Nat O'Connor: We are coming up to the first anniversary of Lifetime Community Rating (LCR) in private health insurance and it is timely to consider how this policy reinforces Ireland’s multi-tier health system and entrenches income inequality.
The previous government introduced LCR in May 2015, affecting everyone aged 34 or older. For every year a person does not hold health insurance, he or she must pay an additional 2 per cent per annum on the cost of an annual health insurance premium.
For example, someone who first takes out health insurance aged 39, five years beyond the age threshold, will pay a 10 per cent additional cost for life; so a €2,000/year premium* will cost that person €2,200/year instead. This adds up, and with the added unknown of health insurance price inflation, the crude percentage increase caused by LCR could have an even greater effect.
(* An average premium of €1,925 in 2015 was cited by a survey carried out for the Health Insurance Authority/HIA, although most people goaded into taking up insurance by LCR appear to be paying around €1,000 for the cheapest policies; schemes that come with so few benefits that serious questions could be asked about them).
But wait, wasn't LCR motivated by equality, or at least solidarity between the generations? LCR pushes younger people to sign up to insurance, which keeps the system funded (and the majority of insurance beneficiaries are older people or people with long-term illnesses). In theory yes, but if someone has a poor start in life or has many demands on their income (from children, disability, elderly relatives, siblings, or whatever) he or she may simply not be able to afford to buy health insurance until later in life – and he or she will be punished by the LCR system for this.
Showing posts with label Nat O'Connor. Show all posts
Showing posts with label Nat O'Connor. Show all posts
Sunday, 13 March 2016
Tuesday, 2 October 2012
Choices Around Cutting Child Benefit
Nat O'Connor: Despite the helpful reminder from Joseph Stiglitz that "Austerity has almost never worked", the Government has decided to cut further and deeper in the next Budget, with reports that Minister Noonan will again prefer two-thirds spending cuts combined with one third tax increases.
There are no easy choices left for the Government, as it seeks to close the deficit through €3.5 billion of measures. While it is necessary to close the deficit, there are a couple of significant questions to be asked that provide important context for any consideration of cutting Child Benefit.
First of all, what is the Government's end goal in terms of public versus private provision of vital matters like health and education, childcare and housing, pensions and income?
Secondly, if 'everything' (including Child Benefit) is on the table for discussion, what are the values and principles that will guide the decisions about what to cut and who to tax?
As this chart shows, the net result of budgets to date has been to 'flat line' Ireland's overall level of taxation while reducing public spending. Any talk of a 'balance' between tax measures and spending in the actual effect of recent budgets is simply not true.
The figures are based on the Government's plan (in Economic and Fiscal Outlook, Budget 2012, page D.19) to end up with total revenue of 34.6 per cent of GDP and total public expenditure of 37.5 percent of GDP by 2015. While these figures might be slightly different in Budget 2013's documentation, there is little evidence of a changed strategy by Minister Noonan.
What level of public services can be delivered through spending at around 37.5 per cent of GDP?
The answer is, not anything like as much as what was delivered at the height of the boom and not the same kind of 'welfare state' as most Western European countries. The long-term EU27 average level of spending is roughly ten percentage points higher than Ireland. As such, if the Government chooses such a low target level of public spending, it should come as no surprise that some core elements of the 'social contract' between Ireland's State and its citizens are now being questioned.
One of those core elements is Universal Child Benefit. There are three clear features of this payment, which indicate fundamental values and principles: (1) It goes to all children equally; (2) It is paid to all citizens with children regardless of their income, as part of the 'return on investment' of taxation and social insurance; and (3) It is a payment from everyone to Ireland's children, regardless of whether or not they have children of their own.
Universal Child Benefit should not be considered a 'sacred cow' any more than the 12.5 per cent corporate tax rate or the existence of the Senate. However, these are major building blocks of the Irish social contract and they should not be radically changed without serious discussion of the implications.
Instead of an open discussion on the issue, there is a risk that the guiding principles underpinning Universal Child Benefit are being discarded without adequate discussion of the changed nature of Ireland's welfare state and social contract that is implied by those changes.
For example, there are endless reports that wealthy people don't need Child Benefit and should not get it. Somehow it is taken as the 'obvious' and 'easy' solution to means test Child Benefit or tax it. However, this argument sweeps aside all three guiding principles. Universal Child Benefit is a social contract, not an individual contract between a person and the State. It is only from an individualistic perspective that it makes sense to say Person A is too rich, therefore tax or cut his/her Child Benefit.
In reality, the administrative burden involved in means testing, plus the highly contentious issue of deciding who needs it and who can't have it, is expensive and fraught with difficulties. A much simpler solution is to say that, if some wealthy people don't need Child Benefit, than simply increase general taxes on wealthy people. At the end of the day, we all benefit from Ireland's children who are the future tax payers, health workers and others that we will need when we are old (whether or not we have children ourselves).
However, if we decide that Universal Child Benefit in its current form is too expensive (because of the decision by Government to target public spending at 37.5 per cent of GDP) than it is possible to imagine alternative uses of public money that would uphold the values and principles of the welfare state.
For example, if we decided that the provision of municipal crèches and pre-school education was a pressing social need (which it is) then we could provide places free-of-charge, to all children equally, regardless of their parents' means and paid for by everyone; because we will all benefit from all children in Ireland having a better start in life and better educational development.
For example, the OECD advises on the benefits of spending early on children.
This chart from another OECD presentation shows that Ireland (in 2008) had the highest net childcare costs in the OECD. No wonder so many families rely on Child Benefit payments!
What is so rarely mentioned in Ireland is that when taxes are low, people end up paying privately out their own pockets. It can be cheaper to pay more tax or social insurance to purchase certain kinds of goods and services collectively. And of course, when we pay collectively, we all share the cost of our children from whose future contributions we will all benefit. When we pay privately, the burden of paying individually is placed squarely on the shoulders of young families, who are not the best placed to carry that burden.
If we see Universal Child Benefit being systematically dismantled in the next Budget (as is suggested in recent reports), while we retain tax breaks, such as those for private pensions that massively benefit people with the highest incomes, then the fundamental values underpinning Ireland's budgetary policy need to be questioned.
The next three or four Budgets are not just about closing the deficit, they are about the nature of the future relationship and social contract between citizens and the State in Ireland for decades to come.
There are no easy choices left for the Government, as it seeks to close the deficit through €3.5 billion of measures. While it is necessary to close the deficit, there are a couple of significant questions to be asked that provide important context for any consideration of cutting Child Benefit.
First of all, what is the Government's end goal in terms of public versus private provision of vital matters like health and education, childcare and housing, pensions and income?
Secondly, if 'everything' (including Child Benefit) is on the table for discussion, what are the values and principles that will guide the decisions about what to cut and who to tax?
As this chart shows, the net result of budgets to date has been to 'flat line' Ireland's overall level of taxation while reducing public spending. Any talk of a 'balance' between tax measures and spending in the actual effect of recent budgets is simply not true.
The figures are based on the Government's plan (in Economic and Fiscal Outlook, Budget 2012, page D.19) to end up with total revenue of 34.6 per cent of GDP and total public expenditure of 37.5 percent of GDP by 2015. While these figures might be slightly different in Budget 2013's documentation, there is little evidence of a changed strategy by Minister Noonan.
What level of public services can be delivered through spending at around 37.5 per cent of GDP?
The answer is, not anything like as much as what was delivered at the height of the boom and not the same kind of 'welfare state' as most Western European countries. The long-term EU27 average level of spending is roughly ten percentage points higher than Ireland. As such, if the Government chooses such a low target level of public spending, it should come as no surprise that some core elements of the 'social contract' between Ireland's State and its citizens are now being questioned.
One of those core elements is Universal Child Benefit. There are three clear features of this payment, which indicate fundamental values and principles: (1) It goes to all children equally; (2) It is paid to all citizens with children regardless of their income, as part of the 'return on investment' of taxation and social insurance; and (3) It is a payment from everyone to Ireland's children, regardless of whether or not they have children of their own.
Universal Child Benefit should not be considered a 'sacred cow' any more than the 12.5 per cent corporate tax rate or the existence of the Senate. However, these are major building blocks of the Irish social contract and they should not be radically changed without serious discussion of the implications.
Instead of an open discussion on the issue, there is a risk that the guiding principles underpinning Universal Child Benefit are being discarded without adequate discussion of the changed nature of Ireland's welfare state and social contract that is implied by those changes.
For example, there are endless reports that wealthy people don't need Child Benefit and should not get it. Somehow it is taken as the 'obvious' and 'easy' solution to means test Child Benefit or tax it. However, this argument sweeps aside all three guiding principles. Universal Child Benefit is a social contract, not an individual contract between a person and the State. It is only from an individualistic perspective that it makes sense to say Person A is too rich, therefore tax or cut his/her Child Benefit.
In reality, the administrative burden involved in means testing, plus the highly contentious issue of deciding who needs it and who can't have it, is expensive and fraught with difficulties. A much simpler solution is to say that, if some wealthy people don't need Child Benefit, than simply increase general taxes on wealthy people. At the end of the day, we all benefit from Ireland's children who are the future tax payers, health workers and others that we will need when we are old (whether or not we have children ourselves).
However, if we decide that Universal Child Benefit in its current form is too expensive (because of the decision by Government to target public spending at 37.5 per cent of GDP) than it is possible to imagine alternative uses of public money that would uphold the values and principles of the welfare state.
For example, if we decided that the provision of municipal crèches and pre-school education was a pressing social need (which it is) then we could provide places free-of-charge, to all children equally, regardless of their parents' means and paid for by everyone; because we will all benefit from all children in Ireland having a better start in life and better educational development.
For example, the OECD advises on the benefits of spending early on children.
This chart from another OECD presentation shows that Ireland (in 2008) had the highest net childcare costs in the OECD. No wonder so many families rely on Child Benefit payments!
What is so rarely mentioned in Ireland is that when taxes are low, people end up paying privately out their own pockets. It can be cheaper to pay more tax or social insurance to purchase certain kinds of goods and services collectively. And of course, when we pay collectively, we all share the cost of our children from whose future contributions we will all benefit. When we pay privately, the burden of paying individually is placed squarely on the shoulders of young families, who are not the best placed to carry that burden.
If we see Universal Child Benefit being systematically dismantled in the next Budget (as is suggested in recent reports), while we retain tax breaks, such as those for private pensions that massively benefit people with the highest incomes, then the fundamental values underpinning Ireland's budgetary policy need to be questioned.
The next three or four Budgets are not just about closing the deficit, they are about the nature of the future relationship and social contract between citizens and the State in Ireland for decades to come.
Wednesday, 13 June 2012
The Costs of Working in Ireland
Nat O'Connor: The ESRI withdrew a working paper today. The Irish Times reported that this was "unprecedented". However, another ESRI report (on waste incineration) was being "re-examined" by the ESRI last year, so it is not completely unheard of.
Working in a think-tank that also publishes discussion papers that are the author's sole responsibility, I have a certain sympathy for the ESRI's position. The whole point about working papers - and the Cost of Working piece was just that, not a 'report' as The Irish Times claims - is that they are open for discussion and debate, and there is an opportunity for new information and new analysis to influence the author's thinking before a final version is produced. Taken to a logical extreme, it is always possible that working papers in the social sciences are simply wrong. The margin of error in statistical analysis always allows for a few lemons. But this is not always obvious and we need the publication of more, and more diverse, analysis in Ireland, not less.
The pity about this brief storm is that the withdrawal of the paper will focus more attention on its uncertain conclusions than if it was quietly ignored. It's worth noting a couple of things about the paper. (I found a copy here: http://www.rte.ie/news/2012/0612/esri_report.pdf).
First of all, the data is from the 2004/05 Household Budget Survey, at a time when we had practically full employment in Ireland. While the 'incentives' might seem to have made moving from welfare to work unattractive, the fact was that practically everyone was actually working and many people left welfare to take up employment. This somewhat deflates the central argument of the paper.
The paper rightly points out the fact that childcare costs are extremely high and that they - and other costs - are a barrier to people entering work. There is no doubt that there is a weight of evidence that people, especially women, are put off from entering the labour market because of the costs of childcare. People parenting alone are particularly affected by this.
But the paper does not examine other costs, and factors that offset these costs. For example, housing costs are a major factor. People who gain employment will lose Rent Supplement, whereas people living in local authority social housing can maintain their lower-than-average 'differential rent' when they gain employment. (Differential rent is not a bad thing, as cheaper rent makes it possible for some people to take lower paid employment). In other words, there are lots of major variables not examined in the paper that change the incentives about working.
Moreover, are economists better placed than psychologists to explain why people go to work? During the boom period, some people went to work for marginal benefit, when costs like childcare are factored in. However, people work in order to maintain social networks, for a sense of personal independence and for lots of other reasons. Looking only at a set of short-term cash 'incentives' won't tell the whole story.
Finally, there are other important factors to be examined. NERI point out that the ratio of people unemployed to job vacancies in Ireland is the second worse in the EU. In other words, there are far more people looking for work than there are jobs, and no amount of changing incentives is going to improve that. The real focus should be on boosting demand in the economy to generate more employment opportunities.
Working in a think-tank that also publishes discussion papers that are the author's sole responsibility, I have a certain sympathy for the ESRI's position. The whole point about working papers - and the Cost of Working piece was just that, not a 'report' as The Irish Times claims - is that they are open for discussion and debate, and there is an opportunity for new information and new analysis to influence the author's thinking before a final version is produced. Taken to a logical extreme, it is always possible that working papers in the social sciences are simply wrong. The margin of error in statistical analysis always allows for a few lemons. But this is not always obvious and we need the publication of more, and more diverse, analysis in Ireland, not less.
The pity about this brief storm is that the withdrawal of the paper will focus more attention on its uncertain conclusions than if it was quietly ignored. It's worth noting a couple of things about the paper. (I found a copy here: http://www.rte.ie/news/2012/0612/esri_report.pdf).
First of all, the data is from the 2004/05 Household Budget Survey, at a time when we had practically full employment in Ireland. While the 'incentives' might seem to have made moving from welfare to work unattractive, the fact was that practically everyone was actually working and many people left welfare to take up employment. This somewhat deflates the central argument of the paper.
