Showing posts with label Sli Eile. Show all posts
Showing posts with label Sli Eile. Show all posts
Friday, 25 February 2011
Problems and Solutions
Sli Eile: Due to Blogger formatting problems, can't post this directly - but click here for a breakdown of the economic issues facing us, counterposing orthodox and unorthodox analyses and responses.
Tuesday, 8 September 2009
The values underlying the Commission on Taxation
Slí Eile: The Commission on Taxation (CoT) Report is another winter blockbuster following the Summer Bord Snip. A pattern has been witnessed - outsourcing of 'hard choices' to some special Group (but clearly heavily orientated with an ideological terms of reference) followed by months and months of anxious waiting, leading up to a series of early leaks to prepare the people. By the time the tome eventually appears the 'wow' factor is greatly diminished. Then we are into talk of a 'menu of options' for further consideration.
Just options, except that some options are getting early dismissal such as taxes on property. The very notion of taxing capital, land, property, wealth of any sort is anathema, and any proposal to extend existing taxes in these areas runs straight into a political and economic interest group wall. This was as true in the 1970s as it is today. The 'old reliables' used to be the pint, the cigs and petrol. Now it is focussed more than ever on taxing incomes - especially incomes that can be measured, assessed and levied.
There are many positive aspects to the CoT Report in my view, not least:
o The move in thinking towards taxing bads such as polluting consumption and production and not just goods like employment and income
o The move towards more property-related and local level taxes (where we are well out of line internationally); and
o The move towards closing some of the more obscene tax breaks and inequitable tax reliefs for those paying tax at above the standard rate.
Still, there is much that is left untouched. The scale of likely additional taxes is limited and the tax-neutral objective means that there will be some losers and some winners.
The very real danger is that this government - any Government - will pick and cite those parts of the package that fits most easily while neglecting the larger issues such as equity and sustainability.
The purpose of taxation should be seen as a threefold mandate:
o To fund public spending on key services and goods;
o To redistribute income and wealth; and
o To influence behaviour in a socially positive way (incentives/disincentives for different types of work, consumption, investment).
These purposes should reflect a philosophy based on:
o Equality of opportunity and condition;
o Solidarity with those who are poor, sick, very young, very old etc;
o Capacity of enterprises to innovate, compete and provide employment at home and abroad;
o Freedom to participate in society as an equal citizen with rights and responsibilities; and
o Service of the common good where collective effort is required in the provision of public goods.
Neo-liberals have to concede that even Adam Smith reserved certain roles to Government including defence and schooling.
Just options, except that some options are getting early dismissal such as taxes on property. The very notion of taxing capital, land, property, wealth of any sort is anathema, and any proposal to extend existing taxes in these areas runs straight into a political and economic interest group wall. This was as true in the 1970s as it is today. The 'old reliables' used to be the pint, the cigs and petrol. Now it is focussed more than ever on taxing incomes - especially incomes that can be measured, assessed and levied.
There are many positive aspects to the CoT Report in my view, not least:
o The move in thinking towards taxing bads such as polluting consumption and production and not just goods like employment and income
o The move towards more property-related and local level taxes (where we are well out of line internationally); and
o The move towards closing some of the more obscene tax breaks and inequitable tax reliefs for those paying tax at above the standard rate.
Still, there is much that is left untouched. The scale of likely additional taxes is limited and the tax-neutral objective means that there will be some losers and some winners.
The very real danger is that this government - any Government - will pick and cite those parts of the package that fits most easily while neglecting the larger issues such as equity and sustainability.
The purpose of taxation should be seen as a threefold mandate:
o To fund public spending on key services and goods;
o To redistribute income and wealth; and
o To influence behaviour in a socially positive way (incentives/disincentives for different types of work, consumption, investment).
These purposes should reflect a philosophy based on:
o Equality of opportunity and condition;
o Solidarity with those who are poor, sick, very young, very old etc;
o Capacity of enterprises to innovate, compete and provide employment at home and abroad;
o Freedom to participate in society as an equal citizen with rights and responsibilities; and
o Service of the common good where collective effort is required in the provision of public goods.
Neo-liberals have to concede that even Adam Smith reserved certain roles to Government including defence and schooling.
Friday, 31 July 2009
NAMA: And then there are the unknown unknowns
Slí Eile: In the immortal words of Donald Rumsfeld: "There are the known knowns and the unknown knowns. And then there are the known unknowns. And then there are the unknown unknowns". Rumsie may have been referring to Iraq but it could have been NAMA.We urgently need a debate now - on what sort of public ownership and control is required.
A curious feature of the debate on NAMA is the extent to which uncertainty, risk and flexibility apply. Notions of 'paying over the true value', 'writing down', flexible bond-equity swaps to free up cash, discretion to impose levies or not. Fintan O'Toole has already pointed to the odd fact that payments into the National Pension Reserve Fund have been fast-forwarded to cover this year and next.
What is odd about this is that we are borrowing to pay into a Fund out of which, already, money is being re-directed temporarily from long-term pension liabilities to recapitlisation of the Banks. What about the fuss over borrowing and the need to bring it down to 3% of GDP quickly and the impossibility of extra borrowing and the risk associated with same (whether off-balance sheet or on). It is all very odd. One rule for bankers (and developers) and another for welfare recipients and users of public services.
If this isn't the biggest reverse bank robbery in history what is it?
Gambling with a total annual budget of around €60billion Euro and a total national (Government) debt of the same amount and more, we are now taking on a cocktail of toxic assets whose book value is €90billion and real value is unknown and purchase value (for you and me) is somewhere in between. It is Rumsfeld's 'unknown unknowns' that scare me. 'What has posterity ever done for us" is one way of dealing with the matter (i.e. transfer the risk and the tax burden to the next generation). But, that is not moral.
Quite clearly, the whole business is an immoral mess. In fairness to those tasked with legislating and dealing with the current mess (for which of course they cannot avoid significant responsibility) it is not so clear exactly what should be done. Nobody is saying that doing nothing is an option. Delaying action is not an option, either (although the NAMA process is extroardinarily long considering the pace of economic events and the credit crunch on businesses). Roughly there are the following options (readers may wish to add a few more or re-phrase these):
Proceed as the Government is doing now through the draft NAMA legislation with all the risks involved;
Change NAMA (e.g. version 2.0 per Patrick Honohan);
Let the banks go to the wall post-guarantee or get taken over by some foreign bank, merge, clean up etc etc;
Set up a new State Bank (and leave the existing banks under guarantee until 2010 without fresh capitalisation);
Nationalise (or take majority interest in) the remaining Irish banks - either temporarily or long-term;
Writing on 22 May, Jim Stewart said (NAMA or nationalisation unlikely to work)
But there is one area in which it is vital that immediate action is taken, and that is to ensure that credit and loans flow to small and medium sized enterprises, and not just those involved in exporting. Large corporate entities and the multinational corporate sector have other sources of finance. Some large firms have no need for additional borrowing. What is needed is a new entity designed to lend funds to the SME sector. Such an entity cannot be “for profit”. It cannot be run on strictly commercial lines, because in the current crisis lending to SMEs is certain to result in losses. This new entity could be funded on the basis that 20% of loans would fail. Lending is thus made with the knowledge that there is an explicit subsidy. The return to the State (and the economy) is indirect in terms of job preservation, so that when the economy recovers there is an existing base which is a potential source of growth and job creation. Such a policy could also act as a certification device to other banks. It would reduce risk to other banks provided claims on collateral were ranked below that of additional funding from other banks
Well, Fine Gael, at least, concur on the need for a new State Bank. Richard Bruton commented, today:
An extremely low level of share prices provides the best of all opportunities to nationalise now. Allied to a National Recovery Bank credit needs to be put on a new footing driven by social need and not profit. What you don't own you cannot control - at least properly. Banking is too important to be left - ever again - in the hands of those who have wrecked the Irish economy and forfeited our children's future.
A curious feature of the debate on NAMA is the extent to which uncertainty, risk and flexibility apply. Notions of 'paying over the true value', 'writing down', flexible bond-equity swaps to free up cash, discretion to impose levies or not. Fintan O'Toole has already pointed to the odd fact that payments into the National Pension Reserve Fund have been fast-forwarded to cover this year and next.
What is odd about this is that we are borrowing to pay into a Fund out of which, already, money is being re-directed temporarily from long-term pension liabilities to recapitlisation of the Banks. What about the fuss over borrowing and the need to bring it down to 3% of GDP quickly and the impossibility of extra borrowing and the risk associated with same (whether off-balance sheet or on). It is all very odd. One rule for bankers (and developers) and another for welfare recipients and users of public services.
If this isn't the biggest reverse bank robbery in history what is it?
Gambling with a total annual budget of around €60billion Euro and a total national (Government) debt of the same amount and more, we are now taking on a cocktail of toxic assets whose book value is €90billion and real value is unknown and purchase value (for you and me) is somewhere in between. It is Rumsfeld's 'unknown unknowns' that scare me. 'What has posterity ever done for us" is one way of dealing with the matter (i.e. transfer the risk and the tax burden to the next generation). But, that is not moral.
