Saturday, 28 February 2009
Nationalisation in the UK
The following link to IPPR discussion on nationalisation in the UK is worth looking at.
Meanwhile, in America ....
Check out Paul Krugman's blog for a progressive perspective on what's happening in the United States.
Friday, 27 February 2009
Trichet's narrow notions of competitiveness
Paul Sweeney: Yesterday, I got to shake the hand of the 5th most powerful man in the world - reluctantly!
Yesterday, JC Trichet, the President of the European Central Bank, said by Newsweek magazine to the 5th most powerful man in the world, made a speech in Dublin. As he left the meeting, I was introduced to him, and I shook his hand, but reluctantly. I suspect that he was somewhat reluctant to shake my hand too, as he heard I was with the Irish Congress of Trade Unions.
Here was a very powerful man in a world economy which is in deep crisis, who had just given a speech on Competitiveness which was straight from the 1980s. It was not economics but pure political economy, serving the interests of the Irish employers and government in their attempts to cut wages. His main message was that we must keep labour costs down.
It was straight from the 1980s understanding of competitiveness because it was the kind economics that Ireland left well behind, back then. It focused largely on cost competitiveness and then on wages, with some reference to unit labour costs. “I believe there should be more public awareness that insufficient attention of wage setting to current and expected productivity developments makes any correction to previous losses of competitiveness more painful in terms of output and employment losses,” he said. He also said “As I mentioned before, wage restraint would help a lot.”
M Trichet did not, however, advocate cuts, like some indigenous economists. He called for “wage setting to take account of the competitiveness and labour market conditions” (not unreasonable) in a what he termed a “responsible and timely manner”. And he said that “national authorities should pursue courageous policies of spending restraint especially in the case of public wages.”
So the government that messed up the economy with light regulation and pro-cyclical policies during the boom is now courageous?
He pointed out that many of Ireland’s fundamental economic strengths have not gone away and the economy is well placed when the international recovery occurs. But he said our success was due to a number of factors, including “a business-friendly regulatory environment.” I thought, reading the papers and listening to the radio, that our business-friendly regulatory environment was the reason Ireland is in deep trouble! Clearly, I was misled! It’s the overpaid workers!
Ireland, fortunately, developed a comprehensive view of what makes a country competitive, in the late 1980s - and Ireland moved on. For a while it became the Celtic Tiger, basing its economics on a whole world view of this complex issue. With a shared view of the total complexity of competitiveness, employers and unions and politicians worked together in a form of Social Partnership to push up employment massively, together with profits and real wages.
Back in 1982, in reaction to a government sponsored report on Competitiveness, by the Three Wise Men, I, with a group of other economists, the Socialist Economists, published Jobs and Wages: the True Story of Competitiveness. In a booklet, we set out the framework for a real comprehensive understanding of what makes a country competitive, from productivity, a functioning banking and insurance systems, good roads and interconnectedness, education and even advocated social partnership! The Irish government later actually set up a social partnership body called the National Competitiveness Council, as the behest of the employers, to analyse the issues on a continuous basis. It has produced excellent work in the area for many years.
However, in recent weeks, some Irish economists, who, believe it or not, avoided the area, (except to pepper reports with the word, 'competitiveness') have come back into it, but like M Trichet, have taken up where the so-called Three Wise Men left off – back 30 years ago.
For a group of economists, the panacea for all our problems appears to be wage cuts (for employees only; only occasionally for others). Now this is understandable because they can measure movements in wages. Economists love to measure things! They hate the impact of institutional and political factors on economies as they cant measure them. Wages are very measurable. One economist just sticks up a graph on total costs, which as we all know have been rising fast and concludes, without blushing, that Ireland’s competitiveness is heading south and wages should be cut (consumer costs are way above the EU average here – 14% above for goods and 21% for services in the EU27 or as high as 33% for consumer services).
Irish costs are way above the EU average, but the reasons are, much more complex than wages. On the other hand, wages have risen faster here than in other EU countries, but in a later blog, I will address this issue in some depth.
The emphasis on wages by economists and by M Trichet is worrying. If we, as a country, are to redefine competitiveness simply as wages, or even unit labour costs or even total costs, we will have lost our shared understanding of an important and real issue which makes our economy work.
It is the naked class nature of their analysis which is worrying. Will we soon stop shaking hands?
Paul Sweeney is Economic Advisor to ICTU
Yesterday, JC Trichet, the President of the European Central Bank, said by Newsweek magazine to the 5th most powerful man in the world, made a speech in Dublin. As he left the meeting, I was introduced to him, and I shook his hand, but reluctantly. I suspect that he was somewhat reluctant to shake my hand too, as he heard I was with the Irish Congress of Trade Unions.
Here was a very powerful man in a world economy which is in deep crisis, who had just given a speech on Competitiveness which was straight from the 1980s. It was not economics but pure political economy, serving the interests of the Irish employers and government in their attempts to cut wages. His main message was that we must keep labour costs down.
It was straight from the 1980s understanding of competitiveness because it was the kind economics that Ireland left well behind, back then. It focused largely on cost competitiveness and then on wages, with some reference to unit labour costs. “I believe there should be more public awareness that insufficient attention of wage setting to current and expected productivity developments makes any correction to previous losses of competitiveness more painful in terms of output and employment losses,” he said. He also said “As I mentioned before, wage restraint would help a lot.”
M Trichet did not, however, advocate cuts, like some indigenous economists. He called for “wage setting to take account of the competitiveness and labour market conditions” (not unreasonable) in a what he termed a “responsible and timely manner”. And he said that “national authorities should pursue courageous policies of spending restraint especially in the case of public wages.”
So the government that messed up the economy with light regulation and pro-cyclical policies during the boom is now courageous?
He pointed out that many of Ireland’s fundamental economic strengths have not gone away and the economy is well placed when the international recovery occurs. But he said our success was due to a number of factors, including “a business-friendly regulatory environment.” I thought, reading the papers and listening to the radio, that our business-friendly regulatory environment was the reason Ireland is in deep trouble! Clearly, I was misled! It’s the overpaid workers!
Ireland, fortunately, developed a comprehensive view of what makes a country competitive, in the late 1980s - and Ireland moved on. For a while it became the Celtic Tiger, basing its economics on a whole world view of this complex issue. With a shared view of the total complexity of competitiveness, employers and unions and politicians worked together in a form of Social Partnership to push up employment massively, together with profits and real wages.
Back in 1982, in reaction to a government sponsored report on Competitiveness, by the Three Wise Men, I, with a group of other economists, the Socialist Economists, published Jobs and Wages: the True Story of Competitiveness. In a booklet, we set out the framework for a real comprehensive understanding of what makes a country competitive, from productivity, a functioning banking and insurance systems, good roads and interconnectedness, education and even advocated social partnership! The Irish government later actually set up a social partnership body called the National Competitiveness Council, as the behest of the employers, to analyse the issues on a continuous basis. It has produced excellent work in the area for many years.
However, in recent weeks, some Irish economists, who, believe it or not, avoided the area, (except to pepper reports with the word, 'competitiveness') have come back into it, but like M Trichet, have taken up where the so-called Three Wise Men left off – back 30 years ago.
