What If Ireland Defaults? (31 page)

Sean Kay is a political scientist at Ohio Wesleyan University who has been observing Ireland's changing economic fortunes over the past number of years. He argues that it is incumbent upon the media to play a responsible role in the forthcoming debate:

I think one of the dangers of the Irish media is that it could become very inward looking when what is really needed is balance. I would be extremely sceptical about default as an option, particularly if it is presented as some quick and easy and straightforward solution that would be good for Ireland. If the Irish media is going to make a case for default, then it is going to have to walk the reader or listener through what it means when it happens.

Then again, there are other commentators who claim that what is needed is a bit of creative destruction. The free market should be allowed to take its course; banks should be allowed to collapse and a series of defaults should happen across Europe. In a way there has never been more of a need for balanced, informed journalism. Ireland's membership of the Eurozone is likely to come under intense scrutiny over the next few years. It is an issue that will be closely related to whether the country defaults or not.

The stakes could not be higher. Can the Irish media step up to the plate?

17

A Behavioural Economist's Perspective on Debt and Default

Michael Dowling

Michael is a lecturer in Finance in Dublin City University.

What happens to a society that undergoes a profound shock to its normal way of living? A society, like Ireland in the 2000s, which finds its highly materialistic existence offers just transient comfort and no real protection against times of crisis? What insights does the intersection of finance and behavioural science provide in how this society might respond? This chapter explores this question using a behavioural perspective and draws on cultural, psychological and historical lessons to suggest a movement towards re-engagement with community (with a modern twist) as the key societal outcome of the crisis.

There seems to be a collective shudder going around the country at the moment as we remember some of the more embarrassing excesses of the boom years. The hot tub in the back garden (usage ten days a year), the many €10 sandwiches and €5 coffees, the fawning over which bottle of expensive wine tastes slightly different to the usual plonk, the €1,000 Jacuzzi bath that clogs up at the first sign of soap. The list goes on …. The raw materialism of the time, perhaps best epitomised by those glitzy €3 million weddings that littered the insides of the likes of
Hello!
magazine, is now viewed with a mixture of anger – as it turns out we ended up paying for those shows of fake wealth – and still a bit of envy – well, that doesn't vanish overnight; but also distaste.

The presence of distaste is new. As families across the country are finding out that those smiling bank manager adverts just covered up for organisations that would cut and run at the first sign of trouble, there are also discovering that their friends, family and community will go out of their way to selflessly help them if they can. There is a realisation that there is ‘fake social' – companies don't
really
want to be our friends on Facebook – and there is the ‘new social' – a vibrant mix of traditional community spirit and new communities of common interest formed through the social internet. We are learning that as much as that Jacuzzi bath might provide a few minutes of comfort before the inevitable breakdown, the power of being part of a strong community is something that won't grind to a halt even in the tough times.

The end result is that Irish society is moving from one that appeared to value raw materialism above all else to a re-imagined community-centred society. The traditional media, a vital voice for materialism, is in accelerated decline, being rapidly replaced by an internet where choosing to view advertising is optional and community-building is
de rigueur
.

This distaste of raw materialism provides an impetus to community-based initiatives; leading to a re-envisaging of how we want our society to progress. This has potent implications for how Irish society will develop post-crisis and this change is already well underway. Community engagement is currently undergoing its own tiger-like boom; but in ways in which an older generation of traditional physically based communities could never have imagined. These changes hold the potential to drive policy for at least the next generation, making them probably the most significant long-term outcome of the crisis.

Too much of the public discussion of the debt crisis has been couched in opaque, complicated, legalistic and economic terms that are largely meaningless to the majority of our day-to-day lives. We need to look at the individual and community level changes that are having a real – and surprisingly positive – impact on Irish society. This chapter begins by charting some of the reasons for the decline of materialism and explores how Irish society is beginning to re-engage with community initiatives, including what this suggests for a post-crisis/debt/default Irish society.

