The other week, RTE reran the 1976 classic movie The Outlaw Josey Wales, starring Clint Eastwood as the eponymous hero. During a particularly brilliant exchange, the bounty hunter Fletcher, hot on the heels of the outlaw Wales, comes out with an inspired put-down to the cowardly senator who is trying to pull the wool over his eyes. Squinting into the sun, chewing tobacco, Fletcher disdainfully hisses: ‘‘Don’t piss down my back and tell me it’s raining’’.
Against the background of the worst unemployment figures we have experienced since 1975, you can’t help but conclude that over the past few weeks in Ireland, there has been a lot of pissing down backs, as ministers and other government spokespeople tell us the economy is robust. We are reassured that the ‘‘fundamentals’’ are solid. Those who query this position are dismissed as ‘‘doom and gloom merchants’’ – a phrase so hackneyed and meaningless that it again reinforces the patronising attitude of our elite towards ordinary people’s worries and general dissent.
The truth is things are now moving so quickly that no one really has a clue where all this is going to end. Historical evidence from other cycles is not comforting, but that might be because the policy response to these situations was unimpressive. If you use traditional tools to respond to modern developments, you might make a bad situation worse.
Listening to this week’s discourse, there’s a terrible feeling that those in charge do not know what they are doing. The Taoiseach and Tanaiste claimed there would be no return to the 1980s.Along with some of their spokespeople, they reiterated that the economy was a much more sophisticated beast than the one that spluttered in the ‘‘Joshua Tree’’ years.
All week, this mantra was hammered home on the airwaves by the economists who work for the banks and stockbrokers. Let’s run with the idea that Ireland today is totally different from Ireland 20 years ago. It’s not hard to agree with this assertion. The question that arises then is: if 21st century Ireland is so different, why does the solution being trotted out now by the Department of Finance sound like 1980s thinking?
Examine what has been proposed as the panacea. Everyone is talking about cutting government spending as if the root cause of today’s dilemma were 1980s-style government incontinence. But that’s not the root of the problem at all and therefore can’t be the only solution.
The root cause of today’s problems is a collapsing property market, coincident with a rapid deterioration in Ireland’s competitiveness. A credit binge disguised the underlying weakness. In fact, we lived in a Botox economy where other people’s money made us look richer in the same way as Botox makes a middle-aged person look younger. Now that the Botox economy has been laid bare, we can’t hide the blemishes or wrinkles any more. The root cause of our present difficulties is too much credit; the root cause in the 1980s was too little credit. Therefore, the solutions have to be totally different.
In the 1980s, the Irish government ‘crowded out’ the private sector, sucking up all the resources of the economy and choking the private sector’s ability to grow, innovate and create employment. Back then, the focus should have been – and was – on sorting out profligate government. By reducing the government deficit, the stranglehold the state had on the rest of us was eased.
Today, the situation is different. The absolute number on the government’s deficit is a passive residual not an active catalyst. The budget deficit figure is the end of the road rather than the beginning. In the boom, the credit profligacy determined the government deficit. In the 1980s, the government profligacy determined the credit deficit.
In short, cause and effect today are precisely the opposite of what they were in the 1980s.Yet the government’s response has been to wheel out 1980s solutions to 21st-century problems. Obviously, government spending has to be cut as credit-driven revenues dry up.
But to claim that this will have a positive ripple effect on a country facing a credit meltdown, is akin to pissing down someone’s back and telling them it’s raining. We need new thinking. We have to separate the old, toxic, property-related detritus from the new opportunities in non property related ventures. There is still a lot of wealth in Ireland. The problem is that this cash is not finding its way into the right companies. On the other hand, there are plenty of good companies in Ireland, starved of credit.
The banks are petrified of touching anyone, which means that good businesses which are employing people and exporting have been lumped in with the bad businesses that were glorified property scams. With the credit crunch, we now risk the good businesses going down with the bad because banks are indiscriminately pulling in credit from everyone.
This is where the state can start getting inventive. Why not unlock some of our personal wealth by making it tax efficient for a rich investor to put money into a real company with a cash-based business plan? We need a scheme, targeted at real businesses.
If you travel around the country you will find hundreds of small companies, starved of cash. Yet collectively, these small businesses are our national ‘get out’ cards. These companies need fresh capital. There is lots of capital about. The only problem is that it isn’t finding these opportunities. If the state made it tax-efficient for wealthy investors to back these small guys with big ideas, we could begin the process of gradually clawing our way out of this swamp.
An idea like this is simple; it uses private resources and costs little, particularly if the capital is not being used anyway. There is no burden on the state to pick winners or anything complicated like that. The private sector is incentivised to do what it is best at: assess risk. We are talking about an urban renewal scheme for the enterprise economy.
