Donal Palcic: Eoin Reeves and I have an opinion piece in the Irish Times today on the information that emerged in relation to the government's plans for privatisation during the latest visit by the troika.
Tuesday 31 January 2012
Monday 30 January 2012
Alternatives to Current Austerity Policy
Nat O'Connor: A wide range of Irish and international economists and commentators were interviewed for an article in last Saturday's Irish Times, including Nobel Prize winner, Joseph Stiglitz who warned about the historical evidence, which shows "There have been almost no instances of successful austerity. ... The prospect of austerity working in Ireland is very bleak. ... the probability of failure is huge."
Yet as Professor Karl Whelan from UCD argues in the same article, those proposing alternatives are "duty-bound to say where we would get the money."
Well, there is no magic solution, but there are increasingly detailed alternative economic policies being developed here and internationally.
I want to deal with three things in this post: (1) what I mean by 'austerity'; (2) what is needed at European level; and (3) alternative economic policies suggested in the UK and Germany.
(1) Austerity is unfortunately a loaded word. Technically, a policy of reducing the deficit through a package of measures to increase revenue and reduce public spending is 'austerity'. But the word is emotion-laden; cuts to education or welfare tend to be more often labelled austerity than measures to cut waste or increase taxes on higher earners, yet the latter measures are also potentially part of austerity measures.
So, to be clear, I am critical of current austerity policies because they have unfairly targetted lower earners and the services upon which they rely; and because the austerity measures are strangling the economy due to insufficient measures to sustain and increase demand to boost economic activity. An alternative economic policy must still deal with the deficit and the national debt. As such, this will involve some 'austerity'. However, any cuts should be balanced by higher public spending in other areas. And increased taxes should target people who can better afford to pay. What would also be different is measures to boost demand, foster sustainable jobs and protect people who are vulnerable.
(2) The Government's reported involvement with an initiative to boost trade and growth in Europe is welcome, but this should not overshadow more profound changes needed at European level that have - to date - been absent from the crisis talks and treaty proposals. For example, the European Central Bank should have a mandate to boost sustainable economic output and maximise employment, similar to the US Federal Reserve. This, among other effects, would allow for inflation targets to vary from the current two per cent to higher levels (maybe four or even six per cent) when this serves Europe's economies better. Controlled higher inflation would help reduce the extent of national and private debt across Europe. Other elements of possible enhanced European co-operation that seem to be missing from the proposed treaty are Eurobonds and a Europe-wide financial transactions tax.
When the final text of the proposals is revealed it will be possible to say more about what exactly they imply.
(3) I recently noted that President Obama's state of the union address echoes some of what has been called for by opponents of Irish austerity policies. The above-mentioned Irish Times article opened by reference to our call for a Plan B.
In a similar vein, Compass in the UK are promoting their own Plan B (published in October 2011), subtitled "A Good Economy for a Good Society".
In summary, Compass is calling for:
- A halt to public spending cuts;
- Quantitative easing to invest in a Green New Deal;
- Tax reform to curb avoidance and increase progressivity;
- Strategic Government support to business (such as a state investment bank);
- Better regulation of banks (including the full separation of retail banking from financial investment banking);
- Social investment, with a focus on prevention;
- A move to shorter paid work time;
- Raising the minimum wage;
- Tackling high pay;
- More employee participation in corporate governance;
- Public service reforms.
In their words, "Plan B shows there is an alternative, not just to cuts, austerity and stagnation, but to a return to business as usual and all that means for growing inequality, climate change and people's well-being."
Another report on similar lines is from the German Friedich Ebert Stiftung. They released a policy paper in January 2012 entitled "Social Growth - Model of a Progressive Economic Policy".
This includes a ten-point programme:
1. Guarantee a stable supply of credit with effective financial market regulation;
2. Use education policy to boost the forces of growth and expand opportunities for all;
3. Open up new areas of growth with industrial policy;
4. Strengthen the position of employees by means of minimum wages and codetermination;
5. Fund public tasks properly and fairly by reforming tax policy;
6. Stablilise the economy and the debt situation by means of an anti-cyclical fiscal policy;
7. Strengthen forces for growth in Europe by means of a robust public financial architecture;
8. Provide for more stability in the Eurozone by means of economic policy co-ordination;
9. Ensure decent work for all by means of European and global standards;
10. Manage globalisation by means of a new economic and monetary order.
Both the Compass Plan B and Friedrich Ebert Stiftung's Social Growth documents articulate in more detail the social democratic critique of current orthodox economics and the dead-end austerity policies it proposes. The alternative policies are not being presented as a panacea, but are suggestions for wide-ranging economic policy reform, built on extensive research and evidence. They represent a viable set of economic policies that governments can pursue to improve people's wellbeing, while restoring sustainable economic output and jobs.
In Ireland's case, we will still no doubt hear voices claiming that such policies wouldn't work here. Well, no doubt they would have be tailored for Irish circumstances. But there is still much of interest in what is being proposed, not least because the proposals see equality and sustainability as core attributes of economic reform, not 'side issues' to be addressed once some kind of mythical 'rising tide' is restored.
And Ireland has some resources that could be immediately mobilised, without altering the IMF/EU agreement. This includes using the remaing NPRF (c. €5 billion) for targetted, productive investment and likewise ring-fencing for investment any money saved from delaying payment of the Anglo promissory notes, which could be one or two billion euro a year for several years. Crucially, it is not just about substituting spending for austerity. There remains a need to reform Ireland's tax system, regulate banking, move public spending to where it is most needed, and a host of other things. While some of such measures may, technically, quality as 'austerity', they differ crucially from current policy in that they would maintain incomes and living standards, promote jobs and sustainable development and lead, ultimately, to a socially just and sustainable recovery.
Yet as Professor Karl Whelan from UCD argues in the same article, those proposing alternatives are "duty-bound to say where we would get the money."
Well, there is no magic solution, but there are increasingly detailed alternative economic policies being developed here and internationally.
I want to deal with three things in this post: (1) what I mean by 'austerity'; (2) what is needed at European level; and (3) alternative economic policies suggested in the UK and Germany.
(1) Austerity is unfortunately a loaded word. Technically, a policy of reducing the deficit through a package of measures to increase revenue and reduce public spending is 'austerity'. But the word is emotion-laden; cuts to education or welfare tend to be more often labelled austerity than measures to cut waste or increase taxes on higher earners, yet the latter measures are also potentially part of austerity measures.
So, to be clear, I am critical of current austerity policies because they have unfairly targetted lower earners and the services upon which they rely; and because the austerity measures are strangling the economy due to insufficient measures to sustain and increase demand to boost economic activity. An alternative economic policy must still deal with the deficit and the national debt. As such, this will involve some 'austerity'. However, any cuts should be balanced by higher public spending in other areas. And increased taxes should target people who can better afford to pay. What would also be different is measures to boost demand, foster sustainable jobs and protect people who are vulnerable.
(2) The Government's reported involvement with an initiative to boost trade and growth in Europe is welcome, but this should not overshadow more profound changes needed at European level that have - to date - been absent from the crisis talks and treaty proposals. For example, the European Central Bank should have a mandate to boost sustainable economic output and maximise employment, similar to the US Federal Reserve. This, among other effects, would allow for inflation targets to vary from the current two per cent to higher levels (maybe four or even six per cent) when this serves Europe's economies better. Controlled higher inflation would help reduce the extent of national and private debt across Europe. Other elements of possible enhanced European co-operation that seem to be missing from the proposed treaty are Eurobonds and a Europe-wide financial transactions tax.
When the final text of the proposals is revealed it will be possible to say more about what exactly they imply.
(3) I recently noted that President Obama's state of the union address echoes some of what has been called for by opponents of Irish austerity policies. The above-mentioned Irish Times article opened by reference to our call for a Plan B.
In a similar vein, Compass in the UK are promoting their own Plan B (published in October 2011), subtitled "A Good Economy for a Good Society".
In summary, Compass is calling for:
- A halt to public spending cuts;
- Quantitative easing to invest in a Green New Deal;
- Tax reform to curb avoidance and increase progressivity;
- Strategic Government support to business (such as a state investment bank);
- Better regulation of banks (including the full separation of retail banking from financial investment banking);
- Social investment, with a focus on prevention;
- A move to shorter paid work time;
- Raising the minimum wage;
- Tackling high pay;
- More employee participation in corporate governance;
- Public service reforms.
In their words, "Plan B shows there is an alternative, not just to cuts, austerity and stagnation, but to a return to business as usual and all that means for growing inequality, climate change and people's well-being."
Another report on similar lines is from the German Friedich Ebert Stiftung. They released a policy paper in January 2012 entitled "Social Growth - Model of a Progressive Economic Policy".
This includes a ten-point programme:
1. Guarantee a stable supply of credit with effective financial market regulation;
2. Use education policy to boost the forces of growth and expand opportunities for all;
3. Open up new areas of growth with industrial policy;
4. Strengthen the position of employees by means of minimum wages and codetermination;
5. Fund public tasks properly and fairly by reforming tax policy;
6. Stablilise the economy and the debt situation by means of an anti-cyclical fiscal policy;
7. Strengthen forces for growth in Europe by means of a robust public financial architecture;
8. Provide for more stability in the Eurozone by means of economic policy co-ordination;
9. Ensure decent work for all by means of European and global standards;
10. Manage globalisation by means of a new economic and monetary order.
Both the Compass Plan B and Friedrich Ebert Stiftung's Social Growth documents articulate in more detail the social democratic critique of current orthodox economics and the dead-end austerity policies it proposes. The alternative policies are not being presented as a panacea, but are suggestions for wide-ranging economic policy reform, built on extensive research and evidence. They represent a viable set of economic policies that governments can pursue to improve people's wellbeing, while restoring sustainable economic output and jobs.
In Ireland's case, we will still no doubt hear voices claiming that such policies wouldn't work here. Well, no doubt they would have be tailored for Irish circumstances. But there is still much of interest in what is being proposed, not least because the proposals see equality and sustainability as core attributes of economic reform, not 'side issues' to be addressed once some kind of mythical 'rising tide' is restored.
And Ireland has some resources that could be immediately mobilised, without altering the IMF/EU agreement. This includes using the remaing NPRF (c. €5 billion) for targetted, productive investment and likewise ring-fencing for investment any money saved from delaying payment of the Anglo promissory notes, which could be one or two billion euro a year for several years. Crucially, it is not just about substituting spending for austerity. There remains a need to reform Ireland's tax system, regulate banking, move public spending to where it is most needed, and a host of other things. While some of such measures may, technically, quality as 'austerity', they differ crucially from current policy in that they would maintain incomes and living standards, promote jobs and sustainable development and lead, ultimately, to a socially just and sustainable recovery.
Friday 27 January 2012
(V) Curbing growing income inequality
Paul Sweeney: No public servant is worth more than £1,000 a year. So said De Valera in 1931 (He paid himself more - £1,500 in March 1932 - but this was a reduction of £1000 or 40%). No man is worth more than €200,000 so declared Brendan Howlin in 2011, as the Government tries to limit the pay of top public servants. Howlin’s move will a) help the public purse, b) help narrow a growing pay gap for the first time in decades, c), it should also have a major demonstration effect and d) its popularity may help in addressing the crisis in a radical way by actually changing the pay gap and thus improving social solidarity.
It has been seen that gross Irish incomes doubled over 20 years in the boom but are relatively stable now. For most at work, they are not falling and for some, in the export and other dynamic sectors, there are small wage rises of around two per cent. Yet Ireland is one of the more unequal societies in the developed world. Financial insecurity and precarious incomes are becoming more commonplace.
Yet it is in time of crisis that some of the most progressive moves have been made. Just after the war, Britain brought in the National Health Service, and Rab Butler, a conservative, radically reformed education in 1944, making secondary education free for all pupils. With vision and leadership, it is possible that this government could steer us out of this deep crisis in a way which makes Ireland the best place in the world in which to work, live and grow old.
It has been seen that the labour market is also becoming polarized between “cool jobs and crap jobs”. At the top, owners and top executives are paying themselves obscene and utterly undeserved sums, as shareholders are unable to govern them. They have rewritten the rules of corporate governance, of “shareholder capitalism”, in their favour and that is what makes government policy on top pay so important.
While we have had endless debate on “public sector reform”. there is no debate on private sector reform. The rot was in the boards of the private banks.
Even US corporate investor Carl Icahn is scathing of US corporate governance, saying “Many US companies are very poorly run and non-competitive because corporate governance in the US is, to a large extent, dysfunctional. Boards do not hold managements accountable, and corporate elections for the most part are travesties.” (Fortune 4 July,2011).
The fight back against reform of top pay has began with the utterances of Michael Somers, who called for the boss of the state-owned AIB to be paid more than half a million because, in his view, this paltry sum may not attract talent.
There is no shortage of talented executives who would gladly work for less than half a million. Further, it is clear that the more the bank executives were paid, the more reckless they became. They did not just destroy three big banks worth around €66bn, but also contributed to bankrupting this country. So any nonsense in favour of widening the pay gap should be dismissed.
The outrage in Ireland on executive pay and wealth accumulation will probably be temporary, as it has been in the UK and US, and even Germany. The ex-head of Germany’s Bundesbank, Axel Weber, was “rewarded” with SFr2m ($4.4m) ‘hello money’ when he became deputy chair at the UBS of Switzerland. It had been one of the first banks to fail in the financial meltdown. There is a long and growing list of “excessive rewards,” peer-endowed, by the supposed “masters of the universe” in the corporate world.
In my view, people should be paid a good salary to do their job. Bonuses should only be for exceptional performance. Most performance-related pay can be, and is, rigged by “peers”. Nobel economist Akerlof is highly skeptical of performance-related pay. It is just a way for those at the top to take more for themselves under the pretence of some kind of good performance. Unless these mega-rewards, which can so distort corporate performance, are stopped, the capitalist system will crash again.
Goldman Sachs (GS) has paid its employees $125bn during the past ten years, twice what it made in net profits. It is to pay them a further £8bn, or an average of £238,000 each. for 2011. That is a good illustration of how perverted the current capitalist system has become, and how far it has moved from its old risk-reward model.
The investors’ Lex column in the Financial Times, commenting on the GS results, said “The reality, however, is that banks also support a thick layer of second tier executives, as well as legions of pen-pushing, meeting-loving, middle- and back-office workers who are paid multiples of their worth and contribution, especially compared with other industries. And market dynamics matter. If the whole financial sector started paying less, the bargaining power would fall for even star employees.”
There is a wide debate about the capitalist system abroad, but little here. Here it is about “public sector reform”. Even the Financial Times is running a long series called “Capitalism in Crisis.”
Mr. Howlin has made a radical move on closing what was a growing gap in pay between those at the top of the public service and those below. What is now needed, to improve economic performance and its sustainability, is reform of private sector governance. The National Competiveness Council calls for such reform in governance in its Competitiveness Challenge, recently published.
Some of the reforms on governance which could be implemented to narrow the pay gap in the rest of the economy would include:
1. Cease all tax subsidies to companies who pay excessive amounts to high earners. For example, no pay of over, say, €200,000 can be offset against a company’s tax (the US has such a limit on offsetting high pay against corporate tax).
2. Curb excessive tax breaks for executive pensions.
3. Limit bonuses to between one-third and one half of salary, otherwise they cannot be offset against tax, and maybe also impose a tax surcharge on them.
4. Reform Irish company law to make it more transparent, by removing the option for all large companies to avoid disclosure by a) going unlimited or b) by merging Irish businesses into European consortia or c) any other means.
5. All public interest companies should have to disclose the full accounts of those individual subsidiaries which are deemed to be of interest to the public.
6. The Irish subsidiaries of European companies which are public interest companies should no longer be able to lump all their assets and sales into one big company.
7. Companies should no longer be allowed to operate in Ireland by profiting from activities here if they are registered in tax havens like Liechtenstein or the Bahamas, without also having an Irish registered base and disclosing all information in accordance with Irish law.
8. There should be a higher tax rate on very high incomes, when we recognise that there are many who “earn” over a million a year.