Quite clearly, the whole business is an immoral mess. In fairness to those tasked with legislating and dealing with the current mess (for which of course they cannot avoid significant responsibility) it is not so clear exactly what should be done. Nobody is saying that doing nothing is an option. Delaying action is not an option, either (although the NAMA process is extroardinarily long considering the pace of economic events and the credit crunch on businesses). Roughly there are the following options (readers may wish to add a few more or re-phrase these):
Proceed as the Government is doing now through the draft NAMA legislation with all the risks involved;
Change NAMA (e.g. version 2.0 per Patrick Honohan);
Let the banks go to the wall post-guarantee or get taken over by some foreign bank, merge, clean up etc etc;
Set up a new State Bank (and leave the existing banks under guarantee until 2010 without fresh capitalisation);
Nationalise (or take majority interest in) the remaining Irish banks - either temporarily or long-term;
Writing on 22 May, Jim Stewart said (NAMA or nationalisation unlikely to work)
But there is one area in which it is vital that immediate action is taken, and that is to ensure that credit and loans flow to small and medium sized enterprises, and not just those involved in exporting. Large corporate entities and the multinational corporate sector have other sources of finance. Some large firms have no need for additional borrowing. What is needed is a new entity designed to lend funds to the SME sector. Such an entity cannot be “for profit”. It cannot be run on strictly commercial lines, because in the current crisis lending to SMEs is certain to result in losses. This new entity could be funded on the basis that 20% of loans would fail. Lending is thus made with the knowledge that there is an explicit subsidy. The return to the State (and the economy) is indirect in terms of job preservation, so that when the economy recovers there is an existing base which is a potential source of growth and job creation. Such a policy could also act as a certification device to other banks. It would reduce risk to other banks provided claims on collateral were ranked below that of additional funding from other banks
Well, Fine Gael, at least, concur on the need for a new State Bank. Richard Bruton commented, today:
Furthermore, there is no guarantee that this huge gamble will result in a resumption of normal credit flows to struggling Irish businesses. Irish banks will remain poorly capitalised and concern will turn to new categories of non-performing loans. If restoring credit flows is the prime objective of banking policy, taxpayer investment in a new, State-owned bank with a clean balance sheet and an appetite to lend, such as Fine Gael’s proposed National Recovery Bank, would be far more likely to succeed at a fraction of the risk.My view is that, given the absolutely critical nature of banking and finance to the economy and society and the complete failure of the Irish financial system to fulfil its social role, there is no just alternative to nationalisation at this point. As I argued, previously:
An extremely low level of share prices provides the best of all opportunities to nationalise now. Allied to a National Recovery Bank credit needs to be put on a new footing driven by social need and not profit. What you don't own you cannot control - at least properly. Banking is too important to be left - ever again - in the hands of those who have wrecked the Irish economy and forfeited our children's future.
Monday, 27 July 2009
Dublin Consensus backed by Garret
Slí Eile: The Dublin Consensus is solid. Garret the Good has added his voice to the Consensus in his most recent Saturday column. He writes:
In the same edition, Noel Whelan ('Lee's economic solutions look unrealistic') suggests a type of clock:
Something similar has been suggested by Swedish economist Jens Henricksson.
Yet again, we are served a diet of mild hysteria and tilted ideology. Taking a figure of €50m per day (dividing €18bn net borrowing by 365 days) - approximately €25m of that goes for capital spending. The remaining €25m arises largely from cyclical factors associated with the surge in payments of unemployment benefit. These may be viewed as partial stabilisers.
We don't hear a prominent chorus for a 'national unemployment clock' on our thoroughfares. Neither do we hear calls for a 'tax relief clock' showing an estimate of how much Government is losing in taxes on subsidised private health, pensions for super-earners etc.
Political and union forces on the left need to stand up to this.
It is now crucially important that the Government secure sufficient Dáil support in the December budget to deliver on its 2010/2011 commitment to reduce current and capital spending by €3 billion and €1.75 billion respectively, as well as to raise tax revenue by €4.6 billion. Failure to secure this support would gravely damage our financial credibility.He also goes on to support - reluctantly - some reductions in social welfare:
While I am certainly not happy about that proposal, the alternative of up to €2 billion in cuts in the total cost of health and education means that I cannot rationally reject the need to take some action in relation to social welfare.Again, it is part of the old Dublin Consensus line that 'There Is No Alternative'. It's a zero sum game: if you don't agree to slash A you are, effectively, supporting a slashing of B and/or C. The 'markets' have already ruled out any discretion on borrowing and any increases in taxes must be moderated (even though we continue to tax the very wealthy very lightly).
In the same edition, Noel Whelan ('Lee's economic solutions look unrealistic') suggests a type of clock:
...a “national debt clock” should be erected in Dublin city centre as a means of focusing minds on how rapidly our national debt is rising....Like 'Today we are borrowing €70 million' as the digits keep rising.
Something similar has been suggested by Swedish economist Jens Henricksson.
Yet again, we are served a diet of mild hysteria and tilted ideology. Taking a figure of €50m per day (dividing €18bn net borrowing by 365 days) - approximately €25m of that goes for capital spending. The remaining €25m arises largely from cyclical factors associated with the surge in payments of unemployment benefit. These may be viewed as partial stabilisers.
We don't hear a prominent chorus for a 'national unemployment clock' on our thoroughfares. Neither do we hear calls for a 'tax relief clock' showing an estimate of how much Government is losing in taxes on subsidised private health, pensions for super-earners etc.
Political and union forces on the left need to stand up to this.
Monday, 20 July 2009
Is public spending in Ireland too high?
Slí Eile: Simple question. But not so straight forward when it comes to it. Too high relative to ‘what we can afford?’, ‘too high relative to what we get out of it?’, ‘too high relative to taxes, borrowing and EU rules on borrowing?’, ‘too high relative to some ideal balance of public and private endeavour?’ It’s a loaded question especially in current-day Irish political economy. Discussion about ‘economics’ used to be kind of nerdy. Now, its not only hot but very political as well.
The OECD Review of the Irish Public Service published in 2008 found that the overall level of public sector employment and spending was modest in Ireland compared to other OECD countries.
Let me answer the question first – no – public spending in Ireland is not too high. Human beings deserve five basic things in life:
1. Love
2. Health
3. Education
4. Work
5. A chance to contribute and participate to society, culture and politics
Now, ‘the State’ (not such a clear-cut concept) can’t do everything nor should it try. Neither can the ‘Market’ (not so clear-cut either). Where the balance lies is a matter of personal and societal choice, at least in democracies.
The Bord Snip/’Special Group’ Report is ideologically loaded. It starts from the simple idea that the State’s role should be kept to a minimum and proceeds on the assumption that much of existing state spending is inefficient and wasteful. Some folks on the left – I fear – have fallen for the argument that:
• Things are bad, very bad;
• We have to cut, we have to cut;
• Sure there is lots of wasteful public sector spending and employment arrangements;
• We should come across as the Nice, Respectable, Responsible and Realistic people that we are, and welcome the broad outline of the Report; and
• We will accept some cuts as necessary (and in any case tactically unavoidable) in exchange for some progressive concessions.
This is dangerous and false reasoning. In my view we should be
• defending the public services and public service workers line by line;
• defending the gains made by public sector workers in terms of employment, tenure, conditions (rather than play off one sector of society against another);
• promoting more public spending and not less in the current economic downturn in order to (i) further close the gap in terms of public services which remain very inadequate here compared to what should be considered right for a country at our level of economic development and (ii) stimulate domestic consumption and investment demand;
• reforming a public service that is inefficient, not well run in many cases, bureaucratically and centrally managed and overly politicised; and
• reducing spending in some areas only to divert it to other areas and increase the overall spending level.
The point is that public spending in Ireland is too low and not too high. We need a Bord Athbheo to:
• Revitalise public services through reform and reallocation of spending from areas and activities of waste to areas of need and new opportunity
• Completely change the existing way of organising work away from inflexible, top-down and bureaucratic work organisation practices.
At the same time, there is scope for an orderly increase in taxes on:
• Property including local-based taxes
• High-income earners via ending non-standard tax reliefs and other tax breaks not necessary for economic activity
• Carbon taxes.
An irony of the current restrictions on employment in the public sector is that a whole industry of control, sanctions and upward delegation of responsibility from lower to higher grades and from line Departments to Department of Finance is happening. This runs exactly counter to what the OECD Review team on the reform of the Irish public service recommended last year. We are going back not forward, in this regard
The OECD Review of the Irish Public Service published in 2008 found that the overall level of public sector employment and spending was modest in Ireland compared to other OECD countries.
Let me answer the question first – no – public spending in Ireland is not too high. Human beings deserve five basic things in life:
1. Love
2. Health
3. Education
4. Work
5. A chance to contribute and participate to society, culture and politics
Now, ‘the State’ (not such a clear-cut concept) can’t do everything nor should it try. Neither can the ‘Market’ (not so clear-cut either). Where the balance lies is a matter of personal and societal choice, at least in democracies.
The Bord Snip/’Special Group’ Report is ideologically loaded. It starts from the simple idea that the State’s role should be kept to a minimum and proceeds on the assumption that much of existing state spending is inefficient and wasteful. Some folks on the left – I fear – have fallen for the argument that:
• Things are bad, very bad;
• We have to cut, we have to cut;
• Sure there is lots of wasteful public sector spending and employment arrangements;
• We should come across as the Nice, Respectable, Responsible and Realistic people that we are, and welcome the broad outline of the Report; and
• We will accept some cuts as necessary (and in any case tactically unavoidable) in exchange for some progressive concessions.
