Slí Eile: The cage was truly rattled, today, by David Blanchflower, UK economist, who challenged the home consensus about deflation. Speaking at the third in a series of 'Crisis' conferences today in Dublin he said that he was against pay cuts, cuts in public spending and deflation to right the economy. He is very concerned that as Governments respond to the crisis by cutting off stimulus interventions too early or - worse still - adding fuel to the fire by undertaking sharply deflationary approaches there is a real danger that the economy will be 'pushed over the cliff'.
When pressed by a perplexed audience of sensible mainstream Irish economists to comment on the current Irish fiscal situation, he made it clear that he was not in favour of the deflationary push. This created some concern and reaction including an intervention by John Fitzgerald, the chair of the first session, to provide a stout defence of a rapid 'fiscal adjustment' and the unworkability of a fiscal stimulus in current Irish fiscal situation. This was followed up by a lengthy presentation by Philip Lane in which he gave a very rounded and robust defence of the current strategy and against any let up in adjustment (even arguing for more cuts in addition to the €4bn adjustment envisaged this year and again for each of the coming two years). His background notes for the conference can be downloaded here.
A clear difference opened up on ends and means. The fiscal adjustment at all costs school believes that we must adjust quickly or else the 'markets' will lose confidence and the recovery will be stretched out over 10 years instead of 3 or 5. Everything else follows - peace, jobs, prosperity.... This view is firmly established in Government, the Department of Finance, the ESRI, nearly all the major newspapers, most political parties and most academic economists who comment on these matters in public. Only the odd TU economist, lefty or Nobel economist from America or Britain who doesn't, well ... fully understand the unique Irish situation (and how bad it is and how dependent we are on markets for sovereign debt risks and how screwed up we are because 'public spending exploded' in last few years). We are now on the road to socialist serfdom as spending has rocketed to over 51% of GNP (much of the increase last year was pure cyclical and advance payments into the NPRF).
Brian Nolan wondered if one way of dealing with unemployment is to distribute it more evenly and avoid unhealthy concentrations. Colm McCarthy says that the choice is between a 30% youth unemployment rate (which is what it was in July of this year) for five years or for 10 years (essentially if we don't follow his prescriptions).
It is really unusual and refreshing to hear an 'outsider' such as Joseph Stiglitz last month or David Blanchflower now challenging this consensus view. Not a few people resent the comments by 'outsiders' as ill-informed and not suitable for Irish situation. Specifically, Philip Lane in a clear response to Blanchflower said that the Irish situation was very different:
* small open economy with high import leakage and low fiscal multipliers
* extremely bad debt situation made worse by pro-cyclical policies in the past (and with the result that we must be pro-cyclical now)
* no option of currency devaluation.
For Lane and all mainstream economists the only solution is 'real depreciation' through salary, wage, rent and other cost reductions allied to cuts in public spending (Lane concedes some room for investment programmes but only at the cost of even more cuts elsewhere in public spending).
Blanchflower who has researched and published extensively on unemployment sees the rise in youth unemployment as profoundly worrying and threatening. It has huge implications for social cohesion, health and morale. There is clear evidence that a whole cohort of young people in the UK suffered from 'permanent scars' as a result of a period of unemployment in their late teens or early twenties (citing, e.g., 1958 birth cohort studies in the UK tracked over 50 years). He argued that we needed to throw everything at this problem because the social costs are incalculable. Not only did he support continuing stimulus measures abroad he clearly favoured some type of counter-cyclical measures in Ireland too. He is very concerned about a 'double-dip' or W-shaped recession - building on evidence from previous recessions and the timing of a slow recovery. He was also scathing in his criticism of 'economics' and 'macro-economics' not only in failing to understand and anticipate the crash but also in making the problem worse by adherence to dogma. He was not optimistic about a recovery any time soon and thought that the world might be headed for a fresh recession especially if Government over-react by withdrawing stimulus spending.
Blanchflower also commented on the state of banking (he was an external member of the Bank of England's Monetary Policy Committee up to last June). He stated bluntly that if you 'don't own it' (banking) you cannot effectively get banks to lend (please, sir, lend). There is no evidence, he says, that banks will start lending any time soon to businesses.
Other presentations were by Colm Harmon on the role of education as a medium-term strategy to position us in the global market and John McHale (on pensions). Both papers should be available on the web in the next day or two (see Geary Institute).
In the wrap-up discussions there was some debate about stimulus measures. George Lee, TD tried to pin down the platform including Colm McCarthy on how much they would need to cut to get the deficit down to a required level. In other words, is there a level of cuts that they would not go beyond ? (Lee). McCarthy ducked.
The timing of adjustment also featured with McCarthy, Lane and Fitzgerald warning against any delays ('we don't want to go down the road of the 1980s..'). So, cut deep, cut now and keep on cutting and if a whole generation is lost through unemployment, emigration and despair - that's just the way it is. We can get back to 'sustainable growth' more quickly by restoring competitiveness (read profitability through driving down other costs). Two speakers (Lane and McCarthy) claimed that the public deficit would be as high as 15% (instead of 13% now) were it not for the fiscal adjustment in last April's budget (but the target was to reach 10.75%). Implicitly, and not so implicitly, one had a clear impression that nobody in this assembly believed that the 3% SGP target would be reached by 2013. However, as we cut and cut we delude ourselves with the thought that had we not cut the deficit would have spiralled up and up (someone even mentioned a possible 20% deficit). no evidence, no modelling, no counter-hypothesis was provided to support these assertions.
Again George Lee asked 'must people be crucified to reach some target?' to which McCarthy replied ' how long do we want to be crucified?'
Please, can decent women and men get up, speak out and stand up.
And could we have a more broad-based debate than one dominated by failed economics which simply doesn't care about the impact of its failure on people.
Showing posts with label Pay Cuts. Show all posts
Showing posts with label Pay Cuts. Show all posts
Monday, 2 November 2009
Sunday, 1 November 2009
Recovery is not reform
Recovery is not reform. The government’s intended path to recovery is a mixture of borrowing, pay cuts, and spending cuts. All recovery plans treat the symptoms of a downturn. Global aggregate demand has been buoyed by injections of capital by governments. There is evidence the medicine is working. Global recovery looks in sight. Reform however, is a deeper, and more important, matter.
What kind of permanent changes to the international financial system do we want to see to reduce the likelihood of prolonged downturns in the future?
You can read the rest of Stephen Kinsella's piece in today's Sunday Independent here.
What kind of permanent changes to the international financial system do we want to see to reduce the likelihood of prolonged downturns in the future?
You can read the rest of Stephen Kinsella's piece in today's Sunday Independent here.
Wednesday, 14 October 2009
Crises: Not 5 but 7
Slí Eile: The National Economic and Social Council (NESC) has recently published its Next Steps in Addressing Ireland’s Five-Part Crisis: Combining Retrenchment with Reform. You can download the full report here and the executive summary here.
The title by-line ‘retrenchment’ with ‘reform’ gives all away. Following earlier work by the Council – which represents the various social partners – it attempts to pull together various strands of the current economic crisis and to propose an ‘integrated approach’. This is welcome. To the five-part crisis (banking, fiscal, competitiveness, unemployment and reputation) must be added a sixth dimension as pointed out by a speaker at last week’s TASC Economic Conference: a political crisis. I would even suggest a 7th: a moral crisis. Do we care enough about people, their well-being and the planet in which we survive? Markets, States and non-governmental actors have failed, so far, to act with sufficient moral responsibility.