9. A systematic and vigorous pursuit of Irish tax exiles must begin, to ensure that they are tax compliant on residence
10. Reform company law on transparency of executive remuneration with tighter legislation for all large companies in Ireland. It should be similar to the SEC (the regulator) in the US, where there is a clear statement of annual remuneration for top executives. Thus there would be a single total figure for the year, with simple disclosure rules covering all top executive remuneration, including pensions, share options, chauffeured company cars, use of helicopters, aeroplanes and other benefits. This should apply to all senior positions in the public sector too and to published in the State Directory (which must be brought back and published electronically again - by Dept Public Expenditure and Reform).
11. Introduce a law to set broad parameters under which top executive pay is to be set by company boards in Ireland. This would include measurable objective criteria, including financial performance, employee welfare, consumer satisfaction, environmental protection, etc.
12. There must be the appointment of at least two or one- fifth of the board of real outsiders as non-executive directors of all major companies. These would be appointed by a government corporate appointments body and/or an investor grouping, and/or by a pension fund.
13. At least two worker representatives should be on every board. This is the rule in Germany and most Nordic countries. In the light of the excessive remuneration and poor performances of many of those at the top of the corporate world, stakeholder in companies need representation on the boards and who better than representatives of the company’s own employee? (e.g. Norwegian Airlines, the up and coming European low cost airline, has two employee reps on the seven person board.)
On the broader side,
1) we need to reform the private sector by change from the Anglo American model of company law which is purported to be dominated by the interests of shareholders. In reality shareholders are diffused and too often have little or no say in the governance of companies. The power is “captured by the top management”. That is what happened the banks. We are reforming bank regulation but not even discussing this core issue.
2) Trade unions must be facilitated – not blocked - by the state in building up as the progressive force they were in the past to shift the imbalance where power is tilted in favour of corporations / capital. .This can be done by changing the laws which have made it so much more difficult for workers to have the civil right to join trade unions. Monti 2, a forthcoming Directive on collective bargaining from the EU Commission, now in the grip of the right, will make is even more difficult for workers to have the civil right to join trade unions.
3) There is need for greater education on why progressive tax systems are a key to redistribution, fairness, sustainable economic demand and social progress.
4) Finally there is a need to return to Social Europe. It is being unwound by the current Commission, the Council of Ministers and Merkozy.
In conclusion, Brendan Howlin’s move to cap the remuneration of top public servants is an historic move, reversing what seemed to be an inexorably growing gap between the top and bottom. The collapse in all six Irish banks has meant there is less excessive pay in them, and the crisis has reined in the remuneration of developers and other business executives. But events in UK show that, as soon as they can, the current business elite cannot wait to get back to the remuneration trough.
There has been much talk and action on public sector reform. What is now required is reform of the private sector – of the corporate governance of private companies, of company law to radically reform their boardrooms and practices – whereby the wider stakeholders interest must become paramount. Such reform of the private sector could, if done effectively, bring an end to corporate greed, risk-taking and huge value destruction.
But private sector reform – the end of Irish Crony Capitalism - is not even on the government’s agenda.
It has been seen that gross Irish incomes doubled over 20 years in the boom but are relatively stable now. For most at work, they are not falling and for some, in the export and other dynamic sectors, there are small wage rises of around two per cent. Yet Ireland is one of the more unequal societies in the developed world. Financial insecurity and precarious incomes are becoming more commonplace.
Yet it is in time of crisis that some of the most progressive moves have been made. Just after the war, Britain brought in the National Health Service, and Rab Butler, a conservative, radically reformed education in 1944, making secondary education free for all pupils. With vision and leadership, it is possible that this government could steer us out of this deep crisis in a way which makes Ireland the best place in the world in which to work, live and grow old.
It has been seen that the labour market is also becoming polarized between “cool jobs and crap jobs”. At the top, owners and top executives are paying themselves obscene and utterly undeserved sums, as shareholders are unable to govern them. They have rewritten the rules of corporate governance, of “shareholder capitalism”, in their favour and that is what makes government policy on top pay so important.
While we have had endless debate on “public sector reform”. there is no debate on private sector reform. The rot was in the boards of the private banks.
Even US corporate investor Carl Icahn is scathing of US corporate governance, saying “Many US companies are very poorly run and non-competitive because corporate governance in the US is, to a large extent, dysfunctional. Boards do not hold managements accountable, and corporate elections for the most part are travesties.” (Fortune 4 July,2011).
The fight back against reform of top pay has began with the utterances of Michael Somers, who called for the boss of the state-owned AIB to be paid more than half a million because, in his view, this paltry sum may not attract talent.
There is no shortage of talented executives who would gladly work for less than half a million. Further, it is clear that the more the bank executives were paid, the more reckless they became. They did not just destroy three big banks worth around €66bn, but also contributed to bankrupting this country. So any nonsense in favour of widening the pay gap should be dismissed.
The outrage in Ireland on executive pay and wealth accumulation will probably be temporary, as it has been in the UK and US, and even Germany. The ex-head of Germany’s Bundesbank, Axel Weber, was “rewarded” with SFr2m ($4.4m) ‘hello money’ when he became deputy chair at the UBS of Switzerland. It had been one of the first banks to fail in the financial meltdown. There is a long and growing list of “excessive rewards,” peer-endowed, by the supposed “masters of the universe” in the corporate world.
In my view, people should be paid a good salary to do their job. Bonuses should only be for exceptional performance. Most performance-related pay can be, and is, rigged by “peers”. Nobel economist Akerlof is highly skeptical of performance-related pay. It is just a way for those at the top to take more for themselves under the pretence of some kind of good performance. Unless these mega-rewards, which can so distort corporate performance, are stopped, the capitalist system will crash again.
Goldman Sachs (GS) has paid its employees $125bn during the past ten years, twice what it made in net profits. It is to pay them a further £8bn, or an average of £238,000 each. for 2011. That is a good illustration of how perverted the current capitalist system has become, and how far it has moved from its old risk-reward model.
The investors’ Lex column in the Financial Times, commenting on the GS results, said “The reality, however, is that banks also support a thick layer of second tier executives, as well as legions of pen-pushing, meeting-loving, middle- and back-office workers who are paid multiples of their worth and contribution, especially compared with other industries. And market dynamics matter. If the whole financial sector started paying less, the bargaining power would fall for even star employees.”
There is a wide debate about the capitalist system abroad, but little here. Here it is about “public sector reform”. Even the Financial Times is running a long series called “Capitalism in Crisis.”
Mr. Howlin has made a radical move on closing what was a growing gap in pay between those at the top of the public service and those below. What is now needed, to improve economic performance and its sustainability, is reform of private sector governance. The National Competiveness Council calls for such reform in governance in its Competitiveness Challenge, recently published.
Some of the reforms on governance which could be implemented to narrow the pay gap in the rest of the economy would include:
1. Cease all tax subsidies to companies who pay excessive amounts to high earners. For example, no pay of over, say, €200,000 can be offset against a company’s tax (the US has such a limit on offsetting high pay against corporate tax).
2. Curb excessive tax breaks for executive pensions.
3. Limit bonuses to between one-third and one half of salary, otherwise they cannot be offset against tax, and maybe also impose a tax surcharge on them.
4. Reform Irish company law to make it more transparent, by removing the option for all large companies to avoid disclosure by a) going unlimited or b) by merging Irish businesses into European consortia or c) any other means.
5. All public interest companies should have to disclose the full accounts of those individual subsidiaries which are deemed to be of interest to the public.
6. The Irish subsidiaries of European companies which are public interest companies should no longer be able to lump all their assets and sales into one big company.
7. Companies should no longer be allowed to operate in Ireland by profiting from activities here if they are registered in tax havens like Liechtenstein or the Bahamas, without also having an Irish registered base and disclosing all information in accordance with Irish law.
8. There should be a higher tax rate on very high incomes, when we recognise that there are many who “earn” over a million a year.
9. A systematic and vigorous pursuit of Irish tax exiles must begin, to ensure that they are tax compliant on residence
10. Reform company law on transparency of executive remuneration with tighter legislation for all large companies in Ireland. It should be similar to the SEC (the regulator) in the US, where there is a clear statement of annual remuneration for top executives. Thus there would be a single total figure for the year, with simple disclosure rules covering all top executive remuneration, including pensions, share options, chauffeured company cars, use of helicopters, aeroplanes and other benefits. This should apply to all senior positions in the public sector too and to published in the State Directory (which must be brought back and published electronically again - by Dept Public Expenditure and Reform).
11. Introduce a law to set broad parameters under which top executive pay is to be set by company boards in Ireland. This would include measurable objective criteria, including financial performance, employee welfare, consumer satisfaction, environmental protection, etc.
12. There must be the appointment of at least two or one- fifth of the board of real outsiders as non-executive directors of all major companies. These would be appointed by a government corporate appointments body and/or an investor grouping, and/or by a pension fund.
13. At least two worker representatives should be on every board. This is the rule in Germany and most Nordic countries. In the light of the excessive remuneration and poor performances of many of those at the top of the corporate world, stakeholder in companies need representation on the boards and who better than representatives of the company’s own employee? (e.g. Norwegian Airlines, the up and coming European low cost airline, has two employee reps on the seven person board.)
On the broader side,
1) we need to reform the private sector by change from the Anglo American model of company law which is purported to be dominated by the interests of shareholders. In reality shareholders are diffused and too often have little or no say in the governance of companies. The power is “captured by the top management”. That is what happened the banks. We are reforming bank regulation but not even discussing this core issue.
2) Trade unions must be facilitated – not blocked - by the state in building up as the progressive force they were in the past to shift the imbalance where power is tilted in favour of corporations / capital. .This can be done by changing the laws which have made it so much more difficult for workers to have the civil right to join trade unions. Monti 2, a forthcoming Directive on collective bargaining from the EU Commission, now in the grip of the right, will make is even more difficult for workers to have the civil right to join trade unions.
3) There is need for greater education on why progressive tax systems are a key to redistribution, fairness, sustainable economic demand and social progress.
4) Finally there is a need to return to Social Europe. It is being unwound by the current Commission, the Council of Ministers and Merkozy.
In conclusion, Brendan Howlin’s move to cap the remuneration of top public servants is an historic move, reversing what seemed to be an inexorably growing gap between the top and bottom. The collapse in all six Irish banks has meant there is less excessive pay in them, and the crisis has reined in the remuneration of developers and other business executives. But events in UK show that, as soon as they can, the current business elite cannot wait to get back to the remuneration trough.
There has been much talk and action on public sector reform. What is now required is reform of the private sector – of the corporate governance of private companies, of company law to radically reform their boardrooms and practices – whereby the wider stakeholders interest must become paramount. Such reform of the private sector could, if done effectively, bring an end to corporate greed, risk-taking and huge value destruction.
But private sector reform – the end of Irish Crony Capitalism - is not even on the government’s agenda.
There is an alternative
Tom Healy: A copy of a paper I gave at the Dublin Economics Workshop today is available here. The conference provides an opportunity for a large number of people to debate economics policies. The current workshop is part of a series of its kind on the economic crisis which goes back to January 2009.
A key focus of the paper is on unemployment - especially youth. The impact of fiscal austerity on the domestic economy is outlined and the implications of this for the future of public services here. Unless current economic policies are reversed Ireland will emerge with an even lower level of public spending and revenue than is currently the case. It is very unlikely that the Troika can succeed in reaching the 3% deficit target by 2015, especially as the European economy of the Eurozone heads into a new recession in 2012. In short we need a Plan B and we need it very soon.
A key focus of the paper is on unemployment - especially youth. The impact of fiscal austerity on the domestic economy is outlined and the implications of this for the future of public services here. Unless current economic policies are reversed Ireland will emerge with an even lower level of public spending and revenue than is currently the case. It is very unlikely that the Troika can succeed in reaching the 3% deficit target by 2015, especially as the European economy of the Eurozone heads into a new recession in 2012. In short we need a Plan B and we need it very soon.
Thursday 26 January 2012
26 into one won't go
Michael Taft: Media outlets are reporting a new crackdown on the unemployed. Apparently, the Department of Social Protection intends to introduce new regulations whereby ‘target-dates’ for exiting the Live Register will be set for different categories of unemployed. If someone remains on the Live Register past that target-date, they may be subject to a new set of interviews and investigations which could lead to reductions or even ending their unemployment payment. This, no doubt, reflects the Minister’s description of unemployment as a ‘life-style’ choice for a growing number of jobless, especially young jobless.
This also reflects a new twist in victimising the unemployed for a crisis not of their making.
This also reflects a policy mind-set that is detached from the reality of the labour market and even from the Government’s own employment projections.
First, Eurostat produces a ‘job vacancy rate’ which measures the number of job vacancies in the EU economies. Using this we can estimate how the number of job vacancies compares with the actual number of unemployed. What is the ratio of unemployed per job vacancy in Ireland? 26:1. Let’s ‘reflect’ on that for a moment.
There are 26 unemployed people for every 1 job vacancy.
How do we compare with other EU countries? The first chart shows the figures for the 23 EU countries whose data are available at Eurostat. The numbers are calculated from the Eurostat data using conservative assumptions that if anything are likely to result in an underestimate of the figures shown. Ireland is one of the worst performers in the EU. It ranks 4th last out of 23 countries reporting, with more than three times the EU-27 ratio of unemployed per vacancy. The figures for some countries require some qualification, but are mostly accurate enough to provide a reasonable picture across Europe.
However, the crucial point is that one can interview, examine and investigate the unemployed for as long as whenever – if there are 26 people chasing one vacancy, then the dole queues will continue to stretch out on to the street. To threaten reduction or suspension of unemployment payments in such conditions is little short of callous.
But this is all convenient for the Government because it takes attention away from the driving force behind unemployment – the simple lack of jobs. It also takes attention away to the Government’s self-admitted losing battle over job creation:
• In April of last year the Government projected that there would be over 100,000 new net jobs in the economy by 2015.
• In the last budget they reduced this job creation projection to 62,000.
This explains why they revised their unemployment projections in 2015 from 10 percent (in April 2011) to 11.6 percent in the last budget.
Indeed, the Government has admitted that there will be no short-term relief from unemployment. In the Regulatory Impact Analysis in the appendix of the Industrial Relations (Amendment) (No.3) Bill, 2011, the Government openly admits:
‘Ireland has experienced a very sharp increase in unemployment in recent years, with little prospect of improvement in the short term . . . ‘
So with employment projections shrinking, unemployment projections rising, and a public admission that the jobless situation will not improve in the short-term, the Government thinks it’s a good idea to start targeting the unemployed, rather than the policies that would get them back to work.
No matter what is done using supply-side policies –through training, up-skilling or negative incentives – you cannot squeeze 310,000 unemployed into the approximately 13,000 total jobs that are available (calculated from the most recent Eurostat data, 3rd quarter 2011). Even if all the vacancies are filled instantly, approximately 300,000 will remain unemployed. Essentially, what training does in terms of unemployment in this situation is to change the names of the lucky ones to get jobs.
It has been also argued that the problem is a mismatch between the unemployed and the jobs available. These figures give the lie to that as the central problem. It is true that there are skill mismatches, notably due to the downsizing of the swollen construction sector in the boom. However, the large majority of these workers could be employed in other sectors with a certain amount of re-training - but only if the jobs are there. And herein lies the rub. There are few jobs as the data above show. Punishing people will not solve the problem. Only the provision of jobs will.
Ireland has 59.3% of the unemployed out of work for at least a year, over 180,000 people, and this number has increased sharply, well above that of the EU countries as a whole, as the second chart shows. The reason the unemployed are out of work is due to the lack of jobs, and not a sudden bout of laziness in the population. In the 27 countries of the EU, Ireland has the third highest long-term unemployment share among total unemployment, after Slovakia and Bulgaria, both of which had particular historical problems including the de-industrialisation that followed the shift from Communism.
By delaying the solution to this problem, permanent damage is done to the prospects of many unemployed, as many studies show, referring to a lasting “scarring” effect. Youth unemployment is also particularly high in Ireland compared to other EU countries, coming 6th last in the ranking with a 30% unemployment rate among youth.
While measures to support the long-term unemployed will certainly be welcomed, Breda O’Brien from the Irish National Organisation of the Unemployed is sceptical:
"Breda O’Brien said the new service would assess people but that the supports offered to those with a higher probability of re-entering employment would be minimal. 'The Government has to seriously address this issue. It cannot be threatening people to have their social welfare cut if there is no job there'.”
