Paul Sweeney: The Government strategy for privatising AIB has focused solely on the art of the deal – the price, how much to sell, and when to sell our 99 per cent. There has as yet been no discussion about what comes next, including control of Ireland’s second-largest bank; its future governance; the importance of credit to SMEs and individuals; or where the billions raised will be invested. These longer-term considerations are far more important than this short-term focus on the deal.
Showing posts with label Paul Sweeney. Show all posts
Showing posts with label Paul Sweeney. Show all posts
Monday, 13 March 2017
Wednesday, 8 February 2017
Researching Ireland and the MNEs
David Jacobson: The recent announcement that HP Inc is to shed almost 500 jobs as it closes its global print business in Kildare is a stark reminder of the role that Foreign Direct Investment (FDI) plays in Ireland.
Saturday, 4 February 2017
If Apple won’t pay tax what hope is there for civilisation?
Paul Sweeney: Multinationals owe responsibility to a wider group than their shareholders.
As the Apple tax case moves towards the European Union courts, €13 billion has been transferred to Ireland. The implications of the case will effect how multi-national companies implement taxes across Europe.
Brussels has been accused of “bending the rules” in its pursuit of Apple for €13 billion in taxes it says should have been paid in Ireland. But in truth it is the multinationals and their corporate lawyers and accountants who have twisted the rules on taxation almost out of existence.
The tax system had been “captured” by the tax avoidance industry. Multinationals were paying less and less tax and states were reduced to tax wars against each other in failing efforts to attract them.
The public needed a champion to restore some order on the chaos and it got it in Margrethe Vestager, the European commissioner for competition. Under her the directorate general for competition did what the directorate general for taxation and directorate general for economic and financial affairs were unwilling or unable to do.
I was a dissenting member of the government advisory group that recommended the low 12.5 per cent rate of corporation tax in the early 1990s. I dissented because I believed that the rate should only be reduced to 20 per cent from the 35 per cent nominal rate then prevailing. I believed if it was only 12.5 per cent after legitimate deductions, companies might only pay an effective rate of 6 or 7 per cent.
I was so naive. Today some companies pay nothing and too many pay very little. Apple paid a mere 0.005per cent on its European profits in 2014.
It is too easy for multinationals to pay what they like in taxes, aided by globalisation, technology, multitudes of subsidiary companies in different jurisdictions and none, armies of tax-avoiding lawyers and accountants and by regulatory capture,
In a recent article on Apple’s dispute with the European Commission, Liza Lovdhal-Gormsen (the director of the Competition Law Forum) draws on the quote by Judge Wendle Holmes: “I like to pay taxes. With them, I buy civilisation.”
Lovdhal-Gormsen argues that certainty of law is central to this contract, but if the world’s biggest and most profitable company is reluctant to pay taxes and aggressively uses an array of subsidiaries to avoid tax, what hope is there for civilisation?
Lovdhal-Gormsen is correct to say that people are losing faith in EU institutions, but we are also angry when profits are untaxed and when public services are failing. Indeed Vestager has restored some faith in the EU with her ruling regarding Apple.
Brussels has been accused of “bending the rules” in its pursuit of Apple for €13 billion in taxes it says should have been paid in Ireland. But in truth it is the multinationals and their corporate lawyers and accountants who have twisted the rules on taxation almost out of existence.
The tax system had been “captured” by the tax avoidance industry. Multinationals were paying less and less tax and states were reduced to tax wars against each other in failing efforts to attract them.
The public needed a champion to restore some order on the chaos and it got it in Margrethe Vestager, the European commissioner for competition. Under her the directorate general for competition did what the directorate general for taxation and directorate general for economic and financial affairs were unwilling or unable to do.
I was a dissenting member of the government advisory group that recommended the low 12.5 per cent rate of corporation tax in the early 1990s. I dissented because I believed that the rate should only be reduced to 20 per cent from the 35 per cent nominal rate then prevailing. I believed if it was only 12.5 per cent after legitimate deductions, companies might only pay an effective rate of 6 or 7 per cent.
I was so naive. Today some companies pay nothing and too many pay very little. Apple paid a mere 0.005per cent on its European profits in 2014.
It is too easy for multinationals to pay what they like in taxes, aided by globalisation, technology, multitudes of subsidiary companies in different jurisdictions and none, armies of tax-avoiding lawyers and accountants and by regulatory capture,
In a recent article on Apple’s dispute with the European Commission, Liza Lovdhal-Gormsen (the director of the Competition Law Forum) draws on the quote by Judge Wendle Holmes: “I like to pay taxes. With them, I buy civilisation.”
Lovdhal-Gormsen argues that certainty of law is central to this contract, but if the world’s biggest and most profitable company is reluctant to pay taxes and aggressively uses an array of subsidiaries to avoid tax, what hope is there for civilisation?
Lovdhal-Gormsen is correct to say that people are losing faith in EU institutions, but we are also angry when profits are untaxed and when public services are failing. Indeed Vestager has restored some faith in the EU with her ruling regarding Apple.
Bending the rules
The EU is accused of the “aggressive use of state aid rules to pursue its corporation tax agenda”. But it is the multinationals who are bending the rules, because they can, in the globalised world. For them corporate social responsibility means their fiduciary duty is only to their shareholders and it excludes all others.
The commission did not apply these state aid rules to tax subsidies for many years. If it had, it may have lessened Ireland’s collapse because it might have stopped the many tax subsidies thrown at property investors by governments from the mid-1990s. Tax “incentives” are subsidies and are at last included in the determination of state aid.
The Apple tax case is not undermining the OECD efforts to bring order to the international tax system, but is complementing it. Lovdhal-Gormsen correctly says the corporate tax system needs reform. But she claims that state aid enforcement is not the appropriate tool. On the contrary, it has to be an integral part of the system. For example, suddenly giving a 100 per cent write-off in year one to a new hotel can wipe out existing hoteliers who did not have such a subsidy.
Tax competition or tax wars between countries is promoted as “good” by the tax industry and our Government. However, tax wars are won by tax-avoiding multinational corporations (MNCs) but are ultimately lost by sovereign states.
The commission did not apply these state aid rules to tax subsidies for many years. If it had, it may have lessened Ireland’s collapse because it might have stopped the many tax subsidies thrown at property investors by governments from the mid-1990s. Tax “incentives” are subsidies and are at last included in the determination of state aid.
The Apple tax case is not undermining the OECD efforts to bring order to the international tax system, but is complementing it. Lovdhal-Gormsen correctly says the corporate tax system needs reform. But she claims that state aid enforcement is not the appropriate tool. On the contrary, it has to be an integral part of the system. For example, suddenly giving a 100 per cent write-off in year one to a new hotel can wipe out existing hoteliers who did not have such a subsidy.
Tax competition or tax wars between countries is promoted as “good” by the tax industry and our Government. However, tax wars are won by tax-avoiding multinational corporations (MNCs) but are ultimately lost by sovereign states.
Indigenous industry
We do not know the truth of her prediction that “this ruling will make companies more wary of investing in Europe”, but is abundantly clear that Ireland also needs to seriously address indigenous industry.
In recent years, the proportion of sales MNCs make outside their home states is falling, as are their profits, and the flow of new multinational investment has been declining relative to GDP, according to the Economist (January 28th).
The issue is much bigger than the €13 billion tax to be paid by Apple under this ruling. Ireland has been one of the greatest beneficiaries of globalisation. MNCs have contributed much, but globalisation is under threat. One reason is that the little people are angry that big companies are not paying their fair share of tax. What is “fair” is debatable, but paying virtually zero on big profits is not fair.
Apple makes wonderful products, employs many in Ireland (unlike some big tax avoiders). However, its bosses see tax minimisation, which is easy in today’s world, as a core objective. They need to move back to the stakeholder model of corporate governance where companies owe responsibility to a wider group than its shareholders. Then civilisation will survive.
Paul Sweeney is Chair of TASC's Economists' Network.
This article was first published in the Irish Times 2 February 2017
In recent years, the proportion of sales MNCs make outside their home states is falling, as are their profits, and the flow of new multinational investment has been declining relative to GDP, according to the Economist (January 28th).
The issue is much bigger than the €13 billion tax to be paid by Apple under this ruling. Ireland has been one of the greatest beneficiaries of globalisation. MNCs have contributed much, but globalisation is under threat. One reason is that the little people are angry that big companies are not paying their fair share of tax. What is “fair” is debatable, but paying virtually zero on big profits is not fair.
Apple makes wonderful products, employs many in Ireland (unlike some big tax avoiders). However, its bosses see tax minimisation, which is easy in today’s world, as a core objective. They need to move back to the stakeholder model of corporate governance where companies owe responsibility to a wider group than its shareholders. Then civilisation will survive.
Paul Sweeney is Chair of TASC's Economists' Network.
This article was first published in the Irish Times 2 February 2017
Wednesday, 27 July 2016
Has the OECD abandoned its neo-liberal taxation policies?
Paul Sweeney: The OECD has relentlessly pursued a neo-liberal taxation policy. It seldom uses the word taxation without the appendage “burden” For its tax department, tax is not a “charge” or a “payment”, but nearly always a “burden”. On taxation, the OECD seemed like a Koch Brothers’ funded think-tank rather than one funded by governments. So when it revises its thinking in a new paper, it has to be welcome.
Thursday, 26 May 2016
In this Programme – “There’s One for Everyone in the Audience.”
Paul Sweeney: This Programme for government is quite different from previous programmes. It is 160 pages where is the last programme was a mere 60.
The many promises are a recognition of the vulnerability of this new minority government. It has to be more open to the views of others. In turn, this means that it will be much more difficult to be decisive in policy implementation. Yet, this handicap may lead to better policies. One of the downsides of social partnership was that issues took a long time to resolve, but the benefit was that better decisions were made in the long run, because many had contributed, foreseeing the downsides and strengthening policy.
Wednesday, 22 August 2012
The MOU, Big Box economics and shopping centres
Paul Sweeney: The Rule Book by which Ireland is presently run, “The Memorandum of Understanding” (MOU) between the Troika and the Government, is forcing the government to impose a high level of austerity and some welcome reforms, like the belated regulation of the rotten banking system; reform of the legal system which is run by lawyers for lawyers; and then some other “reforms”.
One such other “reform” in the MOU which has actually been implemented is to allow more Big Box supermarkets on the edges of towns, with vast car parks, hollowing out urban centres.
Right wing economic ideologues love Big Box economics. Some little ideologue slipped this “reform” into the MOU and now it is being enacted. They hope that it will bring down prices. It may for a while, till the competition has been eliminated and urban centres destroyed.
Too many economists are indifferent to the non-economic impacts of economic decisions. The destruction of urban centres and replacement by Big Boxes is outside “pure economics”, they will argue. They may however, concede that once competition has been wiped out, prices may rise again, but console us with their belief that the market will operate and it will eventually bring in other Big Boxes in competition with Big Box No 1.
Dundrum Shopping Centre, while less of a Big Ugly Box than many others, has sucked much of the heart out of Rathmines, Dun Laoire, Bray and other south Dublin urban town centres.
Supermarket sizes had been regulated by the state under retail planning laws in Ireland. They were “relaxed” to allow IKEA to drop its vast box into Finglas. IKEA threatened to hover up all the business from Northern Ireland and not to pay any VAT here. The government caved in.
Now more big boxes are to be allowed to be built all over Ireland thanks to the section on retail size inserted into the MOU.
In the light of the news that Ireland has the highest number of shopping centres per head of population in Europe, this will not happen too soon. This information on the flood of shopping centres is revealed in a survey of 24 countries by the commercial property consultancy, Jones Lang Lasalle. I do not think we needed a survey to find out that we had lots of empty shops, but nonetheless such empirical evidence is very useful to inform future decisions.
The survey found that Ireland had almost 500sqm of shopping centre space per 1,000 people - more than twice the average European of 179sqm per thousand. Most of our shopping centres had being constructed during the boom. Too many are located in regional locations which cannot now sustain all of their units.
It is therefore no surprise that even when the bust ends, Jones Lang Lasalle predicts that even a return to a healthy retail trade will not be enough to provide tenants for all of the retail space that has resulted since the boom.
State regulation has its faults, limits and errors are made, but the superiority of the market as the alternative has been found deeply wanting in Ireland, even before this relaxation of the retail planning laws. The inane property boom has cost us all muchos dineros, but will leave also a horrible physical blight on our cities and towns for decades to come.
Perhaps after we say goodbye to the Troika, if it happens, in 2014, the government will reassert itself as a government for the people and will reinstate the retail planning laws to protect our urban heritage from this clause in the MOU which enshrines suburban retail Big Box Blight all over Ireland.
One such other “reform” in the MOU which has actually been implemented is to allow more Big Box supermarkets on the edges of towns, with vast car parks, hollowing out urban centres.
Right wing economic ideologues love Big Box economics. Some little ideologue slipped this “reform” into the MOU and now it is being enacted. They hope that it will bring down prices. It may for a while, till the competition has been eliminated and urban centres destroyed.
Too many economists are indifferent to the non-economic impacts of economic decisions. The destruction of urban centres and replacement by Big Boxes is outside “pure economics”, they will argue. They may however, concede that once competition has been wiped out, prices may rise again, but console us with their belief that the market will operate and it will eventually bring in other Big Boxes in competition with Big Box No 1.
Dundrum Shopping Centre, while less of a Big Ugly Box than many others, has sucked much of the heart out of Rathmines, Dun Laoire, Bray and other south Dublin urban town centres.
Supermarket sizes had been regulated by the state under retail planning laws in Ireland. They were “relaxed” to allow IKEA to drop its vast box into Finglas. IKEA threatened to hover up all the business from Northern Ireland and not to pay any VAT here. The government caved in.
Now more big boxes are to be allowed to be built all over Ireland thanks to the section on retail size inserted into the MOU.
In the light of the news that Ireland has the highest number of shopping centres per head of population in Europe, this will not happen too soon. This information on the flood of shopping centres is revealed in a survey of 24 countries by the commercial property consultancy, Jones Lang Lasalle. I do not think we needed a survey to find out that we had lots of empty shops, but nonetheless such empirical evidence is very useful to inform future decisions.
The survey found that Ireland had almost 500sqm of shopping centre space per 1,000 people - more than twice the average European of 179sqm per thousand. Most of our shopping centres had being constructed during the boom. Too many are located in regional locations which cannot now sustain all of their units.
It is therefore no surprise that even when the bust ends, Jones Lang Lasalle predicts that even a return to a healthy retail trade will not be enough to provide tenants for all of the retail space that has resulted since the boom.
State regulation has its faults, limits and errors are made, but the superiority of the market as the alternative has been found deeply wanting in Ireland, even before this relaxation of the retail planning laws. The inane property boom has cost us all muchos dineros, but will leave also a horrible physical blight on our cities and towns for decades to come.
Perhaps after we say goodbye to the Troika, if it happens, in 2014, the government will reassert itself as a government for the people and will reinstate the retail planning laws to protect our urban heritage from this clause in the MOU which enshrines suburban retail Big Box Blight all over Ireland.
Thursday, 5 July 2012
Stiglitz on the Euro deal
Paul Sweeney: We need vision and leadership in Europe. The lack of this leadership among the Europe elite/authorities, of which its citizens are fully aware (and will punish them for it), finally appears to have forced this “leadership” to realise that there was a threat unless it acted decisively. It appears that some major decisions may have, at long last, been made at the 20th summit last Thursday which could get Europe moving again and may give hope to Ireland – if executed.
However, as the Irish government leaders have admitted a lot more needs to be done, around the opportunities provided in the deal for this country. Ireland did get a leg up, but as Joe Stiglitz says here, the deal will not stabilise the euro. Much more needs to be done, overall. I think we are in an era where the role of the state and states acting together makes markets. This is an era of real political economy at work. At present, markets, in crisis due to governments’ continuing indecision on the rules governing them, are causing chaos. This is understandable.
I don’t blame “Germany” but I blame those conservatives who are in power in Germany. They are wedded to 1930s economics.
However, as the Irish government leaders have admitted a lot more needs to be done, around the opportunities provided in the deal for this country. Ireland did get a leg up, but as Joe Stiglitz says here, the deal will not stabilise the euro. Much more needs to be done, overall. I think we are in an era where the role of the state and states acting together makes markets. This is an era of real political economy at work. At present, markets, in crisis due to governments’ continuing indecision on the rules governing them, are causing chaos. This is understandable.
I don’t blame “Germany” but I blame those conservatives who are in power in Germany. They are wedded to 1930s economics.