Such a move could be the beginning. The Department of Finance mandarins are obsessed with the budget deficit, but this will not solve our problem. Our politicians have to realise that the property scam is over and that we should never again become infatuated with bricks and mortar. It’s time to channel funds away from that mess and into the real economy. Little by little, this can be achieved. The beauty of EMU is that we should never want for capital. The challenge is in finding away of directing that capital into the right hands.
In this way, we might be able to limit our involvement with the late 1970s to the replaying of old classic movies rather than the rehashing of old, failed ideas.
David, It’s a nice idea to try and stimulate a VC culture among our own, but I don’t know if the people with the money have the ability to access risk outside of property area. The bricks and mortar model is so simple in comparison to modern business that the cultural difference would be almost impossible to bridge. I know this from my own experience – I’ve spent the last three years and almost half a million – no grants – doing R&D on a new product for Europe and I’ve yet to find someone who would put any value… Read more »
David,
A great article as always. But here is my problem, I know the Irish Government and the Department of Finance ain’t going too implement your ideas or any new ideas. They will eventual act when it is too late, wait and see is their mantra.
So what can we do to help while they wait?
David: I agree that ” There is still a lot of wealth in Ireland. The problem is that this cash is not finding its way into the right companies.” but I’m not so sure that “there are plenty of good companies in Ireland, starved of credit.” Most small business plans are based on the service economy, serving local needs rather than international demands. Even where they succeed on the wider stage, by establishing a sandwich bar franchise or a health food franchise or even a construction enterprise, they are all vulnerable when international economy starts to feel the economic draft.… Read more »
I must agree that backing indigenous firms and start-ups offers the highest returns on investment for our economy as long as the owners don’t all re-locate to Malta or Monte Carlo. It is, however, a long term game. It is difficult to increase the pace of investment. There are only so many good investment opportunities at any one time. You’re absolutely right to propose that government create the right incentives for investment but that won’t make the next few years any easier. So in the medium term we must do everything that we can to protect and if possible grow… Read more »
Hi David, The suggestion to set-up a scheme for those with capital to invest is already there, its the BES (and the EU have allowed us to continue with it). The BES can be used for a wide range of qualifying businesses. In the past, some of those qualifying were “dubious” such as hotels, etc, which were more or less property vehicles. However, BES or not, private individuals are just as wary of investing in businesses that ‘need the money’ than banks. There will be risk takers out there, but when the investment climate goes “bad”, there will be fewer… Read more »
Did anybody see on the news that the Aran islands might become a tax heaven? What a joke! Is that the best idea they can come up with?
Why don’t the commission on taxation come up with a broader all-encompassing plan that makes more sense for indigenous businesses in the country?
Can’t see the government do anything to encourage investment in these companies.
If they cant do basic things like encourage people to put money in pensions then we have no hope of what you are suggesting. As yet they have set up a stakeholder pension system or ISA’s as they do in the UK, or compulsion as they do in Australia.
Man, David you depress me, we’re screwed arent we?
Sorry Havent Set Up – So Damn depressed I cant type!
its all connected, banks can’t loan … they are looking for a bailout, the proposals to have the government revive the mortgages securities market is one example where the banks want the govt to provide funds and accept mortgage deeds as security in return… because there is nobody else in the world the banks can sell the loans on to…. as now the mortgages are bigger than the security. fully agree with the essence of the article that ensuring credit is available to the right industries is important. but how? Providing credit & investment to Irish non property business is… Read more »
I take complete issue with the main thrust of the argument that 80s are different now. We indeed have a huge issue with government profligacy and now that the masking effect of the property boom has evaporated the lunacy of the one way bet on benchmarking is revealed in all it’s rip off glory. The suggested solution is that the poor punters in the private sector be left sort out the mess for themselves using our indigenous wealth from the private sector. Keep the government out and let the tough get goin’ (not a bad idea – at first sight).… Read more »
David, A thought-provoking article as always. Yes, I agree it is the private sector that needs to be at the forefront of our recovery strategy. I also agree with the point that many of the investors lack the skills to properly evaluate engineering and hi-tech investment opportunities. This was partly responsible for the over-investment in property in the last decade as people thought it was the “safe bet” especially in the aftermath of the dot.com bubble. Now, I think that we have to leverage those who invested in “bricks and mortar” into other areas, perhaps related to property. One such… Read more »
It was already very difficult to get a business based on a new idea or innovation off the ground in Ireland. The (relatively little) money that was available went to established business needing investment for growth, or business with already well proven markets and business models (and thus not genuinely innovative). Irish conservatism galore… Though there were some good efforts to provide more funding for these types of business which deserve praise. With the current major credit contraction, I can only see the situation getting worse… Unless the people who used to invest in the perceived ‘safe’ bets of property… Read more »
We have been strangled for years. We have appealed to Government for basic help like broadband but it fell on incompetent ears. That said people still have to eat and we will have to hire more people due to increased business. We want to hire apprentices and keep the staff we have but the attitude we get from established big names and from the greedy leeches in the various departments it is going to be made as difficult as possible for us. There was no entrepreneurial support during the boom so we can say goodbye to any hope of any… Read more »
“in spite of you” Hk, I’ve wondered about that off and on too. We sucked in a lot of companies, mid – late 90’s, when wages were low and maybe the IDA derserves some credit for that manufacturing success. But given our low cost base, educated work force, neutrality, stability, english language and european ties it was hardly rocket science. How well would we have done with no IDA? I think we would have done much the same. I think the hard working individuals in the private sector who have worked like crazy to ensure deadlines are met, etc., deserve… Read more »
Man the lifeboats ourselves rather than let the incompetent bufoons that took us into the iceberg tell us it’s allright.