The paper rightly points out the fact that childcare costs are extremely high and that they - and other costs - are a barrier to people entering work. There is no doubt that there is a weight of evidence that people, especially women, are put off from entering the labour market because of the costs of childcare. People parenting alone are particularly affected by this.
But the paper does not examine other costs, and factors that offset these costs. For example, housing costs are a major factor. People who gain employment will lose Rent Supplement, whereas people living in local authority social housing can maintain their lower-than-average 'differential rent' when they gain employment. (Differential rent is not a bad thing, as cheaper rent makes it possible for some people to take lower paid employment). In other words, there are lots of major variables not examined in the paper that change the incentives about working.
Moreover, are economists better placed than psychologists to explain why people go to work? During the boom period, some people went to work for marginal benefit, when costs like childcare are factored in. However, people work in order to maintain social networks, for a sense of personal independence and for lots of other reasons. Looking only at a set of short-term cash 'incentives' won't tell the whole story.
Finally, there are other important factors to be examined. NERI point out that the ratio of people unemployed to job vacancies in Ireland is the second worse in the EU. In other words, there are far more people looking for work than there are jobs, and no amount of changing incentives is going to improve that. The real focus should be on boosting demand in the economy to generate more employment opportunities.
Thursday, 12 April 2012
Agreement and Difference with Minister Howlin
Nat O'Connor: Minister Brendan Howlin’s opinion piece in the Irish Times is to be welcomed. It is valuable to have a Government Minister engaging with the vital arguments put forward in the joint opinion piece of Friday 6th April by 39 economic analysts, many of whom are members of TASC’s Economists’ Network.
There are a number of areas of agreement between both pieces. Both seek to achieve recovery through growth and both acknowledge the important role of achieving productivity and efficiencies in the public service. Most significantly, both agree with the importance of investment, and Minister Howlin’s piece identifies similar sources for investment as those identified in the original article, such as the NPRF and pension funds.
There is potentially a significant difference of opinion in the articles about what would be the role of investment now. Minister Howlin confusingly supports investment yet dismisses stimulus as short-term only. It appears to be on this basis that he claims the Government can go no further in the direction of counter-cyclical policies. The depiction of investment as mere stimulus fails to see the win-win scenario that is possible from targeted investment in specific infrastructure and human capital (such as broadband and education) which will also result in an increase in the economy’s long-term productive capacity. Ireland would in future reap the rewards of these investments, as they create opportunities to create and expand businesses that would not be possible without such investment.
Minister Howlin rightly points to the scale of the problem confronting the State, in terms of the enormous gap between tax revenue and spending. However, he fails to address the options for structuring taxation differently to increase revenue and to balance some of the injustice of regressive tax measures, like the increase in VAT. Likewise, the problem is ultimately not just the State’s finances, but the finances of the country as a whole, including private debt and the crisis of unemployment.
Surprisingly, Minister Howlin does not mention unemployment and job creation, although in fairness, they may be implied by his discussion of increasing investment. However, it is important that growth in sustainable jobs is the measure of success, not just GDP growth statistics. In the context of jobs, Minister Howlin does not explicitly mention the demand-side to job creation (that is, the need for more demand in the economy to permit job creation) but again this may be implicit in his emphasis on investment.
It is unfortunate that Minister Howlin does not address the economic and fiscal costs of social disinvestment. Public service cuts can lead to social costs such as more young people leaving education early, worse educational outcomes overall, less early intervention in health and mental health problems, and so on. These costs have a real effect on the economy, by lowering its long-term productive capacity – the reverse effect of productive investment.
Moreover, social problems have a real effect on the Exchequer, as a euro saved today may result in crime or health issues that cost many more euros tomorrow. If preventing social problems now (through early intervention or education supports) is cheaper than paying to deal with them in future, Ireland’s lenders can accept that this increases rather than diminishes Ireland’s debt sustainability. The 'troika' care more about the debt being repaid than the means used to do so, and they are open to rational cost-benefit calculations such as this.
There is some agreement between the articles on the importance of action at the EU level. However, Minister Howlin only focuses on the role of the European Central Bank, whereas arguably there has been a failure of leadership by both the Council and Commission. The dogmatic pursuit of price stability by the ECB is also unhelpful, and needs to be tempered by an equal focus on employment and sustainable growth in the Euro zone economies. Yet, there is little sign of this kind of thinking at EU level, where there are the resources for an EU-wide programme of productive investment.
Minister Howlin offers a defence of the fiscal compact treaty, which will require Ireland to reduce its structural deficit to less than half of one per cent. From a Keynesian perspective, it is economically correct to have some kind of mechanism that will oblige a Government to save during good economic times. However, Minister Howlin is factually incorrect when he suggests that having the compact would have caused the previous administrations to stow away more savings. This is because major institutions, like the IMF and ECB, claimed that Ireland had a structural surplus during the boom. It was only retrospectively that these calculations were substantially revised to show structural deficits in the last years of the boom. The difficulty in defining and measuring structural deficits – let alone forcing governments to act on them – should not be underestimated.
Minister Howlin acknowledges that he simplifies the argument made by the original contributors. We were certainly not arguing that there is a simple or pain-free way to achieve Ireland’s social and economic recovery. The Fianna Fáil policies of 1977 he dismisses were focused on increasing current spending as a crude stimulus, which is far from what is being proposed by the call for productive and targeted investment through capital spending on infrastructure and human capital.
What is at stake is whether or not there is a viable set of economic policies that would address the jobs crisis and social problems resulting from the current crisis, while also addressing the fiscal crisis that the State faces, as an alternative to the economic approach being taken by the current Government, which in many of its core aspects is a continuation of the policies of the previous administration.
Building on the areas of agreement, such as public service reform and the need for investment, the following arguments (and points of disagreement with Minister Howlin) are reasons to believe the alternative being proposed is viable:
• Productive investment is much more than short-term stimulus because it will increase our economy’s future productive capacity and job creating capacity, which in turn will raise the State’s revenue;
• Much more could be done to restructure taxation to make it more just and to bridge the State’s deficit;
• Social problems through social disinvestment will cost more to solve than they will to prevent – and lenders can be persuaded of that;
• The EU could do much more to solve the crisis, including changing the mandate of the ECB to include maximum employment and sustainable growth.
There are a number of areas of agreement between both pieces. Both seek to achieve recovery through growth and both acknowledge the important role of achieving productivity and efficiencies in the public service. Most significantly, both agree with the importance of investment, and Minister Howlin’s piece identifies similar sources for investment as those identified in the original article, such as the NPRF and pension funds.
There is potentially a significant difference of opinion in the articles about what would be the role of investment now. Minister Howlin confusingly supports investment yet dismisses stimulus as short-term only. It appears to be on this basis that he claims the Government can go no further in the direction of counter-cyclical policies. The depiction of investment as mere stimulus fails to see the win-win scenario that is possible from targeted investment in specific infrastructure and human capital (such as broadband and education) which will also result in an increase in the economy’s long-term productive capacity. Ireland would in future reap the rewards of these investments, as they create opportunities to create and expand businesses that would not be possible without such investment.
Minister Howlin rightly points to the scale of the problem confronting the State, in terms of the enormous gap between tax revenue and spending. However, he fails to address the options for structuring taxation differently to increase revenue and to balance some of the injustice of regressive tax measures, like the increase in VAT. Likewise, the problem is ultimately not just the State’s finances, but the finances of the country as a whole, including private debt and the crisis of unemployment.
Surprisingly, Minister Howlin does not mention unemployment and job creation, although in fairness, they may be implied by his discussion of increasing investment. However, it is important that growth in sustainable jobs is the measure of success, not just GDP growth statistics. In the context of jobs, Minister Howlin does not explicitly mention the demand-side to job creation (that is, the need for more demand in the economy to permit job creation) but again this may be implicit in his emphasis on investment.
It is unfortunate that Minister Howlin does not address the economic and fiscal costs of social disinvestment. Public service cuts can lead to social costs such as more young people leaving education early, worse educational outcomes overall, less early intervention in health and mental health problems, and so on. These costs have a real effect on the economy, by lowering its long-term productive capacity – the reverse effect of productive investment.
Moreover, social problems have a real effect on the Exchequer, as a euro saved today may result in crime or health issues that cost many more euros tomorrow. If preventing social problems now (through early intervention or education supports) is cheaper than paying to deal with them in future, Ireland’s lenders can accept that this increases rather than diminishes Ireland’s debt sustainability. The 'troika' care more about the debt being repaid than the means used to do so, and they are open to rational cost-benefit calculations such as this.
There is some agreement between the articles on the importance of action at the EU level. However, Minister Howlin only focuses on the role of the European Central Bank, whereas arguably there has been a failure of leadership by both the Council and Commission. The dogmatic pursuit of price stability by the ECB is also unhelpful, and needs to be tempered by an equal focus on employment and sustainable growth in the Euro zone economies. Yet, there is little sign of this kind of thinking at EU level, where there are the resources for an EU-wide programme of productive investment.
Minister Howlin offers a defence of the fiscal compact treaty, which will require Ireland to reduce its structural deficit to less than half of one per cent. From a Keynesian perspective, it is economically correct to have some kind of mechanism that will oblige a Government to save during good economic times. However, Minister Howlin is factually incorrect when he suggests that having the compact would have caused the previous administrations to stow away more savings. This is because major institutions, like the IMF and ECB, claimed that Ireland had a structural surplus during the boom. It was only retrospectively that these calculations were substantially revised to show structural deficits in the last years of the boom. The difficulty in defining and measuring structural deficits – let alone forcing governments to act on them – should not be underestimated.
Minister Howlin acknowledges that he simplifies the argument made by the original contributors. We were certainly not arguing that there is a simple or pain-free way to achieve Ireland’s social and economic recovery. The Fianna Fáil policies of 1977 he dismisses were focused on increasing current spending as a crude stimulus, which is far from what is being proposed by the call for productive and targeted investment through capital spending on infrastructure and human capital.
What is at stake is whether or not there is a viable set of economic policies that would address the jobs crisis and social problems resulting from the current crisis, while also addressing the fiscal crisis that the State faces, as an alternative to the economic approach being taken by the current Government, which in many of its core aspects is a continuation of the policies of the previous administration.
Building on the areas of agreement, such as public service reform and the need for investment, the following arguments (and points of disagreement with Minister Howlin) are reasons to believe the alternative being proposed is viable:
• Productive investment is much more than short-term stimulus because it will increase our economy’s future productive capacity and job creating capacity, which in turn will raise the State’s revenue;
• Much more could be done to restructure taxation to make it more just and to bridge the State’s deficit;
• Social problems through social disinvestment will cost more to solve than they will to prevent – and lenders can be persuaded of that;
• The EU could do much more to solve the crisis, including changing the mandate of the ECB to include maximum employment and sustainable growth.
Tuesday, 10 April 2012
Germany in and with and for Europe
Nat O'Connor: As noted in an earlier post, it is useful to see that there is lively debate going on in Germany about Europe and alternatives to austerity. This is an important counterbalance to the 'Austerity Germany' we see presented in much of the media, which creates the illusion that the German people are united in a desire to punish Ireland and other peripheral EU states for our economic and fiscal woes. On the contrary, Helmut Schmidt makes a major contribution to the debate by pointing out Germany's benefit from ensuring solidarity between the centre and periphery of the EU.
Helmut Schmidt was the Social Democratic Chancellor of West Germany from 1974 to 1982. In a key speech to the German Social Democrat party conference in 2011, he outlines the importance of Germany's integration with the other countries of Europe and proposes "radical regulations" for the EU's financial markets as well as the "financing of growth-enhancing projects" to help EU member-states achieve balanced budgets.
The Foundation for European Progressive Studies (FEPS) has recently republished this speech in 15 other European languages in order for Schmidt's message to be widely heard across Europe. An online, English version of the speech is here.
Born in 1918, Schmit takes a long view of the challenges of the 21st Century, as well as the failures of the 20th. He notes that there has been conflict between the centre and periphery of Europe since the Middle Ages - and it most often ended in war. The founders of the European Coal and Steel Community were explicitly motivated to bind Germany into an integrated Europe and to avoid further conflict.
At the same time, Schmidt argues that German strategic interests are also better served by integration into Europe. By 2050, European nations will each constitute "just a fraction of one per cent of the world's population." ... "That is why the European nation states have a long-term strategic interest in their mutual integration."
Schmidt points to recent German budget surpluses as a "very undesirable development". ... "as in reality all our surpluses are the deficits of other countries." (There is a lesson there for those who claim that Ireland can restore its economy on the back of exports alone).
Schmidt supports some sort of fiscal transfer at EU level. In terms of contributions to the EU's budget, he notes: "It is a fact that, for decades now, Germany has been a net contributor. ... And of course Greece, Portugal and Ireland have always been net recipients."
Schmidt identifies the weakness of the EU's institutions in addressing the financial crisis. "Umpteen thousands of financial traders in the USA and Europe, plus a number of ratings agencies, have succeeded in turning the politically responsible governments in Europe into hostages." ... "In 2008/2009, governments the world over managed to rescue the banks with the help of guarantees and the taxpayers' money. Since 2010, however, this herd of highly intelligent, psychosis-prone financial managers has gone back to its old game of profits and bonuses."
He argues that the EU or Eurozone could and should "introduce radical regulations for the common financial market in the euro currency area. These regulations should cover the separation of normal commercial banks from investment and shadow banks; a ban on the short selling of securities at a future date; a ban on trading in derivatives, unless they have been approved by the official stock exchange supervisory body; and the effective limitation of transactions affecting the euro area carried out by the currently unsupervised rating agencies."
Various other policies are also required, including "monitoring mechanisms, a common economic and fiscal policy as well as a series of tax, spending, social and labour market reforms in the different countries." However, despite the need for closer coordination in a range of area, Schmidt argues that the EU will not become a federation any time soon.
"A common debt will be inevitable too. We Germans should not refuse to accept this..."
"We should also avoid advocating an extreme deflationary policy for the whole of Europe. On the contrary, Jacques Delors is quite right to insist that a balancing of the budgets should be accompanied by the introduction and financing of growth-enhancing projects. No country can consolidate its budget without growth and without new jobs. Those who believe that Europe can recover solely by making budgetary savings should take a close look at the fateful effects of Heinrich Brüening's deflationary policy in 1930/32. It triggered depression and intolerable levels of unemployment, thus paving the way for the demise of the first German democracy."
