Nat O'Connor: The BBC reports that "A group of rich Germans has launched a petition calling for the government to make wealthy people pay higher taxes." German speakers can access the petition website here.
The idea is that if each of the 2.2 million Germans with €500,000 or more paid a 5 percent wealth tax for 2 years, the state would raise €100 billion "to fund ecological programmes, education and social projects".
The National Irish Bank wealth report claims that Irish households had an average wealth (net of debt) of €547,000 in early 2008 (including primary residences). The report is summarised here, and available as a PDF here.
Over 18 months later, in depressed Ireland, a lot of the NIB report's gloss is less an accurate estimate of remaining wealth and more like a monument to hubris (e.g. "There are now more Mercedes per capita in Ireland than in Germany where they are made").
Page 15 of the NIB wealth report suggests that 10 percent of Ireland's near €1 trillion in wealth was held in savings/deposits. The text says this is "€100 million", but unless I have missed something, 10 percent should be €100 billion. This in line with the €80 billion reported for 2005 in Bank of Ireland's 2007 Wealth of the Nation report. Of course, much larger sums were invested in shares and other financial assets, as well as a disproportionate amount in property. Much of which is likely to have fallen (if not collapsed) in value.
In order for a wealth tax to work here, it would probably have to include property, shares and other financial assets as well as savings/deposits. If not, people may simply move their savings into investments to avoid the tax.
Also, any wealth tax will not just include the helicopter-owning wine investors that the NIB report describes, but it will also include a lot of middle class households whose deposits/investments/property equate to their retirement savings. Many people who simply downsized their primary residence during the boom may have gained €500,000 plus in that single transaction, which may also represent their one-off 'cashing in' of assets to prepare for retirement. And many of these households - who are not professional wealth managers - may have invested in the 'safe options', like bank shares and property. In other words, the pool of 'wealth' is not an infinite resource that already makes enough profit that it will reproduce itself endlessly regardless of how much it is taxed.
Yet, the whole premise of progressive taxation is that 'money makes money'; that is, all things being equal, a careful investor with a pool of money can make a tidy profit on an ongoing basis. Our commercial legislation, regulation, taxation, tax expenditure, etc. is designed to encourage investment and to permit such wealth to grow. The basis for wealth tax then is that in exchange for the ways in which we encourage investment, the state's guarantee of bank deposits, etc. we can legitimately seek a fair share in the profits made by wealth. Not too big, to avoid discouraging investment here, but not too small, to avoid growing the gap between the 'haves' and 'have nots'.
(Note, I am now shifting away from the German idea of a one-off two-year tax. Here I'm examining the idea of more wealth tax on an ongoing basis).
If the state wanted to tax the remainder of Ireland's wealth - and let's say that €500 billion remains - it would need a range of property taxes, deposit taxes, share/financial asset taxes, etc. These would affect many ordinary households. However, a 0.1 percent wealth tax on €500 billion would result in €5 billion for the Exchequer every year.
€5 billion might be as much as we can expect from wealth tax. It won't close the structural deficit in the current budget, but it would make a major contribution - not only to repairing the state's finances, but also to reducing our unequal distribution of wealth.
In practice, the result of the various wealth taxes would look something like this:
- A household living in a house worth €500,000 would pay €500 a year in property tax.
- Someone with €200,000 deposited in the bank would pay €200 a year in deposit tax.
- A shareholder with €10,000,000 in assets would pay €10,000 a year in financial asset tax.
etc.
The fact that a general rule of 0.1 percent applies regardless of the form of wealth would negate incentives to shift the form of wealth - except of course, to move it out of the country; but those who can already do. The 0.1 percent could also be modified to make the tax progressive, rather than a single rate.
Of course, the tax would have administrative costs, and there'd have to be exempt categories, such as asset-rich, cash-poor older people living in houses they own. Hence, in this example, only €4 billion might actually be gained for current expenditure rather than €5 billion.
I may be making various simplifications or unreasonable assumptions. Is there a category of Ireland's wealth that will be impossible to tax? Is any of this wealth already taxed? Is there a constitutional barrier to taxing wealth (as opposed to gains)? Does 0.1 percent as a general rule for wealth/property tax seem reasonable (on the basis that assets will in general grow by more than this per annum, above inflation)?
Friday, 30 October 2009
Thursday, 29 October 2009
Its OK to borrow off-sheet when it comes to NAMA
Slí eile: When it comes to sorting out banking and keeping risk to under 5% for bondholders, there is nothing to beat a bit of creative accounting and re-labelling. The creation of SPV - Special Purpose Vehicle involving a 51% private (big) investor holdings to get around the EU Stability and Growth Pact guidelines is intriguing. We are talking about big money here - over 30% of annual GDP in 2009. I am not complaining except to wonder if this latest wizardry will not give rise to more questions, delays and problems.
In a letter to Eurostat regarding September Maastricht Return, the Department of Finance projected a General Government Balance (GGB) for 2009 of -€19,982 million or -12.0% of GDP, 'which shows a worsening of €1,569 million on the April 2009 forecast deficit of -€18,413 million, or 10.7% of GDP'. In other words, as everyone knows and accepts by now the exchequer is miles off course and the wind of collapsing tax receipts continues to blow the ship north by north west where we are warned of some nasty IMF rocks (although Michael Casey doesn't regard this as the worse thing that could happen).
The Department of Finance acknowledge that the 'principal causes of the dis-improvement in this level of the GGB' includes a further collapse in tax revenue of €2.1 bn
Would anyone in Merrion Street, the ESRI or among academia care to estimate what proportion of this tax shortfall (and rising spending resulting from more unemployment) is a direct consequence of:
pay cuts
collapse in consumer confidence
businesses going to the wall because of lack of credit
How long will the GGB increase or remain at about 12% until the truth emerges? I suspect that some people are thinking to themselves that an international recovery allied to resumed emigration will relieve the pressure and pull us - eventually - out the present impossible bind.
Eventually things will come around - no matter how incompetent and self-defeating fiscal policy is. However, we have choices. If we cut too much and too quickly allied to measures which target low pay and welfare then the recovery will be slower, longer and more painful with pain multiplied for those at the bottom.
A national unemployment emergency should be declared and every initiative, cut or allocation job-proofed. The consequences of a lost generation to unemployment, despair and ill-health are incalculable.
In a letter to Eurostat regarding September Maastricht Return, the Department of Finance projected a General Government Balance (GGB) for 2009 of -€19,982 million or -12.0% of GDP, 'which shows a worsening of €1,569 million on the April 2009 forecast deficit of -€18,413 million, or 10.7% of GDP'. In other words, as everyone knows and accepts by now the exchequer is miles off course and the wind of collapsing tax receipts continues to blow the ship north by north west where we are warned of some nasty IMF rocks (although Michael Casey doesn't regard this as the worse thing that could happen).
The Department of Finance acknowledge that the 'principal causes of the dis-improvement in this level of the GGB' includes a further collapse in tax revenue of €2.1 bn
Would anyone in Merrion Street, the ESRI or among academia care to estimate what proportion of this tax shortfall (and rising spending resulting from more unemployment) is a direct consequence of:
pay cuts
collapse in consumer confidence
businesses going to the wall because of lack of credit
How long will the GGB increase or remain at about 12% until the truth emerges? I suspect that some people are thinking to themselves that an international recovery allied to resumed emigration will relieve the pressure and pull us - eventually - out the present impossible bind.
Eventually things will come around - no matter how incompetent and self-defeating fiscal policy is. However, we have choices. If we cut too much and too quickly allied to measures which target low pay and welfare then the recovery will be slower, longer and more painful with pain multiplied for those at the bottom.
A national unemployment emergency should be declared and every initiative, cut or allocation job-proofed. The consequences of a lost generation to unemployment, despair and ill-health are incalculable.
Wednesday, 28 October 2009
Controversies over speed of fiscal adjustment
Slí Eile: A recent paper by John Fitzgerald of the ESRI (‘Fiscal Policy for Recovery’) indicates the scale of challenge facing public finances in Ireland. His medicine, while conforming to the standard prescription, is greatly more nuanced than the Slash and Burn school of McCarthy/Department of Finance). He outlines six principal Conclusions as follows:
Standard Dublin Consensus Conclusions:
Wages are too high and need to be cut by ‘7% over 3 years’ (in the public and private sectors)
Capital investment should be focussed on producing ‘the maximum impact on the productive capacity of the economy’ but not primarily as generating jobs in the short-run (implicitly the inevitability of continuing high levels of unemployment is accepted pending a larger-scale resumption of outward migration?)
Frontload public spending cuts but in a way that increases efficiency ‘with a minimum impact on services’. ‘Cuts in expenditure now, with an agreed reform package, may well be the only way to achieve long-term reform’. (Fitzgerald rules out a Keynesian stimulus as the scope for borrowing is too constrained by the depth of pro-cyclical squander in the 97-07 period. He also acknowledges that cutting spending and wages will be deflationary and will postpone recovery in 2010 but believes that TINA).
Reform the welfare system to avoid creating ‘poverty traps’ or disincentives to returning to work (when such eventually becomes possible). (This can only mean lower welfare vis-a-vis wages)
Non-Standard Conclusions:
Taxes as a % of GNP should be raised to 45% over a number of years (with an ESRI preference for property and carbon taxes and some shifting in employer PRSI towards employees)
Tax child benefit but no generalised cuts in welfare rates.
Nearly all of the above runs directly contrary to the position taken by the ICTU (see ‘There is Still a Better, Fairer Way’) and by various progressive commentators (see for example
notesonthefront.typepad.com). In essence the disagreement centers on:
* The deflationary impact of pay cuts in general (as against the claim that such cuts will price us back into export markets and boost investor confidence and expectations).
* The need to prioritise job retention and creation through an investment package (as distinct from a lower capital spend suggested by Fitzgerald of around 4% of GNP)
* Prolonging the period of fiscal adjustment (as against a short, sharp snap before the economy bounces back in 2011 or 2012 – hopefully !)
* Defending all families – especially poorer families – in terms of welfare payments and living standards (as against withdrawing net payments to some households and reducing the ‘replacement rate’)
* Raising taxes towards 40-45% more quickly than that envisaged by Fitzgerald.
Fitzgerald makes two further points which should not be overlooked:
Indeed it was remarkable.
On this last point I must concur 110%.
Standard Dublin Consensus Conclusions:
Wages are too high and need to be cut by ‘7% over 3 years’ (in the public and private sectors)
Capital investment should be focussed on producing ‘the maximum impact on the productive capacity of the economy’ but not primarily as generating jobs in the short-run (implicitly the inevitability of continuing high levels of unemployment is accepted pending a larger-scale resumption of outward migration?)
Frontload public spending cuts but in a way that increases efficiency ‘with a minimum impact on services’. ‘Cuts in expenditure now, with an agreed reform package, may well be the only way to achieve long-term reform’. (Fitzgerald rules out a Keynesian stimulus as the scope for borrowing is too constrained by the depth of pro-cyclical squander in the 97-07 period. He also acknowledges that cutting spending and wages will be deflationary and will postpone recovery in 2010 but believes that TINA).
Reform the welfare system to avoid creating ‘poverty traps’ or disincentives to returning to work (when such eventually becomes possible). (This can only mean lower welfare vis-a-vis wages)
Non-Standard Conclusions:
Taxes as a % of GNP should be raised to 45% over a number of years (with an ESRI preference for property and carbon taxes and some shifting in employer PRSI towards employees)
Tax child benefit but no generalised cuts in welfare rates.
Nearly all of the above runs directly contrary to the position taken by the ICTU (see ‘There is Still a Better, Fairer Way’) and by various progressive commentators (see for example
notesonthefront.typepad.com). In essence the disagreement centers on:
* The deflationary impact of pay cuts in general (as against the claim that such cuts will price us back into export markets and boost investor confidence and expectations).
* The need to prioritise job retention and creation through an investment package (as distinct from a lower capital spend suggested by Fitzgerald of around 4% of GNP)
* Prolonging the period of fiscal adjustment (as against a short, sharp snap before the economy bounces back in 2011 or 2012 – hopefully !)
* Defending all families – especially poorer families – in terms of welfare payments and living standards (as against withdrawing net payments to some households and reducing the ‘replacement rate’)
* Raising taxes towards 40-45% more quickly than that envisaged by Fitzgerald.
Fitzgerald makes two further points which should not be overlooked:
My own view is that the 7% public service pay cut in March has made a significant dent in the difference between public and private differentials, while still leaving a substantial public sector premium. The tacit acceptance by the public sector of these cuts was quite a remarkable recognition of the crisis which the economy faces.
Indeed it was remarkable.
Before we can determine the appropriate path of fiscal policy over the next five years we must first decide on what is the long run level of public services that we want. Then the tax level will have to be set at an appropriate level to fund that level of services.
On this last point I must concur 110%.
The many-legged Irish Recession
"The Irish economy certainly is in a recession and, by the rule-of-thumb definition, we’re in a depression. The economy will fall by more than 10% from peak to trough. However, it is understandable that we don’t use the word ‘depression’ – as that word conjures up scenes of mass deprivation and extreme poverty in a time before a modern welfare state.
The issue of when the economy returns to quarterly growth will be more than just a statistical fact – it will be highly politicised. Optimistic forecasters predict the economy – on a quarter-by-quarter basis – will go into the black as early as the first quarter of next year. Others suggest it will occur later. Whoever is right, we will probably see GNP increase on quarter-by-quarter basis sometime next year".
Click here to read the rest of Michael Taft's post over on Notes on the Front.
The issue of when the economy returns to quarterly growth will be more than just a statistical fact – it will be highly politicised. Optimistic forecasters predict the economy – on a quarter-by-quarter basis – will go into the black as early as the first quarter of next year. Others suggest it will occur later. Whoever is right, we will probably see GNP increase on quarter-by-quarter basis sometime next year".
Click here to read the rest of Michael Taft's post over on Notes on the Front.
Cash for Crap Houses: Ireland & NAMA
Stephen Kinsella: Ronan Lyons has the story on the idea that NAMA should become a hands-on property management company. Long story short, it is a very bad idea. But you knew that.
Allow me to be very cynical for a moment and, just as a thought experiment, assume NAMA does become such a property management company, because of political and regulatory capture, say. I'd value everyone's comments on this, simply because I'm worried a version of this idea is in the backs of minds of a set of vested interests.
NAMA will obtain houses in targeted regions all over Ireland, specifically the areas where the boom went last, and then bulldoze them, collapsing supply back to, say, 2002 levels. NAMA can also use some of the newly constructed dwellings for social housing and amenity projects.
NAMA can then offer current homeowners a twenty percent rebate for the building of new homes, or a straight cash for crap houses swop, where we upgrade the housing stock for everyone overnight, so someone in an uninsulated bungalow can get a brand-new house for, literally, nothing. NAMA can bulldoze the old house to further restrict supply.
This would help boost the construction and associated industries, create job growth and allow for legions of people to get back on an artificially constructed 'property ladder'.
