Karina is an economist with the Economic and Social Research Institute (ESRI) in Ireland. She is also an Adjunct Associate Professor at Trinity College Dublin and a Research Fellow at the Institute for Labor Studies (IZA) in Germany, holds a PhD from University College Dublin has economics at Cambridge University. She’s easily the smartest person ever to appear on the show.
Side note from Andi: Before you dive in, this is episode 50 of the show. I’ve no idea how we got here! Thanks for listening. It doesn’t matter if this is your first of 50th, thank you!
Listen below or find it on Spotify, Apple and Google or just search for Strategy Sessions wherever you get your podcasts.
In this episode we discuss:
- What’s driving the cost of living crisis
- The definition of a recession and if the UK is in a recession
- The difference between inflation, falling inflation and deflation
- What role consumer sentiment plays in how people spend
- The impact of current issues on the UK, Ireland and Europe
- How reduced spending power impacts different groups in society
- Lessons from Covid on managing economic shocks
- How marketers can get a better understanding of the economic issues
- What macro-economic indicators marketers should look for to help understand if/when a recovery is starting
Karina Doorley heads up the Tax, Welfare and Pensions team at the Economic and Social Research Institute (ESRI) in Ireland. She is also an Adjunct Associate Professor at Trinity College Dublin and a Research Fellow at the Institute for Labor Studies (IZA) in Germany. She received her PhD from University College Dublin in 2012 with a thesis focused on the effect of fiscal and social policies on labour supply and redistribution in Europe. Prior to this, she studied economics at Cambridge University and University College Dublin.
Karina worked at IZA in Germany as a Research Associate from 2012 until 2014 before joining the Luxembourg Institute of Socio-Economic Research (LISER) as a Research Associate. She was appointed head of the “Employment and Wages” unit at LISER in 2016. In 2017 she moved to the ESRI as a Research Officer and was appointed Senior Research Officer in 2019.
Karina’s research interests include income distribution, tax and welfare policy, gender equality and demographic change. She is a frequent contributor to radio and television discussions on economic matters. Find her on LinkedIn.
Monday 13 March, The Alex Hotel, Dublin
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This transcript has been done automagically using Happy Scribe and hasn’t been checked by a real person, so there may be some hilarious mistakes where the AI can’t work out our accents – I’m sure they’re trained on just the American accent.
My guest today on the strategy sessions is Karina Doorley. Karina. Welcome to the strategy sessions.
Thank you very much, Andi.
Now, you are a first on the Strategy Sessions. So it’s episode 50 and you are the very first person who does your job to be on the show. So do you want to explain to everyone else what your job is? Because it’s not necessarily a marketing job.
No, I should be really upfront from the beginning, an economist, so I’m the good kind. So I studied economics at Trinity College Dublin, at Cambridge, at University College of Dublin, and then spent a lot of time on the continent in Luxembourg and Germany and basically doing research on poverty, inequality and how the tax benefit system contributes to both of these things and also how it affects working census. So what makes people want to work and what keeps them at home?
Well, listen, I love how you just casually mentioned probably the best university in Ireland, the university in England, which is tied with the reputation of the best university in England. I just kind of glossed over them as if they were just shops that you nipped into at the weekend. But we’ll probably come back to talking about education and things at the end. What I wanted to get into is to talk about your experience and if you’re listening to this and thinking marketing podcast, why have we got an economist on? Well, as a marketer, you’ve probably been aware that the cost of living crisis might be affecting your sales at the minute. You might have noticed that people are struggling for money because their energy bills have gone up. Marketing doesn’t exist in a vacuum, right? People’s lives don’t exist in a vacuum. All these other macroeconomic things that are going on have an impact on people’s lives. And most marketers that I’ve spoken to, and when I say most, I’m including myself in that haven’t got a clue what it means, what some of these terms mean. I had a really interesting conversation with someone about inflation the other week who thought that because inflation was falling, that meant prices were going to fall.
I’m like, no, that’s deflation not what you’re talking about. So I thought, you know what? What we need is someone who can explain all these things, tell us what they mean and dive into what the problems are and how we can fix them. So nothing major to do in the next hour, not at all easy. So first of all, let’s talk about what is causing this cost of living crisis. I hear the phrase cost of living crisis, but what’s driving it? Because it’s a unique set of circumstances, isn’t it, that’s causing prices to rise everywhere.
So I’m sure your listeners will be familiar with each of these in isolation, but together they’re all driving the huge starts in prices we’ve seen over the last number of years. So the first factor is the pandemic. Pandemic affected the demand for goods and services, but in particular, consumption shifted away from services, so people couldn’t go to restaurants or go for their facial or use those services that they used to use because they were all closed down. So they shifted their consumption to goods, to things that are manufactured. And that led to a rise in demand for raw materials and intermediary parts at a time when logistics were under severe pressure, so things weren’t moving about as easily. So when you have high demand for something that’s not easily available, that leads to inflation, that pushes the price up. And that actually still remains somewhat of an issue. I mean, until very recently, there were still serious lockdowns in China. So it, you know, the supply chains aren’t moving as easily as they used to anymore, although it has improved drastically since 2020. So the pandemic is the first thing. The second thing is the war in Ukraine.
