Irish Lessons

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This week will be full of market-moving economic data. We expect purchasing manager surveys and light-vehicle sales to indicate steady demand in November, as investors await Friday’s jobs report. Recent data on unemployment claims point to continued momentum and payroll growth should rebound from October’s meagre reading which was suppressed by both weather and strike activity. Markets will also be focused on wage growth, with futures still only assigning a 64% probability of a December Fed rate cut.

That being said, any decision on a December rate cut will also depend on next week’s CPI report and, whether they admit it or not, the Fed’s own quiet assessment of the potential for the new Administration’s agenda to reignite inflation. It will likely be some months, therefore, before investors can more accurately assess the potential path for economic growth, corporate profits, inflation and interest rates. As we note in our year-ahead outlook, while we have emerged from a cyclical storm, we have entered a policy fog.

But while we wait for the fog to clear, I wanted to address a longer-term and somewhat weightier topic, namely the connection between the mechanics of democracy and economic, financial and social progress. Many Americans regard the United States as being the world’s greatest democracy. However, given the division caused by our horribly drawn-out election campaigns, it is worth asking whether the rusty mechanics of American democracy are so ill-fitted to the age we now live in as to represent a major long-term risk to the U.S. economy and the investment environment.

I’ve been thinking about this a good deal recently because of a country where, I’d argue, they “do democracy better”. That country is my native Ireland.

Doing Democracy Better

Last Friday, the Irish went to the polls to elect a new parliament[1], or Dail, following an election campaign that lasted just three weeks. Under Irish law, a general election has to be held within five years of the last one. However, the exact timing, within this limit, is entirely at the discretion of the Prime Minister, or Taoiseach. Because he has this power, neither the governing parties nor the opposition parties have any incentive to spend resources on the campaign before the election is called. Not that they have much need for these resources since political ads are banned on Irish television. However, each party does get to present what is known as a party political broadcast on television and there is plenty of media coverage, polls and political interviews during the campaign. In addition, in the most recent campaign, there were three televised debates among the party leaders. The candidates, and the thousands of volunteers working for them, also do extensive door-to-door canvassing asking the electorate for their vote. In other words, it is pretty easy for voters to get fully informed during the election campaign.

However, the really clever part of Irish elections is the implementation of proportional representation through the use of a single transferable vote in multi-member constituencies[2]. This sounds much more complicated than it actually is, so let me explain:

The country is divided into 43 separate constituencies that elect either 3, 4 or 5 members to a 174 member Dail. Constituency boundaries are drawn up by an independent electoral commission to avoid gerrymandering.

As a voter, you indicate your preference for candidates by writing down 1, 2, 3 and so on, beside their names on the ballot paper. If there are 14 candidates, you can, and probably should, write down numbers all the way to 14.

When the counting begins, the ballot papers are first stacked based on first preference votes. In a three-member constituency, the “quota” is set at a quarter of the vote plus one. If a candidate exceeds the quota, they are deemed elected and any surplus ballots they have, over and above the quota, are redistributed among the other candidates according to voters’ second preferences indicated on those surplus ballots. Candidates receiving the fewest votes are eliminated and their votes are also redistributed to the other candidates. Eventually, after multiple counts, which can take a day or two, everyone is elected or eliminated and you have a new Dail.

This system has a number of really valuable advantages.

• First, it delivers proportional representation, with all major segments of society in Ireland represented in the Dail, in rough proportion to the votes they received.
• Second, there is no such thing as a wasted vote. If you want to vote for a particular candidate even if you think they have no realistic shot of winning, you simply vote 1 for that candidate and 2 for your next choice. When your preferred candidate is eliminated, your vote transfers, in full, to your second choice.
• Third, it encourages the election of moderates who have appeal across the political spectrum. In order to pick up the last seat in a constituency, candidates need the 9th or 10th preferences of people who likely have very different political views. This requires candidates to be regarded at least a decent person by a broad swath of people.
• Fourth, all major parties have good reason to compete in all the constituencies. There are no “red counties” or “blue counties” in Irish elections.