This is dangerous and false reasoning. In my view we should be
• defending the public services and public service workers line by line;
• defending the gains made by public sector workers in terms of employment, tenure, conditions (rather than play off one sector of society against another);
• promoting more public spending and not less in the current economic downturn in order to (i) further close the gap in terms of public services which remain very inadequate here compared to what should be considered right for a country at our level of economic development and (ii) stimulate domestic consumption and investment demand;
• reforming a public service that is inefficient, not well run in many cases, bureaucratically and centrally managed and overly politicised; and
• reducing spending in some areas only to divert it to other areas and increase the overall spending level.
The point is that public spending in Ireland is too low and not too high. We need a Bord Athbheo to:
• Revitalise public services through reform and reallocation of spending from areas and activities of waste to areas of need and new opportunity
• Completely change the existing way of organising work away from inflexible, top-down and bureaucratic work organisation practices.
At the same time, there is scope for an orderly increase in taxes on:
• Property including local-based taxes
• High-income earners via ending non-standard tax reliefs and other tax breaks not necessary for economic activity
• Carbon taxes.
An irony of the current restrictions on employment in the public sector is that a whole industry of control, sanctions and upward delegation of responsibility from lower to higher grades and from line Departments to Department of Finance is happening. This runs exactly counter to what the OECD Review team on the reform of the Irish public service recommended last year. We are going back not forward, in this regard
Thursday, 16 July 2009
Bord Snip Nua Report: Some thoughts
Slí Eile: An Bord Snip Nua, or the Special Group on Public Service Numbers and Expenditure Programmes (hereafter the ‘Special Group’) to give it its full title, will dominate public attention for some time. Five months before a budget, two months before Lisbon II, three weeks before the Dublin horse show, four weeks before the Galway races and a week after the Dáil rose. Good timing.
Anyway.
So, it is proposed to make further cuts in Overseas Aid because it ‘cannot be afforded’. That says it all. The Swedish Prime Minister is reported, today, as saying ‘Our citizens will not accept the repeated use of taxpayers’ money to save financial institutions that have acted irresponsibly’.
Say, what is the final figure on the Anglo-Irish bail-out going to look like - €7bn, €11bn, more? And to what end? So much for moral hazard. In the meantime, social welfare recipients can expect mounting political pressure to cut their benefits by 5% in the run up to the December budget (that is if we do not have a budget or an election sooner). Easy to call for a 5% cut in welfare benefits when one is on 100K, 200K, more? per annum. After you, fellow citizens of the Special Group. Let's spell it out. The Special Group was as follows:
• Colm McCarthy, UCD economist (chair);
• Donal McNally, Second Secretary General, Department of Finance;
• Pat McLoughlin, CEO of Irish Payment Services Organisation;
• Maurice O’Connell, former Governor of the Central Bank of Ireland;
• William Slattery, Executive VP, European Offshore Domiciles, State Street Corporation; and
• Mary Walsh, former Partner, PricewaterhouseCoopers (and member of the Commission on Taxation – by the way)
The problem with an exercise such as Bord Snip Nua is that its terms of reference are set in advance to exclude particular issues, including the scandalously low level of tax paid by particular groups in Irish society who avail of various tax breaks and reliefs. The accent of the exercise is on spending. This is sheer ideology.
An interesting feature of the Report acknowledged up front is the following:
"The Group also received valuable submissions from members of the public".
Was there an invitation to invite submissions? Did this include our elected representatives on local authorities and the Oireachtas?
It would be interesting to undertake a values analysis of the Special Group –
• What priorities and competing values were discussed?
• Where did the Special Group stand on the rationale for public versus private provision?
• What is an acceptable level of poverty, and what responsibilities arise for Government, families and other actors?
• And the old chestnut – what is the optimum balance – Berlin or Boston or something in between?
Some initial points:
Total Government spending (current and capital) is projected to rise to over 50% of GNP (the measure of income preferred over GDP by the Special Group). This, it is claimed, is unsustainable. The reason why spending shot up in 2008 and 2009 reflects a rising unemployment payment bill, alongside a collapse in national income. This is typical in a cycle where automatic stabilizers are built in as a result of falling tax receipts and rising welfare payments as economic activity declines.
It is important to note that the Special Group went well beyond the position announced in the Supplementary Budget of April this year. The latter envisaged a cut of €1.5bn in 2010, followed by another cut of €1.5bn in 2011 (in addition to tax hikes, bringing the total adjustment to €9.4bn in just two years 2010-11). The Special Group have gone for cuts of over €5bn, where ‘most but not all of the savings identified would be potentially deliverable in 2010’ (p4). The total hit – if implemented in one year – would be around 9.3% of total spending. The main targets would be reductions in staffing in the health and education sectors, and reductions in payments to those on social welfare. Inevitably, many public service programmes will be curtailed or discontinued - as is already happening.
Although the Special Group has no remit in regard to levels of public sector pay, it clearly indicated that further cuts in take-home pay are on the cards. Also recommended is a Benchmarking (downwards) exercise. Presumably this will not extend to the highly paid in the private and financial sectors.
Anyway.
So, it is proposed to make further cuts in Overseas Aid because it ‘cannot be afforded’. That says it all. The Swedish Prime Minister is reported, today, as saying ‘Our citizens will not accept the repeated use of taxpayers’ money to save financial institutions that have acted irresponsibly’.
Say, what is the final figure on the Anglo-Irish bail-out going to look like - €7bn, €11bn, more? And to what end? So much for moral hazard. In the meantime, social welfare recipients can expect mounting political pressure to cut their benefits by 5% in the run up to the December budget (that is if we do not have a budget or an election sooner). Easy to call for a 5% cut in welfare benefits when one is on 100K, 200K, more? per annum. After you, fellow citizens of the Special Group. Let's spell it out. The Special Group was as follows:
• Colm McCarthy, UCD economist (chair);
• Donal McNally, Second Secretary General, Department of Finance;
• Pat McLoughlin, CEO of Irish Payment Services Organisation;
• Maurice O’Connell, former Governor of the Central Bank of Ireland;
• William Slattery, Executive VP, European Offshore Domiciles, State Street Corporation; and
• Mary Walsh, former Partner, PricewaterhouseCoopers (and member of the Commission on Taxation – by the way)
The problem with an exercise such as Bord Snip Nua is that its terms of reference are set in advance to exclude particular issues, including the scandalously low level of tax paid by particular groups in Irish society who avail of various tax breaks and reliefs. The accent of the exercise is on spending. This is sheer ideology.
An interesting feature of the Report acknowledged up front is the following:
"The Group also received valuable submissions from members of the public".
Was there an invitation to invite submissions? Did this include our elected representatives on local authorities and the Oireachtas?
It would be interesting to undertake a values analysis of the Special Group –
• What priorities and competing values were discussed?
• Where did the Special Group stand on the rationale for public versus private provision?
• What is an acceptable level of poverty, and what responsibilities arise for Government, families and other actors?
• And the old chestnut – what is the optimum balance – Berlin or Boston or something in between?
Some initial points:
Total Government spending (current and capital) is projected to rise to over 50% of GNP (the measure of income preferred over GDP by the Special Group). This, it is claimed, is unsustainable. The reason why spending shot up in 2008 and 2009 reflects a rising unemployment payment bill, alongside a collapse in national income. This is typical in a cycle where automatic stabilizers are built in as a result of falling tax receipts and rising welfare payments as economic activity declines.
It is important to note that the Special Group went well beyond the position announced in the Supplementary Budget of April this year. The latter envisaged a cut of €1.5bn in 2010, followed by another cut of €1.5bn in 2011 (in addition to tax hikes, bringing the total adjustment to €9.4bn in just two years 2010-11). The Special Group have gone for cuts of over €5bn, where ‘most but not all of the savings identified would be potentially deliverable in 2010’ (p4). The total hit – if implemented in one year – would be around 9.3% of total spending. The main targets would be reductions in staffing in the health and education sectors, and reductions in payments to those on social welfare. Inevitably, many public service programmes will be curtailed or discontinued - as is already happening.
Although the Special Group has no remit in regard to levels of public sector pay, it clearly indicated that further cuts in take-home pay are on the cards. Also recommended is a Benchmarking (downwards) exercise. Presumably this will not extend to the highly paid in the private and financial sectors.
Wednesday, 1 July 2009
The Dublin Consensus
Sli Eile: We recall the term ‘Washington Consensus’ as it was first coined in the 1980s. Dani Rodrik summed it up as:
Stablize, Privatise, Liberalise.
Part of the recipe was to get your ‘macro balances in order’
In Table 1 of his paper, Rodrik (a critic of same) lists the 10 Washington Consensus principles as:
1. Fiscal discipline
2. Reorientation of public expenditures
3. Tax reform
4. Financial liberalization
5. Unified and competitive exchange rates
6. Trade liberalization
7. Openness to DFI
8. Privatization
9. Deregulation
10. Secure Property Rights
Sounds familiar?