Someone please tell me I'm wrong about all this. I'm sure I've missed a step somewhere along the way.
Allow me to be very cynical for a moment and, just as a thought experiment, assume NAMA does become such a property management company, because of political and regulatory capture, say. I'd value everyone's comments on this, simply because I'm worried a version of this idea is in the backs of minds of a set of vested interests.
NAMA will obtain houses in targeted regions all over Ireland, specifically the areas where the boom went last, and then bulldoze them, collapsing supply back to, say, 2002 levels. NAMA can also use some of the newly constructed dwellings for social housing and amenity projects.
NAMA can then offer current homeowners a twenty percent rebate for the building of new homes, or a straight cash for crap houses swop, where we upgrade the housing stock for everyone overnight, so someone in an uninsulated bungalow can get a brand-new house for, literally, nothing. NAMA can bulldoze the old house to further restrict supply.
This would help boost the construction and associated industries, create job growth and allow for legions of people to get back on an artificially constructed 'property ladder'.
Someone please tell me I'm wrong about all this. I'm sure I've missed a step somewhere along the way.
Monday, 26 October 2009
Lost in the forest
Michael Taft: Some people can’t see the forest for the trees. And some people can’t see either the forest or the trees. They just can’t see. Take the reaction to the latest public sector employment earnings. The headline figures are that public sector pay has risen by 3.2 percent in the year up to June. This has resulted in even more garment-rending in some quarters – we’re in the middle of a recession, and these cocooned public sector workers are still raking it in. That’s one way of looking at it – if you can’t either see the trees or the forest. Now let’s open our eyes.
Since the payment of the last tranche of the previous agreement in September of last year (which was agreed over three years ago, what has happened with public sector pay?
First Quarter of this Year: + 0.4%
First Quarter (including the pension levy): - 7.1%
Second Quarter 2009: + 0.2%
Even without the pension levy, public sector wage growth has fallen off considerably, to a second quarter growth of 0.2 percent. This didn’t get much attention in the media. Rather, attention was focused on the annual increase which included the last tranche of the social partnership deal that was agreed over three years ago, and which was paid out last September. Throw in the pension levy, and the drop in wages was severe.
Fergal O’Brien, senior economist over at IBEC, believes he can clearly see the forest.:
‘Obviously there is clear divergence still between what is happening in the public sector in terms of controlling the pay bill versus what’s happening in the private sector.’
He bases this ‘clear distinction’ on the supposition that, while public sector pay has increased by two percent, private sector pay has fallen by 11 percent in the last year. Where does he get this figure of 11 percent? I suspect he has pulled this out of some IBEC survey of its members. Is this real? Not if official data is anything to go by.
CSO data on wages lag and, therefore, the last quarter we have data across the range of sectors reporting is the 4th quarter of last year. However, as the recession gained traction, we find that pay in almost all sectors increased well ahead of that in the public sector and utilities (which is mostly made up of public enterprises). This is a big tree to miss.
In the first quarter of this year, we can compare the broad industrial / financial sectors with the public sector. While overall pay in the manufacturing sector increased by 2.7 percent, and increased by 0.6 percent in the financial sector, public sector pay increased by 0.4 percent.
Many commentators have queried why manufacturing earnings rose during this period? We can get lost in the forest if we don’t get a grip on these numbers. As I’ve pointed out before – this earnings increase went exclusively to the managerial sector, with office and factory floor workers seeing their quarterly earnings fall. A similar trend can be seen in the financial sector.
None of this should be taken as an argument for not cutting public sector wages (or for freezing them, or for increasing them). It is, in the first instance, an argument for taking an evidence-based approach to this debate. Unsubstantiated assertions and contentions not grounded in fact have degraded the economic debate for too long; it degrades it still.
There are people who claim to know the solution to our problems, and beckon us to follow them into the forest in the hope of getting out on the other side. The problem is that too many of these people can’t see too well, and their compasses are broken. If we unquestioningly follow them, we may be stuck in the forest for a long time.
Since the payment of the last tranche of the previous agreement in September of last year (which was agreed over three years ago, what has happened with public sector pay?
First Quarter of this Year: + 0.4%
First Quarter (including the pension levy): - 7.1%
Second Quarter 2009: + 0.2%
Even without the pension levy, public sector wage growth has fallen off considerably, to a second quarter growth of 0.2 percent. This didn’t get much attention in the media. Rather, attention was focused on the annual increase which included the last tranche of the social partnership deal that was agreed over three years ago, and which was paid out last September. Throw in the pension levy, and the drop in wages was severe.
‘Obviously there is clear divergence still between what is happening in the public sector in terms of controlling the pay bill versus what’s happening in the private sector.’
He bases this ‘clear distinction’ on the supposition that, while public sector pay has increased by two percent, private sector pay has fallen by 11 percent in the last year. Where does he get this figure of 11 percent? I suspect he has pulled this out of some IBEC survey of its members. Is this real? Not if official data is anything to go by.
CSO data on wages lag and, therefore, the last quarter we have data across the range of sectors reporting is the 4th quarter of last year. However, as the recession gained traction, we find that pay in almost all sectors increased well ahead of that in the public sector and utilities (which is mostly made up of public enterprises). This is a big tree to miss.
In the first quarter of this year, we can compare the broad industrial / financial sectors with the public sector. While overall pay in the manufacturing sector increased by 2.7 percent, and increased by 0.6 percent in the financial sector, public sector pay increased by 0.4 percent.
Many commentators have queried why manufacturing earnings rose during this period? We can get lost in the forest if we don’t get a grip on these numbers. As I’ve pointed out before – this earnings increase went exclusively to the managerial sector, with office and factory floor workers seeing their quarterly earnings fall. A similar trend can be seen in the financial sector.
None of this should be taken as an argument for not cutting public sector wages (or for freezing them, or for increasing them). It is, in the first instance, an argument for taking an evidence-based approach to this debate. Unsubstantiated assertions and contentions not grounded in fact have degraded the economic debate for too long; it degrades it still.
There are people who claim to know the solution to our problems, and beckon us to follow them into the forest in the hope of getting out on the other side. The problem is that too many of these people can’t see too well, and their compasses are broken. If we unquestioningly follow them, we may be stuck in the forest for a long time.
An alternative approach
"There are now 428,000 people on the live register. The corrosive effect of this – the risk of long-term unemployment and the pressure on the public finances – emphasises the need for a holistic approach to the crisis.
Simplistic solutions like the short, sharp correction don’t cut it at all. Jobs, their protection and creation, must be at the heart of everything we do. It is important to realise that finding a way out of our current crisis is not just an economic challenge. A country is much more than an economy and it is this point of departure that motivated Ictu to launch the Get Up Stand Up campaign."
You can read the rest of David Begg's opinion piece in today's Irish Times here.
Simplistic solutions like the short, sharp correction don’t cut it at all. Jobs, their protection and creation, must be at the heart of everything we do. It is important to realise that finding a way out of our current crisis is not just an economic challenge. A country is much more than an economy and it is this point of departure that motivated Ictu to launch the Get Up Stand Up campaign."
You can read the rest of David Begg's opinion piece in today's Irish Times here.
Saturday, 24 October 2009
How are we going to pay for a Learning Society?
Slí Eile: It is necessary to point out that no society anywhere in the world provides ‘free education’. Paying for teachers, other staff, materials, buildings etc comes from the public purse and households and businesses through various taxes, fees and levies. In some parts of the world, businesses contribute to vocational education through a corporate levy (e.g. through the chambers of commerce in Germany).
Generally, primary and secondary education are ‘free’. In practice, households – depending on their means – probably spend anything up to a third of what is spent by the State on various school-related costs (the precise amount is difficult to measure or compare across countries). In higher education, practice varies. From a relatively universal provision in the 1960-1990s many economically developed countries have moved back to arrangements for charging fees for higher education. Ireland moved in the opposite direction in the 1990s.
The issue of ‘free fees’ at third level came up in this country as an issue in 2003 but was quickly quashed for political reasons. Social equality has been cited by many critics of ‘free fees’ but this rationale is not entirely convincing given the track record of some of these critics on the wider social equality agenda. Some critics have pointed to the ‘funding crisis’ in third level as a reason to complement state funding with some higher level of household charges for tuition. A ‘Student Registration Fee’ is just a fee by another name (has anyone really quantified the costs of ‘tuition’ and other institutional costs in HE institutions?)
I believe that there is a strong moral case for a publicly-funded, universal, inclusive, democratically run public system of lifelong learning from early childhood through to adult learning and training. If society chooses to have such a system and to fund it through national or local taxes then it must be prepared to support a much higher tax-take than is presently the case. The claimed ‘unfairness’ of raising taxes from low-income households (many of whom never had the chance of going beyond primary or intermediate/group certificate) to pay for third level of education of well-off students in, for example, medicine is a serious concern. At the risk of over-simplifying, there are a number of ways of addressing this:
A General taxation to support all tuition costs (Labour Party, Green and Sinn Féin positions)
B Tax on graduates (Fine Gael position)
C Tuition fees for those who can afford it (Fianna Fáil position).
The problem with solution A – as it currently stands – is that it is not applied to every lifelong learner. So, for example, part-time students at third level do not generally avail of free tuition, full-time post-graduate students have to pay increasingly hefty fees, students from outside the EU (excluding the very rich ones!) have to pay very high fees and this is a barrier to student mobility and internationalisation where Irish HE needs to catch up with the rest of the English-speaking world. The other problem with A is that as the fiscal situation in Ireland continues to deteriorate (essentially the slash and burn strategy is not working and may be pushing borrowing up further) the need to re-prioritise public spending (if not to reduce it) arises. Why should the very well-off continue to enjoy free tuition at third level when others face pay cuts, welfare reductions, job losses etc.?
True, but the very same argument can be made about medical cards, ‘free travel’ for our seniors and child benefit for high-income households. The problem with universalism is that you will always have rich folks in the net and you can always point to this case and that case of subsidy. The alternative based on needs and means-testing is very well in theory but, in practice, leads to other anomalies (how do you assess income and wealth in a fair and transparent way when some occupational groups can effectively write-off all sorts of costs and capital allowances against income not to mention wealth if that were a criterion). One of the reasons behind free fees in the mid-1990s was (i) the unfair tax covenanting which free fees replaced and (ii) the unfairness faced by PAYEE people vis-à-vis self-employed, farmers and others when it came to income assessments. The improvement in participation by some social groups between 1998 and 2004 has been adduced as proof of the benefits of free fees. However, I do not think you can prove anything of this sort without looking at a whole range of other factors – something that has not been carried out by any researcher.
The problem with the graduate tax proposal (B above) is that it does not raise money in the medium term (if that is the main concern) and it doesn’t address the equality issue. The other very real concern is that such a proposal gives a strong incentive to those who will emigrate in the coming years stay abroad and skip the tax. Given the mobility of highly-skilled labour this is a very real concern and one that is not taken seriously by proponents of the loans or graduate tax approach either in recent times or in the 1980s when it first came up.
This leaves us with option C – getting more households to pay for third level education. While I think that the initial decision to introduce ‘free fees’ was not a wise one – in the context of continuing high costs for part-timers and households having to supplement inadequate funding of first and second level – I think that any proposal to simply abolish free fees and introduce tuition fees as a general rule (which will inevitably rise from year to year once started) would be a backward step. The experience of the UK and Australia suggests that the re-introduction of tuition fees, there, has done little to promote social equality. Indeed, one of the great leaps forward in human skill in the United States was associated with the provision of ‘free education’ to soldiers after WWII who had served their country. The provision of universal upper secondary education in the 1940s was followed, quickly, by rapid expansion in college and university education in the US in the 1950s and 1960s. Likewise, the partial opening up of higher education to women and working class students in the UK helped to transform opportunities for millions.
In many ways the demise of the ancien régime at Stormont was the result of a better educated Catholic middle class gaining confidence to challenge discrimination. Catholics were badly discriminated against but had the benefits of the NHS and some managed to benefit from fee higher education.
If, as some argue, fees should be reintroduced for full-time undergraduates of EU nationality, why not extend fees to all post-compulsory education – as was suggested by some in the aftermath of the ESRI Tussing report in 1978? Why should post-compulsory education (senior cycle of second level) be ‘free’ for very wealthy families? I guess one answer to this is to say that almost everyone participates in second level education whereas third level is much more selective and socially discriminatory. However, there is huge variation in the extent of second level completion by locality, school and social group.
Advocates of reversing the third-level ‘free fees’ policy supposedly on equity grounds need to be consistent. Why should the line be drawn at third level?
I am not suggesting that fees be introduced at second level to restore the pre-
1968 situation. ‘Free education’ at second level was a milestone in Ireland history, socially and economically and in no small way paved the way for economic development in the 1990s onwards. However, a coherent and egalitarian approach to lifelong learning needs to be informed by the following principles:
* Public provision of education up the age of 18 to provide all young people with a good, rounded and vocationally-relevant preparation for life and work.
* Sharing of costs between public, private and household interests but with the vast bulk of costs undertaken by public sources in the early to mid-stages of education (roughly first and second level)
* Direction of scarce public resources to helping those least able to afford education to participate in further, higher and adult education.
The present funding formula is fragmented and biased in favour of those best able to avail of educational opportunities. Operating on the principle of ‘the more you have the more you get’ principle we have an inefficient and publicly wasteful system that militates against low-income households and discourages people from pursuing opportunities in the post-18 age bracket.
To put it another way, we have a rationing system whereby third level places (full-time undergraduate) are rationed out on the basis of success in one assessment or test known as the Leaving Certificate while another rationing system operates to allocate a fixed number of ‘post-leaving certificate’ places to a huge pool of young pool (and a growing number of adults) who wish to avail of second chance education but cannot in many cases.
Reflecting their middle-class audience, the serious media outlets obsess with ‘getting into college’ and measure success on this basis (including league-tabling of second level schools). The alternative measure of success is Leaving Cert points which determine third level entry. The ultimate metric is employment and income – especially that arising from the various careers from law to medicine to business. Frankly that is an empoverished notion of education. (I suggest two films for those interested in thinking about these issues:
Kess by Ken Loach
Educating Rita)
Yet, the roots of inequality are sown long before children reach school. Differences in income, health, parental education and associated cultural capital impart a huge difference in starting point to children as they start out their educational journey at junior infants. At each hurdle along the way from selective entry to second level to competition for places in medicine or some other highly prized path the children of disadvantaged households are left behind to experience poorer supports, less privately funded extra-curricular activities and immersion in schools and localities where the odds are stacked against them. Such is life in an unequal society. People learn, early on, that ‘this is the way things are’. One of the immense ironies of 'Christian ethos' (Catholic or Protestant) in Ireland as in many other countries is that, in practice, it served to reinforce social inequality and educate the elite for elite positions in business, civil service, the army and the church. Ever wonder where the heroes of our banking, public service, corporate and church systems were educated? (This is not to deny the equally valid point that some religious providers of education provided unique opportunities to the disadvantaged to realise their education and personal potential and a few have courageously and consistently challenged a fundamentally unjust and corrupt society).