In short, Helmut Schmidt's speech is a reminder that, taking the long view, not only are there alternatives to austerity - but austerity on its own is not a solution at all. Solidarity and leadership are needed to bring about recovery, led by an integrated EU, with centre and periphery working together for their mutual benefit.
Helmut Schmidt was the Social Democratic Chancellor of West Germany from 1974 to 1982. In a key speech to the German Social Democrat party conference in 2011, he outlines the importance of Germany's integration with the other countries of Europe and proposes "radical regulations" for the EU's financial markets as well as the "financing of growth-enhancing projects" to help EU member-states achieve balanced budgets.
The Foundation for European Progressive Studies (FEPS) has recently republished this speech in 15 other European languages in order for Schmidt's message to be widely heard across Europe. An online, English version of the speech is here.
Born in 1918, Schmit takes a long view of the challenges of the 21st Century, as well as the failures of the 20th. He notes that there has been conflict between the centre and periphery of Europe since the Middle Ages - and it most often ended in war. The founders of the European Coal and Steel Community were explicitly motivated to bind Germany into an integrated Europe and to avoid further conflict.
At the same time, Schmidt argues that German strategic interests are also better served by integration into Europe. By 2050, European nations will each constitute "just a fraction of one per cent of the world's population." ... "That is why the European nation states have a long-term strategic interest in their mutual integration."
Schmidt points to recent German budget surpluses as a "very undesirable development". ... "as in reality all our surpluses are the deficits of other countries." (There is a lesson there for those who claim that Ireland can restore its economy on the back of exports alone).
Schmidt supports some sort of fiscal transfer at EU level. In terms of contributions to the EU's budget, he notes: "It is a fact that, for decades now, Germany has been a net contributor. ... And of course Greece, Portugal and Ireland have always been net recipients."
Schmidt identifies the weakness of the EU's institutions in addressing the financial crisis. "Umpteen thousands of financial traders in the USA and Europe, plus a number of ratings agencies, have succeeded in turning the politically responsible governments in Europe into hostages." ... "In 2008/2009, governments the world over managed to rescue the banks with the help of guarantees and the taxpayers' money. Since 2010, however, this herd of highly intelligent, psychosis-prone financial managers has gone back to its old game of profits and bonuses."
He argues that the EU or Eurozone could and should "introduce radical regulations for the common financial market in the euro currency area. These regulations should cover the separation of normal commercial banks from investment and shadow banks; a ban on the short selling of securities at a future date; a ban on trading in derivatives, unless they have been approved by the official stock exchange supervisory body; and the effective limitation of transactions affecting the euro area carried out by the currently unsupervised rating agencies."
Various other policies are also required, including "monitoring mechanisms, a common economic and fiscal policy as well as a series of tax, spending, social and labour market reforms in the different countries." However, despite the need for closer coordination in a range of area, Schmidt argues that the EU will not become a federation any time soon.
"A common debt will be inevitable too. We Germans should not refuse to accept this..."
"We should also avoid advocating an extreme deflationary policy for the whole of Europe. On the contrary, Jacques Delors is quite right to insist that a balancing of the budgets should be accompanied by the introduction and financing of growth-enhancing projects. No country can consolidate its budget without growth and without new jobs. Those who believe that Europe can recover solely by making budgetary savings should take a close look at the fateful effects of Heinrich Brüening's deflationary policy in 1930/32. It triggered depression and intolerable levels of unemployment, thus paving the way for the demise of the first German democracy."
In short, Helmut Schmidt's speech is a reminder that, taking the long view, not only are there alternatives to austerity - but austerity on its own is not a solution at all. Solidarity and leadership are needed to bring about recovery, led by an integrated EU, with centre and periphery working together for their mutual benefit.
Friday, 16 March 2012
The Alcohol Industry - A case study of health versus wealth
Nat O'Connor: The recently completed (Feb 2012) Steering Group Report On a National Substance Misuse Strategy has taken a public health approach to the issue of alcohol, and it estimates the costs to Irish society of dealing with alcohol abuse to be €3.7 billion. At the same time, the alcohol manufacturing and retail industry provided €2 billion in VAT and excise to the State, as well as 50,000-60,000 direct and indirect jobs.
There’s just no way to reduce the €3.7 billion of social harm and retain the same levels of tax and jobs. One of the recommended societal goals is to reduce alcohol consumption by nearly a quarter (page 7), which would have to significantly affect the alcohol industry.
It's a good case study of a genuine dilemma facing the Government about how to curb the societal harm and economic costs from alcohol abuse while minimising the loss of jobs or tax revenue from the alcohol industry.
Minority reports from both the ABFI and MEAS disagree with the steering groups findings. This suggests that the alcohol industry sees the report's recommendations overall as a financial threat, although it would be unfair to infer from this that the industry is unwilling to deal with the issue of abuse.
Table 7 (page 78) gives the breakdown of the €3.7 billion cost to society:
• €1.2 billion (32%) Costs to healthcare system of alcohol-related illnesses
• €1.2 billion (32%) Alcohol-related crime
• €526 million (14%) Alcohol-related road accidents
• €330 million (9%) Output lost to alcohol-related absence from work
• €197 million (5%) Alcohol-related accidents at work
• €167 million (5%) Alcohol-related suicides
• €110 million (3%) Alcohol-related premature mortality
The economic role of alcohol production and consumption is addressed too (page 71):
• €7.2 billion personal expenditure on beverages
• €2.9 billion turnover in drinks manufacturing, including €1 billion in drinks exports
• The on-trade provides 43,629 full-time job equivalents, and off-licences another 2,850.
• Manufacturing and retail provide €2 billion in VAT and excise.
Alcohol consumption in Ireland (at 11.3 litres per capita) is higher than the OECD average of 9.1 (page 64), but more significantly, Irish adults binge drink more than any other European country, with one quarter of Irish adults binge drinking every week (page 7).
A summary of some of the recommended actions (listed in full on pages 54-62) are as follows:
• Increase the price of alcohol over the medium term to ensure that alcohol becomes less affordable, using excise, including linking excise more closely to alcohol content;
• Minimum pricing per gram of alcohol;
• Increase enforcement of some existing laws, including physical separation of alcohol in mixed retail outlets;
• Develop proposals for an all-island initiative in relation to alcohol issues;
• Allow the HSE to object to the granting of a court certificate for a new licence or renewed licence;
• Introduce a statutory code of practice on the sale of alcohol in the off-licence sector;
• Develop a system to monitor the enforcement of sale, supply, delivery or online advertisement of alcohol to minors, with particular emphasis on age verification;
• Consider the possible need to strengthen the legislative controls on distance sales;
• Establish standards for mandatory server training programmes in the on-trade and off-trade sectors;
• Engage with EU colleagues to explore the feasibility of introducing common restrictions on advertising on a European level.
• Restrict alcohol advertisement generally, including a 9pm watershed for tv and radio, alcohol ads for over-18s cinema screenings only, and prohibition of all outdoor advertising of alcohol;
• Phase out drinks industry sponsorship of sport and other large public events by 2016;
• Introduce appropriate hospital procedures to provide alcohol testing of drivers who are taken to hospital following fatal/injury collisions;
• Monitor and regularly publish the volume of driver alcohol testing by An Garda Síochána;
• Introduce a ‘social responsibility’ levy on the drinks industry;
• Reduce the low-risk weekly guidelines to match the UK levels;
• Develop and implement more detailed clinical guidelines for health professionals relating to the management of at-risk patients;
• Increase information on alcohol products sold in Ireland to include grams of alcohol, calorific content and health warnings;
• A wide range of preventative measures, especially targeted at high risk groups, particular communities, and children and families of those abusing alcohol;
• Encourage the provision of alcohol-free venues for young people, with an emphasis on those most at risk (e.g. Youth cafés, alcohol-free music and dance venues and sports venues);
• Further integration of alcohol strategy with other national addiction and mental health strategies;
• Various clinical guidelines and protocols;
• Improve detoxification services;
• Continue to implement and develop, as appropriate, epidemiological indicators and the associated data collection systems and a research programme to examine the economic, social and health consequences of alcohol and the impact of alcohol policy measures.
Of course, some of these actions, particularly local action and prevention, may require additional financial resources at a time when the Government is still battling a massive deficit. Yet, the economic gains of tackling alcohol-related harm may be a good social investment that will pay dividends in later years.
From an equality perspective, excise increases will disproportionately affect people on low incomes. While there are good arguments in favour of using price to disincentive negative behaviours (i.e. pignovian taxes), this compounds poverty and an already unfair distribution of income. Ideally, we should ensure a minimum adequate income for everyone in Ireland before relying on flat taxes to dissuade people from alcohol abuse. There is also a risk that people with an alcohol addiction and/or related mental health problems will simply spend more of their incomes on alcohol and less on everything else. Therefore education and other action to support people in tackling alcohol addiction will be crucial, and this will require significant investment in healthcare and social support services, not least specialist interventions with the highest risk groups.
Many of the recommendations, particularly the earlier ones, will cost money to the alcohol industry to implement. Not least the call for a ‘social responsibility’ levy on the drinks industry, which could help pay for the required healthcare and social services. So the stage is set for conflict between the long-term health costs and the short-term economic benefits of alcohol to the Irish economy and society.
There’s just no way to reduce the €3.7 billion of social harm and retain the same levels of tax and jobs. One of the recommended societal goals is to reduce alcohol consumption by nearly a quarter (page 7), which would have to significantly affect the alcohol industry.
It's a good case study of a genuine dilemma facing the Government about how to curb the societal harm and economic costs from alcohol abuse while minimising the loss of jobs or tax revenue from the alcohol industry.
Minority reports from both the ABFI and MEAS disagree with the steering groups findings. This suggests that the alcohol industry sees the report's recommendations overall as a financial threat, although it would be unfair to infer from this that the industry is unwilling to deal with the issue of abuse.
Table 7 (page 78) gives the breakdown of the €3.7 billion cost to society:
• €1.2 billion (32%) Costs to healthcare system of alcohol-related illnesses
• €1.2 billion (32%) Alcohol-related crime
• €526 million (14%) Alcohol-related road accidents
• €330 million (9%) Output lost to alcohol-related absence from work
• €197 million (5%) Alcohol-related accidents at work
• €167 million (5%) Alcohol-related suicides
• €110 million (3%) Alcohol-related premature mortality
The economic role of alcohol production and consumption is addressed too (page 71):
• €7.2 billion personal expenditure on beverages
• €2.9 billion turnover in drinks manufacturing, including €1 billion in drinks exports
• The on-trade provides 43,629 full-time job equivalents, and off-licences another 2,850.
• Manufacturing and retail provide €2 billion in VAT and excise.
Alcohol consumption in Ireland (at 11.3 litres per capita) is higher than the OECD average of 9.1 (page 64), but more significantly, Irish adults binge drink more than any other European country, with one quarter of Irish adults binge drinking every week (page 7).
A summary of some of the recommended actions (listed in full on pages 54-62) are as follows:
• Increase the price of alcohol over the medium term to ensure that alcohol becomes less affordable, using excise, including linking excise more closely to alcohol content;
• Minimum pricing per gram of alcohol;
• Increase enforcement of some existing laws, including physical separation of alcohol in mixed retail outlets;
• Develop proposals for an all-island initiative in relation to alcohol issues;
• Allow the HSE to object to the granting of a court certificate for a new licence or renewed licence;
• Introduce a statutory code of practice on the sale of alcohol in the off-licence sector;
• Develop a system to monitor the enforcement of sale, supply, delivery or online advertisement of alcohol to minors, with particular emphasis on age verification;
• Consider the possible need to strengthen the legislative controls on distance sales;
• Establish standards for mandatory server training programmes in the on-trade and off-trade sectors;
• Engage with EU colleagues to explore the feasibility of introducing common restrictions on advertising on a European level.
• Restrict alcohol advertisement generally, including a 9pm watershed for tv and radio, alcohol ads for over-18s cinema screenings only, and prohibition of all outdoor advertising of alcohol;
• Phase out drinks industry sponsorship of sport and other large public events by 2016;
• Introduce appropriate hospital procedures to provide alcohol testing of drivers who are taken to hospital following fatal/injury collisions;
• Monitor and regularly publish the volume of driver alcohol testing by An Garda Síochána;
• Introduce a ‘social responsibility’ levy on the drinks industry;
• Reduce the low-risk weekly guidelines to match the UK levels;
• Develop and implement more detailed clinical guidelines for health professionals relating to the management of at-risk patients;
• Increase information on alcohol products sold in Ireland to include grams of alcohol, calorific content and health warnings;
• A wide range of preventative measures, especially targeted at high risk groups, particular communities, and children and families of those abusing alcohol;
• Encourage the provision of alcohol-free venues for young people, with an emphasis on those most at risk (e.g. Youth cafés, alcohol-free music and dance venues and sports venues);
• Further integration of alcohol strategy with other national addiction and mental health strategies;
• Various clinical guidelines and protocols;
• Improve detoxification services;
• Continue to implement and develop, as appropriate, epidemiological indicators and the associated data collection systems and a research programme to examine the economic, social and health consequences of alcohol and the impact of alcohol policy measures.
Of course, some of these actions, particularly local action and prevention, may require additional financial resources at a time when the Government is still battling a massive deficit. Yet, the economic gains of tackling alcohol-related harm may be a good social investment that will pay dividends in later years.
From an equality perspective, excise increases will disproportionately affect people on low incomes. While there are good arguments in favour of using price to disincentive negative behaviours (i.e. pignovian taxes), this compounds poverty and an already unfair distribution of income. Ideally, we should ensure a minimum adequate income for everyone in Ireland before relying on flat taxes to dissuade people from alcohol abuse. There is also a risk that people with an alcohol addiction and/or related mental health problems will simply spend more of their incomes on alcohol and less on everything else. Therefore education and other action to support people in tackling alcohol addiction will be crucial, and this will require significant investment in healthcare and social support services, not least specialist interventions with the highest risk groups.