Rodrik outlines a supplementary list in the ‘Augmented Washington Consensus’ (sounds a bit less familiar) as follows:
11. Corporate governance
12. Anti-corruption
13. Flexible labor markets
14. WTO agreements
15. Financial codes and standards
16. “Prudent” capital-account opening
17. Non-intermediate exchange rate regimes
18. Independent central banks/inflation targeting
19. Social safety nets
20. Targeted poverty reduction
I suggest that there is, already, a real ‘Dublin Consensus’ and it goes as follows:
1. Sort out Banking through some form of toxic-containment (folks differ on the details)
2. Frontload big, immediate cuts in nominal wages in the private and especially the public sectors (real ‘plain vanilla’ cuts and not just voluntary contributions from the judiciary, contrived ‘pension’ levies and various stealth charges)
3. Frontload big, immediate cuts in public spending across the board from pay (see above) to social welfare (‘the highest in Europe’ false claim) to ‘wasteful’ capital projects to other items
4. Bring the low and middle-income groups back into the tax net
5. Downsize and reform the public sector
There are a few supplementaries like privitising some state assets – but the core of the Dublin Consensus is captured in the above five points. This is a real, audible and visible consensus from the pages of the Irish Times to learned articles and conference papers to ‘economics for the simple’ on the public airways – and of course many but not all the comments among our separated brethren on irisheconomy.ie.
By the way, I completely disagree with the view that the ‘left’ is in any way winning the economic argument.
The right is winning hands down and we are looking at, potentially, the most deflationary fiscal stance since at least the 1950s and further erosion in our already weak public and social infrastructure – relative to the standard of provision and living standards people have become accustomed to following the Celtic Tiger.
So, when journalist Sarah Carey writing in today’s Irish Times argues that the ICTU should roll over and declare:
Is there no other show in town?
Has the Dublin consensus won?
Should we fold up, go home and concede that the logic of market economics, international finances, a failed domestic banking model and an overwhelming media, economics and political consensus that the only path to recovery is through cuts, more cuts, unemployment and dramatic falls in living standards. Nobody likes to say it quite like this – but that is what most people are assuming – there is no other way – we have to price ourselves back into markets, we have to balance the public books fast and hold on until the tide comes back in on an international recovery.
The debate about jobs subsidies is a deflection.
Whether or not you think such subsidies will work is not the point. My original blog questioned the evidence that they would work and implied that other uses of this expenditure would be more effective. At this point in time it is hard to cast judgment since we have no details or analysis beyond a few media leaks. And there is no certainty on where different interests stand on the various issues. The point is that we need to move away from marginal debates about relatively marginal issues to confronting the real issues:
1. Domestic fiscal stimulus versus profound fiscal deflation for 2009-2012/13
2. Skills, innovation and growing the indigenous economy on world markets versus business as usual depending on FDI and a relatively protected and cosseted non-traded sector (as in price controls, costs and rigid work practices in the case of the public and civil service)
3. Corporate governance change versus cosmetic name change
4. Finding another way of dealing with banking rather than bleeding the whole country with a blanket cheque to recapitalise the failed (with the bail-out of Anglo-Irish ultimately costing more than an entire year’s education budget)
This is where the real debate needs to be reclaimed and the Dublin Consensus challenged. Self-proclaimed progressive and left folk including public sectors unions need to get serious about reform of the public service (which is one area where the Dublin Consensus is partially right) – how can we expect people to buy-into Scandinavian tax levels and redistribution policies unless we reform, root and branch, a slowing-moving, under-funded, under-staffed (yes I meant under-staffed) and inefficient public service operating in a very inefficient manner and subject to all sorts of political constraints and centralisation that is out of line with 21st Century public management.
(Glad that progressive economy trumps Grey’s Anatomy).
Stablize, Privatise, Liberalise.
Part of the recipe was to get your ‘macro balances in order’
In Table 1 of his paper, Rodrik (a critic of same) lists the 10 Washington Consensus principles as:
1. Fiscal discipline
2. Reorientation of public expenditures
3. Tax reform
4. Financial liberalization
5. Unified and competitive exchange rates
6. Trade liberalization
7. Openness to DFI
8. Privatization
9. Deregulation
10. Secure Property Rights
Sounds familiar?
Rodrik outlines a supplementary list in the ‘Augmented Washington Consensus’ (sounds a bit less familiar) as follows:
11. Corporate governance
12. Anti-corruption
13. Flexible labor markets
14. WTO agreements
15. Financial codes and standards
16. “Prudent” capital-account opening
17. Non-intermediate exchange rate regimes
18. Independent central banks/inflation targeting
19. Social safety nets
20. Targeted poverty reduction
I suggest that there is, already, a real ‘Dublin Consensus’ and it goes as follows:
1. Sort out Banking through some form of toxic-containment (folks differ on the details)
2. Frontload big, immediate cuts in nominal wages in the private and especially the public sectors (real ‘plain vanilla’ cuts and not just voluntary contributions from the judiciary, contrived ‘pension’ levies and various stealth charges)
3. Frontload big, immediate cuts in public spending across the board from pay (see above) to social welfare (‘the highest in Europe’ false claim) to ‘wasteful’ capital projects to other items
4. Bring the low and middle-income groups back into the tax net
5. Downsize and reform the public sector
There are a few supplementaries like privitising some state assets – but the core of the Dublin Consensus is captured in the above five points. This is a real, audible and visible consensus from the pages of the Irish Times to learned articles and conference papers to ‘economics for the simple’ on the public airways – and of course many but not all the comments among our separated brethren on irisheconomy.ie.
By the way, I completely disagree with the view that the ‘left’ is in any way winning the economic argument.
The right is winning hands down and we are looking at, potentially, the most deflationary fiscal stance since at least the 1950s and further erosion in our already weak public and social infrastructure – relative to the standard of provision and living standards people have become accustomed to following the Celtic Tiger.
So, when journalist Sarah Carey writing in today’s Irish Times argues that the ICTU should roll over and declare:
'Comrades, I have nothing to offer you but cuts and taxes. The deeper the pain now, the quicker all this will be over’we have to ask:
Is there no other show in town?
Has the Dublin consensus won?
Should we fold up, go home and concede that the logic of market economics, international finances, a failed domestic banking model and an overwhelming media, economics and political consensus that the only path to recovery is through cuts, more cuts, unemployment and dramatic falls in living standards. Nobody likes to say it quite like this – but that is what most people are assuming – there is no other way – we have to price ourselves back into markets, we have to balance the public books fast and hold on until the tide comes back in on an international recovery.
The debate about jobs subsidies is a deflection.
Whether or not you think such subsidies will work is not the point. My original blog questioned the evidence that they would work and implied that other uses of this expenditure would be more effective. At this point in time it is hard to cast judgment since we have no details or analysis beyond a few media leaks. And there is no certainty on where different interests stand on the various issues. The point is that we need to move away from marginal debates about relatively marginal issues to confronting the real issues:
1. Domestic fiscal stimulus versus profound fiscal deflation for 2009-2012/13
2. Skills, innovation and growing the indigenous economy on world markets versus business as usual depending on FDI and a relatively protected and cosseted non-traded sector (as in price controls, costs and rigid work practices in the case of the public and civil service)
3. Corporate governance change versus cosmetic name change
4. Finding another way of dealing with banking rather than bleeding the whole country with a blanket cheque to recapitalise the failed (with the bail-out of Anglo-Irish ultimately costing more than an entire year’s education budget)
This is where the real debate needs to be reclaimed and the Dublin Consensus challenged. Self-proclaimed progressive and left folk including public sectors unions need to get serious about reform of the public service (which is one area where the Dublin Consensus is partially right) – how can we expect people to buy-into Scandinavian tax levels and redistribution policies unless we reform, root and branch, a slowing-moving, under-funded, under-staffed (yes I meant under-staffed) and inefficient public service operating in a very inefficient manner and subject to all sorts of political constraints and centralisation that is out of line with 21st Century public management.
(Glad that progressive economy trumps Grey’s Anatomy).
Thursday, 11 June 2009
Bloated public sector wages?: Mythbusters 101 sequel
Sli Eile: In a previous post, Mythbusters 101: Wages in the Irish Public Sector, I examined the available evidence in regard to public sector wages and how they compare to corresponding employee wages in the private sector. The ‘political’ context is clear:
Some well-paid economists and media commentators are concerned about average wages being considerably higher in the public sector than in the private sector – even when other factors are allowed for (gender, education, experience, union membership etc); and
Something needs to be done by Government – they argue – to close the gap by reducing public sector wages (further) and boost competitiveness in the traded sector as Ireland seeks to ‘price itself’ back into world markets (scrambling to compete, also, against the negative impact of falling world trade and demand as well as Euro appreciation against Sterling and other currencies).
So, there you have it. But, their focus is narrow and their implied or explicit solution ‘rich’ especially considering where people are coming from. Lets dig a little deeper.
What sorts of factors has driven salaries in the Irish public sector in recent decades? Lets be honest. Along with a rising economic tide, rising house prices abetted and fuelled by various types of tax cuts made a huge contribution to wage increases in the public and private sectors. Although the information is dated (and not explicitly sourced in official statistics), the following table taken from IMPACT/CPSU illustrates the general point:
COMPARISON OF HOUSE PRICES, SALARY AND GDP
1974 TO 2006
House Price | Secretary General | Clerical Officer | GDP (€million) | |
1974 | €10,943 | €9,881 | €2,748 | €3,860 |
2006 | €351,263 | €19,1488 | €34,050 | €152,091 |
Increase % | 3110% | 1838% | 1139% | 3840% |
Source: Submission by the CPSU and IMPACT to the Benchmarking Body for the Clerical Officer Grade in the Civil Service, Health Service and Local Authority Sector, July 2006. note that the figures shown for GDP, above, differ from those subsequently published by the CSO.