Like all NESC documents there is a good conceptual framework underlying its work. But, inevitably, reflecting its structure, function and composition there is a strong element of ‘on the one hand and on the other hand’. Here is a sample:
It is necessary to combine unavoidable retrenchment with major reform in a range of policy areas and systems.
‘unavoidable’ mirrors a highly held view these days:
TINA – There-Is-No-Other-Way (e.g. deflation)
TOGIT – The-Only-Game-In-Town (e.g. NAMA)
Joseph Stiglitz has warned us about being intimidated. Other adjectives used in the NESC document are ‘severe retrenchment’ (p7) and ‘immediate retrenchment’ (p9)
Interestingly, the NESC document goes on to say (p60):
The deterioration in the labour market, in the lives of many households and individuals, is being compounded by falling disposable incomes and retrenchments in some areas of current public social spending.
Government has achieved savings of c10.5 billion or 6.3 per cent of GDP and published the McCarthy Report. But there continues to be a huge gap in the public finances.
Policy and public debate on the fiscal, economic and social aspects of the crisis still seem dominated by short-term, immediate and zero-sum aspects; it has not proven possible to secure support for a perspective based on long-term mutual gains.
And, on page 61, the Report rightly draws attention to the way cuts in public spending can impact adversely on vulnerable and low-income groups.
In its response, the Government clearly sees this work of NESC as offering a talking and thinking platform on which to get buy-in for a new a ‘agreement’ (From the Govt Press Release: "In response to the challenge set out in the Report, the Government proposes to invite the Social Partners to meet to discuss whether there is sufficient basis for entering substantive negotiations to secure an agreed national response to the current economic crisis")
A classic nescism is the following:
There remains a tendency for opinion on the fiscal crisis to polarise into two camps, with one stressing the need to reduce the gap between spending and revenue and the other the need to maintain existing services and conditions. These positions tend to cancel one another out, rather than pushing the debate into new terrain in ways that makes policy decision clearer and public understanding greater.
But, in the meantime, the following questions have to be faced: The General Government Deficit is in the order of €20bn this year
Government can either (i) cut spending (ii) raise taxes (iii) borrow more or draw down on cash reserves (it is too late, apparently, to divert NPRF cash since Government diligently pre-paid next year’s amount as well as this years – called APCS – Acute Pro-Cyclical Syndrome). NESC clearly favours raising the share of taxes as % of GDP to bring us up closer to EU norms. But, it does not specify its stance on some of the major issues:
Pay cuts
Welfare cuts
Which areas of public spending would be cut
Instead it opts for ‘severe retrenchment’. Then again, it is hard to imagine the partners to NESC agreeing to a common approach on the above.
The title by-line ‘retrenchment’ with ‘reform’ gives all away. Following earlier work by the Council – which represents the various social partners – it attempts to pull together various strands of the current economic crisis and to propose an ‘integrated approach’. This is welcome. To the five-part crisis (banking, fiscal, competitiveness, unemployment and reputation) must be added a sixth dimension as pointed out by a speaker at last week’s TASC Economic Conference: a political crisis. I would even suggest a 7th: a moral crisis. Do we care enough about people, their well-being and the planet in which we survive? Markets, States and non-governmental actors have failed, so far, to act with sufficient moral responsibility.
Like all NESC documents there is a good conceptual framework underlying its work. But, inevitably, reflecting its structure, function and composition there is a strong element of ‘on the one hand and on the other hand’. Here is a sample:
It is necessary to combine unavoidable retrenchment with major reform in a range of policy areas and systems.
‘unavoidable’ mirrors a highly held view these days:
TINA – There-Is-No-Other-Way (e.g. deflation)
TOGIT – The-Only-Game-In-Town (e.g. NAMA)
Joseph Stiglitz has warned us about being intimidated. Other adjectives used in the NESC document are ‘severe retrenchment’ (p7) and ‘immediate retrenchment’ (p9)
Interestingly, the NESC document goes on to say (p60):
The deterioration in the labour market, in the lives of many households and individuals, is being compounded by falling disposable incomes and retrenchments in some areas of current public social spending.
Government has achieved savings of c10.5 billion or 6.3 per cent of GDP and published the McCarthy Report. But there continues to be a huge gap in the public finances.
Policy and public debate on the fiscal, economic and social aspects of the crisis still seem dominated by short-term, immediate and zero-sum aspects; it has not proven possible to secure support for a perspective based on long-term mutual gains.
And, on page 61, the Report rightly draws attention to the way cuts in public spending can impact adversely on vulnerable and low-income groups.
In its response, the Government clearly sees this work of NESC as offering a talking and thinking platform on which to get buy-in for a new a ‘agreement’ (From the Govt Press Release: "In response to the challenge set out in the Report, the Government proposes to invite the Social Partners to meet to discuss whether there is sufficient basis for entering substantive negotiations to secure an agreed national response to the current economic crisis")
A classic nescism is the following:
There remains a tendency for opinion on the fiscal crisis to polarise into two camps, with one stressing the need to reduce the gap between spending and revenue and the other the need to maintain existing services and conditions. These positions tend to cancel one another out, rather than pushing the debate into new terrain in ways that makes policy decision clearer and public understanding greater.
But, in the meantime, the following questions have to be faced: The General Government Deficit is in the order of €20bn this year
Government can either (i) cut spending (ii) raise taxes (iii) borrow more or draw down on cash reserves (it is too late, apparently, to divert NPRF cash since Government diligently pre-paid next year’s amount as well as this years – called APCS – Acute Pro-Cyclical Syndrome). NESC clearly favours raising the share of taxes as % of GDP to bring us up closer to EU norms. But, it does not specify its stance on some of the major issues:
Pay cuts
Welfare cuts
Which areas of public spending would be cut
Instead it opts for ‘severe retrenchment’. Then again, it is hard to imagine the partners to NESC agreeing to a common approach on the above.
Thursday, 1 October 2009
Public Sector Pay: CSO add their part to the analysis
Slí Eile: The controversy around public-private sector pay differences continues following today's release by the Central Statistics Office of a special multi-variate analysis of pay differences based on the 2007 National Employment Survey. The full Report can be downloaded here.
The conclusion is that public sector workers are better paid than private sector workers even when statistical controls are applied in relation to age, education, experience, gender etc. However, the difference does not seem nearly as large as that shown in the recent analysis by the ESRI. The CSO are careful to point out that even when statistical controls are applied certain differences remain which are hard to account for. In other words you could have two persons employed one in the public sector and one in the private with same level of education, union membership, experience etc and yet one is better paid than the other because the context is very different. This may have something to do with the way in which pay is set at central level or with the nature of jobs in each sector. It could also indicate a degree of labour market segmentation. Another feature of both studies - ESRI and CSO - is that non-regular bonuses of employees are not included in the underlying data. This can be an important feature of some private sector occupations including finance and banking (where evidently such bonuses have been sharply cut back in recent times). Previous blogs have addressed some of the issues. See here and here. There has been, already, adverse Union reaction to the latest findings.
While it is necessary to oppose proposals to cut pay in either the public or private sectors because of their deflationary impact and the unfairness of imposing cuts in pay on average to below average workers it is not helpful to dismiss robust statistical work - limited as it is by the available data. What should be countered is the way in which some commentators jump on these findings to support their argument for levelling down of wage income to lower levels. Silence prevails on other types of income. Getting back to competitiveness becomes a matter of getting back to normal profit levels (and super-normal in the case of many sheltered sectors and quasi oligopolies).