Many of the recommendations, particularly the earlier ones, will cost money to the alcohol industry to implement. Not least the call for a ‘social responsibility’ levy on the drinks industry, which could help pay for the required healthcare and social services. So the stage is set for conflict between the long-term health costs and the short-term economic benefits of alcohol to the Irish economy and society.
Thursday, 15 March 2012
Oireachtas Dysfunction on Economic Policy?
Paul Hunt (a regular commentator on PE) has written a lengthy analysis in the Dublin Review of Book linking the dysfunction of the Oireachtas with the woes of the Irish economy.
There is a lot to agree with in the article, such as his assertion that “open, transparent, adversarial disputation of public policy proposals based on facts, evidence and analysis is the most effective means of ensuring good governance”. However, some aspects of the analysis are tenuous.
The article ranges from a discussion of the economic history of the twentieth century to a comparison of the influence of different European powers over their respective governments. As result, the treatment is inevitably somewhat simplified in places but gives a relatively clear overall narrative from the author's perspective.
In the closing pages, the analysis veers dangerously close to cynicism, if not outright conspiracy theory. There is a lack of evidence supplied to justify writing off the entire policy making system as a monolithic industry using propaganda and spin to provide post hoc justifications for decisions that benefit vested interests and harm the public interest. It can feel like that sometimes, but it is an oversimplification and exaggeration.
While the essay is surprisingly tolerant of failures of investigative journalism, on the basis that the media is “probably insufficiently resourced and lacks the incentive”, there is a need for more nuances about why policy-making can be dysfunctional in Ireland. Failure by successive governments to invest in social scientific policy research is one component, as is a failure to develop career structures and human resources policies that would incentivise the kind of numerate, analytical skills required in a modern civil service.
There are a few specific points that I find particularly contentious.
The assertion that neo-liberalism was “theoretically sound” whereas Keynesianism was “naïve” and “beguiling” shows a certain bias. Different aspects of these theories have been both bolstered and undermined by a range of evidence at this stage, and both have major flaws.
Likewise, I cannot agree that the early Irish state “placed a premium on governance without effective scrutiny, restraint or accountability”. On the contrary, the stability of parliamentary democracy in Ireland – probably due to our geographical and cultural connections to stable regimes in the UK and USA – provided a forum where civil war enemies could hold each other to account for their use of state power and limit the abuse of national resources. Arguably, the Dáil worked much better to achieve these aims eighty years ago than it does today and I endorse the article's conclusion that it is now dominated by the Government.
Finally, I reject the assertion that “most voters are broadly content” with a weak Oireachtas. I do not believe that people are apathetic either. I think there is a great anger and frustration with the political system and the PR-driven nature of political communication in recent years. Participatory experiments like those done by Claiming Our Future and We The Citizens provide evidence to suggest that people are able to get their heads around tricky issues and would welcome much more frank, detailed and nuanced policy discussions by politicians.
There is one contradiction in the article, between the idealised – perhaps even naïve – depiction of the role of governments and parliament near the end, where it is claimed that they should always act in the public interest, versus the earlier analysis that interest groups “are behaving rationally” by each “pursuing their interests” using whatever “power and influence they can exercise”.
Much as I agree with the article that a much stronger and independent research and analytic capability should be made available to the Oireachtas, in reality democratic politics is largely an agreement to replace violent conflict with competition between different vested interests, with parties in Government constrained to spread just enough benefits around to satisfy their diverse voter bases or lose the next election.
Is this cynical in turn? I don't think so, because alongside the reality that politics is inevitably partisan, I believe that there are public servants and politicians on all sides who sincerely care about the public interest or 'common good' and try to arrive at balanced policy solutions. But there is a risk that even the best of them are lulled into a sense that the Oireachtas and Government are doing the best they can, in a technocratic way. Parliamentary activity - and policy making more generally - should not be seen as a merely technical activity, where the optimal solutions can arise from dispassionate analysis of facts and figures. On the contrary, values matter too and what policy is considered 'optimal' almost certainly depends on one's moral perspective.
I welcome the article's contribution to the public debate on political reform, but I believe that any drive for deep reform of the Oireachtas, including heightened scrutiny and holding of governments to account, must be fuelled by the knowledge that the costs and benefits of public policy decisions are not distributed equally. This sense of urgency and unfairness should remind those politicians who care about the public interest that their duty is to question and oppose bad policy, even if that means losing their salaries and their careers.
There is a lot to agree with in the article, such as his assertion that “open, transparent, adversarial disputation of public policy proposals based on facts, evidence and analysis is the most effective means of ensuring good governance”. However, some aspects of the analysis are tenuous.
The article ranges from a discussion of the economic history of the twentieth century to a comparison of the influence of different European powers over their respective governments. As result, the treatment is inevitably somewhat simplified in places but gives a relatively clear overall narrative from the author's perspective.
In the closing pages, the analysis veers dangerously close to cynicism, if not outright conspiracy theory. There is a lack of evidence supplied to justify writing off the entire policy making system as a monolithic industry using propaganda and spin to provide post hoc justifications for decisions that benefit vested interests and harm the public interest. It can feel like that sometimes, but it is an oversimplification and exaggeration.
While the essay is surprisingly tolerant of failures of investigative journalism, on the basis that the media is “probably insufficiently resourced and lacks the incentive”, there is a need for more nuances about why policy-making can be dysfunctional in Ireland. Failure by successive governments to invest in social scientific policy research is one component, as is a failure to develop career structures and human resources policies that would incentivise the kind of numerate, analytical skills required in a modern civil service.
There are a few specific points that I find particularly contentious.
The assertion that neo-liberalism was “theoretically sound” whereas Keynesianism was “naïve” and “beguiling” shows a certain bias. Different aspects of these theories have been both bolstered and undermined by a range of evidence at this stage, and both have major flaws.
Likewise, I cannot agree that the early Irish state “placed a premium on governance without effective scrutiny, restraint or accountability”. On the contrary, the stability of parliamentary democracy in Ireland – probably due to our geographical and cultural connections to stable regimes in the UK and USA – provided a forum where civil war enemies could hold each other to account for their use of state power and limit the abuse of national resources. Arguably, the Dáil worked much better to achieve these aims eighty years ago than it does today and I endorse the article's conclusion that it is now dominated by the Government.
Finally, I reject the assertion that “most voters are broadly content” with a weak Oireachtas. I do not believe that people are apathetic either. I think there is a great anger and frustration with the political system and the PR-driven nature of political communication in recent years. Participatory experiments like those done by Claiming Our Future and We The Citizens provide evidence to suggest that people are able to get their heads around tricky issues and would welcome much more frank, detailed and nuanced policy discussions by politicians.
There is one contradiction in the article, between the idealised – perhaps even naïve – depiction of the role of governments and parliament near the end, where it is claimed that they should always act in the public interest, versus the earlier analysis that interest groups “are behaving rationally” by each “pursuing their interests” using whatever “power and influence they can exercise”.
Much as I agree with the article that a much stronger and independent research and analytic capability should be made available to the Oireachtas, in reality democratic politics is largely an agreement to replace violent conflict with competition between different vested interests, with parties in Government constrained to spread just enough benefits around to satisfy their diverse voter bases or lose the next election.
Is this cynical in turn? I don't think so, because alongside the reality that politics is inevitably partisan, I believe that there are public servants and politicians on all sides who sincerely care about the public interest or 'common good' and try to arrive at balanced policy solutions. But there is a risk that even the best of them are lulled into a sense that the Oireachtas and Government are doing the best they can, in a technocratic way. Parliamentary activity - and policy making more generally - should not be seen as a merely technical activity, where the optimal solutions can arise from dispassionate analysis of facts and figures. On the contrary, values matter too and what policy is considered 'optimal' almost certainly depends on one's moral perspective.
I welcome the article's contribution to the public debate on political reform, but I believe that any drive for deep reform of the Oireachtas, including heightened scrutiny and holding of governments to account, must be fuelled by the knowledge that the costs and benefits of public policy decisions are not distributed equally. This sense of urgency and unfairness should remind those politicians who care about the public interest that their duty is to question and oppose bad policy, even if that means losing their salaries and their careers.
Friday, 2 March 2012
What exactly will we be asked in the fiscal treaty referendum?
Nat O'Connor: The Taoiseach has signed the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (also known as the 'fiscal compact' or the Fiscal Stability Treaty). However, it will only be ratified by Ireland if it is agreed by the Irish people in a referendum.
There is still some uncertainly about what exactly we will be voting about. Putting a debt brake in the Constitution would be a very different prospect from merely a ratification clause. We will know more when we see the actual wording of the referendum. Will it be simply "The State may ratify..." or will it include other constitutional changes and some formula of words in the Constitution to create a "binding, permanent" mechanism that will constrain future governments in relation to fiscal policy and how they deal with deficits and the national debt?
At this time, the advice of the Attorney General has not been published, so we do not know why a referendum will be held. We can probably assume that it is for the usual reason. That is, Ireland has had a series of referendums (modifying Article 29 of Bunreacht na hÉireann) to permit the Government to ratify European treaties such as Maastricht, Amsterdam and Nice. The wording of Bunreacht na hÉireann for recent treaties is straightforward: “The State may ratify the Treaty…”
On that basis, it is likely that the reason for Ireland to hold a referendum is again for the people to give the State permission to ratify the Fiscal Stability Treaty.
However, a second potential reason for Ireland to hold a referendum comes from the working of the Treaty itself. The Treaty calls for the Contracting Parties to "transpose the 'balanced budget rule' into their national legal systems, through binding, permanent and preferably constitutional provisions". Although there is no obligation in the Treaty to place the balanced budget rule (or 'debt brake') in Ireland's constitution, there is an implication that the rule should be transposed in a way that is stronger than ordinary legislation. The creation of a "binding, permanent" provision may therefore be part of the reason why Ireland is having a referendum. When we have clarity on this matter, it will easier to judge the long-term economic and democratic impact of the referendum.
There is still some uncertainly about what exactly we will be voting about. Putting a debt brake in the Constitution would be a very different prospect from merely a ratification clause. We will know more when we see the actual wording of the referendum. Will it be simply "The State may ratify..." or will it include other constitutional changes and some formula of words in the Constitution to create a "binding, permanent" mechanism that will constrain future governments in relation to fiscal policy and how they deal with deficits and the national debt?
At this time, the advice of the Attorney General has not been published, so we do not know why a referendum will be held. We can probably assume that it is for the usual reason. That is, Ireland has had a series of referendums (modifying Article 29 of Bunreacht na hÉireann) to permit the Government to ratify European treaties such as Maastricht, Amsterdam and Nice. The wording of Bunreacht na hÉireann for recent treaties is straightforward: “The State may ratify the Treaty…”
On that basis, it is likely that the reason for Ireland to hold a referendum is again for the people to give the State permission to ratify the Fiscal Stability Treaty.
However, a second potential reason for Ireland to hold a referendum comes from the working of the Treaty itself. The Treaty calls for the Contracting Parties to "transpose the 'balanced budget rule' into their national legal systems, through binding, permanent and preferably constitutional provisions". Although there is no obligation in the Treaty to place the balanced budget rule (or 'debt brake') in Ireland's constitution, there is an implication that the rule should be transposed in a way that is stronger than ordinary legislation. The creation of a "binding, permanent" provision may therefore be part of the reason why Ireland is having a referendum. When we have clarity on this matter, it will easier to judge the long-term economic and democratic impact of the referendum.
Friday, 10 February 2012
Minimum Essential Budgets
Nat O'Connor: The TCD Policy Institute recently published a volume by the Vincentian Partnership for Social Justice and Dr Micheál Collins, which examines the 'minimum essential' budgets required by different household types. The Vincentians have been working on this kind of study for a number of years, and a copy of the report can be found under publications on budgeting.ie.
I think Dan O'Brien rather unfairly criticises the report in his Irish Times editorial. He argues that taxpayers’ money should not have funded the research, and that "Impartiality and objectivity are hallmarks of academic research. Publishing the views of a lobbyist blurs the line, thereby undermining TCD's credibility."
In fairness, one of the authors, Micheál Collins, was working as an academic member of staff at TCD at the time of receiving the grant. If anything, his work on the report has helped document the method and findings in a more academically rigorous way. Money was not being given to lobbyists, as Dan O'Brien portrays it.
Every piece of research comes from implicit or explicit normative assumptions. What matters is whether or not the method is robust and the evidence is clearly visible so that others can make alternative interpretations of the same data. In fairness to this study, it is based on an established, qualitative method involving focus groups who discuss what they regard as a reasonable standard of living and it does provide quite a lot of detail about the weekly costs they regard as 'minimum' broken down under a range of headings.
This standard of living does involve more than survival and includes a modest degree of "social inclusion and participation". However, Appendix A shows what is involved in minimum social participation remains frugal. For example, the €12.66 per week in a family budget for socialising is based on ten social events per adult each year. The researchers then go to the local shops and services and check out the prices to pay for the list.
What the report highlights is that, unsurprisingly, a great number of people on modest incomes in Ireland do not have an income sufficient to meet a 'minimum essential' budget. In particular, families with children in a number of cases have insufficient incomes. Moreover, it is of concern that a single person working full-time on the minimum wage also cannot afford an essential budget.
However, some households do have sufficient income. For example, a pensioner couple's income from the non-contributory state pension is sufficient to cover their minimum essentials because of the range of other non-cash supports, like fuel allowance, free travel and medical card. That's a useful validation of the welfare system and hardly a 'lobbyist' perspective.
What is missing from the report is a more full exposition of the costs. The publication notes that grocery prices are typically based on the least expensive supermarket 'own brand' items, but we only see aggregates and it would be useful to see item-by-item breakdowns; I imagine that this would be of particular use to the Department of Social Protection and services like MABS who advise people on how to budget their income. It should also be of interest to businesses to see evidence of market niches for cheaper goods and services.
The focus on weekly itemised expenditure is also of value because it highlights in very tangible terms how vulnerable household budgets are to relatively small ‘shocks’, like medical expenses or the costs of a funeral. What happens in reality is that people on low incomes are particularly badly insulated against such one-off expenses and these can lead to the use of moneylenders. In 2007 (latest survey) more than one in five people had difficulty accessing banking facilities (i.e. getting a basic bank account). This gap is filled for people on the lowest incomes by “52 licensed moneylenders in Ireland, 36 of whom operate ‘doorstep collection’ businesses” and who can charge over 150 per cent interest on small loans. See TASC (2010) Life and Debt.