Another way of looking at this from the point of view of low-paid public sector workers is to say that, over time, we see two parallel developments:
Senior manager premia growing within the public (and private) sectors; and
Strong ‘negative premia’ for some private sector workers in vulnerable sectors (hotels, catering, retail etc) where the international race to the bottom applies – this has the effect of dragging down average employee wages in the private sector compared to their better paid and more strongly unionised peers in the public sector. (see for details on the CSO website for average weekly earnings in 2007 in accommodation and catering at €446 per week compared to €856 in the ‘Real estate, renting of Machinery’ sector).
What the Kelly et al (‘Benchmarking, Social Partnership and Higher Remuneration: Wage Settling Institutions and the Public-Private Sector Wage Gap in Ireland) and Boyle et al (Public-Private Wage Differentials in Ireland) papers do not address is the much wider issue of:
How do all incomes compare between those working in the public sector and those outside the public sector? In other words, what picture emerges if we were able to account for all types of income including those of the self-employed, investors etc.?
The dispersion of wages in the public sector is different (more compressed) to that in the private sector.
So, ask a question that lends itself to an answer which available data can provide and is part of the conventional response to the current economic crisis:
Cut public sector wages to align more with private
Cut all wages at the same time
Increase profitability
Increase competitiveness
Provide for some trickle-down once public finances, world markets etc recover
The plebs will buy into this since ‘there is no alternative’.
To sum up – yes wages are higher in the public sector than in the private because if you compare salaried employees in the sectors the impact of trade union membership and stable employment contracts has given an advantage to workers in the public service. However, when account is taken of profits and other sources of income the picture is probably very different. Two questions arise here:
Is total household income averaged out for those households where none of its members are working in the public service higher than in other households? (does anyone reading this know of research in Ireland on this issue?)
How have the major aggregates for income fared over the last decade?
The second question is easier to approach. CSO publish national accounts data which show aggregate data for various types of non-wage income (Table 12 in National Income and Expenditure Tables, 1995-2007). Undistributed profits of companies grew from 18 to 20% of total output (Net National Product at Factor Cost) between 2000 and 2006 (it feel to 13% in 2001). Over the same period, ‘remuneration of employees’ increased its share from 63 to 64%. Lets say all employees, on average, were just about keeping pace with other sectors in the economy (CSO data also reveal that ‘sole independent traders’ did not fare as well as wage-employees with average annual increases of 7.7% per annum compared to 10.4% for the latter – Table 12.1). However, we still don’t know how individuals or households compare when all types of income are taken into account. It may be objected that two other factors arise when comparing those in the public and private sectors:
Most (but certainly not all) public sector jobs are secure compared to jobs in the non-public sector;
The present economic value of future pension income for public sector workers compares favourably with that of most private sector employees. The Review Body on Higher Remuneration in the Public Sector in its 2007 discounted average private sector salaries by 15 per cent to account for average differences in regard to pension provision between the public and private sectors.
The first objection is valid and it is hard to put a ‘value’ on this. When economic times are tough the economic value of a public sector job certainly rises, dramatically, compared to most jobs in the private sector. This can give rise to considerable and understandable resentment among private sector workers and their families. The second objection lends itself to a more complex discussion about pensions. The fact is that about one half of private sector employees are not in any occupational pension scheme themselves. However, the proportions among private sector workers participating in some scheme differ dramatically between high and low-income workers. Colm McCarthy has cited data to show that the bottom income decile of persons in employment have a 10% take-up of pension schemes compared to 90% for top income decile (a handy statistic to remember!) – reference 2004, persons aged 20-69 sourced by McCarthy from Pension Board data.
You can take the view that ‘everyone must share the pain’ and everyone must take a cut especially public service workers. However, this line of reasoning leaves out the Elephant in the parlour which is other types of income that are less visible, frequently outside the scope of taxable income and reckoning and absent from the focus of media attention. The other problem with the ‘everyone must share the pain’ line is that those who promote this are in the top income deciles drawing, not infrequently, multiple incomes from academic salaries (€100K p.a. plus) consultancy and investment income (although the latter has probably taken a hammering of late).
Sharing the pain when you are on the breadline is quite another reality.
Next Mythbusters will focus on social welfare rates – the likely target of adverse media and political attention as Budget 2010 approaches. Are rates, here, high by international standards (extending beyond Derry and Newry, that is)?
Monday, 8 June 2009
TASC Annual Lecture discussion
Slí Eile: The Annual TASC Lecture given by James Galbraith and Maria Rodigrues attracted limited media attention (see Irish Times coverage). You can find an interview with Galbraith at Irish Left Review as well as a lot on TV3's Nightly News with Vincent Browne. Both Galbraith and Rodrigues pointed to the need for:
- An ambitious, internationally co-ordinated and effective stimulus package; and
- Deep reform of institutions and the regulatory framework within which corporations – especially financial – work.
The key messages are not to be missed – even in Ireland….however the event went without comment on irisheconomy.ie.
Lets suppose some household name Irish economist were to respond to the lecture last Thursday evening what would he (they are almost entirely he) say? Something on the following lines:
Thank you for a very interesting lecture Professor Galbraith and Rodigrues. But, you know, what you propose might be all very well in the US or some European countries …. It just doesn’t apply here. For one thing we are so deeply in trouble financially, fiscally and otherwise that we need to get public finances, competitiveness and banking sorted out BEFORE we can entertain notions of expansion in public spending. Secondly, a domestic, home-grown stimulus package probably would not work so well here anyway because we are a small open economy with high import content in most forms of public spending and, therefore, low Keynesian multipliers…..
Or words to that effect….
The point needs to be seriously debated and we have hardly begun. I suggest that we are confronted by two salient facts whether we like it or not:
1. An overwhelming Irish media, professional economics, political consensus that stimulus packages will not work here, at this time…
2. A lack of a coherent, well-thought out, empirically-backed, convincing alternative package of proposals to counter the orthodoxy consensus.
This, I suggest, is a crisis of political economy. Speaking of the political, some Government commentators who suggest (correctly) that the ESRI – an independent economic think-tank – is broadly behind the Government’s approach to economic policy is correct. If anything, it could be said that Government is too timid and not deflationary enough in the view of some economists (although more outside than inside the ESRI on this one).
So, we have deflationary politics, deflationary economics, ecologically disastrous patterns of behaviour and supporting ‘all growth is good’ ideology and no comprehensive, elaborated economic plan from the left. Is it any wonder that we are not seeing a seismic shift to the left fast enough to match the seriousness of the current economic crisis. If anything we are seeing a very worrying movement in the opposition direction in many EU States. In part that reflects the failure of many progressive forces including allied intellectual forces to embrace a more urgent, joined-up and well-thought out response to the current gathering storm.
Please, please can we have more thought, more debate and more action.
- An ambitious, internationally co-ordinated and effective stimulus package; and
- Deep reform of institutions and the regulatory framework within which corporations – especially financial – work.
The key messages are not to be missed – even in Ireland….however the event went without comment on irisheconomy.ie.
Lets suppose some household name Irish economist were to respond to the lecture last Thursday evening what would he (they are almost entirely he) say? Something on the following lines:
Thank you for a very interesting lecture Professor Galbraith and Rodigrues. But, you know, what you propose might be all very well in the US or some European countries …. It just doesn’t apply here. For one thing we are so deeply in trouble financially, fiscally and otherwise that we need to get public finances, competitiveness and banking sorted out BEFORE we can entertain notions of expansion in public spending. Secondly, a domestic, home-grown stimulus package probably would not work so well here anyway because we are a small open economy with high import content in most forms of public spending and, therefore, low Keynesian multipliers…..
Or words to that effect….
The point needs to be seriously debated and we have hardly begun. I suggest that we are confronted by two salient facts whether we like it or not:
1. An overwhelming Irish media, professional economics, political consensus that stimulus packages will not work here, at this time…
2. A lack of a coherent, well-thought out, empirically-backed, convincing alternative package of proposals to counter the orthodoxy consensus.
This, I suggest, is a crisis of political economy. Speaking of the political, some Government commentators who suggest (correctly) that the ESRI – an independent economic think-tank – is broadly behind the Government’s approach to economic policy is correct. If anything, it could be said that Government is too timid and not deflationary enough in the view of some economists (although more outside than inside the ESRI on this one).
So, we have deflationary politics, deflationary economics, ecologically disastrous patterns of behaviour and supporting ‘all growth is good’ ideology and no comprehensive, elaborated economic plan from the left. Is it any wonder that we are not seeing a seismic shift to the left fast enough to match the seriousness of the current economic crisis. If anything we are seeing a very worrying movement in the opposition direction in many EU States. In part that reflects the failure of many progressive forces including allied intellectual forces to embrace a more urgent, joined-up and well-thought out response to the current gathering storm.
Please, please can we have more thought, more debate and more action.
Friday, 5 June 2009
Mythbusters 101: Wages in the Irish public sector
Sli Eile: Are incomes, on average, higher in the public sector than in the private sector? Note the reference to ‘incomes’ and not ‘wages’ in this question.