Materialism in Decline (Thanks to the Decline of Traditional Media)

Apart from 2,000 daily calories of (ideally) unprocessed food, clothing, shelter and the occasional drop of medicine, there is very little we actually
need
to buy. The role of advertising is to convince us to add desires to our shopping list alongside these needs, and it is particularly effective at doing this. Consider that about 55 per cent of Irish families buy expensive powdered baby milk despite ample supplies of the natural variety and the evidence that breastfed babies are healthier and perform better in school and later life. Leaving aside the medical cases requiring bottle-feeding, advertising has apparently convinced Irish families to spend money on something where the alternative is free and demonstrably better. Advertising is clearly a powerful tool in the arsenal of materialism.

This materialism has a significant impact on communities. Materialism doesn't easily co-exist with community involvement. A research paper from 1997 by Ronald Inglehart, a noted culture researcher, contrasts materialism with post-materialism, and is of relevance to our discussion. Materialism, he says, is associated with emphasis on economic well-being, working hard and survival; while post-materialism – where material possessions are still valued, but not prioritised – is associated with political participation, taking pride in things like a clean environment and living in pleasant surroundings, and openness to people from different backgrounds.

These post-materialist characteristics are clearly drivers for community involvement. A materialistic society is too busy working hard to earn money to acquire more possessions to be involved in the community. It is for this reason that this section charts the threats to materialism, particularly the threat to advertising effectiveness. If materialism is finding it harder to maintain its message of ‘more possessions equates to a happier life', this can provide a rationale for the re-emergence of community involvement and suggests that the rise in community interest is not just a temporary blip in the otherwise dominant advance of the desire to acquire.

The traditional media plays a vital role in materialism given that it serves as the main platform for advertising of products and services. However there are strong indicators that traditional media is under threat from alternative media sources, particularly through the internet. As traditional media declines and advertising becomes optional we should see a decline in the ability of companies to influence the consumption behaviour of the population. As noted already, this loosening of materialism's grip plays an important role in allowing the new community-centred society to emerge.

At the beginning of 2011, Irish television ownership stood at an impressive 106 per cent (due to multiple television sets in some households), and our newspaper readership numbers are high with 573,630 buying a daily newspaper and 991,697 buying a Sunday newspaper as of December 2010; although these newspaper numbers are a drop of 11 per cent in daily newspapers and 14 per cent in Sunday newspapers compared to December 2008. But overall there doesn't seem to be any shortage of interest in traditional media.

However, there is an underlying change in the consumption of traditional media that is not reflected in the raw numbers. No one would expect that people would throw out a perfectly fine television just because of their newfound distaste for materialism; but what has changed significantly is the interest displayed in traditional media's messages. People are increasingly watching television with less focus due to watching while also engaging in internet-based activities. A 2011 experimental study by two Boston University researchers, S. Adam Brasel and James Gips, notes that for the key advertising demographic, the under 30 age group, 40 per cent of internet and television viewing is simultaneous – people are browsing and watching TV at the same time. The researchers find that people who watch television while also browsing the internet concentrated most of their time on their internet activities and were constantly flicking back and forth between the two activities. This form of television viewing is hardly optimal for a television advertiser wishing to embed their product message.

With the decline in television attention has also come an acceleration of availability of alternative media sources which have either reduced or no advertising. YouTube, for example, is twice as popular in Ireland in 2011 as it was at the beginning of 2008, and carries minimal advertising. News can be freely read online without intrusive advertising, compared to an estimated €700 annual cost of buying the advertising-heavy
Irish Independent
/
Sunday Independent
every day. Media piracy is another source of viewing that poses a threat to advertising effectiveness through traditional media, given that pirated material rarely contains advertisements. Reliable statistics on media piracy in Ireland are not available, but we do know there is an increasing (unsuccessful) effort by digital rights holders such as the Irish Recording Music Association to persuade internet service providers to disconnect persistent illegal downloaders of media material, indicating their concern over piracy. The managing director of Xtravision also partially blamed internet piracy for the national entertainment chain being pushed into interim receivership in April 2011 and subsequent examinership.