On the funding of education, a solution needs to be found that addresses a number of issues together and not just in isolation from each other:
*Rebalancing of educational investment (time, money, effort, quality) towards the early years of childhood (roughly from birth to about 7) where language, social skills and self-confidence are established for life;
* Changing the way in which schools are run to open management to democratic community control and accountability – schools remain some of the most undemocratic institutions in society;
* Transforming the nature of the learning experience away from rote industrial-age training to a broader, more applied and learner centered experience;
* Provide a universal and publicly-funded system of education as a fundamental human right and privilege and not just as a commodity to be traded and invested in for personal gain only.
On the issue of ‘third level fees’ it is necessary to propose solutions that channel resources to those most in need while defending the social gains made so far.
I suggest a solution in regard to third level fees on the following lines (which does involve some level of fees for very wealthy households):
For all households above a particular threshold of income over a three-year period – introduce a cost-sharing scheme whereby the full economic cost of a course is divided between the household and the State (this might be on a 10:90 basis). The full economic cost of a course may be a multiple of nominal tuition fees. In fact, before ‘free fees’ the State effectively subsidised a large part of the total cost of provision. In a revised cost-sharing scheme the bulk of the total cost is still covered by the State (out of general taxation). However, a fixed ceiling (e.g. €3,000) and a 10% cost of total costs – whichever is the highest (normally no more than €1,000 per annum per student) could be set. This would replace the current registration fee. Costs average about €11,000 per annum but there is wide variation around this average with some scientific oriented courses costing a lot more than the average.
The real barrier to entry by disadvantaged households is living costs (for those who survive education to Leaving Cert level if they have not been already knocked out of the 'social tournament') – especially those ‘away from home’. If there were a way of channeling the proceeds of a cost-sharing arrangement (as above) towards enhanced living cost allowances for disadvantaged households then the fairness of a revised funding mechanism would be more apparent. All of this should be de-coupled from the other big issue of what overall level of funding is appropriate for each level of education and education as a whole.
One way to focus this debate is to set a national target that up to 10% of GDP is spent on lifelong learning of which HE is one element (shock, horror, what about Bord Snip!!). Other elements would include workplace training, schools and pre-school. Such a target would need to be included in an overall plan for the Learning Sector to bring about efficiencies and better combinations of resources and talent with the focus, more than ever, on the individual learner.
Look - the alternative to a rational, inclusive and ambitious Learning strategy is a dumbed-down non-smart economy, a sick society because unequal and an impaired democratic spirit because learning is the key to active and responsible engagement.
Lets think big and beyond the current narrow debates.
Generally, primary and secondary education are ‘free’. In practice, households – depending on their means – probably spend anything up to a third of what is spent by the State on various school-related costs (the precise amount is difficult to measure or compare across countries). In higher education, practice varies. From a relatively universal provision in the 1960-1990s many economically developed countries have moved back to arrangements for charging fees for higher education. Ireland moved in the opposite direction in the 1990s.
The issue of ‘free fees’ at third level came up in this country as an issue in 2003 but was quickly quashed for political reasons. Social equality has been cited by many critics of ‘free fees’ but this rationale is not entirely convincing given the track record of some of these critics on the wider social equality agenda. Some critics have pointed to the ‘funding crisis’ in third level as a reason to complement state funding with some higher level of household charges for tuition. A ‘Student Registration Fee’ is just a fee by another name (has anyone really quantified the costs of ‘tuition’ and other institutional costs in HE institutions?)
I believe that there is a strong moral case for a publicly-funded, universal, inclusive, democratically run public system of lifelong learning from early childhood through to adult learning and training. If society chooses to have such a system and to fund it through national or local taxes then it must be prepared to support a much higher tax-take than is presently the case. The claimed ‘unfairness’ of raising taxes from low-income households (many of whom never had the chance of going beyond primary or intermediate/group certificate) to pay for third level of education of well-off students in, for example, medicine is a serious concern. At the risk of over-simplifying, there are a number of ways of addressing this:
A General taxation to support all tuition costs (Labour Party, Green and Sinn Féin positions)
B Tax on graduates (Fine Gael position)
C Tuition fees for those who can afford it (Fianna Fáil position).
The problem with solution A – as it currently stands – is that it is not applied to every lifelong learner. So, for example, part-time students at third level do not generally avail of free tuition, full-time post-graduate students have to pay increasingly hefty fees, students from outside the EU (excluding the very rich ones!) have to pay very high fees and this is a barrier to student mobility and internationalisation where Irish HE needs to catch up with the rest of the English-speaking world. The other problem with A is that as the fiscal situation in Ireland continues to deteriorate (essentially the slash and burn strategy is not working and may be pushing borrowing up further) the need to re-prioritise public spending (if not to reduce it) arises. Why should the very well-off continue to enjoy free tuition at third level when others face pay cuts, welfare reductions, job losses etc.?
True, but the very same argument can be made about medical cards, ‘free travel’ for our seniors and child benefit for high-income households. The problem with universalism is that you will always have rich folks in the net and you can always point to this case and that case of subsidy. The alternative based on needs and means-testing is very well in theory but, in practice, leads to other anomalies (how do you assess income and wealth in a fair and transparent way when some occupational groups can effectively write-off all sorts of costs and capital allowances against income not to mention wealth if that were a criterion). One of the reasons behind free fees in the mid-1990s was (i) the unfair tax covenanting which free fees replaced and (ii) the unfairness faced by PAYEE people vis-à-vis self-employed, farmers and others when it came to income assessments. The improvement in participation by some social groups between 1998 and 2004 has been adduced as proof of the benefits of free fees. However, I do not think you can prove anything of this sort without looking at a whole range of other factors – something that has not been carried out by any researcher.
The problem with the graduate tax proposal (B above) is that it does not raise money in the medium term (if that is the main concern) and it doesn’t address the equality issue. The other very real concern is that such a proposal gives a strong incentive to those who will emigrate in the coming years stay abroad and skip the tax. Given the mobility of highly-skilled labour this is a very real concern and one that is not taken seriously by proponents of the loans or graduate tax approach either in recent times or in the 1980s when it first came up.
This leaves us with option C – getting more households to pay for third level education. While I think that the initial decision to introduce ‘free fees’ was not a wise one – in the context of continuing high costs for part-timers and households having to supplement inadequate funding of first and second level – I think that any proposal to simply abolish free fees and introduce tuition fees as a general rule (which will inevitably rise from year to year once started) would be a backward step. The experience of the UK and Australia suggests that the re-introduction of tuition fees, there, has done little to promote social equality. Indeed, one of the great leaps forward in human skill in the United States was associated with the provision of ‘free education’ to soldiers after WWII who had served their country. The provision of universal upper secondary education in the 1940s was followed, quickly, by rapid expansion in college and university education in the US in the 1950s and 1960s. Likewise, the partial opening up of higher education to women and working class students in the UK helped to transform opportunities for millions.
In many ways the demise of the ancien régime at Stormont was the result of a better educated Catholic middle class gaining confidence to challenge discrimination. Catholics were badly discriminated against but had the benefits of the NHS and some managed to benefit from fee higher education.
If, as some argue, fees should be reintroduced for full-time undergraduates of EU nationality, why not extend fees to all post-compulsory education – as was suggested by some in the aftermath of the ESRI Tussing report in 1978? Why should post-compulsory education (senior cycle of second level) be ‘free’ for very wealthy families? I guess one answer to this is to say that almost everyone participates in second level education whereas third level is much more selective and socially discriminatory. However, there is huge variation in the extent of second level completion by locality, school and social group.
Advocates of reversing the third-level ‘free fees’ policy supposedly on equity grounds need to be consistent. Why should the line be drawn at third level?
I am not suggesting that fees be introduced at second level to restore the pre-
1968 situation. ‘Free education’ at second level was a milestone in Ireland history, socially and economically and in no small way paved the way for economic development in the 1990s onwards. However, a coherent and egalitarian approach to lifelong learning needs to be informed by the following principles:
* Public provision of education up the age of 18 to provide all young people with a good, rounded and vocationally-relevant preparation for life and work.
* Sharing of costs between public, private and household interests but with the vast bulk of costs undertaken by public sources in the early to mid-stages of education (roughly first and second level)
* Direction of scarce public resources to helping those least able to afford education to participate in further, higher and adult education.
The present funding formula is fragmented and biased in favour of those best able to avail of educational opportunities. Operating on the principle of ‘the more you have the more you get’ principle we have an inefficient and publicly wasteful system that militates against low-income households and discourages people from pursuing opportunities in the post-18 age bracket.
To put it another way, we have a rationing system whereby third level places (full-time undergraduate) are rationed out on the basis of success in one assessment or test known as the Leaving Certificate while another rationing system operates to allocate a fixed number of ‘post-leaving certificate’ places to a huge pool of young pool (and a growing number of adults) who wish to avail of second chance education but cannot in many cases.
Reflecting their middle-class audience, the serious media outlets obsess with ‘getting into college’ and measure success on this basis (including league-tabling of second level schools). The alternative measure of success is Leaving Cert points which determine third level entry. The ultimate metric is employment and income – especially that arising from the various careers from law to medicine to business. Frankly that is an empoverished notion of education. (I suggest two films for those interested in thinking about these issues:
Kess by Ken Loach
Educating Rita)
Yet, the roots of inequality are sown long before children reach school. Differences in income, health, parental education and associated cultural capital impart a huge difference in starting point to children as they start out their educational journey at junior infants. At each hurdle along the way from selective entry to second level to competition for places in medicine or some other highly prized path the children of disadvantaged households are left behind to experience poorer supports, less privately funded extra-curricular activities and immersion in schools and localities where the odds are stacked against them. Such is life in an unequal society. People learn, early on, that ‘this is the way things are’. One of the immense ironies of 'Christian ethos' (Catholic or Protestant) in Ireland as in many other countries is that, in practice, it served to reinforce social inequality and educate the elite for elite positions in business, civil service, the army and the church. Ever wonder where the heroes of our banking, public service, corporate and church systems were educated? (This is not to deny the equally valid point that some religious providers of education provided unique opportunities to the disadvantaged to realise their education and personal potential and a few have courageously and consistently challenged a fundamentally unjust and corrupt society).
On the funding of education, a solution needs to be found that addresses a number of issues together and not just in isolation from each other:
*Rebalancing of educational investment (time, money, effort, quality) towards the early years of childhood (roughly from birth to about 7) where language, social skills and self-confidence are established for life;
* Changing the way in which schools are run to open management to democratic community control and accountability – schools remain some of the most undemocratic institutions in society;
* Transforming the nature of the learning experience away from rote industrial-age training to a broader, more applied and learner centered experience;
* Provide a universal and publicly-funded system of education as a fundamental human right and privilege and not just as a commodity to be traded and invested in for personal gain only.
On the issue of ‘third level fees’ it is necessary to propose solutions that channel resources to those most in need while defending the social gains made so far.
I suggest a solution in regard to third level fees on the following lines (which does involve some level of fees for very wealthy households):
For all households above a particular threshold of income over a three-year period – introduce a cost-sharing scheme whereby the full economic cost of a course is divided between the household and the State (this might be on a 10:90 basis). The full economic cost of a course may be a multiple of nominal tuition fees. In fact, before ‘free fees’ the State effectively subsidised a large part of the total cost of provision. In a revised cost-sharing scheme the bulk of the total cost is still covered by the State (out of general taxation). However, a fixed ceiling (e.g. €3,000) and a 10% cost of total costs – whichever is the highest (normally no more than €1,000 per annum per student) could be set. This would replace the current registration fee. Costs average about €11,000 per annum but there is wide variation around this average with some scientific oriented courses costing a lot more than the average.
The real barrier to entry by disadvantaged households is living costs (for those who survive education to Leaving Cert level if they have not been already knocked out of the 'social tournament') – especially those ‘away from home’. If there were a way of channeling the proceeds of a cost-sharing arrangement (as above) towards enhanced living cost allowances for disadvantaged households then the fairness of a revised funding mechanism would be more apparent. All of this should be de-coupled from the other big issue of what overall level of funding is appropriate for each level of education and education as a whole.
One way to focus this debate is to set a national target that up to 10% of GDP is spent on lifelong learning of which HE is one element (shock, horror, what about Bord Snip!!). Other elements would include workplace training, schools and pre-school. Such a target would need to be included in an overall plan for the Learning Sector to bring about efficiencies and better combinations of resources and talent with the focus, more than ever, on the individual learner.
Look - the alternative to a rational, inclusive and ambitious Learning strategy is a dumbed-down non-smart economy, a sick society because unequal and an impaired democratic spirit because learning is the key to active and responsible engagement.
Lets think big and beyond the current narrow debates.
Publishing tax returns, Norwegian style
An Saoi: Thanks to this article on the BBC’s website, I have wasted hours of my own and my employer’s time looking at the tax returns of the rich and famous of Norway. I was able to do this because the Norwegians publish the income returns of all. For example, a Mr. Tore Lie tops the list in 2008 with an income of 101,870,780 NOK or about €12M and he paid 34,164,782 NOK or say €4M in tax. Anyone with a bit of basic Norwegian can read all about him here.
For those with an interest in football, Steffen Iversen - formerly of Tottenham Hotspur and now with Rosenborg Trondheim - earned a mere 5.2M NOK about €600,000 and paid nearly half of it in tax.
Fascinating as the details are, does publishing the information do any good? Or is really just a way of satisfying idle curiosity? Personally I am in favour, but consider the whining farmers made about the publication of their social welfare payments from Dept of Agriculture! Perhaps Ms. Burton should propose it as an amendment in the forthcoming Finance Bill? Any views?
For those with an interest in football, Steffen Iversen - formerly of Tottenham Hotspur and now with Rosenborg Trondheim - earned a mere 5.2M NOK about €600,000 and paid nearly half of it in tax.
Fascinating as the details are, does publishing the information do any good? Or is really just a way of satisfying idle curiosity? Personally I am in favour, but consider the whining farmers made about the publication of their social welfare payments from Dept of Agriculture! Perhaps Ms. Burton should propose it as an amendment in the forthcoming Finance Bill? Any views?
Friday, 23 October 2009
Revitalising economics after the crash: online petition
"The economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth".
These words, by Nobel Laureate Paul Krugman, form the inspiration behind an online petition originated by Professor Geoffrey M. Hodgson of the University of Hertfordshire's Business School.
In press release, Professor Hodgson writes:
An online declaration in support of a fuller extract from Krugman's article (see text below)has received over 2000 signatures in little over a month.[...]
Krugman joins a line of Nobel Laureates, including Ronald Coase, Wassily Leontief and Milton Friedman, who have argued that economists has become largely transformed into a branch of applied mathematics, with inadequate contact with the real world. On the online website, Krugman's words are supported by Nobel Laureate Douglass North.