The issue of one-off 'shocks' emphasises the importance of non-cash supports as 'shock-absorbers'; such as the medical card or social housing. These help people to cope with sudden expenses, without having to use up any savings they might have or take a loan. The study also usefully opens the door to more in-depth examination of where non-cash supports can help people get by without getting into debt.
I think Dan O'Brien rather unfairly criticises the report in his Irish Times editorial. He argues that taxpayers’ money should not have funded the research, and that "Impartiality and objectivity are hallmarks of academic research. Publishing the views of a lobbyist blurs the line, thereby undermining TCD's credibility."
In fairness, one of the authors, Micheál Collins, was working as an academic member of staff at TCD at the time of receiving the grant. If anything, his work on the report has helped document the method and findings in a more academically rigorous way. Money was not being given to lobbyists, as Dan O'Brien portrays it.
Every piece of research comes from implicit or explicit normative assumptions. What matters is whether or not the method is robust and the evidence is clearly visible so that others can make alternative interpretations of the same data. In fairness to this study, it is based on an established, qualitative method involving focus groups who discuss what they regard as a reasonable standard of living and it does provide quite a lot of detail about the weekly costs they regard as 'minimum' broken down under a range of headings.
This standard of living does involve more than survival and includes a modest degree of "social inclusion and participation". However, Appendix A shows what is involved in minimum social participation remains frugal. For example, the €12.66 per week in a family budget for socialising is based on ten social events per adult each year. The researchers then go to the local shops and services and check out the prices to pay for the list.
What the report highlights is that, unsurprisingly, a great number of people on modest incomes in Ireland do not have an income sufficient to meet a 'minimum essential' budget. In particular, families with children in a number of cases have insufficient incomes. Moreover, it is of concern that a single person working full-time on the minimum wage also cannot afford an essential budget.
However, some households do have sufficient income. For example, a pensioner couple's income from the non-contributory state pension is sufficient to cover their minimum essentials because of the range of other non-cash supports, like fuel allowance, free travel and medical card. That's a useful validation of the welfare system and hardly a 'lobbyist' perspective.
What is missing from the report is a more full exposition of the costs. The publication notes that grocery prices are typically based on the least expensive supermarket 'own brand' items, but we only see aggregates and it would be useful to see item-by-item breakdowns; I imagine that this would be of particular use to the Department of Social Protection and services like MABS who advise people on how to budget their income. It should also be of interest to businesses to see evidence of market niches for cheaper goods and services.
The focus on weekly itemised expenditure is also of value because it highlights in very tangible terms how vulnerable household budgets are to relatively small ‘shocks’, like medical expenses or the costs of a funeral. What happens in reality is that people on low incomes are particularly badly insulated against such one-off expenses and these can lead to the use of moneylenders. In 2007 (latest survey) more than one in five people had difficulty accessing banking facilities (i.e. getting a basic bank account). This gap is filled for people on the lowest incomes by “52 licensed moneylenders in Ireland, 36 of whom operate ‘doorstep collection’ businesses” and who can charge over 150 per cent interest on small loans. See TASC (2010) Life and Debt.
The issue of one-off 'shocks' emphasises the importance of non-cash supports as 'shock-absorbers'; such as the medical card or social housing. These help people to cope with sudden expenses, without having to use up any savings they might have or take a loan. The study also usefully opens the door to more in-depth examination of where non-cash supports can help people get by without getting into debt.
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.
Thursday, 26 January 2012
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.
Friday, 20 January 2012
Time for Plan B
Nat O'Connor: Austerity policies are not working. I was one of 59 signatories of a letter in today's Irish Times calling for Plan B.
Plan B must include productive investment in infrastructure, education and labour skills. There is some money available to spearhead this, in the remainder of the National Pension Reserve Fund and in cash balances held by the Government. Rather than using this money to further capitalise the banks and/or pay off debt, it would be more effective and more socially just for the Government to boost productive investment. Ireland's economy is operating far below its productive capacity and capital spending as a proportion of GDP is now the lowest in Europe. Therefore there is ample absorptive capacity to increase investment in areas such as the provision of next generation broadband infrastructure, retraining etc., as well as other areas that will boost employment in the short term and increase productive and innovative capacity in the medium and long term.
The private sector is not currently investing, therefore the State needs to get the ball rolling. This can be funded from part of the €15 billion or more the Government currently holds in cash and assets, as well as from tax increases on wealth and higher incomes. The Government's announcement that it is looking at the Anglo promissory notes is very welcome, and could also release some money for investment that is currently earmarked as part of the €3.1 billion to be paid on promissory notes this year.
Plan B must include productive investment in infrastructure, education and labour skills. There is some money available to spearhead this, in the remainder of the National Pension Reserve Fund and in cash balances held by the Government. Rather than using this money to further capitalise the banks and/or pay off debt, it would be more effective and more socially just for the Government to boost productive investment. Ireland's economy is operating far below its productive capacity and capital spending as a proportion of GDP is now the lowest in Europe. Therefore there is ample absorptive capacity to increase investment in areas such as the provision of next generation broadband infrastructure, retraining etc., as well as other areas that will boost employment in the short term and increase productive and innovative capacity in the medium and long term.
The private sector is not currently investing, therefore the State needs to get the ball rolling. This can be funded from part of the €15 billion or more the Government currently holds in cash and assets, as well as from tax increases on wealth and higher incomes. The Government's announcement that it is looking at the Anglo promissory notes is very welcome, and could also release some money for investment that is currently earmarked as part of the €3.1 billion to be paid on promissory notes this year.
Tuesday, 10 January 2012
The data being sent to IMF and EU bodies should be public
Nat O'Connor: The latest IMF report on Ireland has an important annex: Annex 1. Provision of data (pages 81-82), which gives a list of "indicators and reports" that "shall be made available to the staff of the European Commission, the ECB and the IMF by the Irish authorities on a regular basis." A unit within the Department of Finance will "coordinate and collect" the relevant "data and information". (It is an update on a list that formed part of the original agreement with the IMF and EU bodies; pages 33-34 here).
A lot of this data is very valuable for understanding and analysing the Irish economy and the effects of Irish Government policy. It is reasonable for the IMF, EC and ECB to seek this data to monitor Ireland's ability to repay the money we borrowed from them. Indeed, it is valuable to have their expertise on what data is required to monitor our economy and national debt. However, now that this data is being collected, it should as a matter of course be made publicly available within Ireland as well.
For clarity, the entire Annex is repeated at the end of this post. There are 22 sets of data referred to: F1 to F11 are from the Departments of Finance and PER; N1 to N5 are from the NTMA; and C1 to C6 are from the Central Bank.
First of all, it should be noted that some of this data is already available, but the majority of it is not. Secondly, it is not clear that all of the required information will exist at the time when it is supposed to be submitted. Thirdly, it should be acknowledged that there may, in a limited number of cases, be legitimate reasons for not publicly releasing some of these datasets. For general principles on what might be legitimate reasons for not releasing data, I would refer to the guidelines given in the Freedom of Information Act 1997. However, just because the release of some information can be blocked, does not mean that it should be. Certainly, any refusal to publish a dataset should be explained by the relevant Minister to the Oireachtas.
Conversly, as part of the Government's announced reform of the national Budget process, it may well be their intention to publish this sort of data. Its release would certainly help the Oireachtas to hold the Government to account. Access to this data would also probably be necessary for the new Fiscal Advisory Council to be effective.
F6 is an example of good practice in relation to the budget. It requires the publication of revenue and expenditure plans for the next four years. This original requirement helped open up the Budget process and multi-annual budget planning will hopefully become standard practice even once the agreement with the IMF and EU concludes.
Much of the data being required refers to the national debt. The sustainability of Ireland's debt is crucial to whether or not the economy can recover, or whether a prolonged period of stagnation - or indeed some form of default - is inevitable. There are periods in the history of most states when political discourse is dominated by the debt and the deficit. This is certainly the case in Ireland today. There is a pressing need to ensure that this discussion is grounded in accurate facts and figures, and does not lead to wrong information being spread in public.
The implication of F10 is worrying. The data required here is "Assessment report of the management of activation policies and on the outcome of job seekers' search activities and participation in labour market programmes." One one level that is useful data. However, it is not balanced by other data in the list, and may give a distorted picture of the Irish economy. Labour activation is to be welcomed, but priority should be given to ensuring that jobs exist in the first place, before putting pressure on people who are unemployed.
The Government has signalled that we will make use of our crisis by improving our systems of oversight and scrutiny, to make sure that a similar crisis does not happen again. An important step in that direction would be the regular release of these datasets, on a single website, in machine readable format, at the same time (if not before) they are sent to the IMF and EU bodies. For example, the website of the Fiscal Advisory Council could be used for this purpose.
The extent of the national crisis requires the Government to repeatedly ask the public's patience and understanding for the difficult decisions it has to make. But confidence in those decisions is eroded when access to the relevant data on the economy and national debt is denied. Genuine reform of economic and budgetary policy should begin with a new openness in relation to data, including the full set of data currently being sent to the IMF and EU bodies.
...
Annex 1. Provision of data
During the programme, the following indicators and reports shall be made available to the staff of the European Commission, the ECB and the IMF by the Irish authorities on a regular basis. The External Programme Compliance Unit (EPCU) of the Department of Finance will coordinate and collect data and information and forward to all external programme partners.
Ref.
Report
Frequency
To be provided by the Department of Finance in consultation with the Department of Public Expenditure and Reform as appropriate
F.1
Monthly data on adherence to budget targets (Exchequer statement, details on Exchequer revenues and expenditure with information on Social Insurance Fund to follow as soon as practicable).
Monthly, 10 days after the end of each month
F.2
Updated monthly report on the Exchequer Balance and General Government Balance outlook for the remainder of the year which shows transition from the Exchequer Balance to the General Government Balance (using presentation in Table 1 and Table 2A of the EDP notification).
Monthly, 20 days after the end of each month
F.3
Quarterly data on main revenue and expenditure items of local Government.
Quarterly, 90 days after the end of each quarter
F.4
Quarterly data on the public service wage bill, number of employees and average wage (using the presentation of the Pay and Pension Bill with further details on pay and pension costs of local authorities).
Quarterly, 30 days after the end of each quarter
F.5
Quarterly data on general Government accounts, and general Government debt as per the relevant EU regulations on statistics.
Quarterly accrual data, 90 days after the end of each quarter
F.6
Updated annual plans of the general Government balance and its breakdown into revenue and expenditure components for the current year and the following four years, using presentation in the stability programme's standard table on general Government budgetary prospects.
30 days after EDP Notifications
F.7
Data on short- and medium- /long-term debt falling due (all instruments) over the next 36 months (interest and amortisation) for Non-Commercial State Agencies
Quarterly , 30 working days after the end of each quarter
F.8
Data on short- and medium- /long-term debt falling due (all instruments) over the next 36 months (interest and amortisation) for local authorities
Quarterly, 30 working days after the end of each quarter
F.9
Data on short- and medium- /long-term debt falling due (all instruments) over the next 36 months for State- owned commercial enterprises (interest and amortisation)
Quarterly, 30 working days after the end of each quarter
F.10
Assessment report of the management of activation policies and on the outcome of job seekers' search activities and participation in labour market programmes.
Quarterly, 30 working days after the end of each quarter.
F.11
Report on progress achieved towards interim PLAR targets and actual and planned asset disposals.
Quarterly, 10 working days after the end of each quarter.
To be provided by the NTMA
N.1
Monthly information on the Government's cash position with indication of sources as well of number of days covered
Monthly, three working days after the end of each Month
N.2
Data on below-the-line financing for central Government.
Monthly, no later than 15 days after the end of each month
N.3
Data on public debt and new guarantees issued by central Government to public enterprises and the private sector.
Monthly, 30 working days after the end of each month
N.4
Data on short-, medium- and long-term debt falling due (all instruments) over the next 36 months (interest and amortisation) for central Government.
Monthly , 30 working days after the end of each month
N.5
Updated estimates of financial sources (bonds issuance, other financing sources) for the banking and Government sectors in the next 12 months
Monthly, 30 working days after the end of each month
To be provided by the Central Bank of Ireland
C.1
The Central Bank of Ireland’s balance sheet.
Weekly, next working day
C.2
Individual maturity profiles (amortisation only) for each of the domestic banks will be provided as of the last Friday of each month.
Monthly, 30 working days after each month end.
C.3
Detailed financial and regulatory information (consolidated data) on domestic individual Irish banks and the banking sector in total especially regarding profitability (P&L), balance sheet, asset quality, regulatory capital; PLAR funding plan forecasts
Quarterly, 35 working days after the end of each quarter
C.4
Detailed information on deposits for the last Friday of each month.
Monthly, 30 working days after each month end.
C.5
Data on liabilities covered under the ELG Scheme for each of the Covered Institutions.
Monthly, 30 working days after each month end.
C.6
Deleveraging committee minutes and deleveraging sales progress sheets, detailing pricing, quantum, and other relevant result metrics.
Monthly, reflecting committee meetings held each month
A lot of this data is very valuable for understanding and analysing the Irish economy and the effects of Irish Government policy. It is reasonable for the IMF, EC and ECB to seek this data to monitor Ireland's ability to repay the money we borrowed from them. Indeed, it is valuable to have their expertise on what data is required to monitor our economy and national debt. However, now that this data is being collected, it should as a matter of course be made publicly available within Ireland as well.
For clarity, the entire Annex is repeated at the end of this post. There are 22 sets of data referred to: F1 to F11 are from the Departments of Finance and PER; N1 to N5 are from the NTMA; and C1 to C6 are from the Central Bank.
First of all, it should be noted that some of this data is already available, but the majority of it is not. Secondly, it is not clear that all of the required information will exist at the time when it is supposed to be submitted. Thirdly, it should be acknowledged that there may, in a limited number of cases, be legitimate reasons for not publicly releasing some of these datasets. For general principles on what might be legitimate reasons for not releasing data, I would refer to the guidelines given in the Freedom of Information Act 1997. However, just because the release of some information can be blocked, does not mean that it should be. Certainly, any refusal to publish a dataset should be explained by the relevant Minister to the Oireachtas.