Reducing or cutting off unemployment pay becomes a matter of punishing the unemployed, something that was supposed to have gone out with the Poor Law of centuries past. Why is policy regressing to this approach of Victorian times? And why are the unemployed being made scapegoats for failing employment policies?
Supply-side policies of any kind – the only ones that are being tried – simply cannot work in this context. Only demand-side policies that actually create the required number of jobs can have an effect on unemployment of any significance.
I am grateful to Ronan O’Brien for his contribution to the data and analysis.
This also reflects a new twist in victimising the unemployed for a crisis not of their making.
This also reflects a policy mind-set that is detached from the reality of the labour market and even from the Government’s own employment projections.
First, Eurostat produces a ‘job vacancy rate’ which measures the number of job vacancies in the EU economies. Using this we can estimate how the number of job vacancies compares with the actual number of unemployed. What is the ratio of unemployed per job vacancy in Ireland? 26:1. Let’s ‘reflect’ on that for a moment.
There are 26 unemployed people for every 1 job vacancy.
How do we compare with other EU countries? The first chart shows the figures for the 23 EU countries whose data are available at Eurostat. The numbers are calculated from the Eurostat data using conservative assumptions that if anything are likely to result in an underestimate of the figures shown. Ireland is one of the worst performers in the EU. It ranks 4th last out of 23 countries reporting, with more than three times the EU-27 ratio of unemployed per vacancy. The figures for some countries require some qualification, but are mostly accurate enough to provide a reasonable picture across Europe.
However, the crucial point is that one can interview, examine and investigate the unemployed for as long as whenever – if there are 26 people chasing one vacancy, then the dole queues will continue to stretch out on to the street. To threaten reduction or suspension of unemployment payments in such conditions is little short of callous.
But this is all convenient for the Government because it takes attention away from the driving force behind unemployment – the simple lack of jobs. It also takes attention away to the Government’s self-admitted losing battle over job creation:
• In April of last year the Government projected that there would be over 100,000 new net jobs in the economy by 2015.
• In the last budget they reduced this job creation projection to 62,000.
This explains why they revised their unemployment projections in 2015 from 10 percent (in April 2011) to 11.6 percent in the last budget.
Indeed, the Government has admitted that there will be no short-term relief from unemployment. In the Regulatory Impact Analysis in the appendix of the Industrial Relations (Amendment) (No.3) Bill, 2011, the Government openly admits:
‘Ireland has experienced a very sharp increase in unemployment in recent years, with little prospect of improvement in the short term . . . ‘
So with employment projections shrinking, unemployment projections rising, and a public admission that the jobless situation will not improve in the short-term, the Government thinks it’s a good idea to start targeting the unemployed, rather than the policies that would get them back to work.
No matter what is done using supply-side policies –through training, up-skilling or negative incentives – you cannot squeeze 310,000 unemployed into the approximately 13,000 total jobs that are available (calculated from the most recent Eurostat data, 3rd quarter 2011). Even if all the vacancies are filled instantly, approximately 300,000 will remain unemployed. Essentially, what training does in terms of unemployment in this situation is to change the names of the lucky ones to get jobs.
It has been also argued that the problem is a mismatch between the unemployed and the jobs available. These figures give the lie to that as the central problem. It is true that there are skill mismatches, notably due to the downsizing of the swollen construction sector in the boom. However, the large majority of these workers could be employed in other sectors with a certain amount of re-training - but only if the jobs are there. And herein lies the rub. There are few jobs as the data above show. Punishing people will not solve the problem. Only the provision of jobs will.
Ireland has 59.3% of the unemployed out of work for at least a year, over 180,000 people, and this number has increased sharply, well above that of the EU countries as a whole, as the second chart shows. The reason the unemployed are out of work is due to the lack of jobs, and not a sudden bout of laziness in the population. In the 27 countries of the EU, Ireland has the third highest long-term unemployment share among total unemployment, after Slovakia and Bulgaria, both of which had particular historical problems including the de-industrialisation that followed the shift from Communism.
By delaying the solution to this problem, permanent damage is done to the prospects of many unemployed, as many studies show, referring to a lasting “scarring” effect. Youth unemployment is also particularly high in Ireland compared to other EU countries, coming 6th last in the ranking with a 30% unemployment rate among youth.
While measures to support the long-term unemployed will certainly be welcomed, Breda O’Brien from the Irish National Organisation of the Unemployed is sceptical:
"Breda O’Brien said the new service would assess people but that the supports offered to those with a higher probability of re-entering employment would be minimal. 'The Government has to seriously address this issue. It cannot be threatening people to have their social welfare cut if there is no job there'.”
Reducing or cutting off unemployment pay becomes a matter of punishing the unemployed, something that was supposed to have gone out with the Poor Law of centuries past. Why is policy regressing to this approach of Victorian times? And why are the unemployed being made scapegoats for failing employment policies?
Supply-side policies of any kind – the only ones that are being tried – simply cannot work in this context. Only demand-side policies that actually create the required number of jobs can have an effect on unemployment of any significance.
I am grateful to Ronan O’Brien for his contribution to the data and analysis.
(IV) The rise of the new aristocracy
Paul Sweeney: Mitt Romney’s pay of $42.5m – all unearned – in two years on which he paid an effective income tax rate of only 14.65 per cent summarises all I am saying in these five blogs on living standards. We have a new aristocracy, new barons and earls who live in splendour, whose children will live in untold luxury while most of us struggle. But unlike the barons of old who had contributed to crude welfare systems, many of these guys see it as their duty to contribute as little as possible to society. The post-war Social Contract is broken.
In the last post, it was seen that the middle is being squeezed. In this one we will have a look over the pay, or more accurately the remuneration, that some of the biggest and best of our great corporate leaders have paid themselves, and issues around why they get away with it.
It will be seen that even with the Crash of 2008, and the poor performance of many firms, they are a paying themselves far too much. And the shareholder value system which is supposed to govern them is clearly broken. The top executives run the top firms as personal fiefdoms – not to generate added value for shareholders, workers and communities, but mainly for themselves. The post war business model of “shareholder value” is broken too.
Indeed, in just five or seven years at the top of a major corporation, many top executives pay themselves staggering amounts. Such are the “rewards” extracted from the firms that they have become a new aristocracy, whereby, after a life of untold luxury, they can leave vast sums, often untaxed, to their descendants.
As the typical company board resembles a retirement home for the great and the good, usually male and from the same social background, with many cross-directorships (as shown so clearly for Ireland in Mapping the Golden Circle published by TASC in 2010). Boards are filled with retired businessmen, ousted politicians and, more recently, retired senior public servants from regulators or economic departments, all of whom are selected, by each other, on the basis of their unwillingness to challenge each other or the company’s executives.
In the UK there is a raging debate on executive pay and particularly on top bankers' pay. The UK public is incensed at the pay the bosses of the state owned banks are paying themselves.
RBS is 83 per cent state-owned and has been the target of the UK Chancellor's calls for restraint as the banks announce their bonus awards next month. Despite being under strong pressure to pay less to their bosses, and the fact that its share price fell by almost half in 2011 and that it has sacked thousands of employees – RBS’s board is going ahead with plans to pay big bonuses to its top executives. CEO Stephen Hester is getting the maximum pay-out of 6m shares for 2011 – worth about £1.5m on the closing price of a week ago. That is 25 per cent less than the £2.04m bonus he accepted last year. This is on top of his basic salary of £1.2 million.
John Hourican, head of its investment banking business, is about to receive a £5m share bonus that was awarded in 2009. The latest bonus round comes as RBS makes thousands more job cuts after deciding to close large parts of its investment banking business.
Bob Diamond, Barclays’ chief executive announced in line for a £10 million bonus, leading to renewed anger about the excessive rewards enjoyed by bankers. Barclays shed 3,000 jobs across the group last year.
Mr Diamond, once described by Lord Mandelson as ‘the unacceptable face of banking’, is “entitled” to a bonus in shares of up to seven and a half times his £1.35million salary.
Diamond introduced what he calls 'the no-jerk rule' and has encouraged at least 40 executives at his firm to find jobs elsewhere. The American-born chief executive of Barclays said he does not care how good people are at what they do, if they are not suitable, they will be told to go. He said dozens of executives have been shown the door after behaving like jerks or spending lavish amounts of money.
The median income of FTSE 100 bosses has soared from 47 to 102 times employees’ median earnings since 2000. Similarly, senior executives’ pay has quadrupled since 2002, while the FTSE 100 index has stagnated and employee pay has gone up by a fraction of the amount.
FTSE 100 directors had a 49 per cent increase in their total earnings the last financial years. This gave them an average pay of £2.7 million each.
Top earners at some of the world’s biggest banks are still taking annual bonus equal to their salary according to a survey by the Financial Stability Board, a Basel-based committee of regulators. The use of bonuses is particularly pronounced in the US and the UK, where bonus payments account for between 80 and 96 per cent of the total pay awarded to US banks’ highest-paid employees, and between 78 and 93 per cent of the total pay awarded to UK banks’ highest-paid executives, according to the survey.
The world’s super rich are taking delivery of ever larger and more motor yachts this year with the biggest being “Topaz” a 147 metre yacht built in Germany for the Al Nahyan family of Abu Dhabi. These cost over $100m and can cost $1m a week to charter. Topaz will be the fourth in length with Roman Abramovich Eclipse a 164m being the largest. In spite of the recession, more of these super yachts were sold last year than in 2010.
Let’s have a quick look at some of the remuneration packages which the executives of top companies are “earning”. And remember, there are then of thousand of staggeringly wealthy people, who like Mitt Romney have such vast wealth that it is generating incomes of tens of millions a year, without having to work. And most pay little tax, under the regimes which have become acceptable in even “social” Europe. Such is the level of acceptance of low taxes for rich people that some regular folks even are heard to “praise” Michael O’ Leary for paying his income tax here. But if his wealth is €600 million and it generates 5 per cent a year, that’s another €30m. What is the rate of tax he pays on this?
The highest paid UK executives in 2010/11 were Mick Davis of Xstrata who paid himself £18.4m, followed closely behind by Bert Becht of Reckett Benckiser at $17.9m. Next was Michael Spencer of ICAP at $13.4m and our own Sir Terry Leahy of Tesco at a mere €12m. Tesco refuse to publish separate accounts for their Irish operations in case we see how well they are doing here (with Government approval). Close behind was Tom Albanese of Rio Tinto at $11.6m.
This week the UK government watered down its plans to tackle executive pay. It is now only seeking to get shareholders to change company policy with a binding vote on remuneration. It eschewed direct regulation and the mild reforms were welcomed by the likes of PWC, the CBI employers’ group, and the Institute of Directors. Mr Cable, the Business Secretary, was under pressure from Downing Street, and withdrew the proposal that most worried companies’ bosses – putting an employee representative on the remuneration committee. He also backed off the reform to require companies to publish a standardised ratio between executive pay and employee earnings, which would have been more transparent. A single pay figure for total pay of each director is to be published, which is one small step forward. Cable is still unsure about barring executives from one company from sitting on the remuneration committee of another.
The British Labour Party recently promised a new regime of transparency and the publication of a league table of companies that have the biggest pay gaps between bosses and shopfloor staff and to have employee reps on the remuneration committees.
Francisco Luzón, a senior director of Santander, the eurozone’s biggest bank by market capitalisation, is retiring with a pension pot of €56m. He ran the Americas division for 15 years as an executive director. Santander remained profitable throughout the western world’s economic and financial crisis thanks in part to its lucrative operations in Brazil and elsewhere in Latin America.
The annual salary of Lloyd Blankfein, Goldman’s chief executive, more than tripled in January, from $600,000 to $2m. Bankers at other groups have had their fixed pay increased by between 30 and 100 per cent, depending on their seniority, according to headhunters.
A few years ago the head of Porsche Wendelin Wiedenkin was Europe’s highest paid businessman with €67m in 2007. There was outrage in Germany as CEOs who had “earned” 14 times average employees salaries ten years earlier, were by then pulling 44 times the average.
In an unusual move, shareholders at Cairn Energy’s blocked plans to award its chairman an extra £2.5m share incentive this week.
Moving to Ireland, just a few years ago, here was the pay of the Anglo Irish Bank Bosses in 2007.
Sure was not every cent of the 8.4 million paid to these guys warranted? Look at the value they added to the banks and to Ireland. But did not the Irish taxpayer pay just one of the debts run up by these immensely rewarded men on 25th January for a staggering €1.3bn.
Here was the pay of some top executives back in 2006
The above pay of Irish bosses is from “Narrowing the Pay Gap”, published by Irish Congress of Trade Unions back in early 2998. When it was published, few were interested in high pay, as the Crash, well underway, was hardly noticeable. Today, we have an inordinate focus on what our money as consumers or taxpayers is paying our betters/servants.
Andrew Smithers, an interesting UK financial commentator, of Smithers and Co, quoted in the FT on 6th January 2012, has suggested that “the whole corporate culture in the boardroom has changed with the rise of the bonus culture and share options for business executives. They have not responded by cutting prices and competing like fury, they’ve responded by cutting staff.” The average chief executive of an S&P500 company is only in the job for five or six years and their pay is often closely linked to the share price of their corporation or to its returns on equity.
That creates strong incentives to keep profits high in the short term, and Mr Smithers suggests that “these incentives changed the way in which management has acted in the recession. Instead of hoarding labour and cutting prices to increase market share, companies are sacking workers, holding prices and choosing to buy back their own equity rather than make new investments.”
In the next and final post on living standards, we will see what can be done to reform the scandal of the rise of this new aristocracy at the top of companies in our democratic societies. One which has distorted the management of these companies, often into losing billions, leading to many job losses and which contributed so much to the financial crisis.
In the last post, it was seen that the middle is being squeezed. In this one we will have a look over the pay, or more accurately the remuneration, that some of the biggest and best of our great corporate leaders have paid themselves, and issues around why they get away with it.
It will be seen that even with the Crash of 2008, and the poor performance of many firms, they are a paying themselves far too much. And the shareholder value system which is supposed to govern them is clearly broken. The top executives run the top firms as personal fiefdoms – not to generate added value for shareholders, workers and communities, but mainly for themselves. The post war business model of “shareholder value” is broken too.
Indeed, in just five or seven years at the top of a major corporation, many top executives pay themselves staggering amounts. Such are the “rewards” extracted from the firms that they have become a new aristocracy, whereby, after a life of untold luxury, they can leave vast sums, often untaxed, to their descendants.
As the typical company board resembles a retirement home for the great and the good, usually male and from the same social background, with many cross-directorships (as shown so clearly for Ireland in Mapping the Golden Circle published by TASC in 2010). Boards are filled with retired businessmen, ousted politicians and, more recently, retired senior public servants from regulators or economic departments, all of whom are selected, by each other, on the basis of their unwillingness to challenge each other or the company’s executives.
In the UK there is a raging debate on executive pay and particularly on top bankers' pay. The UK public is incensed at the pay the bosses of the state owned banks are paying themselves.
RBS is 83 per cent state-owned and has been the target of the UK Chancellor's calls for restraint as the banks announce their bonus awards next month. Despite being under strong pressure to pay less to their bosses, and the fact that its share price fell by almost half in 2011 and that it has sacked thousands of employees – RBS’s board is going ahead with plans to pay big bonuses to its top executives. CEO Stephen Hester is getting the maximum pay-out of 6m shares for 2011 – worth about £1.5m on the closing price of a week ago. That is 25 per cent less than the £2.04m bonus he accepted last year. This is on top of his basic salary of £1.2 million.
John Hourican, head of its investment banking business, is about to receive a £5m share bonus that was awarded in 2009. The latest bonus round comes as RBS makes thousands more job cuts after deciding to close large parts of its investment banking business.
Bob Diamond, Barclays’ chief executive announced in line for a £10 million bonus, leading to renewed anger about the excessive rewards enjoyed by bankers. Barclays shed 3,000 jobs across the group last year.
Mr Diamond, once described by Lord Mandelson as ‘the unacceptable face of banking’, is “entitled” to a bonus in shares of up to seven and a half times his £1.35million salary.