So that has led to shocks in the energy and food market because Russia and Ukraine provide large amounts of grain in the global market and there are also energy embargoes on Russia. So both of those things are driving up the cost of two key sort of products that people use every day. Households use food and fuel. And since the main drivers of inflation now are food and fuel, that’s really affecting low income households more than it is high income households, because most of their money goes on food and fuel, whereas high income households might spend a larger proportion on luxuries or services and so on.
So this is a global problem, really, isn’t it, that has you mentioned China, because a lot of the things we buy off the shelves are made in China. Russia, because energy comes from Russia in terms of oil and gas. Ukraine because some raw materials for lots of products and cooker and things like that come from there. And there’s been other things as well, I think, with kind of rice harvests and potato crops and things failing in different parts of the world over the years, all of this has kind of come together to drive prices up. So inflation, I see the BBC constantly, almost daily, trying to explain what inflation is to people. So give us a kind of one two sentence definition of what inflation is, maybe as well, just for the person I was talking to the other week, and I won’t mention the name, what’s the difference between sort of inflation going up and coming down and deflation?
So inflation means that prices are rising and prices are usually rising, right? So we’re used to a certain level of inflation. The central bank might target specific levels that they want to keep inflation under. That’s fine. The inflation we’re seeing at the moment is way beyond those targets. We’re talking 10% year on year. That means that this year a product will cost you 10% more than it did last year. Now, when we talk about inflation going down and it is starting to go down and the expectations are that it will sort of come under control later this year, that means that price rises, prices are going to be rising less fast.
So that 10% increase that we’ve seen over the last year, that’s here to stay more or less, right. We’ll see more increases over the next year and after that. But really, what what we’re going to see is a permanently higher price level for most things. Now, the, the Office for Budget Responsibility in the UK is forecasting maybe there’s going to be some deflation, you know, in 2024. 2025? There there might be, but that’s not going to undo all of the price increases that we’ve seen to date.
Yeah. And so the, the risk with inflation then is as prices get up, up and up, everyone has to put the prices up, wage demands get higher, prices go up again and you get caught in this cycle where prices just keep going up and up and get faster and faster and faster because everything’s getting more expensive. It’s kind of broadly, I think, the way the theory anyway. So to stop that, central banks deploy to the layman sounds like a really cruel tactic to it’s, like your skin, because everything’s gone up in price. So the central bank has a great idea. What do central banks do to control inflation?
At the edge of my experience here as a microeconomist, trying to comment on central bank policy, but I’ll give it a go. So at a very basic level, if you increase interest rates, this encourages people to save more and to borrow less. So this reduces the demand for goods and services, it makes people want to spend less money and puts downward pressure on prices. But the inflationary environment, whereas moment, is very particular, so it’s quite unique. Right. Most of the pricing experiences, the price increases we’re experiencing, are out of our control, right? In the UK and Ireland or in the Eurozone, they’re out of our control. They are to do with the remnants of the Pandemic or the war in Ukraine. The other sort of unique factor here is that inflation is highest for what economists call necessary goods. So the goods we can’t really shift our consumption away from, we need food and we need fuel. So it’s not really clear that households can easily reduce their expenditure on these goods. On top of that, as you’ve mentioned, interest rates then are pushing up mortgage repayments and reducing the value of people’s houses and that further reduces their standard of living.
So I thought I don’t have a clear answer on this, but I think if we do see inflation unwinding in the next year or two, we might see return to a lower long run interest rate. Some of the hikes are reversed and.
Going back to your work in your area of speciality as well. It feels like this hiking interest rate, even if it’s not, if you’re in the rental sector rather than a mortgage sector, it’s often passed on to you as a renter anyway, because the mortgage has gone up for your landlord, therefore your prices go up anyway. It feels like the people who are going to get whacked most by rising interest rates are not the ones spending on luxuries anyway, it’s the people at the very margins of financial affordability and people who are living in or near fuel poverty anyway. Are they not the ones who are going to be affected worse by central bank policy like this?
Yeah, that’s a really interesting top. So this is what we call the incidence of the tax, right? So you can increase interest rates and have mortgage holders pay a higher rate of interest on their borrowings. But if they are renting their home out to a private renter, and if the rental market is quite tight, let’s say there isn’t a lot of supply of rental properties, then that is going to get completely passed off because they can, because the market will allow them to raise prices like that. So that is certainly the case in Ireland at the moment. There’s very low supply of rental properties. So you would imagine that any increase in mortgage rate is just going to be passed straight through to the renter?
Yes. And while these are all global problems, you’re based in Ireland and a lot of the listeners are in the UK and the Eurozone as well, and different countries within those jurisdictions are responding to this crisis in a different way, aren’t they? So not everybody is to roll back a few months into those heady months where it felt like a fever dream of different Prime Ministers every week, or different Chancellors every week in the UK doing the best to crash the economy. But not everyone has responded to the crisis of raising prices in the same way. So how have Ireland handled it? Is anybody else in the Euro zoos are doing well or badly? If you can talk about the UK without laughing, please do. That would be interesting to know as a contrast.