The context is claims made by some commentators that wages (note wages) are about 20% higher in the public sector than in the private (and the strong implication that wages in the public service need to be cut by this amount for reasons of restoring public finance as well as encouraging cost competitiveness in the traded sectors). Allied to this is a broader agenda about reducing wages in general. It is no accident that media and political commentators focus in not only on the supposed wage difference but also the claimed benefits of security, pension entitlement and outmoded and inflexible work practices.
By focussing, narrowly, on wage costs as distinct from incomes (much harder to measure with up to date statistics) the terrain for making comparisons is restricted. Thus, income of the self-employed, dividends, rental income, profits etc are excluded. But, lets stay with that narrow terrain of wages for the moment.
An important reference was the paper entitled Public-Private Wage Differentials in Ireland, 1994-2001 by Gerry Boyle, Rory McElligott and Jim O’Leary published in the ESRI Quarterly Economic Commentary in 2004. The data are dated but it remains the single most used reference point for comparing wages. Recourse to published CSO data on average hourly earnings for specific sectors is possible to compare trends since 2001, the last year covered in the Boyle et al comparison (even though the latter uses total monthly earnings).
In comparing the public and private sectors (sticking with a broad definition of public sector to include education, health, semi-state companies etc) account needs to be taken of differences in age-profile, educational attainment, unit size and occupational structure. Boyle et al. factored this in by using a multi-variate approach based on through-time data from the European Community Household Panel Survey (the comparator nowadays would be the EU Survey on Income and Living Conditions (EUSILC). As in any comparison of income care is needed with regard to quality of reported earnings – perhaps more so at the top and lower end of the income scale where some survey under-reporting is possible. By focussing, only, on employees there is relatively less scope for under-reporting. The other difficulty arises from comparing various ‘benefits-in-kind’ not all of which may appear in the reported data.
Data issues aside, the Boyle et al. paper concludes, clearly and convincingly, that on average wages are higher than in the private sector for employees. They conclude following extensive regression analysis on earnings data as follows:
We estimate that in 2001, the latest year for which we have completed our analysis, the premium enjoyed by public servants was about 13 per cent, on the basis of gross monthly earnings.
More recent work by Eilish Kelly, Séamus McGuinness and Philip O’Connell (‘Benchmarking, Social Partnership and Higher Remuneration: Wage Settling Institutions and the Public-Private Sector Wage Gap in Ireland’ ESRI Working Paper no 270, December 2008) also shows a significant premium for public sector workers compared to private – statistically allowing for various factors that differentiate these sectors (educational level, occupation, age etc). Using more recent data from a different data source to that used by Boyle et al.: the National Employment Survey, Kelly et al. report an increase in the estimated public sector pay premium (after adjustment for other factors) from 7.7 to 23.5% between 2003 and 2006. Furthermore they report, as did Boyle et al., higher premia still for lower paid workers in the public sector (32% in 2006 compared to 24% in 2003 in Kelly et al). It should be noted that Kelly et al restricted their sample to full-time, permanent employees who are aged between 25 and 59, and exclude semi-state body employees
(All of these studies use standard econometric regressions with employee wages regressed on a range of explanatory variables including age/experience, education, gender, size of enterprise etc. However, there are some differences in the list of explanatory variables included. For example Kelly et al include a measure of ‘professional body membership’ to control for the effect of union membership on wages. This variable, alone, accounts for a premium of 14% in 2006 in favour of public sector workers.).
Why such a premium exists and what its implications are in the current economic climate could be explored further. Historically, it is likely that the existence of such a premium is associated with:
- Strong trade union membership across the whole public service (picked up anyway in the Kelly et al paper);
- Allied to this the role of centralised pay agreements in maintaining a relatively stable pattern (between public and private) over time; and
- Benchmarking which had the effect of raising senior and top-manager pay in the public service relative to lower-paid public and private sector workers.
Boyle et al. showed that the difference between high and low earners is smaller in the public sector (in 2001). Furthermore they showed that the ‘premium’ to public service workers was higher at the lower end of the wage distribution which illustrates that the meagrely-paid among particular groups of public service workers like some industrial workers, clerical staff at point of entry etc on close to something around €25,000 a year are relatively well paid compared to the working poor or in the private sector on rock-bottom wages close to the national minimum wage (and sometimes less in the ‘informal’ economy). They estimate a premium of about 17% for the bottom 10% of earners (the lowest 10% of earners in the public service earned 17% more than the lowest 10% of earners in the private sector – after adjustment for factors such as age, education, occupation etc).
A marked feature of public sector pay has been the very large growth in senior and top management salaries– some of this linked directly to ‘benchmarking’ awards in two phases over recent years. The theory was that the public service needed to attract or retain the best talent by aligning salaries with comparable roles in the private sector. This ‘theory’ is very questionnable because:
- The public service can never be simply run like a business centered on the ethos of profit maximisation
- The inequality between the lowest and highest paid is a justifiable source of resentment among many {the ratio of salaries for Clerical officer staff (civil service, health and local authority) to CEO/Secretary-General has increased from a factor of 3.5 to 5.6 (Source: IMPACT/CPSU – Table 10) between 1987 and 2006 for examples}.
- Public service labour markets remain rigid and internal so that inflows from the private sector at the very top level is the exception more than the rule.
All of this needs to be borne in mind since the ‘premium’ to public sector workers compared to private sector workers is one dimension. The other ‘premium’ is the ratio of high to low earners in each of the public and private sectors has gone up appreciably over time. I don’t see too many people in the economic fraternity complaining about that. (We have seen obscene growing differences in regard to top remuneration in Corporate USA and mimicked in Ireland and elsewhere from the era of ‘greed is good’ onwards.)
What sorts of factors has driven salaries in recent decades and what implications can be drawn for incomes policy? I will look at these issues as well as some evidence on non-wage incomes, in a subsequent 'Mythbuster'.
The context is claims made by some commentators that wages (note wages) are about 20% higher in the public sector than in the private (and the strong implication that wages in the public service need to be cut by this amount for reasons of restoring public finance as well as encouraging cost competitiveness in the traded sectors). Allied to this is a broader agenda about reducing wages in general. It is no accident that media and political commentators focus in not only on the supposed wage difference but also the claimed benefits of security, pension entitlement and outmoded and inflexible work practices.
By focussing, narrowly, on wage costs as distinct from incomes (much harder to measure with up to date statistics) the terrain for making comparisons is restricted. Thus, income of the self-employed, dividends, rental income, profits etc are excluded. But, lets stay with that narrow terrain of wages for the moment.
An important reference was the paper entitled Public-Private Wage Differentials in Ireland, 1994-2001 by Gerry Boyle, Rory McElligott and Jim O’Leary published in the ESRI Quarterly Economic Commentary in 2004. The data are dated but it remains the single most used reference point for comparing wages. Recourse to published CSO data on average hourly earnings for specific sectors is possible to compare trends since 2001, the last year covered in the Boyle et al comparison (even though the latter uses total monthly earnings).
In comparing the public and private sectors (sticking with a broad definition of public sector to include education, health, semi-state companies etc) account needs to be taken of differences in age-profile, educational attainment, unit size and occupational structure. Boyle et al. factored this in by using a multi-variate approach based on through-time data from the European Community Household Panel Survey (the comparator nowadays would be the EU Survey on Income and Living Conditions (EUSILC). As in any comparison of income care is needed with regard to quality of reported earnings – perhaps more so at the top and lower end of the income scale where some survey under-reporting is possible. By focussing, only, on employees there is relatively less scope for under-reporting. The other difficulty arises from comparing various ‘benefits-in-kind’ not all of which may appear in the reported data.
Data issues aside, the Boyle et al. paper concludes, clearly and convincingly, that on average wages are higher than in the private sector for employees. They conclude following extensive regression analysis on earnings data as follows:
We estimate that in 2001, the latest year for which we have completed our analysis, the premium enjoyed by public servants was about 13 per cent, on the basis of gross monthly earnings.
More recent work by Eilish Kelly, Séamus McGuinness and Philip O’Connell (‘Benchmarking, Social Partnership and Higher Remuneration: Wage Settling Institutions and the Public-Private Sector Wage Gap in Ireland’ ESRI Working Paper no 270, December 2008) also shows a significant premium for public sector workers compared to private – statistically allowing for various factors that differentiate these sectors (educational level, occupation, age etc). Using more recent data from a different data source to that used by Boyle et al.: the National Employment Survey, Kelly et al. report an increase in the estimated public sector pay premium (after adjustment for other factors) from 7.7 to 23.5% between 2003 and 2006. Furthermore they report, as did Boyle et al., higher premia still for lower paid workers in the public sector (32% in 2006 compared to 24% in 2003 in Kelly et al). It should be noted that Kelly et al restricted their sample to full-time, permanent employees who are aged between 25 and 59, and exclude semi-state body employees
(All of these studies use standard econometric regressions with employee wages regressed on a range of explanatory variables including age/experience, education, gender, size of enterprise etc. However, there are some differences in the list of explanatory variables included. For example Kelly et al include a measure of ‘professional body membership’ to control for the effect of union membership on wages. This variable, alone, accounts for a premium of 14% in 2006 in favour of public sector workers.).