As the counting was winding up on Sunday, it appeared that Ireland will once again be run by a moderate center-right coalition of Fianna Fail and Fine Gael, with the cooperation of one or two smaller parties or some independents. However, there has been no national trauma involved and the policies adopted by the new government will generally be a continuation of the old policies.

Elections and Consequences

As has been often said in the last few weeks, elections have consequences.

In Ireland, relatively “good” elections, for many decades, have generally resulted in good governments. These governments have enabled Ireland to evolve from one of the poorest nations in Europe to one of the richest. They have, after a disastrous financial and property bubble that burst during the global financial crisis, restored stability to the public finances, running budget surpluses and retiring debt. They have fostered changes to Ireland’s laws and Constitution to mirror a social transition in Ireland from a deeply conservative and religious country to a more liberal and secular society. They helped unite the country during the pandemic so that Ireland experienced just half the death rate seen in the United States[3]. They have tried to play a constructive role in dealing with global challenges, such as climate change and Russia’s invasion of Ukraine. They have helped to finally bring peace to Northern Ireland and to establish a more friendly and businesslike relationship with the United Kingdom after centuries of strife.

Ireland certainly continues to face challenges from inequality, a lack of affordable housing, an over-reliance on tax revenues from global multinational corporations and the complications caused by Brexit. But in all of these challenges, its system of elections and democracy will likely continue to be a source of stability and strength.

In the United States, by sharp contrast, a first-past-the-post system has ensured that voters have effectively had to choose between the same two parties for over 170 years. This and the primary system promotes the nomination of extremists on both sides. The long, drawn-out campaigns, dominated by billions of mostly unregulated dollars buying unlimited negative TV and social media ads leave the electorate tuned-out and exhausted – so much so that in the last very close and very consequential election more people chose not to vote than voted for either of the two leading candidates. Policies promised on the campaign trail are accelerating the growth in our national debt while political division prevents even the most basic reforms needed to address evolving challenges both at home and around the world. Most tragically, U.S. elections are increasingly dividing our nation into two tribes.

Fixing U.S. elections is severely hampered by an almost unamendable U.S. constitution[4]. In an ideal world, politicians from both parties would try to reform the system for the good of the country. However, in the absence of such reform, investors would be well advised to regard the growing disfunction of the U.S. political system as a long-term risk to U.S. financial assets in general. This, combined with a manifestly over-valued U.S. dollar and relatively expensive U.S. equity markets, underscores the continuing need for international diversification in balanced portfolios.

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[1] Technically, Ireland has two houses of parliament, with the upper house being a 60-seat Senate, or Seanad,.  However, the Seanad has limited powers and, given that the new Taoiseach has the power to appoint 11 of its members, it essentially acts as a rubber stamp for legislation initiated in the Dail.

[2] While most democracies around the world use some form of proportional representation, only Malta and Ireland use a single transferable vote system - despite its obvious virtues.  Ironically, this system was imposed upon Ireland in the 1919 local elections in waning days of British rule as an attempt to limit the power of Sinn Fein which had dominated the 1918 UK general election in Ireland.  The first Irish government recognized the virtues of the system and adopted it for the 1922 and all subsequent Irish elections.

[3] See John Hopkins Coronavirus resource center – coronavirus.jhu.edu/data/mortality

[4] An amendment to the U.S. Constitution requires a two-thirds vote of both Houses of Congress and ratification by three-quarters of the states.  An amendment to the Irish Constitution only requires a simple majority vote in the Dail and the Seanad and a simple majority in a national referendum.  Since 1971, there has been just one technical and inconsequential amendment to the U.S. Constitution.  Over the same period, the Irish Constitution has been amended 30 times, including provisions to join the European Union, relinquish a territorial claim over Northern Ireland, and  allow for divorce, abortion and gay marriage.