Wednesday, 20 June 2012
The advocates of austerity are now calling for growth
Paul Sweeney: When all of the advocates of austerity are now calling for growth as well as more cuts, is it no wonder the public is confused?
The peoples of Europe have clearly decided a) that the level of austerity imposed on them is too harsh, b) it is hitting the poorest hardest (what is new?) and c) it is not working (after four years, they know it for sure!). So the conservatives have a new hymn sheet with the word growth peppered at the end of every refrain instead of amen. But people are not fools. They know that the growth policies being proposed are “Structural.” They are impacting only on supply side, with cuts in minimum wages, basic hours, benefits and all the rest of it where it impacts on the precariat.
Our own government is deeply disappointing in its slavish adherence to the Supply Side Approach to the economy. Four years on, plummeting domestic demand – by 26 per cent and still falling - and large falls in GNP and GDP are worrying. There was a rise of 0.7% in GDP last year. This fact has been trotted out at every opportunity as a great economic “fact”. Unfortunately, this piddling performance could be revised down to 0.0 shortly and even at this pace, it will take 15 years to get back to where we were.
Sebastian Dullien has a good critical perspective on what needs to be done here. It ties in nicely with the finely honed Demand Side analysis, recently undertaken by the Irish Congress of Trade Unions for boosting jobs and confidence in Ireland’s collapsed economy.
The peoples of Europe have clearly decided a) that the level of austerity imposed on them is too harsh, b) it is hitting the poorest hardest (what is new?) and c) it is not working (after four years, they know it for sure!). So the conservatives have a new hymn sheet with the word growth peppered at the end of every refrain instead of amen. But people are not fools. They know that the growth policies being proposed are “Structural.” They are impacting only on supply side, with cuts in minimum wages, basic hours, benefits and all the rest of it where it impacts on the precariat.
Our own government is deeply disappointing in its slavish adherence to the Supply Side Approach to the economy. Four years on, plummeting domestic demand – by 26 per cent and still falling - and large falls in GNP and GDP are worrying. There was a rise of 0.7% in GDP last year. This fact has been trotted out at every opportunity as a great economic “fact”. Unfortunately, this piddling performance could be revised down to 0.0 shortly and even at this pace, it will take 15 years to get back to where we were.
Sebastian Dullien has a good critical perspective on what needs to be done here. It ties in nicely with the finely honed Demand Side analysis, recently undertaken by the Irish Congress of Trade Unions for boosting jobs and confidence in Ireland’s collapsed economy.
Tuesday, 12 June 2012
Paul de Grauwe on the need for action
Paul Sweeney: With all the events happening in Europe and the lack of leadership by the Prime Ministers, Finance Ministers, the economic Commissioner s of the Union itself and most of all from the unelected leaders (laggards?) of the ECB, it is refreshing to read a view that gives some ideas on leadership.
Paul De Grauwe, formerly of Leuven University and now of LSE, has been on top of comment and in my opinion, sound solutions for the past three or four years of the crisis.
This is a well-written, clear and concise viewpoint, well worth reading in full.
Paul De Grauwe, formerly of Leuven University and now of LSE, has been on top of comment and in my opinion, sound solutions for the past three or four years of the crisis.
This is a well-written, clear and concise viewpoint, well worth reading in full.
Thursday, 7 June 2012
Fiddling while Europe burns
Paul Sweeney: Today’s Financial Times tells us that in an effort to persuade Spain to accept a bailout, “unlike earlier bailouts for Greece, Portugal and Ireland, the proposed Spanish rescue would require few austerity measures beyond reforms already agreed with the EU and could even dispense with the close monitoring by international lenders that has proved contentious in Athens and Dublin, according to people familiar with the plans.”
It is reported that the oversight of the support to Spain would be dependent on increased outside oversight and faster restructuring of the banking and financial sector.
Why should Ireland and Greece have severe austerity imposed under the Memorandum of Understanding with the Troika of the EU, ECB and IMF while Spain gets off more lightly in comparison?
The answer is of course, size and importance. Ireland is unimportant in the order of things and this hard lesson is being driven home in the wake of last week’s referendum vote. We can be the model of goodness and obedience and the veritable “Poster Child of Austerity” but it still does not matter to the kingpins in Europe.
Not that austerity at this level is working. It is exacerbated by European and world conditions, but still is too severe in such a short time period. Yes we are heading towards target - if not acutely to hit it - on the deficit level, but little else is working. Growth is anemic and at last year’s level of GDP growth of 0.7 per cent, (if it's not revised downwards by the CSO later) it would take 15 years to get back to the level of 2007 GDP. It would take far longer on GNP and a very long time for the recovery of domestic demand to reach the level of five years ago.
Unemployment is at a very high level of over 14 per cent and it is at 25 per cent by the wide measure – officially. Emigration is very high too and participation in work has fallen dramatically especially for women and the young.
It is excellent that FDI continues to flow in and jobs are created. This shows that the fundamental economy in Ireland is working. Indeed it is working very well – very well!
But it is not enough. Domestic demand has fallen massively. And it is not just the collapse in investment (due to lack of confidence but also lack of state-led investment) but especially its main component – consumer spending.
What would help? If the so called leaders in Europe (largely a bunch of conservatives hide-bound by 1920s economics) could get their act together before the whole edifice falls apart, that would be most helpful. The edifice that is collapsing is both the euro, the European Social Model, the Single Market and the European Project itself. They have been fiddling while Europe burns - for four years now.
The election of Hollande has changed the balance, somewhat. The EU is no longer dominated by Germany and France. (It may seem like it is now just Germany, but Merkel is increasingly isolated). This gives some hope. If the left is elected in Germany and Italy within the next year, all may change. But social democracy and socialism in Europe is in crisis too.
Many of the political leaders of social democracy and socialism have forgotten their core values. Instead, they espoused what is now fairly clearly a failed market system. Most have now recognised this. Yet most these leaders still seem immobilised. Intellectually and politically.
The immediate answer should be the message that – “the European Social Model is alive and well. When sustainable growth returns, it will be enhanced.”
It’s a simple message which would give hope to hundreds of millions in Europe. It also needs to be accompanied by policies to stimulate growth, now. For them, it seems the European Social Model is under deep threat. It not just that ECB boss Draghi said the Model is finished, but the conservatives have decided to end the Post-War European Social Contract.
They simply want to keep the money. Sharing is out. The cake is no longer growing. The Soviet tanks are no longer in Germany. The alternative socialist vision is blurred. What impetus is on the elite and owners of capital to share but the minimum, with labour?
The European elite have decided, along with their US cousins, that inequality does not matter. But they are very wrong, as Joe Stiglitz says in the blog below. He says “Inequality leads to lower growth and less efficiency. Lack of opportunity means that its most valuable asset – its people – is not being fully used. Many at the bottom, or even in the middle, are not living up to their potential, because the rich, needing few public services and worried that a strong government might redistribute income, use their political influence to cut taxes and curtail government spending.”
In conclusion, it does seem that we are heading back to naked class war in Europe.
If you do not believe me, then why are the European elites and the ECB saving the banks and letting sovereign states sink? Why, after four years, are there still no solutions?
It is reported that the oversight of the support to Spain would be dependent on increased outside oversight and faster restructuring of the banking and financial sector.
Why should Ireland and Greece have severe austerity imposed under the Memorandum of Understanding with the Troika of the EU, ECB and IMF while Spain gets off more lightly in comparison?
The answer is of course, size and importance. Ireland is unimportant in the order of things and this hard lesson is being driven home in the wake of last week’s referendum vote. We can be the model of goodness and obedience and the veritable “Poster Child of Austerity” but it still does not matter to the kingpins in Europe.
Not that austerity at this level is working. It is exacerbated by European and world conditions, but still is too severe in such a short time period. Yes we are heading towards target - if not acutely to hit it - on the deficit level, but little else is working. Growth is anemic and at last year’s level of GDP growth of 0.7 per cent, (if it's not revised downwards by the CSO later) it would take 15 years to get back to the level of 2007 GDP. It would take far longer on GNP and a very long time for the recovery of domestic demand to reach the level of five years ago.
Unemployment is at a very high level of over 14 per cent and it is at 25 per cent by the wide measure – officially. Emigration is very high too and participation in work has fallen dramatically especially for women and the young.
It is excellent that FDI continues to flow in and jobs are created. This shows that the fundamental economy in Ireland is working. Indeed it is working very well – very well!
But it is not enough. Domestic demand has fallen massively. And it is not just the collapse in investment (due to lack of confidence but also lack of state-led investment) but especially its main component – consumer spending.
What would help? If the so called leaders in Europe (largely a bunch of conservatives hide-bound by 1920s economics) could get their act together before the whole edifice falls apart, that would be most helpful. The edifice that is collapsing is both the euro, the European Social Model, the Single Market and the European Project itself. They have been fiddling while Europe burns - for four years now.
The election of Hollande has changed the balance, somewhat. The EU is no longer dominated by Germany and France. (It may seem like it is now just Germany, but Merkel is increasingly isolated). This gives some hope. If the left is elected in Germany and Italy within the next year, all may change. But social democracy and socialism in Europe is in crisis too.
Many of the political leaders of social democracy and socialism have forgotten their core values. Instead, they espoused what is now fairly clearly a failed market system. Most have now recognised this. Yet most these leaders still seem immobilised. Intellectually and politically.
The immediate answer should be the message that – “the European Social Model is alive and well. When sustainable growth returns, it will be enhanced.”
It’s a simple message which would give hope to hundreds of millions in Europe. It also needs to be accompanied by policies to stimulate growth, now. For them, it seems the European Social Model is under deep threat. It not just that ECB boss Draghi said the Model is finished, but the conservatives have decided to end the Post-War European Social Contract.
They simply want to keep the money. Sharing is out. The cake is no longer growing. The Soviet tanks are no longer in Germany. The alternative socialist vision is blurred. What impetus is on the elite and owners of capital to share but the minimum, with labour?
The European elite have decided, along with their US cousins, that inequality does not matter. But they are very wrong, as Joe Stiglitz says in the blog below. He says “Inequality leads to lower growth and less efficiency. Lack of opportunity means that its most valuable asset – its people – is not being fully used. Many at the bottom, or even in the middle, are not living up to their potential, because the rich, needing few public services and worried that a strong government might redistribute income, use their political influence to cut taxes and curtail government spending.”
In conclusion, it does seem that we are heading back to naked class war in Europe.
If you do not believe me, then why are the European elites and the ECB saving the banks and letting sovereign states sink? Why, after four years, are there still no solutions?
Wednesday, 30 May 2012
Has the State any Business in Business?
Sinéad Pentony: TASC held its first lunchtime seminar yesterday. Paul Sweeney considered the question - ‘Has the State any business in business?’. Paul’s presentation put the issue of privatisation in the current context; identified the winners and losers in privatisation; and how/where it fits into industrial policy. The presentation draws a number of conclusions including the need for a more nuanced approach – privatisation is not a black and white issue; and there is a need for more diversity in the forms of ownership, as set out in the recent report by The Ownership Commission, which was chaired by Will Hutton.
Thursday, 12 April 2012
Response to Mr Howlin
Paul Sweeney: Mr Howlin’s considered response to the letter from the group of economists, of which I was one, is very welcome. His response is serious and measured and set out the case for the Government programme and its actions to date.
It reads far better than the crass headline of the article – which implies the authors of the letter were simply proposing “a silver bullet” to resolve Ireland’s deep and complex economic problems.
First, is it important to acknowledge that Mr Howlin in a government whose hands are tied by the Troika Agreement and the destruction left by the pro-cyclical, tax-cutting, tax-shifting and anti-regulation policies practiced with such vim by the last government. It has had to shift a lot of dung from the Aegean Stables of the Irish State before it can make progress. He is also in a government led by a bigger, deeply conservative party.
To my reading, Brendan Howlin acknowledges in a cautious way – as one would expect from a Minister in a government which is being underwritten by the Troika – that Europe and the ECB is not really dealing effectively with the crisis. We economists and social scientists can say it explicitly and see their repeatedly failure, but it is very difficult to this government to bite the hand. The EU/ECB approaches are partial, piecemeal and doomed to failure and repeated revisions. Further, an EU-wide stimulus would lift many economies from recession, but with 23 of the 27 states being led by conservative parties, this may be wishful thinking, for the moment.
As Minister for Public Service Reform he has had the most difficult task, especially in such a deep crisis, and he pays tribute to the role of public servants in their actions. Ireland is also fortunate that it has a Minister who is committed to public service – notwithstanding the dire circumstances we are in – and this shows in his dealings in the complexity of the reform programme.
His response demonstrates a cautious but welcome commitment to investment and that the government “is open to using the NPRF to leverage investment” in jobs and the economy. I read this as someone who implying that he needs support from progressives to help persuade his conservative colleagues who, over-awed by neoclassical economic view of the dreaded word “leakage” from a small open economy, are afraid of taking action in effecting this investment.
One can debate on whether the government is pursing “austerity” (I’m beginning to dislike the word almost as much as that other abused word, “neo-liberal”) or not. He is correct that they are “borrowing enormous sums of money to sustain the state,” and so are not pursuing austerity, in this sense. But by the end of this year, a staggering €24.4bn will also be taken out of the economy.
I also think that the time period is too short. It was to be 3 years originally and it is clearly not working as we have no green shoots except exports. A puny rise in GDP last year tells more about the activities of MNCs than about the Irish economy where domestic demand continues to collapse – aided and abetted by too high a level of cuts in too short a time period, and with too little in progressive increases in taxes.
Where we can have productive debate is on where the cuts are being made and where taxes are being raised. I, for one, will say that this government has shifted the balance somewhat from cuts to taxes, but the tax mix has not been what is optimum or best needed. For example increasing VAT by 10% is both regressive and deflationary (from 21 to 23%) and not increasing income taxes or introducing wealth taxes or getting a few bob with say a 2.5% increase in the low CT rate from the booming, exporting corporates is not good economics. (I also acknowledge that there have been some good progressive taxes on unearned income). Of course, if there had to be cuts, have they made the right ones? I’ll skip over this debate as it is complex and most people will disagree with each other on the detail.
Mr Howlin ends with the comment like “we would use all of our available resources in an all-or-nothing attempt to kick-start the economy strikes me as more Fianna Fáil circa 1977 than John Maynard Keynes”. Yet did I not hear conservative Mr Noonan on the Politics Programme a few weeks ago go further? He was talking of the possibility of investing the €5.3bn AND leveraging (borrowing) it for more investment, AND New Era AND EIB money.
So maybe the Government will finally work out where it should invest and get moving on it, sooner. But is also needs to re-examine where it is cutting and taxing.
Finally, it is not good enough for the government to simply blame the EU recession for its failure in generating any growth (in GNP and Domestic demand). The role of government in the cuts and taxes to date has had a major negative impact on “growth.”
Constructive criticism is aimed at assisting.
It reads far better than the crass headline of the article – which implies the authors of the letter were simply proposing “a silver bullet” to resolve Ireland’s deep and complex economic problems.
First, is it important to acknowledge that Mr Howlin in a government whose hands are tied by the Troika Agreement and the destruction left by the pro-cyclical, tax-cutting, tax-shifting and anti-regulation policies practiced with such vim by the last government. It has had to shift a lot of dung from the Aegean Stables of the Irish State before it can make progress. He is also in a government led by a bigger, deeply conservative party.
To my reading, Brendan Howlin acknowledges in a cautious way – as one would expect from a Minister in a government which is being underwritten by the Troika – that Europe and the ECB is not really dealing effectively with the crisis. We economists and social scientists can say it explicitly and see their repeatedly failure, but it is very difficult to this government to bite the hand. The EU/ECB approaches are partial, piecemeal and doomed to failure and repeated revisions. Further, an EU-wide stimulus would lift many economies from recession, but with 23 of the 27 states being led by conservative parties, this may be wishful thinking, for the moment.
As Minister for Public Service Reform he has had the most difficult task, especially in such a deep crisis, and he pays tribute to the role of public servants in their actions. Ireland is also fortunate that it has a Minister who is committed to public service – notwithstanding the dire circumstances we are in – and this shows in his dealings in the complexity of the reform programme.
His response demonstrates a cautious but welcome commitment to investment and that the government “is open to using the NPRF to leverage investment” in jobs and the economy. I read this as someone who implying that he needs support from progressives to help persuade his conservative colleagues who, over-awed by neoclassical economic view of the dreaded word “leakage” from a small open economy, are afraid of taking action in effecting this investment.
One can debate on whether the government is pursing “austerity” (I’m beginning to dislike the word almost as much as that other abused word, “neo-liberal”) or not. He is correct that they are “borrowing enormous sums of money to sustain the state,” and so are not pursuing austerity, in this sense. But by the end of this year, a staggering €24.4bn will also be taken out of the economy.