For a group of economists, the panacea for all our problems appears to be wage cuts (for employees only; only occasionally for others). Now this is understandable because they can measure movements in wages. Economists love to measure things! They hate the impact of institutional and political factors on economies as they cant measure them. Wages are very measurable. One economist just sticks up a graph on total costs, which as we all know have been rising fast and concludes, without blushing, that Ireland’s competitiveness is heading south and wages should be cut (consumer costs are way above the EU average here – 14% above for goods and 21% for services in the EU27 or as high as 33% for consumer services).
Irish costs are way above the EU average, but the reasons are, much more complex than wages. On the other hand, wages have risen faster here than in other EU countries, but in a later blog, I will address this issue in some depth.
The emphasis on wages by economists and by M Trichet is worrying. If we, as a country, are to redefine competitiveness simply as wages, or even unit labour costs or even total costs, we will have lost our shared understanding of an important and real issue which makes our economy work.
It is the naked class nature of their analysis which is worrying. Will we soon stop shaking hands?
Paul Sweeney is Economic Advisor to ICTU
Thursday, 26 February 2009
Shadow regulation and shadow banking: the role of the Dublin International Financial Services Centre
This piece has been cross-posted from the Tax Justice Network blog. Although written in July 2008, it remains highly topical.
Yet despite the location of managed funds and substantial operations in Ireland, the Irish regulator did not feature in any media analysis or discussions relating to the insolvency and subsequent take-over of Bear Stearns. In an interview, the Irish regulator considered his remit is to ‘Irish banks’ – that is, banks that have their headquarters located in Ireland.Nineteen funds reported as facing difficulties in the sub-prime crisis, have been identified as located at the Dublin IFSC. Almost always, the IFSC link is not discussed. There is an exception, however: the case of four German banks (see Box 2).
Jim Stewart: Shadow regulation and shadow banking: the role of the Dublin International Financial Services Centre There has been much analysis of this topic and various policy reforms have been proposed: these include looking at the role of ratings agencies, mark-to-market rules, greater transparency, and especially reform of financial regulation. Very little has been written, however, on the role in this crisis played by tax havens and offshore financial centres with “light touch” regulation. Below is an examination of their role in the crisis, looking specifically at the Dublin International Financial Services Centre (IFSC,) where many of the funds that have collapsed or have been in difficulties are located.
A shadow banking system
The Bank for International Settlements (BIS) in its 78th annual report identified one of the main roots of the crisis. “How,” it asked, “could a huge shadow banking system emerge without provoking clear statements of official concern?”This shadow banking system has boomed over the last decade or so, as a variety of new players have evolved or emerged in the international financial system. Some are hedge funds or investment banks, or more arcane Conduits or Structured Investment Vehicles (SIVs) which are artificial structures created by banks or other institutions, off their balance sheets. These players in the shadow banking system behave rather like traditional banks – they borrow short-term money and then lend it again at longer-term maturities – but outside traditional regulatory structures. Instead of taking deposits, like “normal” banks do, they raise funds in other ways, such as by issuing commercial paper.The financial problems in global markets have been described as “the worst financial crisis since the Great Depression.” The crisis is ongoing, and it is uncertain how deep or protracted it will be.Most of the activity associated with the so- called ‘conduits’ (off-balance sheet vehicles) is regulatory arbitrage: it exists to avoid restrictions placed on banks. Bank supervisors turned a blind eye to it.
Bill Gross, founder of the US financial firm Pimco, said this shadow banking system “has lain hidden for years, untouched by regulation, yet free to magically and mystically create and then package subprime loans into a host of three-letter conduits that only Wall Street wizards could explain.”
Bank regulation exists for very good reasons. Banks must set aside cushions of capital to protect the banks against downturns and other unforeseen events, to prevent problems turning into systemic panics. Such panics are rare, but the collapse of Britain’s Northern Rock last year was a clear example of one. In the shadow banking system, institutions were able to sidestep this kind of regulation and borrow money against much smaller capital cushions than traditional regulators would accept. As a result, systemic risk increased dramatically. “Perhaps,” the BIS report said, “it is simply that no one saw any pressing need to ask hard questions about the sources of profits when things were going so well.”
The role of tax havens
One important reason for the lack of official attention to the growth of the shadow banking system was the extensive use of tax havens. Historically, hedge funds were often domiciled in the Cayman Islands, Bermuda or the British Virgin Islands. However, competition between financial centres on regulation (and tax) is considerable, and more recently European jurisdictions, notably the Channel Islands, Ireland and Luxembourg, have been “streamlining” regulation, among other things, to attract funds.In Ireland, for example, if the relevant documents are provided to the regulator by 3 p.m. the fund will be authorised the next day. A prospectus for a quoted instrument is a complex legal and financial document (a debt instrument issued by Sachsen Bank ran to 245 pages) so it is unlikely it could be adequately assessed between 3 p.m. and the normal close of business (5 p.m.) Even worse, Luxembourg has a new law stating that as long as the fund manager “notifies” the regulator within a month of launch, the fund can enjoy pre-authorisation approval. The Financial Times has noted that the Luxembourg regulator does not “scrutinise promoters”.
It was not especially the low-tax regime that attracted funds to Dublin, but other features: Ireland ticks certain boxes for funds and the regulators in their home countries, including the fact that certain EU directives apply, and being within the Euro currency zone is also highly attractive. Perhaps most alluring of all, however, is its “light touch regulation.” Bear Stearns is so far [NB: writing in July 2008 - JS] the biggest institution to have collapsed from this credit crunch. Problems emerged in June 2007 when two Bear Stearns hedge funds incorporated in the Cayman Islands announced considerable losses. Bear Stearns had two investment funds and six debt securities listed on the Irish Stock Exchange, and it also operates three subsidiaries in the Dublin IFSC through a holding company, Bear Stearns Ireland Ltd., for which every $1 of equity financed $119 of gross assets – an exceedingly high (and in most circumstances dangerous) ratio.
Where is the regulator?
How, and by whom, was Bear Stearns Ireland Ltd. regulated? The accounts state that the Irish group and subsidiaries are regulated by Irish Financial Services Regulatory Authority. According to EU directives, it is clear that the host country – Ireland in this case – has responsibility for regulation (see box 1)
Yet despite the location of managed funds and substantial operations in Ireland, the Irish regulator did not feature in any media analysis or discussions relating to the insolvency and subsequent take-over of Bear Stearns. In an interview, the Irish regulator considered his remit is to ‘Irish banks’ – that is, banks that have their headquarters located in Ireland.Nineteen funds reported as facing difficulties in the sub-prime crisis, have been identified as located at the Dublin IFSC. Almost always, the IFSC link is not discussed. There is an exception, however: the case of four German banks (see Box 2). Between them, they required state aid from the German taxpayer totalling €16.8 billion as a result of the losses from the shadow banking system. Some people argue that financial innovation associated with risk management has been a major source of economic growth, particularly in the US. But “financial innovation,” in the current crisis appears to have motivated by opaque shifting of risk, and avoidance of regulation.
Dr. Jim Stewart is Senior Lecturer in Finance at the TCD School of Business
Pension levy - illustrating 'upside-down' nature of tax reliefs
Gerard Hughes and Jim Stewart of progressive-economy@tasc have taken a closer look at the pension levy, which concluded its passage through the Dail yesterday and is on its way to the Seanad. Click here to read their analysis, which highlights once again the 'upside-down' nature of tax reliefs.