The conclusion is that public sector workers are better paid than private sector workers even when statistical controls are applied in relation to age, education, experience, gender etc. However, the difference does not seem nearly as large as that shown in the recent analysis by the ESRI. The CSO are careful to point out that even when statistical controls are applied certain differences remain which are hard to account for. In other words you could have two persons employed one in the public sector and one in the private with same level of education, union membership, experience etc and yet one is better paid than the other because the context is very different. This may have something to do with the way in which pay is set at central level or with the nature of jobs in each sector. It could also indicate a degree of labour market segmentation. Another feature of both studies - ESRI and CSO - is that non-regular bonuses of employees are not included in the underlying data. This can be an important feature of some private sector occupations including finance and banking (where evidently such bonuses have been sharply cut back in recent times). Previous blogs have addressed some of the issues. See here and here. There has been, already, adverse Union reaction to the latest findings.
While it is necessary to oppose proposals to cut pay in either the public or private sectors because of their deflationary impact and the unfairness of imposing cuts in pay on average to below average workers it is not helpful to dismiss robust statistical work - limited as it is by the available data. What should be countered is the way in which some commentators jump on these findings to support their argument for levelling down of wage income to lower levels. Silence prevails on other types of income. Getting back to competitiveness becomes a matter of getting back to normal profit levels (and super-normal in the case of many sheltered sectors and quasi oligopolies).
Tuesday, 22 September 2009
More Talk about Public v Private Pay
The ESRI released a study today showing a gap between public and private pay. And IMPACT have released an objection to it.
But is there anything new in all this?
In many ways, the ESRI paper is academic. It is a twenty-one page report of a statistical comparison of 2003 and 2006 data, which means that it doesn't include recent changes, including further pay awards, but also pay cuts and the pension levy.
IMPACT argues that it doesn't compare 'real jobs'. Certainly, the statistical analysis doesn't seem to include trade union membership as a variable (although it does include 'membership of a professional body'). There is obviously a large different in the private sector between the 'good jobs' in large, unionised firms and the full range of private sector wages.
Are there any recent studies comparing unionised versus non-unionised levels of pay (cutting across the artificial public-private divide)? That would seem to be more pertinent. It also would refocus the question on the right to join a trade union and the right of workers to negotiate good wages. As mentioned before in relation to this issue, low wages lead to increased state expenditure, such as income supports, social housing, etc.
There probably needs to be more attention paid to the differences between managerial pay and other pay. Although there is less of a 'pay gap' at managerial level, because higher grades in the public service received higher awards in order to catch up with managerial pay in the private sector that had soared, that process failed to address the question of whether private sector managerial pay was reasonable in the first place. There probably is much more scope for re-examining managerial wages in the public sector than the broad wages of ordinary public servants - but that would involve a debate about what is a reasonable managerial wage.
The ESRI's figures, presumably from a press release, were trotted out on the radio yesterday. And the argument predictably turned to whether the public service is overpaid. But it is equally the case that workers in the private sector are underpaid, at least in some sectors. Again, it would be nice to see some international figures on this, based on purchasing power parity.
There is no doubt that the state's financial situation is dire, and some radical action will have to be taken in the immediate future. But Vincent Browne argued recently that the country's financial situation is nothing like as bad. There is still plenty of wealth in Ireland. So, it is a pity that the Government seems reluctant to grapple with the need for tax reform - and a large scale broadening of the tax base.
Further cuts in public wages will also surely depress the economy further. And then there are a lot of households who have taken out large mortgages on the basis of an ability to pay them back. Housing costs represent the stubborn bottom line in terms of the pay levels that people need to get by, and undermining people's ability to pay these loans will further weaken the banks.
All of this is to say that we are likely to see another round of arguments about public versus private pay in the media, but it is only part of the bigger picture.
But is there anything new in all this?
In many ways, the ESRI paper is academic. It is a twenty-one page report of a statistical comparison of 2003 and 2006 data, which means that it doesn't include recent changes, including further pay awards, but also pay cuts and the pension levy.
IMPACT argues that it doesn't compare 'real jobs'. Certainly, the statistical analysis doesn't seem to include trade union membership as a variable (although it does include 'membership of a professional body'). There is obviously a large different in the private sector between the 'good jobs' in large, unionised firms and the full range of private sector wages.
Are there any recent studies comparing unionised versus non-unionised levels of pay (cutting across the artificial public-private divide)? That would seem to be more pertinent. It also would refocus the question on the right to join a trade union and the right of workers to negotiate good wages. As mentioned before in relation to this issue, low wages lead to increased state expenditure, such as income supports, social housing, etc.
There probably needs to be more attention paid to the differences between managerial pay and other pay. Although there is less of a 'pay gap' at managerial level, because higher grades in the public service received higher awards in order to catch up with managerial pay in the private sector that had soared, that process failed to address the question of whether private sector managerial pay was reasonable in the first place. There probably is much more scope for re-examining managerial wages in the public sector than the broad wages of ordinary public servants - but that would involve a debate about what is a reasonable managerial wage.
The ESRI's figures, presumably from a press release, were trotted out on the radio yesterday. And the argument predictably turned to whether the public service is overpaid. But it is equally the case that workers in the private sector are underpaid, at least in some sectors. Again, it would be nice to see some international figures on this, based on purchasing power parity.
There is no doubt that the state's financial situation is dire, and some radical action will have to be taken in the immediate future. But Vincent Browne argued recently that the country's financial situation is nothing like as bad. There is still plenty of wealth in Ireland. So, it is a pity that the Government seems reluctant to grapple with the need for tax reform - and a large scale broadening of the tax base.
Further cuts in public wages will also surely depress the economy further. And then there are a lot of households who have taken out large mortgages on the basis of an ability to pay them back. Housing costs represent the stubborn bottom line in terms of the pay levels that people need to get by, and undermining people's ability to pay these loans will further weaken the banks.
All of this is to say that we are likely to see another round of arguments about public versus private pay in the media, but it is only part of the bigger picture.
Monday, 3 August 2009
Homo Economicus Dublinius
Slí Eile: Commenting on this website, anonymous said
Lets assume Home Economicus Dublinius is a 50 year old male, professor of economics in the Free University of Dublin who earns €120,000 a year, plus external research consultancy fees permitted by his institution of 25%, plus an unknown income stream from investments in property, bonds and equity (being a smart connoisseur of the markets, you know).
OK, Homo Economicus Dublinius has had to take a hardship hit this year of 10% in ‘pension’ levy on his base salary of €120,000. That translates into a nominal wage income cut of, say, 8% (on €150K).
Add to that, Government steals another 5% in various stealth charges and taxes. So the additional burden is over 10%. But, hold on, given sauce for the welfare goose we must factor in the impact of price deflation for the gander. So, his real cut in take-home pay is not as much as 10%. Still, it's hard – some adjustments to the property portfolio....
Now, someone on, say, €25,000 a year (cleaning attendant at the Free University of Dublin) needs to take a nominal pay cut of 20% to help the national war effort to make Ireland competitive again, and get the bloated public sector off the backs of hard-pressed taxpayers in the ‘real economy’ (read: private sector minus banking, property and estate). Or, more effective still, let's see the attendant’s job phased out altogether since she is on a contract and does not have to be replaced (the softest target surely in the public sector).
Where does that leave us?
This is not idle speculation.
Have a read of Kathy Sheridan’s piece in the Irish Times a couple of weeks ago (Taking Stock of the Newly Destitute):
Or, take a real couple this time:
...as a private sector worker married to a nurse I can assure you that the reality of life for us is very different to the majority of people who post to this site.Fair point, although one cannot presume the background of all who contribute, comment or read any site on the internet.