Sorry, I’ve already not managed that. So if we go back to last October, September, October, there were massive differences between the budget announced by the Irish government and the mini budget announced by the then Chancellor. So the mini budget basically promised massive tax cuts without any sort of indication of how they might be funded, and that was disastrous. We all know what happened then. So the reversal of that mini budget and then the Autumn Statement were the policy changes in those were a bit more similar to the Irish budget. So it’s the Irish policy response to the cost of living crisis. So both governments targeted a number of one off payments at low income households through the benefit system. So here is the thought experiment was this. They weren’t sure how long inflation was going to stay high. They didn’t want to permanently increase benefit levels in case it became unmanageable. So they gave out one off payments to help people sort of weather the storm in a sort of kicking the can down the road. Exercise, if you like. So we’ll deal with this again this time next year. And where they differed in their policy response was tax.
So Minister Donohue in Ireland, increased tax thresholds in Ireland to also help to compensate higher income households from inflation. But tax thresholds have been frozen in the UK for the next number of years and this amounts to an effective tax increase. Right. If you freeze the level at which you start to pay the higher rate of tax in an economy where wages are growing every year, which is the case in the UK, and that is going to put a higher tax burden on earners. So that is a tax hike. And the effect of that tax hike, the extent of it, will depend on what the level of inflation is.
I suppose the UK, you may say I’ll say this, the UK under List trustees leadership, effectively got it wrong. I think that the way that the markets responded, the way that the public responded, and the fact that a lettuce in the Daily Star Outlasted List Trust, as Prime Minister, shows that generally speaking, people didn’t buy into the changes that she made. But for the sake of the discussion, it is an interesting .1 of the things that they wanted to do was cut corporation tax. So corporation taxes the tax businesses pay on their profits and they wanted to do that. The theory goes, you cut the tax, therefore you bring in more investment into the country and that generates bigger companies coming here making more profits, which funds all the things you want to do. And that was lambasted generally around the world by lots of people for this particular approach. However, one of the interesting things is Ireland has a much lower rate of corporation tax in the UK. It’s 19%, I think currently in the UK, rising to 26 shortly and it’s about 12% in Ireland. Is that right? You give us the right figures in a moment.
So Ireland has got this much lower rate of corporation tax, which has helped to fund the things that it’s got it’s done over the last year or so. Whereas the UK was kind of laughed at globally for trying to match that what’s the kind of the bit that’s missing around all of that was about why the UK’s plan wasn’t going to work and why people were like, no, you can’t do that just yet.
It’s not technically a bad policy decision to cut corporation tax if you believe that it’s going to attract corporations to come and base themselves in the country and to trade and to sort of make up the shortfall by being profitable and paying tax at the lower rate. Essentially. The fact that it was announced with a whole range of labour tax cuts as well didn’t help. But also you kind of have to look at the markets at this point, the markets being people. People who invest didn’t believe that this was going to work. Right. And when the whole market believes that it’s not going to work, then typically it will not work. It’s self fulfilling. So in the end, it was the right decision to reverse that. That doesn’t mean that it would never be a good policy decision to cut corporation tax. So Ireland has had a very low rate of corporation tax for many years now and it’s been sort of a great success, I would say, to the country, although it doesn’t come without its drawback. So our low corporation tax rate means that we attract lots of multinationals to base themselves in Ireland.
But the issue is that a lot of our corporation tax and a lot of our tax overall comes from a very small number of companies. So if something happens to one of those companies, they get mad CEO or their sector isn’t doing well or something like that. That can have nothing of any one particular name.
Would you like to name any names when you talk about mud CEOs?
No, I’ll pass on that one.
Look, hypothetically speaking, if we were to, let’s come up with a name maybe like Mellon USC or something like that for somebody, but just hypothetically, mellon USC perhaps or something.
Yeah. So if Mellon USC tanks their company, then that would have a massive impact on the tax take in Ireland and it could significantly affect the ability of the government to fund activities. So the way the Irish government deals with that is that they use what they call excess corporation tax receipts, what they think could be sort of receipts of a volatile nature or might not be repeated. They put those aside typically, or try to put them aside and not to use them for day to day spending. Like you’re not going to use something like that to increase benefits or to cut taxes. You might use it for a capital spending project, a one off thing. Okay. So it has been really useful over the course of the pandemic and the cost of living crisis because there has been a need for lots of one off payments. So corporation taxation has been very important there for the country and I suppose kept our economy very robust. But it does come with the downsides as well.
If you haven’t been to Dublin recently, you need to go again, right? Because it’s a phenomenal city where especially around the canal area and the financial services district. I forget what the proper name for it is, but you’ve got Google, Facebook, Meta, Twitter are there, HubSpot? Are there basically all the major US tech companies seem to have their European headquarters based in Dublin. Although I suppose since we first started talking about doing this interview karina, the US tech companies have announced about 50,000 job losses in the last two weeks, I think across the likes of Amazon, Facebook, Google, Twitter and various other places. So it is, as you say, that there’s no perfect solution to this problem. The corporation tax is great and one but then it can quite quickly turn source on.
Absolutely. And while the tech companies did so well during the pandemic, it seems from observation that maybe they over invested and now they need to lay off some staff. And maybe they’re back to their kind of pre pandemic steady. State and hopefully that will just sort of keep ticking over, but sort of remains to be seen if there are any deeper trouble than that.
So across we can see there’s the start of what may be a recession in different places. So a recession just to give us the economic version of what a recession is, because we hear that some recessions mentioned almost daily at the minute, there is a particular definition of a recession. Do you want to share that with us?