Diamond introduced what he calls 'the no-jerk rule' and has encouraged at least 40 executives at his firm to find jobs elsewhere. The American-born chief executive of Barclays said he does not care how good people are at what they do, if they are not suitable, they will be told to go. He said dozens of executives have been shown the door after behaving like jerks or spending lavish amounts of money.
The median income of FTSE 100 bosses has soared from 47 to 102 times employees’ median earnings since 2000. Similarly, senior executives’ pay has quadrupled since 2002, while the FTSE 100 index has stagnated and employee pay has gone up by a fraction of the amount.
FTSE 100 directors had a 49 per cent increase in their total earnings the last financial years. This gave them an average pay of £2.7 million each.
Top earners at some of the world’s biggest banks are still taking annual bonus equal to their salary according to a survey by the Financial Stability Board, a Basel-based committee of regulators. The use of bonuses is particularly pronounced in the US and the UK, where bonus payments account for between 80 and 96 per cent of the total pay awarded to US banks’ highest-paid employees, and between 78 and 93 per cent of the total pay awarded to UK banks’ highest-paid executives, according to the survey.
The world’s super rich are taking delivery of ever larger and more motor yachts this year with the biggest being “Topaz” a 147 metre yacht built in Germany for the Al Nahyan family of Abu Dhabi. These cost over $100m and can cost $1m a week to charter. Topaz will be the fourth in length with Roman Abramovich Eclipse a 164m being the largest. In spite of the recession, more of these super yachts were sold last year than in 2010.
Let’s have a quick look at some of the remuneration packages which the executives of top companies are “earning”. And remember, there are then of thousand of staggeringly wealthy people, who like Mitt Romney have such vast wealth that it is generating incomes of tens of millions a year, without having to work. And most pay little tax, under the regimes which have become acceptable in even “social” Europe. Such is the level of acceptance of low taxes for rich people that some regular folks even are heard to “praise” Michael O’ Leary for paying his income tax here. But if his wealth is €600 million and it generates 5 per cent a year, that’s another €30m. What is the rate of tax he pays on this?
The highest paid UK executives in 2010/11 were Mick Davis of Xstrata who paid himself £18.4m, followed closely behind by Bert Becht of Reckett Benckiser at $17.9m. Next was Michael Spencer of ICAP at $13.4m and our own Sir Terry Leahy of Tesco at a mere €12m. Tesco refuse to publish separate accounts for their Irish operations in case we see how well they are doing here (with Government approval). Close behind was Tom Albanese of Rio Tinto at $11.6m.
This week the UK government watered down its plans to tackle executive pay. It is now only seeking to get shareholders to change company policy with a binding vote on remuneration. It eschewed direct regulation and the mild reforms were welcomed by the likes of PWC, the CBI employers’ group, and the Institute of Directors. Mr Cable, the Business Secretary, was under pressure from Downing Street, and withdrew the proposal that most worried companies’ bosses – putting an employee representative on the remuneration committee. He also backed off the reform to require companies to publish a standardised ratio between executive pay and employee earnings, which would have been more transparent. A single pay figure for total pay of each director is to be published, which is one small step forward. Cable is still unsure about barring executives from one company from sitting on the remuneration committee of another.
The British Labour Party recently promised a new regime of transparency and the publication of a league table of companies that have the biggest pay gaps between bosses and shopfloor staff and to have employee reps on the remuneration committees.
Francisco Luzón, a senior director of Santander, the eurozone’s biggest bank by market capitalisation, is retiring with a pension pot of €56m. He ran the Americas division for 15 years as an executive director. Santander remained profitable throughout the western world’s economic and financial crisis thanks in part to its lucrative operations in Brazil and elsewhere in Latin America.
The annual salary of Lloyd Blankfein, Goldman’s chief executive, more than tripled in January, from $600,000 to $2m. Bankers at other groups have had their fixed pay increased by between 30 and 100 per cent, depending on their seniority, according to headhunters.
A few years ago the head of Porsche Wendelin Wiedenkin was Europe’s highest paid businessman with €67m in 2007. There was outrage in Germany as CEOs who had “earned” 14 times average employees salaries ten years earlier, were by then pulling 44 times the average.
In an unusual move, shareholders at Cairn Energy’s blocked plans to award its chairman an extra £2.5m share incentive this week.
Moving to Ireland, just a few years ago, here was the pay of the Anglo Irish Bank Bosses in 2007.
Sure was not every cent of the 8.4 million paid to these guys warranted? Look at the value they added to the banks and to Ireland. But did not the Irish taxpayer pay just one of the debts run up by these immensely rewarded men on 25th January for a staggering €1.3bn.
Here was the pay of some top executives back in 2006
The above pay of Irish bosses is from “Narrowing the Pay Gap”, published by Irish Congress of Trade Unions back in early 2998. When it was published, few were interested in high pay, as the Crash, well underway, was hardly noticeable. Today, we have an inordinate focus on what our money as consumers or taxpayers is paying our betters/servants.
Andrew Smithers, an interesting UK financial commentator, of Smithers and Co, quoted in the FT on 6th January 2012, has suggested that “the whole corporate culture in the boardroom has changed with the rise of the bonus culture and share options for business executives. They have not responded by cutting prices and competing like fury, they’ve responded by cutting staff.” The average chief executive of an S&P500 company is only in the job for five or six years and their pay is often closely linked to the share price of their corporation or to its returns on equity.
That creates strong incentives to keep profits high in the short term, and Mr Smithers suggests that “these incentives changed the way in which management has acted in the recession. Instead of hoarding labour and cutting prices to increase market share, companies are sacking workers, holding prices and choosing to buy back their own equity rather than make new investments.”
In the next and final post on living standards, we will see what can be done to reform the scandal of the rise of this new aristocracy at the top of companies in our democratic societies. One which has distorted the management of these companies, often into losing billions, leading to many job losses and which contributed so much to the financial crisis.
Obama on Income Equality and Economic Recovery
Nat O'Connor: President Obama used his State of the Union address 2012 to highlight income inequality. His speech is only one of a number of examples of a growing international awareness that economic inequality is a core problem for developed economies and societies.
In addition, his speech echoed many progressive suggestions for how to achieve economic recovery in the current context.
President Obama was very clear on the issue of inequality. For example, saying, "We can either settle for a country where a shrinking number of people do really well while a growing number of Americans barely get by, or we can restore an economy where everyone gets a fair shot ..." He observed that "Folks at the top saw their incomes rise like never before, but most hardworking Americans struggled with costs that were growing, paychecks that weren’t, and personal debt that kept piling up."
In particular, President Obama focused on the tax breaks that Congress has given to the wealthiest Americans: "Right now, we’re poised to spend nearly $1 trillion more on what was supposed to be a temporary tax break for the wealthiest 2 percent of Americans. Right now, because of loopholes and shelters in the tax code, a quarter of all millionaires pay lower tax rates than millions of middle-class households. ... Do we want to keep these tax cuts for the wealthiest Americans? Or do we want to keep our investments in everything else – like education and medical research; a strong military and care for our veterans? Because if we’re serious about paying down our debt, we can’t do both."
Obama was also clear about the mathematics of tax breaks for wealthy individuals. "... when I get a tax break I don’t need and the country can’t afford, it either adds to the deficit, or somebody else has to make up the difference — like a senior on a fixed income, or a student trying to get through school, or a family trying to make ends meet."
In terms of economic policy, President Obama is of course hugely restricted in what he can actually achieve if Congress disagrees. Also, the speech is a centrepiece of his re-election campaign, therefore some of the promises may be taken with a grain of salt. He nevertheless spelled out a clear critique of previous policy and a framework for a progressive economic recovery that would serve society.
Obama stated that "we will not go back to an economy weakened by outsourcing, bad debt, and phony financial profits."
He outlined some measures to help "responsible homeowners" caught in mortgage debt, such as "a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low rates." And it would be financed through "A small fee on the largest financial institutions [to] ensure that it won’t add to the deficit and will give those banks that were rescued by taxpayers a chance to repay a deficit of trust."
Obama made a number of observations about the same rules applying equally to everyone, including the financial system: "we need smart regulations to prevent irresponsible behavior." ... "if you are a big bank or financial institution, you’re no longer allowed to make risky bets with your customers’ deposits. You’re required to write out a 'living will' that details exactly how you’ll pay the bills if you fail – because the rest of us are not bailing you out ever again." And significantly, Obama seeks to "establish a Financial Crimes Unit of highly trained investigators to crack down on large-scale fraud and protect people’s investments."
As he outlined his preferred economic policies, Obama's message on multinational corporations should not be ignored in Ireland: "no American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas" ... "From now on, every multinational company should have to pay a basic minimum tax. And every penny should go towards lowering taxes for companies that choose to stay here and hire here in America."
He had a clear focus on supporting productive investment and job creation in the USA, especially good jobs in deprived areas: "if you’re an American manufacturer, you should get a bigger tax cut. If you’re a high-tech manufacturer, we should double the tax deduction you get for making your products here. And if you want to relocate in a community that was hit hard when a factory left town, you should get help financing a new plant, equipment, or training for new workers."
He also identified the important role of education in long-term sustainable growth: "Higher education can’t be a luxury - it is an economic imperative that every family in America should be able to afford."
He also had clear messages on gender equality and environmental sustainability: "women should earn equal pay for equal work" and "we don’t have to choose between our environment and our economy".
He clearly identified that productive investment by government can form part of productive investment to grow the economy, for example: "government support is critical in helping businesses get new energy ideas off the ground".
Furthermore he identified the need to repair national infrastructure: "So much of America needs to be rebuilt. We’ve got crumbling roads and bridges; a power grid that wastes too much energy; an incomplete high-speed broadband network that prevents a small business owner in rural America from selling her products all over the world."
In brief, Obama's desired economic policy is: smart regulation of financial institutions; ensure multinationals pay their taxes; support for manufacturing (especially high-tech and investments in deprived areas); affordable higher education for all; equal pay for women and men; environmentally sound investments in clean energy; government-funded research and development; and state-led action to repair and rebuild national infrastructure (from basics like roads, to new essentials like broadband).
All of these objectives are equally valid here and should form part of a Plan B alternative to current economic policies that are socially destructive and economically inefficient.
Of course, while supporting much that Obama proposes, one can still dislike a lot of the reality of US economic policy and accompanying ideology. The admiration of wealth gained by 'success' tends to underestimate the deep economic and social divides between different groups in the USA, and the reality that a family's wealth often allows their children to become wealthy in turn. Likewise, the narrow focus on equality of opportunity tends to ignore the evidence that a measure of equality of outcome is required before an economic system will actually reward merit rather than privilege. Nonetheless, there is much to agree with in the economic vision that Obama has outlined. Just as there is much to disagree with the lack of a similar vision for a change of direction in economic policy here.
In addition, his speech echoed many progressive suggestions for how to achieve economic recovery in the current context.
President Obama was very clear on the issue of inequality. For example, saying, "We can either settle for a country where a shrinking number of people do really well while a growing number of Americans barely get by, or we can restore an economy where everyone gets a fair shot ..." He observed that "Folks at the top saw their incomes rise like never before, but most hardworking Americans struggled with costs that were growing, paychecks that weren’t, and personal debt that kept piling up."
In particular, President Obama focused on the tax breaks that Congress has given to the wealthiest Americans: "Right now, we’re poised to spend nearly $1 trillion more on what was supposed to be a temporary tax break for the wealthiest 2 percent of Americans. Right now, because of loopholes and shelters in the tax code, a quarter of all millionaires pay lower tax rates than millions of middle-class households. ... Do we want to keep these tax cuts for the wealthiest Americans? Or do we want to keep our investments in everything else – like education and medical research; a strong military and care for our veterans? Because if we’re serious about paying down our debt, we can’t do both."
Obama was also clear about the mathematics of tax breaks for wealthy individuals. "... when I get a tax break I don’t need and the country can’t afford, it either adds to the deficit, or somebody else has to make up the difference — like a senior on a fixed income, or a student trying to get through school, or a family trying to make ends meet."
In terms of economic policy, President Obama is of course hugely restricted in what he can actually achieve if Congress disagrees. Also, the speech is a centrepiece of his re-election campaign, therefore some of the promises may be taken with a grain of salt. He nevertheless spelled out a clear critique of previous policy and a framework for a progressive economic recovery that would serve society.
Obama stated that "we will not go back to an economy weakened by outsourcing, bad debt, and phony financial profits."
He outlined some measures to help "responsible homeowners" caught in mortgage debt, such as "a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low rates." And it would be financed through "A small fee on the largest financial institutions [to] ensure that it won’t add to the deficit and will give those banks that were rescued by taxpayers a chance to repay a deficit of trust."
Obama made a number of observations about the same rules applying equally to everyone, including the financial system: "we need smart regulations to prevent irresponsible behavior." ... "if you are a big bank or financial institution, you’re no longer allowed to make risky bets with your customers’ deposits. You’re required to write out a 'living will' that details exactly how you’ll pay the bills if you fail – because the rest of us are not bailing you out ever again." And significantly, Obama seeks to "establish a Financial Crimes Unit of highly trained investigators to crack down on large-scale fraud and protect people’s investments."
As he outlined his preferred economic policies, Obama's message on multinational corporations should not be ignored in Ireland: "no American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas" ... "From now on, every multinational company should have to pay a basic minimum tax. And every penny should go towards lowering taxes for companies that choose to stay here and hire here in America."
He had a clear focus on supporting productive investment and job creation in the USA, especially good jobs in deprived areas: "if you’re an American manufacturer, you should get a bigger tax cut. If you’re a high-tech manufacturer, we should double the tax deduction you get for making your products here. And if you want to relocate in a community that was hit hard when a factory left town, you should get help financing a new plant, equipment, or training for new workers."
He also identified the important role of education in long-term sustainable growth: "Higher education can’t be a luxury - it is an economic imperative that every family in America should be able to afford."
He also had clear messages on gender equality and environmental sustainability: "women should earn equal pay for equal work" and "we don’t have to choose between our environment and our economy".
He clearly identified that productive investment by government can form part of productive investment to grow the economy, for example: "government support is critical in helping businesses get new energy ideas off the ground".
Furthermore he identified the need to repair national infrastructure: "So much of America needs to be rebuilt. We’ve got crumbling roads and bridges; a power grid that wastes too much energy; an incomplete high-speed broadband network that prevents a small business owner in rural America from selling her products all over the world."
In brief, Obama's desired economic policy is: smart regulation of financial institutions; ensure multinationals pay their taxes; support for manufacturing (especially high-tech and investments in deprived areas); affordable higher education for all; equal pay for women and men; environmentally sound investments in clean energy; government-funded research and development; and state-led action to repair and rebuild national infrastructure (from basics like roads, to new essentials like broadband).
All of these objectives are equally valid here and should form part of a Plan B alternative to current economic policies that are socially destructive and economically inefficient.
Of course, while supporting much that Obama proposes, one can still dislike a lot of the reality of US economic policy and accompanying ideology. The admiration of wealth gained by 'success' tends to underestimate the deep economic and social divides between different groups in the USA, and the reality that a family's wealth often allows their children to become wealthy in turn. Likewise, the narrow focus on equality of opportunity tends to ignore the evidence that a measure of equality of outcome is required before an economic system will actually reward merit rather than privilege. Nonetheless, there is much to agree with in the economic vision that Obama has outlined. Just as there is much to disagree with the lack of a similar vision for a change of direction in economic policy here.
Wednesday 25 January 2012
Draft heads of Personal Insolvency Bill out today- at long last!
Marie Sherlock: The long awaited heads of the Draft Personal Insolvency Bill was published today and at first glance, there is much to welcome.
For too long Ireland has stood far behind most other advanced industrial countries in not having a non-judicial framework in place to address contemporary problems of over- indebtedness, but Ireland will now move ahead of the curve by including not only unsecured, but also secured, typically mortgage debt in the new debt settlement institution. The problem of addressing the debt overhang problem could only ever be achieved by adopting a holistic approach to all forms of debt currently borne by Irish households, and I’m glad to say that today’s draft is a vital first step in the right direction.
