A Behavioural Economist’s Perspective on Debt and Default
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.
Having set out some of the benefits of community, we can now look at some of the evidence of community involvement taking hold in Irish society. For this we can look at community involvement statistics and also some broader measures of the importance attached to being socially active.
Irish society has always been highly community oriented. Researchers of early Irish history such as University College Dublin’s (UCD) retired Professor of History, Francis John Byrne, and the late Professor Daniel A. Binchy described in vivid detail the role and importance of clans and tribes in early Irish history, and the importance this system attached to community cooperation and ties. Thus, Professor Binchy refers to the early Irish as ‘tribal, rural, hierarchical and familiar’. Rural Ireland also has a long-established tradition of ‘meitheal’; a Gaelic term used to describe volunteer labour groups who would assemble to help members of the community, for example to bring in the harvest. References to meitheal on paper are fleeting despite the widespread nature of the event, but the following gives some flavour of the idea:
At harvest time neighbours would combine together to help one another make hay or gather other crops. This co-operation was a great way of fostering neighbourliness and a spirit of togetherness in the community. Those in the ‘meitheal’ joined the host farmer for a meal at the end of the day’s work. Kitchens in the old farmhouses were very big so as to accommodate the large numbers. Every farmer would repay his neighbour by taking part in his meitheal next time round.
There are indications that Irish society is re-discovering its social roots. Although we would expect this to be a gradual process, especially given that people are quite naturally currently pre-occupied with handling the personal impact of the crisis on their lives. But the signs of a growth are there. The Tidy Towns community improvement initiative had 821 entrants in 2011; the highest number of competitors in its 53-year history, and compared to less than 700 entrants in pre-crisis 2006. The Social Entrepreneurs Ireland Awards and Pride of Place awards, two national schemes that are heavily focused on community initiatives, both reported record interest in their 2011 awards. There has been a doubling of participation in sports volunteering amongst the unemployed. Interestingly, the growth in sports volunteering has only been seen in team sports. The importance of building social capital appears to be slowly being re-discovered.
However, the real social revolution is not happening in physical communities, but through the social internet. The powerhouse of internet social communities in Ireland is a website called Boards.ie. This website has 435,000 members – overwhelmingly Irish – and 2.2 million unique visits every month, with discussions spread across 600 different sub-communities. Google Trends suggests the website is about three times more popular in 2011 as it was at the beginning of 2007. Want to talk about a personal problem? There’s over half a million posts on people’s problems and the associated advice given. Got a stutter? Have a read of the stuttering sub-forum. 200,000 posts on transport; 100,000 on parenting; 800,000 on politics …. Interested in scuba diving, mythology, the weather, palaeontology …? Communities of interest representing nearly 10 per cent of the Irish population have self-organised themselves around every possible interest, and Boards.ie is just one example, albeit a highly prominent one, of this new social movement.
Initial fears that physical communities would suffer from people spending more time online have been dismissed by studies of what actually happens. Thus, Andrea Kavanaugh from Virginia Tech University in the United States and her colleagues found in a 2005 study that being part of an online community for a town strengthened the feeling of belongingness to the linked physical community. Similar findings have been reported for users of Facebook – people are building social capital online that can be utilised offline. A 2010 study published in American Behavioral Scientist finds that people living in rural communities use the internet to maintain and build social capital in their physical communities, thus overcoming the hampering effect of distance between households in a typical rural community.
An Irish example of this online–offline linkage can be seen in Ballymacarbry Community Centre in Waterford, which won a 2011 Pride of Place award and was described by the judges as ‘the best they had ever seen in nine years of judging the Pride of Place Competition. … The judges were witness to how clear vision and single mindedness can create a cohesive community.’ Despite Ballymacarbry only returning a population count of 436 in the 2011 census, they have 220 followers of their online page on Facebook. The local population can blend offline with online and be kept up to date on the schedule for community meetings, news on the latest bake sale (proceeds of €330 for donation to the Irish Society for the Prevention of Cruelty to Animals), and progress in having concerns addressed about a wind farm planned for construction in the near future. This is the new post-materialistic Ireland slowly emerging from the dust of materialism’s failed promises.
Debt and Default: The Inadvertent Route to Societal Happiness?
Materialism is in decline, and community involvement is increasingly moving centre stage, helped by the recognition of the power of social capital and the boom in internet-organised communities. Of course, it would be naïve to assume that this is an entirely willing move on the part of Irish society; a large number of people who are no longer driving materialism forward are presumably inhibited from doing so due to a decline in their disposable income. Thus, it is quite possible that the ‘stick’ of debt and default has brought us to where we are, rather than the ‘carrot’ of putative benefits. That does make the suggestion of a societal value shift a bit more tentative. We can though speculate as to what a future community-centred Irish society would mean in terms of well-being and involvement.
Research in countries across the world shows money to be important in terms of national happiness, but only up to a certain level. Someone in abject poverty will be less happy than someone who can put food on the table. But the benefits of money level off quickly and benefits can easily be nullified if the more qualitative influences on life satisfaction fall as a result of economic development. Thus, China’s tripling of household incomes for its population between 1990 and 2000 actually resulted in lower reported levels of happiness among the population.
Irish people report one of the highest levels of life satisfaction in the world. In 2007, 46 per cent of survey respondents claimed to be very happy with their lives. This makes us one of the happiest countries in the world. A 2011 research paper by Professor Brendan Walsh in UCD charted the long-term well-being of the Irish population from 1975 to 2011 and found very little increase as a result of the boom years in the 2000s, and only a minor decline in reported life satisfaction caused by the debt crisis. There was even an uptick in happiness reported in 2011.
Yet nearly every public discussion about the crisis seems to concentrate on gross domestic product, or debt or the possibility of default. The boom in doom-laden words in the media is in huge disparity to what’s happening in people’s lives. Clearly something is missing from the public debate. Could the Irish people have already discovered what policy makers are so desperately fumbling to find? – That just having money to spend on material goods is not really the route to societal happiness.
Ireland’s future, if we continue along the route we have commenced, is to move closer to the Scandinavian countries – the happiest countries in the world. Ronald Inglehart and his colleagues in 2008 studied why these countries were so happy and found that what distinguished them was not their high income but their high levels of social capital. They had the highest reported levels of trusting other people, of openness, of prizing living in pleasant surroundings, of a wide range of social activities. In short, they attached greater importance to living in a community rather than an economy. We ideally wouldn’t have chosen debt and crisis to get us to this same realisation, but now that we’re here let’s enjoy what we’ve inadvertently started – a renewed joy of social living.