The narrow training of economists -- which concentrates on mathematical techniques and the building of empirically uncontrolled formal models -- has been a major reason for the failure of the economics profession to appreciate market vulnerability and warn of the serious risks in the financial system. In their pursuit of tractable models, economists have made over-simplified and misguided assumptions concerning of human agents, markets and other institutions, rather than engaging adequately with the complexities of the real world.
Mathematics is very important and useful, but it should be a servant to economics, and not its master. Real-world substance should prevail over mathematical technique. To help avoid further failings, governments in the USA, Europe and elsewhere should look into the state of economics and the way economics is taught.
Of the 2000-plus signatories of the current online appeal, 62% have PhDs, 20% are from the USA, and 10% from the UK.
As well as Nobel Laureate Douglass North, other prominent signatories include leading international academics and researchers such as Masahiko Aoki, Tony Aspromourgos, Michael Bernstein, Margaret Blair, Mark Blaug, Daniel Bromley, John Cantwell, Ha-Joon Chang, Victoria Chick, Keith Cowling, Kurt Dopfer, Gregory Dow, Ronald Dore, Giovani Dosi, Jean-Pierre Dupuy, Peter Earl, Jan Fagerberg, Olivier Favereau, Duncan Foley, John Foster, Geoffrey Harcourt, Arnold Heertje, Joseph Henrich, Stuart Holland, Will Hutton, Peter Kellner, Arjo Klamer, Mark Lavoie,
Richard Lipsey, Brian Loasby, Mark Lutz, Ronald Martin, William McKelvey, Deirdre McCloskey, Stanley Metcalfe, Julie Nelson, Richard Norgaard, Luigi Pasinetti, Peter Richerson, Erik Reinert, Barkley Rosser, Kurt Rothschild, Bridget Rosewell, Robert Rowthorn, Malcolm Rutherford, Paolo Saviotti, Malcolm Sawyer, Esther-Mirjam Sent, Mark Setterfield, Gerald Silverberg, Laurence Shute, Robert Skidelsky, Peter Skott, Ronald Stanfield, Arthur Stinchcombe, Thomas Weisskopf, Sidney Winter and Stefano Zamagni.
All 2000-plus signatories endorse the following words by Paul Krugman:
"Few economists saw our current crisis coming, but this predictive was the least of the field's problems. More important was the profession's blindness to the very possibility of catastrophic failures in a market economy ... the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth ... economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations ... Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets -- especially financial markets -- that can cause the economy's operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don't believe in regulation. ... When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly." (/New
York Times, September 2nd , 2009.)
Additional supporters can sign the petition here
These words, by Nobel Laureate Paul Krugman, form the inspiration behind an online petition originated by Professor Geoffrey M. Hodgson of the University of Hertfordshire's Business School.
In press release, Professor Hodgson writes:
An online declaration in support of a fuller extract from Krugman's article (see text below)has received over 2000 signatures in little over a month.[...]
Krugman joins a line of Nobel Laureates, including Ronald Coase, Wassily Leontief and Milton Friedman, who have argued that economists has become largely transformed into a branch of applied mathematics, with inadequate contact with the real world. On the online website, Krugman's words are supported by Nobel Laureate Douglass North.
The narrow training of economists -- which concentrates on mathematical techniques and the building of empirically uncontrolled formal models -- has been a major reason for the failure of the economics profession to appreciate market vulnerability and warn of the serious risks in the financial system. In their pursuit of tractable models, economists have made over-simplified and misguided assumptions concerning of human agents, markets and other institutions, rather than engaging adequately with the complexities of the real world.
Mathematics is very important and useful, but it should be a servant to economics, and not its master. Real-world substance should prevail over mathematical technique. To help avoid further failings, governments in the USA, Europe and elsewhere should look into the state of economics and the way economics is taught.
Of the 2000-plus signatories of the current online appeal, 62% have PhDs, 20% are from the USA, and 10% from the UK.
As well as Nobel Laureate Douglass North, other prominent signatories include leading international academics and researchers such as Masahiko Aoki, Tony Aspromourgos, Michael Bernstein, Margaret Blair, Mark Blaug, Daniel Bromley, John Cantwell, Ha-Joon Chang, Victoria Chick, Keith Cowling, Kurt Dopfer, Gregory Dow, Ronald Dore, Giovani Dosi, Jean-Pierre Dupuy, Peter Earl, Jan Fagerberg, Olivier Favereau, Duncan Foley, John Foster, Geoffrey Harcourt, Arnold Heertje, Joseph Henrich, Stuart Holland, Will Hutton, Peter Kellner, Arjo Klamer, Mark Lavoie,
Richard Lipsey, Brian Loasby, Mark Lutz, Ronald Martin, William McKelvey, Deirdre McCloskey, Stanley Metcalfe, Julie Nelson, Richard Norgaard, Luigi Pasinetti, Peter Richerson, Erik Reinert, Barkley Rosser, Kurt Rothschild, Bridget Rosewell, Robert Rowthorn, Malcolm Rutherford, Paolo Saviotti, Malcolm Sawyer, Esther-Mirjam Sent, Mark Setterfield, Gerald Silverberg, Laurence Shute, Robert Skidelsky, Peter Skott, Ronald Stanfield, Arthur Stinchcombe, Thomas Weisskopf, Sidney Winter and Stefano Zamagni.
All 2000-plus signatories endorse the following words by Paul Krugman:
"Few economists saw our current crisis coming, but this predictive was the least of the field's problems. More important was the profession's blindness to the very possibility of catastrophic failures in a market economy ... the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth ... economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations ... Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets -- especially financial markets -- that can cause the economy's operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don't believe in regulation. ... When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly." (/New
York Times, September 2nd , 2009.)
Additional supporters can sign the petition here
The battle at Boots
Michael Taft: Sometimes, something happens that takes your breath away. The chain store Boots is engaged in a deplorable assault on their employees’ wages and working conditions – employees who are some of the lowest paid in the economy. Not only that, it constitutes an assault upon other enterprises, the Exchequer and the Irish economy.
Let’s do some background. Over the summer Boots and the representatives of their employees – Mandate – met on a number of occasions to discuss a range of cost saving measures. In particular, management demanded:
• 15.5% wage reduction at the top scale of pay from €14.20 to €12 per hour
• 25% reduction in public holiday pay
• 25% reduction in Sunday Premiums
• Increased flexibility in weekend work for full time staff
Unsurprisingly, the negotiations didn’t go too well, especially given that Boots is a profitable enterprise. Mandate requested the company attend the Labour Relations Commission (LRC) to sort matters out. Suddenly, in August, Boots management wrote to the union stating that unless Mandate accepted the new pay and working conditions, Boots would terminate all existing collective agreements negotiated with the union over the past fifteen years. In addition, the management stated they would not attend the LRC. This action certainly wasn’t intended to build an atmosphere for constructive dialogue.
Eventually, management relented and attended the LRC with Mandate in October. However, such was their attitude, they might as well not. All they were prepared to do was remove the threat to the collective agreements if the union unconditionally accepted the new conditions of employment in full.
Currently, Mandate is balloting Boots employees for industrial action. The ballots will be counted on November 6th – ICTU’s National Day of Action.
It doesn’t get much worse than this. A full-time 39-hour per week employee at the top of the scale earns €28,800 – about 30 percent below the average industrial wage. Boots management is demanding a pay cut of nearly €4,500 a year. That’s savage. But Boots management isn’t just targeting those at the top of the scale – they’re demanding 25 percent cuts in holiday and Sunday pay for all employees.
This isn’t a company in trouble. In 2008, the Irish division in Boots earned €20 million in 2008 with current cash reserves in excess of €70 million. Worldwide, Alliance Boots posted an EBITDA of over £1 billion in March this year (that’s trading profit before depreciation and amortisation) while their underlying profit – excluding finance costs – is a healthy £236 million.
Okay, but what now? How has the recession and the decline in consumer spending affected Boots? Probably not much. The CSO’s Retail Sales Index shows all businesses suffering a drop of 7.5 percent in sales (from a 2005 base year). But sales in the Pharmaceuticals & Cosmetic Articles group have actually increased by 17.1 percent – the biggest increase of any retail grouping. That doesn’t’ necessarily mean that Boots turnover or profits have increased by that amount. But since it is a major player in this grouping, we shouldn’t be too surprised to see them staying relatively dry in this recessionary storm.
To be fair to Boots (which is owned by a private equity firm), they’re not just having a go at their own employees. They have recently withdrawn from the Ethical Trading Initiative, which was established 10 years ago to tackle the use of sweatshops in the developing world (members include, Tesco, Sainsbury's and Marks & Spencer to name a few). A Boots spokesperson explained their decision this way:
‘The reasoning for this is because it (the Ethical Trading Initiative) only concentrates on labour standards and at Boots we focus on all aspects of sustainability, with labour standards only one aspect of many that we need to consider.’
Yeah, sure, whatever.
The treatment of employees is bad enough – it rightly offends most people’s sense of justice and fair play. The issues, however, spill out of the workplace and into the larger economy. For instance, Boots is not just attacking its workforce – its attacking the Exchequer.
A full-time employee on the top of the scale is paying a little over €4,700 in income tax, PRSI and levies. In addition, employers’ pay a little over €2,900 in PRSI. The total benefit to the Exchequer is about €7,650.
If, however, Boots succeeds in cutting wages at the top of the scale, the benefit to the Exchequer falls by over €2,700. Even including the potential increase in corporate tax revenue (if Boots pays at the nominal 12.5 percent; it should be pointed out the real effective tax rate, when allowances and reliefs are included, is less), the net loss to the Exchequer would be over €2,100 for each Boots worker in this category. Now calculate the tax loss (and this doesn't count lost VAT revenue from reduced spending) from the full range of pay cuts that are being demanded from the 900+ employees in the chain.
The owners of Boots gets the gain; the workers – both in Boots and throughout the economy – take the pain.
And it doesn’t stop there. Staying with the full time Boots worker at the top of the pay scale, her/his disposable income would fall by nearly €40 per week. If we accept that most of this money would have been spent (those on low and average incomes have a higher propensity to spend, unlike those on higher incomes who have a higher propensity to save), then that’s money not flowing to the proverbial local shops.
Businesses reliant upon selling goods and services into the domestic economy will suffer a loss of turnover. Many of these businesses are genuinely in trouble. This decline in sales will hit them even harder with all the consequences this may hold: lower profits tax, reduced wages and/or hours, job losses: this is the deflationary process set in train by Boots. It’s not just their own workers who get slammed, it’s not just the Exchequer that gets hit – other businesses, their owners and workers, also suffer.
[Note: this is just one more example of why those economists who claim that wage cuts will automatically increase employment are wrong. The actions of Boots management is not about saving jobs, never mind creating more. It’s about enhancing profits for a private equity firm.]
That’s why the looming battle at Boots is not just a fight that only concerns those who work there. It’s our battle as well. It’s not just about ‘an injury to one is an injury to all’. This is a battle over public finances, this is a battle over economic growth, this is a battle over all our living standards.
That’s why, if the employees at Boots vote to take industrial action, they deserve our fullest support.
If you want to help create public support for the Boots workers – and hopefully force management to step back from their damaging course of action before it comes to industrial action – please spread the word.
You can circulate this e-card from Mandate to family, friends and work colleagues.
Cross-posted from Notes on the Front.
Let’s do some background. Over the summer Boots and the representatives of their employees – Mandate – met on a number of occasions to discuss a range of cost saving measures. In particular, management demanded:
• 15.5% wage reduction at the top scale of pay from €14.20 to €12 per hour
• 25% reduction in public holiday pay
• 25% reduction in Sunday Premiums
• Increased flexibility in weekend work for full time staff
Unsurprisingly, the negotiations didn’t go too well, especially given that Boots is a profitable enterprise. Mandate requested the company attend the Labour Relations Commission (LRC) to sort matters out. Suddenly, in August, Boots management wrote to the union stating that unless Mandate accepted the new pay and working conditions, Boots would terminate all existing collective agreements negotiated with the union over the past fifteen years. In addition, the management stated they would not attend the LRC. This action certainly wasn’t intended to build an atmosphere for constructive dialogue.
Eventually, management relented and attended the LRC with Mandate in October. However, such was their attitude, they might as well not. All they were prepared to do was remove the threat to the collective agreements if the union unconditionally accepted the new conditions of employment in full.
Currently, Mandate is balloting Boots employees for industrial action. The ballots will be counted on November 6th – ICTU’s National Day of Action.
It doesn’t get much worse than this. A full-time 39-hour per week employee at the top of the scale earns €28,800 – about 30 percent below the average industrial wage. Boots management is demanding a pay cut of nearly €4,500 a year. That’s savage. But Boots management isn’t just targeting those at the top of the scale – they’re demanding 25 percent cuts in holiday and Sunday pay for all employees.
This isn’t a company in trouble. In 2008, the Irish division in Boots earned €20 million in 2008 with current cash reserves in excess of €70 million. Worldwide, Alliance Boots posted an EBITDA of over £1 billion in March this year (that’s trading profit before depreciation and amortisation) while their underlying profit – excluding finance costs – is a healthy £236 million.
Okay, but what now? How has the recession and the decline in consumer spending affected Boots? Probably not much. The CSO’s Retail Sales Index shows all businesses suffering a drop of 7.5 percent in sales (from a 2005 base year). But sales in the Pharmaceuticals & Cosmetic Articles group have actually increased by 17.1 percent – the biggest increase of any retail grouping. That doesn’t’ necessarily mean that Boots turnover or profits have increased by that amount. But since it is a major player in this grouping, we shouldn’t be too surprised to see them staying relatively dry in this recessionary storm.
To be fair to Boots (which is owned by a private equity firm), they’re not just having a go at their own employees. They have recently withdrawn from the Ethical Trading Initiative, which was established 10 years ago to tackle the use of sweatshops in the developing world (members include, Tesco, Sainsbury's and Marks & Spencer to name a few). A Boots spokesperson explained their decision this way:
‘The reasoning for this is because it (the Ethical Trading Initiative) only concentrates on labour standards and at Boots we focus on all aspects of sustainability, with labour standards only one aspect of many that we need to consider.’
Yeah, sure, whatever.
The treatment of employees is bad enough – it rightly offends most people’s sense of justice and fair play. The issues, however, spill out of the workplace and into the larger economy. For instance, Boots is not just attacking its workforce – its attacking the Exchequer.
A full-time employee on the top of the scale is paying a little over €4,700 in income tax, PRSI and levies. In addition, employers’ pay a little over €2,900 in PRSI. The total benefit to the Exchequer is about €7,650.
If, however, Boots succeeds in cutting wages at the top of the scale, the benefit to the Exchequer falls by over €2,700. Even including the potential increase in corporate tax revenue (if Boots pays at the nominal 12.5 percent; it should be pointed out the real effective tax rate, when allowances and reliefs are included, is less), the net loss to the Exchequer would be over €2,100 for each Boots worker in this category. Now calculate the tax loss (and this doesn't count lost VAT revenue from reduced spending) from the full range of pay cuts that are being demanded from the 900+ employees in the chain.
