Talk about macroeconomic aggregates doesn’t cut it with voters

THE electoral dust has finally settled, and from the wreckage of the coalition we can expect no further survivors.

It was a case study in how to lose an election, a mixture of arrogance and tin-eared disconnect, combined with a lurking bruised populace (or “whingers” as the Taoiseach would have us known) unwilling to believe that the recovery existed, never mind had been kept going.

Behavioural economics has a fair degree of traction now as the driving paradigm of how we should interrogate the economy.

It has, perhaps, not yet reached the point where it is the mainstream but it nonetheless has some useful findings which shed light on the results.

Perhaps the main precept of behavioural economics is that around what is known as ‘prospect theory’.

This, for which a Nobel Prize was awarded, tells us how people (“whingers”) feel about losses and gains. Put simply, we don’t treat them the same — we feel our losses more keenly than we appreciate our gains.

It is this that lies at the heart of the problem for the coalition.

Capital formation and personal consumption took a massive hammering in the deflation of the bubble. Since then they have risen pallidly if at all.

Since 2011, over the nearly 20 quarters, personal consumption has risen by just over 9%.

That is, in effect, flat. It remains below the peak.

People do not feel the recovery there. As a consequence, they feel, at best indifferent to and at worse feel that there has been deterioration in their position.

The scars of the deflating of the bubble, fading though they be, are still hurting more than the sickly rise in personal spending.

Whether this is fair or not to the coalition, it is where they were.

This is reinforced by the Central Bank data on household wealth. Much of the rise in household net worth over the last few years has been on the basis of increases in pension pots or on the basis of house prices. Neither of these feed into immediate consumption or utility.

The fall in household net worth, from about €800bn to about €600bn over the 2007-2012 period hurts a lot more than the rise back to about €750bn now.

The €200bn loss greatly outweighs the €150bn gain.

Again, this may be unfair to the coalition, but there it is.

Talk about macroeconomic aggregates doesn’t cut it with people who still bear the scars of the crash.

A further element that is clear from behavioural economics is that fairness is something that matters.

Fairness and trust are really important elements of economic exchange.

There is increasing evidence that people are not, contrary to the precepts of traditional economics, self interested only.

Put simply, while we greatly value our own utility we also gain utility from the utility of others.

Put even simpler, economics has discovered that which Thatcher denied existed, society.

An important element is that people converge to some degree of fairness in society.

In simple games of giving and receiving we find people willing to exchange fairly substantial portions of wealth.

This is borne out by the findings of the exit polls, which showed much greater concern for fairness issues — health in particular — than for tax cuts.

Homelessness was seen as more important than tax cuts.

People wanted fairness and competency and there was scant evidence of either from Fine Gael in particular.

They have squandered decades of perception of being a competent economic managerial crew.

They have continued this with the shenanigans around Irish Water.

They and Renua exemplify the words of Keynes: “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

Reaching back to the tax cutting-tropes of the heirs of Arthur Laffer, and the neo-Thatcherite self-interested economic man, they missed the recent revolution in how people think and ran into the revolution of 2016.