So an economy is technically in recession if it records negative economic growth for GDP growth for two successive quarters. So if you have six months where growth is negative so the economy contracts, then you are in a recession.
I just think that’s a really weird definition. I think only economists think everything should grow constantly. It just feels like a normal you’re up a little bit, you’re down a little bit. But two quarters of negative economic growth is a recession.
The economy grows every year and that’s because we are more productive every year, right, through innovation, R and D and so on. So you would expect the economy to be growing slowly every year as people get better at doing stuff right. Your firms and individuals are constantly innovating and building what they already know. So when the economy grows is improved access to goods and services, including healthcare, education, and that increases quality of life and increases our lifespan as well. And prices and wages tend to grow too, although at different rates. So prices don’t always grow at the same rate as wages. But when the economy doesn’t grow so that’s when we think this is problematic, why is the economy not growing? Why are we not being more productive? It’s usually not because people aren’t innovating, it’s something structural wrong in the economy. Right? And so that’s what we term a recession. So we’ve got fewer goods and services produced or consumed and less money available for wage increases or spend.
And I think that the lesson for marketers in this though is that while we talk about and we are talking about the economy as a whole, even inflation as a whole, is that actually when you drill down into the economy isn’t just one thing, is it? There’s so many moving parts to that. So not every sector in the economy is. If we are in a recession, which the bank of England thinks we are, although we might not be until we get the results to but assuming we are in a recession at the moment, that doesn’t necessarily mean every section of the economy is shrinking, does it? It just means that maybe the bigger ones can be shrinking because it’s an average figure.
Absolutely. During the Pandemic we saw that some sectors did very well and some sectors didn’t, so it was a lot easier to categorise them then because the ones who stayed open did very well and the ones who were closed, like services didn’t do well and tech did really well and services didn’t. That’s kind of the kind of polar from the Pandemic. And it’s probably a bit trickier to sort of predict what sectors are going to do better this time around. I know in Ireland the ICT and Pharma are kind of quite strong and performing very robustly, so it’s not expected that they’re going to sort of decline over the course of the next couple of years. But then at the moment, Ireland isn’t currently predicted to go into recession over the next few years. We’re still expecting small level of economic growth this year, whereas that’s not true for the UK, which is predicted to contract over the next two years and return to economic growth then. But having said so, those forecasts are they’re from the end of last year? At the end of last year, most of Eurozone countries were also predicted to go into recession and now it seems that most commentators are thinking that maybe a lot of the countries will technically go into a recession.
But having said all of that, right, we’re talking here about technical recessions. The bottom line is that people are going to feel like it’s a recession because their incomes are going to grow more slowly than prices, so standards of living are going to reduce even if we’re not technically in a recession.
So for marketers then, who are selling goods? The marketers do lots of different jobs in different places. You mentioned farmer there and people like but generally speaking, marketers are selling goods that people want to buy, right? There’s b to b marketing as well, which is slightly different when we come up to that. But for consumer goods and things like that, what impact does that confidence bit have on people’s spending power? If they feel like they have less money or if they feel like there’s.
A recession coming, it has a massive impact. So does this. Consumer Sentiment index surveys of a bunch of people idea, a representative sample of the population. Ask them how they feel about how the economy has done over the last year, how do they feel about it next year, what do they think about employment, inflation? And then ask them about their own household finances and savings and do they have any big purchase intentions and so on. So there’s loads of things in there that influence consumer spending decisions and that’s what’s contained in these consumer sentiment indices. So in Ireland, consumer sentiment reached its lowest level in 14 years last year, so the latest figures are even lower than those recorded at the onset of the pandemic.
So is the last time it was this law the kind of the crashing end of the Celtic tiger?
Is that when it was the start of the Great Recession? Yeah, exactly. It’s quite telling. So it really reflects how people feel about the cost of living crisis and how their worries about energy, poverty and so on affects their ability to spend. So what happens when people don’t feel confident in the economy or in their own household finances? They save, they accumulate what we call precautionary savings, just in case, sort of.
Savings rainy day fund.
Exactly. And that means that they’re less likely to make that large purchase or book that holiday or take out that loan, so they build up their savings instead, just in case. And of course, the interest rate increase will also encourage this. It will encourage savings rather than spending.
And I think from my own research into kind of the history of recessions, this is number two or number three of my working career. I forget, I’m getting old now anyway. But over time, I think the one positive for marketers to take away from this is that a recession doesn’t mean everything’s going to shit and everyone’s going to die and everyone’s going to stop buying your product. And here we go. It means that the economy is going to shrink slightly over two consecutive periods. But there is some evidence from previous recessions that lots of sectors and lots of things grow over a recession. Many businesses thrive in recessions and often people will trade down, don’t they? Which is another reason why I think people at the bottom financially struggle, because they have nothing to trade down to. So people can trade down from a premium product to a slightly less premium product, or kind of a night in product instead of a night out product, that sort of thing, to save money. So is there any evidence of that that you’ve seen, and maybe the impacts of that on lower income households as well?