There are three new forms of non-judicial debt resolution proposed (i) debt relief certificates to cater for unsecured debt under €20,000, (ii) debt settlement arrangements to cater for unsecured debts over the value of €20,001 and (iii) personal insolvency arrangements which will cover unsecured and secured debt up to a value of €3m.
Ultimately, it would seem that the success or failure of the non-judicial system to function as a less costly, more effective and more humane system for dealing with the problem of over-indebtedness in this country, will rest on five key measures.
The first is that debtors wishing to enter a non-judicial process will have access to appropriate advice and representation. The draft bill sets out clear guidelines for each of the three debt resolution processes on how the intermediary (for the debt relief certificate) or personal insolvency trustee (for the debt settlement and personal insolvency arrangements) will advise the debtors and mediate in the debt resolution process.
The only concern is that debtors should not be saddled with excessive costs for this service, but the draft bill states that other the initial fee, the debtor will not have to bear the costs of the process. There is some mention that the Insolvency service will “recover costs”, but does not state from whom. I would firmly share the view of the Law Reform Commission which was set out in their 2010 Report on Personal Debt Management in Ireland that the State should not be made bear these costs (for a task that if the Banks were doing correctly, there would be no need for these new processes) and that the creditors should be held liable.
The second key measure will be the success in forcing the banks to the negotiating table. There is some concern that the banks have an effective veto over their participation- the personal insolvency process depends on the agreement of 75% of “secured” creditors- which is typically the mortgage lender. Given what we know about the practises of some lenders in this country and that some 50% of those mortgages in arrears are with banks outside the “covered” institutions, there is a danger that some mortgage lenders will not engage. However it must also be noted that failure to participate in the non judicial process will be factored into consideration in the awarding of costs if a bankruptcy petition goes to the Courts.
The third measure is that a decent minimum level of income must be established for households who enter any of the three non judicial processes and to its credit the draft heads of Bill is very clear on this. But the detail has yet to be ironed out and will be set out by way of ministerial regulation. Imposing a new repayment schedule in a debt settlement/insolvency arrangement should not have the effect of forcing more households into a dependence on social welfare. Already, we have seen that the availability of the mortgage interest supplement has become an implicit subsidy to the Banks, while helping households’ repay some of their mortgage. The Social welfare system and the State must not be made take on any more of the costs of resolving the problems of the banks.
Fourthly, keeping people in their homes, where it is viable to do so will be a key measure of success, so that additional pressure in not loaded on an already over-subscribed social housing waiting list. Remember that as of the end of September 2011, over one in eight mortgages held in this country were either in arrears or had pre-empted arrears by restructuring the mortgage schedule or payment. Personal insolvency will not necessarily result in an individual having to surrender their home and the Bill details how the recommendations of the Keane report on mortgage arrears published last October, must be considered as part of the range of options for the debtor in terms of split mortgages, mortgage to rent and trade down mortgages, even though these proposals are not without their problems in terms of broad assumptions on rising incomes and increasing house values.
In terms of the balance sheet implications for the banks, the draft heads of bill specifies that no write down can be below the current value of the security, so if the bottom up stress testing exercise undertaken by Blackrock was done correctly last Spring, then the corresponding negative impact of a write down on the Bank’s balance sheet should be limited to the rolled up and future interest payments.
On a final note, this legislation has been long overdue but support for its introduction has taken time to gain traction and support, with plenty of doomsayers talking up the risks of moral hazard. Indeed, I remember sometime in late 2008 doing an radio debate against a certain economics professor from NUIG before he took up the role of Special Adviser to the Minister for Finance and was dismissed out of hand when putting forward our (hardly radical) proposals for distressed mortgage holders! But back to the draft heads of Bill, provision has been made for reform of the judicial bankruptcy procedures with the reduction in the discharge period from 12years down to 3years which opens up a significant difference in the discharge period between the judicial and non judicial procedures. Non judicial personal insolvency has a discharge period of 6-7 years. The terms of discharge for a bankrupt appear to be much more onerous, with 50% of all preferential creditors to be paid and a possible extension of the discharge period out to 8 years.
On a superficial level, the lack of a level playing pitch between the discharge periods for these two processes may appear unjust to a public dissatisfied with the pace in which delinquent bankers are being pursued and uneasy about salaries of €200,000 paid to developers co-operating with Nama. The Government will have a significant job to do in communicating its reasons for the distinction.
For too long Ireland has stood far behind most other advanced industrial countries in not having a non-judicial framework in place to address contemporary problems of over- indebtedness, but Ireland will now move ahead of the curve by including not only unsecured, but also secured, typically mortgage debt in the new debt settlement institution. The problem of addressing the debt overhang problem could only ever be achieved by adopting a holistic approach to all forms of debt currently borne by Irish households, and I’m glad to say that today’s draft is a vital first step in the right direction.
There are three new forms of non-judicial debt resolution proposed (i) debt relief certificates to cater for unsecured debt under €20,000, (ii) debt settlement arrangements to cater for unsecured debts over the value of €20,001 and (iii) personal insolvency arrangements which will cover unsecured and secured debt up to a value of €3m.
Ultimately, it would seem that the success or failure of the non-judicial system to function as a less costly, more effective and more humane system for dealing with the problem of over-indebtedness in this country, will rest on five key measures.
The first is that debtors wishing to enter a non-judicial process will have access to appropriate advice and representation. The draft bill sets out clear guidelines for each of the three debt resolution processes on how the intermediary (for the debt relief certificate) or personal insolvency trustee (for the debt settlement and personal insolvency arrangements) will advise the debtors and mediate in the debt resolution process.
The only concern is that debtors should not be saddled with excessive costs for this service, but the draft bill states that other the initial fee, the debtor will not have to bear the costs of the process. There is some mention that the Insolvency service will “recover costs”, but does not state from whom. I would firmly share the view of the Law Reform Commission which was set out in their 2010 Report on Personal Debt Management in Ireland that the State should not be made bear these costs (for a task that if the Banks were doing correctly, there would be no need for these new processes) and that the creditors should be held liable.
The second key measure will be the success in forcing the banks to the negotiating table. There is some concern that the banks have an effective veto over their participation- the personal insolvency process depends on the agreement of 75% of “secured” creditors- which is typically the mortgage lender. Given what we know about the practises of some lenders in this country and that some 50% of those mortgages in arrears are with banks outside the “covered” institutions, there is a danger that some mortgage lenders will not engage. However it must also be noted that failure to participate in the non judicial process will be factored into consideration in the awarding of costs if a bankruptcy petition goes to the Courts.
The third measure is that a decent minimum level of income must be established for households who enter any of the three non judicial processes and to its credit the draft heads of Bill is very clear on this. But the detail has yet to be ironed out and will be set out by way of ministerial regulation. Imposing a new repayment schedule in a debt settlement/insolvency arrangement should not have the effect of forcing more households into a dependence on social welfare. Already, we have seen that the availability of the mortgage interest supplement has become an implicit subsidy to the Banks, while helping households’ repay some of their mortgage. The Social welfare system and the State must not be made take on any more of the costs of resolving the problems of the banks.
Fourthly, keeping people in their homes, where it is viable to do so will be a key measure of success, so that additional pressure in not loaded on an already over-subscribed social housing waiting list. Remember that as of the end of September 2011, over one in eight mortgages held in this country were either in arrears or had pre-empted arrears by restructuring the mortgage schedule or payment. Personal insolvency will not necessarily result in an individual having to surrender their home and the Bill details how the recommendations of the Keane report on mortgage arrears published last October, must be considered as part of the range of options for the debtor in terms of split mortgages, mortgage to rent and trade down mortgages, even though these proposals are not without their problems in terms of broad assumptions on rising incomes and increasing house values.
In terms of the balance sheet implications for the banks, the draft heads of bill specifies that no write down can be below the current value of the security, so if the bottom up stress testing exercise undertaken by Blackrock was done correctly last Spring, then the corresponding negative impact of a write down on the Bank’s balance sheet should be limited to the rolled up and future interest payments.
On a final note, this legislation has been long overdue but support for its introduction has taken time to gain traction and support, with plenty of doomsayers talking up the risks of moral hazard. Indeed, I remember sometime in late 2008 doing an radio debate against a certain economics professor from NUIG before he took up the role of Special Adviser to the Minister for Finance and was dismissed out of hand when putting forward our (hardly radical) proposals for distressed mortgage holders! But back to the draft heads of Bill, provision has been made for reform of the judicial bankruptcy procedures with the reduction in the discharge period from 12years down to 3years which opens up a significant difference in the discharge period between the judicial and non judicial procedures. Non judicial personal insolvency has a discharge period of 6-7 years. The terms of discharge for a bankrupt appear to be much more onerous, with 50% of all preferential creditors to be paid and a possible extension of the discharge period out to 8 years.
On a superficial level, the lack of a level playing pitch between the discharge periods for these two processes may appear unjust to a public dissatisfied with the pace in which delinquent bankers are being pursued and uneasy about salaries of €200,000 paid to developers co-operating with Nama. The Government will have a significant job to do in communicating its reasons for the distinction.
The Promissory Notes
Tom McDonnell: The IBRC promissory notes have attracted a lot of attention in recent days. Karl Whelan, Seamus Coffey, the Nama Wine Lake contributors, the Debt Justice Action Group and many others have all highlighted and explained this issue very well. Here is a brief primer (click on bottom right to view in full screen mode):
The Debt Trap
Sinéad Pentony: The dust has hardly settled from the Troika’s departure when we are facing the repayment of €1.25 billion in unsecured bonds that are not covered by the bank guarantee to Anglo bondholders today.
Last week the Troika asserted that the “front loaded fiscal consolidation is on track, with the 2011 deficit significantly below the programme target”. Recent growth has been on the back of a strong performing export sector, but as forecasts for global growth are reduced, this channel for growth will diminish and it is going to become increasingly difficult to achieve the deficit reduction targets set out in the EU/IMF Programme of Financial Support for Ireland.
The deficit stood at 10.1 per cent (€16 billion) in 2011 and Budget 2012 is intended to reduce this to 8.6 per cent (€13.5 billion). In an attempt to reduce the deficit by €2.5 billion, cuts of €3.8 billion are being imposed. In the absence of strong growth domestically and globally, the government will have to face the prospect of having to cut more to achieve a smaller reduction in the deficit.
This is before we factor in the servicing/repayments of (sovereign and banking) debts, which includes today’s repayment of €1.25 billion in unsecured bonds and a further €3.1 billion in Anglo promissory notes at the end of March. Given the current state of our finances, these repayments will have to be financed through borrowing, which adds a further cost – interest.
The Anglo–Not Our Debt campaign which TASC is supporting has been raising awareness and generating much-needed debate on the issue. These debts are strangling our economy and we cannot begin the process of recovery until they are re-negotiated and re-structured.
We are borrowing to pay/service debts and we are borrowing to run the country, but repayments all come from the same source – government revenue (mostly taxes and charges). If we continue down this road we will see an ever-increasing proportion of taxation revenue being diverted to service/repay debt. This will result in further reductions in the revenue used to maintain and upgrade our infrastructure, finance health services and provide schools and housing – unless of course taxes and charges are increased.
Increasing tax revenue can only be achieved if the economy is growing and more people are working, but we are missing one essential ingredient - investment. The Troika identified “subdued” domestic demand and lower GDP growth projections of 0.5 per cent as the major challenges facing Ireland in 2012, both of which can be solved through significant investment in physical infrastructure and human capital. The question that is always asked is ‘where will the money come from?’.
There have been lots of creative proposals and suggestions put forward on where finance could be found. A quick look at the 2010 European Investment Bank (EIB) Activity and Financial Reports show that EIB lending reached €72 billion in 2010 and it made a net profit of over €2 billion in 2010. The EIB is a triple A-rated bank and can therefore borrow at very low rates of interest.
Member states are required to provide matching funding averaging 50 per cent. But given the scale of the crisis, it would make sense to reduce the level of matching funds required. This would facilitate increased lending and much great leveraging of EU resources, particularly by the countries utilising the EFSF (Ireland, Greece and Portugal): while our scope for investment is much more limited, such investment is essential for recovery. However, this will require the agreement of member states.
The latest report from the International Labour Organisation (ILO) on Global Employment Trends 2012 should provide all political leaders with much needed motivation to start coming up with policy responses that will put struggling economies on a sustainable path to recovery.
The ILO report is called “Preventing a Deeper Jobs Crisis” and it states that the world faces the “urgent challenge of creating 600 million productive jobs over the next decade in order to generate sustainable growth and maintain social cohesion.”
The report also calls for fiscal consolidation efforts to be carried out in a socially responsible manner, with growth and employment prospects as guiding principles. Budget 2012 and the decision to repay unsecured bondholders today, provide ample evidence that these guiding principles are not being applied in Ireland.
Last week the Troika asserted that the “front loaded fiscal consolidation is on track, with the 2011 deficit significantly below the programme target”. Recent growth has been on the back of a strong performing export sector, but as forecasts for global growth are reduced, this channel for growth will diminish and it is going to become increasingly difficult to achieve the deficit reduction targets set out in the EU/IMF Programme of Financial Support for Ireland.
The deficit stood at 10.1 per cent (€16 billion) in 2011 and Budget 2012 is intended to reduce this to 8.6 per cent (€13.5 billion). In an attempt to reduce the deficit by €2.5 billion, cuts of €3.8 billion are being imposed. In the absence of strong growth domestically and globally, the government will have to face the prospect of having to cut more to achieve a smaller reduction in the deficit.
This is before we factor in the servicing/repayments of (sovereign and banking) debts, which includes today’s repayment of €1.25 billion in unsecured bonds and a further €3.1 billion in Anglo promissory notes at the end of March. Given the current state of our finances, these repayments will have to be financed through borrowing, which adds a further cost – interest.
The Anglo–Not Our Debt campaign which TASC is supporting has been raising awareness and generating much-needed debate on the issue. These debts are strangling our economy and we cannot begin the process of recovery until they are re-negotiated and re-structured.
We are borrowing to pay/service debts and we are borrowing to run the country, but repayments all come from the same source – government revenue (mostly taxes and charges). If we continue down this road we will see an ever-increasing proportion of taxation revenue being diverted to service/repay debt. This will result in further reductions in the revenue used to maintain and upgrade our infrastructure, finance health services and provide schools and housing – unless of course taxes and charges are increased.
Increasing tax revenue can only be achieved if the economy is growing and more people are working, but we are missing one essential ingredient - investment. The Troika identified “subdued” domestic demand and lower GDP growth projections of 0.5 per cent as the major challenges facing Ireland in 2012, both of which can be solved through significant investment in physical infrastructure and human capital. The question that is always asked is ‘where will the money come from?’.
There have been lots of creative proposals and suggestions put forward on where finance could be found. A quick look at the 2010 European Investment Bank (EIB) Activity and Financial Reports show that EIB lending reached €72 billion in 2010 and it made a net profit of over €2 billion in 2010. The EIB is a triple A-rated bank and can therefore borrow at very low rates of interest.
Member states are required to provide matching funding averaging 50 per cent. But given the scale of the crisis, it would make sense to reduce the level of matching funds required. This would facilitate increased lending and much great leveraging of EU resources, particularly by the countries utilising the EFSF (Ireland, Greece and Portugal): while our scope for investment is much more limited, such investment is essential for recovery. However, this will require the agreement of member states.
The latest report from the International Labour Organisation (ILO) on Global Employment Trends 2012 should provide all political leaders with much needed motivation to start coming up with policy responses that will put struggling economies on a sustainable path to recovery.
The ILO report is called “Preventing a Deeper Jobs Crisis” and it states that the world faces the “urgent challenge of creating 600 million productive jobs over the next decade in order to generate sustainable growth and maintain social cohesion.”
The report also calls for fiscal consolidation efforts to be carried out in a socially responsible manner, with growth and employment prospects as guiding principles. Budget 2012 and the decision to repay unsecured bondholders today, provide ample evidence that these guiding principles are not being applied in Ireland.
(III) The squeezed middle
Paul Sweeney: There has been much discussion on what is called the Squeezed Middle. This refers to those middle class families who are seeing declines in their incomes and in additional benefits, like free college fees in the UK or reduced health care. It is a real issue. There is a strong case for what are called middle class people to join with the working class for a rebalancing in society through a downward adjustment in the incomes and wealth of those who are taking too much – those at the top.
