A couple of weeks ago, I gave a talk at the Professional Insurance Brokers Association conference on the Irish economy and the seven stages of grief. It seemed to go down quite well with the audience, and was picked up in the media, so I thought I’d pick out the key messages and make it into a blog post. This is a cut-down version of my talk, and if you would like to receive the full version, complete with fancy graphs, quotes, charts, pictures and PowerPoint, do let me know.

The starting point for my talk was to question whether economies move through inevitable cycles of growth and decline, or whether they move through clearly marked stages which are shaped by policy decisions. It is common to think of economic cycles where lean years follow fat years, as night follows day. It was inevitable, says this process, that a deep recession would follow such rapid growth in the Irish economy, and it is inevitable that the economy will at some point “turn the corner” and growth will return. I’m arguing, however, that there is nothing inevitable about economic change – it requires policy decisions. It took vast EU and FDI money for the Irish economy to grow, and it took policy decisions in the banks and government for the economy to collapse.

It is going to require further policy decisions to return us to growth.

Governments and banks should not think of themselves as passive recipients of economic change, riding out the storm, and hoping for the bottom of the market and then turning the corner (to mix my metaphors). Rather they have the ability to change policy and move us into the next period of economic activity. I’m arguing there are seven periods in the Irish economy. The first five follow the classic five stages of grief, and the last two will return us to growth.

Denial – back in 2006 and 2007 the economic indicators began to deviate from their uniform pattern of growth. Investment was not as solid, house buyers seemed reluctant. Something negative seemed to be happening to current expenditure. Ireland had firmly lost its competitive edge. 14% of all tax take each month came from selling and buying houses. The economists who voiced these concerns were blamed for talking down the economy. Bertie Ahern wondered out loud why they didn’t commit suicide. The government and many others denied anything worrying was happening. They told themselves, the media and the back room of Doheny and Nesbitt’s pub: “The Irish economy is different. The downturn is only affecting countries which engaged in sub-prime lending. The indicators, at worst, are mixed. OK, the Celtic Tiger might be over, but at least we are not the UK or the USA which have real problems.”

It became harder and harder in 2008 to ignore the mixed indicators, deny anything was wrong, and blame people for talking down the economy. By 2009, denial had moved onto the next stage of grief: Anger.

Anger – the debate about the collapse in the economy became personalised as people, the media and the government looked for scapegoats. The reasons for the recession were (and are) complicated. However, two scapegoats emerged – Michael “Fingers” Fingleton and Sean Fitzpatrick. Blame for the recession moved from a wide-range of policy makers to one or two people, and Molesworth Street echoed with the sound of people marching on Leinster House or the banks. After a while, people realised that burning effigies of Fingers and Seany weren’t going to get money flowing, and people began to bargain.

Bargaining – when anger and denial don’t halt the meltdown, people began to see if they could bargain their way out of recession. People cut back on their expenditure. Companies (unnecessarily) sacked people in order to reduce their costs, but in fact reduced their capacity to deliver for their clients. The market over-reacted as people, businesses and government tried to bargain their way out of recession. In 2010, government has been forced to explain to a suspicious electorate about their Budgetary projections, and differentiate between real borrowings and what Brian Lenihan in April 2010 told Ivan Yates on Newstalk “Accountancy devices (and) not real borrowing.”

Depression – since 2008 the government has introduced a vast range of policy responses to the banking and financial disasters, including the guarantee of banking liabilities, restrictions on bankers’ pay, requirements to lend to the enterprise sector, but expenditure continues to rise and tax continues to fall. Between 2007 and 2009, tax income fell by 20% and expenditure rose by 9%. In 2010, tax income has stagnated, and very few policy responses seem to have been able to turn the economy around.

Acceptance – this is where I think we are now because we are hearing the following comments a lot: “Mistakes were made”, “we are where we are”, “we can’t live beyond our means”, “we need to find out who did this and get the money back.” Bertie Ahern has acknowledged in May 2010 that tax incentives should have been stopped earlier. Martin Mansergh has said that government wasn’t very good at saying no to pressure groups and that if we are to avoid future policy errors, government needs to be stronger in the face of pressure groups.

Those were the five stages of the recession. There are two more stages before we can get back to economic growth.

Learning – we need to learn why Ireland slipped into recession so easily. The Celtic Tiger is now usually seen as two periods – the first period was when Ireland manufactured and exported products and attracted inward investment. The second period – put simply – was when we sold things to each other and allowed an ever-larger number of people to take a slice of profit for each transaction. The economy grew but it did not diversify. The tax regime did not diversify either. Ireland, I believe, threw money at problems rather than reforming the problematic institutions and processes, and when the money ran out, the institutions and processes ground to a halt.

We confused lagging indicators for leading indicators. We denied there was a problem for too long, and when the picture began to change, we realised that the statistics and data on which we were operating we incomplete, dated and wrong.

Implementing – The government talks about a smart economy, but the economy needs to be founded on real timely, smart, data. We need to move the spoofers and chancers to one side, and focus on informed, evidence-based policy. Whatever the government does in 2010, it is going to be unpopular. Vested interests (at sectoral and regional level) have been used to receiving money from a government with a massive surplus. That money does not exist any more, and now is the time for government to fix the institutions and processes which are dysfunctional.

If government is going to do unpopular things, they might as well be based on evidence, informed by expertise and on the basis of real data.