There’s definitely evidence that people change their spending behaviour when faced with price hikes. So if the cost of certain types of food increases, people substitute other types of food for them. So there are definitely opportunities for people with products or firms with products that they think can replace maybe more expensive ones or ones that have seen their price increase a lot over the last couple of years. So I think recessions are a great time for people to innovate. There’s nothing like a bit of pressure.
To absolutely people trade. Now, I can tell you from my own spending behaviour, when I had to consider using Clan to buy a tub of lower pack butter because it was over five quid for one of the little ones, that’s when I realised, I was like, yeah, this is me trading down to something different. I was not paying £5 for butter. What have they done to the cows? People do adjust their spending behaviour, don’t they, based on the cost of certain things. But that can change. Again, it’s not like everything comes down. You have your own sort of philtre, oh, I’ll change down my butter, I’ll change this, I’ll change that, but I’m keeping the expensive pizza, there’s no way I’m changing that, or I’m keeping Kellogg’s cereal or whatever. And so it is individual, isn’t it, in terms of how that plays out. But you can make some kind of macro assumptions based on, yeah, people trade.
Off cost for their personal preferences. That’s really what it boils down to. So if the cost is prohibitive, even if they really prefer a product, then they’re going to trade away from it. And that’s why governments can impose things like tobacco taxes and alcohol taxes, because they use them as a tool to get people to substitute away from these sort of goods that have negative externalities and towards healthier goods, but people who really still want to smoke or drink are going to do it.
So from a market perspective, there’s a lot of sensible research that talks about cutting prices is one of the stupidest things you can do at the moment in terms of profitability impact, and not so much cutting prices permanently, but discounting, sorry, is one of the stupidest things you can do. And my marketing head says, yes, I fully understand that. But then to go back to this group of people who are sort of living on the poverty line and in low income households and things like that, what sort of impact are Brands not running price promotions or putting prices up to £5 for butter or whatever, having on people at the lower end of the market?
Well, I think there are some really shocking effects on low income households, for a start, so that a lot of households are turning to food banks and warmholds and so on, and that’s really terrible to see. You would hope that policy would be able to address those issues, at least in the short term, until inflation unwinds a little bit, I suppose. The fact that many governments, in response to this crisis, have focused on one off measures. So in Ireland, we have the Energy credit, there have been a couple of top ups to people’s social welfare payments, just kind of one off payments to see them through the winter or whatever. The fact that those aren’t certain, once they’re gone, they’re gone. And at least in Ireland, the actual underlying core rates of welfare haven’t. Been increased in line with inflation. I know that that’s coming in the UK in April time. It creates a lot of uncertainty for families who might have a lot of their income is made up of social welfare for whatever reason. If they’re pensioners or have a disabled member or whatever it is, that creates a mental toll as well as everything else.
But I suppose a lot of households will be waiting to see what’s going to happen once the final one off payment happens, right? Particularly in Ireland. Is the government going to index social welfare payments in line with inflation in order to allow those households to catch up with the new price level? As we’ve said, it’s not going away, right? The price increases are going to slow down what that new price level is here to stay. A lot of countries do this automatically. They index social welfare and tax payments automatically in line with price growth or wage growth, whatever it is. The UK does that for many benefits, ireland doesn’t. And there’s kind of the mixture across the EU of whether they do or they don’t, the countries where they don’t. Those countries are going to be saved low income households, and those countries are going to be feeling the pinch a bit more because they have this uncertainty about what’s happening to their payment the next time it’s reevaluated.
There’s a wider point and I keep sort of bringing some of this back to marketing, for obvious reasons. When we talk about sort of people in lower income households, what sort of percentage of the economy are we talking about and does it change hugely across Ireland and the UK? Is it sort of broadly comparable in terms of the numbers involved?
I think a lot of people are surprised by what the median household income is, right, so the median household income is half of households have less than this and half have more than it, and people are surprised by how low it is. There is a huge chunk of the economy that is living on what many people might think is a low household income. So household disposable income is a good way to measure income. So that’s sort of what the poverty and inequality headline indices are based on. When you hear that poverty has increased or inequality has decreased, that’s what it’s based on, household disposable income. You can also sort of scale that for the household composition, because we know that there are economies of scale, so an extra adult doesn’t cost the same as the first adult, a child doesn’t cost the same as an adult. But even doing that, you’d probably be surprised by how many households are living on less than the median or how many are living below a certain level. That strikes me as something that people get shocked by when you show these statistics.
And I think that’s one of the reasons why it’s really important for marketers. So marketers are, generally speaking, a very weird bunch of people. They tend to come from AB households in the UK particularly, tend to come from AB households over indexed in terms of fee paying schools, and often, certainly when you collide with sort of London ad agency world, that type. Of thing. It’s really interesting what their view on the world is in terms of the number of people who live in and kind of this whole well, it’s only the cost of a glass of wine. Why would that be an issue? That kind of mentality when you used to pay £10 for a glass of wine? Understanding that some people spend their, you know, wholes household budget is less than £50 for the week can be really a difficult thing to get your head around. So it is interesting for to understand that actually it’s not just a small bunch of people at the margins we’re talking about. We are talking about vast swathes of the country. People who buy the products that you’re trying to sell are actually under severe financial pressure and are really impacted probably more than you are by this rising cost of everything.
That’s very interesting.