I also think that the time period is too short. It was to be 3 years originally and it is clearly not working as we have no green shoots except exports. A puny rise in GDP last year tells more about the activities of MNCs than about the Irish economy where domestic demand continues to collapse – aided and abetted by too high a level of cuts in too short a time period, and with too little in progressive increases in taxes.
Where we can have productive debate is on where the cuts are being made and where taxes are being raised. I, for one, will say that this government has shifted the balance somewhat from cuts to taxes, but the tax mix has not been what is optimum or best needed. For example increasing VAT by 10% is both regressive and deflationary (from 21 to 23%) and not increasing income taxes or introducing wealth taxes or getting a few bob with say a 2.5% increase in the low CT rate from the booming, exporting corporates is not good economics. (I also acknowledge that there have been some good progressive taxes on unearned income). Of course, if there had to be cuts, have they made the right ones? I’ll skip over this debate as it is complex and most people will disagree with each other on the detail.
Mr Howlin ends with the comment like “we would use all of our available resources in an all-or-nothing attempt to kick-start the economy strikes me as more Fianna Fáil circa 1977 than John Maynard Keynes”. Yet did I not hear conservative Mr Noonan on the Politics Programme a few weeks ago go further? He was talking of the possibility of investing the €5.3bn AND leveraging (borrowing) it for more investment, AND New Era AND EIB money.
So maybe the Government will finally work out where it should invest and get moving on it, sooner. But is also needs to re-examine where it is cutting and taxing.
Finally, it is not good enough for the government to simply blame the EU recession for its failure in generating any growth (in GNP and Domestic demand). The role of government in the cuts and taxes to date has had a major negative impact on “growth.”
Constructive criticism is aimed at assisting.
Wednesday, 21 March 2012
Europe from the periphery
Paul Sweeney: These days, Europe appears to be a cold place viewed from the periphery in Ireland. We are being bailed out and supported in many ways by the Troika of the EU, ECB and IMF, but the terms imposed upon citizens largely reflect the liberal economic perspective. We are four long years into austerity. Indicators are no longer falling, but little is rising, particularly green shoots.
At this inauspicious time, a progressive vision for Europe demands a strong focus by progressive parties and organisations on the European Social Model and a clear understanding what is meant by the abused word “competitiveness.” This small western island hjas been laid low by liberal economics but,with European solidarity and support, rather than punishment and austerity, can rebound as a model member state. As progressives, we also need to consciously set out to restore the wage share in national income to improve equity, social cohesions, personal income distribution, longer term wealth distribution, macroeconomic stability and the composition of aggregate demand.
Persuading Voters that the Post-War European Social Compact is Alive and Well
Economic and social progress in Europe since the war has been remarkable. Living standards and improvements in housing, health and peoples’ security have been excellent. There had been a consensus with conservatives that national income and wealth would be shared, but with the prolonged crisis, growing numbers of conservatives no longer want to share. The cake is no longer growing – thanks to their policies - and they want to keep more of it for themselves.
But the best way to grow national income is though social solidarity, education, investment, efficient public services and equitable incomes.
Re-building the European Social Model must be the priority of all progressive forces in Europe. Many Europeans fear that governments are neglecting citizens and are obsessed by appeasing the financial markets; have a very narrow view of “competitiveness”; and with fiscal rectitude. This means that the Post-War European Social Compact appears to be dying or dead for increasing numbers of European citizens.
Apparent confirmation of its death was given by the key unelected European leader, Mario Draghi, who was quoted in the Wall Street Journal earlier this year as saying that “Europe's vaunted social model is "already gone”." Thus a clarion call for all progressive parties must be that the European Social Model is very much alive. Not alone will it continue to be a core objective in progressives’ policy implementation in government, but we should guarantee that the Social Model will be enhanced in line with economic and social progress.
The prolonged ineptitude of European leaders, predominantly conservatives, in dealing with the crisis effectively has undermined public confidence in the European project. The failure of austerity measures has led the same leaders to pursue them with more vigour, instead of learning from their mistakes. The Fiscal Compact will exacerbate the problem.
Mr. Draghi also argued that “austerity, coupled with structural change, is the only option for economic renewal”. Like ancient Greek priests, appeasing the gods with sacrifices, he wants to feed even more of our living standards to the markets, saying "Backtracking on fiscal targets would elicit an immediate reaction by the market."
On top of this deep crisis, there are great challenges with ageing populations straining pensions, rising health costs, environmental issues and much more. There is a hollowing-out of the middle with the growth in “Cool Jobs and Crap Jobs” worldwide. Solid pensionable jobs like banking, computing, parts of accounting, engineering etc. are being de-skilled and outsourced from Europe. The polarisation of jobs is a vital area which has to be addressed.
Some of these challenges may mean doing things very differently, but all can be overcome. Revitalising the Social Model is the key to rebuilding confidence in Europe. One step in this direction is to have a clear understanding of one of the most abused concepts in modern economics- “competitiveness".
Competitiveness is Poorly Understood
The most abused word in modern political economy is “competitiveness.” It is not just that each economist has a different definition, but even the same economist may define it in several ways. For most of them and for many institutions it is simply a description of short-term movements in wages. A more sophisticated definition is of short run movements in unit labour costs, but both are too often ideological, using easily available data to beat up workers and trade unions. This is now a tired abuse of what can be a helpful concept in modern economics in measuring national economic progress. Unless we all subscribe to the same understanding, we must avoid this abused word/concept.
A good definition (as given in the 2003 European Comission Report on Competitiveness) is: “Competitiveness is understood to mean high and rising standards of living of a nation with the lowest possible level of involuntary unemployment on a sustainable basis.” But this does not inform on how to measure it.
I suggest the complexity of the issue is best understood by examining the work of Ireland’s tripartite National Competitiveness Council, which represents unions, employers and Government (albeit with only one-eighth union representation). It produces an annual Benchmarking or Scorecard report covering Ireland’s competitiveness performance in a comprehensive and coherent way. It has a collection of statistical indicators against a whole-of-economy comparison to 17 other economies and the OECD or EU average. Costs and labour costs are included but they are only a small part of the overall measurement of a country’s competitiveness. It is deeply disappointing that sophisticated analysts such as the OECD, IMF etc. still define competitiveness only in terms of unit labour costs. But perhaps it is deliberately ideological?
It is worth remembering that only 9% of EU GDP is exported (measuring the exports in value added, not gross, terms), which means EU countries are very largely competing with themselves. We do buy European, already! However, competitiveness is worth benchmarking, if done properly.
A View from a Troubled Western Island
It is essential to avoid the core/periphery break up in Europe. Ireland grew from one of the poorest of the poor in Europe to one of the richest in twenty years, thanks in no small part to its membership of the Union. It is facing enormous economic problems at present, but provided we get support in facing our staggering and perhaps insurmountable private banking debts, Ireland will recover and revert to become a net contributor to the Union’s funds.
Ireland‘s economic collapse in 2008 was not due to poor competitiveness, nor to public sector profligacy, but to gross irresponsibility by a small elite in the private sector, operating within what had become an ultra-liberal economic system. It was the private banking collapse, which the government foolishly under-wrote which brought Ireland down. Commissioner Rehn demanded, in Latin, “pacta sunt servanda” and in English that the Irish taxpayers “respect your commitments and obligations”. However, these debts are not ours, but those of the private defunct banks, which our sacked government guaranteed, in our name, without our consent.
Prior to this, European banks queued up to lend to our reckless banks, while the ECB looked on benignly. Tax policy – cutting direct taxes on incomes and profits, tax breaks especially for property investment and tax-shifting – also contributed substantially to Ireland’s current economic crisis. The third factor was de-regulation.
Today Irish taxpayers are repaying the bank creditors (EU banks and hedge funds) of the six Irish banks which were socialised. This is an impossible task for 1.8 million people at work, where GDP has collapsed by over 13 per cent between 2008 and 2011, GNP by over 16 per cent and domestic demand by a staggering 24.9 per cent and is still in decline. Unemployment is at 14.6 per cent. When discouraged workers, those who would like to work full time, are included the official figure rises to 25 per cent. Youth unemployment is soaring and long term unemployment is 60.3 of the total.
When the trade unions first met the ECB, EU, IMF Troika in late 2010 when Ireland was placed in Examinership, we pointed out that Ireland has many core strengths, but that the bailout package agreed by the Government with them made the economic recovery very difficult. We said that the deflationary impacts of the measures in the package are such that growth has little chance of reviving. This has been proven to be correct - unless one gives credence to the technical definition of “the end of recession” with a few recent quarters of very weak growth in GDP. It will take many years to makes up for the fall of 13 per cent at current rates, especially with citizens’ taxes diverted to fund the apparently endless private bank bailout.
The previous government tried an experiment in Internal Devaluation because there could be no devaluation in a single currency area. Fortunately, this strategy failed.
Had it worked, the recession would be even worse. It would have sucked more demand out of the economy. Overall, the average employee who remained in work saw no decline in real hourly earnings from the beginning of 2008 when the Crash began. For some workers, in the export and other dynamic sectors, there have been small wage rises. The real losses were the considerable numbers (a huge 14 per cent fall) who lost their jobs. A recent study of how employers dealt with the total wage bill found that there had been cuts, but “however, these cuts were primarily achieved though employment reductions with relatively low contributions at the aggregate level from changes in average hourly earnings and average weekly paid hours” (see Walsh, Kieran “Wage bill change during the recession: how have employers reacted to the downturn?” Statistical and Social Enquiry Society of Ireland, February, 2012)
This relative stability in real incomes of those who kept their jobs since the Crash of 2008 has also been extremely important in ensuing that the terrible collapse in domestic demand – of one quarter in less than four years – was not worse. This is because averagely paid workers generally spend most of their incomes. The last government also cut the minimum wage by 12 per cent but the new government reversed this immediately. It also did not cut welfare rates and there is a deal with the public service whereby there will be no further pay cuts (two of which averaged 14 per cent) provided there is support for substantial change, which is occurring.
The relative stability in real incomes, in welfare rates and in public employment is the key to the explanation of why there has been no rioting in Ireland, despite our travails. It is crucial that the core economies which are performing well, act in solidarity and not in punishment to the underperforming peripherals.
Nor should we entertain the idea of a ‘two speed’ Europe, which could allow an inner core to move towards closer economic and political union supposedly “to protect the Union as a whole.” To move in that direction is to abandon solidarity and to miss this opportunity to build a cohesive Europe.
Restoring the Wage Share of National Income
The share of national income going to wages has fallen considerably in most developed countries since the early 1970s. There has been a slight reversal in recent years, but it is forecast to fall back again. One explanation for the falling labour share and rising share to capital might be that there has been an intensification of capital investment. However, against that, there has been a huge improvement in human capital with all countries seeing major increases in educational and skills attainment. It seems that the investment in human capital is not being rewarded by increases in labour’s share of national income. As less national income is going to workers, this has a secular impact on aggregate demand and thus on growth.
The issue of the decline in labour income share involves equity, social cohesion and personal income distribution, longer-term wealth distribution, macroeconomic stability and the composition of aggregate demand.
The “American Dream” of the next generation enjoying a higher standard of living than their parents has been dead since the early 1970s. Since 1975 US workers’ median incomes have not risen. There are hard lessons to be learned from America. The stagnation in incomes was masked for some time because the working and middle classes borrowed against their homes. Now the home ownership dream has turned into a nightmare for many with negative equity and big debts. It was also masked by a dramatic fall in the prices of many goods now imported from Asia which reduced the cost of living. It was further masked by the growth in dual-income families, where there had only been one earner in the past. Male, unionised and in well paid manufacturing, these American workers had previously seen themselves as firmly in the “middle class”.
The fall in labour’s share of national income was also driven by globalisation, accelerated by technology, falling prices in transport and instant communications. In turn, these trends were accentuated by liberalisation of borders and markets, especially labour markets.
The value of the fall between 1973 and 2011 is substantial in monetary terms. Even with the smallest decline which as in France of 3.5%, it is still a transfer of €71bn from labour’s share of GDP to capital. For Germany it is €137bn.[Click to enlarge table below].
The decline of trade unions and the paucity of vision and lack of ambition in progressive parties, which should be counterforces to such trends, also facilitated the stagnation of incomes of the majority, in spite of economic growth and growth in labour productivity.
There is also a view that corporations and the rich should not have to pay “too much tax” as it is a disincentive to investment. Simultaneously, people are demanding more and better public services, but have been increasingly unwilling to pay for them through taxation. The aversion of many governments and major institutions like the IMF and OECD to progressive income taxes which they now pejoratively term “taxes on labour” means that if acted upon, taxation will fail to be a redistributive mechanism. It also means that the great polarisation of incomes will continue unchecked and citizens will grow even more angry and frustrated.
A Common Fiscal Policy is key to addressing inequality, sorting out the banks and boosting demand by underwriting an EU wide stimulus programme. It may begin with a small budget overall, but a small budget in EU terms is still a lot of cash. I would go for tax coordination rather than harmonisation where member states can set rates, within bands, though a common tax base for companies makes sense in a single market.
Conclusion
The real irony in Europe is that this deep crisis was caused by neo-liberal economic policies. Yet it is conservatives who are in power in most member states. They are prolonging the crisis with the same old failed policies and general incompetence. Some are even reverting to narrow nationalism. Instead, bold action with an EU-wide stimulus and policies informed by a longer term vision of European solidarity is required.
There is a lesson in this for us all. That is to replenish our vision by going back to core ideas, sticking to them in a principled way and being innovative in our policy responses.
Part of this post is based on a a presentation given to a meeting of progressive groups, parties and individuals in the French Parliament on Friday March 16th entitled "The Renaissance of Europe". It was sponsored by four EU think-tanks: FEPF, Jean Jaures, Friedrich Ebert Stiftung and Italianieuropei. This event will be followed by seminars in Rome and Berlin in advance of the Italian and German elections.
At this inauspicious time, a progressive vision for Europe demands a strong focus by progressive parties and organisations on the European Social Model and a clear understanding what is meant by the abused word “competitiveness.” This small western island hjas been laid low by liberal economics but,with European solidarity and support, rather than punishment and austerity, can rebound as a model member state. As progressives, we also need to consciously set out to restore the wage share in national income to improve equity, social cohesions, personal income distribution, longer term wealth distribution, macroeconomic stability and the composition of aggregate demand.
Persuading Voters that the Post-War European Social Compact is Alive and Well
Economic and social progress in Europe since the war has been remarkable. Living standards and improvements in housing, health and peoples’ security have been excellent. There had been a consensus with conservatives that national income and wealth would be shared, but with the prolonged crisis, growing numbers of conservatives no longer want to share. The cake is no longer growing – thanks to their policies - and they want to keep more of it for themselves.
But the best way to grow national income is though social solidarity, education, investment, efficient public services and equitable incomes.
Re-building the European Social Model must be the priority of all progressive forces in Europe. Many Europeans fear that governments are neglecting citizens and are obsessed by appeasing the financial markets; have a very narrow view of “competitiveness”; and with fiscal rectitude. This means that the Post-War European Social Compact appears to be dying or dead for increasing numbers of European citizens.
Apparent confirmation of its death was given by the key unelected European leader, Mario Draghi, who was quoted in the Wall Street Journal earlier this year as saying that “Europe's vaunted social model is "already gone”." Thus a clarion call for all progressive parties must be that the European Social Model is very much alive. Not alone will it continue to be a core objective in progressives’ policy implementation in government, but we should guarantee that the Social Model will be enhanced in line with economic and social progress.
The prolonged ineptitude of European leaders, predominantly conservatives, in dealing with the crisis effectively has undermined public confidence in the European project. The failure of austerity measures has led the same leaders to pursue them with more vigour, instead of learning from their mistakes. The Fiscal Compact will exacerbate the problem.
Mr. Draghi also argued that “austerity, coupled with structural change, is the only option for economic renewal”. Like ancient Greek priests, appeasing the gods with sacrifices, he wants to feed even more of our living standards to the markets, saying "Backtracking on fiscal targets would elicit an immediate reaction by the market."
On top of this deep crisis, there are great challenges with ageing populations straining pensions, rising health costs, environmental issues and much more. There is a hollowing-out of the middle with the growth in “Cool Jobs and Crap Jobs” worldwide. Solid pensionable jobs like banking, computing, parts of accounting, engineering etc. are being de-skilled and outsourced from Europe. The polarisation of jobs is a vital area which has to be addressed.
Some of these challenges may mean doing things very differently, but all can be overcome. Revitalising the Social Model is the key to rebuilding confidence in Europe. One step in this direction is to have a clear understanding of one of the most abused concepts in modern economics- “competitiveness".