Lets assume Home Economicus Dublinius is a 50 year old male, professor of economics in the Free University of Dublin who earns €120,000 a year, plus external research consultancy fees permitted by his institution of 25%, plus an unknown income stream from investments in property, bonds and equity (being a smart connoisseur of the markets, you know).
OK, Homo Economicus Dublinius has had to take a hardship hit this year of 10% in ‘pension’ levy on his base salary of €120,000. That translates into a nominal wage income cut of, say, 8% (on €150K).
Add to that, Government steals another 5% in various stealth charges and taxes. So the additional burden is over 10%. But, hold on, given sauce for the welfare goose we must factor in the impact of price deflation for the gander. So, his real cut in take-home pay is not as much as 10%. Still, it's hard – some adjustments to the property portfolio....
Now, someone on, say, €25,000 a year (cleaning attendant at the Free University of Dublin) needs to take a nominal pay cut of 20% to help the national war effort to make Ireland competitive again, and get the bloated public sector off the backs of hard-pressed taxpayers in the ‘real economy’ (read: private sector minus banking, property and estate). Or, more effective still, let's see the attendant’s job phased out altogether since she is on a contract and does not have to be replaced (the softest target surely in the public sector).
Where does that leave us?
This is not idle speculation.
Have a read of Kathy Sheridan’s piece in the Irish Times a couple of weeks ago (Taking Stock of the Newly Destitute):
Or, take a real couple this time:
A couple in their mid-40s who had worked hard since their teens, each running a small business, had bought an old house and were slowly doing it up, but failed to sell their first home before the slump. Now they can’t sell either. Both businesses have come to a stand-still, but for welfare purposes they are regarded as asset-rich so are entitled to no benefits. They are currently surviving on hand-outs from family members and the Vincent de Paul, as well as food parcels left on the doorstep by concerned friends.And some economists are calling for cuts in welfare spending as well as reductions in the minimum wage. Well, let's say it again: it is one thing for someone in the top income decile in relatively secure employment to take a 10% cut in income; its quite another matter for someone in the middle income bracket to lose practically all income all at once (such as in the example above), and yet another matter for someone who is already among the ‘working poor’ (i.e. close the statutory minimum wage) to take a cut of 5, 10 or more percent.
Wednesday, 29 July 2009
Dublin Consensus rattled by Begg article
Slí Eile: Nothing better to create some heat over on irisheconomy.ie or in follow-up comments to an op ed on the Irish Times than an article by ICTU General Secretary, David Begg, arguing against deflation and for a fiscal stimulus. Fulminations followed in quick succession. Interesting to see such passion, conviction and certitude. Remember, a key point of the Dublin Consensus is that There Is No Other Way. Say it often enough, loud enough and confidently enough and the message will stick especially when it is backed by stylised and 'obvious facts'. One commentator on irisheconomy.ie even commented: 'Begg’s quoting of Joe Stiglitz’s comments on the US fiscal stimulus in support of his (Begg’s) critique of Irish fiscal policy is quite ridiculous.' Others were even more strident and impolite.
Michael Taft has been contesting some of these 'obvious facts'.
David Begg was spot on in drawing attention to the very dangerous policy currently pursued. Analysis based on modelling of the Irish economy shows how various policy scenarios including pay cuts, public spending cuts and international recovery would impact on GDP, public sector borrowing and consumption (which I will hasten to add doesn't deter the ESRI from joining the Dublin Consensus). Public sector pay cuts offer extremely limited returns in terms of borrowing reductions.
Two key point that should not be lost in today's article by David Begg are the following:
The first point is vital because I sense that the room for rational debate based on evidence, research and values is very limited because:
In conclusion - the switching to terminology of 'devaluation' over on irisheconomy.ie is very misleading. The 1986 and 1993 currency devaluations adjusted the prices of Irish exports on world markets and imports on Irish markets. It also kept inflation high for a time. Many differences apply between now and then, one of which was the extent to which product and labour markets internationally played a role in helping - eventually - Irish recovery. A so-called real devaluation now based, on wage-cutting, is a dangerous and possibly ruinous gamble. This was the point of Begg's article. The alternative is targetted stimulus based on recovery bonds in the context of a high national savings rate (as consumers are scared to spend) and the beginnings of a strategic investment in skills, jobs, innovation, new traded services. Otherwise, we may face a missed decade like we had in the 1950s, and like Finland initially underwent in 1991-94. Can we not learn from this? There is another way.
Michael Taft has been contesting some of these 'obvious facts'.
David Begg was spot on in drawing attention to the very dangerous policy currently pursued. Analysis based on modelling of the Irish economy shows how various policy scenarios including pay cuts, public spending cuts and international recovery would impact on GDP, public sector borrowing and consumption (which I will hasten to add doesn't deter the ESRI from joining the Dublin Consensus). Public sector pay cuts offer extremely limited returns in terms of borrowing reductions.
Two key point that should not be lost in today's article by David Begg are the following:
1 "A very formidable deflationary coalition has been assembled in support of current policy. This was in evidence at the MacGill Summer School – an irony given Patrick MacGill’s commitment to working people – and it includes many of the State agencies like the ESRI and IDA."
2 ".... there is a growing chasm of scepticism between the elite and the population at large concerning the efficacy of the policy prescription."The first point is vital because I sense that the room for rational debate based on evidence, research and values is very limited because:
- openess to debate and conflicting ideas is not as welcome as it should be in state organisations
- the Irish economics profession is predominantly ... well, right-wing (how else can one put it)
- issues which have a long-term implication (environment, social equality, democractic reform) are crowded out due to an unusually high degree of short-termism - hence, for example, Oireachtas reform is reduced to a discussion about how many T.D.s we should have.
In conclusion - the switching to terminology of 'devaluation' over on irisheconomy.ie is very misleading. The 1986 and 1993 currency devaluations adjusted the prices of Irish exports on world markets and imports on Irish markets. It also kept inflation high for a time. Many differences apply between now and then, one of which was the extent to which product and labour markets internationally played a role in helping - eventually - Irish recovery. A so-called real devaluation now based, on wage-cutting, is a dangerous and possibly ruinous gamble. This was the point of Begg's article. The alternative is targetted stimulus based on recovery bonds in the context of a high national savings rate (as consumers are scared to spend) and the beginnings of a strategic investment in skills, jobs, innovation, new traded services. Otherwise, we may face a missed decade like we had in the 1950s, and like Finland initially underwent in 1991-94. Can we not learn from this? There is another way.
Wednesday, 20 May 2009
Keep cutting and hoping?
Slí Eile: If anything the atmosphere at today's 2nd 'Economic Crisis' conference in Dublin was gloomier than the first one last January. It was a more serene gloom as people are becoming more accustomed to recession psychology. One recalls audible gasps in the audience at the January conference when the more rash were predicting a 15% unemployment rate later this year and a 10% fall in national income. Some of the papers for the conference can already be downloaded at irisheconomy.ie But don't expect any huge surprises or variations in view. The chorus can be distilled down to:
we got to price ourselves back into world markets
nominal wages must be cut - especially those of the public sector
fiscal balance must be restored quickly – primarily through continuing expenditure cuts and targetted tax hikes
everything else must be driven by the above or wait on the above.
Economist Philip Lane commended 'all political parties are showing a responsible approach to fiscal policy … none have espoused extreme views such as repudiation of debt' Hmmm
The overwhelming consensus and underlying assumption from the podium of 6 speakers and virtually all persons who asked questions from the floor is that 'there is no other way' than austerity and severe fiscal adjustment to right the economy over a number of years. The media lapped it up and the experts qua economists are revered as people with special knowledge and insight to whom lesser mortals look up for wisdom. John Fitzgerald suggested that we will know when the recovery has arrived when such conferences are not packed out (this one was full for about 4 weeks due to pre-booking). Irisheconomy.ie was referred to by more than one commentator in such reverential terms as to suggest a required daily meditation.