Yeah, which is one of the reasons why I wanted to do this episode, to kind of shine a light on the fact that it’s not everyone sitting around and going, oh my God, I’m not going to be able to buy this wine anymore this week, I’ll have to only buy this one. There are real sort of factors and choices behind it, I suppose.
The other thing I stopped banging on about this soon was the other thing about the fact that low income high schools are most affected by inflation at the moment. They also don’t have savings to fall back on. Right. So many of the higher income highsal families have pandemic savings where they didn’t spend a lot during the pandemic they couldn’t spend on their services and they’re just unwinding that now that’s cushioning them and they maybe not really feeling the effects of the cost of living crisis because they have savings to fall back on. Low income households also are less likely to have somebody in work, they might be loan parents, they might be pensioners, whatever. So they’re not going to see wage increases. They’re really dependent on government decisions about indexing or providing one off top ups. There is no cushion there apart from government.
There’s some long term impact as well of this, isn’t there? So you might be thinking, okay, my product is selling well at the minute or not, but there’s a long term impact of people making the choice between heating and eating, which is the current mantra at the minute. And there’s a lot of discussions about that, because it does, over the next 1510 years, continue to have an impact. It has a ripple impact, doesn’t it? Which again, market is a great at thinking short term this week, this month, this quarter. I even worked with one company once who used to review sales every hour. I find it honestly, my head exploded. I know the size of them, they needed to do something, but, yeah, it was ridiculous. So, yeah, that’s long term thinking every week of a month. But actually, this is going to have a huge impact on where the economy and where the market goes next, isn’t it? Because austerity, or people living in austere conditions has a ripple impact over decades?
It does, and there’s a lot of research on this. So if income inequality in the country increases, that’s the gap between rich and poor. So if the rich get richer and the poor are getting poorer, it leads to a kind of a them and off scenario. Right. So people don’t have a sort of sense of social cohesion and that can lead to sort of extreme voting behaviour. Social unrest, yeah, you can say the three word, too. So it does have really long lasting and ripple effects well beyond the spending habits of households who are under pressure.
Just as soon as you brought Brexit up. Maybe you did talk to me about the impact of Brexit on what the UK is going through at the minute. Because from what I’ve seen and the issue, the figures I look at, the UK is, well, this is a global problem in European terms. The UK is struggling worse than most of the European Union nations in how they are cushioned and impacting the issues of these rising prices.
Yeah, it’s very difficult to consider the issues being faced by the UK at the moment without thinking about Brexit. I mean, it’s clearly a massive factor. The extent of the effect is kind of hard to measure because so much else is going on at the same time. But certainly the trade flows between the UK and the Eurozone are down, like, well, down on what they were beforehand. And that has to be contributing to the fact that the UK is probably going into recession and it will continue to contribute to its long run economic trajectory in the future. Maybe there’ll be a bounce back, who knows? But at the moment, it looks like Bryson is definitely negatively contributing to the UK’s economic situation. So paper by one of my co authors at the Sri recently showed that trade flows are down by 20%, which is pretty massive.
It’s just a willful act of self harm, that’s all it was. Just jump out of this plane without a parachute. Why? Because we’re British. Clearly not a Brexit here, obviously, but with the lies we were sold to make this happen, it’s very hard to.
Understand from a sort of, I’d say more outside perspective, but we’re not really outsiders in Ireland. I mean, it really affects us as well. DK is one of our big trading partners, although that importance has been going down over time as well, as opposed much to our relief now, huge.
I think there’s an emotional versus rational. So, again, this is a great lesson for marketers, is that emotion often trumps rational thinking when it comes to how people buy, and they’re buying behaviour and their purchase behaviour and their behaviour of putting crosses in boxes. So what were the reasons for staying in the European Union? They were all rational reasons, right? There was no emotive reason to stay in the EU. It made a lot of bloody sense. It was the sensible thing to do, it was just put stay in. But the emotive reasons were all about state. You’re all about leaving the bank, the drum about migrants and about the NHS and about us being better. And what were the answers to that? We could trade more with Europe if we stayed in the average punter down the street and worries about the heating bill, not about how much the business is going to trade with Europe. And there’s an interesting look at what works for your messaging. If you want to take a hard right turn into, what does that mean for your marketing material? It’s like, well, stop talking about features all the time because nobody cares, and give them an emotive reason to buy your product.
The lessons of Brexit, take a positive one. Emotive messaging can trump rational messaging, but there you go. Little marketing lesson for you there.
Thank you very much.
What are the things we can learn just off the back of Brexit, which was shooting ourselves in the foot, then came the Pandemic, now comes the recession. Are there any lessons from any of those two things that we can use to kind of set a course to stay positive about what’s coming over the next little bit?
I thought the policy reaction to the Pandemic was quite interesting because clearly lessons were learned from the Great Recession, right? So during the Great Recession, both the UK and Ireland saw pretty serious austerity measures that didn’t happen during the Pandemic. So the Pandemic, the policy response was to sort of keep the economy on ice, to pump money in, to keep workers connected to their firms as far as possible, to increase the incomes of those who had lost their jobs so that they would continue spending. And it worked so because it was a sort of short term shock to the economy. That whole keeping it on ice strategy worked. Because then when firms were ready to get back into business, when the public health restrictions had eased, they were able to because they still had their staff. The staff had been connected to them, authorised, they hadn’t had to emigrate for the most part, because they had been provided with financial support and so on. So I think there are lessons there to the extent that we think this is also a temporary shock, and I think most commentators would say that it probably is. Right, so what happens to inflation over the next year or two partly depends on the war in Ukraine, but even with the war still ongoing, things are starting to stabilise already.