This would not just be a redistribution on grounds of equity: a more equitable society also generates more demand and investment in the economy.
As will be seen in other posts in this series, the decline in incomes was hidden or masked by the credit boom when the chattering classes could only talk about the rise in the value of their homes. They believed that they were substantially better off and took longer or more expensive holidays, bought cars they really could not afford, and ate out more.
With the credit boom well and truly over, the middle classes everywhere are now feeling the squeeze. Politicians are raising taxes to pay for big holes in public finances and cutting public services, many of which the middle class also enjoy. It is hurting nowhere more than here in Ireland, as our collapse is the biggest and worst, exacerbated by the gravely erroneous decision to repay all private bank debts, in full and with all interest.
It has been seen that there are harsh lessons from the USA where median incomes have not risen since the early 1970s in real terms. This means that most Americans have not seen any improvement in their living standards for about 40 odd years. Many had the illusion of improvement when they took equity out of their homes during the housing bubble. In contrast, here in Ireland we have seen a great rise in real incomes in the 20 years up to the Crash of 2008.
As there has been substantial growth in the US and also in productivity in the period, where is the rise in national income per head going? As the Occupy Movement correctly reminds us, it is going to the very top. It is the top 1 per cent in the US who are pocketing all the money earned by the majority. Back 40 years ago, this elite pocketed 8 per cent of national income, but now they take almost one fifth of all income in the US.
While there are varying statistics on the infamous top 1 %, I have not seen any reasonable analysis which does not broadly concur that they have been reaping most of the rewards of growth in the US.
In the US the cost of healthcare and of college education has soared. In the States one can go to university in one’s own state for modest fees, but as the public universities are strapped for cash, with the cutbacks in public funding – because of the tax cuts over the decades, they are raising fees. And private colleges charge fees of $30-40,000 and more a year. 75% of Americans now think college is too expensive, according to Pew Research. And when you graduate, all is not rosy. Many graduates have huge debts to repay. Also while college graduates typically earned €20,000 a year more than non graduates in the US, this is changing. Average starting salaries for college graduates in the US have been falling in the past four years.
Owning your own home, and latterly getting a college education, was part of the American Dream. Now both are not repaying in the way that hard working American families expected. They feel very let down by the system.
There are similar trends in many other countries of the Western world, where education is not the social escalator it once was. European states are cutting public services and that includes education and health. Both are labour intensive and expensive. Health inflation has been far higher than average inflation for years. People want better public services but do not want to pay for them. Our government, certainly the FG wing, promises no rise in income tax. The government programme laid out to 2015 for the Troika shows a reduction in public spending from 45 per cent in 2011 to just 38 per cent in 2014 (assuming growth at 4 per cent!).
And we are to repay the bondholders in full, which may knock perhaps up to two per cent off GDP for decades? Meaning less for schools, roads, hospitals and other public services, which are not just used by the working class.
A further insecurity for the middle class, which we have seen very clearly in Ireland, is the reneging on the promises made for employees on retirement. In many middle class jobs, you could expect to retire at 60 or 65 with a good pension of half your final salary - or in some cases even two thirds. And it was linked to rises in salaries (which generally rise faster than inflation) back in the office. The wholesale move by employers, including some of the very best employers and richest firms, to get rid of defined benefit pensions has hit the middle class very hard. Many younger people have not realised how much this action will cost them. And pension adjustments include working longer, though we are all living much longer. But that is cutting off job opportunities for graduates and other young people at the entry scales.
Many of the pension changes represent a unilateral change to a key element of the social contract which people in Western societies had come to expect. Of course, such pensions were based on financial markets. They had been moved from solid investments to more speculative investments by fund managers, and so the schemes got severely burnt. People are also living longer than the actuaries had calculated. For some years, these pension funds performed so well that few considered the possible alternative of paying more for an enhanced and safer state pension. That must be an alternative now.
Of course, if the middle class are being squeezed, spare a thought for the working class. In the US and Europe the mass departure of well-paid manufacturing jobs to Asia has hit this class hard. In Ireland the huge collapse of construction has hit manual and skilled workers (and professionals and others) brutally too. Ireland still has a fair proportion of manufacturing jobs, but many are taken by the middle class. But the manufacturing sector is not as safe as it used to be. Weekly we see the threats from mobile capital to shift abroad unless our government does this or that. The alternative service sector jobs are not as well paid, though here in Ireland, where service exports now almost equal good exports, service jobs can be very good.
But it could be worse. The West has built up a good safety net in social security, healthcare and education for its citizens which has helped. Middle classes also benefit hugely from public spending in these areas. This safety net has also acted as an “automatic stabiliser” in this major recession, boosting demand to a level it would not have reached in it its absence. It is important that the welfare state is preserved and maintained even with the stark challenges which face us here in Ireland and elsewhere.
While the growth in the incomes and wealth of the top 1 per cent has soared to levels which have brought the divide back to around the level of the 1920s in the US, and perhaps also in the UK and some other states, it is unlikely to go back to the level of Victorian times. This is because of the safety net which protects both those at the bottom and many in the middle. What is most interesting is that, with several decades of growing pressure on the Squeezed Middle in the US, as it is they who represent most voters, they have not found a way to rebuild the American Dream. Indeed, astute observes would argue that the Squeezed Middle in the US seems hell-bent on increased, python-like squeezing of itself.
Is this what awaits us in Europe? The current leadership in Europe, while incapable of real leadership and decisiveness on dealing with the Euro and the broader European economic crisis, is very cunningly dismantling Social Europe. Three currently proposed Commission “reforms” will make things a lot worse for the vast majority of EU citizens. First, Monti 2 will curb trade unions greatly in collective bargaining; the Euro Plus Pact will institutionalise the shift in national income from labour to capital under a lot of verbiage about “competiveness” and thirdly, the pre-Keynesian straight jacket which it is designing for “balanced Budgets” will greatly hamper any actions that progressive governments can take in times of crisis.
In conclusion, trends generated by globalisation, technology and de-regulation have rapidly transformed western economies, brought much progress, but also much change which is uncomfortable for many, including the middle classes. Cuts in public spending by governments, which have had to bail out private banks, and the loss of revenue through the general collapse, have engendered greater insecurity. The shifts in jobs to lower cost areas and enabling technology which allows former higher quality jobs to be outsourced abroad is hitting middle class security. Whether the “coping classes”, who are the voting classes, will seek an effective re-alignment in politics to give greater protection from rapid change and recognise the value of taxation, remains to be seen.
In the next post I will look at the great improvements in living standards enjoyed by the new aristocracy, the great “entrepreneurs” - i.e., top executives of top firms.
This would not just be a redistribution on grounds of equity: a more equitable society also generates more demand and investment in the economy.
As will be seen in other posts in this series, the decline in incomes was hidden or masked by the credit boom when the chattering classes could only talk about the rise in the value of their homes. They believed that they were substantially better off and took longer or more expensive holidays, bought cars they really could not afford, and ate out more.
With the credit boom well and truly over, the middle classes everywhere are now feeling the squeeze. Politicians are raising taxes to pay for big holes in public finances and cutting public services, many of which the middle class also enjoy. It is hurting nowhere more than here in Ireland, as our collapse is the biggest and worst, exacerbated by the gravely erroneous decision to repay all private bank debts, in full and with all interest.
It has been seen that there are harsh lessons from the USA where median incomes have not risen since the early 1970s in real terms. This means that most Americans have not seen any improvement in their living standards for about 40 odd years. Many had the illusion of improvement when they took equity out of their homes during the housing bubble. In contrast, here in Ireland we have seen a great rise in real incomes in the 20 years up to the Crash of 2008.
As there has been substantial growth in the US and also in productivity in the period, where is the rise in national income per head going? As the Occupy Movement correctly reminds us, it is going to the very top. It is the top 1 per cent in the US who are pocketing all the money earned by the majority. Back 40 years ago, this elite pocketed 8 per cent of national income, but now they take almost one fifth of all income in the US.
While there are varying statistics on the infamous top 1 %, I have not seen any reasonable analysis which does not broadly concur that they have been reaping most of the rewards of growth in the US.
In the US the cost of healthcare and of college education has soared. In the States one can go to university in one’s own state for modest fees, but as the public universities are strapped for cash, with the cutbacks in public funding – because of the tax cuts over the decades, they are raising fees. And private colleges charge fees of $30-40,000 and more a year. 75% of Americans now think college is too expensive, according to Pew Research. And when you graduate, all is not rosy. Many graduates have huge debts to repay. Also while college graduates typically earned €20,000 a year more than non graduates in the US, this is changing. Average starting salaries for college graduates in the US have been falling in the past four years.
Owning your own home, and latterly getting a college education, was part of the American Dream. Now both are not repaying in the way that hard working American families expected. They feel very let down by the system.
There are similar trends in many other countries of the Western world, where education is not the social escalator it once was. European states are cutting public services and that includes education and health. Both are labour intensive and expensive. Health inflation has been far higher than average inflation for years. People want better public services but do not want to pay for them. Our government, certainly the FG wing, promises no rise in income tax. The government programme laid out to 2015 for the Troika shows a reduction in public spending from 45 per cent in 2011 to just 38 per cent in 2014 (assuming growth at 4 per cent!).
And we are to repay the bondholders in full, which may knock perhaps up to two per cent off GDP for decades? Meaning less for schools, roads, hospitals and other public services, which are not just used by the working class.
A further insecurity for the middle class, which we have seen very clearly in Ireland, is the reneging on the promises made for employees on retirement. In many middle class jobs, you could expect to retire at 60 or 65 with a good pension of half your final salary - or in some cases even two thirds. And it was linked to rises in salaries (which generally rise faster than inflation) back in the office. The wholesale move by employers, including some of the very best employers and richest firms, to get rid of defined benefit pensions has hit the middle class very hard. Many younger people have not realised how much this action will cost them. And pension adjustments include working longer, though we are all living much longer. But that is cutting off job opportunities for graduates and other young people at the entry scales.
Many of the pension changes represent a unilateral change to a key element of the social contract which people in Western societies had come to expect. Of course, such pensions were based on financial markets. They had been moved from solid investments to more speculative investments by fund managers, and so the schemes got severely burnt. People are also living longer than the actuaries had calculated. For some years, these pension funds performed so well that few considered the possible alternative of paying more for an enhanced and safer state pension. That must be an alternative now.
Of course, if the middle class are being squeezed, spare a thought for the working class. In the US and Europe the mass departure of well-paid manufacturing jobs to Asia has hit this class hard. In Ireland the huge collapse of construction has hit manual and skilled workers (and professionals and others) brutally too. Ireland still has a fair proportion of manufacturing jobs, but many are taken by the middle class. But the manufacturing sector is not as safe as it used to be. Weekly we see the threats from mobile capital to shift abroad unless our government does this or that. The alternative service sector jobs are not as well paid, though here in Ireland, where service exports now almost equal good exports, service jobs can be very good.
But it could be worse. The West has built up a good safety net in social security, healthcare and education for its citizens which has helped. Middle classes also benefit hugely from public spending in these areas. This safety net has also acted as an “automatic stabiliser” in this major recession, boosting demand to a level it would not have reached in it its absence. It is important that the welfare state is preserved and maintained even with the stark challenges which face us here in Ireland and elsewhere.
While the growth in the incomes and wealth of the top 1 per cent has soared to levels which have brought the divide back to around the level of the 1920s in the US, and perhaps also in the UK and some other states, it is unlikely to go back to the level of Victorian times. This is because of the safety net which protects both those at the bottom and many in the middle. What is most interesting is that, with several decades of growing pressure on the Squeezed Middle in the US, as it is they who represent most voters, they have not found a way to rebuild the American Dream. Indeed, astute observes would argue that the Squeezed Middle in the US seems hell-bent on increased, python-like squeezing of itself.
Is this what awaits us in Europe? The current leadership in Europe, while incapable of real leadership and decisiveness on dealing with the Euro and the broader European economic crisis, is very cunningly dismantling Social Europe. Three currently proposed Commission “reforms” will make things a lot worse for the vast majority of EU citizens. First, Monti 2 will curb trade unions greatly in collective bargaining; the Euro Plus Pact will institutionalise the shift in national income from labour to capital under a lot of verbiage about “competiveness” and thirdly, the pre-Keynesian straight jacket which it is designing for “balanced Budgets” will greatly hamper any actions that progressive governments can take in times of crisis.
In conclusion, trends generated by globalisation, technology and de-regulation have rapidly transformed western economies, brought much progress, but also much change which is uncomfortable for many, including the middle classes. Cuts in public spending by governments, which have had to bail out private banks, and the loss of revenue through the general collapse, have engendered greater insecurity. The shifts in jobs to lower cost areas and enabling technology which allows former higher quality jobs to be outsourced abroad is hitting middle class security. Whether the “coping classes”, who are the voting classes, will seek an effective re-alignment in politics to give greater protection from rapid change and recognise the value of taxation, remains to be seen.
In the next post I will look at the great improvements in living standards enjoyed by the new aristocracy, the great “entrepreneurs” - i.e., top executives of top firms.
Tuesday 24 January 2012
(II) The first generation to face lower living standards
Paul Sweeney: Ireland’s younger generations may be the first since the Post War period not to have higher incomes than those of their parents. The combined impact of globalisation, liberalisation, and the technological and communications revolution on the labour market are squeezing the working and middle classes as never before.
The young will see no further rises in real incomes unless there are fundamental changes in society. Trends in income distribution and labour markets indicate that they will not have their parents’ lifestyle, security, nor expect to age comfortably.
Young people in the US and in parts of Europe already have lower living standards than those of their parents. It is not only that well paid manufacturing jobs have shifted to Asia, but many middle class jobs are being broken down into segments by technology and are shifting east too. Hundreds of millions are joining the middle classes in Asia, Russia and South America and competing for jobs. Many of the jobs will be servicing consumers in the West from there.
There has been a major shift in incomes to the very top earners, with labour’s share of national income in decline for decades in most advanced countries. The graph below shows how progressive income distribution has been rolled back in the US to levels last seen in the 1920s.
Source: Economist 21 Jan 2012
And those at the very top are reaping most of the benefits. And as they don’t spend all their money – because they have too much – aggregate demand is slowing. Nor do they invest it, as in the past. Many can pass it on, often undiminished and untaxed to their children.
The top 1% in the US had an average income of $1.8m in 2008 and in net worth the top 1% started at $6.9m in 2009 per the Federal Reserve, which was down 23% on 2007. The 1% richest get half of their incomes from salaries, a quarter from self employment and business income and the other quarter from capital i.e. interest, dividends, capital gains and rent (Economist 21 Jan).
There is a hollowing out of the middle with a growth in “Cool Jobs and Crap Jobs”. Solid pensionable jobs like banking and computing, parts of accounting, engineering etc. are being de-skilled and outsourced. One upside to this is that, at present, Ireland is winning some of these jobs, with its growth in export services.
Median male earnings in the US have not risen since 1975, in spite of substantial economic growth and growth in productivity. Nor have average household disposable incomes in Japan and Germany grown in a decade. It is no wonder Germany is not consuming as workers had no extra pay (until recently). The OECD found rising income inequality in 17 of 22 advanced countries.
The share of National Income taken by the top 1 per cent in the US had declined between the 1930s Depression and 1970, but 58% of the increase in total incomes since then went to this tiny group.
Is this because we are evolving into a “winner takes all” version of capitalism? Globalisation and communications have meant that entertainment and sports stars have turned local markets into one big global market, generating vast earnings for themselves and their backers. As stars are much admired in the celebrity society, they lead in the defence of the growing inequity of global income and wealth distribution. They are so unique, entertain us so much they deserve every penny they get. That is the market!
CEOs and CFOs may also argue that they are exceptional and talented and must be paid vast sums, untaxed, otherwise they will emigrate. Yet there is a clear inverse relationship between super pay and poor corporate performance world-wide, especially in finance. For example, as the remuneration, especially bonuses and share options, of the top executives of AIB, BOI and Anglo soared, they took bigger and bigger risks – to boost their remuneration packages. They took the risks with shareholders’ funds and they lost, bigtime. Their boards, likeminded men (some token women) who are still running many organisations in Ireland, cheered them on.