Why such a premium exists and what its implications are in the current economic climate could be explored further. Historically, it is likely that the existence of such a premium is associated with:
- Strong trade union membership across the whole public service (picked up anyway in the Kelly et al paper);
- Allied to this the role of centralised pay agreements in maintaining a relatively stable pattern (between public and private) over time; and
- Benchmarking which had the effect of raising senior and top-manager pay in the public service relative to lower-paid public and private sector workers.
Boyle et al. showed that the difference between high and low earners is smaller in the public sector (in 2001). Furthermore they showed that the ‘premium’ to public service workers was higher at the lower end of the wage distribution which illustrates that the meagrely-paid among particular groups of public service workers like some industrial workers, clerical staff at point of entry etc on close to something around €25,000 a year are relatively well paid compared to the working poor or in the private sector on rock-bottom wages close to the national minimum wage (and sometimes less in the ‘informal’ economy). They estimate a premium of about 17% for the bottom 10% of earners (the lowest 10% of earners in the public service earned 17% more than the lowest 10% of earners in the private sector – after adjustment for factors such as age, education, occupation etc).
A marked feature of public sector pay has been the very large growth in senior and top management salaries– some of this linked directly to ‘benchmarking’ awards in two phases over recent years. The theory was that the public service needed to attract or retain the best talent by aligning salaries with comparable roles in the private sector. This ‘theory’ is very questionnable because:
- The public service can never be simply run like a business centered on the ethos of profit maximisation
- The inequality between the lowest and highest paid is a justifiable source of resentment among many {the ratio of salaries for Clerical officer staff (civil service, health and local authority) to CEO/Secretary-General has increased from a factor of 3.5 to 5.6 (Source: IMPACT/CPSU – Table 10) between 1987 and 2006 for examples}.
- Public service labour markets remain rigid and internal so that inflows from the private sector at the very top level is the exception more than the rule.
All of this needs to be borne in mind since the ‘premium’ to public sector workers compared to private sector workers is one dimension. The other ‘premium’ is the ratio of high to low earners in each of the public and private sectors has gone up appreciably over time. I don’t see too many people in the economic fraternity complaining about that. (We have seen obscene growing differences in regard to top remuneration in Corporate USA and mimicked in Ireland and elsewhere from the era of ‘greed is good’ onwards.)
What sorts of factors has driven salaries in recent decades and what implications can be drawn for incomes policy? I will look at these issues as well as some evidence on non-wage incomes, in a subsequent 'Mythbuster'.
Friday, 29 May 2009
Dissent in the ranks
Slí Eile: Over on irisheconomy.ie (our neighbouring island!) you can read an interesting debate about accountability sparked by a chance remark about deflation which, I think, people are missing in the follow-up comments. There, Kevin O'Rourke writes:
However, the fact that the Government is cutting expenditure and raising taxes as severely as it now has to, thus lowering aggregate demand and worsening unemployment at the worst possible time imaginable (we can argue about the size of this effect, but its sign is in no doubt) is a damning indictment of Fianna Fáil/PD fiscal policy over the past few years.
Thursday, 28 May 2009
Surely we can do better than this?
Sli Eile: Writing in the Irish Times, Michael Casey a former chief economist with the Central Bank argues that a ‘Change of Government will not solve our economic woes’. He goes on to list seven reasons why there is little an alternative Government can do:
We lack the power to devalue currency or change interest rates (just as well?)
Public finances are stuck between a hard rock and a hard place (cut and be damned or reflate and be damned, it is said)
Social partnership will not, cannot, deliver an ‘appropriate incomes policy’ (what would that look like if it included all incomes?)
Public Sector reform will take years (if not decades?) to deliver
Toxic Banking is a poisoned chalice and nobody wants to drink from it (before, during or after NAMA has run its course in 20 something)
‘No political party has formulated an alternative industrial policy’ (not entirely true actually)
‘Most important economic decisions are made in Brussels, Frankfurt and Washington’ (it used to be London, and that was a key argument for joining the Common Market’)
And there the article ends. Is that all that there is to say? One may argue with many of the above claims, but there is an underlying truth – business as usual is gone and in a post-recession world we are left standing on our own two feet. I contest that these two feet should be:
- A new economic policy based on internationally traded services and products with completely new indigenous public, private and community enterprises;
- A new social and democratic contract that will replace the existing model of partnership and ensure the provision of a basic income for all and a 21st century European level of public services.
But how will this be paid for? And how will we dig ourselves out of the present financial hole? And where will be the political momentum come from?
What has progressive economics to offer? What could contributors to this blog suggest? What have non-readers who prefer to read irisheconomy.ie to say?
What is the minimum that a progressive coalition of economists, thinkers, politicians and social commentators and activists could agree on? Let's see. How about a set of ‘contestable’ statements to start a debate:
1 Banking – get this right as a top priority. It is a complex area but you don’t need to be a financial whiz kid to arrive at an obvious conclusion – only full ownership and control of Banking by the State can save this sector and the rest of the economy. Why wait for it to happen, and then say it is our only option. I appreciate that not everyone agrees with this …..
2 Fiscal policy – public finances are in dire straits and nobody denies this (at least since the start of this year). So, let's raid the rich (and not so rich) with much higher capital, new property, local residential and high-income taxes, while closing as many of the tax loopholes and reliefs which have long outlived their economic usefulness (if they every really had any). At the same time increase (yes!) public spending in a planned and strategic way to improve public services, capital infrastructure and job-retention and training while increasing public borrowing through a brokered ‘off-balance’ approach.
3 Jobs – a fiscal stimulus carefully targeted and forensically tested could arrest at least some of the jobs haemorrhage. Although there are no magic solutions, let's accelerate a programme of investment in select areas of research and development and link these to new enterprises – temporarily nationalising those firms that still have a viable future but are about to close, aiding firms in trouble through a new credit agency, converting unused land banks into productive social use and identifying potentially new growth areas for international services such as education, health and green technology. Fine Gael have made some valuable proposals in regard to a slate of new State companies and green technology (Rebuilding Ireland - a New Era for the Irish Economy)
4 Public Services - we need more, and not less, by way of health, education and protection against poverty. We are still among the most prosperous countries in the world but we need to move from being a society of nouveau riche and haves and have nots to a society where citizens and communities share the cost of providing an acceptable level of income, nurture, care and protection.
5 Reform of Corporations and Public Services
Linked to a reformed and enhanced public service is the need to democratise institutions (as well as reform public sector institutions, work practices and responsiveness). Our education and health sectors (to take just two examples) remain profoundly undemocratic and exclusionist in spite of all the talk about customers and inclusion. Likewise, the workplace needs to become a place where skills, team-working and decision-making are not the preserve of the shareholders or the managerial elite. Openness, transparency and accountability must reach into every public, private and voluntary organisations (but especially those in receipt of State subsidies or in charge of delivering some part of public or social services).
A new deal for a new Ireland. Five principles to start a national and international/EU debate. Who is up for it? Comments, disagreements, suggestions?
Or should we resign ourselves to waiting out the storm and someone else (IMF, ECB, EIB, ECion, London, Washington) will bail us out eventually ….? Surely we can do better than this.
We lack the power to devalue currency or change interest rates (just as well?)
Public finances are stuck between a hard rock and a hard place (cut and be damned or reflate and be damned, it is said)
Social partnership will not, cannot, deliver an ‘appropriate incomes policy’ (what would that look like if it included all incomes?)
Public Sector reform will take years (if not decades?) to deliver
Toxic Banking is a poisoned chalice and nobody wants to drink from it (before, during or after NAMA has run its course in 20 something)
‘No political party has formulated an alternative industrial policy’ (not entirely true actually)
‘Most important economic decisions are made in Brussels, Frankfurt and Washington’ (it used to be London, and that was a key argument for joining the Common Market’)
And there the article ends. Is that all that there is to say? One may argue with many of the above claims, but there is an underlying truth – business as usual is gone and in a post-recession world we are left standing on our own two feet. I contest that these two feet should be:
- A new economic policy based on internationally traded services and products with completely new indigenous public, private and community enterprises;
- A new social and democratic contract that will replace the existing model of partnership and ensure the provision of a basic income for all and a 21st century European level of public services.
But how will this be paid for? And how will we dig ourselves out of the present financial hole? And where will be the political momentum come from?
What has progressive economics to offer? What could contributors to this blog suggest? What have non-readers who prefer to read irisheconomy.ie to say?
What is the minimum that a progressive coalition of economists, thinkers, politicians and social commentators and activists could agree on? Let's see. How about a set of ‘contestable’ statements to start a debate:
1 Banking – get this right as a top priority. It is a complex area but you don’t need to be a financial whiz kid to arrive at an obvious conclusion – only full ownership and control of Banking by the State can save this sector and the rest of the economy. Why wait for it to happen, and then say it is our only option. I appreciate that not everyone agrees with this …..
2 Fiscal policy – public finances are in dire straits and nobody denies this (at least since the start of this year). So, let's raid the rich (and not so rich) with much higher capital, new property, local residential and high-income taxes, while closing as many of the tax loopholes and reliefs which have long outlived their economic usefulness (if they every really had any). At the same time increase (yes!) public spending in a planned and strategic way to improve public services, capital infrastructure and job-retention and training while increasing public borrowing through a brokered ‘off-balance’ approach.