The owners of Boots gets the gain; the workers – both in Boots and throughout the economy – take the pain.
And it doesn’t stop there. Staying with the full time Boots worker at the top of the pay scale, her/his disposable income would fall by nearly €40 per week. If we accept that most of this money would have been spent (those on low and average incomes have a higher propensity to spend, unlike those on higher incomes who have a higher propensity to save), then that’s money not flowing to the proverbial local shops.
Businesses reliant upon selling goods and services into the domestic economy will suffer a loss of turnover. Many of these businesses are genuinely in trouble. This decline in sales will hit them even harder with all the consequences this may hold: lower profits tax, reduced wages and/or hours, job losses: this is the deflationary process set in train by Boots. It’s not just their own workers who get slammed, it’s not just the Exchequer that gets hit – other businesses, their owners and workers, also suffer.
[Note: this is just one more example of why those economists who claim that wage cuts will automatically increase employment are wrong. The actions of Boots management is not about saving jobs, never mind creating more. It’s about enhancing profits for a private equity firm.]
That’s why the looming battle at Boots is not just a fight that only concerns those who work there. It’s our battle as well. It’s not just about ‘an injury to one is an injury to all’. This is a battle over public finances, this is a battle over economic growth, this is a battle over all our living standards.
That’s why, if the employees at Boots vote to take industrial action, they deserve our fullest support.
If you want to help create public support for the Boots workers – and hopefully force management to step back from their damaging course of action before it comes to industrial action – please spread the word.
You can circulate this e-card from Mandate to family, friends and work colleagues.
Cross-posted from Notes on the Front.
Prudence in the Face of the Unknown is Key
Stephen Kinsella: It is almost never correct to sacrifice a present benefit for a doubtful advantage in the future. Ireland's political classes understand this truism at the genetic level. In a world where less and less seems predictable, Ireland faces multiple uncertainties: we cannot afford to splurge on one by neglecting the other.
The coming budget will unhinge whatever remains of social partnership, and may even bring down the Government. The coming wave of mortgage defaults will ensure our banking system remains under extreme pressure and international scrutiny, no matter how well NAMA does or does not perform in cleaning up the balance sheets of recalcitrant banks. It is uncertain how many indigenous Irish businesses will weather the unprecedented economic storm they find themselves in, and what the resulting level of unemployment may be. The slow, but steady, international recovery may leave many parts of Irish society not directly tied to export industries behind. These are short-term concerns.
The negative social consequences of mass unemployment are starting to be felt. The cost to families and communities of increased domestic violence and criminality is incalculable. The security of every family against unnecessary hardship is an invisible social asset on which our culture is dependent: we don’t see this asset until it is gone. These are longer-term concerns.
In the midst of these uncertainties, the government must display prudence in the face of the unknown. Freeing up resources through increased efficiencies in the public sector will take time. One swipe of a pen can reduce incomes of public sector by thousands. A cut in public sector pay is inevitable. An increase in efficiency in the public sector—doing more with less—is not. Which course of action is more prudent, and which more likely to save taxpayers’ money in the long run?
In attempting to be prudent in some areas— fiscal policy, for one—the government may lose the good will of its citizens. By being extremely imprudent, in the cases of NAMA, the stalled reform of the taxation system, the crawl toward accountability, and most of all in a claw back of frontline public services, the government may damage the long run interests of its citizens.
The government has a duty to provide the highest standard of living for its citizens the nation can afford. That appears to be at 2003 levels of income at the moment. Our spending remains at 2009 levels. Prudence dictates the most likely course of action for the government in the coming budget. Actions are not without consequences, however, and a prudent public will do well to remember the choices made on their behalf come election time.
The coming budget will unhinge whatever remains of social partnership, and may even bring down the Government. The coming wave of mortgage defaults will ensure our banking system remains under extreme pressure and international scrutiny, no matter how well NAMA does or does not perform in cleaning up the balance sheets of recalcitrant banks. It is uncertain how many indigenous Irish businesses will weather the unprecedented economic storm they find themselves in, and what the resulting level of unemployment may be. The slow, but steady, international recovery may leave many parts of Irish society not directly tied to export industries behind. These are short-term concerns.
The negative social consequences of mass unemployment are starting to be felt. The cost to families and communities of increased domestic violence and criminality is incalculable. The security of every family against unnecessary hardship is an invisible social asset on which our culture is dependent: we don’t see this asset until it is gone. These are longer-term concerns.
In the midst of these uncertainties, the government must display prudence in the face of the unknown. Freeing up resources through increased efficiencies in the public sector will take time. One swipe of a pen can reduce incomes of public sector by thousands. A cut in public sector pay is inevitable. An increase in efficiency in the public sector—doing more with less—is not. Which course of action is more prudent, and which more likely to save taxpayers’ money in the long run?
In attempting to be prudent in some areas— fiscal policy, for one—the government may lose the good will of its citizens. By being extremely imprudent, in the cases of NAMA, the stalled reform of the taxation system, the crawl toward accountability, and most of all in a claw back of frontline public services, the government may damage the long run interests of its citizens.
The government has a duty to provide the highest standard of living for its citizens the nation can afford. That appears to be at 2003 levels of income at the moment. Our spending remains at 2009 levels. Prudence dictates the most likely course of action for the government in the coming budget. Actions are not without consequences, however, and a prudent public will do well to remember the choices made on their behalf come election time.
Wednesday, 21 October 2009
Shock News: The entire €4bn fiscal adjustment goes to just one Zombie Bank
Slí Eile: The next time you hear a politician or economist saying that our current public borrowing deficit ‘has nothing to do with NAMA’ show them the Red Card as follows:
Department of Finance Press Release 2 October 2009
It reads:
At end-September 2009, the Exchequer deficit is €20,158 million, compared to €9,404 million at end-September last year. The year-on-year deterioration in the deficit of some €10.8 billion is primarily explained by a decline in tax receipts of €4.8 billion, the €4 billion payment to Anglo Irish Bank and €1.7 billion in respect of the frontloading of the annual contribution to the National Pensions Reserve Fund (NPRF).
Non-voted capital expenditure at end-September was €7,026 million. This compares to €1,270 million in the same period of last year. The year-on-year increase is due to the payment of €4 billion to Anglo Irish Bank in 2009 and the increase of €1.7 billion in the payment to the NPRF (a total of €3 billion has been paid to the NPRF in 2009 as part of the bank recapitalisation programme, at this stage last year some €1.3 billion had been transferred to the NPRF).
In plain English what this means is that the infamous €400m a week that we are borrowing is associated with payments to Anglo-Irish and the collapse in tax receipts (which in turn is greatly exacerbated by the bursting of the banks-induced property bubble over the decade to 2008).
The astonishing conclusion to be drawn is that the €4bn payment to the zombie Anglo – a bank that is very unlikely to serve a useful social role by way of lending ever again – earlier this year matches exactly the estimated ‘fiscal adjustment’ proposed in the December 2010. So, welfare recipients, children waiting for CF treatment, public sector workers etc are directly paying money to a zombie bank. And that’s not all. We have another major bank or two waiting in the wings for fresh recapitalistion and possible State takeover if that doesn’t work (which it probably will not in the case of AIB).
The other interesting twist to this sorry tale is that Eurostat have just ruled that money borrowed by the commercial banks from the European Central Bank will not be counted as national debt. This is off-balance sheet borrowing on a massive scale (up to €54bn in bond issues used as collateral by the commercial banks in exchange for capital from the ECB) which will not be counted in that terrifying figure of €400 million a week paraded, daily, in the media.
So, there is one solution for the banks (borrow up to 33% of annual GDP and divert €4bn of precious tax payer money as ‘cash for trash’) and one solution for the rest of us who use public services (must cut back to level of taxes available we are told).
There are three fundamental problems with this strategy and mindset:
1 It is completely unethical to condemn this generation and the next to a massive bail out of bankers, some developers (more than we thought judging by the proposed seed of repayment in the NAMA business plan) and a few politicians who would rather face the electorate later rather than sooner.
2 The clumsy and reckless NAMA solution (described less charitably by Joseph Stiglitz) is very unlikely to achieve its aim of cleaning bank sheets and freeing up credit
3 Deflation won’t work – with an additional deflationary shock in store this December – retail sales in the domestic market together with tax receipts from income and consumption are likely to continue falling and pressure on welfare payments will mount (even if rates are cut) because more and more people will require medical cards, ‘back-to-school’ allowances and other services.
For every person made unemployed as a result of fiscal contraction there is a direct financial cost of some €20,000 per annum in addition to other costs associated with health, housing and education public spending. Not to mention the profound impact on personal and community health and well-being – especially for a new generation that expected more than the Celtic Tiger could promise.
Instead of wage cuts we need to hold the real value of wages for most workers – to do otherwise is to add to the deflationary spiral;
Instead of cuts in welfare to the old, the sick and those not in the labour force we need cuts in welfare to those big cats who played – recklessly – by the rules of capitalism only to be compensated, rewarded and bailed out by Government in a massive exercise of risk-socialisation (essentially Government has nationalised risk in the banking sector and privitised most of the gains to be had from any partial recovery in asset prices in the future).
Instead of cuts in public expenditure we need redirection of spending from unfair subsidies and waste to areas of greatest need (early childhood, social housing and community health services)
Instead of retrenchment in public services we need to expansion to prepare Ireland for the eventual upswing
Instead of no hope and no-other-way mindsets we need to let loose a new wave of entrepreneurs, thinkers and leaders in the public, private and voluntary sectors less oriented to short-term gain, position or income/profit maximisation.
Department of Finance Press Release 2 October 2009
It reads:
At end-September 2009, the Exchequer deficit is €20,158 million, compared to €9,404 million at end-September last year. The year-on-year deterioration in the deficit of some €10.8 billion is primarily explained by a decline in tax receipts of €4.8 billion, the €4 billion payment to Anglo Irish Bank and €1.7 billion in respect of the frontloading of the annual contribution to the National Pensions Reserve Fund (NPRF).
Non-voted capital expenditure at end-September was €7,026 million. This compares to €1,270 million in the same period of last year. The year-on-year increase is due to the payment of €4 billion to Anglo Irish Bank in 2009 and the increase of €1.7 billion in the payment to the NPRF (a total of €3 billion has been paid to the NPRF in 2009 as part of the bank recapitalisation programme, at this stage last year some €1.3 billion had been transferred to the NPRF).
In plain English what this means is that the infamous €400m a week that we are borrowing is associated with payments to Anglo-Irish and the collapse in tax receipts (which in turn is greatly exacerbated by the bursting of the banks-induced property bubble over the decade to 2008).
The astonishing conclusion to be drawn is that the €4bn payment to the zombie Anglo – a bank that is very unlikely to serve a useful social role by way of lending ever again – earlier this year matches exactly the estimated ‘fiscal adjustment’ proposed in the December 2010. So, welfare recipients, children waiting for CF treatment, public sector workers etc are directly paying money to a zombie bank. And that’s not all. We have another major bank or two waiting in the wings for fresh recapitalistion and possible State takeover if that doesn’t work (which it probably will not in the case of AIB).
The other interesting twist to this sorry tale is that Eurostat have just ruled that money borrowed by the commercial banks from the European Central Bank will not be counted as national debt. This is off-balance sheet borrowing on a massive scale (up to €54bn in bond issues used as collateral by the commercial banks in exchange for capital from the ECB) which will not be counted in that terrifying figure of €400 million a week paraded, daily, in the media.
So, there is one solution for the banks (borrow up to 33% of annual GDP and divert €4bn of precious tax payer money as ‘cash for trash’) and one solution for the rest of us who use public services (must cut back to level of taxes available we are told).
There are three fundamental problems with this strategy and mindset:
1 It is completely unethical to condemn this generation and the next to a massive bail out of bankers, some developers (more than we thought judging by the proposed seed of repayment in the NAMA business plan) and a few politicians who would rather face the electorate later rather than sooner.
2 The clumsy and reckless NAMA solution (described less charitably by Joseph Stiglitz) is very unlikely to achieve its aim of cleaning bank sheets and freeing up credit
3 Deflation won’t work – with an additional deflationary shock in store this December – retail sales in the domestic market together with tax receipts from income and consumption are likely to continue falling and pressure on welfare payments will mount (even if rates are cut) because more and more people will require medical cards, ‘back-to-school’ allowances and other services.
For every person made unemployed as a result of fiscal contraction there is a direct financial cost of some €20,000 per annum in addition to other costs associated with health, housing and education public spending. Not to mention the profound impact on personal and community health and well-being – especially for a new generation that expected more than the Celtic Tiger could promise.
Instead of wage cuts we need to hold the real value of wages for most workers – to do otherwise is to add to the deflationary spiral;
Instead of cuts in welfare to the old, the sick and those not in the labour force we need cuts in welfare to those big cats who played – recklessly – by the rules of capitalism only to be compensated, rewarded and bailed out by Government in a massive exercise of risk-socialisation (essentially Government has nationalised risk in the banking sector and privitised most of the gains to be had from any partial recovery in asset prices in the future).
Instead of cuts in public expenditure we need redirection of spending from unfair subsidies and waste to areas of greatest need (early childhood, social housing and community health services)
Instead of retrenchment in public services we need to expansion to prepare Ireland for the eventual upswing
Instead of no hope and no-other-way mindsets we need to let loose a new wave of entrepreneurs, thinkers and leaders in the public, private and voluntary sectors less oriented to short-term gain, position or income/profit maximisation.
Will there be a NAMA for personal debt?
Stephen Kinsella: No. The National Asset Management Agency, NAMA, is designed to remove the ‘impaired loans’ generated by excessive lending to the construction industry. NAMA will exchange bonds, backed by the taxpayer, for these impaired loans. The ECB will exchange the bonds for cash, injecting liquidity into the banking system and, so the story goes, getting banks lending again.
I don’t believe that NAMA in its current form will get banks lending again. Even if NAMA’s critics are 100% wrong, and NAMA succeeds brilliantly, bankers know that another set of ‘impaired loans’ are on the way, and so banks won’t lend into the `real’ economy — to businesses and households — at reasonable rates of interest, because they expect that householders will begin to default en masse. NAMA will fail in its primary objective of ‘getting the banks lending again’.
When interest rates go up, as the European economy recovers, many households now barely making their monthly mortgage repayment will find themselves having to restructure their mortgages, or default entirely. What’s going to happen when thousands of homeowners throw their keys back over the bankers’ desks?
Banks, through the courts, have a set of processes for dealing with the painful processes of individual mortgage defaults. There is no process for dealing with hundreds, and perhaps thousands, of mortgage defaults in a short space of time. Banks will be left with large swathes of bad debt, and will come looking for taxpayer assistance again if they can’t raise funds on the interbank market to cover their losses. We will be back to square one, needing a NAMA 2.
Why?
