‘What has the government done for us?’

Just as all politics is, in the end, economics (what can we afford to do), it is reasonable to suggest that all economic policy is political (what can we afford to do), writes Brian Lucey.

The name of this game is political economy after all, and we forget that at our peril. As we look forward to the last full year of the coalition, it is worth reflecting how things got to the state they are, languishing in the polls and by no means certain that they or any feasible coalition will be in power in 2016.

Modern economics has begun to internalise the idea that people, the ultimate agents or economic actors, are psychologically complex.

At the core of the Government’s puzzlement is this. Having had six years of austerity budgets the last one was neutral, so why are people not hailing us? Worse, the economy is picking up (at least for some) so why should we, the coalition, be punished? This demonstrates a lack of understanding of how people read gains and losses. It’s well-demonstrated in the Monty Python skit where a group of Judean rebels discuss the Romans, their leader asking: “what have the Romans ever done for us?”

After a long list of public works and societal improvements they find one issue to hang them on. People do not feel the same about gains and losses equally.

They feel the pain of loss much more than the joy of gains. Having presided over a series of cutting budgets the pain of those vastly outweighs the joy of, as Leo Varadkar stated, a fiver a week in the pocket. This is compounded by what is known as a recency effect —we give disproportionally more weight to things that happened in the recent past than we do to things in the distant past.

Fianna Fáil got hammered for its recent past of bankrupting the State and making us all look like goms. Fine Gael and Labour are now being punished for their recent past of reneging on election promises or “doing a Rabbitte” and more so for looking like incompetents when left on their own after the troika.

This recency effect is a manifestation of what is known as hyperbolic discounting. Not only do we disproportionally overweigh recent events in the past, so also do we do for things that will happen in the future. Jam tomorrow is all very good, but jam in a few years’ time is more or less irrelevant.

Promises that if we stick with the plan we will all be rich again in 2017 cut no ice to people looking at their flat prospects for 2015 and 2016. In essence, when it comes to economics, individuals are short-term orientated. Institutions, therefore, need to counter-balance that.

A classic example is the pensions issue. There is broad agreement that some form of supplement to the state pension is desirable and needed, and that the short-term nature of people when faced with long-term decisions requires auto-enrolment into a pension. However, here we face the failure of Irish institutions head on. Our political institutions are as short-term as ourselves, and there is no hope that such a policy, long-term beneficial but short-term painful, will happen with an election no more than 15 months away.

The Irish water omnishambles shows this recency bias, and also what is termed an endowment effect. People tend to overvalue what they have, and would require more to part with it than they would pay to get it. We now own ownership of Irish water, and a large part of the debate revolved around its possible privatisation.

There are rational arguments on what parts, if any, of a utility can and cannot be privatised. Generally, the delivery modes of pipes and networks are a natural monopoly and so less suitable for private ownership while a greater case can be made for production units like power plants or water plants. Nonetheless, no effort was made by the political institutions to explain the costs and benefits of possible privatisation, even if such was being ruled out.

Part of the coalition problem is one of success. They have steered the state out of the bailout programme, albeit following a strict road laid down for them. Things have stabilised and turned around. In economics and finance it is well known that success breeds not just or only success, but also overconfidence.

-Brian Lucey