Right? So things are coming down already. So in the absence of any further massive adverse shocks, we’re sort of on course for recovery over the next year or two. So the whole keeping things on ice strategy is probably a good one for this scenario as well. A costly one, though.
A costly there’s been a lot of talk and it seems to be gaining traction over the years of a guaranteed minimum income. Certainly in the UK, which I think is probably against most Tories thinking generally, but there is currently a think tank with a lot of senior Tories involved who are now advocating for this. What’s your view on that? Because, again, from my marketing hat on, having a guaranteed minimum income must stimulate demand with people knowing that they have X amount to spend. And it kind of simplifies the benefits system and gets away knowing that every household is going to have X to spend. Surely there must be benefits from an individual’s household. You mentioned about the problems people have worrying about where’s the next money come from. If it’s a guaranteed minimum income, then it helps them in terms of getting back into economic activity, which is a problem in the UK for people in terms of mental health issues and health issues. But also from the other side, from the demand side, people have got money, they can spend it, so surely are there any downsides to this? What are the issues?
The guaranteed minimum income or universal basic income has been sort of it’s been talked about for decades now, I suppose, in developed countries, but been sort of increased in popularity over the last few years. There was a pilot done in Finland and lots of other countries are thinking about their own pilots. So the idea is as follows. You would basically abolish all benefits if you do it as pure form, right? You abolish all benefits, including in work benefits, everything, and you replace those with minimum income. And what level that is set at depends on policy makers, I suppose, but really, you wouldn’t want anyone to be doing worse off on it. So it would probably have to be set pretty high to the level of the highest benefit level, and then you have to fund it through higher taxes. So that’s the problem. Bit right. And a lot of the studies show that in order to give a minimum income to everybody, that doesn’t leave anybody worth off, and you need to impose a tax rate of like 60, 70%. Right. So that’s a flat tax rate on everybody. So that is the big downside.
Yes, exactly. So, I mean, there are lots there are lots of positives to the idea of minimum income. You’ve touched on some of them. It could help people to be more creative and innovative in their enterprise. They don’t have to worry about being profitable straight away. It can encourage people to go for a job. They really like to wait for the right job and mental health benefits. You’re also sort of rewarding people who want to take care of duties, like caring for elderly parents or caring for children. They’re being recognised through the system, so there are lots of positives to it. The big downside is it is very expensive and we’re not really sure how it would affect work overall. So you might encourage people to join the workforce because they wouldn’t be giving up their minimum income once they got paid. But at the other end of the spectrum, you’ve got people who are already in work who have to pay a much higher tax rate, and some of those will drop out of the labour market. And the people who will drop out are secondary earners in a couple. Secondary earners are the ones who earn the least in a couple.
That’s typically women because of the gender wage gap and traditional divisions of work and caring rules. So you’d see probably a lot of women dropping out of the labour force to care for children. And in terms of gender equality, that’s probably not the best thing either. Many ripple effects.
Is Finland’s trial still ongoing? I’m not going to ask you for the ins and outs of Finland’s trial because you’ve probably not researched it, but is it still ongoing? Is it finished? Did they what was there?
I think the jury is in on us. I’m actually not sure I put you.
On the spot there.
I think it was, here are the positives and here are the negatives of it, and let’s consider doing it full time, but I’m not sure what stage and that deliberation.
It got to okay, I want to pick back up on that sort of classic Irish understatement that you used right at the beginning. Soon as you brought it back into the Finland question again. Take me back to your career. You mentioned was it Trinity you mentioned in Dublin, was it and Cambridge University. So what took you into being an economist? Because I don’t know that people grow up wanting to be an economist, do they?
No, definitely not. No, I wanted to be a vet. I studied business in French in Trinity. I actually did marketing in second year, I think. Don’t remember.
What were your thoughts on it?
I really enjoyed it, but it wasn’t for me. And then I actually majored in accountancy and finance in my final year, so I didn’t really do a lot of economics in my undergrad. I then went off to work for an auditing firm, which I hope name, and hated it. So then I was like, Right, time to go back to school. So I decided on Economics. I liked economics as part of the business degree, so I did a graduate diploma in cambridge and then went to do my masters in Ud and a PhD there as well. So yeah, it was kind of a range of way to come out, I.
Suppose, and I don’t want to kind of force you into political statements or anything like that, that’s not where I’m going with this question. But you research and look at a lot of, as you said at the beginning, on people who are sort of on low incomes and things like that. How do you think government policy not impacts him but supports people like that? It often feels to me like it’s political football, how governments treat people on the lowest incomes rather than actually what’s the best for the people involved in that? Is that what you see or is that just my political leanings? Lean sort of focused on what I see?