Wednesday, 25 February 2009
Pay Cuts
Could all commentators calling for reductions in social welfare payments and / or pay-cuts for the working poor lead the way by voluntarily reducing their salary to about €200 per week and not touch savings for a year. Now who is first?
Ireland is bankrupt. Now let's get over it.
This piece has been cross-posted from Irish Left Review
Terrence McDonough - Goodbody Stockbrokers is predicting a decline in GDP this year of 6% unsettling public finances. Irish Nationwide has been downgraded by Moody’s to one notch above junk. Ireland is bankrupt. More specifically, its financial institutions are bankrupt, its government is bankrupt and, unfortunately, many of its businesses and citizens are bankrupt. But this is not as bad as it sounds. The admission of bankruptcy is the precondition of taking the necessary action which will help the country cope with the continuing economic crisis.
Let’s stop beating around the bush. Let’s look first at the banks. Ireland’s financial institutions are essentially insolvent. They may well be bankrupt right now. If they are not, they will be in several months time. Nobody who counts believes otherwise. This is most graphically evidenced by the fall in their share values to literally pennies. This raises three important questions. When will they go down? Who will take the hit? And what will replace them? The answers to all of these questions are in the grasp of the government. It must resolve to answer them and sooner rather than later.
When will they go down? They need to go down now. Government policy to date has consisted of indecisiveness masquerading as caution and elevated to the level of strategy. The Minister is hoping to muddle through. He is planning to extend the banks just enough government help to keep them going. This was first in the form of guaranteeing their deposits and their debts. Last week a minimal amount of capital was injected into the banks. The first of these options prevented a run on the banks but does nothing to resolve the problem of toxic assets and reluctant lending. Guaranteeing new debts taken on by the banks simply exposes the taxpayer to possible future losses. The promise of guarantees to new bond buyers should be rescinded immediately. Injecting capital may keep the banks alive for a little while longer but it buys the government a stake in a fundamentally dodgy enterprise. It also incentivises the bank managers to buy back the government shares instead of lending. This is to escape the required dividend payments and government oversight of their pay rates, bonuses, and continued employment.
Who will take the hit? Sadly the options so far pursued by the government put the ordinary taxpayer in the crosshairs. Other options under discussion will only make the problem worse. Providing the banks with public insurance against losses is obviously in this category. So too is the much discussed creation of a “bad bank” which will buy the toxic assets of the rest of the banking system. There was even talk by some commentators of using the now nationalised Anglo-Irish bank for this purpose - as if it wasn’t bad enough already. This option basically visits the past sins of the bankers on the general public. Interestingly, however, it is based on the principle that the only way to get things moving again is to purge the institutions of bad debt. This principle is correct and such a purge is one of the historic functions of economic downturns. Writing down debt allows individuals, businesses and the economy to start over again. The “bad bank” proposal seeks to create a “good” private bank by segregating the bad debt in a public financial institution. But wait a minute. Why not do it the other way around?
What should replace the current banks? We urgently need to create a publicly owned and operated “good bank” similar to that proposed by the Financial Times columnist and academic Willem Buiter. This institution (or institutions if some competition is deemed advisable) would assume the deposits of the existing banks. These are already guaranteed by the government in any case. The government would then purchase the good assets of the existing banks for the new good bank. Buying good assets has the advantage of paying a price set in the markets. Assets whose ultimate worth is uncertain and hence hard to price would be left with what are now legacy bad banks. The legacy bad banks would still be owned by their shareholders and would owe obligations to their bondholders. These groups would then assume the risk they contracted for in the first place. The legacy bad banks would be prohibited from accepting new deposits but would have the cash from the sale of their good assets as operating capital. One really attractive aspect of this proposal is that the existing management could be left to manage the remaining assets. If these guys (and gals) are as clever as their bonuses indicate perhaps they can dig the legacy banks out. But if not, there’s always the bankruptcy court with the owners, lenders and managers squarely in the gun sights where they belong. With the bankruptcy of the legacy bad banks, the financial system will be in the hands of the government’s good banks. The public will have dodged the bullet.
This is not necessarily a radical proposal. If you are conservative, the new banks can be privatised after a few years, perhaps at a profit for the state. If you’re a social democrat, the new banks can be kept in public hands and run like utilities providing the basic credit infrastructure of the private economy. If you’re a little more radical, the new banks can become the centre of a popular development strategy to cope with extended bad times. This may well be needed as the current downturn is one of the big ones like the Great Depression of the 30’s and the Great Stagflation of the 70’s and early 80’s. For this reason, the government’s Mr. Micawber strategy, muddling through until something turns up, cannot work with the country’s financial system.
Mr. Micawber won’t work with the public finances, either, which brings us to the second big bankrupt, the state. The state has not yet been forced to go cap in hand to the IMF, but to forestall this possibility, it has already defaulted on its previously agreed obligations to public employees. Dressing up a pay cut as a “pension levy” does not change the fact that the government judged itself unable to financially meet its commitments. Whatever about defaulting on its employees, a formal default on the government debt would be disastrous. The only option is to restore balance to the public finances. Some cuts are possible (all the junior ministers, the entire armed forces, and the Senate come to mind) but it was not overspending that brought us to this pass. It was an unsustainable tax structure based on unfairly taxing buyers in the property markets.
Incredibly the government’s response so far has contained no tax element. It is hoping for a recovery before it has to make this hard decision. This won’t happen. New tax revenue must be found immediately. Income tax must be raised across the middle and top of the income distribution with more than one additional tax band. All tax allowances must be placed on a short death watch unless specifically exempted by new legislation. Taxes on property or “rates” have been proposed. If it is right and proper to tax the kind of property an ordinary person might own, their residence, what’s wrong with taxing property across the board? Wealth is much more unevenly distributed than income. It can be moderately and progressively taxed on a yearly basis and more heavily taxed when inherited.
This brings us to the small bankrupts, businesses and individuals. Here our proposed bank reform can help. Good public banks can bridge cash flow problems for solvent businesses by resuming lending, preventing unnecessary bankruptcies. On the other hand, the legacy bad banks can stop pretending to be solvent by pretending their bad loans may still be collectable. Bankrupt business assets can be sold to solvent businesses at attractive prices. Bankrupt entrepreneurs can start over cleansed of debt. Family homes should be protected, but unpayable private debt should be written down in bankruptcy proceedings. Bankrupt individuals may be denied their credit cards, but they can stop paying interest and start buying products and services again.
The old model worked for a while. The Celtic Tiger period brought an increase in Irish prosperity which may not be fully lost in the current downturn. But it created a highly unequal society addicted to unsustainably low taxes, an unsustainable property bubble, and unsustainable debt. This model has come crashing down as we secretly knew it must. The old model cannot be reconstructed, but the crisis may bring the opportunity for the creation of a more sustainable alternative. Another Ireland is possible. We must stop dithering, act decisively and act now.
Terrence McDonough is professor of economics at the National University of Ireland, Galway
Terrence McDonough - Goodbody Stockbrokers is predicting a decline in GDP this year of 6% unsettling public finances. Irish Nationwide has been downgraded by Moody’s to one notch above junk. Ireland is bankrupt. More specifically, its financial institutions are bankrupt, its government is bankrupt and, unfortunately, many of its businesses and citizens are bankrupt. But this is not as bad as it sounds. The admission of bankruptcy is the precondition of taking the necessary action which will help the country cope with the continuing economic crisis.