Most executives are not outstanding. They have simply “captured executive position.” There are many others just below them to take their place. In Ireland, it was the best paid of our business elite in banking who destroyed enormous value in just a few years. They almost destroyed the country as well, because the government socialised the losses of our “private enterprise” model.
There are hard lessons to be learned from America. The American Dream of real rising incomes and home ownership is dead. The stagnation in incomes was masked for some time because the working and middle classes borrowed against their homes. Now the home ownership dream has turned into a nightmare for many with negative equity and big debts. It was also masked by a dramatic fall in the prices of many goods now imported from abroad.
It was further masked by the growth in dual-income families, where there had only been on earner in the past. Male, unionised and in well paid manufacturing, these American workers had previously seen themselves as firmly in the “middle class.” From 1970, even with two incomes and their homes in hock, many workers in manufacturing and service industries began to struggle. Then came the property and the bank collapses.
Globalisation, accelerated by technology, falling prices in transport, instant communications, and in turn, accentuated by liberalisation of borders and markets, especially labour markets, have facilitated such radical change in incomes.
The decline of trade unions and the paucity of vision and lack of ambition in progressive parties, which should be counterforces to such trends, also facilitated the stagnation of incomes of the majority, in spite of economic growth and growth in labour productivity.
There is also a view that corporations and the rich should not have to pay “too much tax” as it is a disincentive to investment. Yet people are demanding more and better public services, but have been increasingly unwilling to pay for them through taxation. In spite of the outstanding crisis in Ireland, our leaders are terrified to demand that very profitable corporations pay a little more in corporation tax. We cut public services, instead, while we pay the debts of other corporations from worker’s taxes.
It is noteworthy that the very public services which people want more of are health and education, which are labour intensive and more costly. There is a real dilemma here and few politicians lead on it. It also seems that where people are willing to pay taxation, they seem to prefer to pay regressive taxes like VAT instead of progressive taxes on incomes and capital.
On the basis of what has been happening in the USA for thirty years, the stagnation of wages, mitigated for a while by extracting income from homes through credit and dual incomes, we can expect great insecurity. There is likely to be stagnating incomes, increasingly precarious employment and uncertainty - unless there is a radical re-think of key issues like taxation, sound regulation, labour rights and the governance of companies worldwide.
It is not just the recent Crash, with the ensuing immense burden of debt which governments and bankers have hung around our necks, which is driving this pessimistic outlook for incomes and thus living standards. There are the major trends in labour markets, in regressive income distribution, in power relationships between corporations and workers, between capital and labour, between governments, regulators and international bodies. The latter bodies appear to have been “captured” by corporations and these forces are driving down incomes for working and middle class people. These trends have been greatly exacerbated by globalization and by technology.
Ireland’s catch-up with Europe during the real Celtic Tiger period boosted incomes and wealth for many, and modernised our economy, but it has also masked these major trends for us.
A great many have gained from the benefits of technology and globalization, in gadgets and in communications, in lifestyle changes and in lower prices. But the globalization and technology have also brought change and disruption at an unprecedented rate, creating great insecurity as political systems lag behind these changes.
It is now clear that the post-war Social Contract in Europe and the US is breaking down and breaking down fast. This is a major step change in our world.
This is not just an economic and financial crisis. It is an existential crisis for society. We must look at a less consuming and more sustainable economy, which, happily, modern technology allows us to build. We, as citizens, have to decide what kind of society we want to live in. It is increasingly precarious, insecure, unstable, with increasing divisions, but it does not have to be like that.
The next post in this series on living standards will examine the “Squeezed Middle” where the middle classes are increasingly insecure as society changes rapidly.
The young will see no further rises in real incomes unless there are fundamental changes in society. Trends in income distribution and labour markets indicate that they will not have their parents’ lifestyle, security, nor expect to age comfortably.
Young people in the US and in parts of Europe already have lower living standards than those of their parents. It is not only that well paid manufacturing jobs have shifted to Asia, but many middle class jobs are being broken down into segments by technology and are shifting east too. Hundreds of millions are joining the middle classes in Asia, Russia and South America and competing for jobs. Many of the jobs will be servicing consumers in the West from there.
There has been a major shift in incomes to the very top earners, with labour’s share of national income in decline for decades in most advanced countries. The graph below shows how progressive income distribution has been rolled back in the US to levels last seen in the 1920s.
Source: Economist 21 Jan 2012
And those at the very top are reaping most of the benefits. And as they don’t spend all their money – because they have too much – aggregate demand is slowing. Nor do they invest it, as in the past. Many can pass it on, often undiminished and untaxed to their children.
The top 1% in the US had an average income of $1.8m in 2008 and in net worth the top 1% started at $6.9m in 2009 per the Federal Reserve, which was down 23% on 2007. The 1% richest get half of their incomes from salaries, a quarter from self employment and business income and the other quarter from capital i.e. interest, dividends, capital gains and rent (Economist 21 Jan).
There is a hollowing out of the middle with a growth in “Cool Jobs and Crap Jobs”. Solid pensionable jobs like banking and computing, parts of accounting, engineering etc. are being de-skilled and outsourced. One upside to this is that, at present, Ireland is winning some of these jobs, with its growth in export services.
Median male earnings in the US have not risen since 1975, in spite of substantial economic growth and growth in productivity. Nor have average household disposable incomes in Japan and Germany grown in a decade. It is no wonder Germany is not consuming as workers had no extra pay (until recently). The OECD found rising income inequality in 17 of 22 advanced countries.
The share of National Income taken by the top 1 per cent in the US had declined between the 1930s Depression and 1970, but 58% of the increase in total incomes since then went to this tiny group.
Is this because we are evolving into a “winner takes all” version of capitalism? Globalisation and communications have meant that entertainment and sports stars have turned local markets into one big global market, generating vast earnings for themselves and their backers. As stars are much admired in the celebrity society, they lead in the defence of the growing inequity of global income and wealth distribution. They are so unique, entertain us so much they deserve every penny they get. That is the market!
CEOs and CFOs may also argue that they are exceptional and talented and must be paid vast sums, untaxed, otherwise they will emigrate. Yet there is a clear inverse relationship between super pay and poor corporate performance world-wide, especially in finance. For example, as the remuneration, especially bonuses and share options, of the top executives of AIB, BOI and Anglo soared, they took bigger and bigger risks – to boost their remuneration packages. They took the risks with shareholders’ funds and they lost, bigtime. Their boards, likeminded men (some token women) who are still running many organisations in Ireland, cheered them on.
Most executives are not outstanding. They have simply “captured executive position.” There are many others just below them to take their place. In Ireland, it was the best paid of our business elite in banking who destroyed enormous value in just a few years. They almost destroyed the country as well, because the government socialised the losses of our “private enterprise” model.
There are hard lessons to be learned from America. The American Dream of real rising incomes and home ownership is dead. The stagnation in incomes was masked for some time because the working and middle classes borrowed against their homes. Now the home ownership dream has turned into a nightmare for many with negative equity and big debts. It was also masked by a dramatic fall in the prices of many goods now imported from abroad.
It was further masked by the growth in dual-income families, where there had only been on earner in the past. Male, unionised and in well paid manufacturing, these American workers had previously seen themselves as firmly in the “middle class.” From 1970, even with two incomes and their homes in hock, many workers in manufacturing and service industries began to struggle. Then came the property and the bank collapses.
Globalisation, accelerated by technology, falling prices in transport, instant communications, and in turn, accentuated by liberalisation of borders and markets, especially labour markets, have facilitated such radical change in incomes.
The decline of trade unions and the paucity of vision and lack of ambition in progressive parties, which should be counterforces to such trends, also facilitated the stagnation of incomes of the majority, in spite of economic growth and growth in labour productivity.
There is also a view that corporations and the rich should not have to pay “too much tax” as it is a disincentive to investment. Yet people are demanding more and better public services, but have been increasingly unwilling to pay for them through taxation. In spite of the outstanding crisis in Ireland, our leaders are terrified to demand that very profitable corporations pay a little more in corporation tax. We cut public services, instead, while we pay the debts of other corporations from worker’s taxes.
It is noteworthy that the very public services which people want more of are health and education, which are labour intensive and more costly. There is a real dilemma here and few politicians lead on it. It also seems that where people are willing to pay taxation, they seem to prefer to pay regressive taxes like VAT instead of progressive taxes on incomes and capital.
On the basis of what has been happening in the USA for thirty years, the stagnation of wages, mitigated for a while by extracting income from homes through credit and dual incomes, we can expect great insecurity. There is likely to be stagnating incomes, increasingly precarious employment and uncertainty - unless there is a radical re-think of key issues like taxation, sound regulation, labour rights and the governance of companies worldwide.
It is not just the recent Crash, with the ensuing immense burden of debt which governments and bankers have hung around our necks, which is driving this pessimistic outlook for incomes and thus living standards. There are the major trends in labour markets, in regressive income distribution, in power relationships between corporations and workers, between capital and labour, between governments, regulators and international bodies. The latter bodies appear to have been “captured” by corporations and these forces are driving down incomes for working and middle class people. These trends have been greatly exacerbated by globalization and by technology.
Ireland’s catch-up with Europe during the real Celtic Tiger period boosted incomes and wealth for many, and modernised our economy, but it has also masked these major trends for us.
A great many have gained from the benefits of technology and globalization, in gadgets and in communications, in lifestyle changes and in lower prices. But the globalization and technology have also brought change and disruption at an unprecedented rate, creating great insecurity as political systems lag behind these changes.
It is now clear that the post-war Social Contract in Europe and the US is breaking down and breaking down fast. This is a major step change in our world.
This is not just an economic and financial crisis. It is an existential crisis for society. We must look at a less consuming and more sustainable economy, which, happily, modern technology allows us to build. We, as citizens, have to decide what kind of society we want to live in. It is increasingly precarious, insecure, unstable, with increasing divisions, but it does not have to be like that.
The next post in this series on living standards will examine the “Squeezed Middle” where the middle classes are increasingly insecure as society changes rapidly.
Monday 23 January 2012
(I) What has happened to incomes since the crash?
Paul Sweeney: This is the first of five posts examining trends in living standards in the past, present and the likely future. As we explore the polarization of incomes between the top and bottom, it is apparent that the fat cats are getting fatter. The phenomenon of the “squeezed middle” will also be examined. We will find considerable evidence that that the middle classes are indeed being squeezed in the Western countries. It will be seen that the younger generations in Ireland today are the first since WW2 which may not see its living standards exceed those of their parents - unless there is change. Finally, some remedies will be examined which might reduce income polarisation and make society more secure, equal, stable and dynamic.
Part 1 What has happened to Incomes Since the Crash?
The previous government tried to reduce workers’ incomes to improve “competitiveness”. Because there could be no devaluation, as we are in a single currency area, the Eurozone, it tried an experiment in Internal Devaluation. Unlike a regular devaluation of a currency where virtually everyone, bar exporters, suffers somewhat equally, only employees would suffer under the Green Party/ Fianna Fail plan. Happily, it will be seen that this strategy failed.
Had it worked, the recession would be even worse. It would have sucked more demand out of the economy. It would also have been inequitable, transferring part of employees’ incomes to employers. And with demand down, most employers would not have re-invested the surplus.
Irish domestic demand has plummeted by 25 per cent in just four years, leading to many closures and job losses. Irish wages of the 1.5 million employees (of whom over one-fifth only work part time) totaled €68bn last year, down from a peak of €75.5bn in 2008. And it will be even less this year. Most of the decline was due to the fall in employment and in hours worked.
The biggest hit on living standards since the Crash of 2008 has been on the vast numbers – over 300,000 - who lost their jobs; followed by many who are discouraged workers and would like to work; and the many who are under-employed. The crisis has also engendered great insecurity.
Since the Crash of four years ago, the incomes of most remaining workers – well over one million employees - have not fallen, but have been stable. A key reason why there has not been more anger on the streets against the Austerity Programmes over the last three years is this fact - that the incomes of the vast majority workers who retained their jobs and that was most of them, have been reasonably stable since beginning of the Crash of 2008, and for some, incomes actually rose slightly in real terms.
This stability in incomes followed a massive rise in incomes during the previous two decades. Disposable incomes doubled in the 20 years of Irish Social Partnership from 1987.
The 20 year boom included a superb economic performance during the Celtic Tiger period which morphed into the bubble during the McCreevy/Cowan era. There were four phases, (each lasting seven years) of the Celtic Tiger Era. The first seven years was “Takeoff”, with social solidarity but “jobless growth” from 1987 to 1993.
Between 1994 to 2000 inclusive, Ireland’s economy performed extraordinarily well. This was the real “Celtic Tiger” phase of sustainable growth and progress.
The “False Boom” / “Bubble” period was the next seven years, 2001 to 2007. It was the ideology of ultra free-market economics which led to the Bust worldwide and especially in Ireland, where McCreevy implemented these ideas in an extreme fashion, with tax-shifting, direct tax cuts, deregulation, no regulation and privatisation.
We are now in the fourth phase which is “Bust and Recovery”. This may be another seven years period 2008 to 2014. However, if we - our government, employers, unions and all do not get it right and if the EU does not pull its act together, the Recovery part will take longer. Today, seven years looks too short. It now seems that Ireland is highly unlikely to recover to our 2007 levels of national income until around 2018-21.
Recovery certainly does not look as if it is happening, due a) to the inability of the EU to act, b) to the continuing worldwide recession and c) the severity of the Austerity programme at home.
Irish living standards doubled in the first three phases of the Tiger years, in less than 20 years. This was a remarkable improvement in living standards for average workers. This doubling of incomes was unique worldwide, particularly as it coincided with a doubling in employment too. It must be noted that incomes continued to rise during the Bubble period 2001 to 2007.
What has happened to incomes since the crash in 2008? The weekly incomes of all workers saw no change since the beginning of the Crash in Q1 2008 to Q3, 2011 (CSO). However, as there was deflation - prices fell in part of this period - most workers had a small real rise in incomes. Hourly earnings rose by a little more in the period, giving a real rise in the period of almost four years.
The figures vary if different categories of workers and different periods are taken, but overall, the average employee saw no fall in real incomes from the beginning of 2008 when the Crash began. For some workers, in the export and other dynamic sectors, there have been small wage rises of around 2 per cent.
This relative stability in real incomes since the Crash of 2008 is one factor contributing to the explanation of why there has been no rioting in Ireland. It has also been extremely important in ensuing that the terrible collapse in domestic demand – of one quarter in less than four years – was not worse. This is because averagely paid workers generally spend most of their incomes.
Labour market experts know that nominal wages and salaries are like a ratchet. They go up or stay still, but seldom fall. They only fall in very exceptional circumstances.
The real losers are those who have lost their jobs. A total of 352,000 lost employment between Q1, 2008 and Q3 2011. This includes many self-employed who have also lost their work, with many now substantially underemployed. Other big losers are all public servants who had their earnings reduced by an average of 14 per cent.
If we now move to the division of the national cake, National Income, we see that there has been a major shift in the share of the national cake, worldwide. This shift has been from labour to capital over the past two decades.
While Ireland has seen a partial reversal of this trend in the past few years, with a shift in some more national income back to employees, their share is still well below that in most countries. However, at 63 per cent in 2011, labour’s share of national income in Ireland is below that of Germany (68.3%), UK (71.3%), or even the US (64.3%).
Some Irish economists actually argue that shifting income from employees to employers will improve Irish “competitiveness”. They have argued for cutting wages in the hope that firms will then make more money which means they become more profitable, and then they may invest. But why would any firm invest when the biggest problem facing them is the huge fall in domestic demand?
Most importantly, this “wage competitiveness” argument ignores the real driver of increased incomes for all, which is productivity. Merely shifting national income from the 1.5 million employees in Ireland to employers, particularly when the employees’ share is low compared to most other countries, is both regressive and will not work.
Productivity is the key to continuing economic success, provided its rewards are shared equitably. After falls in productivity, it is rising rapidly having risen by a substantial 5 per cent last year, on top of rises in previous years. The fall in Irish unit labour costs has been around 15 per cent over the past four years compared to under 6 per cent in the Eurozone. The decline of low productivity sectors like construction and services (including the public) has contributed, as has the growth in the high sectors such as the foreign owned export sector. The lower wage rises here than in Europe in recent years have also contributed (to a lesser degree than the decline of low productivity sectors) to the improvement in unit labour costs. Thus unit labour costs here have fallen very substantially compared to competitors since 2008. But, where are the jobs?