Competitiveness is Poorly Understood
The most abused word in modern political economy is “competitiveness.” It is not just that each economist has a different definition, but even the same economist may define it in several ways. For most of them and for many institutions it is simply a description of short-term movements in wages. A more sophisticated definition is of short run movements in unit labour costs, but both are too often ideological, using easily available data to beat up workers and trade unions. This is now a tired abuse of what can be a helpful concept in modern economics in measuring national economic progress. Unless we all subscribe to the same understanding, we must avoid this abused word/concept.
A good definition (as given in the 2003 European Comission Report on Competitiveness) is: “Competitiveness is understood to mean high and rising standards of living of a nation with the lowest possible level of involuntary unemployment on a sustainable basis.” But this does not inform on how to measure it.
I suggest the complexity of the issue is best understood by examining the work of Ireland’s tripartite National Competitiveness Council, which represents unions, employers and Government (albeit with only one-eighth union representation). It produces an annual Benchmarking or Scorecard report covering Ireland’s competitiveness performance in a comprehensive and coherent way. It has a collection of statistical indicators against a whole-of-economy comparison to 17 other economies and the OECD or EU average. Costs and labour costs are included but they are only a small part of the overall measurement of a country’s competitiveness. It is deeply disappointing that sophisticated analysts such as the OECD, IMF etc. still define competitiveness only in terms of unit labour costs. But perhaps it is deliberately ideological?
It is worth remembering that only 9% of EU GDP is exported (measuring the exports in value added, not gross, terms), which means EU countries are very largely competing with themselves. We do buy European, already! However, competitiveness is worth benchmarking, if done properly.
A View from a Troubled Western Island
It is essential to avoid the core/periphery break up in Europe. Ireland grew from one of the poorest of the poor in Europe to one of the richest in twenty years, thanks in no small part to its membership of the Union. It is facing enormous economic problems at present, but provided we get support in facing our staggering and perhaps insurmountable private banking debts, Ireland will recover and revert to become a net contributor to the Union’s funds.
Ireland‘s economic collapse in 2008 was not due to poor competitiveness, nor to public sector profligacy, but to gross irresponsibility by a small elite in the private sector, operating within what had become an ultra-liberal economic system. It was the private banking collapse, which the government foolishly under-wrote which brought Ireland down. Commissioner Rehn demanded, in Latin, “pacta sunt servanda” and in English that the Irish taxpayers “respect your commitments and obligations”. However, these debts are not ours, but those of the private defunct banks, which our sacked government guaranteed, in our name, without our consent.
Prior to this, European banks queued up to lend to our reckless banks, while the ECB looked on benignly. Tax policy – cutting direct taxes on incomes and profits, tax breaks especially for property investment and tax-shifting – also contributed substantially to Ireland’s current economic crisis. The third factor was de-regulation.
Today Irish taxpayers are repaying the bank creditors (EU banks and hedge funds) of the six Irish banks which were socialised. This is an impossible task for 1.8 million people at work, where GDP has collapsed by over 13 per cent between 2008 and 2011, GNP by over 16 per cent and domestic demand by a staggering 24.9 per cent and is still in decline. Unemployment is at 14.6 per cent. When discouraged workers, those who would like to work full time, are included the official figure rises to 25 per cent. Youth unemployment is soaring and long term unemployment is 60.3 of the total.
When the trade unions first met the ECB, EU, IMF Troika in late 2010 when Ireland was placed in Examinership, we pointed out that Ireland has many core strengths, but that the bailout package agreed by the Government with them made the economic recovery very difficult. We said that the deflationary impacts of the measures in the package are such that growth has little chance of reviving. This has been proven to be correct - unless one gives credence to the technical definition of “the end of recession” with a few recent quarters of very weak growth in GDP. It will take many years to makes up for the fall of 13 per cent at current rates, especially with citizens’ taxes diverted to fund the apparently endless private bank bailout.
The previous government tried an experiment in Internal Devaluation because there could be no devaluation in a single currency area. Fortunately, this strategy failed.
Had it worked, the recession would be even worse. It would have sucked more demand out of the economy. Overall, the average employee who remained in work saw no decline in real hourly earnings from the beginning of 2008 when the Crash began. For some workers, in the export and other dynamic sectors, there have been small wage rises. The real losses were the considerable numbers (a huge 14 per cent fall) who lost their jobs. A recent study of how employers dealt with the total wage bill found that there had been cuts, but “however, these cuts were primarily achieved though employment reductions with relatively low contributions at the aggregate level from changes in average hourly earnings and average weekly paid hours” (see Walsh, Kieran “Wage bill change during the recession: how have employers reacted to the downturn?” Statistical and Social Enquiry Society of Ireland, February, 2012)
This relative stability in real incomes of those who kept their jobs since the Crash of 2008 has also been extremely important in ensuing that the terrible collapse in domestic demand – of one quarter in less than four years – was not worse. This is because averagely paid workers generally spend most of their incomes. The last government also cut the minimum wage by 12 per cent but the new government reversed this immediately. It also did not cut welfare rates and there is a deal with the public service whereby there will be no further pay cuts (two of which averaged 14 per cent) provided there is support for substantial change, which is occurring.
The relative stability in real incomes, in welfare rates and in public employment is the key to the explanation of why there has been no rioting in Ireland, despite our travails. It is crucial that the core economies which are performing well, act in solidarity and not in punishment to the underperforming peripherals.
Nor should we entertain the idea of a ‘two speed’ Europe, which could allow an inner core to move towards closer economic and political union supposedly “to protect the Union as a whole.” To move in that direction is to abandon solidarity and to miss this opportunity to build a cohesive Europe.
Restoring the Wage Share of National Income
The share of national income going to wages has fallen considerably in most developed countries since the early 1970s. There has been a slight reversal in recent years, but it is forecast to fall back again. One explanation for the falling labour share and rising share to capital might be that there has been an intensification of capital investment. However, against that, there has been a huge improvement in human capital with all countries seeing major increases in educational and skills attainment. It seems that the investment in human capital is not being rewarded by increases in labour’s share of national income. As less national income is going to workers, this has a secular impact on aggregate demand and thus on growth.
The issue of the decline in labour income share involves equity, social cohesion and personal income distribution, longer-term wealth distribution, macroeconomic stability and the composition of aggregate demand.
The “American Dream” of the next generation enjoying a higher standard of living than their parents has been dead since the early 1970s. Since 1975 US workers’ median incomes have not risen. There are hard lessons to be learned from America. The stagnation in incomes was masked for some time because the working and middle classes borrowed against their homes. Now the home ownership dream has turned into a nightmare for many with negative equity and big debts. It was also masked by a dramatic fall in the prices of many goods now imported from Asia which reduced the cost of living. It was further masked by the growth in dual-income families, where there had only been one earner in the past. Male, unionised and in well paid manufacturing, these American workers had previously seen themselves as firmly in the “middle class”.
The fall in labour’s share of national income was also driven by globalisation, accelerated by technology, falling prices in transport and instant communications. In turn, these trends were accentuated by liberalisation of borders and markets, especially labour markets.
The value of the fall between 1973 and 2011 is substantial in monetary terms. Even with the smallest decline which as in France of 3.5%, it is still a transfer of €71bn from labour’s share of GDP to capital. For Germany it is €137bn.[Click to enlarge table below].
The decline of trade unions and the paucity of vision and lack of ambition in progressive parties, which should be counterforces to such trends, also facilitated the stagnation of incomes of the majority, in spite of economic growth and growth in labour productivity.
There is also a view that corporations and the rich should not have to pay “too much tax” as it is a disincentive to investment. Simultaneously, people are demanding more and better public services, but have been increasingly unwilling to pay for them through taxation. The aversion of many governments and major institutions like the IMF and OECD to progressive income taxes which they now pejoratively term “taxes on labour” means that if acted upon, taxation will fail to be a redistributive mechanism. It also means that the great polarisation of incomes will continue unchecked and citizens will grow even more angry and frustrated.
A Common Fiscal Policy is key to addressing inequality, sorting out the banks and boosting demand by underwriting an EU wide stimulus programme. It may begin with a small budget overall, but a small budget in EU terms is still a lot of cash. I would go for tax coordination rather than harmonisation where member states can set rates, within bands, though a common tax base for companies makes sense in a single market.
Conclusion
The real irony in Europe is that this deep crisis was caused by neo-liberal economic policies. Yet it is conservatives who are in power in most member states. They are prolonging the crisis with the same old failed policies and general incompetence. Some are even reverting to narrow nationalism. Instead, bold action with an EU-wide stimulus and policies informed by a longer term vision of European solidarity is required.
There is a lesson in this for us all. That is to replenish our vision by going back to core ideas, sticking to them in a principled way and being innovative in our policy responses.
Part of this post is based on a a presentation given to a meeting of progressive groups, parties and individuals in the French Parliament on Friday March 16th entitled "The Renaissance of Europe". It was sponsored by four EU think-tanks: FEPF, Jean Jaures, Friedrich Ebert Stiftung and Italianieuropei. This event will be followed by seminars in Rome and Berlin in advance of the Italian and German elections.
Friday, 27 January 2012
(V) Curbing growing income inequality
Paul Sweeney: No public servant is worth more than £1,000 a year. So said De Valera in 1931 (He paid himself more - £1,500 in March 1932 - but this was a reduction of £1000 or 40%). No man is worth more than €200,000 so declared Brendan Howlin in 2011, as the Government tries to limit the pay of top public servants. Howlin’s move will a) help the public purse, b) help narrow a growing pay gap for the first time in decades, c), it should also have a major demonstration effect and d) its popularity may help in addressing the crisis in a radical way by actually changing the pay gap and thus improving social solidarity.
It has been seen that gross Irish incomes doubled over 20 years in the boom but are relatively stable now. For most at work, they are not falling and for some, in the export and other dynamic sectors, there are small wage rises of around two per cent. Yet Ireland is one of the more unequal societies in the developed world. Financial insecurity and precarious incomes are becoming more commonplace.
Yet it is in time of crisis that some of the most progressive moves have been made. Just after the war, Britain brought in the National Health Service, and Rab Butler, a conservative, radically reformed education in 1944, making secondary education free for all pupils. With vision and leadership, it is possible that this government could steer us out of this deep crisis in a way which makes Ireland the best place in the world in which to work, live and grow old.
It has been seen that the labour market is also becoming polarized between “cool jobs and crap jobs”. At the top, owners and top executives are paying themselves obscene and utterly undeserved sums, as shareholders are unable to govern them. They have rewritten the rules of corporate governance, of “shareholder capitalism”, in their favour and that is what makes government policy on top pay so important.
While we have had endless debate on “public sector reform”. there is no debate on private sector reform. The rot was in the boards of the private banks.
Even US corporate investor Carl Icahn is scathing of US corporate governance, saying “Many US companies are very poorly run and non-competitive because corporate governance in the US is, to a large extent, dysfunctional. Boards do not hold managements accountable, and corporate elections for the most part are travesties.” (Fortune 4 July,2011).
The fight back against reform of top pay has began with the utterances of Michael Somers, who called for the boss of the state-owned AIB to be paid more than half a million because, in his view, this paltry sum may not attract talent.
There is no shortage of talented executives who would gladly work for less than half a million. Further, it is clear that the more the bank executives were paid, the more reckless they became. They did not just destroy three big banks worth around €66bn, but also contributed to bankrupting this country. So any nonsense in favour of widening the pay gap should be dismissed.
The outrage in Ireland on executive pay and wealth accumulation will probably be temporary, as it has been in the UK and US, and even Germany. The ex-head of Germany’s Bundesbank, Axel Weber, was “rewarded” with SFr2m ($4.4m) ‘hello money’ when he became deputy chair at the UBS of Switzerland. It had been one of the first banks to fail in the financial meltdown. There is a long and growing list of “excessive rewards,” peer-endowed, by the supposed “masters of the universe” in the corporate world.
In my view, people should be paid a good salary to do their job. Bonuses should only be for exceptional performance. Most performance-related pay can be, and is, rigged by “peers”. Nobel economist Akerlof is highly skeptical of performance-related pay. It is just a way for those at the top to take more for themselves under the pretence of some kind of good performance. Unless these mega-rewards, which can so distort corporate performance, are stopped, the capitalist system will crash again.
Goldman Sachs (GS) has paid its employees $125bn during the past ten years, twice what it made in net profits. It is to pay them a further £8bn, or an average of £238,000 each. for 2011. That is a good illustration of how perverted the current capitalist system has become, and how far it has moved from its old risk-reward model.
The investors’ Lex column in the Financial Times, commenting on the GS results, said “The reality, however, is that banks also support a thick layer of second tier executives, as well as legions of pen-pushing, meeting-loving, middle- and back-office workers who are paid multiples of their worth and contribution, especially compared with other industries. And market dynamics matter. If the whole financial sector started paying less, the bargaining power would fall for even star employees.”
There is a wide debate about the capitalist system abroad, but little here. Here it is about “public sector reform”. Even the Financial Times is running a long series called “Capitalism in Crisis.”
Mr. Howlin has made a radical move on closing what was a growing gap in pay between those at the top of the public service and those below. What is now needed, to improve economic performance and its sustainability, is reform of private sector governance. The National Competiveness Council calls for such reform in governance in its Competitiveness Challenge, recently published.
Some of the reforms on governance which could be implemented to narrow the pay gap in the rest of the economy would include:
1. Cease all tax subsidies to companies who pay excessive amounts to high earners. For example, no pay of over, say, €200,000 can be offset against a company’s tax (the US has such a limit on offsetting high pay against corporate tax).
2. Curb excessive tax breaks for executive pensions.
3. Limit bonuses to between one-third and one half of salary, otherwise they cannot be offset against tax, and maybe also impose a tax surcharge on them.
4. Reform Irish company law to make it more transparent, by removing the option for all large companies to avoid disclosure by a) going unlimited or b) by merging Irish businesses into European consortia or c) any other means.
5. All public interest companies should have to disclose the full accounts of those individual subsidiaries which are deemed to be of interest to the public.
6. The Irish subsidiaries of European companies which are public interest companies should no longer be able to lump all their assets and sales into one big company.
7. Companies should no longer be allowed to operate in Ireland by profiting from activities here if they are registered in tax havens like Liechtenstein or the Bahamas, without also having an Irish registered base and disclosing all information in accordance with Irish law.
8. There should be a higher tax rate on very high incomes, when we recognise that there are many who “earn” over a million a year.
9. A systematic and vigorous pursuit of Irish tax exiles must begin, to ensure that they are tax compliant on residence
10. Reform company law on transparency of executive remuneration with tighter legislation for all large companies in Ireland. It should be similar to the SEC (the regulator) in the US, where there is a clear statement of annual remuneration for top executives. Thus there would be a single total figure for the year, with simple disclosure rules covering all top executive remuneration, including pensions, share options, chauffeured company cars, use of helicopters, aeroplanes and other benefits. This should apply to all senior positions in the public sector too and to published in the State Directory (which must be brought back and published electronically again - by Dept Public Expenditure and Reform).
11. Introduce a law to set broad parameters under which top executive pay is to be set by company boards in Ireland. This would include measurable objective criteria, including financial performance, employee welfare, consumer satisfaction, environmental protection, etc.
12. There must be the appointment of at least two or one- fifth of the board of real outsiders as non-executive directors of all major companies. These would be appointed by a government corporate appointments body and/or an investor grouping, and/or by a pension fund.
13. At least two worker representatives should be on every board. This is the rule in Germany and most Nordic countries. In the light of the excessive remuneration and poor performances of many of those at the top of the corporate world, stakeholder in companies need representation on the boards and who better than representatives of the company’s own employee? (e.g. Norwegian Airlines, the up and coming European low cost airline, has two employee reps on the seven person board.)
On the broader side,
1) we need to reform the private sector by change from the Anglo American model of company law which is purported to be dominated by the interests of shareholders. In reality shareholders are diffused and too often have little or no say in the governance of companies. The power is “captured by the top management”. That is what happened the banks. We are reforming bank regulation but not even discussing this core issue.
2) Trade unions must be facilitated – not blocked - by the state in building up as the progressive force they were in the past to shift the imbalance where power is tilted in favour of corporations / capital. .This can be done by changing the laws which have made it so much more difficult for workers to have the civil right to join trade unions. Monti 2, a forthcoming Directive on collective bargaining from the EU Commission, now in the grip of the right, will make is even more difficult for workers to have the civil right to join trade unions.
3) There is need for greater education on why progressive tax systems are a key to redistribution, fairness, sustainable economic demand and social progress.