I suppose there’s a cynical view of it and then there’s the view that maybe they’re doing their best. It really depends. Right, so it varies from year to year budgetary cycle and it varies depending on who’s in. So in the UK, indexation of benefits is sort of established but often it’s like, oh, we’re not doing it this year and that’s kind of concerning. If you establish a system of indexation there should be a really good reason to not do it because that establishing that system provides certainty and certainty is great for the markets, it’s great for households, they know exactly what’s coming. If you don’t do it, then you have to have a really good reason and it should be, should be a credible reason that people can understand and say, okay, we get it, we can’t afford it, or crash the economy or whatever. But when you’re in a situation where tax cuts are being promised or other things like that, but benefits aren’t going to be indexed, that’s a bit concerning and you wonder political parties just trying to appeal to their voters. And we do, we do a post budget analysis every year at the Sri where we show overall what’s the distributional impact of the package and the thing the media always pick up on is it progressive or aggressive?
So it’s a progressive as in it affects so it’s more beneficial for low income households compared to high income households. So policymakers like to say, oh, it’s a progressive package, we’re really targeting low income households. A progressive package is one that targets high income households and it’s not that black and white, right? So there might be a good reason to target high income households. If you want to encourage women into the labour market, let’s say secondary owners, you have to target that portion of the income distribution. But by and large environment where prices are growing and low income households are struggling, you really want to be targeted in the nature of your support. And there was a lot of talk about targeting last year in the UK, in Ireland and at the eurozone level. The EU, the European Commission and the OECD were coming in and saying, listen, make your packages targeted, we don’t want to further fuel inflation. And that was the risk. If you promise massive tax cuts at a time when prices are growing, they’re both growing even further. So any support you provide has to be targeted at the lowest income households.
Now, I think on balance, both the UK and Irish governments probably manage that in the end. After the UK, it’s how you finish, right?
We got there in the end, we fenestrated the right people and we got there in the end, try an error. So as we get to the end, I want to come back a lot of marketers, and I bang on about this when I speak at conferences, focus on all the wrong things, right? We focus on kind of marketing metrics. How many people have seen something or clicked on it or gone through the landing page, and then when you go to the board and you start telling them this how many things did we sell? What profit did we make? And we talk about all the wrong things. So over the next year or two, if you’re recession does hit and over the next 3612 months, people in marketing are going to be going into meetings and being told budgets are being cut because there’s a recession on. Or this has to come out because there’s a recession on, what are the things that we can look at for knowing that the green shoots are happening? To be able to sit in that meeting and go, Ah, but the CPI have said that the RPT has gone back up.
So therefore we should be one of the things that we should be looking for that we can actually go. Right? Do you know what, we can see that’s happening, therefore we know we’re kind of getting towards the end of this, or these are the green sheets. What things can people look for to find some hope in all of this?
Well, CPI is a good first one, right? So when CPI starts to come down, so it’s currently at ten or 9% or something like that, when that starts to come down, that is a good sign, right? So that means that price growth is slowing. Doesn’t mean that prices are going down, but that growth is slowing. Another one to watch would be household disposable income. That at the end of the day is what households have spent, that is their post tax and transfer income. If you can look at that scaled by the number of people in the household, even better, because it tells you how far that income has to go. There’s also another metric called after housing costs income. So housing costs are one of those things that’s sort of hard to avoid, right? So disposable income takes off your tax, that’s your benefits. But if you can also subtract housing costs from that as sort of an unavoidable thing that households have to pay for. Gives you an idea of how much they have left over for other things that you might want to be marketing to them. So I’d be looking at household incomes, I’d be looking at prices.
And in Ireland, GDP growth doesn’t make a lot of sense to look at. We have another indicator, Gnistar, which is sort of more suitable for the Irish economy because it’s so reliant on multinationals. But GDP growth is also the economy can be in recession because GDP is declining by 10%, or it can be in recession because it’s declining by half percent. So those are very different things.
Yeah, they’re good things to be able to cheque out and then see how they go. And it’s the bank of England generally who published those forecasts in the UK, I think, is it? And I know they’re talked about by other people.
So in Ireland will be the Central Statistics Office, whatever the equivalent of that in the UK is. I’m not sure.
It’S miserable in Northern Ireland. It’s a different thing in the rest of the UK anyway. Yeah, them, I think the Office of Budget Responsibility no, there’s something different there.
About their reports are very useful to look at as well, because they give a very independent overview of the economy. So I would strongly advise and look at their website as well.
Just a shout out, then the Fiscal Council in Ireland do the same thing.
Brilliant stuff. Brilliant. I think the lesson for me for marketers is to understand that the decisions that are being taken at government level and policy might seem a bit abstract to us and what’s happening to people on the ground and recessions and a lot of the terminology that’s used this doesn’t really impact me. It does. The amount of money people have in the pocket impacts everything we do as marketers. So understanding this, getting a better, being able to track it and knowing what goes on is great. To be able to then go back. When you’re sitting in those meetings and your budget is being hammered, at least you might be able to take some of this and go, karina said, don’t cut my budget. Because Karina said, look at this, it’s going down and that’s going up, so we’re fine. And that’s perfectly okay. The people can bring you up.
And Karina said, that’s the thing.
Yeah, absolutely perfect. So, listen, Karina, thank you very much for your time. It’s been brilliant to understand a little bit more about what’s going on in the market, understand why Briggs it is such a catastrophe. I’ll clip that bit up and put it out in the show promo. Karina said this and yeah. And thank you very much for your time.
You’re very welcome. Thanks for having me.