Conversly, as part of the Government's announced reform of the national Budget process, it may well be their intention to publish this sort of data. Its release would certainly help the Oireachtas to hold the Government to account. Access to this data would also probably be necessary for the new Fiscal Advisory Council to be effective.
F6 is an example of good practice in relation to the budget. It requires the publication of revenue and expenditure plans for the next four years. This original requirement helped open up the Budget process and multi-annual budget planning will hopefully become standard practice even once the agreement with the IMF and EU concludes.
Much of the data being required refers to the national debt. The sustainability of Ireland's debt is crucial to whether or not the economy can recover, or whether a prolonged period of stagnation - or indeed some form of default - is inevitable. There are periods in the history of most states when political discourse is dominated by the debt and the deficit. This is certainly the case in Ireland today. There is a pressing need to ensure that this discussion is grounded in accurate facts and figures, and does not lead to wrong information being spread in public.
The implication of F10 is worrying. The data required here is "Assessment report of the management of activation policies and on the outcome of job seekers' search activities and participation in labour market programmes." One one level that is useful data. However, it is not balanced by other data in the list, and may give a distorted picture of the Irish economy. Labour activation is to be welcomed, but priority should be given to ensuring that jobs exist in the first place, before putting pressure on people who are unemployed.
The Government has signalled that we will make use of our crisis by improving our systems of oversight and scrutiny, to make sure that a similar crisis does not happen again. An important step in that direction would be the regular release of these datasets, on a single website, in machine readable format, at the same time (if not before) they are sent to the IMF and EU bodies. For example, the website of the Fiscal Advisory Council could be used for this purpose.
The extent of the national crisis requires the Government to repeatedly ask the public's patience and understanding for the difficult decisions it has to make. But confidence in those decisions is eroded when access to the relevant data on the economy and national debt is denied. Genuine reform of economic and budgetary policy should begin with a new openness in relation to data, including the full set of data currently being sent to the IMF and EU bodies.
...
Annex 1. Provision of data
During the programme, the following indicators and reports shall be made available to the staff of the European Commission, the ECB and the IMF by the Irish authorities on a regular basis. The External Programme Compliance Unit (EPCU) of the Department of Finance will coordinate and collect data and information and forward to all external programme partners.
Ref.
Report
Frequency
To be provided by the Department of Finance in consultation with the Department of Public Expenditure and Reform as appropriate
F.1
Monthly data on adherence to budget targets (Exchequer statement, details on Exchequer revenues and expenditure with information on Social Insurance Fund to follow as soon as practicable).
Monthly, 10 days after the end of each month
F.2
Updated monthly report on the Exchequer Balance and General Government Balance outlook for the remainder of the year which shows transition from the Exchequer Balance to the General Government Balance (using presentation in Table 1 and Table 2A of the EDP notification).
Monthly, 20 days after the end of each month
F.3
Quarterly data on main revenue and expenditure items of local Government.
Quarterly, 90 days after the end of each quarter
F.4
Quarterly data on the public service wage bill, number of employees and average wage (using the presentation of the Pay and Pension Bill with further details on pay and pension costs of local authorities).
Quarterly, 30 days after the end of each quarter
F.5
Quarterly data on general Government accounts, and general Government debt as per the relevant EU regulations on statistics.
Quarterly accrual data, 90 days after the end of each quarter
F.6
Updated annual plans of the general Government balance and its breakdown into revenue and expenditure components for the current year and the following four years, using presentation in the stability programme's standard table on general Government budgetary prospects.
30 days after EDP Notifications
F.7
Data on short- and medium- /long-term debt falling due (all instruments) over the next 36 months (interest and amortisation) for Non-Commercial State Agencies
Quarterly , 30 working days after the end of each quarter
F.8
Data on short- and medium- /long-term debt falling due (all instruments) over the next 36 months (interest and amortisation) for local authorities
Quarterly, 30 working days after the end of each quarter
F.9
Data on short- and medium- /long-term debt falling due (all instruments) over the next 36 months for State- owned commercial enterprises (interest and amortisation)
Quarterly, 30 working days after the end of each quarter
F.10
Assessment report of the management of activation policies and on the outcome of job seekers' search activities and participation in labour market programmes.
Quarterly, 30 working days after the end of each quarter.
F.11
Report on progress achieved towards interim PLAR targets and actual and planned asset disposals.
Quarterly, 10 working days after the end of each quarter.
To be provided by the NTMA
N.1
Monthly information on the Government's cash position with indication of sources as well of number of days covered
Monthly, three working days after the end of each Month
N.2
Data on below-the-line financing for central Government.
Monthly, no later than 15 days after the end of each month
N.3
Data on public debt and new guarantees issued by central Government to public enterprises and the private sector.
Monthly, 30 working days after the end of each month
N.4
Data on short-, medium- and long-term debt falling due (all instruments) over the next 36 months (interest and amortisation) for central Government.
Monthly , 30 working days after the end of each month
N.5
Updated estimates of financial sources (bonds issuance, other financing sources) for the banking and Government sectors in the next 12 months
Monthly, 30 working days after the end of each month
To be provided by the Central Bank of Ireland
C.1
The Central Bank of Ireland’s balance sheet.
Weekly, next working day
C.2
Individual maturity profiles (amortisation only) for each of the domestic banks will be provided as of the last Friday of each month.
Monthly, 30 working days after each month end.
C.3
Detailed financial and regulatory information (consolidated data) on domestic individual Irish banks and the banking sector in total especially regarding profitability (P&L), balance sheet, asset quality, regulatory capital; PLAR funding plan forecasts
Quarterly, 35 working days after the end of each quarter
C.4
Detailed information on deposits for the last Friday of each month.
Monthly, 30 working days after each month end.
C.5
Data on liabilities covered under the ELG Scheme for each of the Covered Institutions.
Monthly, 30 working days after each month end.
C.6
Deleveraging committee minutes and deleveraging sales progress sheets, detailing pricing, quantum, and other relevant result metrics.
Monthly, reflecting committee meetings held each month
Wednesday, 4 January 2012
Stiglitz and Job Creation
Nat O'Connor: Joseph Stiglitz has an interesting three-page article in Vanity Fair where he reassesses the causes of, and therefore necessary solutions to, the current "Long Slump" in the USA, comparing it with the Great Depression.
In addition to the massive damage caused by the banking system and financial speculation, there were social and technological changes underpinning the Great Depression and (Stiglitz argues) similar changes in employment patterns underpin the current Long Slump.
Before the Great Depression, one in five Americans worked on a farm. Today, it is one in fifty. Before the Great Depression took hold, agriculture in the USA was already in difficulty. Technological improvements in machines, seeds, etc had lead to much higher production. While this might seem good for one farmer, when all farmers have higher production, prices fall due to the surplus supply. Part of the long-term solution, Stiglitz argues, was the painful move of many Americans away from farming to working in manufacturing. The main driver of this was World War 2, which led to massive Government spending on war industry, which laid the basis for a massive shift towards industrial production post-war. Combined with the GI Bill, which gave veterns access to university education, the nature of employment was transformed.
Obviously, Ireland had a quite different history of development. Movement away from the land was slower and we have maintained small farms, whereas the US has moved to large-scale industrial agriculture. Alhough Ireland had some earlier industrialisation (Lemass/Whitaker), only in the 1980s and 1990s did Ireland see employment rise in newer industries like IT, pharmaceuticals, etc. Nevertheless, Ireland experienced the same technological shifts in agriculture that have resulted in far less people working in farming now than was the case in the 1930s. Unlike the USA, mass emigration out of Ireland disguises the extent to which there was an exodus from the land to other areas of employment.
Stiglitz then goes on to argue that similar improvements in production (largely) combined with global competition from low wage countries (but perhaps to a lesser extent) mean that machinisation is now dominant in US manufacturing, rather than mass employment. Hence, there is a need to shift the expectations (and skills) of a great number of people from industry to services.
Sitlitz has two conclusions about how to bring about the transformation from manufacturing to service industries. His second conclusion is that banking reform is still necessary and that little has been done to date in the USA. We need to put much more regulation on the banking system to ensure that it serves society and lends money to the job creating small and medium enterprises in the real economy. (This point seems equally relevant to the Irish case.)
His first conclusion is more challenging. Stiglitz argues that the only way to resolve the crisis in jobs is for the State to engage in a massive programme of productive investment; preferably without another war. We know what the long-term drivers of economic development are: education, technological innovation and infrastructure. The State needs to borrow to invest heavily in these - reversing decades of declining investment - in order to do no less than transform employment patterns.
It's a big challenge to the failed strategy of austerity, which has seen cutbacks and job losses combined with an unreformed banking sector that continues to pay bonuses and engage in financial speculation, with public money.
It is obviously more difficult for the State to engage in major productive investment in Ireland because of the difficulty in borrowing money. Nevertheless, there needs to be much more discussion of the development path we are on. What is the future for jobs in Ireland? We know we can't go back to 12 per cent of the work force employed in construction. Half of that level would be a long-term norm. So just where are the jobs going to come from in 2016 and 2021? Even if resources for investment are limited, we still need to focus on education, technological development and the hundreds of different supports needed to retrain workers and build the capacity of Ireland's businesses to create jobs. And it seems likely that the State needs to lead the way towards increasing productive investment in every way it can.
In addition to the massive damage caused by the banking system and financial speculation, there were social and technological changes underpinning the Great Depression and (Stiglitz argues) similar changes in employment patterns underpin the current Long Slump.
Before the Great Depression, one in five Americans worked on a farm. Today, it is one in fifty. Before the Great Depression took hold, agriculture in the USA was already in difficulty. Technological improvements in machines, seeds, etc had lead to much higher production. While this might seem good for one farmer, when all farmers have higher production, prices fall due to the surplus supply. Part of the long-term solution, Stiglitz argues, was the painful move of many Americans away from farming to working in manufacturing. The main driver of this was World War 2, which led to massive Government spending on war industry, which laid the basis for a massive shift towards industrial production post-war. Combined with the GI Bill, which gave veterns access to university education, the nature of employment was transformed.
Obviously, Ireland had a quite different history of development. Movement away from the land was slower and we have maintained small farms, whereas the US has moved to large-scale industrial agriculture. Alhough Ireland had some earlier industrialisation (Lemass/Whitaker), only in the 1980s and 1990s did Ireland see employment rise in newer industries like IT, pharmaceuticals, etc. Nevertheless, Ireland experienced the same technological shifts in agriculture that have resulted in far less people working in farming now than was the case in the 1930s. Unlike the USA, mass emigration out of Ireland disguises the extent to which there was an exodus from the land to other areas of employment.
Stiglitz then goes on to argue that similar improvements in production (largely) combined with global competition from low wage countries (but perhaps to a lesser extent) mean that machinisation is now dominant in US manufacturing, rather than mass employment. Hence, there is a need to shift the expectations (and skills) of a great number of people from industry to services.
Sitlitz has two conclusions about how to bring about the transformation from manufacturing to service industries. His second conclusion is that banking reform is still necessary and that little has been done to date in the USA. We need to put much more regulation on the banking system to ensure that it serves society and lends money to the job creating small and medium enterprises in the real economy. (This point seems equally relevant to the Irish case.)
His first conclusion is more challenging. Stiglitz argues that the only way to resolve the crisis in jobs is for the State to engage in a massive programme of productive investment; preferably without another war. We know what the long-term drivers of economic development are: education, technological innovation and infrastructure. The State needs to borrow to invest heavily in these - reversing decades of declining investment - in order to do no less than transform employment patterns.
It's a big challenge to the failed strategy of austerity, which has seen cutbacks and job losses combined with an unreformed banking sector that continues to pay bonuses and engage in financial speculation, with public money.
It is obviously more difficult for the State to engage in major productive investment in Ireland because of the difficulty in borrowing money. Nevertheless, there needs to be much more discussion of the development path we are on. What is the future for jobs in Ireland? We know we can't go back to 12 per cent of the work force employed in construction. Half of that level would be a long-term norm. So just where are the jobs going to come from in 2016 and 2021? Even if resources for investment are limited, we still need to focus on education, technological development and the hundreds of different supports needed to retrain workers and build the capacity of Ireland's businesses to create jobs. And it seems likely that the State needs to lead the way towards increasing productive investment in every way it can.
Tuesday, 3 January 2012
Taxing questions
The VAT increase announced in Budget 2012 (and flagged some time before) came into increase on January 1st, and yesterday TASC Director Nat O'Connor had an opinion piece in the Irish Times highlighting the regressive distributional impact of consumption taxes - and pointing out some of the flaws in the argument that increasing consumption taxes in preference to taxes on income or wealth leaves us with more 'choice'. You can read the full article here.
Monday, 5 December 2011
TASC's Response to the Public Spending Announcements
Nat O'Connor: We have made an initial response to the Budget 2012 public spending announcments.
The reforms to the budgetary process could be a significant improvement. But, where is the economic strategy? It seems the Government is continuing in the vein of previous budgets by focusing narrowly on the public finances while neglecting the massive (direct and indirect) effects that these austerity measures have on the economy.
The reforms to the budgetary process could be a significant improvement. But, where is the economic strategy? It seems the Government is continuing in the vein of previous budgets by focusing narrowly on the public finances while neglecting the massive (direct and indirect) effects that these austerity measures have on the economy.
Monday, 21 November 2011
Let's Have More Budget Transparency
Nat O'Connor: Seán Whelan on RTÉ Six One News last Friday quipped that democratically elected representatives were the first to see Michael Noonan's budget proposals... except that they were not our elected representatives, but those of the German people.
It is unfortunate that the Dáil did not receive the draft papers before the Bundestag, but a more important lesson from the episode is that there is every reason to increase the transparency of budget documentation and proposals from now on.
Irish democracy did not collapse because draft proposals on VAT increases and other measures were circulated before the Government met to consider them. Instead, the democratic process was strengthened by their release.
Strong democracy is when everyone has the right to participate in the decisions affecting themselves and, crucially, the resources they need to do so. Information is just one of the essential resources people need to understand and meaningfully participate; through discussion, lobbying, etc.
Consider the traditional budget process, by way of contrast:
1. All proposals are initially developed in secret by the Department of Finance. (Drafts may or may not be circulated, but certainly not to Opposition spokespersons or the public).