Let’s stop beating around the bush. Let’s look first at the banks. Ireland’s financial institutions are essentially insolvent. They may well be bankrupt right now. If they are not, they will be in several months time. Nobody who counts believes otherwise. This is most graphically evidenced by the fall in their share values to literally pennies. This raises three important questions. When will they go down? Who will take the hit? And what will replace them? The answers to all of these questions are in the grasp of the government. It must resolve to answer them and sooner rather than later.
When will they go down? They need to go down now. Government policy to date has consisted of indecisiveness masquerading as caution and elevated to the level of strategy. The Minister is hoping to muddle through. He is planning to extend the banks just enough government help to keep them going. This was first in the form of guaranteeing their deposits and their debts. Last week a minimal amount of capital was injected into the banks. The first of these options prevented a run on the banks but does nothing to resolve the problem of toxic assets and reluctant lending. Guaranteeing new debts taken on by the banks simply exposes the taxpayer to possible future losses. The promise of guarantees to new bond buyers should be rescinded immediately. Injecting capital may keep the banks alive for a little while longer but it buys the government a stake in a fundamentally dodgy enterprise. It also incentivises the bank managers to buy back the government shares instead of lending. This is to escape the required dividend payments and government oversight of their pay rates, bonuses, and continued employment.
Who will take the hit? Sadly the options so far pursued by the government put the ordinary taxpayer in the crosshairs. Other options under discussion will only make the problem worse. Providing the banks with public insurance against losses is obviously in this category. So too is the much discussed creation of a “bad bank” which will buy the toxic assets of the rest of the banking system. There was even talk by some commentators of using the now nationalised Anglo-Irish bank for this purpose - as if it wasn’t bad enough already. This option basically visits the past sins of the bankers on the general public. Interestingly, however, it is based on the principle that the only way to get things moving again is to purge the institutions of bad debt. This principle is correct and such a purge is one of the historic functions of economic downturns. Writing down debt allows individuals, businesses and the economy to start over again. The “bad bank” proposal seeks to create a “good” private bank by segregating the bad debt in a public financial institution. But wait a minute. Why not do it the other way around?
What should replace the current banks? We urgently need to create a publicly owned and operated “good bank” similar to that proposed by the Financial Times columnist and academic Willem Buiter. This institution (or institutions if some competition is deemed advisable) would assume the deposits of the existing banks. These are already guaranteed by the government in any case. The government would then purchase the good assets of the existing banks for the new good bank. Buying good assets has the advantage of paying a price set in the markets. Assets whose ultimate worth is uncertain and hence hard to price would be left with what are now legacy bad banks. The legacy bad banks would still be owned by their shareholders and would owe obligations to their bondholders. These groups would then assume the risk they contracted for in the first place. The legacy bad banks would be prohibited from accepting new deposits but would have the cash from the sale of their good assets as operating capital. One really attractive aspect of this proposal is that the existing management could be left to manage the remaining assets. If these guys (and gals) are as clever as their bonuses indicate perhaps they can dig the legacy banks out. But if not, there’s always the bankruptcy court with the owners, lenders and managers squarely in the gun sights where they belong. With the bankruptcy of the legacy bad banks, the financial system will be in the hands of the government’s good banks. The public will have dodged the bullet.
This is not necessarily a radical proposal. If you are conservative, the new banks can be privatised after a few years, perhaps at a profit for the state. If you’re a social democrat, the new banks can be kept in public hands and run like utilities providing the basic credit infrastructure of the private economy. If you’re a little more radical, the new banks can become the centre of a popular development strategy to cope with extended bad times. This may well be needed as the current downturn is one of the big ones like the Great Depression of the 30’s and the Great Stagflation of the 70’s and early 80’s. For this reason, the government’s Mr. Micawber strategy, muddling through until something turns up, cannot work with the country’s financial system.
Mr. Micawber won’t work with the public finances, either, which brings us to the second big bankrupt, the state. The state has not yet been forced to go cap in hand to the IMF, but to forestall this possibility, it has already defaulted on its previously agreed obligations to public employees. Dressing up a pay cut as a “pension levy” does not change the fact that the government judged itself unable to financially meet its commitments. Whatever about defaulting on its employees, a formal default on the government debt would be disastrous. The only option is to restore balance to the public finances. Some cuts are possible (all the junior ministers, the entire armed forces, and the Senate come to mind) but it was not overspending that brought us to this pass. It was an unsustainable tax structure based on unfairly taxing buyers in the property markets.
Incredibly the government’s response so far has contained no tax element. It is hoping for a recovery before it has to make this hard decision. This won’t happen. New tax revenue must be found immediately. Income tax must be raised across the middle and top of the income distribution with more than one additional tax band. All tax allowances must be placed on a short death watch unless specifically exempted by new legislation. Taxes on property or “rates” have been proposed. If it is right and proper to tax the kind of property an ordinary person might own, their residence, what’s wrong with taxing property across the board? Wealth is much more unevenly distributed than income. It can be moderately and progressively taxed on a yearly basis and more heavily taxed when inherited.
This brings us to the small bankrupts, businesses and individuals. Here our proposed bank reform can help. Good public banks can bridge cash flow problems for solvent businesses by resuming lending, preventing unnecessary bankruptcies. On the other hand, the legacy bad banks can stop pretending to be solvent by pretending their bad loans may still be collectable. Bankrupt business assets can be sold to solvent businesses at attractive prices. Bankrupt entrepreneurs can start over cleansed of debt. Family homes should be protected, but unpayable private debt should be written down in bankruptcy proceedings. Bankrupt individuals may be denied their credit cards, but they can stop paying interest and start buying products and services again.
The old model worked for a while. The Celtic Tiger period brought an increase in Irish prosperity which may not be fully lost in the current downturn. But it created a highly unequal society addicted to unsustainably low taxes, an unsustainable property bubble, and unsustainable debt. This model has come crashing down as we secretly knew it must. The old model cannot be reconstructed, but the crisis may bring the opportunity for the creation of a more sustainable alternative. Another Ireland is possible. We must stop dithering, act decisively and act now.
Terrence McDonough is professor of economics at the National University of Ireland, Galway
Revealing assumptions of former senior civil servant
Peadar Kirby: The article by Cathal O'Loghlin in today's Irish Times headlined 'Union response to public sector levy fails to find a better way' is more revealing for what it doesn't say than for what it does. Essentially, this former assistant secretary in the Department of Finance and director of the International Monetary Fund (presumably Ireland's representative in the 13-country group through which this country is represented in that organisation) criticises the ICTU's alternative proposals to deal with the current crisis on two grounds, both of them disingenuous.
The first is his claim that ICTU fails to make any case against the planned public pension charges and the second is that the trade union group fails to put forward a comprehensive plan for reforming our taxation system. The first claim overlooks the fact that union leaders consistently affirm that they are not against cuts in public sector pay but that they want to see any cuts being implemented in a fair way with those who have contributed most to the present crisis being the ones who pay the most. Secondly, it beggars belief to expect Congress to design a comprehensive reform of the taxation system when the government itself is failing to do this. Most astonishingly O'Loghlin dismisses ICTU's call for a tax on high earners by stating that the 'net yield might reach €3 billion' while asserting that cuts in the order of €15 billion are in fact needed!