Like banks, individual households are highly leveraged, meaning the ratio of their debt to their equity (for most people, their home) is large. The recent Law Commission report puts the ratio of household debt to disposable income at 176%. Just for this reason alone, the probability of large-scale household default is very high. There are other reasons to be concerned about household debt however.
First, the current level of mortgage repayment is low, because of historically low ECB interest rates. Mortgage repayments must, as I’ve mentioned, rise as the EU economy improves in the coming eighteen months and the ECB increases interest rates.
Second, the Central Bank forecasts unemployment to rise to 14%, and perhaps above 14%, in 2010. More and more households will therefore be unable to meet their mortgage payments.
Third, a recent study by David Duffy of the ESRI puts the number of homes in negative equity at 196,000 homes, implying the pool of potential defaulters is large.
To get a very rough sense of the scale of the problem, multiply the 196,000 homes in negative equity by the average mortgage price of a home today, around €235,260. We have €46,110,960,000 of potential bad debts for banks, just from this pool alone. 46 billion euros. If even 15 or 20% of those homes, and only those homes, default, we have another banking crisis, because banks won’t have the capital to absorb so much bad personal debt at once.
Will there be a NAMA 2 for personal and household debt? Can banks and the government devise a formula to forgive part of the principal for homeowners, and absorb the losses partially through a combination of blanket restructuring, debt-equity swops, swift personal bankruptcy processes, and refinancing? I don’t think the combination of financial and regulatory innovation under political pressure is beyond our leaders, but it does seem like a lot to ask for, considering the NAMA 1 money will be well and truly spent in 18 months’ time, and Ireland’s national debt may be as high as 120% of its national output.
I don’t believe that NAMA in its current form will get banks lending again. Even if NAMA’s critics are 100% wrong, and NAMA succeeds brilliantly, bankers know that another set of ‘impaired loans’ are on the way, and so banks won’t lend into the `real’ economy — to businesses and households — at reasonable rates of interest, because they expect that householders will begin to default en masse. NAMA will fail in its primary objective of ‘getting the banks lending again’.
When interest rates go up, as the European economy recovers, many households now barely making their monthly mortgage repayment will find themselves having to restructure their mortgages, or default entirely. What’s going to happen when thousands of homeowners throw their keys back over the bankers’ desks?
Banks, through the courts, have a set of processes for dealing with the painful processes of individual mortgage defaults. There is no process for dealing with hundreds, and perhaps thousands, of mortgage defaults in a short space of time. Banks will be left with large swathes of bad debt, and will come looking for taxpayer assistance again if they can’t raise funds on the interbank market to cover their losses. We will be back to square one, needing a NAMA 2.
Why?
Like banks, individual households are highly leveraged, meaning the ratio of their debt to their equity (for most people, their home) is large. The recent Law Commission report puts the ratio of household debt to disposable income at 176%. Just for this reason alone, the probability of large-scale household default is very high. There are other reasons to be concerned about household debt however.
First, the current level of mortgage repayment is low, because of historically low ECB interest rates. Mortgage repayments must, as I’ve mentioned, rise as the EU economy improves in the coming eighteen months and the ECB increases interest rates.
Second, the Central Bank forecasts unemployment to rise to 14%, and perhaps above 14%, in 2010. More and more households will therefore be unable to meet their mortgage payments.
Third, a recent study by David Duffy of the ESRI puts the number of homes in negative equity at 196,000 homes, implying the pool of potential defaulters is large.
To get a very rough sense of the scale of the problem, multiply the 196,000 homes in negative equity by the average mortgage price of a home today, around €235,260. We have €46,110,960,000 of potential bad debts for banks, just from this pool alone. 46 billion euros. If even 15 or 20% of those homes, and only those homes, default, we have another banking crisis, because banks won’t have the capital to absorb so much bad personal debt at once.
Will there be a NAMA 2 for personal and household debt? Can banks and the government devise a formula to forgive part of the principal for homeowners, and absorb the losses partially through a combination of blanket restructuring, debt-equity swops, swift personal bankruptcy processes, and refinancing? I don’t think the combination of financial and regulatory innovation under political pressure is beyond our leaders, but it does seem like a lot to ask for, considering the NAMA 1 money will be well and truly spent in 18 months’ time, and Ireland’s national debt may be as high as 120% of its national output.
The view from abroad: NAMA
"Two of the world's leading economists today fundamentally differed in their views on the Irish government's NAMA plans.
Nouriel Roubini, Professor of Economics, Stern School of Business NYU, and Willem Buiter, Professor of political economy, London School of Economics, have both today come out with opposing views on the Irish Government's plan to address the financial crisis and the deflation of the property bubble through the setting up of NAMA." Click here for the full story.
Nouriel Roubini, Professor of Economics, Stern School of Business NYU, and Willem Buiter, Professor of political economy, London School of Economics, have both today come out with opposing views on the Irish Government's plan to address the financial crisis and the deflation of the property bubble through the setting up of NAMA." Click here for the full story.
Tuesday, 20 October 2009
Dental practices
Sara Burke - known to readers of Progressive Economy - has a two-part story in today's Irish Times Health Supplement in which she reveals that 'fraudulent and inappropriate'claims by dentists participating in the Dental Treatment Services Scheme could cost at least €8 million this year. You can read the full story here and here.
How much does the State spend as a percentage of GDP?
Slí Eile: Earlier this month, at a conference of the National Economic and Social Council, Joseph Stiglitz warned against a single-minded focus on reducing public liabilities at the cost of public assets. There is an assumption abroad (in Ireland at least) that we are ‘living beyond our means’ and ‘unless we cut public spending the consequences will be terrible’. I would be surprised if a majority of persons who think much about these issues, and follow them in the media and in casual conversation, would disagree with the line that says ‘you can’t continue borrowing that amount – €400 m a week or €21bn a year (and rising)’ ‘We are borrowing to pay for 2008 public services with 2004 taxes – 5 into 3 won’t go’ ‘you can’t raise taxes much any more – businesses and hard-earning tax payers are being hammered’ ‘you will scare foreign investors and market sentiment’ ‘we have to take the pain and do our bit to get the country moving’.
None of these popular sayings have anything directly to do with recovery or job creation. Rather, they concern one issue only – ‘the country is bankrupt – we have to sort out our public finances’. By implication this equates to saying ‘we first have to sort out public finances (and banking) BEFORE we can deal with the job crisis. Indeed, many commentators will add ‘by cutting public spending and keeping a lid on taxes we can help the traded sectors of the economy to price themselves back into world markets – the main basis on which Ireland inc can grow again’.
But, will ‘adjusting’ for €4bn in the coming budget achieve its desired goal? Michael Taft has already demonstrated that public deflation will not achieve the single-minded aim of reducing public borrowing by anything other than a very modest amount. I will not repeat the analysis which can be found here.
In short, cutting public spending – especially when targeted on low to mid-income public servants (believe it or not, there are some) and social welfare recipients – will further reduce tax receipts (other things constant) and add to the volume of social welfare payments (other things constant). The fall in retail sales and tax receipts commented on this blog site is connected to the strongly deflationary impulse of the December 2008 and April 2009 budgets. The extent of the impact is unknown and would be interesting to model, empirically, if the latest data and will were there to do it.
One element missing from the debate is a consideration of the following question:
During these traumatic and uncertain times what level of public services is desirable and attainable on various assumptions and scenarios?
So, are we spending too much on public assets?
Using the latest National Accounts data for 2007 (yes) from the CSO National Income and Expenditure 2008, total spending (current and capital) by Government (central and local) was €73.8bn in 2007. This represented about 38.9% of GDP in that year – the height of the boom. Unfortunately, for some reason, it is very difficult to get a comparable estimate of total public spending in 2008 and projected for 2009. The April Supplementary Budget contained a Macroeconomic and Fiscal Framework. Table 7 in that document sets out total projected current and capital spending for 2009 (but not earlier years) and subsequent years. The total of gross current and gross capital spending (before deduction of receipts in each case) comes to €73.6bn in 2009. This latter figure is unlikely to be directly comparable with the National Accounts figure for 2007.
Taking total projected gross spending in 2009 and dividing by GDP in 2009 (using the latest ESRI forecast), you get an estimate of just 45% of GDP. Something akin to this figure has been used by economists such as Colm McCarthy. For example, An Bord Snip Nua reported (page 2) that:
In 2009, gross voted current spending (not including Central Fund expenditure such as debt service costs) will absorb 39.3% of likely GNP, the highest figure since 1983. Total Government spending (the current voted spending figure, plus debt servicing and other Central Fund expenditure, as well as Exchequer capital which includes the payment to the NPRF) will absorb 51.1% of GNP, the highest figure since 1987.
This claim has gone unchallenged and, in the absence of an explanation about how Bord Snip arrived at this estimate, we have to caution against any conclusion that public spending has jumped from about 39% of GDP in 2007 to 51% in 2009. Included in the 51% figure is the pre-payment of some €1.5bn to the National Pension Reserve Fund.
In the absence of reliable and up to date estimates of national and public accounts, the simplest approach is to add up receipts (which are easier to quantify) and then add an estimate for total borrowing in 2009. Social Justice Ireland have estimated that total income including taxes, social insurance, local government receipts will come to €47bn in 2009. If this comes to pass, it would represent 28.7% of GDP (SJI are using a higher GDP estimate to arrive at a slightly lower estimate of 27.4%)
If total borrowing comes to about €22bn in 2009 – as many commentators now expect - then total spending in 2009 is likely to be somewhere in the region of €69bn (current and capital, local and central). That would give a total public spend of very roughly 42% of GDP. I will settle for that estimate in the absence of any better data (readers may point to better estimates somewhere).
42% - sounds like a lot. It is certainly the case that some areas of public spending continue to grow – higher social welfare costs associated with growing unemployment, the cost of the pay increases across the public sector in September 2008, the impact of rising population on health and education services etc. Set against a collapse in GDP (and a spectacular one for any industrialised country since the 1930s), a significant rise in public spending as a percentage of GDP is not unexpected.
How do we close the gap between 42% and 29% (for total receipts of various kinds)? Bearing in mind that GDP will contract by a further 3% at least in 2010 (and arising from this more unemployed and more social welfare payments at current rates of payment), the challenge for any administration is to significantly raise receipts without further deflating the economy, and continue to borrow to cover those components of the deficit that correspond to (i) capital investment (for which money is usually borrowed anyway, even in good times – roughly €10bn per April figures), (ii) current spending and tax shortfalls associated with the downturn (welfare payments and reduced tax receipts) – estimates vary but could be €6bn. The remaining gap could be in the order of €6-7bn – the structural element. I think that there is a case for continuing to run a deficit of about €15bn per annum – or about 10% of GDP in 2010 - while re-targetting public spending on job-creating and job-retaining projects and maintaining the real values of social welfare payments (any short-term gains made as a result of modest HCIP falls in 2008-09 are more than cancelled out by reductions in wider social provision, plus likely impending price increases in 2011 as prices recover). The ‘structural gap’ of some €7bn needs to be tackled through a combination of measures:
Capital taxes
Income tax base widening
Tax-relief reductions (especially the most inequitable)
Local taxes
Income tax surcharges on very high incomes
Corporate tax increases to 15% and pegged for 5 years.
Yet again, we hear the often repeated claim that the yawning public sector deficit has nothing to do with the banks and NAMA. For one thing, we would not be as much in this mess were it not for the banks (thanks for the apologies emanating from Kenmare). In the second place, the recapitalisation cost of the banks is exacting its own ‘opportunity cost’ on public finances. Don’t take my word for it. The Department of Finance has revealed that:
At end-September 2009, the Exchequer deficit is €20,158 million, compared to €9,404 million at end-September last year. The year-on-year deterioration in the deficit of some €10.8 billion is primarily explained by a decline in tax receipts of €4.8 billion, the €4 billion payment to Anglo Irish Bank and €1.7 billion in respect of the frontloading of the annual contribution to the National Pensions Reserve Fund (NPRF).
A parting thought - now, suppose that the world is headed towards a double-dip recession with a downward shock to world trade and sovereign defaults spreading across Europe – what would that mean for Irish exports, for Irish tax receipts from VAT and income – and for public spending on education, health and social welfare? However unlikely such a doomsday scenario looks, it is worth bringing together a number of ‘what if’ scenarios ranging from rapid economic recovery from 2010 onwards to double-dip world slump in 2010 (and L-shaped recession for Ireland which I think is the more likely as our key trading partners pull out of recession next year and we are left to clean up on debt, NAMA and the prolonged deflationary impact of Budgets 2008-2010 and beyond).
It is not a pretty sight and nobody knows for sure what is going to happen next. Not good for confidence, trust, and job-creating investment and consumption.
We need a change of direction politically. All this deflation stuff is not good.
None of these popular sayings have anything directly to do with recovery or job creation. Rather, they concern one issue only – ‘the country is bankrupt – we have to sort out our public finances’. By implication this equates to saying ‘we first have to sort out public finances (and banking) BEFORE we can deal with the job crisis. Indeed, many commentators will add ‘by cutting public spending and keeping a lid on taxes we can help the traded sectors of the economy to price themselves back into world markets – the main basis on which Ireland inc can grow again’.
But, will ‘adjusting’ for €4bn in the coming budget achieve its desired goal? Michael Taft has already demonstrated that public deflation will not achieve the single-minded aim of reducing public borrowing by anything other than a very modest amount. I will not repeat the analysis which can be found here.
In short, cutting public spending – especially when targeted on low to mid-income public servants (believe it or not, there are some) and social welfare recipients – will further reduce tax receipts (other things constant) and add to the volume of social welfare payments (other things constant). The fall in retail sales and tax receipts commented on this blog site is connected to the strongly deflationary impulse of the December 2008 and April 2009 budgets. The extent of the impact is unknown and would be interesting to model, empirically, if the latest data and will were there to do it.
One element missing from the debate is a consideration of the following question:
During these traumatic and uncertain times what level of public services is desirable and attainable on various assumptions and scenarios?
So, are we spending too much on public assets?
Using the latest National Accounts data for 2007 (yes) from the CSO National Income and Expenditure 2008, total spending (current and capital) by Government (central and local) was €73.8bn in 2007. This represented about 38.9% of GDP in that year – the height of the boom. Unfortunately, for some reason, it is very difficult to get a comparable estimate of total public spending in 2008 and projected for 2009. The April Supplementary Budget contained a Macroeconomic and Fiscal Framework. Table 7 in that document sets out total projected current and capital spending for 2009 (but not earlier years) and subsequent years. The total of gross current and gross capital spending (before deduction of receipts in each case) comes to €73.6bn in 2009. This latter figure is unlikely to be directly comparable with the National Accounts figure for 2007.
Taking total projected gross spending in 2009 and dividing by GDP in 2009 (using the latest ESRI forecast), you get an estimate of just 45% of GDP. Something akin to this figure has been used by economists such as Colm McCarthy. For example, An Bord Snip Nua reported (page 2) that:
In 2009, gross voted current spending (not including Central Fund expenditure such as debt service costs) will absorb 39.3% of likely GNP, the highest figure since 1983. Total Government spending (the current voted spending figure, plus debt servicing and other Central Fund expenditure, as well as Exchequer capital which includes the payment to the NPRF) will absorb 51.1% of GNP, the highest figure since 1987.