Face it, if you’re in business you’re on your own and dont ever forget it.
An understanding bank manager who talks straight is your best bet….they’re as rare as rocking horse shit at the best of times and have gone the way of the dodo right now.
The solution to this problem, is to find some DNA belonging to Michael O Leary, Warren Buffet, Denis O Brien, Tony Ryan and do some genetic cloning so we can replace the current imbeciles who are running this country into the ground.
A good start would be IQ screening, this should be done on every politician in government and any found with 140 of an IQ or less should be sacked.
As MK said, BES was conceived as just such a incentive. to “unlock some of our personal wealth by making it tax efficient for a rich investor to put money into a real company with a cash-based business plan” It was seens as a response to the “need a scheme, targeted at real businesses.” William Kingston, Lecturer in Innovation in TCD first proposed what became BES in a very interesting paper, taken up by the UK Government. The Irish government followed and progressively changed into something that was completely contrary to what William Kingston advocated. It was strangled as middle… Read more »
Donal,
I assume you meant pusillanimous and not pussillanimous. Nice word!
I wasn’t talking about BES or seed capital or going cap in hand to the bank manager. I was talking about SMEs trying to keep on going.
We work at the coal face of the economy. Right at the shitty end where nobody goes. I.e. the ports.
The economy needs ‘significant’ investment and output from productive businesses with sustainable international businesses whether they be Irish owned or not. Relative numbers are worth considering, from 2007 to 2013 €180 billion is committed to the NDP (few real hard figures on returns?) but only €175 million to a NDP backed Seed and Venture Capital fund scheme where about a half has been allocated 2 years later and only a ‘handful’ of investments to date. Where is the urgency ? Now do we need more ‘innovative’ policies ?
In contrast to Johnny Dunne, I believe that what our economy needs is a complete change of mind on the part of the state and governing classes in relation to wealth creation. They still believe that we can prosper by selling ever more expensive properties to one another and that policy has to be focused on ensuring that this paradigm continues. As an example, where did INTO’s Joe O’Toole come with the notion that benchmarking was just an ATM? He has never shown any evidence that someone has to fund ATMs. The financial institutions also seem to have forgotten that,… Read more »
Sub
When it comes to energy security, we’re not very secure! Wind and solar for example are not sufficient to provide for our energy needs…yet nobody ever talks about nuclear power. Establishing one of the next generation nuclear facilities will supply the bulk of our energy needs and could provide employment to thousands. Bring in the French to build it!
Regarding nuclear, on the face of it, it may have attractions, however, there is evidence to suggest that the reserves of nuclear fuel (uranium etc.) may be exhausted before oil, especially if there is large scale uptake of the technology which, in the aftermath of the G8 conference appears to be happening. Also, if demand for nuclear is high and the expertise to build the nuclear power-stations is scarce, costs will rise and budget over-runs can be expected. With Ireland’s poor record on keeping to budget and timescales on projects (e.g. Luas) and in the context of exhaustible reserves and… Read more »
Lads,
Why all the pontificating. We have businesses. Why not work with what we have.
Its not very sexy but its here and now.
Why does everybody forget the simple fact that the iRISH POUND IS TRADING AT 1.02 vis a vis sterling and $2 to the pound .Until the euro depreciates by 105 the traded sector is up the creek.