But the most revealing thing of all is O'Loghlin's inability to grasp the essential core principle of ICTU's position, a core principle that finds a ready response among many ordinary Irish people to judge by Saturday's huge march in Dublin. This is the principle of fairness. He fails to mention ICTU's call to introduce a tax on properties other than the principal family residence, its proposal for a 48% tax band for high earners and its call to end the general tax subsidies for the hospital co-location scheme. Indeed, his comment on tax relief for union subscriptions (a petty issue indeed) is perhaps most revealing of a hostility to trade union membership. All in all, his article seems to be motivated by an attempt to argue that public service pay needs to be cut back, missing any of the points made by Paul Sweeney in his recent contribution to this blog. While ICTU's plan may not amount to a full strategy for resolving the huge crisis our political and economic elites have landed us in, it is by far the best beginning towards some equitable and fair way of addressing the crisis.
The first is his claim that ICTU fails to make any case against the planned public pension charges and the second is that the trade union group fails to put forward a comprehensive plan for reforming our taxation system. The first claim overlooks the fact that union leaders consistently affirm that they are not against cuts in public sector pay but that they want to see any cuts being implemented in a fair way with those who have contributed most to the present crisis being the ones who pay the most. Secondly, it beggars belief to expect Congress to design a comprehensive reform of the taxation system when the government itself is failing to do this. Most astonishingly O'Loghlin dismisses ICTU's call for a tax on high earners by stating that the 'net yield might reach €3 billion' while asserting that cuts in the order of €15 billion are in fact needed!
But the most revealing thing of all is O'Loghlin's inability to grasp the essential core principle of ICTU's position, a core principle that finds a ready response among many ordinary Irish people to judge by Saturday's huge march in Dublin. This is the principle of fairness. He fails to mention ICTU's call to introduce a tax on properties other than the principal family residence, its proposal for a 48% tax band for high earners and its call to end the general tax subsidies for the hospital co-location scheme. Indeed, his comment on tax relief for union subscriptions (a petty issue indeed) is perhaps most revealing of a hostility to trade union membership. All in all, his article seems to be motivated by an attempt to argue that public service pay needs to be cut back, missing any of the points made by Paul Sweeney in his recent contribution to this blog. While ICTU's plan may not amount to a full strategy for resolving the huge crisis our political and economic elites have landed us in, it is by far the best beginning towards some equitable and fair way of addressing the crisis.
Tuesday, 24 February 2009
To nationalise or not to nationalise ?
Sli Eile: Now that the inevitable draws near - questions are asked about how nationalisation of banking in Ireland would operate. It is timely to address this issue. Banking is at the heart of economy. At the heart of banking is trust. That trust has been shattered. Some of the fall-out is a dramatic fall in share values, a crises in credit lines to small and medium-sized enterprises and frightening and unknown levels of bad debt. Proceeding to nationalisation will carry huge risks and - if unaccompanied by a dramatic change in culture and governance - may only serve to spread the risk to taxpayers.
We urgently need a debate now - on what sort of public ownership and control is required. Some questions on which I would welcome discussion are:
how can a viable State Bank be created that will compete on the open market with other banks internationally while offering credit to businesses and individuals?
what forms of democratic control can be used to ensure representation by the whole community including those working in the financial industry?
how can bad debt be written down, transferred and ring fenced?
how would nationalisation work in the context of European law on competition?
what guarantees and compensation are in order for which types of shareholders - especially those many small holders who have been badly burnt by the behaviour of Banks such as Anglo-Irish?
What lessons can be learned from nationalisation in other jurisdictions?
Sli Eile is anonymous. Obviously.
We urgently need a debate now - on what sort of public ownership and control is required. Some questions on which I would welcome discussion are:
how can a viable State Bank be created that will compete on the open market with other banks internationally while offering credit to businesses and individuals?
what forms of democratic control can be used to ensure representation by the whole community including those working in the financial industry?
how can bad debt be written down, transferred and ring fenced?
how would nationalisation work in the context of European law on competition?
what guarantees and compensation are in order for which types of shareholders - especially those many small holders who have been badly burnt by the behaviour of Banks such as Anglo-Irish?
What lessons can be learned from nationalisation in other jurisdictions?
Sli Eile is anonymous. Obviously.
The Swedish experience - lessons to be learned?
Peter Connell: Last week David Begg, in outlining ICTU's 10 point pact in response to the current economic crisis, referred to the Swedish experience of the 1990s and some of the strategies that contributed to its economic and fiscal crisis. He specifically referred to a paper by Jens Henriksson entitled 'Ten Lessons About Budget Consolidation' on how Sweden dealt with its fiscal crisis in the early 1990s. Henriksson worked as an advisor to the incoming social democratic government from 1994 onwards and, arising from that experience, constructed his ten lessons. The article is worth a read, but I suggest it shouldn't necessarily be taken as a template for how we get ourselves out of the mess we're in. The interesting thing is that his lessons are essentially political rather than economic or financial. Lesson 5, for example, is that consolidation should be designed as a package and this is one of the arguments in the paper that is reflected in ICTU's 10 point pact.
The point also found a huge resonance amongst many of the public sector workers who marched on Saturday's protest. Because the government failed to introduce the levy as part of a package (and apart from the fact its provisions are grossly inequitable) a huge amount of political energy has been misspent. Brian Cowen is unlikely to be a great fan of Henriksson's Lesson 3 either - 'the one responsible must put her or his job on the line'.
Since last week a number of commentators, including Jim O'Leary in the Irish Times of Feb 20th, have dug a little deeper and pointed out that Henriksson emphasises the key importance of 'sound public finances as a prerequisite for growth' (Lesson 1). Over at http://www.irisheconomy.ie/, O'Leary approvingly cites the Swedish government's cuts in social welfare benefits as part of its budget consolidation programme and links this policy to Henriksson's Lesson 2 - if you are in debt you are not free.
The question is, though, just how useful are these fairly general statements as policy tools in getting us out of the particular situation we're currently in? Sweden arrived at a situation in 1994 of having a budget deficit of 11% of GDP under a specific set of circumstances. The early 1990s witnessed an international economic downturn, but nothing like the global crisis we're experiencing today. Until just a few months ago the OECD preached fiscal consolidation and promoted pubic spending cuts as the way to do it. Now, governments have other priorities including saving enterprises and jobs, and avoiding the spectre of mass unemployment. It's fine to quote the neat maxim - if you are in debt you are not free - but exactly where that leaves the Irish economy over the next 5 - 7 years isn't exactly clear. And, of course, there are other perspectives on the Swedish experience. What role, for example, did Sweden's history of social solidarity play in how it addressed its crisis? Others have pointed out policy tools beyond fiscal consolidation that contributed to Sweden's success - see O. Emre Ergungor. He writes about how the Swedish government addressed the issue of creditworthiness in the real economy - how to get credit to perfectly viable businesses which can sustain and create jobs.
Dare one suggest that in the smart economy we're supposed to be building this might be a greater priority than cutting wages?
Peter Connell is a member of the TCD Pension Policy Research Group
The point also found a huge resonance amongst many of the public sector workers who marched on Saturday's protest. Because the government failed to introduce the levy as part of a package (and apart from the fact its provisions are grossly inequitable) a huge amount of political energy has been misspent. Brian Cowen is unlikely to be a great fan of Henriksson's Lesson 3 either - 'the one responsible must put her or his job on the line'.