The consensus is overwhelming.
On the 'what to do' (economists unlike others are not shy about policy recommendations – but these are of course value-neutral):
move very quickly towards fiscal balance – front-load nominal pay cuts (and another sizeable pay cut in the public sector except this time a proper plain vanilla one and not one dressed up as a pension levy)
raise taxes and prioritise those on property and carbon emission (by now an ESRI favourite)
encourage more competition (move parts of state-holdings into direct competition)
adjust social welfare payments and the minimum wage (downward of course)
use supply-side measures to activate the unemployed and re-skill or up-skill the long-term unemployed.
Inequality got a mention in one paper (Brian Nolan) suggesting that inequality in household income (after tax and transfers) has been fairly static over time in Ireland but that we are towards the high end of inequality in OECD. Without any data it was alleged by more than one speaker that the recent Supplementary budget was strongly ('remarkably' was the term used by Brian Nolan) redistributive (in favour of those on low incomes or welfare).
One journalist gave John Fitzgerald a grilling on whether he supported pay cuts in the public sector to remove the '20% premium' to the latter over the private sector (where does that figure come from?). Fitzgerald said politely 'it would be nice …' Another journalist asked a question about some website ('progressive economy – ever heard of it?) claiming that Irish wages are about average. Oddly enough throughout the proceedings there was scant reference to profits and their role in driving inflation (in parts of the non-traded services sector). Karl Whelan concluded that the structural-cyclical deficit distinction is not so useful after all – a view not shared by Philip Lane.
Lane's key argument for pro-cyclical deflation now was based on the fact that our initial state is so bad (in other words so pro-cyclical during the boom times) that a fiscal stimulus is neither affordable or desirable now. In chilling tones he spoke of the 'unallocated corrections' in 2011 and beyond not to mention the harsh medicine in store this coming December (that is if an earlier budget is not forced by some new international meltdown). Along with others, Lane is very explicit: 'significant reductions' are needed in public spending this coming 2010 budget and beyond.
Colm McCarthy's (of Bord Snip fame) paper discussed the pension crises. With ageing populations, people living longer and the meltdown in private equity and Defined Benefit schemes (including the large private sector employers) McCarthy believes that the retirement age needs to be raised and more encouragement for private savings. In direct response to a question about tax relief for pensions (at the higher marginal tax rate) he said that he had problems with the line of argument that such tax concessions were 'reliefs' and he seemed to favour keeping many of these be kept in place (lets see what the Commission on Taxation says line). He said that he had 'less faith in capitalism when it came to DB schemes' than many in the Trade Unions.
Banking received attention with Patrick Honohan's paper. NAMA in its current incarnated proposal got mixed support signals. The view is that a refined version of NAMA would eventually take shape. While the risk to taxpayers was acknowledged (by Honohan) he is not for nationalisation.
All in all it was not an encouraging event – more cuts, no end in sight and a very cold and calculating 'markets must clear' as we hope for an international recovery – eventually.
Nobody was asking the question – by how much does unemployment need to increase and how much do wages need to fall to price us back into international markets?
Wednesday, 13 May 2009
Do it, Explain it, Avoid it
Sli Eile: “Do it, Explain it and Avoid it” is the advice of Jens Henriksson. He also says that ‘A few powerpoint slides, a report and a good one-liner can have an enormous impact.’ Ten Lessons about Budget Consolidation (which, interestingly, was free for download from the Breugel site in February, but is now offered for sale) became the received economic wisdom earlier this year. Even the Irish Congress of Trade Unions invited Jan Henriksson to speak. The ICTU ten-point plan There is a Better, Fairer Way argued that budgetary consolidation should be designed as a package with fairness its cornerstone. But be careful what you buy. As Jim O’Leary pointed out back in February, Henriksson’s recipe lessons contain some very nasty medicine such as pay and social welfare cuts. In fact, the Henriksson recipe tastes like a very orthodox slice of ‘balance the books’ before you move on to anything else.
A previous post by Peter Connell (The Swedish experience: lessons to be learned) has drawn attention to the 'political’ and not just ‘economic’ nature of the ‘lessons’ contained therein. It also reminded readers that both the international context of the early 1990s, as well as the legacy of the Swedish social model and partnership, made adjustment possible and sustainable.
To what extent is public policy drawing from the Henriksson ‘Ten Lessons’ (they were originally construed as ‘commandments’ but Henriksson wisely toned it down to ‘lessons’ for international consumption)? And is it the only effective medicine available? Lets run through, briefly, the medicine in 10 steps:
Lesson One: Sound public finances are a prerequisite for growth
Henriksson even goes so far as to suggest that ‘risk aversion is king in economic policy’. It certainly was in the first wave of responses to the Great Crash in 1929 with the disastrous consequences that followed. Getting the public finances right is certainly one element of the recipe. The main contention here, is how the burden is shared and adjustments made. A cartoon from the 1930s depicted various members of society on a ladder descending into the sea with those higher up the ladder saying ‘we should all take a cut and move a step down’.
Certainly, the Government, here, has shared the cost by imposing proportionately similar cuts to those on about the average industrial wage as to those much higher up the income ladder. With so many tax reliefs in place it is hard to know the real effect for those outside the PAYEE tax net.
So, it is the way you do it that matters and not just the fact of balancing the books.
2 If you are in debt, you are not free
Mortgage holders would agree. Again, the issue here is not the level of debt at any point in time as much as the relationship of debt to long-term capacity to generate new income to repay debt. Clearly, some level of risk is involved as it is for individuals. Being a member of a currency union is help in this context as is the relatively low level of debt to GDP ratio for Ireland, currently. The lack of freedom arises from the way in which finance markets interfere with the political process by compromising other issues that fall outside narrow measures of credit-worthiness. If the global markets are king along with its weapons of mass destruction = financial derivatives then the way to address this is not for individual nation states to slaughter the weak and the poor but to work together to regulate markets and financiers that ushered in this crisis in the first place.
The way to relative freedom is through investment in Ireland’s ‘smart economy’ supported by a ‘smart society’ founded on protection of the weak and provision of social services through a balance of taxation at local and national level.
3 The one responsible must put her or his job on the line
Point well made. But, there is little culture of responsibility here whether in State, Corporate or Church worlds except when someone is forced out whether by media, backbenchers or other trend-setters. One of the issues that needs to be brought center stage to any analysis of the current economic malaise is the essentially undemocratic nature of markets as they currently operate as well as processes in our national polity. People need clear yardsticks by which to measure Governments and leaders. Governments should contract with the people not just at each General Election (essentially people don’t vote on which Government to have but on a menu of parties which put together Governments depending all sorts of considerations that may not be foreseen in the run up to an election). The Oireachtas needs radical reforming to make Governments more accountable.
4 Set goals and stick to them
Setting goals is not easy especially if there is more than one. The Swedes had to choose between fiscal stability and unemployment. They gave priority to fiscal priority (just as the Irish Government is doing now) and, implicitly, let unemployment float downwards as conditions improved – eventually. It was painful (as was the case in Finland) but, according to Henriksson, it worked. However, the Swedes (and Finns) had the advantage of at least (i) relatively strong levels of internal social cooperation and solidarity and (ii) favourable external circumstances and international trade. Add to this a strong native base of outward indigenous industry and services and the Nordic countries were able to survive and overcome their severe economic problems of the 1990s
5 Consolidation should be designed as a package
Here the advice turns particularly political – even Machiavellian. Henricksson writes (p19):
...there is also empirical work showing that a right-wing government that raises taxes is more likely to succeed in budget consolidation than a rightwing government that only adheres to expenditure cuts. The opposite goes for left-wing governments…..