David — the following is not that related to the article above — nevertheless — I think you will enjoy the following essay written by Paul Graham — a tech entrepreneur with unique insights. http://www.paulgraham.com/siliconvalley.html How to be Silicon Valley May 2006 Could you reproduce Silicon Valley elsewhere, or is there something unique about it? It wouldn’t be surprising if it were hard to reproduce in other countries, because you couldn’t reproduce it in most of the US either. What does it take to make a silicon valley even here? What it takes is the right people. If you could… Read more »
Brilliant article by Paul Graham describing ingredients for a potential Silicon Bog, and thanks for bringing it to our attention Bobby boy. Trouble is that the whole computer idea has now been done to death, rather like the steam engine in the 1930s and piston engined planes in the 1950s. Silicon and its hard and soft-ware offspring are not longer the big new thing attracting the brightest and best. The new challenge is to discover affordable, lightweight, portable power that does not depend on hydrocarbons. The answer probably lies in some unexplored corner of the realm of physical chemistry, not… Read more »
Its a blank canvas ok. Alternative energy exists but the Greens won’t have it. Its called Nuclear. Or if you are G Walker Bush its Nucular.
Funny they will say fluoride is non toxic and the mess in Cork harbour is grand for bunnies and small babies but Nuclear is a bridge too far for the Greenie turncoats.
The Greens are hypocrites of the highest order. We will be sitting in the (organic, natch) dark before they get their fingers out of their crusty arses.
I suspect it will take a couple of years for the current changes to play out. I was queuing in Aldi today with my small few items, behind a well dressed couple whose laser card was rejected by the POS system. It struck me that this would have been unusual a couple of years back. Every second person I talked to who has a credit card has it maxed to the limit, but not just to 2000 or 4000 but anything from 7000 to an eye watering 15,000 euros. Another friend who bought in desperation at the height of the… Read more »
Paul Graham’s piece leaves a lot to be desired in his analysis of Silicon Valley. “I think you only need two kinds of people to create a technology hub: rich people and nerds. They’re the limiting reagents in the reaction that produces startups, because they’re the only ones present when startups get started. ” Only two kinds of people? What about customers? Who is actually going to buy the products/services of the start-ups – regardless of where they are sited, how many rish people are involved in the funding and how many clever geeks/nerds are involved in the start-up? It… Read more »
I’d agree with Donal O’Brolchain that much of the innovation over the past 60 years was funded by agencies of US government (NASA, ONR,DOD,CIA etc.), motivated ultimately by the Cold War. International oil companies also were sources of funding for significant innovations. However Ireland’s defense research budget, space budget and hydrocarbon basic research budget is negligible in total. Paul Graham provides some pointers to how we might direct our limited resources and his analysis is entirely appropriate for Irish desire to establish a Silicon Bog. We don’t have competing ideologies to conquer, so we cannot afford the scattergun approach and… Read more »
Malcolm: I’m sorry but if you don’t believe that Information & Communications Technologies remain a challenge with great commercial opportunities then you don’t know the domain. I agree that energy, bio-tech and genomics are some of the hottest research topics right now but great IT research & development underpins that. However, Paul Graham’s article can be transposed to pretty much any technical domain. As a member of the fraternity of nerds who sometimes works with nerds from different fields in what’s known as cross disciplinary research, it’s amazing how similar we all are. It’s also amazing how positively stupid our… Read more »
Shane: I’ve made use of interesting developments in information and communication technology ever since I wrote my first Fortran IV program 40 years ago. The point I was trying to make was that they are now a mature technology, with advances made in tiny incremental and largely predictable steps. International competition in these fields is cut-throat; they no longer form a likely basis for enhancing a national economy. For any innovation, of equal importance to its nerds, boffins, publicists and customers are the lawyers who patent any lucrative discovery on the international stage and reserve a share of its profits… Read more »
Malcolm, I agree that they are a mature technology, but application is still wide open for exploitation. Shane’s cross disciplinary research, offers endless opportunities for mature technologies. Nokia, didn’t invent the mobile phone, but look at where they’ve taken it through R&D. Green field research is for the big boys – niche application is where we should be going as it gives a quick return that can be used to finance further advancements quickly to reinforce a lead position. The Japanese got off the ground using it – in their case it was simply the development and application of advanced… Read more »
I think you are all partially right ! ;-) There is no simple formula for success, and the silicon valley blueprint (nerds and rich people) doesnt necesarily work. In fact most of the time it doesnt work! A lot of business success is down to chance. Intel and Microsoft only came about because of a mis-managed PC project in IBM. That is the ONLY reason. Without that IBM project there would be no Intel (as we know it), Bill Gates may very well still be failing at selling accounts software in Seattle, no Compaq, no Dell, no PC ‘world’ as… Read more »