Since last week a number of commentators, including Jim O'Leary in the Irish Times of Feb 20th, have dug a little deeper and pointed out that Henriksson emphasises the key importance of 'sound public finances as a prerequisite for growth' (Lesson 1). Over at http://www.irisheconomy.ie/, O'Leary approvingly cites the Swedish government's cuts in social welfare benefits as part of its budget consolidation programme and links this policy to Henriksson's Lesson 2 - if you are in debt you are not free.
The question is, though, just how useful are these fairly general statements as policy tools in getting us out of the particular situation we're currently in? Sweden arrived at a situation in 1994 of having a budget deficit of 11% of GDP under a specific set of circumstances. The early 1990s witnessed an international economic downturn, but nothing like the global crisis we're experiencing today. Until just a few months ago the OECD preached fiscal consolidation and promoted pubic spending cuts as the way to do it. Now, governments have other priorities including saving enterprises and jobs, and avoiding the spectre of mass unemployment. It's fine to quote the neat maxim - if you are in debt you are not free - but exactly where that leaves the Irish economy over the next 5 - 7 years isn't exactly clear. And, of course, there are other perspectives on the Swedish experience. What role, for example, did Sweden's history of social solidarity play in how it addressed its crisis? Others have pointed out policy tools beyond fiscal consolidation that contributed to Sweden's success - see O. Emre Ergungor. He writes about how the Swedish government addressed the issue of creditworthiness in the real economy - how to get credit to perfectly viable businesses which can sustain and create jobs.
Dare one suggest that in the smart economy we're supposed to be building this might be a greater priority than cutting wages?
Peter Connell is a member of the TCD Pension Policy Research Group
Monday, 23 February 2009
Towards a New Political Economy
Paula Clancy: Welcome to progressive-economy@tasc.
Economics has been described as the 'dismal science'. Economists are often stereotyped as conservative, wallowing in bad news, unfeeling and sometimes allied to powerful financial, economic circles and interests. Academic economics has acquired the reputation of being almost a branch of applied mathematics, with a series of assumptions and models that bear little or no relationship to the real world. Yet, formal theorising and selective empirical analysis has not stopped many economists from offering comprehensive advice and prescriptions to Governments or the commercial organisations that employ them. In the late 19th Century, 'Political Economy' was replaced by 'economics'. From then on, 'economics' began to assume a subordinating role in offering 'values-free' advice based on models of the world that reflected the inherent assumptions and interests of those who practiced and sponsored it. In short, economics has long been seen as the preserve of people with unique access to theory, information and policy wisdom - if only politicians and senior policy makers listened and employed more of them!
However, homo economicus has not saved the world.
TASC believes that it is time to reclaim 'economics' by rediscovering the political, social and cultural in 'economics'. We assert that economics is not, and cannot be, neutral. The very questions we seek to ask, the assumptions we chose to make and the options we decide to recommend are based on a set of values. More to the point, we propose a vision of a different society and polity - one in which people, meaningful relationships and human well-being are ends and not means to serving some other elusive goal. To compete we must also be ready to cooperate. A society that is best placed to be competitive and sustainable on global and domestic markets, we claim, is one that is founded on principles of social justice, equality and democracy where markets work to serve the common good and human rights are respected. A new Political Economy is one that opens up the insights of various disciplines to each other so that 'economics' takes its place in a dialogue involving many different academic disciplines as well as civil society, the world of politics and public discourse.
A new Political Economy must address the fundamental choices, values and alternative possible ways forward that the traditional practice of 'economics' shies away from. For this reason, TASC has created progressive-economy@tasc to provide a public forum for economic debate.
Peadar Kirby notes in his post, “we need to debate how the state and the market should relate to one another: in other words, what is the role of the state in configuring the market for social development and how should the state play that role?”.
I hope that progressive-economy@tasc can play a role in shaping and driving forward this and other debates.
Paula Clancy is Director of TASC
Economics has been described as the 'dismal science'. Economists are often stereotyped as conservative, wallowing in bad news, unfeeling and sometimes allied to powerful financial, economic circles and interests. Academic economics has acquired the reputation of being almost a branch of applied mathematics, with a series of assumptions and models that bear little or no relationship to the real world. Yet, formal theorising and selective empirical analysis has not stopped many economists from offering comprehensive advice and prescriptions to Governments or the commercial organisations that employ them. In the late 19th Century, 'Political Economy' was replaced by 'economics'. From then on, 'economics' began to assume a subordinating role in offering 'values-free' advice based on models of the world that reflected the inherent assumptions and interests of those who practiced and sponsored it. In short, economics has long been seen as the preserve of people with unique access to theory, information and policy wisdom - if only politicians and senior policy makers listened and employed more of them!
However, homo economicus has not saved the world.
TASC believes that it is time to reclaim 'economics' by rediscovering the political, social and cultural in 'economics'. We assert that economics is not, and cannot be, neutral. The very questions we seek to ask, the assumptions we chose to make and the options we decide to recommend are based on a set of values. More to the point, we propose a vision of a different society and polity - one in which people, meaningful relationships and human well-being are ends and not means to serving some other elusive goal. To compete we must also be ready to cooperate. A society that is best placed to be competitive and sustainable on global and domestic markets, we claim, is one that is founded on principles of social justice, equality and democracy where markets work to serve the common good and human rights are respected. A new Political Economy is one that opens up the insights of various disciplines to each other so that 'economics' takes its place in a dialogue involving many different academic disciplines as well as civil society, the world of politics and public discourse.
A new Political Economy must address the fundamental choices, values and alternative possible ways forward that the traditional practice of 'economics' shies away from. For this reason, TASC has created progressive-economy@tasc to provide a public forum for economic debate.
Peadar Kirby notes in his post, “we need to debate how the state and the market should relate to one another: in other words, what is the role of the state in configuring the market for social development and how should the state play that role?”.
I hope that progressive-economy@tasc can play a role in shaping and driving forward this and other debates.
Paula Clancy is Director of TASC
Sunday, 22 February 2009
Pay cuts are neither a panacea nor even a help for Ireland's economic problems
Paul Sweeney: The remarkable barrage of calls for pay cuts, from both orthodox economists and the "pop economists", as the the solution to (most of) our economic problems, in the mainstream media, without any alternative views, demonstrates that real solutions to our immense economic problems are further away than we thought. It demonstrates a very limited view of the complexity of competitiveness and the focus on one element of cost competitiveness is misguided.
Competitiveness is very complex covering costs, quality of infrastructure, services, public services, credit etc (see for example, NCC report contents which gives an overview of some issues around the subject on page 7). The list of "12 pillars of competitiveness" in the World Economic Forum’s World Competitiveness Report (page 3 of Chapter 1) can be found here. Some economists have even posted charts with rising costs and labour costs as THE indicator of overall competitiveness!
Unit labour costs are a better indicator, and Ireland's overall productivity is very high. We do have a problem because productivity has not risen in recent years in the era of the Domestically Induced Boom since 2001, but neither has it fallen. And of course, we know that some sectors are more productive than others. But the key issue, never addressed, is why wage and salary earners, who make up 80% of the workforce, should be the only ones who have to contribute to the cost reductions?
Orthodox economists assume society is classless and seldom address cutting professional fees, the profits of wholesalers and other owners of capital, except to vaguely murmur of the need for "more competition." Has this something to do with ideology?