2. Government Ministers are briefed by the Minister for Finance in a meeting of the Government, and may even be asked to agree proposals at the same meeting - without access to alternative expert opinion, advice, etc. Even if they do not agree them in the same meeting, they have only days to seek advice and cannot avail of a richer public discussion with analysis from all perspectives.
3. Some, all or none of the budget proposals may be discussed by Government Ministers with their colleagues on the backbenches of the Dáil. Advice from chosen experts may or may not be sought, at the discretion of each Minister.
4. The final Budget is kept secret until read out by the Minister for Finance on Budget Day. In fairness, the IMF/EU obligation to publish a four-year plan has created more openness.
5. Opposition spokespersons and economic commentators prepare most of their responses in the absence of information about the Budget proposals, often based on rumours or leaks. They are only given minutes to prepare a response to the actual proposals, and must make off-the-cuff responses without research or advice. This makes for shallow analysis that tends to highlight more immediate proposals, or more populist concerns, while neglecting deeper effects on the economy and society.
6. The Dáil votes on the Budget without most of the TDs having read the documents. Strictly speaking, TDs vote on a series of 'financial resolutions' based on the Budget speech. There will be (limited) time for discussion later when the annual Finance Bill, Social Welfare Bill, etc are introduced to make most the resolutions into law. However, votes on resolutions are sufficient for measures that come into effect at midnight. And legislation is sometimes rushed through the Dáil; like last year's Social Welfare Bill the very next day.
Traditional Budget secrecy is seriously flawed and undemocratic. It is also a hugely inefficient and impractical way to run the Government in an advanced economy!
For example, the proposal to raise VAT by 2 percentage points has a range of complex effects on the economy. It requires TDs to know what goods and services attract the standard rate of VAT, as well as to know that VAT dampens employment in the economy less than income tax but more than wealth taxes. The regressive nature of VAT also needs to be explained - that is, that people on lower incomes pay proportionately more of their incomes. It takes time to put together analysis and briefings for those making the decisions, let along for those whose lives will be affected by them.
This year by accident (and again because of the IMF/EU loan) we have a new and improved process:
1. Draft proposals from the Department of Finance are aired in public.
2. Economic analysts (including think-tanks), sectoral lobbyists and the general public are given time to reflect on these proposals and respond to them. An informed public debate is possible.
3. The members of the Government and TDs on both sides of the Dáil can learn from the public discussion and expert analysis. The Government has the option of fine-tuning or even changing proposals.
4. The Budget Day proposals are likely to be less of a surprise and Opposition spokespersons will have had access to information and advice to prepare more detailed and considered responses.
5. TDs have had the benefit of public discussion and contact from their constituents before voting on the Budget.
Does anyone have a problem with making this more open approach permanent?
There are a couple of issues raised by more openness, but in balance I don't think they outweigh the benefits.
The Government is not weakened in its ability to choose to accept or modify proposals. Getting more feedback from lobbies, experts and constituents can only be a good thing. The Government is not exhibiting weakness by changing proposals in the face of evidence, although they would have to justify decisions that appear to simply cave in to politically powerful lobby groups.
(In practice, capitulation to lobbyists tends to happen between Budget Day and the final Finance Act three months later, which often contains quite different proposals - especially on the minutae of tax law - than were in the Budget. However, media and public scrutiny of the Finance Act is very limited).
One tricky issue relates to the 'midnight' proposals: changes that will apply with near immediate effect. For example, excise might change at midnight to prevent people stocking up on alcohol beforehand.
Whether people should get more than a couple of hours warning on such changes is an open question. It may be more effective for raising revenue, but it is arguably more democratic if people know what's being proposed and have a chance to react to it (even if that reaction is a trip to the off-licence). After all, the Government can never fully predict the 'behavioural' effects of Budget changes. And the short-term loss of excise revenue may be off-set by longer-term public understanding and acceptance of how we pay for the services provided by our state.
And if there really are some new taxes that require secrecy before being announced 'with immediate effect', good quality analysis on the day can be preserved through 'lock ins'. They do this in Canada. Several hours before the budget announcements, a selection of Opposition spokespersons and their advisors are locked into a room without mobile phones but with a copy of the budget documents. In another room, a selection of journalists and economic analysts are likewise locked in with the budget. The result is that Opposition responses and expert analysis can be based on the detail of what's being proposed.
Voting on how public money is spent is one of the main purposes of parliament and the Constitution of Ireland makes it very clear that the Government can only spend money in line with budgets agreed by the Dáil.
There is every reason why the vital scrutiny of public money should be as open as possible.
It is unfortunate that the Dáil did not receive the draft papers before the Bundestag, but a more important lesson from the episode is that there is every reason to increase the transparency of budget documentation and proposals from now on.
Irish democracy did not collapse because draft proposals on VAT increases and other measures were circulated before the Government met to consider them. Instead, the democratic process was strengthened by their release.
Strong democracy is when everyone has the right to participate in the decisions affecting themselves and, crucially, the resources they need to do so. Information is just one of the essential resources people need to understand and meaningfully participate; through discussion, lobbying, etc.
Consider the traditional budget process, by way of contrast:
1. All proposals are initially developed in secret by the Department of Finance. (Drafts may or may not be circulated, but certainly not to Opposition spokespersons or the public).
2. Government Ministers are briefed by the Minister for Finance in a meeting of the Government, and may even be asked to agree proposals at the same meeting - without access to alternative expert opinion, advice, etc. Even if they do not agree them in the same meeting, they have only days to seek advice and cannot avail of a richer public discussion with analysis from all perspectives.
3. Some, all or none of the budget proposals may be discussed by Government Ministers with their colleagues on the backbenches of the Dáil. Advice from chosen experts may or may not be sought, at the discretion of each Minister.
4. The final Budget is kept secret until read out by the Minister for Finance on Budget Day. In fairness, the IMF/EU obligation to publish a four-year plan has created more openness.
5. Opposition spokespersons and economic commentators prepare most of their responses in the absence of information about the Budget proposals, often based on rumours or leaks. They are only given minutes to prepare a response to the actual proposals, and must make off-the-cuff responses without research or advice. This makes for shallow analysis that tends to highlight more immediate proposals, or more populist concerns, while neglecting deeper effects on the economy and society.
6. The Dáil votes on the Budget without most of the TDs having read the documents. Strictly speaking, TDs vote on a series of 'financial resolutions' based on the Budget speech. There will be (limited) time for discussion later when the annual Finance Bill, Social Welfare Bill, etc are introduced to make most the resolutions into law. However, votes on resolutions are sufficient for measures that come into effect at midnight. And legislation is sometimes rushed through the Dáil; like last year's Social Welfare Bill the very next day.
Traditional Budget secrecy is seriously flawed and undemocratic. It is also a hugely inefficient and impractical way to run the Government in an advanced economy!
For example, the proposal to raise VAT by 2 percentage points has a range of complex effects on the economy. It requires TDs to know what goods and services attract the standard rate of VAT, as well as to know that VAT dampens employment in the economy less than income tax but more than wealth taxes. The regressive nature of VAT also needs to be explained - that is, that people on lower incomes pay proportionately more of their incomes. It takes time to put together analysis and briefings for those making the decisions, let along for those whose lives will be affected by them.
This year by accident (and again because of the IMF/EU loan) we have a new and improved process:
1. Draft proposals from the Department of Finance are aired in public.
2. Economic analysts (including think-tanks), sectoral lobbyists and the general public are given time to reflect on these proposals and respond to them. An informed public debate is possible.
3. The members of the Government and TDs on both sides of the Dáil can learn from the public discussion and expert analysis. The Government has the option of fine-tuning or even changing proposals.
4. The Budget Day proposals are likely to be less of a surprise and Opposition spokespersons will have had access to information and advice to prepare more detailed and considered responses.
5. TDs have had the benefit of public discussion and contact from their constituents before voting on the Budget.
Does anyone have a problem with making this more open approach permanent?
There are a couple of issues raised by more openness, but in balance I don't think they outweigh the benefits.
The Government is not weakened in its ability to choose to accept or modify proposals. Getting more feedback from lobbies, experts and constituents can only be a good thing. The Government is not exhibiting weakness by changing proposals in the face of evidence, although they would have to justify decisions that appear to simply cave in to politically powerful lobby groups.
(In practice, capitulation to lobbyists tends to happen between Budget Day and the final Finance Act three months later, which often contains quite different proposals - especially on the minutae of tax law - than were in the Budget. However, media and public scrutiny of the Finance Act is very limited).
One tricky issue relates to the 'midnight' proposals: changes that will apply with near immediate effect. For example, excise might change at midnight to prevent people stocking up on alcohol beforehand.
Whether people should get more than a couple of hours warning on such changes is an open question. It may be more effective for raising revenue, but it is arguably more democratic if people know what's being proposed and have a chance to react to it (even if that reaction is a trip to the off-licence). After all, the Government can never fully predict the 'behavioural' effects of Budget changes. And the short-term loss of excise revenue may be off-set by longer-term public understanding and acceptance of how we pay for the services provided by our state.
And if there really are some new taxes that require secrecy before being announced 'with immediate effect', good quality analysis on the day can be preserved through 'lock ins'. They do this in Canada. Several hours before the budget announcements, a selection of Opposition spokespersons and their advisors are locked into a room without mobile phones but with a copy of the budget documents. In another room, a selection of journalists and economic analysts are likewise locked in with the budget. The result is that Opposition responses and expert analysis can be based on the detail of what's being proposed.
Voting on how public money is spent is one of the main purposes of parliament and the Constitution of Ireland makes it very clear that the Government can only spend money in line with budgets agreed by the Dáil.
There is every reason why the vital scrutiny of public money should be as open as possible.
Friday, 18 November 2011
Solving the Euro Crisis without Germany Paying More
Nat O'Connor: It seems that domestic politics in Germany are focused on dealing with a perception by German taxpayers that they are at risk of 'paying' for the euro crisis.
Yet, there seem to be obvious political institutional solutions, using the ECB, that could help resolve the immediate euro crisis without the Germans having to 'pick up the bill'.
First of all, and partially an aside, it is calculated by German development bank, Kreditanstalt für Wiederaufbau (cited by the influential Hans Böckler Stiftung, bottom of page 5, in German), that Germany benefitted from having the euro, as a relatively weaker currency than the Deutschmark would have been. They argue Germany benefited by €50-60 billion in the last two years by not having their own currency (which would have been stronger and therefore raised the cost and lowered the competitiveness of their exports). Although this argument is circulating within Germany, it is not influencing the European debate as much as it should.
Secondly, even leaving aside this important line of argument about the less-often-calculated benefits to Germany, there is the obvious solution to any euro crisis: change the rules governing the European Central Bank (ECB). Currently the ECB is constrained to only focus on inflation. It should have a new mandate: to remain strongly independent, but to also focus on maximising employment and also act as a lender of last resort, which John Bruton spoke about very clearly on RTÉ Morning Ireland yesterday (17 Nov).
What the lender of last resort means is that the ECB would buy the government bonds of any state that is having a hard time getting a sustainable rate of interest on the private markets. Of course, if some countries benefit from this facility more than others, that would be effectively a form of fiscal transfer between eurozone members. The ECB would remain independent and could not be instructed when to buy bonds, but it would still be open to excess use.
The risk (to Germany and other stronger economies) is that currently weaker economies (like Italy, Greece or Ireland) might lean heavily on this facility instead of making the necessary (and politically difficult) structural reforms in their own economies and public spending.
One possible solution (and this is open to constructive criticism as I may have missed an equally obvious flaw!) is for a simple mechanism to be instated to resolve this: the ECB could simply keep track of how much each country benefits from it acting as lender of last resort. This record could in turn affect the annual contributions each country has to make to the EU. So although stronger countries like Germany would pay in the short term, this would be equalised in the long term by relatively poorer countries paying a little over the odds in their annual payments to the EU for a period of years (or decades if necessary). Such a mechanism should provide a disincentive for countries to lean too heavily on the lender of last resort and be obliged to make harder domestic decisions. Yet it would prevent the kind of unnessary crisis that Italy and others are facing at this time. (Note that Italy has been running a Government surplus, not a deficit - as I think John Bruton pointed out in the above interview).
The proposal of such an equalisation mechanism might also be the sugar-coating necessary for German voters to accept the need for the ECB to have as full a mandate as the Bank of England or US Federal Reserve.
Yet, there seem to be obvious political institutional solutions, using the ECB, that could help resolve the immediate euro crisis without the Germans having to 'pick up the bill'.
First of all, and partially an aside, it is calculated by German development bank, Kreditanstalt für Wiederaufbau (cited by the influential Hans Böckler Stiftung, bottom of page 5, in German), that Germany benefitted from having the euro, as a relatively weaker currency than the Deutschmark would have been. They argue Germany benefited by €50-60 billion in the last two years by not having their own currency (which would have been stronger and therefore raised the cost and lowered the competitiveness of their exports). Although this argument is circulating within Germany, it is not influencing the European debate as much as it should.
Secondly, even leaving aside this important line of argument about the less-often-calculated benefits to Germany, there is the obvious solution to any euro crisis: change the rules governing the European Central Bank (ECB). Currently the ECB is constrained to only focus on inflation. It should have a new mandate: to remain strongly independent, but to also focus on maximising employment and also act as a lender of last resort, which John Bruton spoke about very clearly on RTÉ Morning Ireland yesterday (17 Nov).
What the lender of last resort means is that the ECB would buy the government bonds of any state that is having a hard time getting a sustainable rate of interest on the private markets. Of course, if some countries benefit from this facility more than others, that would be effectively a form of fiscal transfer between eurozone members. The ECB would remain independent and could not be instructed when to buy bonds, but it would still be open to excess use.
The risk (to Germany and other stronger economies) is that currently weaker economies (like Italy, Greece or Ireland) might lean heavily on this facility instead of making the necessary (and politically difficult) structural reforms in their own economies and public spending.