The problem, in an Irish context, is that up to now we have had a choice of two kinds of political arrangements – both right of centre and both committed in practice to low taxes and by direct implication low spending too. The options for any incoming administration over the next 3-4 gloomy years are stark – unless they really want to break new ground and depart from the Henricksson scipt.
The key point under lesson 5, according to Henricksson, is that Government need to inflict pain as uniformly as possible on the grounds that (p19):
When one strong interest group complains, you are in trouble. But if everybody complains, you are not.
6 Act structurally but be consistent
Only an economist could talk like this! The advice here is that it is better to go for a flat, across-the-board cut of say 10% (or 11% as was actually cut from all items of Government consumption in the Swedish case) rather than target this area or that budget line. The blunt approach sends an extremely strong signal to everyone. The problem with this is immediately obvious though – it is one thing for someone on €500,000 a year to take a cut of 10%; it is another for someone on €200 a week to take a cut of €20 (even if average prices are falling). It is quite unfair, regressive and deflationary to cut spending especially where people are already on the bread line. But, consistency was never part of the vocabulary here and not even during the current economic impasse. You know this when people in the corporate and public sectors walk away with pensions in the high six digits.
7 Do not leave the problems to the Local Authorities
Given Sweden’s history of strong local government with responsibility (and funding from local taxes) to provide education, healthcare and childcare as well as other services, Central Government did shift much of the adjustment to local authorities and this was not a good thing according to Henricksson. But, Ireland is not Sweden when it comes to local taxation or delegation of powers and revenue-collecting.
8 Be honest to citizens and financial markets
Here the advice is to keep to a conservative set of fiscal assumptions and make it clear from the outset how painful things will be. The aim is to get the ‘markets’ (everything comes back to this) to buy-into what Government is saying and to enable the national authorities – eventually – to get into a ‘virtuous circle’. A series of botched budgets and serious macro-economic under-shoots in the Irish case does not help. And Government has a credibility problem where citizens, investors and international capital markets are concerned.
9 Stick to one message
Here Government has been more successful. The ‘One’ message coming through has been to CUT:
Cut (real and nominal) wages and welfare rates;
Cut public expenditure and spread taxes increases to bring in more of the lower paid; and
Thereby inch back into export markets, foreign direct investment and the ‘smart’ economy which, by now, everyone is paying lipservice to.
10 Stick to it
Once a country emerges from the painful adjustment, it must avoid going back to ‘the old system’ and ways.
Summing up
Lets be clear, the Henricksson medicine, if applied comprehensively here, would be brutal medicine politically, economically and socially. Even if it attracted widespread political buy-in (through for example a national Government of all the main political parties) or revamped social partnership, it would involve a winding down of public spending and household consumption at a rate not seen in recent decades. It would imply escalating levels of unemployment, poverty and in all likelihood would set back levels of public health. It may be countered that this will happen anyway and that the Henricksson medicine would enable us to get over it more quickly than muddling through.
It is necessary to question the moral basis on which any society or elected Government can sacrifice the health and well-being of its citizens on the altar of market clearance and fiscal rectitude. There has to be a better way – a fairer way. What would it look like? Moving beyond the immediate crisis and response, what major actions can be taken by Government, here, to help rebuild the economy? Over on www.irishleftreview.org , Michael Taft has provided some interesting ideas under ‘What a Progressive Government Would Do in the First 100 Days (or Start to Do)’
One final point – notwithstanding the rigidity and apocalyptic tone of the Henricksson medicine (which, if progressives actually read it, one would not advocate here as part of some new social solidarity pact…) – Henricksson clearly counsels against cutting too much in the areas of education and research. One wonders why.
Friday, 27 February 2009
Trichet's narrow notions of competitiveness
Paul Sweeney: Yesterday, I got to shake the hand of the 5th most powerful man in the world - reluctantly!
Yesterday, JC Trichet, the President of the European Central Bank, said by Newsweek magazine to the 5th most powerful man in the world, made a speech in Dublin. As he left the meeting, I was introduced to him, and I shook his hand, but reluctantly. I suspect that he was somewhat reluctant to shake my hand too, as he heard I was with the Irish Congress of Trade Unions.
Here was a very powerful man in a world economy which is in deep crisis, who had just given a speech on Competitiveness which was straight from the 1980s. It was not economics but pure political economy, serving the interests of the Irish employers and government in their attempts to cut wages. His main message was that we must keep labour costs down.
It was straight from the 1980s understanding of competitiveness because it was the kind economics that Ireland left well behind, back then. It focused largely on cost competitiveness and then on wages, with some reference to unit labour costs. “I believe there should be more public awareness that insufficient attention of wage setting to current and expected productivity developments makes any correction to previous losses of competitiveness more painful in terms of output and employment losses,” he said. He also said “As I mentioned before, wage restraint would help a lot.”
M Trichet did not, however, advocate cuts, like some indigenous economists. He called for “wage setting to take account of the competitiveness and labour market conditions” (not unreasonable) in a what he termed a “responsible and timely manner”. And he said that “national authorities should pursue courageous policies of spending restraint especially in the case of public wages.”
So the government that messed up the economy with light regulation and pro-cyclical policies during the boom is now courageous?
He pointed out that many of Ireland’s fundamental economic strengths have not gone away and the economy is well placed when the international recovery occurs. But he said our success was due to a number of factors, including “a business-friendly regulatory environment.” I thought, reading the papers and listening to the radio, that our business-friendly regulatory environment was the reason Ireland is in deep trouble! Clearly, I was misled! It’s the overpaid workers!
Ireland, fortunately, developed a comprehensive view of what makes a country competitive, in the late 1980s - and Ireland moved on. For a while it became the Celtic Tiger, basing its economics on a whole world view of this complex issue. With a shared view of the total complexity of competitiveness, employers and unions and politicians worked together in a form of Social Partnership to push up employment massively, together with profits and real wages.
Back in 1982, in reaction to a government sponsored report on Competitiveness, by the Three Wise Men, I, with a group of other economists, the Socialist Economists, published Jobs and Wages: the True Story of Competitiveness. In a booklet, we set out the framework for a real comprehensive understanding of what makes a country competitive, from productivity, a functioning banking and insurance systems, good roads and interconnectedness, education and even advocated social partnership! The Irish government later actually set up a social partnership body called the National Competitiveness Council, as the behest of the employers, to analyse the issues on a continuous basis. It has produced excellent work in the area for many years.
However, in recent weeks, some Irish economists, who, believe it or not, avoided the area, (except to pepper reports with the word, 'competitiveness') have come back into it, but like M Trichet, have taken up where the so-called Three Wise Men left off – back 30 years ago.
For a group of economists, the panacea for all our problems appears to be wage cuts (for employees only; only occasionally for others). Now this is understandable because they can measure movements in wages. Economists love to measure things! They hate the impact of institutional and political factors on economies as they cant measure them. Wages are very measurable. One economist just sticks up a graph on total costs, which as we all know have been rising fast and concludes, without blushing, that Ireland’s competitiveness is heading south and wages should be cut (consumer costs are way above the EU average here – 14% above for goods and 21% for services in the EU27 or as high as 33% for consumer services).
Irish costs are way above the EU average, but the reasons are, much more complex than wages. On the other hand, wages have risen faster here than in other EU countries, but in a later blog, I will address this issue in some depth.