4) Finally there is a need to return to Social Europe. It is being unwound by the current Commission, the Council of Ministers and Merkozy.
In conclusion, Brendan Howlin’s move to cap the remuneration of top public servants is an historic move, reversing what seemed to be an inexorably growing gap between the top and bottom. The collapse in all six Irish banks has meant there is less excessive pay in them, and the crisis has reined in the remuneration of developers and other business executives. But events in UK show that, as soon as they can, the current business elite cannot wait to get back to the remuneration trough.
There has been much talk and action on public sector reform. What is now required is reform of the private sector – of the corporate governance of private companies, of company law to radically reform their boardrooms and practices – whereby the wider stakeholders interest must become paramount. Such reform of the private sector could, if done effectively, bring an end to corporate greed, risk-taking and huge value destruction.
But private sector reform – the end of Irish Crony Capitalism - is not even on the government’s agenda.
It has been seen that gross Irish incomes doubled over 20 years in the boom but are relatively stable now. For most at work, they are not falling and for some, in the export and other dynamic sectors, there are small wage rises of around two per cent. Yet Ireland is one of the more unequal societies in the developed world. Financial insecurity and precarious incomes are becoming more commonplace.
Yet it is in time of crisis that some of the most progressive moves have been made. Just after the war, Britain brought in the National Health Service, and Rab Butler, a conservative, radically reformed education in 1944, making secondary education free for all pupils. With vision and leadership, it is possible that this government could steer us out of this deep crisis in a way which makes Ireland the best place in the world in which to work, live and grow old.
It has been seen that the labour market is also becoming polarized between “cool jobs and crap jobs”. At the top, owners and top executives are paying themselves obscene and utterly undeserved sums, as shareholders are unable to govern them. They have rewritten the rules of corporate governance, of “shareholder capitalism”, in their favour and that is what makes government policy on top pay so important.
While we have had endless debate on “public sector reform”. there is no debate on private sector reform. The rot was in the boards of the private banks.
Even US corporate investor Carl Icahn is scathing of US corporate governance, saying “Many US companies are very poorly run and non-competitive because corporate governance in the US is, to a large extent, dysfunctional. Boards do not hold managements accountable, and corporate elections for the most part are travesties.” (Fortune 4 July,2011).
The fight back against reform of top pay has began with the utterances of Michael Somers, who called for the boss of the state-owned AIB to be paid more than half a million because, in his view, this paltry sum may not attract talent.
There is no shortage of talented executives who would gladly work for less than half a million. Further, it is clear that the more the bank executives were paid, the more reckless they became. They did not just destroy three big banks worth around €66bn, but also contributed to bankrupting this country. So any nonsense in favour of widening the pay gap should be dismissed.
The outrage in Ireland on executive pay and wealth accumulation will probably be temporary, as it has been in the UK and US, and even Germany. The ex-head of Germany’s Bundesbank, Axel Weber, was “rewarded” with SFr2m ($4.4m) ‘hello money’ when he became deputy chair at the UBS of Switzerland. It had been one of the first banks to fail in the financial meltdown. There is a long and growing list of “excessive rewards,” peer-endowed, by the supposed “masters of the universe” in the corporate world.
In my view, people should be paid a good salary to do their job. Bonuses should only be for exceptional performance. Most performance-related pay can be, and is, rigged by “peers”. Nobel economist Akerlof is highly skeptical of performance-related pay. It is just a way for those at the top to take more for themselves under the pretence of some kind of good performance. Unless these mega-rewards, which can so distort corporate performance, are stopped, the capitalist system will crash again.
Goldman Sachs (GS) has paid its employees $125bn during the past ten years, twice what it made in net profits. It is to pay them a further £8bn, or an average of £238,000 each. for 2011. That is a good illustration of how perverted the current capitalist system has become, and how far it has moved from its old risk-reward model.
The investors’ Lex column in the Financial Times, commenting on the GS results, said “The reality, however, is that banks also support a thick layer of second tier executives, as well as legions of pen-pushing, meeting-loving, middle- and back-office workers who are paid multiples of their worth and contribution, especially compared with other industries. And market dynamics matter. If the whole financial sector started paying less, the bargaining power would fall for even star employees.”
There is a wide debate about the capitalist system abroad, but little here. Here it is about “public sector reform”. Even the Financial Times is running a long series called “Capitalism in Crisis.”
Mr. Howlin has made a radical move on closing what was a growing gap in pay between those at the top of the public service and those below. What is now needed, to improve economic performance and its sustainability, is reform of private sector governance. The National Competiveness Council calls for such reform in governance in its Competitiveness Challenge, recently published.
Some of the reforms on governance which could be implemented to narrow the pay gap in the rest of the economy would include:
1. Cease all tax subsidies to companies who pay excessive amounts to high earners. For example, no pay of over, say, €200,000 can be offset against a company’s tax (the US has such a limit on offsetting high pay against corporate tax).
2. Curb excessive tax breaks for executive pensions.
3. Limit bonuses to between one-third and one half of salary, otherwise they cannot be offset against tax, and maybe also impose a tax surcharge on them.
4. Reform Irish company law to make it more transparent, by removing the option for all large companies to avoid disclosure by a) going unlimited or b) by merging Irish businesses into European consortia or c) any other means.
5. All public interest companies should have to disclose the full accounts of those individual subsidiaries which are deemed to be of interest to the public.
6. The Irish subsidiaries of European companies which are public interest companies should no longer be able to lump all their assets and sales into one big company.
7. Companies should no longer be allowed to operate in Ireland by profiting from activities here if they are registered in tax havens like Liechtenstein or the Bahamas, without also having an Irish registered base and disclosing all information in accordance with Irish law.
8. There should be a higher tax rate on very high incomes, when we recognise that there are many who “earn” over a million a year.
9. A systematic and vigorous pursuit of Irish tax exiles must begin, to ensure that they are tax compliant on residence
10. Reform company law on transparency of executive remuneration with tighter legislation for all large companies in Ireland. It should be similar to the SEC (the regulator) in the US, where there is a clear statement of annual remuneration for top executives. Thus there would be a single total figure for the year, with simple disclosure rules covering all top executive remuneration, including pensions, share options, chauffeured company cars, use of helicopters, aeroplanes and other benefits. This should apply to all senior positions in the public sector too and to published in the State Directory (which must be brought back and published electronically again - by Dept Public Expenditure and Reform).
11. Introduce a law to set broad parameters under which top executive pay is to be set by company boards in Ireland. This would include measurable objective criteria, including financial performance, employee welfare, consumer satisfaction, environmental protection, etc.
12. There must be the appointment of at least two or one- fifth of the board of real outsiders as non-executive directors of all major companies. These would be appointed by a government corporate appointments body and/or an investor grouping, and/or by a pension fund.
13. At least two worker representatives should be on every board. This is the rule in Germany and most Nordic countries. In the light of the excessive remuneration and poor performances of many of those at the top of the corporate world, stakeholder in companies need representation on the boards and who better than representatives of the company’s own employee? (e.g. Norwegian Airlines, the up and coming European low cost airline, has two employee reps on the seven person board.)
On the broader side,
1) we need to reform the private sector by change from the Anglo American model of company law which is purported to be dominated by the interests of shareholders. In reality shareholders are diffused and too often have little or no say in the governance of companies. The power is “captured by the top management”. That is what happened the banks. We are reforming bank regulation but not even discussing this core issue.
2) Trade unions must be facilitated – not blocked - by the state in building up as the progressive force they were in the past to shift the imbalance where power is tilted in favour of corporations / capital. .This can be done by changing the laws which have made it so much more difficult for workers to have the civil right to join trade unions. Monti 2, a forthcoming Directive on collective bargaining from the EU Commission, now in the grip of the right, will make is even more difficult for workers to have the civil right to join trade unions.
3) There is need for greater education on why progressive tax systems are a key to redistribution, fairness, sustainable economic demand and social progress.
4) Finally there is a need to return to Social Europe. It is being unwound by the current Commission, the Council of Ministers and Merkozy.
In conclusion, Brendan Howlin’s move to cap the remuneration of top public servants is an historic move, reversing what seemed to be an inexorably growing gap between the top and bottom. The collapse in all six Irish banks has meant there is less excessive pay in them, and the crisis has reined in the remuneration of developers and other business executives. But events in UK show that, as soon as they can, the current business elite cannot wait to get back to the remuneration trough.
There has been much talk and action on public sector reform. What is now required is reform of the private sector – of the corporate governance of private companies, of company law to radically reform their boardrooms and practices – whereby the wider stakeholders interest must become paramount. Such reform of the private sector could, if done effectively, bring an end to corporate greed, risk-taking and huge value destruction.
But private sector reform – the end of Irish Crony Capitalism - is not even on the government’s agenda.
Thursday, 26 January 2012
(IV) The rise of the new aristocracy
Paul Sweeney: Mitt Romney’s pay of $42.5m – all unearned – in two years on which he paid an effective income tax rate of only 14.65 per cent summarises all I am saying in these five blogs on living standards. We have a new aristocracy, new barons and earls who live in splendour, whose children will live in untold luxury while most of us struggle. But unlike the barons of old who had contributed to crude welfare systems, many of these guys see it as their duty to contribute as little as possible to society. The post-war Social Contract is broken.
In the last post, it was seen that the middle is being squeezed. In this one we will have a look over the pay, or more accurately the remuneration, that some of the biggest and best of our great corporate leaders have paid themselves, and issues around why they get away with it.
It will be seen that even with the Crash of 2008, and the poor performance of many firms, they are a paying themselves far too much. And the shareholder value system which is supposed to govern them is clearly broken. The top executives run the top firms as personal fiefdoms – not to generate added value for shareholders, workers and communities, but mainly for themselves. The post war business model of “shareholder value” is broken too.
Indeed, in just five or seven years at the top of a major corporation, many top executives pay themselves staggering amounts. Such are the “rewards” extracted from the firms that they have become a new aristocracy, whereby, after a life of untold luxury, they can leave vast sums, often untaxed, to their descendants.
As the typical company board resembles a retirement home for the great and the good, usually male and from the same social background, with many cross-directorships (as shown so clearly for Ireland in Mapping the Golden Circle published by TASC in 2010). Boards are filled with retired businessmen, ousted politicians and, more recently, retired senior public servants from regulators or economic departments, all of whom are selected, by each other, on the basis of their unwillingness to challenge each other or the company’s executives.
In the UK there is a raging debate on executive pay and particularly on top bankers' pay. The UK public is incensed at the pay the bosses of the state owned banks are paying themselves.
RBS is 83 per cent state-owned and has been the target of the UK Chancellor's calls for restraint as the banks announce their bonus awards next month. Despite being under strong pressure to pay less to their bosses, and the fact that its share price fell by almost half in 2011 and that it has sacked thousands of employees – RBS’s board is going ahead with plans to pay big bonuses to its top executives. CEO Stephen Hester is getting the maximum pay-out of 6m shares for 2011 – worth about £1.5m on the closing price of a week ago. That is 25 per cent less than the £2.04m bonus he accepted last year. This is on top of his basic salary of £1.2 million.
John Hourican, head of its investment banking business, is about to receive a £5m share bonus that was awarded in 2009. The latest bonus round comes as RBS makes thousands more job cuts after deciding to close large parts of its investment banking business.
Bob Diamond, Barclays’ chief executive announced in line for a £10 million bonus, leading to renewed anger about the excessive rewards enjoyed by bankers. Barclays shed 3,000 jobs across the group last year.
Mr Diamond, once described by Lord Mandelson as ‘the unacceptable face of banking’, is “entitled” to a bonus in shares of up to seven and a half times his £1.35million salary.
Diamond introduced what he calls 'the no-jerk rule' and has encouraged at least 40 executives at his firm to find jobs elsewhere. The American-born chief executive of Barclays said he does not care how good people are at what they do, if they are not suitable, they will be told to go. He said dozens of executives have been shown the door after behaving like jerks or spending lavish amounts of money.
The median income of FTSE 100 bosses has soared from 47 to 102 times employees’ median earnings since 2000. Similarly, senior executives’ pay has quadrupled since 2002, while the FTSE 100 index has stagnated and employee pay has gone up by a fraction of the amount.
FTSE 100 directors had a 49 per cent increase in their total earnings the last financial years. This gave them an average pay of £2.7 million each.
Top earners at some of the world’s biggest banks are still taking annual bonus equal to their salary according to a survey by the Financial Stability Board, a Basel-based committee of regulators. The use of bonuses is particularly pronounced in the US and the UK, where bonus payments account for between 80 and 96 per cent of the total pay awarded to US banks’ highest-paid employees, and between 78 and 93 per cent of the total pay awarded to UK banks’ highest-paid executives, according to the survey.
The world’s super rich are taking delivery of ever larger and more motor yachts this year with the biggest being “Topaz” a 147 metre yacht built in Germany for the Al Nahyan family of Abu Dhabi. These cost over $100m and can cost $1m a week to charter. Topaz will be the fourth in length with Roman Abramovich Eclipse a 164m being the largest. In spite of the recession, more of these super yachts were sold last year than in 2010.
Let’s have a quick look at some of the remuneration packages which the executives of top companies are “earning”. And remember, there are then of thousand of staggeringly wealthy people, who like Mitt Romney have such vast wealth that it is generating incomes of tens of millions a year, without having to work. And most pay little tax, under the regimes which have become acceptable in even “social” Europe. Such is the level of acceptance of low taxes for rich people that some regular folks even are heard to “praise” Michael O’ Leary for paying his income tax here. But if his wealth is €600 million and it generates 5 per cent a year, that’s another €30m. What is the rate of tax he pays on this?
The highest paid UK executives in 2010/11 were Mick Davis of Xstrata who paid himself £18.4m, followed closely behind by Bert Becht of Reckett Benckiser at $17.9m. Next was Michael Spencer of ICAP at $13.4m and our own Sir Terry Leahy of Tesco at a mere €12m. Tesco refuse to publish separate accounts for their Irish operations in case we see how well they are doing here (with Government approval). Close behind was Tom Albanese of Rio Tinto at $11.6m.
This week the UK government watered down its plans to tackle executive pay. It is now only seeking to get shareholders to change company policy with a binding vote on remuneration. It eschewed direct regulation and the mild reforms were welcomed by the likes of PWC, the CBI employers’ group, and the Institute of Directors. Mr Cable, the Business Secretary, was under pressure from Downing Street, and withdrew the proposal that most worried companies’ bosses – putting an employee representative on the remuneration committee. He also backed off the reform to require companies to publish a standardised ratio between executive pay and employee earnings, which would have been more transparent. A single pay figure for total pay of each director is to be published, which is one small step forward. Cable is still unsure about barring executives from one company from sitting on the remuneration committee of another.
The British Labour Party recently promised a new regime of transparency and the publication of a league table of companies that have the biggest pay gaps between bosses and shopfloor staff and to have employee reps on the remuneration committees.
Francisco Luzón, a senior director of Santander, the eurozone’s biggest bank by market capitalisation, is retiring with a pension pot of €56m. He ran the Americas division for 15 years as an executive director. Santander remained profitable throughout the western world’s economic and financial crisis thanks in part to its lucrative operations in Brazil and elsewhere in Latin America.
The annual salary of Lloyd Blankfein, Goldman’s chief executive, more than tripled in January, from $600,000 to $2m. Bankers at other groups have had their fixed pay increased by between 30 and 100 per cent, depending on their seniority, according to headhunters.
A few years ago the head of Porsche Wendelin Wiedenkin was Europe’s highest paid businessman with €67m in 2007. There was outrage in Germany as CEOs who had “earned” 14 times average employees salaries ten years earlier, were by then pulling 44 times the average.
In an unusual move, shareholders at Cairn Energy’s blocked plans to award its chairman an extra £2.5m share incentive this week.
Moving to Ireland, just a few years ago, here was the pay of the Anglo Irish Bank Bosses in 2007.
Sure was not every cent of the 8.4 million paid to these guys warranted? Look at the value they added to the banks and to Ireland. But did not the Irish taxpayer pay just one of the debts run up by these immensely rewarded men on 25th January for a staggering €1.3bn.
Here was the pay of some top executives back in 2006
The above pay of Irish bosses is from “Narrowing the Pay Gap”, published by Irish Congress of Trade Unions back in early 2998. When it was published, few were interested in high pay, as the Crash, well underway, was hardly noticeable. Today, we have an inordinate focus on what our money as consumers or taxpayers is paying our betters/servants.