One possible solution (and this is open to constructive criticism as I may have missed an equally obvious flaw!) is for a simple mechanism to be instated to resolve this: the ECB could simply keep track of how much each country benefits from it acting as lender of last resort. This record could in turn affect the annual contributions each country has to make to the EU. So although stronger countries like Germany would pay in the short term, this would be equalised in the long term by relatively poorer countries paying a little over the odds in their annual payments to the EU for a period of years (or decades if necessary). Such a mechanism should provide a disincentive for countries to lean too heavily on the lender of last resort and be obliged to make harder domestic decisions. Yet it would prevent the kind of unnessary crisis that Italy and others are facing at this time. (Note that Italy has been running a Government surplus, not a deficit - as I think John Bruton pointed out in the above interview).
The proposal of such an equalisation mechanism might also be the sugar-coating necessary for German voters to accept the need for the ECB to have as full a mandate as the Bank of England or US Federal Reserve.
Wednesday, 16 November 2011
German Think-tanks, Ireland and the European Crisis
Nat O'Connor: The Taoiseach, Enda Kenny, is making an official visit to Berlin today. As well as meeting Chancellor Angela Merkel, he will speak to the Konrad Adenauer Stiftung (see also, their UK branch).
The Stiftungen (aka think-tanks, foundations) are central to the German political landscape. They are independent of the political parties, but there is one political Stiftung per party, as well as a range of other ones.
I've been reviewing what the different German foundations have to say about the Irish situation and the euro crisis (with the assistance of our intern, Nina Roβmann). What this review shows is that, unlike the rather one-dimensional view that's often reported about what 'Germany says', there is a lively and nuanced policy debate going on in Germany. What follows are some highlights of this debate.
The Konrad Adenauer Stiftung (KAS) is linked to Angela Merkel's Christian Democrat party. Fine Gael, especially in the European parliament, has fashioned itself as a Christian democratic party, although there are important historical differences in the origins of most continental parties of this type. Also, mainstream Irish liberal economics would be far to the right of the German mainstream.
KAS's economic policy is centred on the 'social market economy', regulated markets balanced with social protection and responsibility towards wider society. In terms of Ireland, KAS has identified the emigration of workers as one of the major challenges Ireland faces. They identify cuts to child benefits and public sector wages as hitting ordinary households. They point to €114.7 billion of German claims in Irish banks and the direct repercussions to German banks if these were not repaid.
In their wider analysis, they ask: Is Ireland a new Greece? But they answer 'no'. They explain Ireland's crisis as one of refinancing, whereas the Greek crisis is explained as having more problems of lost competitiveness and structural problems. In one paper, KAS argues against a political union at EU level. They do advocate structural and fiscal reforms in deficit countries and complain that the 'no bailot clause' of the EU treaties was undermined (Article 125 of the Treaty of the Functioning of the EU). However, in a more recent paper KAS's chairman makes an argument for economic government at EU level, which is a changed position.
The other large political foundation is the Friedrich Ebert Stiftung (main site in German only), linked to the social democratic party. The Friedrich Ebert Stiftung (FES) has a different perspective on Ireland and the crisis. Their analysis is that the establishment of monetary union without political union has brought the EU to the brink of collapse. They argues that it is false to claim wage policies in deficit countries are responsibile for the current account imbalances. Instead they point to global economic and financial factors. They argue that Ireland's pro-cyclical spending cuts only aggravated the crisis here and harmed the welfare state.
FES argue that before countries like Ireland lower their wages, relatively low wage countries like Germany have to raise theirs. They also criticise the unequal distribution of wealth in Ireland. FES call for better co-ordination of fiscal and social policies across EU member states, including harmonised corporation tax.
On the wider crisis, FES criticises the policies imposed by the EU on deficit countries, and it warns that this will only lead to rising unemployment, cuts in social services and growing euroscepticism within European trade union and labour movements. FES proposes a four-part change: 1. A European New Deal infrastructure investment strategy for employment; 2. some form of economic government at EU level, including stronger democracy at EU level; 3. co-ordination of wage, fiscal and social policies across Europe; and 4. Eurobonds as a new way of financing government debt. FES argue against a 'growth' strategy for Europe per se, but a strategy for sustainable prosperity based on a real culture of solidarity.
The other four Stiftungen are Heinrich Böll (green), Friedrich Naumann (liberal), Rosa Luxemburg (democratic socialist) and Hanns Seidel (Christian social union).
Heinrich Böll Stiftung (HBS) view Ireland's tax policies as negative. They identify the migration of German companies and jobs to Ireland due to lower taxes. They advocate saving German banks who suffered from 'toxic' Irish stocks. However, they argue that there is of course no alternative to saving Ireland, and the lesson learned should be the establishment of common fiscal and economic policy. They note the German Green Party's Gerhart Schick's call for Ireland to raise corporation tax, not VAT. He also stated that the rich in Ireland have profited above average and should now share their wealth, and that spreading out the burden of the crisis is unfair, as the poor are hit hardest. In another publication, HBS criticise the cuts to unemployment benefit and eduction in Ireland.
On the wider crisis, HBS see a federal EU as necessary and the natural consequence of monetary union. However, they note the evidence of a lack of support for this. They also note the fear of 'Germanisation' of economic policy, and they call for more attention to be paid to the banking sector.
The other foundations have less to say about Ireland in particular, but have their own analyses of the European crisis.
Friedrich Naumann Stiftung (FNS) strongly condemns the violation of the EU's no bailout clause. They argue that the current crisis is not about the euro currency, but about public debt. They argue that any move to European co-ordination of economic and financial policies would be like a 'centrally-planned economy' and they compare any such regulatory framework with George Orwell's 1984. FNS argue the pressure being exerted on Greece by the markets (i.e. by us as free citizens) to get its public finances in order is viewed by the Greek government as slavery which must be resisted.
FNS point out that the global ratings agencies (e.g. Standard & Poors, Moody's and Fitch) are in a conflict of interest when they provide consulting alongside credit rating of states at the same time. FNS also have a paper supporting private currencies to compete with the state's monopoly on currency.
The Rosa Luxemburg Stiftung (RLS) identifies a balance to be struck between the fears of many on the Left of neo-liberal economic policy, and the potential benefits of closer European integration for citizens and society. At one RLS conference, the Jesuit social ethicist Friedhelm Hengsbach SJ argues that the ongoing debate on the EU 'transfer union' is absurd as mechanisms like the European cohesion fund, whose aim it is to balance inequalities among member states, are already in place. He criticises austerity and calls instead for co-ordination of employment, growth, financial, fiscal, wage and social policy. However, he is against common EU economic governance.
RLS argues that the Greek crisis has been oversimplified. The many differences in development in Greece underlie the problems they face, not just wage cost competition. The lack of a social union in the EU permitted redistribution from the bottom to the top, and they call for an EU wide structural policy to trigger a conversion process to help them develop what they lack in public administration, legal framework, social security, regulation, company strength, banking, procurement, infrastructure, etc.
Hanns Seidel stiftung (HSS) focuses more on its core mission, supporting "the democratic and civic education of the German people with a Christian basis". They argue for free personality development and autonomy as well as social responsibility and solidarity. They argue this mission is more important than ever, since requirements for more autonomy, a new "culture of independence" and an "active society of citizens" are increasingly evolving.
The existence of the democracy education foundations is a requirement of the post-war constitution, as is their funding by the state. While this originated as an idea imposed by the Allies that the Germans needed to be 'taught democracy', the Stiftungen have evolved into a major resource for the German political system, and they carry out a wide range of policy research. The foundations also invest a lot of their resources around the world engaged in democracy education.
The funding of the Stiftungen is linked to the long-term success of their political party in parliament, so they have an incentive to supply them with policies that will be successful in the long-term, not just in advance of the next election. This investment pays dividends to the German policy-makers by providing them with a range of well-researched options. This also provides the German public with a more nuanced debate, which is helpful in building public support for pragmatic solutions.
The Stiftungen (aka think-tanks, foundations) are central to the German political landscape. They are independent of the political parties, but there is one political Stiftung per party, as well as a range of other ones.
I've been reviewing what the different German foundations have to say about the Irish situation and the euro crisis (with the assistance of our intern, Nina Roβmann). What this review shows is that, unlike the rather one-dimensional view that's often reported about what 'Germany says', there is a lively and nuanced policy debate going on in Germany. What follows are some highlights of this debate.
The Konrad Adenauer Stiftung (KAS) is linked to Angela Merkel's Christian Democrat party. Fine Gael, especially in the European parliament, has fashioned itself as a Christian democratic party, although there are important historical differences in the origins of most continental parties of this type. Also, mainstream Irish liberal economics would be far to the right of the German mainstream.
KAS's economic policy is centred on the 'social market economy', regulated markets balanced with social protection and responsibility towards wider society. In terms of Ireland, KAS has identified the emigration of workers as one of the major challenges Ireland faces. They identify cuts to child benefits and public sector wages as hitting ordinary households. They point to €114.7 billion of German claims in Irish banks and the direct repercussions to German banks if these were not repaid.
In their wider analysis, they ask: Is Ireland a new Greece? But they answer 'no'. They explain Ireland's crisis as one of refinancing, whereas the Greek crisis is explained as having more problems of lost competitiveness and structural problems. In one paper, KAS argues against a political union at EU level. They do advocate structural and fiscal reforms in deficit countries and complain that the 'no bailot clause' of the EU treaties was undermined (Article 125 of the Treaty of the Functioning of the EU). However, in a more recent paper KAS's chairman makes an argument for economic government at EU level, which is a changed position.
The other large political foundation is the Friedrich Ebert Stiftung (main site in German only), linked to the social democratic party. The Friedrich Ebert Stiftung (FES) has a different perspective on Ireland and the crisis. Their analysis is that the establishment of monetary union without political union has brought the EU to the brink of collapse. They argues that it is false to claim wage policies in deficit countries are responsibile for the current account imbalances. Instead they point to global economic and financial factors. They argue that Ireland's pro-cyclical spending cuts only aggravated the crisis here and harmed the welfare state.
FES argue that before countries like Ireland lower their wages, relatively low wage countries like Germany have to raise theirs. They also criticise the unequal distribution of wealth in Ireland. FES call for better co-ordination of fiscal and social policies across EU member states, including harmonised corporation tax.
On the wider crisis, FES criticises the policies imposed by the EU on deficit countries, and it warns that this will only lead to rising unemployment, cuts in social services and growing euroscepticism within European trade union and labour movements. FES proposes a four-part change: 1. A European New Deal infrastructure investment strategy for employment; 2. some form of economic government at EU level, including stronger democracy at EU level; 3. co-ordination of wage, fiscal and social policies across Europe; and 4. Eurobonds as a new way of financing government debt. FES argue against a 'growth' strategy for Europe per se, but a strategy for sustainable prosperity based on a real culture of solidarity.
The other four Stiftungen are Heinrich Böll (green), Friedrich Naumann (liberal), Rosa Luxemburg (democratic socialist) and Hanns Seidel (Christian social union).
Heinrich Böll Stiftung (HBS) view Ireland's tax policies as negative. They identify the migration of German companies and jobs to Ireland due to lower taxes. They advocate saving German banks who suffered from 'toxic' Irish stocks. However, they argue that there is of course no alternative to saving Ireland, and the lesson learned should be the establishment of common fiscal and economic policy. They note the German Green Party's Gerhart Schick's call for Ireland to raise corporation tax, not VAT. He also stated that the rich in Ireland have profited above average and should now share their wealth, and that spreading out the burden of the crisis is unfair, as the poor are hit hardest. In another publication, HBS criticise the cuts to unemployment benefit and eduction in Ireland.
On the wider crisis, HBS see a federal EU as necessary and the natural consequence of monetary union. However, they note the evidence of a lack of support for this. They also note the fear of 'Germanisation' of economic policy, and they call for more attention to be paid to the banking sector.
The other foundations have less to say about Ireland in particular, but have their own analyses of the European crisis.
Friedrich Naumann Stiftung (FNS) strongly condemns the violation of the EU's no bailout clause. They argue that the current crisis is not about the euro currency, but about public debt. They argue that any move to European co-ordination of economic and financial policies would be like a 'centrally-planned economy' and they compare any such regulatory framework with George Orwell's 1984. FNS argue the pressure being exerted on Greece by the markets (i.e. by us as free citizens) to get its public finances in order is viewed by the Greek government as slavery which must be resisted.
FNS point out that the global ratings agencies (e.g. Standard & Poors, Moody's and Fitch) are in a conflict of interest when they provide consulting alongside credit rating of states at the same time. FNS also have a paper supporting private currencies to compete with the state's monopoly on currency.
The Rosa Luxemburg Stiftung (RLS) identifies a balance to be struck between the fears of many on the Left of neo-liberal economic policy, and the potential benefits of closer European integration for citizens and society. At one RLS conference, the Jesuit social ethicist Friedhelm Hengsbach SJ argues that the ongoing debate on the EU 'transfer union' is absurd as mechanisms like the European cohesion fund, whose aim it is to balance inequalities among member states, are already in place. He criticises austerity and calls instead for co-ordination of employment, growth, financial, fiscal, wage and social policy. However, he is against common EU economic governance.
RLS argues that the Greek crisis has been oversimplified. The many differences in development in Greece underlie the problems they face, not just wage cost competition. The lack of a social union in the EU permitted redistribution from the bottom to the top, and they call for an EU wide structural policy to trigger a conversion process to help them develop what they lack in public administration, legal framework, social security, regulation, company strength, banking, procurement, infrastructure, etc.
Hanns Seidel stiftung (HSS) focuses more on its core mission, supporting "the democratic and civic education of the German people with a Christian basis". They argue for free personality development and autonomy as well as social responsibility and solidarity. They argue this mission is more important than ever, since requirements for more autonomy, a new "culture of independence" and an "active society of citizens" are increasingly evolving.
The existence of the democracy education foundations is a requirement of the post-war constitution, as is their funding by the state. While this originated as an idea imposed by the Allies that the Germans needed to be 'taught democracy', the Stiftungen have evolved into a major resource for the German political system, and they carry out a wide range of policy research. The foundations also invest a lot of their resources around the world engaged in democracy education.
The funding of the Stiftungen is linked to the long-term success of their political party in parliament, so they have an incentive to supply them with policies that will be successful in the long-term, not just in advance of the next election. This investment pays dividends to the German policy-makers by providing them with a range of well-researched options. This also provides the German public with a more nuanced debate, which is helpful in building public support for pragmatic solutions.
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