The emphasis on wages by economists and by M Trichet is worrying. If we, as a country, are to redefine competitiveness simply as wages, or even unit labour costs or even total costs, we will have lost our shared understanding of an important and real issue which makes our economy work.
It is the naked class nature of their analysis which is worrying. Will we soon stop shaking hands?
Paul Sweeney is Economic Advisor to ICTU
Yesterday, JC Trichet, the President of the European Central Bank, said by Newsweek magazine to the 5th most powerful man in the world, made a speech in Dublin. As he left the meeting, I was introduced to him, and I shook his hand, but reluctantly. I suspect that he was somewhat reluctant to shake my hand too, as he heard I was with the Irish Congress of Trade Unions.
Here was a very powerful man in a world economy which is in deep crisis, who had just given a speech on Competitiveness which was straight from the 1980s. It was not economics but pure political economy, serving the interests of the Irish employers and government in their attempts to cut wages. His main message was that we must keep labour costs down.
It was straight from the 1980s understanding of competitiveness because it was the kind economics that Ireland left well behind, back then. It focused largely on cost competitiveness and then on wages, with some reference to unit labour costs. “I believe there should be more public awareness that insufficient attention of wage setting to current and expected productivity developments makes any correction to previous losses of competitiveness more painful in terms of output and employment losses,” he said. He also said “As I mentioned before, wage restraint would help a lot.”
M Trichet did not, however, advocate cuts, like some indigenous economists. He called for “wage setting to take account of the competitiveness and labour market conditions” (not unreasonable) in a what he termed a “responsible and timely manner”. And he said that “national authorities should pursue courageous policies of spending restraint especially in the case of public wages.”
So the government that messed up the economy with light regulation and pro-cyclical policies during the boom is now courageous?
He pointed out that many of Ireland’s fundamental economic strengths have not gone away and the economy is well placed when the international recovery occurs. But he said our success was due to a number of factors, including “a business-friendly regulatory environment.” I thought, reading the papers and listening to the radio, that our business-friendly regulatory environment was the reason Ireland is in deep trouble! Clearly, I was misled! It’s the overpaid workers!
Ireland, fortunately, developed a comprehensive view of what makes a country competitive, in the late 1980s - and Ireland moved on. For a while it became the Celtic Tiger, basing its economics on a whole world view of this complex issue. With a shared view of the total complexity of competitiveness, employers and unions and politicians worked together in a form of Social Partnership to push up employment massively, together with profits and real wages.
Back in 1982, in reaction to a government sponsored report on Competitiveness, by the Three Wise Men, I, with a group of other economists, the Socialist Economists, published Jobs and Wages: the True Story of Competitiveness. In a booklet, we set out the framework for a real comprehensive understanding of what makes a country competitive, from productivity, a functioning banking and insurance systems, good roads and interconnectedness, education and even advocated social partnership! The Irish government later actually set up a social partnership body called the National Competitiveness Council, as the behest of the employers, to analyse the issues on a continuous basis. It has produced excellent work in the area for many years.
However, in recent weeks, some Irish economists, who, believe it or not, avoided the area, (except to pepper reports with the word, 'competitiveness') have come back into it, but like M Trichet, have taken up where the so-called Three Wise Men left off – back 30 years ago.
For a group of economists, the panacea for all our problems appears to be wage cuts (for employees only; only occasionally for others). Now this is understandable because they can measure movements in wages. Economists love to measure things! They hate the impact of institutional and political factors on economies as they cant measure them. Wages are very measurable. One economist just sticks up a graph on total costs, which as we all know have been rising fast and concludes, without blushing, that Ireland’s competitiveness is heading south and wages should be cut (consumer costs are way above the EU average here – 14% above for goods and 21% for services in the EU27 or as high as 33% for consumer services).
Irish costs are way above the EU average, but the reasons are, much more complex than wages. On the other hand, wages have risen faster here than in other EU countries, but in a later blog, I will address this issue in some depth.
The emphasis on wages by economists and by M Trichet is worrying. If we, as a country, are to redefine competitiveness simply as wages, or even unit labour costs or even total costs, we will have lost our shared understanding of an important and real issue which makes our economy work.
It is the naked class nature of their analysis which is worrying. Will we soon stop shaking hands?
Paul Sweeney is Economic Advisor to ICTU
Wednesday, 25 February 2009
Pay Cuts
Could all commentators calling for reductions in social welfare payments and / or pay-cuts for the working poor lead the way by voluntarily reducing their salary to about €200 per week and not touch savings for a year. Now who is first?
Revealing assumptions of former senior civil servant
Peadar Kirby: The article by Cathal O'Loghlin in today's Irish Times headlined 'Union response to public sector levy fails to find a better way' is more revealing for what it doesn't say than for what it does. Essentially, this former assistant secretary in the Department of Finance and director of the International Monetary Fund (presumably Ireland's representative in the 13-country group through which this country is represented in that organisation) criticises the ICTU's alternative proposals to deal with the current crisis on two grounds, both of them disingenuous.
The first is his claim that ICTU fails to make any case against the planned public pension charges and the second is that the trade union group fails to put forward a comprehensive plan for reforming our taxation system. The first claim overlooks the fact that union leaders consistently affirm that they are not against cuts in public sector pay but that they want to see any cuts being implemented in a fair way with those who have contributed most to the present crisis being the ones who pay the most. Secondly, it beggars belief to expect Congress to design a comprehensive reform of the taxation system when the government itself is failing to do this. Most astonishingly O'Loghlin dismisses ICTU's call for a tax on high earners by stating that the 'net yield might reach €3 billion' while asserting that cuts in the order of €15 billion are in fact needed!
But the most revealing thing of all is O'Loghlin's inability to grasp the essential core principle of ICTU's position, a core principle that finds a ready response among many ordinary Irish people to judge by Saturday's huge march in Dublin. This is the principle of fairness. He fails to mention ICTU's call to introduce a tax on properties other than the principal family residence, its proposal for a 48% tax band for high earners and its call to end the general tax subsidies for the hospital co-location scheme. Indeed, his comment on tax relief for union subscriptions (a petty issue indeed) is perhaps most revealing of a hostility to trade union membership. All in all, his article seems to be motivated by an attempt to argue that public service pay needs to be cut back, missing any of the points made by Paul Sweeney in his recent contribution to this blog. While ICTU's plan may not amount to a full strategy for resolving the huge crisis our political and economic elites have landed us in, it is by far the best beginning towards some equitable and fair way of addressing the crisis.
The first is his claim that ICTU fails to make any case against the planned public pension charges and the second is that the trade union group fails to put forward a comprehensive plan for reforming our taxation system. The first claim overlooks the fact that union leaders consistently affirm that they are not against cuts in public sector pay but that they want to see any cuts being implemented in a fair way with those who have contributed most to the present crisis being the ones who pay the most. Secondly, it beggars belief to expect Congress to design a comprehensive reform of the taxation system when the government itself is failing to do this. Most astonishingly O'Loghlin dismisses ICTU's call for a tax on high earners by stating that the 'net yield might reach €3 billion' while asserting that cuts in the order of €15 billion are in fact needed!
But the most revealing thing of all is O'Loghlin's inability to grasp the essential core principle of ICTU's position, a core principle that finds a ready response among many ordinary Irish people to judge by Saturday's huge march in Dublin. This is the principle of fairness. He fails to mention ICTU's call to introduce a tax on properties other than the principal family residence, its proposal for a 48% tax band for high earners and its call to end the general tax subsidies for the hospital co-location scheme. Indeed, his comment on tax relief for union subscriptions (a petty issue indeed) is perhaps most revealing of a hostility to trade union membership. All in all, his article seems to be motivated by an attempt to argue that public service pay needs to be cut back, missing any of the points made by Paul Sweeney in his recent contribution to this blog. While ICTU's plan may not amount to a full strategy for resolving the huge crisis our political and economic elites have landed us in, it is by far the best beginning towards some equitable and fair way of addressing the crisis.