But on cost competition, they say as we cannot devalue, we must do so with wages and this will automatically turn into overall costs!
The transmission mechanism is never detailed, perhaps because it does not work. Further, in the past 5/6 weeks, sterling has appreciated against the Euro by over 9% and the dollar by 13% (UK & US each take around 16% of our exports) and we have heard little of the impact of this devaluation, which has been an undoubted help. Furthermore, while the total cost of an employer hiring a worker in Ireland has been rising, as we have been catching up with Europe, it is still lower than in most of the other 15 member states.And I could go on on costs.
But the biggest issue around Ireland's competitiveness is that we do not have a functioning banking system. Credit is not flowing to businesses; there is a lack of confidence and we do not know how much the blanket banks guarantee will ultimately cost Irish taxpayers. This is the issue everyone is talking about, and it is the real competitiveness issue. Wages costs are nothing compared to getting over this enormous economic hump! And then there is the impact of damage to our international reputation on Foreign Direct Investment caused by our business leaders who have ru(i)n our banks, ably assisted by the sycophantic pro-business attitude dominant in the Financial Regulator's office, in Government and in the economic Departments. Regrettably, some top public servants came to believe that being pro-business meant that what is good for business, as determined by its leaders, is synonymous with the public interest!
The next biggest issue around competitiveness is falling demand. If you cut wages, domestic demand will fall further. It is falling already, as people save and some lose their jobs. But international demand is also falling with the recession, and so exporting is getting more difficult. Germany, the world's great exporting nation, is now facing serious export problems.
The answer is a major international stimulus. So far, this is not being tried at the level required in Europe. But to cut just wages in Ireland in an effort to stimulate exports will not succeed. It will exacerbate our economic problems. It will also impose serious hardship on the working poor and many middle income people. For in Ireland, consumer prices are far above the average in the EU27, being a staggering 33% for services (guess who is making serious money?). On the other hand, the huge gap in revenue and public spending does mean that total labour costs, the main component of current public spending, will have to be addressed - but innovatively, fairly and rapidly.
Where firms are facing serious problems, the existing agreement allows for assessment of finances and if inability to pay is proven, there is not an issue. For some firms, labour costs are so insignificant that pay freezes or cuts mean nothing.
Keynes may have been out of fashion for a long time, but it is remarkable that he is so rejected here and that the old classical economics is still dominant in so many heads in this little economically troubled country of ours.
Paul Sweeney is Economic Advisor to ICTU
Competitiveness is very complex covering costs, quality of infrastructure, services, public services, credit etc (see for example, NCC report contents which gives an overview of some issues around the subject on page 7). The list of "12 pillars of competitiveness" in the World Economic Forum’s World Competitiveness Report (page 3 of Chapter 1) can be found here. Some economists have even posted charts with rising costs and labour costs as THE indicator of overall competitiveness!
Unit labour costs are a better indicator, and Ireland's overall productivity is very high. We do have a problem because productivity has not risen in recent years in the era of the Domestically Induced Boom since 2001, but neither has it fallen. And of course, we know that some sectors are more productive than others. But the key issue, never addressed, is why wage and salary earners, who make up 80% of the workforce, should be the only ones who have to contribute to the cost reductions?
Orthodox economists assume society is classless and seldom address cutting professional fees, the profits of wholesalers and other owners of capital, except to vaguely murmur of the need for "more competition." Has this something to do with ideology?
But on cost competition, they say as we cannot devalue, we must do so with wages and this will automatically turn into overall costs!
The transmission mechanism is never detailed, perhaps because it does not work. Further, in the past 5/6 weeks, sterling has appreciated against the Euro by over 9% and the dollar by 13% (UK & US each take around 16% of our exports) and we have heard little of the impact of this devaluation, which has been an undoubted help. Furthermore, while the total cost of an employer hiring a worker in Ireland has been rising, as we have been catching up with Europe, it is still lower than in most of the other 15 member states.And I could go on on costs.
But the biggest issue around Ireland's competitiveness is that we do not have a functioning banking system. Credit is not flowing to businesses; there is a lack of confidence and we do not know how much the blanket banks guarantee will ultimately cost Irish taxpayers. This is the issue everyone is talking about, and it is the real competitiveness issue. Wages costs are nothing compared to getting over this enormous economic hump! And then there is the impact of damage to our international reputation on Foreign Direct Investment caused by our business leaders who have ru(i)n our banks, ably assisted by the sycophantic pro-business attitude dominant in the Financial Regulator's office, in Government and in the economic Departments. Regrettably, some top public servants came to believe that being pro-business meant that what is good for business, as determined by its leaders, is synonymous with the public interest!
The next biggest issue around competitiveness is falling demand. If you cut wages, domestic demand will fall further. It is falling already, as people save and some lose their jobs. But international demand is also falling with the recession, and so exporting is getting more difficult. Germany, the world's great exporting nation, is now facing serious export problems.
The answer is a major international stimulus. So far, this is not being tried at the level required in Europe. But to cut just wages in Ireland in an effort to stimulate exports will not succeed. It will exacerbate our economic problems. It will also impose serious hardship on the working poor and many middle income people. For in Ireland, consumer prices are far above the average in the EU27, being a staggering 33% for services (guess who is making serious money?). On the other hand, the huge gap in revenue and public spending does mean that total labour costs, the main component of current public spending, will have to be addressed - but innovatively, fairly and rapidly.
Where firms are facing serious problems, the existing agreement allows for assessment of finances and if inability to pay is proven, there is not an issue. For some firms, labour costs are so insignificant that pay freezes or cuts mean nothing.
Keynes may have been out of fashion for a long time, but it is remarkable that he is so rejected here and that the old classical economics is still dominant in so many heads in this little economically troubled country of ours.
Paul Sweeney is Economic Advisor to ICTU
Paying twice for public service pensions
Gerard Hughes: The Government argues that the pension levy is justified because public service pensions are significantly more favourable than the generality of pensions in the private sector. This is a strange argument because the greater value which public service workers derive from their pensions has already been taken into account following the implementation of recommendations made by the Public Service Benchmarking Body in a report in 2007.
Under its terms of reference this body was required to examine the value of public service pension benefits by reference to pension arrangements in the private sector. It took the view that the main comparison of pension benefits in the two sectors should include the mix of defined benefit and defined contribution schemes applicable to employees in the private sector. In conjunction with the Review Body on Higher Remuneration in the Public Sector it commissioned an actuarial firm, Life Strategies Limited, to compare the value of pension arrangements at different grade levels and for different occupations in the public sector relative to the value of pension arrangements in the private sector. Following a detailed comparison of the two sectors Life Strategies advised the benchmarking body that a fair rate for the notional employer cost of public service pensions is 20 per cent of salary and a fair rate for the employer cost for private sector employees who have a pension arrangement is around 8.5 per cent. Consequently, the benchmarking body applied a discount of 12 per cent in setting public service pay to take account of the greater value of the employer contribution to public sector pensions than to private sector pensions.
When the Government implemented the benchmarking body’s recommendations about public service pay in 2007 it did so in the knowledge that the full value of the greater employer contribution to public service pensions was taken into account in the pay award. If a case can be made that a differential has opened up since then in the value of the employer contribution in the two sectors, an additional adjustment may be required to take account of it. However, at present there is no rational basis for requiring public service workers to make an additional contribution via a pension levy towards the cost of their pension.