Andrew Smithers, an interesting UK financial commentator, of Smithers and Co, quoted in the FT on 6th January 2012, has suggested that “the whole corporate culture in the boardroom has changed with the rise of the bonus culture and share options for business executives. They have not responded by cutting prices and competing like fury, they’ve responded by cutting staff.” The average chief executive of an S&P500 company is only in the job for five or six years and their pay is often closely linked to the share price of their corporation or to its returns on equity.
That creates strong incentives to keep profits high in the short term, and Mr Smithers suggests that “these incentives changed the way in which management has acted in the recession. Instead of hoarding labour and cutting prices to increase market share, companies are sacking workers, holding prices and choosing to buy back their own equity rather than make new investments.”
In the next and final post on living standards, we will see what can be done to reform the scandal of the rise of this new aristocracy at the top of companies in our democratic societies. One which has distorted the management of these companies, often into losing billions, leading to many job losses and which contributed so much to the financial crisis.
In the last post, it was seen that the middle is being squeezed. In this one we will have a look over the pay, or more accurately the remuneration, that some of the biggest and best of our great corporate leaders have paid themselves, and issues around why they get away with it.
It will be seen that even with the Crash of 2008, and the poor performance of many firms, they are a paying themselves far too much. And the shareholder value system which is supposed to govern them is clearly broken. The top executives run the top firms as personal fiefdoms – not to generate added value for shareholders, workers and communities, but mainly for themselves. The post war business model of “shareholder value” is broken too.
Indeed, in just five or seven years at the top of a major corporation, many top executives pay themselves staggering amounts. Such are the “rewards” extracted from the firms that they have become a new aristocracy, whereby, after a life of untold luxury, they can leave vast sums, often untaxed, to their descendants.
As the typical company board resembles a retirement home for the great and the good, usually male and from the same social background, with many cross-directorships (as shown so clearly for Ireland in Mapping the Golden Circle published by TASC in 2010). Boards are filled with retired businessmen, ousted politicians and, more recently, retired senior public servants from regulators or economic departments, all of whom are selected, by each other, on the basis of their unwillingness to challenge each other or the company’s executives.
In the UK there is a raging debate on executive pay and particularly on top bankers' pay. The UK public is incensed at the pay the bosses of the state owned banks are paying themselves.
RBS is 83 per cent state-owned and has been the target of the UK Chancellor's calls for restraint as the banks announce their bonus awards next month. Despite being under strong pressure to pay less to their bosses, and the fact that its share price fell by almost half in 2011 and that it has sacked thousands of employees – RBS’s board is going ahead with plans to pay big bonuses to its top executives. CEO Stephen Hester is getting the maximum pay-out of 6m shares for 2011 – worth about £1.5m on the closing price of a week ago. That is 25 per cent less than the £2.04m bonus he accepted last year. This is on top of his basic salary of £1.2 million.
John Hourican, head of its investment banking business, is about to receive a £5m share bonus that was awarded in 2009. The latest bonus round comes as RBS makes thousands more job cuts after deciding to close large parts of its investment banking business.
Bob Diamond, Barclays’ chief executive announced in line for a £10 million bonus, leading to renewed anger about the excessive rewards enjoyed by bankers. Barclays shed 3,000 jobs across the group last year.
Mr Diamond, once described by Lord Mandelson as ‘the unacceptable face of banking’, is “entitled” to a bonus in shares of up to seven and a half times his £1.35million salary.
Diamond introduced what he calls 'the no-jerk rule' and has encouraged at least 40 executives at his firm to find jobs elsewhere. The American-born chief executive of Barclays said he does not care how good people are at what they do, if they are not suitable, they will be told to go. He said dozens of executives have been shown the door after behaving like jerks or spending lavish amounts of money.
The median income of FTSE 100 bosses has soared from 47 to 102 times employees’ median earnings since 2000. Similarly, senior executives’ pay has quadrupled since 2002, while the FTSE 100 index has stagnated and employee pay has gone up by a fraction of the amount.
FTSE 100 directors had a 49 per cent increase in their total earnings the last financial years. This gave them an average pay of £2.7 million each.
Top earners at some of the world’s biggest banks are still taking annual bonus equal to their salary according to a survey by the Financial Stability Board, a Basel-based committee of regulators. The use of bonuses is particularly pronounced in the US and the UK, where bonus payments account for between 80 and 96 per cent of the total pay awarded to US banks’ highest-paid employees, and between 78 and 93 per cent of the total pay awarded to UK banks’ highest-paid executives, according to the survey.
The world’s super rich are taking delivery of ever larger and more motor yachts this year with the biggest being “Topaz” a 147 metre yacht built in Germany for the Al Nahyan family of Abu Dhabi. These cost over $100m and can cost $1m a week to charter. Topaz will be the fourth in length with Roman Abramovich Eclipse a 164m being the largest. In spite of the recession, more of these super yachts were sold last year than in 2010.
Let’s have a quick look at some of the remuneration packages which the executives of top companies are “earning”. And remember, there are then of thousand of staggeringly wealthy people, who like Mitt Romney have such vast wealth that it is generating incomes of tens of millions a year, without having to work. And most pay little tax, under the regimes which have become acceptable in even “social” Europe. Such is the level of acceptance of low taxes for rich people that some regular folks even are heard to “praise” Michael O’ Leary for paying his income tax here. But if his wealth is €600 million and it generates 5 per cent a year, that’s another €30m. What is the rate of tax he pays on this?
The highest paid UK executives in 2010/11 were Mick Davis of Xstrata who paid himself £18.4m, followed closely behind by Bert Becht of Reckett Benckiser at $17.9m. Next was Michael Spencer of ICAP at $13.4m and our own Sir Terry Leahy of Tesco at a mere €12m. Tesco refuse to publish separate accounts for their Irish operations in case we see how well they are doing here (with Government approval). Close behind was Tom Albanese of Rio Tinto at $11.6m.
This week the UK government watered down its plans to tackle executive pay. It is now only seeking to get shareholders to change company policy with a binding vote on remuneration. It eschewed direct regulation and the mild reforms were welcomed by the likes of PWC, the CBI employers’ group, and the Institute of Directors. Mr Cable, the Business Secretary, was under pressure from Downing Street, and withdrew the proposal that most worried companies’ bosses – putting an employee representative on the remuneration committee. He also backed off the reform to require companies to publish a standardised ratio between executive pay and employee earnings, which would have been more transparent. A single pay figure for total pay of each director is to be published, which is one small step forward. Cable is still unsure about barring executives from one company from sitting on the remuneration committee of another.
The British Labour Party recently promised a new regime of transparency and the publication of a league table of companies that have the biggest pay gaps between bosses and shopfloor staff and to have employee reps on the remuneration committees.
Francisco Luzón, a senior director of Santander, the eurozone’s biggest bank by market capitalisation, is retiring with a pension pot of €56m. He ran the Americas division for 15 years as an executive director. Santander remained profitable throughout the western world’s economic and financial crisis thanks in part to its lucrative operations in Brazil and elsewhere in Latin America.
The annual salary of Lloyd Blankfein, Goldman’s chief executive, more than tripled in January, from $600,000 to $2m. Bankers at other groups have had their fixed pay increased by between 30 and 100 per cent, depending on their seniority, according to headhunters.
A few years ago the head of Porsche Wendelin Wiedenkin was Europe’s highest paid businessman with €67m in 2007. There was outrage in Germany as CEOs who had “earned” 14 times average employees salaries ten years earlier, were by then pulling 44 times the average.
In an unusual move, shareholders at Cairn Energy’s blocked plans to award its chairman an extra £2.5m share incentive this week.
Moving to Ireland, just a few years ago, here was the pay of the Anglo Irish Bank Bosses in 2007.
Sure was not every cent of the 8.4 million paid to these guys warranted? Look at the value they added to the banks and to Ireland. But did not the Irish taxpayer pay just one of the debts run up by these immensely rewarded men on 25th January for a staggering €1.3bn.
Here was the pay of some top executives back in 2006
The above pay of Irish bosses is from “Narrowing the Pay Gap”, published by Irish Congress of Trade Unions back in early 2998. When it was published, few were interested in high pay, as the Crash, well underway, was hardly noticeable. Today, we have an inordinate focus on what our money as consumers or taxpayers is paying our betters/servants.
Andrew Smithers, an interesting UK financial commentator, of Smithers and Co, quoted in the FT on 6th January 2012, has suggested that “the whole corporate culture in the boardroom has changed with the rise of the bonus culture and share options for business executives. They have not responded by cutting prices and competing like fury, they’ve responded by cutting staff.” The average chief executive of an S&P500 company is only in the job for five or six years and their pay is often closely linked to the share price of their corporation or to its returns on equity.
That creates strong incentives to keep profits high in the short term, and Mr Smithers suggests that “these incentives changed the way in which management has acted in the recession. Instead of hoarding labour and cutting prices to increase market share, companies are sacking workers, holding prices and choosing to buy back their own equity rather than make new investments.”
In the next and final post on living standards, we will see what can be done to reform the scandal of the rise of this new aristocracy at the top of companies in our democratic societies. One which has distorted the management of these companies, often into losing billions, leading to many job losses and which contributed so much to the financial crisis.
Wednesday, 25 January 2012
(III) The squeezed middle
Paul Sweeney: There has been much discussion on what is called the Squeezed Middle. This refers to those middle class families who are seeing declines in their incomes and in additional benefits, like free college fees in the UK or reduced health care. It is a real issue. There is a strong case for what are called middle class people to join with the working class for a rebalancing in society through a downward adjustment in the incomes and wealth of those who are taking too much – those at the top.
This would not just be a redistribution on grounds of equity: a more equitable society also generates more demand and investment in the economy.
As will be seen in other posts in this series, the decline in incomes was hidden or masked by the credit boom when the chattering classes could only talk about the rise in the value of their homes. They believed that they were substantially better off and took longer or more expensive holidays, bought cars they really could not afford, and ate out more.
With the credit boom well and truly over, the middle classes everywhere are now feeling the squeeze. Politicians are raising taxes to pay for big holes in public finances and cutting public services, many of which the middle class also enjoy. It is hurting nowhere more than here in Ireland, as our collapse is the biggest and worst, exacerbated by the gravely erroneous decision to repay all private bank debts, in full and with all interest.
It has been seen that there are harsh lessons from the USA where median incomes have not risen since the early 1970s in real terms. This means that most Americans have not seen any improvement in their living standards for about 40 odd years. Many had the illusion of improvement when they took equity out of their homes during the housing bubble. In contrast, here in Ireland we have seen a great rise in real incomes in the 20 years up to the Crash of 2008.
As there has been substantial growth in the US and also in productivity in the period, where is the rise in national income per head going? As the Occupy Movement correctly reminds us, it is going to the very top. It is the top 1 per cent in the US who are pocketing all the money earned by the majority. Back 40 years ago, this elite pocketed 8 per cent of national income, but now they take almost one fifth of all income in the US.
While there are varying statistics on the infamous top 1 %, I have not seen any reasonable analysis which does not broadly concur that they have been reaping most of the rewards of growth in the US.
In the US the cost of healthcare and of college education has soared. In the States one can go to university in one’s own state for modest fees, but as the public universities are strapped for cash, with the cutbacks in public funding – because of the tax cuts over the decades, they are raising fees. And private colleges charge fees of $30-40,000 and more a year. 75% of Americans now think college is too expensive, according to Pew Research. And when you graduate, all is not rosy. Many graduates have huge debts to repay. Also while college graduates typically earned €20,000 a year more than non graduates in the US, this is changing. Average starting salaries for college graduates in the US have been falling in the past four years.
Owning your own home, and latterly getting a college education, was part of the American Dream. Now both are not repaying in the way that hard working American families expected. They feel very let down by the system.
There are similar trends in many other countries of the Western world, where education is not the social escalator it once was. European states are cutting public services and that includes education and health. Both are labour intensive and expensive. Health inflation has been far higher than average inflation for years. People want better public services but do not want to pay for them. Our government, certainly the FG wing, promises no rise in income tax. The government programme laid out to 2015 for the Troika shows a reduction in public spending from 45 per cent in 2011 to just 38 per cent in 2014 (assuming growth at 4 per cent!).
And we are to repay the bondholders in full, which may knock perhaps up to two per cent off GDP for decades? Meaning less for schools, roads, hospitals and other public services, which are not just used by the working class.
A further insecurity for the middle class, which we have seen very clearly in Ireland, is the reneging on the promises made for employees on retirement. In many middle class jobs, you could expect to retire at 60 or 65 with a good pension of half your final salary - or in some cases even two thirds. And it was linked to rises in salaries (which generally rise faster than inflation) back in the office. The wholesale move by employers, including some of the very best employers and richest firms, to get rid of defined benefit pensions has hit the middle class very hard. Many younger people have not realised how much this action will cost them. And pension adjustments include working longer, though we are all living much longer. But that is cutting off job opportunities for graduates and other young people at the entry scales.
Many of the pension changes represent a unilateral change to a key element of the social contract which people in Western societies had come to expect. Of course, such pensions were based on financial markets. They had been moved from solid investments to more speculative investments by fund managers, and so the schemes got severely burnt. People are also living longer than the actuaries had calculated. For some years, these pension funds performed so well that few considered the possible alternative of paying more for an enhanced and safer state pension. That must be an alternative now.
Of course, if the middle class are being squeezed, spare a thought for the working class. In the US and Europe the mass departure of well-paid manufacturing jobs to Asia has hit this class hard. In Ireland the huge collapse of construction has hit manual and skilled workers (and professionals and others) brutally too. Ireland still has a fair proportion of manufacturing jobs, but many are taken by the middle class. But the manufacturing sector is not as safe as it used to be. Weekly we see the threats from mobile capital to shift abroad unless our government does this or that. The alternative service sector jobs are not as well paid, though here in Ireland, where service exports now almost equal good exports, service jobs can be very good.
But it could be worse. The West has built up a good safety net in social security, healthcare and education for its citizens which has helped. Middle classes also benefit hugely from public spending in these areas. This safety net has also acted as an “automatic stabiliser” in this major recession, boosting demand to a level it would not have reached in it its absence. It is important that the welfare state is preserved and maintained even with the stark challenges which face us here in Ireland and elsewhere.
While the growth in the incomes and wealth of the top 1 per cent has soared to levels which have brought the divide back to around the level of the 1920s in the US, and perhaps also in the UK and some other states, it is unlikely to go back to the level of Victorian times. This is because of the safety net which protects both those at the bottom and many in the middle. What is most interesting is that, with several decades of growing pressure on the Squeezed Middle in the US, as it is they who represent most voters, they have not found a way to rebuild the American Dream. Indeed, astute observes would argue that the Squeezed Middle in the US seems hell-bent on increased, python-like squeezing of itself.
Is this what awaits us in Europe? The current leadership in Europe, while incapable of real leadership and decisiveness on dealing with the Euro and the broader European economic crisis, is very cunningly dismantling Social Europe. Three currently proposed Commission “reforms” will make things a lot worse for the vast majority of EU citizens. First, Monti 2 will curb trade unions greatly in collective bargaining; the Euro Plus Pact will institutionalise the shift in national income from labour to capital under a lot of verbiage about “competiveness” and thirdly, the pre-Keynesian straight jacket which it is designing for “balanced Budgets” will greatly hamper any actions that progressive governments can take in times of crisis.
In conclusion, trends generated by globalisation, technology and de-regulation have rapidly transformed western economies, brought much progress, but also much change which is uncomfortable for many, including the middle classes. Cuts in public spending by governments, which have had to bail out private banks, and the loss of revenue through the general collapse, have engendered greater insecurity. The shifts in jobs to lower cost areas and enabling technology which allows former higher quality jobs to be outsourced abroad is hitting middle class security. Whether the “coping classes”, who are the voting classes, will seek an effective re-alignment in politics to give greater protection from rapid change and recognise the value of taxation, remains to be seen.
In the next post I will look at the great improvements in living standards enjoyed by the new aristocracy, the great “entrepreneurs” - i.e., top executives of top firms.
This would not just be a redistribution on grounds of equity: a more equitable society also generates more demand and investment in the economy.
As will be seen in other posts in this series, the decline in incomes was hidden or masked by the credit boom when the chattering classes could only talk about the rise in the value of their homes. They believed that they were substantially better off and took longer or more expensive holidays, bought cars they really could not afford, and ate out more.
With the credit boom well and truly over, the middle classes everywhere are now feeling the squeeze. Politicians are raising taxes to pay for big holes in public finances and cutting public services, many of which the middle class also enjoy. It is hurting nowhere more than here in Ireland, as our collapse is the biggest and worst, exacerbated by the gravely erroneous decision to repay all private bank debts, in full and with all interest.