While Irish wages have risen over the past twenty years, total labour costs are 12th in OECD, at $49,830 a year, well below Germany and Belgium at over $61,000 and UK at over $59,000. Irish productivity suffered during the boom, but has since recovered. It is amongst the highest in the world. Ireland’s public service was already small by international standards before the crash and the current reform should improve overall productivity.
However, it will be seen that there is the chilling prospect that the majority of Irish workers may not see any rise in their living standards or real incomes for a decade or more. Prolonged stagnation in earnings could also happen here. It has already begun. It has happened in the USA. The American Dream is dead. US workers have seen no real increase in earnings since 1975. The middle class was squeezed in many developed countries over the past decade and a half. Ireland was an exception to this trend. More recently, wages have stagnated in Germany for a decade till recently (one key reason for the lack of demand there).
In the next post, it will be seen that rises in Irish living standards may be ending, even after recovery. This is because of major external trends. Our young may be the first post-war generation not to achieve a higher standard of living than their parents.
Part 1 What has happened to Incomes Since the Crash?
The previous government tried to reduce workers’ incomes to improve “competitiveness”. Because there could be no devaluation, as we are in a single currency area, the Eurozone, it tried an experiment in Internal Devaluation. Unlike a regular devaluation of a currency where virtually everyone, bar exporters, suffers somewhat equally, only employees would suffer under the Green Party/ Fianna Fail plan. Happily, it will be seen that this strategy failed.
Had it worked, the recession would be even worse. It would have sucked more demand out of the economy. It would also have been inequitable, transferring part of employees’ incomes to employers. And with demand down, most employers would not have re-invested the surplus.
Irish domestic demand has plummeted by 25 per cent in just four years, leading to many closures and job losses. Irish wages of the 1.5 million employees (of whom over one-fifth only work part time) totaled €68bn last year, down from a peak of €75.5bn in 2008. And it will be even less this year. Most of the decline was due to the fall in employment and in hours worked.
The biggest hit on living standards since the Crash of 2008 has been on the vast numbers – over 300,000 - who lost their jobs; followed by many who are discouraged workers and would like to work; and the many who are under-employed. The crisis has also engendered great insecurity.
Since the Crash of four years ago, the incomes of most remaining workers – well over one million employees - have not fallen, but have been stable. A key reason why there has not been more anger on the streets against the Austerity Programmes over the last three years is this fact - that the incomes of the vast majority workers who retained their jobs and that was most of them, have been reasonably stable since beginning of the Crash of 2008, and for some, incomes actually rose slightly in real terms.
This stability in incomes followed a massive rise in incomes during the previous two decades. Disposable incomes doubled in the 20 years of Irish Social Partnership from 1987.
The 20 year boom included a superb economic performance during the Celtic Tiger period which morphed into the bubble during the McCreevy/Cowan era. There were four phases, (each lasting seven years) of the Celtic Tiger Era. The first seven years was “Takeoff”, with social solidarity but “jobless growth” from 1987 to 1993.
Between 1994 to 2000 inclusive, Ireland’s economy performed extraordinarily well. This was the real “Celtic Tiger” phase of sustainable growth and progress.
The “False Boom” / “Bubble” period was the next seven years, 2001 to 2007. It was the ideology of ultra free-market economics which led to the Bust worldwide and especially in Ireland, where McCreevy implemented these ideas in an extreme fashion, with tax-shifting, direct tax cuts, deregulation, no regulation and privatisation.
We are now in the fourth phase which is “Bust and Recovery”. This may be another seven years period 2008 to 2014. However, if we - our government, employers, unions and all do not get it right and if the EU does not pull its act together, the Recovery part will take longer. Today, seven years looks too short. It now seems that Ireland is highly unlikely to recover to our 2007 levels of national income until around 2018-21.
Recovery certainly does not look as if it is happening, due a) to the inability of the EU to act, b) to the continuing worldwide recession and c) the severity of the Austerity programme at home.
Irish living standards doubled in the first three phases of the Tiger years, in less than 20 years. This was a remarkable improvement in living standards for average workers. This doubling of incomes was unique worldwide, particularly as it coincided with a doubling in employment too. It must be noted that incomes continued to rise during the Bubble period 2001 to 2007.
What has happened to incomes since the crash in 2008? The weekly incomes of all workers saw no change since the beginning of the Crash in Q1 2008 to Q3, 2011 (CSO). However, as there was deflation - prices fell in part of this period - most workers had a small real rise in incomes. Hourly earnings rose by a little more in the period, giving a real rise in the period of almost four years.
The figures vary if different categories of workers and different periods are taken, but overall, the average employee saw no fall in real incomes from the beginning of 2008 when the Crash began. For some workers, in the export and other dynamic sectors, there have been small wage rises of around 2 per cent.
This relative stability in real incomes since the Crash of 2008 is one factor contributing to the explanation of why there has been no rioting in Ireland. It has also been extremely important in ensuing that the terrible collapse in domestic demand – of one quarter in less than four years – was not worse. This is because averagely paid workers generally spend most of their incomes.
Labour market experts know that nominal wages and salaries are like a ratchet. They go up or stay still, but seldom fall. They only fall in very exceptional circumstances.
The real losers are those who have lost their jobs. A total of 352,000 lost employment between Q1, 2008 and Q3 2011. This includes many self-employed who have also lost their work, with many now substantially underemployed. Other big losers are all public servants who had their earnings reduced by an average of 14 per cent.
If we now move to the division of the national cake, National Income, we see that there has been a major shift in the share of the national cake, worldwide. This shift has been from labour to capital over the past two decades.
While Ireland has seen a partial reversal of this trend in the past few years, with a shift in some more national income back to employees, their share is still well below that in most countries. However, at 63 per cent in 2011, labour’s share of national income in Ireland is below that of Germany (68.3%), UK (71.3%), or even the US (64.3%).
Some Irish economists actually argue that shifting income from employees to employers will improve Irish “competitiveness”. They have argued for cutting wages in the hope that firms will then make more money which means they become more profitable, and then they may invest. But why would any firm invest when the biggest problem facing them is the huge fall in domestic demand?
Most importantly, this “wage competitiveness” argument ignores the real driver of increased incomes for all, which is productivity. Merely shifting national income from the 1.5 million employees in Ireland to employers, particularly when the employees’ share is low compared to most other countries, is both regressive and will not work.
Productivity is the key to continuing economic success, provided its rewards are shared equitably. After falls in productivity, it is rising rapidly having risen by a substantial 5 per cent last year, on top of rises in previous years. The fall in Irish unit labour costs has been around 15 per cent over the past four years compared to under 6 per cent in the Eurozone. The decline of low productivity sectors like construction and services (including the public) has contributed, as has the growth in the high sectors such as the foreign owned export sector. The lower wage rises here than in Europe in recent years have also contributed (to a lesser degree than the decline of low productivity sectors) to the improvement in unit labour costs. Thus unit labour costs here have fallen very substantially compared to competitors since 2008. But, where are the jobs?
While Irish wages have risen over the past twenty years, total labour costs are 12th in OECD, at $49,830 a year, well below Germany and Belgium at over $61,000 and UK at over $59,000. Irish productivity suffered during the boom, but has since recovered. It is amongst the highest in the world. Ireland’s public service was already small by international standards before the crash and the current reform should improve overall productivity.
However, it will be seen that there is the chilling prospect that the majority of Irish workers may not see any rise in their living standards or real incomes for a decade or more. Prolonged stagnation in earnings could also happen here. It has already begun. It has happened in the USA. The American Dream is dead. US workers have seen no real increase in earnings since 1975. The middle class was squeezed in many developed countries over the past decade and a half. Ireland was an exception to this trend. More recently, wages have stagnated in Germany for a decade till recently (one key reason for the lack of demand there).
In the next post, it will be seen that rises in Irish living standards may be ending, even after recovery. This is because of major external trends. Our young may be the first post-war generation not to achieve a higher standard of living than their parents.
Who will collect our taxes?
An Saoi: Staffing in the Office of the Revenue Commissioners was already a concern when this PQ was asked on 3rd July 2008. The same question was asked on 19th January 2012 and received the following reply.
Below is a Table summarising the level of decline.
The decline is most extreme amongst male staff, particularly those involved in operational and specialist areas, with an overall 27.2% decline in male staff at the three grades.
The figures for 1st March may indeed be an overestimate. They include 28 staff over 60 and 362 staff over 55. It is questionable whether many of those people will stay.
While there are “… discussions on how to address critical skills losses that will arise due to these retirements”, it is clearly a bit late in the day: this problem was clear to many four years ago. There seems little danger of receiving an audit notification in the next few years at least.
Losses in the Revenue are disproportionate to other Government services and are being implanted at a critical time for the State when maximising tax collection is crucial. Such slashing of staff numbers raise major questions as to the ability of the Revenue to effectively police tax, customs and excise collection and doubts of the Government’s ability to reach its tax targets.
Below is a Table summarising the level of decline.
The decline is most extreme amongst male staff, particularly those involved in operational and specialist areas, with an overall 27.2% decline in male staff at the three grades.
The figures for 1st March may indeed be an overestimate. They include 28 staff over 60 and 362 staff over 55. It is questionable whether many of those people will stay.
While there are “… discussions on how to address critical skills losses that will arise due to these retirements”, it is clearly a bit late in the day: this problem was clear to many four years ago. There seems little danger of receiving an audit notification in the next few years at least.
Losses in the Revenue are disproportionate to other Government services and are being implanted at a critical time for the State when maximising tax collection is crucial. Such slashing of staff numbers raise major questions as to the ability of the Revenue to effectively police tax, customs and excise collection and doubts of the Government’s ability to reach its tax targets.
Friday 20 January 2012
Will Ireland Need a Second Bail Out?
Tom McDonnell: Willem Buiter of CitiGroup and formerly of the Bank of England's Monetary Policy Committee reckons that Ireland should negotiate a stand-by second bailout plan in the event it can’t re-access markets in 2013 on favourable terms. Inevitably the notion was attacked as 'ludicrous' by the Government and 'unhelpful' by the Commission. Words like 'fully funded' will bring a wry smile.
While Dan O'Brien argues it would be a mistake to pursue a second bailout at this time for strategic reasons, NamaWineLake, Colm McCarthy, David MacWilliams and Constantin Gurdgiev all argue that a second bailout is inevitable and desirable. I agree that a second bailout is inevitable. This bailout should be negotiated months before the State runs out of funding.
Ireland's debt maturity profile is here:
Coupled with the still gaping hole in the public finances (see page 15) and the unsustainable price (7.5%) for 10 year bonds (Bloomberg) it is clear that Ireland's funding position for 2014 is going to be very difficult.
A lot of course depends on developments in Europe, but on the balance of probability Ireland will enter a second programme of assistance in 2013. Because of the way it is structured, the current bailout mechanism (known as the EFSF) is not able to generate sufficient funds to undertake the level of bond purchases required to stabilise markets. The EFSF is inherently unstable because is is susceptible to a degenerative spiral in which less and less financially stable countries support increasing numbers of financially troubled countries - eventually the stable core simply cannot support the troubled periphery. The EFSF is already unravelling as part of a negative feedback loop and this process of unravelling will be accelerated by the recent downgrades. At any rate it is simply not feasible to expect countries like Italy and Spain to continue to support countries when they themselves are paying higher rates themselves to borrow.
The ESM (European Stability Mechanism) will replace the EFSF either in 2012 or in 2013, and if Ireland gets a second bailout it will be under the auspices of this mechanism. It is imperative that the design of the ESM differs from that of the EFSF. One option is to give the ESM a banking licence and access to ECB funding - and then allow it to buy sovereign debt directly and under defined protocols and conditions.
As part of dealing with the thorny issue of financing Ireland's debt burden, the Anglo promissory notes have understandably taken centre stage with Minister Noonan now promising that a technical paper on the issue is being prepared. Let us hope that the process will be transparent and evidence based and let us also hope that all advice and correspondence relating to the Anglo/INBS debt between the CBI/ECB to the Irish State will be released. The ECB has been notably intransigent on this point so far. The legacy of the Anglo debt is clearly a matter of grave national importance and its imposition on people living in Ireland was a scandalous transfer of wealth. The promissory note story and mechanism is variously explained here by the newly formed "Anglo: Not Our Debt" group, here by NAMA Wine Lake, here by Karl Whelan, here by politico and here by Seamus Coffey.
Ireland's medium-term debt sustainability is on a knife edge. The NTMA is forecasting a debt to GDP ratio of 119% in 2013 - equivalent to a debt to GNP ratio in excess of 140%. This places us firmly in the same ballpark as poor benighted Greece. Relief on the promissory note repayments is a way for all of the key parties to avoid a credit event in Ireland. Ideally this should involve write-down of the €30.6 billion principal but at the very least it should entail a five year holiday on repayments and an extension of the repayment schedule. Such a scenario would help give the economy a modicum of space to recover and offers the possibility that Ireland can manage its way out of the crisis. The alternative is to remain a ward of the official lenders for the forseeable future.
While Dan O'Brien argues it would be a mistake to pursue a second bailout at this time for strategic reasons, NamaWineLake, Colm McCarthy, David MacWilliams and Constantin Gurdgiev all argue that a second bailout is inevitable and desirable. I agree that a second bailout is inevitable. This bailout should be negotiated months before the State runs out of funding.
Ireland's debt maturity profile is here:
Coupled with the still gaping hole in the public finances (see page 15) and the unsustainable price (7.5%) for 10 year bonds (Bloomberg) it is clear that Ireland's funding position for 2014 is going to be very difficult.
A lot of course depends on developments in Europe, but on the balance of probability Ireland will enter a second programme of assistance in 2013. Because of the way it is structured, the current bailout mechanism (known as the EFSF) is not able to generate sufficient funds to undertake the level of bond purchases required to stabilise markets. The EFSF is inherently unstable because is is susceptible to a degenerative spiral in which less and less financially stable countries support increasing numbers of financially troubled countries - eventually the stable core simply cannot support the troubled periphery. The EFSF is already unravelling as part of a negative feedback loop and this process of unravelling will be accelerated by the recent downgrades. At any rate it is simply not feasible to expect countries like Italy and Spain to continue to support countries when they themselves are paying higher rates themselves to borrow.
The ESM (European Stability Mechanism) will replace the EFSF either in 2012 or in 2013, and if Ireland gets a second bailout it will be under the auspices of this mechanism. It is imperative that the design of the ESM differs from that of the EFSF. One option is to give the ESM a banking licence and access to ECB funding - and then allow it to buy sovereign debt directly and under defined protocols and conditions.
As part of dealing with the thorny issue of financing Ireland's debt burden, the Anglo promissory notes have understandably taken centre stage with Minister Noonan now promising that a technical paper on the issue is being prepared. Let us hope that the process will be transparent and evidence based and let us also hope that all advice and correspondence relating to the Anglo/INBS debt between the CBI/ECB to the Irish State will be released. The ECB has been notably intransigent on this point so far. The legacy of the Anglo debt is clearly a matter of grave national importance and its imposition on people living in Ireland was a scandalous transfer of wealth. The promissory note story and mechanism is variously explained here by the newly formed "Anglo: Not Our Debt" group, here by NAMA Wine Lake, here by Karl Whelan, here by politico and here by Seamus Coffey.
Ireland's medium-term debt sustainability is on a knife edge. The NTMA is forecasting a debt to GDP ratio of 119% in 2013 - equivalent to a debt to GNP ratio in excess of 140%. This places us firmly in the same ballpark as poor benighted Greece. Relief on the promissory note repayments is a way for all of the key parties to avoid a credit event in Ireland. Ideally this should involve write-down of the €30.6 billion principal but at the very least it should entail a five year holiday on repayments and an extension of the repayment schedule. Such a scenario would help give the economy a modicum of space to recover and offers the possibility that Ireland can manage its way out of the crisis. The alternative is to remain a ward of the official lenders for the forseeable future.
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