This claim has gone unchallenged and, in the absence of an explanation about how Bord Snip arrived at this estimate, we have to caution against any conclusion that public spending has jumped from about 39% of GDP in 2007 to 51% in 2009. Included in the 51% figure is the pre-payment of some €1.5bn to the National Pension Reserve Fund.
In the absence of reliable and up to date estimates of national and public accounts, the simplest approach is to add up receipts (which are easier to quantify) and then add an estimate for total borrowing in 2009. Social Justice Ireland have estimated that total income including taxes, social insurance, local government receipts will come to €47bn in 2009. If this comes to pass, it would represent 28.7% of GDP (SJI are using a higher GDP estimate to arrive at a slightly lower estimate of 27.4%)
If total borrowing comes to about €22bn in 2009 – as many commentators now expect - then total spending in 2009 is likely to be somewhere in the region of €69bn (current and capital, local and central). That would give a total public spend of very roughly 42% of GDP. I will settle for that estimate in the absence of any better data (readers may point to better estimates somewhere).
42% - sounds like a lot. It is certainly the case that some areas of public spending continue to grow – higher social welfare costs associated with growing unemployment, the cost of the pay increases across the public sector in September 2008, the impact of rising population on health and education services etc. Set against a collapse in GDP (and a spectacular one for any industrialised country since the 1930s), a significant rise in public spending as a percentage of GDP is not unexpected.
How do we close the gap between 42% and 29% (for total receipts of various kinds)? Bearing in mind that GDP will contract by a further 3% at least in 2010 (and arising from this more unemployed and more social welfare payments at current rates of payment), the challenge for any administration is to significantly raise receipts without further deflating the economy, and continue to borrow to cover those components of the deficit that correspond to (i) capital investment (for which money is usually borrowed anyway, even in good times – roughly €10bn per April figures), (ii) current spending and tax shortfalls associated with the downturn (welfare payments and reduced tax receipts) – estimates vary but could be €6bn. The remaining gap could be in the order of €6-7bn – the structural element. I think that there is a case for continuing to run a deficit of about €15bn per annum – or about 10% of GDP in 2010 - while re-targetting public spending on job-creating and job-retaining projects and maintaining the real values of social welfare payments (any short-term gains made as a result of modest HCIP falls in 2008-09 are more than cancelled out by reductions in wider social provision, plus likely impending price increases in 2011 as prices recover). The ‘structural gap’ of some €7bn needs to be tackled through a combination of measures:
Capital taxes
Income tax base widening
Tax-relief reductions (especially the most inequitable)
Local taxes
Income tax surcharges on very high incomes
Corporate tax increases to 15% and pegged for 5 years.
Yet again, we hear the often repeated claim that the yawning public sector deficit has nothing to do with the banks and NAMA. For one thing, we would not be as much in this mess were it not for the banks (thanks for the apologies emanating from Kenmare). In the second place, the recapitalisation cost of the banks is exacting its own ‘opportunity cost’ on public finances. Don’t take my word for it. The Department of Finance has revealed that:
At end-September 2009, the Exchequer deficit is €20,158 million, compared to €9,404 million at end-September last year. The year-on-year deterioration in the deficit of some €10.8 billion is primarily explained by a decline in tax receipts of €4.8 billion, the €4 billion payment to Anglo Irish Bank and €1.7 billion in respect of the frontloading of the annual contribution to the National Pensions Reserve Fund (NPRF).
A parting thought - now, suppose that the world is headed towards a double-dip recession with a downward shock to world trade and sovereign defaults spreading across Europe – what would that mean for Irish exports, for Irish tax receipts from VAT and income – and for public spending on education, health and social welfare? However unlikely such a doomsday scenario looks, it is worth bringing together a number of ‘what if’ scenarios ranging from rapid economic recovery from 2010 onwards to double-dip world slump in 2010 (and L-shaped recession for Ireland which I think is the more likely as our key trading partners pull out of recession next year and we are left to clean up on debt, NAMA and the prolonged deflationary impact of Budgets 2008-2010 and beyond).
It is not a pretty sight and nobody knows for sure what is going to happen next. Not good for confidence, trust, and job-creating investment and consumption.
We need a change of direction politically. All this deflation stuff is not good.
Monday, 19 October 2009
Guest post by Stephen Kinsella: NAMA will not get banks lending again
Stephen Kinsella: The primary objective of the National Asset Management Agency is to increase the flow of credit to the ‘real’ economy — that’s you and me, homes and businesses — by clearing banks’ balance sheets of ‘impaired’ assets. The story goes that these assets reduce the banks’ abilities to borrow on the interbank lending market, choking the banks of the necessary funds to lend out to small and medium businesses. Starved of capital, the businesses fold, and people are made unemployed; economy and society generally suffer.
The ‘impaired’ assets to be bought by NAMA are to be seen as the dam obstructing the flow of capital to these businesses, and their removal will start the process of lending by our retail banks off again.
This logic is flawed.
The cleansed banks will not begin lending once the transfer of loans to NAMA is complete, and NAMA’s bonds are swopped for ECB cash. Even completely cleansed banks are not enough to restore lending to previous levels for several reasons.
First, we are in a completely different business environment. Banks as for-profit going concerns are right not to lend to prospective borrowers whose businesses are too risky: that behaviour would throw away the cash NAMA just gave the banks.
Second, banks debt in relation to their equity—their leverage—is too high, meaning they need to pay down their debts quickly, and cannot do so while lending out more money, which would perforce increase their debt.
Third, despite evidence to the contrary, bankers are smart people. Bankers understand instinctively that the level of uncertainty in the economic system is very high, so they will try to increase their cash balances to compensate for that reduction in certainty. As JM Keynes once wrote: “The possession of actual money lulls our disquietude, and the premium which we require to make us part with money is the measure of the degree of our disquietude”. Our bankers now have a ‘liquidity preference’ for cash, meaning we won’t see increased lending to the real economy at reasonable rates of interest. Banks can always manage to lend at unreasonable rates of interest, but that doesn’t help the real economy.
Fourth, all our bankers understand that even if NAMA succeeds brilliantly, beyond even its greatest supporters’ dreams, their balance sheets contain another ticking time bomb: the coming implosion of the Irish residential mortgage market. The ECB will increase its interest rates in the coming year. When hundreds, and perhaps thousands, of homeowners throw their keys back in the bankers’ faces, and create another slew of bad debt to be mopped up, the bankers know they will need cash waiting to cover these bad debts, in addition to another bailout from the taxpayer.
Banks will not lend to risky propositions in riskier times when their balance sheets (and their fiduciary duty) is to deleverage. The bankers will wisely sit on the cash we will have injected into their balance sheets, and wait until the time is right to call for more.
It is now a foregone conclusion that NAMA will be brought in. NAMA’s basic form is unalloyed by months of intense public debate on the merits and demerits of this ‘bad bank’. Given that NAMA will not meet its objective to increase lending to the real economy, we must urgently consider major modifications to NAMA as it moves through the committee phase toward its eventual implementation.
Dr. Stephen Kinsella is a Lecturer in Economics at the University of Limerick and author of Ireland in 2050: How Will We be Living? (Liberties Press)
The ‘impaired’ assets to be bought by NAMA are to be seen as the dam obstructing the flow of capital to these businesses, and their removal will start the process of lending by our retail banks off again.
This logic is flawed.
The cleansed banks will not begin lending once the transfer of loans to NAMA is complete, and NAMA’s bonds are swopped for ECB cash. Even completely cleansed banks are not enough to restore lending to previous levels for several reasons.
First, we are in a completely different business environment. Banks as for-profit going concerns are right not to lend to prospective borrowers whose businesses are too risky: that behaviour would throw away the cash NAMA just gave the banks.
Second, banks debt in relation to their equity—their leverage—is too high, meaning they need to pay down their debts quickly, and cannot do so while lending out more money, which would perforce increase their debt.
Third, despite evidence to the contrary, bankers are smart people. Bankers understand instinctively that the level of uncertainty in the economic system is very high, so they will try to increase their cash balances to compensate for that reduction in certainty. As JM Keynes once wrote: “The possession of actual money lulls our disquietude, and the premium which we require to make us part with money is the measure of the degree of our disquietude”. Our bankers now have a ‘liquidity preference’ for cash, meaning we won’t see increased lending to the real economy at reasonable rates of interest. Banks can always manage to lend at unreasonable rates of interest, but that doesn’t help the real economy.
Fourth, all our bankers understand that even if NAMA succeeds brilliantly, beyond even its greatest supporters’ dreams, their balance sheets contain another ticking time bomb: the coming implosion of the Irish residential mortgage market. The ECB will increase its interest rates in the coming year. When hundreds, and perhaps thousands, of homeowners throw their keys back in the bankers’ faces, and create another slew of bad debt to be mopped up, the bankers know they will need cash waiting to cover these bad debts, in addition to another bailout from the taxpayer.
Banks will not lend to risky propositions in riskier times when their balance sheets (and their fiduciary duty) is to deleverage. The bankers will wisely sit on the cash we will have injected into their balance sheets, and wait until the time is right to call for more.
It is now a foregone conclusion that NAMA will be brought in. NAMA’s basic form is unalloyed by months of intense public debate on the merits and demerits of this ‘bad bank’. Given that NAMA will not meet its objective to increase lending to the real economy, we must urgently consider major modifications to NAMA as it moves through the committee phase toward its eventual implementation.
Dr. Stephen Kinsella is a Lecturer in Economics at the University of Limerick and author of Ireland in 2050: How Will We be Living? (Liberties Press)
Wages, cuts and effects
Under the headline 'Wage cuts: road to recovery or path to prolonged slump?', the Irish Times today features a debate between IBEC's David Croughan and Paul Sweeney, Economic Advisor to ICTU (and blogger of this parish). You can read both articles here.
Tax outturn: you read it first here
An Saoi: The Sunday Business Post’s front page tells us that the Government are expecting tax to be nearly €3,000M short in the current year.
This figure, of course, has been known to readers of Progressive Economy for some time. For example, you were informed here after the publication of the September figures, here after the publication of the August figures, or even here after the publication of the July figures. Having thrown all modesty out the window, you can further check out previous musings on the subject for the June figures, May and finally April. May I tell the Dept of Finance that I am using nothing more than a standard spreadsheet, no complex economic models and it consistently produces figures that are closer to outturn than theirs.
A secondary problem has now developed in tax collection, apart from the economic collapse. Many previously compliant taxpayers are pleading inability to pay, and current arrears are increasing rapidly. While the Revenue branch of the AHCPS has pointed this out regularly, the union’s members in Dept. of Finance didn’t bother to listen. On 3rd October I wrote the following on this site,
“Non-payment of taxes looks to me to be as another major component in the decline in tax yield. The Revenue branch of the AHCPS has made this clear to its own union and to other members of Congress that non-payment of declared liabilities is a huge issue. This suggests to me that the underlying state of Irish business is perhaps even worse than is being suggested. A business, which owes more than a few months tax is unlikely to survive.”
On the 10th August,
“Outside of workers with multi-nationals and in the Public Service, very little Income Tax is being paid. Tax may be deducted by many employers, but the union representing Tax Inspectors suggests that it is not being paid to the Collector General. Much of the collapse in employment has affected a core group of taxpayers, males in well-paid full-time employment.”
Yet the approach is now to cut further. The withdrawal of at least €4,000M from the Irish economy will further reduce the yield from taxation having a minimal net gain to the Exchequer. Factoring in an even greater cut because of the shortfall in 2009 may mean that they will want to cut up to €6,000M in the coming year. A cut of 4% of GNP - it seems Fianna Fáil wish to return us, Pol-Pot-like, to the 1950s.
This figure, of course, has been known to readers of Progressive Economy for some time. For example, you were informed here after the publication of the September figures, here after the publication of the August figures, or even here after the publication of the July figures. Having thrown all modesty out the window, you can further check out previous musings on the subject for the June figures, May and finally April. May I tell the Dept of Finance that I am using nothing more than a standard spreadsheet, no complex economic models and it consistently produces figures that are closer to outturn than theirs.
A secondary problem has now developed in tax collection, apart from the economic collapse. Many previously compliant taxpayers are pleading inability to pay, and current arrears are increasing rapidly. While the Revenue branch of the AHCPS has pointed this out regularly, the union’s members in Dept. of Finance didn’t bother to listen. On 3rd October I wrote the following on this site,
“Non-payment of taxes looks to me to be as another major component in the decline in tax yield. The Revenue branch of the AHCPS has made this clear to its own union and to other members of Congress that non-payment of declared liabilities is a huge issue. This suggests to me that the underlying state of Irish business is perhaps even worse than is being suggested. A business, which owes more than a few months tax is unlikely to survive.”
On the 10th August,
“Outside of workers with multi-nationals and in the Public Service, very little Income Tax is being paid. Tax may be deducted by many employers, but the union representing Tax Inspectors suggests that it is not being paid to the Collector General. Much of the collapse in employment has affected a core group of taxpayers, males in well-paid full-time employment.”
Yet the approach is now to cut further. The withdrawal of at least €4,000M from the Irish economy will further reduce the yield from taxation having a minimal net gain to the Exchequer. Factoring in an even greater cut because of the shortfall in 2009 may mean that they will want to cut up to €6,000M in the coming year. A cut of 4% of GNP - it seems Fianna Fáil wish to return us, Pol-Pot-like, to the 1950s.
Sunday, 18 October 2009
IMF tanks in the square
Michael Taft: In the end-of-year round-ups, a number of Ministers will win prizes for the most absurd comments on the economy. Minister Mary Coughlan’s declaration that the Government had the fiscal crisis under control – only weeks before the emergency April Budget – is a cert. Minister Lenihan’s comments on the construction sector shortly after he was promoted (‘game over, game over’) – that’s a prize winner, too. For me, however, the award for most irresponsible and insulting comment should go to Mary Harney and her latest claim:
‘Minister for Health Mary Harney said yesterday, that if the Government did not cut public expenditure by 30 per cent “then others will come in, like the IMF, and overnight they will make decisions.’
In other, slightly democratic regimes, the threat of tanks in the street is used to shut the public up. Here, Harney’s IMF serves the same purpose. Different tank design, same effect.
Just to show how detached Minister Harvey is from any economic planet in the known universe, she made her comment on the day that the Retail Sales Index was published by the CSO. They don’t make for happy reading.
Since the huge decline in April, retail sales have struggled. Slight increases in sales volumes have come at the cost of deflationary price-reductions. Still, following the April decline, the summer wasn’t as bad as many feared. Until August came around.
In August, much of the volume gains of the previous three months were wiped out while, in sales terms (and that’s a key element of whether an enterprise stays in business), the Index took another sharp turn south, representing the second biggest monthly decline this year.