It has been seen that there are harsh lessons from the USA where median incomes have not risen since the early 1970s in real terms. This means that most Americans have not seen any improvement in their living standards for about 40 odd years. Many had the illusion of improvement when they took equity out of their homes during the housing bubble. In contrast, here in Ireland we have seen a great rise in real incomes in the 20 years up to the Crash of 2008.
As there has been substantial growth in the US and also in productivity in the period, where is the rise in national income per head going? As the Occupy Movement correctly reminds us, it is going to the very top. It is the top 1 per cent in the US who are pocketing all the money earned by the majority. Back 40 years ago, this elite pocketed 8 per cent of national income, but now they take almost one fifth of all income in the US.
While there are varying statistics on the infamous top 1 %, I have not seen any reasonable analysis which does not broadly concur that they have been reaping most of the rewards of growth in the US.
In the US the cost of healthcare and of college education has soared. In the States one can go to university in one’s own state for modest fees, but as the public universities are strapped for cash, with the cutbacks in public funding – because of the tax cuts over the decades, they are raising fees. And private colleges charge fees of $30-40,000 and more a year. 75% of Americans now think college is too expensive, according to Pew Research. And when you graduate, all is not rosy. Many graduates have huge debts to repay. Also while college graduates typically earned €20,000 a year more than non graduates in the US, this is changing. Average starting salaries for college graduates in the US have been falling in the past four years.
Owning your own home, and latterly getting a college education, was part of the American Dream. Now both are not repaying in the way that hard working American families expected. They feel very let down by the system.
There are similar trends in many other countries of the Western world, where education is not the social escalator it once was. European states are cutting public services and that includes education and health. Both are labour intensive and expensive. Health inflation has been far higher than average inflation for years. People want better public services but do not want to pay for them. Our government, certainly the FG wing, promises no rise in income tax. The government programme laid out to 2015 for the Troika shows a reduction in public spending from 45 per cent in 2011 to just 38 per cent in 2014 (assuming growth at 4 per cent!).
And we are to repay the bondholders in full, which may knock perhaps up to two per cent off GDP for decades? Meaning less for schools, roads, hospitals and other public services, which are not just used by the working class.
A further insecurity for the middle class, which we have seen very clearly in Ireland, is the reneging on the promises made for employees on retirement. In many middle class jobs, you could expect to retire at 60 or 65 with a good pension of half your final salary - or in some cases even two thirds. And it was linked to rises in salaries (which generally rise faster than inflation) back in the office. The wholesale move by employers, including some of the very best employers and richest firms, to get rid of defined benefit pensions has hit the middle class very hard. Many younger people have not realised how much this action will cost them. And pension adjustments include working longer, though we are all living much longer. But that is cutting off job opportunities for graduates and other young people at the entry scales.
Many of the pension changes represent a unilateral change to a key element of the social contract which people in Western societies had come to expect. Of course, such pensions were based on financial markets. They had been moved from solid investments to more speculative investments by fund managers, and so the schemes got severely burnt. People are also living longer than the actuaries had calculated. For some years, these pension funds performed so well that few considered the possible alternative of paying more for an enhanced and safer state pension. That must be an alternative now.
Of course, if the middle class are being squeezed, spare a thought for the working class. In the US and Europe the mass departure of well-paid manufacturing jobs to Asia has hit this class hard. In Ireland the huge collapse of construction has hit manual and skilled workers (and professionals and others) brutally too. Ireland still has a fair proportion of manufacturing jobs, but many are taken by the middle class. But the manufacturing sector is not as safe as it used to be. Weekly we see the threats from mobile capital to shift abroad unless our government does this or that. The alternative service sector jobs are not as well paid, though here in Ireland, where service exports now almost equal good exports, service jobs can be very good.
But it could be worse. The West has built up a good safety net in social security, healthcare and education for its citizens which has helped. Middle classes also benefit hugely from public spending in these areas. This safety net has also acted as an “automatic stabiliser” in this major recession, boosting demand to a level it would not have reached in it its absence. It is important that the welfare state is preserved and maintained even with the stark challenges which face us here in Ireland and elsewhere.
While the growth in the incomes and wealth of the top 1 per cent has soared to levels which have brought the divide back to around the level of the 1920s in the US, and perhaps also in the UK and some other states, it is unlikely to go back to the level of Victorian times. This is because of the safety net which protects both those at the bottom and many in the middle. What is most interesting is that, with several decades of growing pressure on the Squeezed Middle in the US, as it is they who represent most voters, they have not found a way to rebuild the American Dream. Indeed, astute observes would argue that the Squeezed Middle in the US seems hell-bent on increased, python-like squeezing of itself.
Is this what awaits us in Europe? The current leadership in Europe, while incapable of real leadership and decisiveness on dealing with the Euro and the broader European economic crisis, is very cunningly dismantling Social Europe. Three currently proposed Commission “reforms” will make things a lot worse for the vast majority of EU citizens. First, Monti 2 will curb trade unions greatly in collective bargaining; the Euro Plus Pact will institutionalise the shift in national income from labour to capital under a lot of verbiage about “competiveness” and thirdly, the pre-Keynesian straight jacket which it is designing for “balanced Budgets” will greatly hamper any actions that progressive governments can take in times of crisis.
In conclusion, trends generated by globalisation, technology and de-regulation have rapidly transformed western economies, brought much progress, but also much change which is uncomfortable for many, including the middle classes. Cuts in public spending by governments, which have had to bail out private banks, and the loss of revenue through the general collapse, have engendered greater insecurity. The shifts in jobs to lower cost areas and enabling technology which allows former higher quality jobs to be outsourced abroad is hitting middle class security. Whether the “coping classes”, who are the voting classes, will seek an effective re-alignment in politics to give greater protection from rapid change and recognise the value of taxation, remains to be seen.
In the next post I will look at the great improvements in living standards enjoyed by the new aristocracy, the great “entrepreneurs” - i.e., top executives of top firms.
Tuesday, 24 January 2012
(II) The first generation to face lower living standards
Paul Sweeney: Ireland’s younger generations may be the first since the Post War period not to have higher incomes than those of their parents. The combined impact of globalisation, liberalisation, and the technological and communications revolution on the labour market are squeezing the working and middle classes as never before.
The young will see no further rises in real incomes unless there are fundamental changes in society. Trends in income distribution and labour markets indicate that they will not have their parents’ lifestyle, security, nor expect to age comfortably.
Young people in the US and in parts of Europe already have lower living standards than those of their parents. It is not only that well paid manufacturing jobs have shifted to Asia, but many middle class jobs are being broken down into segments by technology and are shifting east too. Hundreds of millions are joining the middle classes in Asia, Russia and South America and competing for jobs. Many of the jobs will be servicing consumers in the West from there.
There has been a major shift in incomes to the very top earners, with labour’s share of national income in decline for decades in most advanced countries. The graph below shows how progressive income distribution has been rolled back in the US to levels last seen in the 1920s.
Source: Economist 21 Jan 2012
And those at the very top are reaping most of the benefits. And as they don’t spend all their money – because they have too much – aggregate demand is slowing. Nor do they invest it, as in the past. Many can pass it on, often undiminished and untaxed to their children.
The top 1% in the US had an average income of $1.8m in 2008 and in net worth the top 1% started at $6.9m in 2009 per the Federal Reserve, which was down 23% on 2007. The 1% richest get half of their incomes from salaries, a quarter from self employment and business income and the other quarter from capital i.e. interest, dividends, capital gains and rent (Economist 21 Jan).
There is a hollowing out of the middle with a growth in “Cool Jobs and Crap Jobs”. Solid pensionable jobs like banking and computing, parts of accounting, engineering etc. are being de-skilled and outsourced. One upside to this is that, at present, Ireland is winning some of these jobs, with its growth in export services.
Median male earnings in the US have not risen since 1975, in spite of substantial economic growth and growth in productivity. Nor have average household disposable incomes in Japan and Germany grown in a decade. It is no wonder Germany is not consuming as workers had no extra pay (until recently). The OECD found rising income inequality in 17 of 22 advanced countries.
The share of National Income taken by the top 1 per cent in the US had declined between the 1930s Depression and 1970, but 58% of the increase in total incomes since then went to this tiny group.
Is this because we are evolving into a “winner takes all” version of capitalism? Globalisation and communications have meant that entertainment and sports stars have turned local markets into one big global market, generating vast earnings for themselves and their backers. As stars are much admired in the celebrity society, they lead in the defence of the growing inequity of global income and wealth distribution. They are so unique, entertain us so much they deserve every penny they get. That is the market!
CEOs and CFOs may also argue that they are exceptional and talented and must be paid vast sums, untaxed, otherwise they will emigrate. Yet there is a clear inverse relationship between super pay and poor corporate performance world-wide, especially in finance. For example, as the remuneration, especially bonuses and share options, of the top executives of AIB, BOI and Anglo soared, they took bigger and bigger risks – to boost their remuneration packages. They took the risks with shareholders’ funds and they lost, bigtime. Their boards, likeminded men (some token women) who are still running many organisations in Ireland, cheered them on.
Most executives are not outstanding. They have simply “captured executive position.” There are many others just below them to take their place. In Ireland, it was the best paid of our business elite in banking who destroyed enormous value in just a few years. They almost destroyed the country as well, because the government socialised the losses of our “private enterprise” model.
There are hard lessons to be learned from America. The American Dream of real rising incomes and home ownership is dead. The stagnation in incomes was masked for some time because the working and middle classes borrowed against their homes. Now the home ownership dream has turned into a nightmare for many with negative equity and big debts. It was also masked by a dramatic fall in the prices of many goods now imported from abroad.
It was further masked by the growth in dual-income families, where there had only been on earner in the past. Male, unionised and in well paid manufacturing, these American workers had previously seen themselves as firmly in the “middle class.” From 1970, even with two incomes and their homes in hock, many workers in manufacturing and service industries began to struggle. Then came the property and the bank collapses.
Globalisation, accelerated by technology, falling prices in transport, instant communications, and in turn, accentuated by liberalisation of borders and markets, especially labour markets, have facilitated such radical change in incomes.
The decline of trade unions and the paucity of vision and lack of ambition in progressive parties, which should be counterforces to such trends, also facilitated the stagnation of incomes of the majority, in spite of economic growth and growth in labour productivity.
There is also a view that corporations and the rich should not have to pay “too much tax” as it is a disincentive to investment. Yet people are demanding more and better public services, but have been increasingly unwilling to pay for them through taxation. In spite of the outstanding crisis in Ireland, our leaders are terrified to demand that very profitable corporations pay a little more in corporation tax. We cut public services, instead, while we pay the debts of other corporations from worker’s taxes.
It is noteworthy that the very public services which people want more of are health and education, which are labour intensive and more costly. There is a real dilemma here and few politicians lead on it. It also seems that where people are willing to pay taxation, they seem to prefer to pay regressive taxes like VAT instead of progressive taxes on incomes and capital.
On the basis of what has been happening in the USA for thirty years, the stagnation of wages, mitigated for a while by extracting income from homes through credit and dual incomes, we can expect great insecurity. There is likely to be stagnating incomes, increasingly precarious employment and uncertainty - unless there is a radical re-think of key issues like taxation, sound regulation, labour rights and the governance of companies worldwide.
It is not just the recent Crash, with the ensuing immense burden of debt which governments and bankers have hung around our necks, which is driving this pessimistic outlook for incomes and thus living standards. There are the major trends in labour markets, in regressive income distribution, in power relationships between corporations and workers, between capital and labour, between governments, regulators and international bodies. The latter bodies appear to have been “captured” by corporations and these forces are driving down incomes for working and middle class people. These trends have been greatly exacerbated by globalization and by technology.
Ireland’s catch-up with Europe during the real Celtic Tiger period boosted incomes and wealth for many, and modernised our economy, but it has also masked these major trends for us.
A great many have gained from the benefits of technology and globalization, in gadgets and in communications, in lifestyle changes and in lower prices. But the globalization and technology have also brought change and disruption at an unprecedented rate, creating great insecurity as political systems lag behind these changes.
It is now clear that the post-war Social Contract in Europe and the US is breaking down and breaking down fast. This is a major step change in our world.
This is not just an economic and financial crisis. It is an existential crisis for society. We must look at a less consuming and more sustainable economy, which, happily, modern technology allows us to build. We, as citizens, have to decide what kind of society we want to live in. It is increasingly precarious, insecure, unstable, with increasing divisions, but it does not have to be like that.
The next post in this series on living standards will examine the “Squeezed Middle” where the middle classes are increasingly insecure as society changes rapidly.
The young will see no further rises in real incomes unless there are fundamental changes in society. Trends in income distribution and labour markets indicate that they will not have their parents’ lifestyle, security, nor expect to age comfortably.
Young people in the US and in parts of Europe already have lower living standards than those of their parents. It is not only that well paid manufacturing jobs have shifted to Asia, but many middle class jobs are being broken down into segments by technology and are shifting east too. Hundreds of millions are joining the middle classes in Asia, Russia and South America and competing for jobs. Many of the jobs will be servicing consumers in the West from there.
There has been a major shift in incomes to the very top earners, with labour’s share of national income in decline for decades in most advanced countries. The graph below shows how progressive income distribution has been rolled back in the US to levels last seen in the 1920s.
Source: Economist 21 Jan 2012
And those at the very top are reaping most of the benefits. And as they don’t spend all their money – because they have too much – aggregate demand is slowing. Nor do they invest it, as in the past. Many can pass it on, often undiminished and untaxed to their children.
The top 1% in the US had an average income of $1.8m in 2008 and in net worth the top 1% started at $6.9m in 2009 per the Federal Reserve, which was down 23% on 2007. The 1% richest get half of their incomes from salaries, a quarter from self employment and business income and the other quarter from capital i.e. interest, dividends, capital gains and rent (Economist 21 Jan).
There is a hollowing out of the middle with a growth in “Cool Jobs and Crap Jobs”. Solid pensionable jobs like banking and computing, parts of accounting, engineering etc. are being de-skilled and outsourced. One upside to this is that, at present, Ireland is winning some of these jobs, with its growth in export services.
Median male earnings in the US have not risen since 1975, in spite of substantial economic growth and growth in productivity. Nor have average household disposable incomes in Japan and Germany grown in a decade. It is no wonder Germany is not consuming as workers had no extra pay (until recently). The OECD found rising income inequality in 17 of 22 advanced countries.
The share of National Income taken by the top 1 per cent in the US had declined between the 1930s Depression and 1970, but 58% of the increase in total incomes since then went to this tiny group.
Is this because we are evolving into a “winner takes all” version of capitalism? Globalisation and communications have meant that entertainment and sports stars have turned local markets into one big global market, generating vast earnings for themselves and their backers. As stars are much admired in the celebrity society, they lead in the defence of the growing inequity of global income and wealth distribution. They are so unique, entertain us so much they deserve every penny they get. That is the market!
CEOs and CFOs may also argue that they are exceptional and talented and must be paid vast sums, untaxed, otherwise they will emigrate. Yet there is a clear inverse relationship between super pay and poor corporate performance world-wide, especially in finance. For example, as the remuneration, especially bonuses and share options, of the top executives of AIB, BOI and Anglo soared, they took bigger and bigger risks – to boost their remuneration packages. They took the risks with shareholders’ funds and they lost, bigtime. Their boards, likeminded men (some token women) who are still running many organisations in Ireland, cheered them on.
Most executives are not outstanding. They have simply “captured executive position.” There are many others just below them to take their place. In Ireland, it was the best paid of our business elite in banking who destroyed enormous value in just a few years. They almost destroyed the country as well, because the government socialised the losses of our “private enterprise” model.
There are hard lessons to be learned from America. The American Dream of real rising incomes and home ownership is dead. The stagnation in incomes was masked for some time because the working and middle classes borrowed against their homes. Now the home ownership dream has turned into a nightmare for many with negative equity and big debts. It was also masked by a dramatic fall in the prices of many goods now imported from abroad.
It was further masked by the growth in dual-income families, where there had only been on earner in the past. Male, unionised and in well paid manufacturing, these American workers had previously seen themselves as firmly in the “middle class.” From 1970, even with two incomes and their homes in hock, many workers in manufacturing and service industries began to struggle. Then came the property and the bank collapses.
Globalisation, accelerated by technology, falling prices in transport, instant communications, and in turn, accentuated by liberalisation of borders and markets, especially labour markets, have facilitated such radical change in incomes.
The decline of trade unions and the paucity of vision and lack of ambition in progressive parties, which should be counterforces to such trends, also facilitated the stagnation of incomes of the majority, in spite of economic growth and growth in labour productivity.