Sunday, 22 February 2009
Pay cuts are neither a panacea nor even a help for Ireland's economic problems
Paul Sweeney: The remarkable barrage of calls for pay cuts, from both orthodox economists and the "pop economists", as the the solution to (most of) our economic problems, in the mainstream media, without any alternative views, demonstrates that real solutions to our immense economic problems are further away than we thought. It demonstrates a very limited view of the complexity of competitiveness and the focus on one element of cost competitiveness is misguided.
Competitiveness is very complex covering costs, quality of infrastructure, services, public services, credit etc (see for example, NCC report contents which gives an overview of some issues around the subject on page 7). The list of "12 pillars of competitiveness" in the World Economic Forum’s World Competitiveness Report (page 3 of Chapter 1) can be found here. Some economists have even posted charts with rising costs and labour costs as THE indicator of overall competitiveness!
Unit labour costs are a better indicator, and Ireland's overall productivity is very high. We do have a problem because productivity has not risen in recent years in the era of the Domestically Induced Boom since 2001, but neither has it fallen. And of course, we know that some sectors are more productive than others. But the key issue, never addressed, is why wage and salary earners, who make up 80% of the workforce, should be the only ones who have to contribute to the cost reductions?
Orthodox economists assume society is classless and seldom address cutting professional fees, the profits of wholesalers and other owners of capital, except to vaguely murmur of the need for "more competition." Has this something to do with ideology?
But on cost competition, they say as we cannot devalue, we must do so with wages and this will automatically turn into overall costs!
The transmission mechanism is never detailed, perhaps because it does not work. Further, in the past 5/6 weeks, sterling has appreciated against the Euro by over 9% and the dollar by 13% (UK & US each take around 16% of our exports) and we have heard little of the impact of this devaluation, which has been an undoubted help. Furthermore, while the total cost of an employer hiring a worker in Ireland has been rising, as we have been catching up with Europe, it is still lower than in most of the other 15 member states.And I could go on on costs.
But the biggest issue around Ireland's competitiveness is that we do not have a functioning banking system. Credit is not flowing to businesses; there is a lack of confidence and we do not know how much the blanket banks guarantee will ultimately cost Irish taxpayers. This is the issue everyone is talking about, and it is the real competitiveness issue. Wages costs are nothing compared to getting over this enormous economic hump! And then there is the impact of damage to our international reputation on Foreign Direct Investment caused by our business leaders who have ru(i)n our banks, ably assisted by the sycophantic pro-business attitude dominant in the Financial Regulator's office, in Government and in the economic Departments. Regrettably, some top public servants came to believe that being pro-business meant that what is good for business, as determined by its leaders, is synonymous with the public interest!
The next biggest issue around competitiveness is falling demand. If you cut wages, domestic demand will fall further. It is falling already, as people save and some lose their jobs. But international demand is also falling with the recession, and so exporting is getting more difficult. Germany, the world's great exporting nation, is now facing serious export problems.
The answer is a major international stimulus. So far, this is not being tried at the level required in Europe. But to cut just wages in Ireland in an effort to stimulate exports will not succeed. It will exacerbate our economic problems. It will also impose serious hardship on the working poor and many middle income people. For in Ireland, consumer prices are far above the average in the EU27, being a staggering 33% for services (guess who is making serious money?). On the other hand, the huge gap in revenue and public spending does mean that total labour costs, the main component of current public spending, will have to be addressed - but innovatively, fairly and rapidly.
Where firms are facing serious problems, the existing agreement allows for assessment of finances and if inability to pay is proven, there is not an issue. For some firms, labour costs are so insignificant that pay freezes or cuts mean nothing.
Keynes may have been out of fashion for a long time, but it is remarkable that he is so rejected here and that the old classical economics is still dominant in so many heads in this little economically troubled country of ours.
Paul Sweeney is Economic Advisor to ICTU
Competitiveness is very complex covering costs, quality of infrastructure, services, public services, credit etc (see for example, NCC report contents which gives an overview of some issues around the subject on page 7). The list of "12 pillars of competitiveness" in the World Economic Forum’s World Competitiveness Report (page 3 of Chapter 1) can be found here. Some economists have even posted charts with rising costs and labour costs as THE indicator of overall competitiveness!
Unit labour costs are a better indicator, and Ireland's overall productivity is very high. We do have a problem because productivity has not risen in recent years in the era of the Domestically Induced Boom since 2001, but neither has it fallen. And of course, we know that some sectors are more productive than others. But the key issue, never addressed, is why wage and salary earners, who make up 80% of the workforce, should be the only ones who have to contribute to the cost reductions?
Orthodox economists assume society is classless and seldom address cutting professional fees, the profits of wholesalers and other owners of capital, except to vaguely murmur of the need for "more competition." Has this something to do with ideology?
But on cost competition, they say as we cannot devalue, we must do so with wages and this will automatically turn into overall costs!
The transmission mechanism is never detailed, perhaps because it does not work. Further, in the past 5/6 weeks, sterling has appreciated against the Euro by over 9% and the dollar by 13% (UK & US each take around 16% of our exports) and we have heard little of the impact of this devaluation, which has been an undoubted help. Furthermore, while the total cost of an employer hiring a worker in Ireland has been rising, as we have been catching up with Europe, it is still lower than in most of the other 15 member states.And I could go on on costs.
But the biggest issue around Ireland's competitiveness is that we do not have a functioning banking system. Credit is not flowing to businesses; there is a lack of confidence and we do not know how much the blanket banks guarantee will ultimately cost Irish taxpayers. This is the issue everyone is talking about, and it is the real competitiveness issue. Wages costs are nothing compared to getting over this enormous economic hump! And then there is the impact of damage to our international reputation on Foreign Direct Investment caused by our business leaders who have ru(i)n our banks, ably assisted by the sycophantic pro-business attitude dominant in the Financial Regulator's office, in Government and in the economic Departments. Regrettably, some top public servants came to believe that being pro-business meant that what is good for business, as determined by its leaders, is synonymous with the public interest!
The next biggest issue around competitiveness is falling demand. If you cut wages, domestic demand will fall further. It is falling already, as people save and some lose their jobs. But international demand is also falling with the recession, and so exporting is getting more difficult. Germany, the world's great exporting nation, is now facing serious export problems.
The answer is a major international stimulus. So far, this is not being tried at the level required in Europe. But to cut just wages in Ireland in an effort to stimulate exports will not succeed. It will exacerbate our economic problems. It will also impose serious hardship on the working poor and many middle income people. For in Ireland, consumer prices are far above the average in the EU27, being a staggering 33% for services (guess who is making serious money?). On the other hand, the huge gap in revenue and public spending does mean that total labour costs, the main component of current public spending, will have to be addressed - but innovatively, fairly and rapidly.
Where firms are facing serious problems, the existing agreement allows for assessment of finances and if inability to pay is proven, there is not an issue. For some firms, labour costs are so insignificant that pay freezes or cuts mean nothing.
Keynes may have been out of fashion for a long time, but it is remarkable that he is so rejected here and that the old classical economics is still dominant in so many heads in this little economically troubled country of ours.
Paul Sweeney is Economic Advisor to ICTU
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