It is possibly too early to say, but materialism does appear to be on the wane in Ireland. While wages dropped 14 per cent from 2008 to the middle of 2011, retail sales suffered a 20 per cent drop over the same period, according to Central Statistics Office data. Certainly lower disposable income and reduced lending will be the primary causes of the drop, but the excessive drop suggests more factors at play than merely the amount of money in our pockets. At the least we can say that there is a reduced focus on material goods acquisition among the population, which suggests greater available time to focus on post-material ambitions, such as community engagement.

Society Responds: The Re-Emergence of Community

Being part of a community offers a wide variety of benefits. At an important basic level, the work of Robert Putnam demonstrates that people who are more socially active are not just happier, they are also healthier. Community involvement also offers us coping strategies in times of crisis and need that are an improvement over how we could cope if we just had to handle problems by ourselves. This section discusses the power of community and charts how Ireland is now re-engaging with community; the concluding section discusses the future possibilities from this shift in attention towards community and away from materialism.

Sociologists frequently refer to ‘social capital' when discussing community. Social capital is the value of the ‘goodwill that others have towards us'. This is an inherently community-based concept that conceptualises the idea that there is value in our social connections, such as being able to rely on friends, family and neighbours in difficult times.

A mid-2011 story in the
Irish Times
epitomises the power of social capital and tells of a Galway family having to stay with their seriously ill daughter in Our Lady's Children's Hospital, Crumlin, in Dublin and the mother thinking back over her experience of that time:

She thought about the small, constant kindnesses of friends and neighbours that had sustained the family through their struggle: a lit fire when they returned on winter nights; meals prepared; someone to look after their younger child, then just a baby.

International researchers have documented how strong social networks can work together to overcome even the worse disasters. Thus, researchers Emily Chamlee-Wright and Virgil Storr show how strong community ties helped a collection of small towns in New Orleans recover after Hurricane Katrina, and an associated spill of millions of barrels of oil, had devastated their community. Other researchers have found similar stories in the wake of the disastrous earthquakes in Kobe, Japan in 1995 and Gujarat, India in 2001.

An interesting 2001 study by World Bank researchers Michael Lokshin and Ruslan Yemtsov provides more details on how such social capital works. They studied the 1998 Russian currency crisis and its impact on households using survey data from approximately 3,000 Russian households. A key finding is that households that are socially excluded, such as the elderly, relied on passive coping strategies – mainly cuts to expenditure – to handle the crisis, whereas more social households adopted a variety of active approaches to cope with the economic turmoil; including relying on help from neighbours and finding supplementary work. This suggests that households strong in social capital are able to utilise this resource in times of need to actively manage their problems and find positive solutions.

One of the issues with social capital is understanding the ‘investment' required to build this capital. While people generally show a willingness to help other people, the level of help is usually mediated by the closeness of their ties to a person. For example, a 2007 paper by Canadian researcher Brenda Murphy examined community responses to an electricity blackout that affected approximately 50 million people across Canada and the US and found that people's help of others was strongly mediated by familiarity. One-quarter of the sampled population had helped neighbours, 15 per cent had helped family and friends, and only 2 per cent had helped strangers. This suggests benefits to investing in social capital. The following quote from a 2004 paper by Charles Kadushin whimsically illustrates this idea:

I am baking a cake and have run out of sugar, but I can go to my neighbour next door to get some. It was worth being nice to that neighbour even though I did not particularly fancy her. Do I have to return the sugar? Maybe she can borrow my lawn mower the next time she needs to mow her lawn and that will count as a return of the favour. Maybe the value of the sugar is trivial enough not to require repayment in kind.

It sounds distasteful to view community involvement as an investment (one book on the topic suggests regularly culling unproductive contacts from your network!), and this has been a common criticism of social capital theory. However, we are not really talking about investment in the traditional financial sense of seeking to optimise returns from time spent, but instead just noting that social capital can deliver strong benefits in terms of overall life satisfaction and help in times of need, but it does need time to be spent in developing this resource. That might just be time spent with friends in the pub, or helping out with refereeing matches in the local club or volunteering in a community organisation. This is time that just isn't available where materialism is a driving force and working to acquire material possessions is considered of paramount importance.