progressive. The wave of anti-immigrant, nationalist sentiment, sweeping England, clearly shows that it won’t. France could be next. The EU should not wait to find out.