Gerard Hughes is a Visiting Professor at the TCD School of Business
Under its terms of reference this body was required to examine the value of public service pension benefits by reference to pension arrangements in the private sector. It took the view that the main comparison of pension benefits in the two sectors should include the mix of defined benefit and defined contribution schemes applicable to employees in the private sector. In conjunction with the Review Body on Higher Remuneration in the Public Sector it commissioned an actuarial firm, Life Strategies Limited, to compare the value of pension arrangements at different grade levels and for different occupations in the public sector relative to the value of pension arrangements in the private sector. Following a detailed comparison of the two sectors Life Strategies advised the benchmarking body that a fair rate for the notional employer cost of public service pensions is 20 per cent of salary and a fair rate for the employer cost for private sector employees who have a pension arrangement is around 8.5 per cent. Consequently, the benchmarking body applied a discount of 12 per cent in setting public service pay to take account of the greater value of the employer contribution to public sector pensions than to private sector pensions.
When the Government implemented the benchmarking body’s recommendations about public service pay in 2007 it did so in the knowledge that the full value of the greater employer contribution to public service pensions was taken into account in the pay award. If a case can be made that a differential has opened up since then in the value of the employer contribution in the two sectors, an additional adjustment may be required to take account of it. However, at present there is no rational basis for requiring public service workers to make an additional contribution via a pension levy towards the cost of their pension.
Gerard Hughes is a Visiting Professor at the TCD School of Business
Demand (for solutions) will generate supply - in long term
David Jacobson: I can’t help wondering why the people whose theories are responsible for the current crisis continue to be listened to by those trying to find solutions. In general terms traditional economics – the dominant economic paradigm – is more or less the only economics taught in economics departments in Ireland. In relation to micro-economics – the economics of firms as suppliers and people as consumers – this is called Neoclassical Economics. In relation to macro-economics – the economics of GNP, of interest rates, fiscal policy and unemployment – this is the New Classical Economics. Sub-disciplines in economics, like International Finance, use both micro and macro. The primary argument underlying financial markets in the period leading up to the current collapse has been that markets work, and that they work best when “unimpeded” – by which is meant unregulated. Left to their own devices, the argument went, markets will reach “equilibrium”, which is the position closest to the optimum interest of the buyers and sellers.
All this of course ignores the extent to which markets are made by key players. Think of the answers to the following questions: Who sets the rules? Who monitors and inspects to ensure that the rules are followed? Do those rules in any case favour some players? How closely are the rules followed in practice? What happens to those who do not follow the rules? What are the social consequences of great wealth in the hands of the few who successfully manipulated the rules, without prosecution? If the trust necessary for the successful operation of a banking system has broken down, how can it be rebuilt?
Only to a very small extent are these questions addressed by those working within the dominant economic paradigm. But it is just such questions that need to be answered before we can achieve a modicum of stability in the future. Either economists are going to have to look beyond the parameters of their training, or others, from other disciplines, will suggest answers. This is one case where the demand (for solutions) will successfully generate supply, at least in the long run!
Professor David Jacobson teaches at DCU
All this of course ignores the extent to which markets are made by key players. Think of the answers to the following questions: Who sets the rules? Who monitors and inspects to ensure that the rules are followed? Do those rules in any case favour some players? How closely are the rules followed in practice? What happens to those who do not follow the rules? What are the social consequences of great wealth in the hands of the few who successfully manipulated the rules, without prosecution? If the trust necessary for the successful operation of a banking system has broken down, how can it be rebuilt?
Only to a very small extent are these questions addressed by those working within the dominant economic paradigm. But it is just such questions that need to be answered before we can achieve a modicum of stability in the future. Either economists are going to have to look beyond the parameters of their training, or others, from other disciplines, will suggest answers. This is one case where the demand (for solutions) will successfully generate supply, at least in the long run!
Professor David Jacobson teaches at DCU
Return to Growth Paradigm in Petrochemical Economy not an Option
Peadar Kirby: The focus of public attention and debate on recession and cutbacks at the moment indicates the extreme poverty of public discourse in this country. Essentially it confirms that at the heart of our current crisis is a crisis of ideas and imagination. Those academics contributing to the debate seem to be vying with one another in describing the cuts in living standards facing us all (though, of course, those whose actions created the bubble economy have so far not suffered in any direct way at all), but few are offering a way forward beyond the vacuous mantra of ‘competitiveness’.
A number of key debates are urgently needed:
1) What sort of state do we want? All attention so far has been focused on cutbacks to the current state apparatus – through the actions of the so-called An Bord Snip Nua, through public spending cuts and through cuts to the incomes of all public employees. But this begs the question of devising an agenda for reform of the state, fashioning a state that can effectively carry out the tasks that are required of it. Indeed, it needs to be acknowledged that the Irish state is constantly managing crises and has developed very little ability to plan proactively across the range of public policy areas.
2) Answering what sort of state we want requires us to debate how the state and the market should relate to one another: in other words what is the role of the state in configuring the market for social development and how should the state play that role? This raises another set of very important issues which most Irish economists seem completely unable to address because of their neo-classical training.
3) Setting the context for economic and social recovery: commentary on our current situation fails most of the time to take any account of the fact that decisions in Copenhagen in December will require us to reduce carbon emissions very substantially and very fast. The only way we are addressing this is through presenting the ‘green economy’ as a possible source of new jobs. Yet, while this is true, there is no chance whatsoever that we can achieve anything like the necessary cuts in carbon emissions by that means alone; huge changes in how we source our food and drink, in our patterns of mobility, in our sources and uses of energy will also be required.
If we could begin debating these wider issues, realising that some attempt to return to a growth paradigm within the petrochemical economy is simply not an option if we are going to survive as a species, we might free the imagination and generate some really creative thinking about what future we can build for ourselves.
Professor Peadar Kirby teaches at the University of Limerick
A number of key debates are urgently needed:
1) What sort of state do we want? All attention so far has been focused on cutbacks to the current state apparatus – through the actions of the so-called An Bord Snip Nua, through public spending cuts and through cuts to the incomes of all public employees. But this begs the question of devising an agenda for reform of the state, fashioning a state that can effectively carry out the tasks that are required of it. Indeed, it needs to be acknowledged that the Irish state is constantly managing crises and has developed very little ability to plan proactively across the range of public policy areas.
2) Answering what sort of state we want requires us to debate how the state and the market should relate to one another: in other words what is the role of the state in configuring the market for social development and how should the state play that role? This raises another set of very important issues which most Irish economists seem completely unable to address because of their neo-classical training.
3) Setting the context for economic and social recovery: commentary on our current situation fails most of the time to take any account of the fact that decisions in Copenhagen in December will require us to reduce carbon emissions very substantially and very fast. The only way we are addressing this is through presenting the ‘green economy’ as a possible source of new jobs. Yet, while this is true, there is no chance whatsoever that we can achieve anything like the necessary cuts in carbon emissions by that means alone; huge changes in how we source our food and drink, in our patterns of mobility, in our sources and uses of energy will also be required.
If we could begin debating these wider issues, realising that some attempt to return to a growth paradigm within the petrochemical economy is simply not an option if we are going to survive as a species, we might free the imagination and generate some really creative thinking about what future we can build for ourselves.
Professor Peadar Kirby teaches at the University of Limerick
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