It would have been worse had it not been for pharmaceuticals and cosmetics remaining relatively buoyant. And, what Ulster Bank analyst Lynsey Clemenger called the IKEA affect. The opening of the hyper-store resulted in a big – and temporary boost to furniture and lighting sales. Take those out of the equation, and things get even bleaker.
People have been inundated with Ministerial claims that we are living beyond our means (translation: living standards will have to be cut). Now they hear a chorus of assertions that billions more will be cut. People don’t need to study multiplier effects to know what this will mean. But let’s do a couple of calculations.
The ESRI projected that cutting public sector wages by 5 percent and cutting the public sector payroll by 17,000 would represent a reduction of €2 billion in total. Never mind that this wouldn’t produce much in savings (by the second year, the borrowing requirement would fall by a mere -0.4 percent). What would it do to private consumer expenditure?
• In the first year consumption would fall by -1.3 percent rising to -1.9 percent in the second year.
• In money terms, this approximates a fall of €1.1 billion in the first year, sliding to slightly over €1.5 billion.
That’s a big hunk taken out of spending.
This fall will have repercussions. Enterprises selling goods and services into the domestic economy will continue to struggle with all the deflationary knock-on in terms of jobs and wages. From a fiscal perspective, this will continue to have a dampening effect on VAT and, therefore, on public finances. The Government is preparing policies that will depress consumer activity and tax revenue.
That’s bad enough. But Commandant Harney’s prediction of tanks in the street is a red flag – loss of economic sovereignty, more years of austerity. You couldn’t promulgate a better scenario to ensure a further retrenchment of consumer activity. Cuts and tanks? I know I’ll be salting it away.
Still, let’s try to find a silver lining. If the Government proceeds with their failed deflationary strategies then maybe we should welcome the IMF – not as conquerors but liberators. We could ask them to do the one thing that would boost our economic prospects and begin to bring the deficit under control:
Overnight, please take away this government and give us a chance to elect a new, progressive one – a government filled with Ministers who know what the hell they are doing.
‘Minister for Health Mary Harney said yesterday, that if the Government did not cut public expenditure by 30 per cent “then others will come in, like the IMF, and overnight they will make decisions.’
In other, slightly democratic regimes, the threat of tanks in the street is used to shut the public up. Here, Harney’s IMF serves the same purpose. Different tank design, same effect.
Just to show how detached Minister Harvey is from any economic planet in the known universe, she made her comment on the day that the Retail Sales Index was published by the CSO. They don’t make for happy reading.
Since the huge decline in April, retail sales have struggled. Slight increases in sales volumes have come at the cost of deflationary price-reductions. Still, following the April decline, the summer wasn’t as bad as many feared. Until August came around.
In August, much of the volume gains of the previous three months were wiped out while, in sales terms (and that’s a key element of whether an enterprise stays in business), the Index took another sharp turn south, representing the second biggest monthly decline this year.
It would have been worse had it not been for pharmaceuticals and cosmetics remaining relatively buoyant. And, what Ulster Bank analyst Lynsey Clemenger called the IKEA affect. The opening of the hyper-store resulted in a big – and temporary boost to furniture and lighting sales. Take those out of the equation, and things get even bleaker.
People have been inundated with Ministerial claims that we are living beyond our means (translation: living standards will have to be cut). Now they hear a chorus of assertions that billions more will be cut. People don’t need to study multiplier effects to know what this will mean. But let’s do a couple of calculations.
The ESRI projected that cutting public sector wages by 5 percent and cutting the public sector payroll by 17,000 would represent a reduction of €2 billion in total. Never mind that this wouldn’t produce much in savings (by the second year, the borrowing requirement would fall by a mere -0.4 percent). What would it do to private consumer expenditure?
• In the first year consumption would fall by -1.3 percent rising to -1.9 percent in the second year.
• In money terms, this approximates a fall of €1.1 billion in the first year, sliding to slightly over €1.5 billion.
That’s a big hunk taken out of spending.
This fall will have repercussions. Enterprises selling goods and services into the domestic economy will continue to struggle with all the deflationary knock-on in terms of jobs and wages. From a fiscal perspective, this will continue to have a dampening effect on VAT and, therefore, on public finances. The Government is preparing policies that will depress consumer activity and tax revenue.
That’s bad enough. But Commandant Harney’s prediction of tanks in the street is a red flag – loss of economic sovereignty, more years of austerity. You couldn’t promulgate a better scenario to ensure a further retrenchment of consumer activity. Cuts and tanks? I know I’ll be salting it away.
Still, let’s try to find a silver lining. If the Government proceeds with their failed deflationary strategies then maybe we should welcome the IMF – not as conquerors but liberators. We could ask them to do the one thing that would boost our economic prospects and begin to bring the deficit under control:
Overnight, please take away this government and give us a chance to elect a new, progressive one – a government filled with Ministers who know what the hell they are doing.
Saturday, 17 October 2009
Kenmare Dublin Economics Workshop
Slí Eile: The chorus is in full swing. The Dublin Economic Consensus workshop in Kenmare. Cuts, Deflation, Now, No Alternative. Even Garrett the Good is rowing in behind it arguing against a staggered deflation. We are being warned about the IMF if we don't roll over. Fearful of losing jobs and not knowing where to turn a lot of people are scared and buying into this There-Is-No-Alternative. Meanwhile, the Kenmare DEW is cranking up the media. See their programme for this weekend here. I assume that papers will be available in the coming days on the following website.
If economics is the science of scarcity and choice consider that, according to the DEW brochure, 'Accommodation is available in the Park Hotel and a number of guest houses .....room availability, as ever, is exceptionally tight and priority is given to applicants who are willing to share a room....the Conference Fee is €80....accommodation (including dinner on both Friday and Saturday night) is available at the following rates per person sharing: Park Hotel €380, Sheen Falls €380, Guest Houses €290'
Clearly not for those on the minimum wage or on social welfare.
If economics is the science of scarcity and choice consider that, according to the DEW brochure, 'Accommodation is available in the Park Hotel and a number of guest houses .....room availability, as ever, is exceptionally tight and priority is given to applicants who are willing to share a room....the Conference Fee is €80....accommodation (including dinner on both Friday and Saturday night) is available at the following rates per person sharing: Park Hotel €380, Sheen Falls €380, Guest Houses €290'
Clearly not for those on the minimum wage or on social welfare.
Benchmarking pay of migrants and women
Slí Eile: There is a rising crescendo of continuing controversy about public sector pay. On the one side independent statistical and research evidence is showing a ‘premium’ to public sector workers no matter what it is measured or adjusted for various measurable things. On the other side, public sector trade unions are disputing this evidence and are pointing to the difficulties of true ‘like-with-like’ comparisons.
Moreover, there is a sense that the whole controversy is removing the focus from where it should be – the super rich, the rich and the not-so-rich self-employed and owners of various sources of income other than (measurable) wage income. The work by the ESRI (and Boyle et al in 2004) has been well documented. More recently, the ESRI paper in the Economic and Social Review generated public attention (and adverse union reaction). The analysis of the 2007 National Employment Survey (same source as used by ESRI) by the Central Statistics Office has complicated the picture, somewhat, by allowing for different variables (for example size of enterprise) and different models.
In an article in the Irish Times, Scapegoating public sector lets wealthy off the hook, Fintan O’Toole makes a very good point in saying the following:
There is one sense in which the public sector unions deserve what they’re getting. Through the secretive benchmarking process, they bought in to the idea of setting wages in the public and private sectors against each other. This was always absurd and deceitful. The deception is the idea that workers in the two sectors of the economy can be compared in some cool, scientific way. In fact, we’re dealing not with science but with politics. What is the equivalent in private firms of a garda or a primary school principal? What is the equivalent in State employment of a shop assistant or a sales rep or a mushroom picker?
To say that jobs are not strictly comparable now is one thing. To have said it 5 or 10 years ago might have pointed in a different direction. One the big issues left aside by many commentators is:
The low level of pay (by international standards) among many private sector workers – in particular women and migrants. The inequitable structure of income in both private and public sectors with those at the top earning huge salaries (and in many cases non-regular bonuses not counted in the CSO National Employment Survey used by CSO and ESRI for this analysis). I am not aware of any publicity about the ‘negative premium’ to workers from EU Accession countries (-0.207 – Table C6, page 29) as well as for women (0.176 in favour of men for both sectors combined). These figures relate to permanent full-time employees aged 25-59 and using statistical controls for size of enterprise.
Where are the headlines ‘Research shows premium to Irish-national, male public-sector workers as calls emerge for reverse benchmarking to close the gap with female migrants in the private sector!’ ?
O'Toole commented:
If we’re serious about bringing public sector wages into line with those in private firms, we need to allow more exploitation of women and of the low-paid, who benefit most from having State jobs. This may be an absurd conclusion, but it is the logic of an argument that suggests that public sector workers be penalised because so many in the private sector suffer from gender discrimination, exploitation and rotten pensions.
We need to cop on to the game that’s being played here and focus on the real divide, which is not that between public and private but that between those who can really afford to live on less and those who can’t. Wages should be cut from the top down, through taxation in the private sector and pay cuts in the public sector.
Moreover, there is a sense that the whole controversy is removing the focus from where it should be – the super rich, the rich and the not-so-rich self-employed and owners of various sources of income other than (measurable) wage income. The work by the ESRI (and Boyle et al in 2004) has been well documented. More recently, the ESRI paper in the Economic and Social Review generated public attention (and adverse union reaction). The analysis of the 2007 National Employment Survey (same source as used by ESRI) by the Central Statistics Office has complicated the picture, somewhat, by allowing for different variables (for example size of enterprise) and different models.
In an article in the Irish Times, Scapegoating public sector lets wealthy off the hook, Fintan O’Toole makes a very good point in saying the following:
There is one sense in which the public sector unions deserve what they’re getting. Through the secretive benchmarking process, they bought in to the idea of setting wages in the public and private sectors against each other. This was always absurd and deceitful. The deception is the idea that workers in the two sectors of the economy can be compared in some cool, scientific way. In fact, we’re dealing not with science but with politics. What is the equivalent in private firms of a garda or a primary school principal? What is the equivalent in State employment of a shop assistant or a sales rep or a mushroom picker?
To say that jobs are not strictly comparable now is one thing. To have said it 5 or 10 years ago might have pointed in a different direction. One the big issues left aside by many commentators is:
The low level of pay (by international standards) among many private sector workers – in particular women and migrants. The inequitable structure of income in both private and public sectors with those at the top earning huge salaries (and in many cases non-regular bonuses not counted in the CSO National Employment Survey used by CSO and ESRI for this analysis). I am not aware of any publicity about the ‘negative premium’ to workers from EU Accession countries (-0.207 – Table C6, page 29) as well as for women (0.176 in favour of men for both sectors combined). These figures relate to permanent full-time employees aged 25-59 and using statistical controls for size of enterprise.
Where are the headlines ‘Research shows premium to Irish-national, male public-sector workers as calls emerge for reverse benchmarking to close the gap with female migrants in the private sector!’ ?
O'Toole commented:
If we’re serious about bringing public sector wages into line with those in private firms, we need to allow more exploitation of women and of the low-paid, who benefit most from having State jobs. This may be an absurd conclusion, but it is the logic of an argument that suggests that public sector workers be penalised because so many in the private sector suffer from gender discrimination, exploitation and rotten pensions.
We need to cop on to the game that’s being played here and focus on the real divide, which is not that between public and private but that between those who can really afford to live on less and those who can’t. Wages should be cut from the top down, through taxation in the private sector and pay cuts in the public sector.
Friday, 16 October 2009
Child Benefit and teddy bears' picnics
"As we are all frog-marched down to the Finance Minister’s picnic, let’s see what effect cutting Child Benefit will have. For all the indications are that this payment is in the firing line. Many have argued that it’s a no-brainer – sure, doesn’t Child Benefit get paid to rich folk? Doesn’t that mean it’s regressive? We could cut the payment without harming (too much) low and average income groups – and save the state a lot of money". You can read the rest of Michael Taft's post on the effects of a cut in Child Benefit here.
Towards a Progressive Economics: papers and podcasts
We are slowly uploading the papers presented to the TASC Autumn Conference, Towards a Progressive Economics, starting with Paula Clancy's opening remarks, and Dr. John Barry's presentation on 'Greening the Economy and Greening Economics'. Click here for an abstract of Professor Terrence McDonough's presentation, and here to read the presentation by Dr. Mary Murphy to the panel on 'Deflation vs. economic development'. Michael Taft's presentation to the same panel is also now available for download. Pauline Conroy's presentation to the panel on banking is available here.
In addition to the conference videos, you can click here for a podcast of John Barry's presentation to the morning session, and here for a podcast of Fintan O'Toole's paper (thanks to Donagh of ILR for these).
In addition to the conference videos, you can click here for a podcast of John Barry's presentation to the morning session, and here for a podcast of Fintan O'Toole's paper (thanks to Donagh of ILR for these).
Thursday, 15 October 2009
NAMA: trick or treat?
Slí Eile: I see that over on irisheconomy.ie Karl Whelan is doing overtime churning out one blog after another on the NAMA business plan. His latest Hard to Deny Now that NAMA is a Developer Rescue Plan is generating a lot of discussion. I am not a fan of NAMA. Prevous blog here Different views emerge about just how dangerous NAMA is as well as on tactics about where we go from here. Is it too late now that the Government have secured their position?
Terry McDonough: Towards a progressive economics
Following the TASC Autumn Conference on Saturday, Terry McDonough talked to Donagh Brennan of Irish Left Review to give his take on 'progressive economics', elaborating on the paper he presented to the conference. Click here to listen to the podcast.
Wednesday, 14 October 2009
The crisis as seen from London
Slí Eile: Ken Livingstone has an interesting blog (thanks to Alan Mathews for alerting to this recently in irisheconomy). Following a lengthy, thoughtful, facts-based and insightful article, Michael Burke (Ireland: The Nature of the Crisis) writes:
An alternative is readily apparent, which could restore rapidly economic activity. But to do so would require taking control of the main levers of the economy. Only the state can do that. At a minimum, the nationalisation of the leading elements of the banking, property and construction sectors, as well as a repudiation of some or all of their accumulated debts, can lay the basis for an economic recovery inIreland
I tend to agree. Fiscal stimulus, corporate governance change and tax reform are all necessary. But, we need something much more radical, joined-up and internationally associated to work. In the future I fear that we will regret not being bold enough to name it.
An alternative is readily apparent, which could restore rapidly economic activity. But to do so would require taking control of the main levers of the economy. Only the state can do that. At a minimum, the nationalisation of the leading elements of the banking, property and construction sectors, as well as a repudiation of some or all of their accumulated debts, can lay the basis for an economic recovery in
I tend to agree. Fiscal stimulus, corporate governance change and tax reform are all necessary. But, we need something much more radical, joined-up and internationally associated to work. In the future I fear that we will regret not being bold enough to name it.
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