There is also a view that corporations and the rich should not have to pay “too much tax” as it is a disincentive to investment. Yet people are demanding more and better public services, but have been increasingly unwilling to pay for them through taxation. In spite of the outstanding crisis in Ireland, our leaders are terrified to demand that very profitable corporations pay a little more in corporation tax. We cut public services, instead, while we pay the debts of other corporations from worker’s taxes.
It is noteworthy that the very public services which people want more of are health and education, which are labour intensive and more costly. There is a real dilemma here and few politicians lead on it. It also seems that where people are willing to pay taxation, they seem to prefer to pay regressive taxes like VAT instead of progressive taxes on incomes and capital.
On the basis of what has been happening in the USA for thirty years, the stagnation of wages, mitigated for a while by extracting income from homes through credit and dual incomes, we can expect great insecurity. There is likely to be stagnating incomes, increasingly precarious employment and uncertainty - unless there is a radical re-think of key issues like taxation, sound regulation, labour rights and the governance of companies worldwide.
It is not just the recent Crash, with the ensuing immense burden of debt which governments and bankers have hung around our necks, which is driving this pessimistic outlook for incomes and thus living standards. There are the major trends in labour markets, in regressive income distribution, in power relationships between corporations and workers, between capital and labour, between governments, regulators and international bodies. The latter bodies appear to have been “captured” by corporations and these forces are driving down incomes for working and middle class people. These trends have been greatly exacerbated by globalization and by technology.
Ireland’s catch-up with Europe during the real Celtic Tiger period boosted incomes and wealth for many, and modernised our economy, but it has also masked these major trends for us.
A great many have gained from the benefits of technology and globalization, in gadgets and in communications, in lifestyle changes and in lower prices. But the globalization and technology have also brought change and disruption at an unprecedented rate, creating great insecurity as political systems lag behind these changes.
It is now clear that the post-war Social Contract in Europe and the US is breaking down and breaking down fast. This is a major step change in our world.
This is not just an economic and financial crisis. It is an existential crisis for society. We must look at a less consuming and more sustainable economy, which, happily, modern technology allows us to build. We, as citizens, have to decide what kind of society we want to live in. It is increasingly precarious, insecure, unstable, with increasing divisions, but it does not have to be like that.
The next post in this series on living standards will examine the “Squeezed Middle” where the middle classes are increasingly insecure as society changes rapidly.
Monday, 23 January 2012
(I) What has happened to incomes since the crash?
Paul Sweeney: This is the first of five posts examining trends in living standards in the past, present and the likely future. As we explore the polarization of incomes between the top and bottom, it is apparent that the fat cats are getting fatter. The phenomenon of the “squeezed middle” will also be examined. We will find considerable evidence that that the middle classes are indeed being squeezed in the Western countries. It will be seen that the younger generations in Ireland today are the first since WW2 which may not see its living standards exceed those of their parents - unless there is change. Finally, some remedies will be examined which might reduce income polarisation and make society more secure, equal, stable and dynamic.
Part 1 What has happened to Incomes Since the Crash?
The previous government tried to reduce workers’ incomes to improve “competitiveness”. Because there could be no devaluation, as we are in a single currency area, the Eurozone, it tried an experiment in Internal Devaluation. Unlike a regular devaluation of a currency where virtually everyone, bar exporters, suffers somewhat equally, only employees would suffer under the Green Party/ Fianna Fail plan. Happily, it will be seen that this strategy failed.
Had it worked, the recession would be even worse. It would have sucked more demand out of the economy. It would also have been inequitable, transferring part of employees’ incomes to employers. And with demand down, most employers would not have re-invested the surplus.
Irish domestic demand has plummeted by 25 per cent in just four years, leading to many closures and job losses. Irish wages of the 1.5 million employees (of whom over one-fifth only work part time) totaled €68bn last year, down from a peak of €75.5bn in 2008. And it will be even less this year. Most of the decline was due to the fall in employment and in hours worked.
The biggest hit on living standards since the Crash of 2008 has been on the vast numbers – over 300,000 - who lost their jobs; followed by many who are discouraged workers and would like to work; and the many who are under-employed. The crisis has also engendered great insecurity.
Since the Crash of four years ago, the incomes of most remaining workers – well over one million employees - have not fallen, but have been stable. A key reason why there has not been more anger on the streets against the Austerity Programmes over the last three years is this fact - that the incomes of the vast majority workers who retained their jobs and that was most of them, have been reasonably stable since beginning of the Crash of 2008, and for some, incomes actually rose slightly in real terms.
This stability in incomes followed a massive rise in incomes during the previous two decades. Disposable incomes doubled in the 20 years of Irish Social Partnership from 1987.
The 20 year boom included a superb economic performance during the Celtic Tiger period which morphed into the bubble during the McCreevy/Cowan era. There were four phases, (each lasting seven years) of the Celtic Tiger Era. The first seven years was “Takeoff”, with social solidarity but “jobless growth” from 1987 to 1993.
Between 1994 to 2000 inclusive, Ireland’s economy performed extraordinarily well. This was the real “Celtic Tiger” phase of sustainable growth and progress.
The “False Boom” / “Bubble” period was the next seven years, 2001 to 2007. It was the ideology of ultra free-market economics which led to the Bust worldwide and especially in Ireland, where McCreevy implemented these ideas in an extreme fashion, with tax-shifting, direct tax cuts, deregulation, no regulation and privatisation.
We are now in the fourth phase which is “Bust and Recovery”. This may be another seven years period 2008 to 2014. However, if we - our government, employers, unions and all do not get it right and if the EU does not pull its act together, the Recovery part will take longer. Today, seven years looks too short. It now seems that Ireland is highly unlikely to recover to our 2007 levels of national income until around 2018-21.
Recovery certainly does not look as if it is happening, due a) to the inability of the EU to act, b) to the continuing worldwide recession and c) the severity of the Austerity programme at home.
Irish living standards doubled in the first three phases of the Tiger years, in less than 20 years. This was a remarkable improvement in living standards for average workers. This doubling of incomes was unique worldwide, particularly as it coincided with a doubling in employment too. It must be noted that incomes continued to rise during the Bubble period 2001 to 2007.
What has happened to incomes since the crash in 2008? The weekly incomes of all workers saw no change since the beginning of the Crash in Q1 2008 to Q3, 2011 (CSO). However, as there was deflation - prices fell in part of this period - most workers had a small real rise in incomes. Hourly earnings rose by a little more in the period, giving a real rise in the period of almost four years.
The figures vary if different categories of workers and different periods are taken, but overall, the average employee saw no fall in real incomes from the beginning of 2008 when the Crash began. For some workers, in the export and other dynamic sectors, there have been small wage rises of around 2 per cent.
This relative stability in real incomes since the Crash of 2008 is one factor contributing to the explanation of why there has been no rioting in Ireland. It has also been extremely important in ensuing that the terrible collapse in domestic demand – of one quarter in less than four years – was not worse. This is because averagely paid workers generally spend most of their incomes.
Labour market experts know that nominal wages and salaries are like a ratchet. They go up or stay still, but seldom fall. They only fall in very exceptional circumstances.
The real losers are those who have lost their jobs. A total of 352,000 lost employment between Q1, 2008 and Q3 2011. This includes many self-employed who have also lost their work, with many now substantially underemployed. Other big losers are all public servants who had their earnings reduced by an average of 14 per cent.
If we now move to the division of the national cake, National Income, we see that there has been a major shift in the share of the national cake, worldwide. This shift has been from labour to capital over the past two decades.
While Ireland has seen a partial reversal of this trend in the past few years, with a shift in some more national income back to employees, their share is still well below that in most countries. However, at 63 per cent in 2011, labour’s share of national income in Ireland is below that of Germany (68.3%), UK (71.3%), or even the US (64.3%).
Some Irish economists actually argue that shifting income from employees to employers will improve Irish “competitiveness”. They have argued for cutting wages in the hope that firms will then make more money which means they become more profitable, and then they may invest. But why would any firm invest when the biggest problem facing them is the huge fall in domestic demand?
Most importantly, this “wage competitiveness” argument ignores the real driver of increased incomes for all, which is productivity. Merely shifting national income from the 1.5 million employees in Ireland to employers, particularly when the employees’ share is low compared to most other countries, is both regressive and will not work.
Productivity is the key to continuing economic success, provided its rewards are shared equitably. After falls in productivity, it is rising rapidly having risen by a substantial 5 per cent last year, on top of rises in previous years. The fall in Irish unit labour costs has been around 15 per cent over the past four years compared to under 6 per cent in the Eurozone. The decline of low productivity sectors like construction and services (including the public) has contributed, as has the growth in the high sectors such as the foreign owned export sector. The lower wage rises here than in Europe in recent years have also contributed (to a lesser degree than the decline of low productivity sectors) to the improvement in unit labour costs. Thus unit labour costs here have fallen very substantially compared to competitors since 2008. But, where are the jobs?
While Irish wages have risen over the past twenty years, total labour costs are 12th in OECD, at $49,830 a year, well below Germany and Belgium at over $61,000 and UK at over $59,000. Irish productivity suffered during the boom, but has since recovered. It is amongst the highest in the world. Ireland’s public service was already small by international standards before the crash and the current reform should improve overall productivity.
However, it will be seen that there is the chilling prospect that the majority of Irish workers may not see any rise in their living standards or real incomes for a decade or more. Prolonged stagnation in earnings could also happen here. It has already begun. It has happened in the USA. The American Dream is dead. US workers have seen no real increase in earnings since 1975. The middle class was squeezed in many developed countries over the past decade and a half. Ireland was an exception to this trend. More recently, wages have stagnated in Germany for a decade till recently (one key reason for the lack of demand there).
In the next post, it will be seen that rises in Irish living standards may be ending, even after recovery. This is because of major external trends. Our young may be the first post-war generation not to achieve a higher standard of living than their parents.
Part 1 What has happened to Incomes Since the Crash?
The previous government tried to reduce workers’ incomes to improve “competitiveness”. Because there could be no devaluation, as we are in a single currency area, the Eurozone, it tried an experiment in Internal Devaluation. Unlike a regular devaluation of a currency where virtually everyone, bar exporters, suffers somewhat equally, only employees would suffer under the Green Party/ Fianna Fail plan. Happily, it will be seen that this strategy failed.
Had it worked, the recession would be even worse. It would have sucked more demand out of the economy. It would also have been inequitable, transferring part of employees’ incomes to employers. And with demand down, most employers would not have re-invested the surplus.
Irish domestic demand has plummeted by 25 per cent in just four years, leading to many closures and job losses. Irish wages of the 1.5 million employees (of whom over one-fifth only work part time) totaled €68bn last year, down from a peak of €75.5bn in 2008. And it will be even less this year. Most of the decline was due to the fall in employment and in hours worked.
The biggest hit on living standards since the Crash of 2008 has been on the vast numbers – over 300,000 - who lost their jobs; followed by many who are discouraged workers and would like to work; and the many who are under-employed. The crisis has also engendered great insecurity.
Since the Crash of four years ago, the incomes of most remaining workers – well over one million employees - have not fallen, but have been stable. A key reason why there has not been more anger on the streets against the Austerity Programmes over the last three years is this fact - that the incomes of the vast majority workers who retained their jobs and that was most of them, have been reasonably stable since beginning of the Crash of 2008, and for some, incomes actually rose slightly in real terms.
This stability in incomes followed a massive rise in incomes during the previous two decades. Disposable incomes doubled in the 20 years of Irish Social Partnership from 1987.
The 20 year boom included a superb economic performance during the Celtic Tiger period which morphed into the bubble during the McCreevy/Cowan era. There were four phases, (each lasting seven years) of the Celtic Tiger Era. The first seven years was “Takeoff”, with social solidarity but “jobless growth” from 1987 to 1993.
Between 1994 to 2000 inclusive, Ireland’s economy performed extraordinarily well. This was the real “Celtic Tiger” phase of sustainable growth and progress.
The “False Boom” / “Bubble” period was the next seven years, 2001 to 2007. It was the ideology of ultra free-market economics which led to the Bust worldwide and especially in Ireland, where McCreevy implemented these ideas in an extreme fashion, with tax-shifting, direct tax cuts, deregulation, no regulation and privatisation.
We are now in the fourth phase which is “Bust and Recovery”. This may be another seven years period 2008 to 2014. However, if we - our government, employers, unions and all do not get it right and if the EU does not pull its act together, the Recovery part will take longer. Today, seven years looks too short. It now seems that Ireland is highly unlikely to recover to our 2007 levels of national income until around 2018-21.
Recovery certainly does not look as if it is happening, due a) to the inability of the EU to act, b) to the continuing worldwide recession and c) the severity of the Austerity programme at home.
Irish living standards doubled in the first three phases of the Tiger years, in less than 20 years. This was a remarkable improvement in living standards for average workers. This doubling of incomes was unique worldwide, particularly as it coincided with a doubling in employment too. It must be noted that incomes continued to rise during the Bubble period 2001 to 2007.
What has happened to incomes since the crash in 2008? The weekly incomes of all workers saw no change since the beginning of the Crash in Q1 2008 to Q3, 2011 (CSO). However, as there was deflation - prices fell in part of this period - most workers had a small real rise in incomes. Hourly earnings rose by a little more in the period, giving a real rise in the period of almost four years.
The figures vary if different categories of workers and different periods are taken, but overall, the average employee saw no fall in real incomes from the beginning of 2008 when the Crash began. For some workers, in the export and other dynamic sectors, there have been small wage rises of around 2 per cent.
This relative stability in real incomes since the Crash of 2008 is one factor contributing to the explanation of why there has been no rioting in Ireland. It has also been extremely important in ensuing that the terrible collapse in domestic demand – of one quarter in less than four years – was not worse. This is because averagely paid workers generally spend most of their incomes.
Labour market experts know that nominal wages and salaries are like a ratchet. They go up or stay still, but seldom fall. They only fall in very exceptional circumstances.
The real losers are those who have lost their jobs. A total of 352,000 lost employment between Q1, 2008 and Q3 2011. This includes many self-employed who have also lost their work, with many now substantially underemployed. Other big losers are all public servants who had their earnings reduced by an average of 14 per cent.
If we now move to the division of the national cake, National Income, we see that there has been a major shift in the share of the national cake, worldwide. This shift has been from labour to capital over the past two decades.
While Ireland has seen a partial reversal of this trend in the past few years, with a shift in some more national income back to employees, their share is still well below that in most countries. However, at 63 per cent in 2011, labour’s share of national income in Ireland is below that of Germany (68.3%), UK (71.3%), or even the US (64.3%).
Some Irish economists actually argue that shifting income from employees to employers will improve Irish “competitiveness”. They have argued for cutting wages in the hope that firms will then make more money which means they become more profitable, and then they may invest. But why would any firm invest when the biggest problem facing them is the huge fall in domestic demand?
Most importantly, this “wage competitiveness” argument ignores the real driver of increased incomes for all, which is productivity. Merely shifting national income from the 1.5 million employees in Ireland to employers, particularly when the employees’ share is low compared to most other countries, is both regressive and will not work.
Productivity is the key to continuing economic success, provided its rewards are shared equitably. After falls in productivity, it is rising rapidly having risen by a substantial 5 per cent last year, on top of rises in previous years. The fall in Irish unit labour costs has been around 15 per cent over the past four years compared to under 6 per cent in the Eurozone. The decline of low productivity sectors like construction and services (including the public) has contributed, as has the growth in the high sectors such as the foreign owned export sector. The lower wage rises here than in Europe in recent years have also contributed (to a lesser degree than the decline of low productivity sectors) to the improvement in unit labour costs. Thus unit labour costs here have fallen very substantially compared to competitors since 2008. But, where are the jobs?
While Irish wages have risen over the past twenty years, total labour costs are 12th in OECD, at $49,830 a year, well below Germany and Belgium at over $61,000 and UK at over $59,000. Irish productivity suffered during the boom, but has since recovered. It is amongst the highest in the world. Ireland’s public service was already small by international standards before the crash and the current reform should improve overall productivity.
However, it will be seen that there is the chilling prospect that the majority of Irish workers may not see any rise in their living standards or real incomes for a decade or more. Prolonged stagnation in earnings could also happen here. It has already begun. It has happened in the USA. The American Dream is dead. US workers have seen no real increase in earnings since 1975. The middle class was squeezed in many developed countries over the past decade and a half. Ireland was an exception to this trend. More recently, wages have stagnated in Germany for a decade till recently (one key reason for the lack of demand there).
In the next post, it will be seen that rises in Irish living standards may be ending, even after recovery. This is because of major external trends. Our young may be the first post-war generation not to achieve a higher standard of living than their parents.
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