3 Jobs – a fiscal stimulus carefully targeted and forensically tested could arrest at least some of the jobs haemorrhage. Although there are no magic solutions, let's accelerate a programme of investment in select areas of research and development and link these to new enterprises – temporarily nationalising those firms that still have a viable future but are about to close, aiding firms in trouble through a new credit agency, converting unused land banks into productive social use and identifying potentially new growth areas for international services such as education, health and green technology. Fine Gael have made some valuable proposals in regard to a slate of new State companies and green technology (Rebuilding Ireland - a New Era for the Irish Economy)
4 Public Services - we need more, and not less, by way of health, education and protection against poverty. We are still among the most prosperous countries in the world but we need to move from being a society of nouveau riche and haves and have nots to a society where citizens and communities share the cost of providing an acceptable level of income, nurture, care and protection.
5 Reform of Corporations and Public Services
Linked to a reformed and enhanced public service is the need to democratise institutions (as well as reform public sector institutions, work practices and responsiveness). Our education and health sectors (to take just two examples) remain profoundly undemocratic and exclusionist in spite of all the talk about customers and inclusion. Likewise, the workplace needs to become a place where skills, team-working and decision-making are not the preserve of the shareholders or the managerial elite. Openness, transparency and accountability must reach into every public, private and voluntary organisations (but especially those in receipt of State subsidies or in charge of delivering some part of public or social services).
A new deal for a new Ireland. Five principles to start a national and international/EU debate. Who is up for it? Comments, disagreements, suggestions?
Or should we resign ourselves to waiting out the storm and someone else (IMF, ECB, EIB, ECion, London, Washington) will bail us out eventually ….? Surely we can do better than this.
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?
Tuesday, 19 May 2009
Will a Domestic Stimulus work in a Small Open Economy like Ireland?
Sli Eile: Taoiseach Brian Cowen commented over the last weekend that the main opposition parties wants the Government to cut more while the other (minor) opposition party wants the Government to cut less. Hard to disagree with this observation. Draw your own conclusions. But, who is for not cutting at all and instead spending more? Yes, spend more but very differently and under very different arrangements with regard to how banking, public finances and corporations are run in Ireland and Europe.
Turning to political economy, the trouble with many economists is that they can only look back – to old theories, old evidence and old empirical models based on what is measurable and what was given in terms of the external environment. On the other hand, it is hard to look into the future without regard to what has happened in the past and why it happened. The 1960s were the heyday of econometric modelling as economists discovered new data sources and put all their quantitative prowess on display through the science of multi-variate statistical modelling. This was, also, the time of ‘manpower planning’ and Economic Programmes (Whitaker closer to home). The first ‘Oil Shock’ of 1973, and following it the slowdown in economic growth in the early 1980s, disturbed many of the stable empirical relationships.
The new orthodoxy was monetarism – strong medicine for a new world – allied to ever more complex modelling of micro-economic behaviour and macro-economic impacts.
We are in a muddle again as the old world dissolved in 2008. In particular, the emergence of a very different profile of industrial output, labour market structure and public-private balance emerged in Ireland in the 1990s and the present decade.
The bottom line is that it is hard to model an economic ‘readjustment’, let alone a recovery, when you in the midst of an economic tsunami. The ‘old reliables’ are gone in more ways than one.
A future blog will comment on the latest ESRI publication Recovery Scenarios for Ireland (published last week). This blog goes back to an earlier, less publicised, document that sought to quantify the impact of various policy shifts in regard to expenditure, taxation, employment as well as ‘exogenous’ shifts in competitiveness and world trade.
In a heroic attempt to model the impact of various (simplistic) adjustments to taxes, public spending and nominal wages, the authors of the ESRI paper entitled ‘The Behaviour of the Irish Economy: Insights from the HERMES macro-economic model’, (Adele Bergin, Thomas Conefrey, John Fitzgerald and Ide Kearney) have done some service in assessing the impacts of various changes on key economic outcomes such as GNP, GDP, Unemployment, Government Borrowing and price inflation. Using historical data and based on a complex forecasting model (HERMES) drawing data from another global era, they have modelled forward the projected or estimated impacts of a number of ‘shocks’ or adjustments including the following:
5% cut in nominal wages
Cuts in public spending
1% Increases in world growth
1% Improvements in competitiveness
A number of salient points are in order:
Economics is not a perfect science – the questions you choose to ask and explore empirically are a function of your values and those underlying assumptions and interests that you hold dear;
Instability, uncertainty, conditionality and the impact of ‘exogenous’ variables renders standardised econometrics in the league of heroic simplicity, in spite of all its finesse and seeming complexity;
The past is a different place and not necessarily a sound guide to the future or present; and
No policy response is ideologically, politically or morally neutral.
That said, fair play to the ESRI for using the only empirical data available to assess various possible outcomes. But, empirics can never tell the full story, neither can they tell you what to do. The ESRI authors fully acknowledge the limitations (‘expectations in the model are backward looking’, p7 and ‘the unquantifiable effect on confidence’ is omitted).
The doctrine of ‘expansionary fiscal contraction’ (public spending cuts fuelling recovery of private consumption and investment) is firmly rebuked in the paper, as it had been already by Bradley and Whelan in a 1997 paper. The problem identified in many ‘growth studies’ over recent decades is that it is fiercely difficult to account for factors such as new technologies, the impact of political changes and swings in business mood. Some economists such as Harberger (1998) have distinguished between “yeast” and “mushroom” effects in explaining economic growth.
Factors such as knowledge and human capital act like yeast to increase productivity relatively evenly across the economy, while other factors such as a technological breakthrough or discovery suddenly mushroom to increase productivity more dramatically in some sectors than others. The ‘X’ factor is a lot bigger than people imagine. During the heady days of the Celtic Tiger, some growth studies identified a very large ‘unexplained’ residual in the case of Ireland, suggesting productivity increases well above what could be accounted for by standard input measures. Buried in the plot was, no doubt, the impact of temporary foreign direct investment, price transferring and international spillover effects.
The number-crunching (based on ceteris paribus on the explanatory side – all else constant while one variable is shifted but allowing for interactions in all the outcome variables) on various scenarios is summarised in the ESRI paper as follows:
Gross National Product and Gross Domestic Product would fall initially but recover in the medium- to long-term as a result of a 5% cut in nominal wages (details are summarised on page 3 of the paper).
GNP/GDP would fall initially as well as in the medium-term (to 2013) as a result of a one-off hike of €1billion in any of the following: income tax, property tax, public sector pay cuts, employment cuts and Government investment reductions. The extent of the impact varies with larger negative impacts in the case of cuts in employment, public sector pay and income tax. Carbon taxes would be mildly expansionary in the case of the GNP measure due to a reduction in profit repatriations by the manufacturing sector (but not GDP).
GNP/GDP would be higher in the medium-term as a result of either a 1% increase in world growth or a 1% improvement in competitiveness.
One of the major sources of instability is migration. Unemployment peaked at 17% in the late 1980s but would have gone much higher were it not for the huge level of outward migration at the time reflecting job opportunities in the UK and other destinations. Clearly, the same does not hold now. A safe bet is that labour supply will remain fairly ‘inelastic’, at least until green shoots of recovery appear in the UK labour market. The implications of this – not spelt out in the ESRI paper – is that any deflationary shock (recall that the ESRI scenarios entailed a €1billion shock, which is a small compared to what Government is promising us for the next 4 years) will have large and difficult-to-predict impacts on unemployment. Although the ESRI didn’t model the impacts on poverty, health and well-being it is safe to assume that these will be substantial – in the absence of any reversal of current economic policy.
Still, while modelling for a fall in employment in the education and health sectors (p20) the authors bank on ‘extensive emigration’ so that the unemployment rate would initially rise by 0.9 per cent points and fall back to 0.2 by 2015 (for a reduction of around 17,000 in the numbers employed in health and education in 2009). They acknowledge the uncertainty in the labour market situation internationally. Nobody has provided solid evidence, yet, that we are looking at return to net outward migration, and certainly nothing of the order last seen in the late-1980s (when unemployment peaked at 17% and net outward migration at 44,000 in 1989). Put another way, it is not obvious that unemployed teacher graduates or nurses can readily find employment in the UK and further afield. But, it may come to that if labour markets pick up elsewhere before the Irish labour market. And, it would seem that domestic policy is, implicitly aiming for this outcome.
Instructively, the ESRI conclude that pay cuts in the public sector have bigger bucks than employment cuts. Hence, a cut of 17,000 jobs in 2009 would save ‘only’ €500 – much less than half of what could be saved from a cut of 5% in public sector pay. The lesson they seem to be strongly hinting at is cut pay before you cut jobs.
Very crudely, if Government is promising an ‘adjustment’ of some €4 billion for each of the coming 3 years on top of the full-year adjustment of €5 billion, this year then we are looking at (very crudely) something possibly like €17 billion in total cumulative terms. In other words, a one-off impact of a €1 billion multiplied 17 times gives a downward long-run adjustment of 7 % in GNP – other things equal. Who is to know the dynamic effect of such an adjustment if it further depresses demand and undermine confidence?
Perhaps the one of the most intriguing aspects of this paper is the estimated impact of cuts in Government investment (p22). They write:
we consider the impact of a €1 billion reduction in expenditure on public investment under the National Development Plan. These results only take account of the demand side impact of the change in investment. They take no account of the longer-term supply side impact reducing national output and productivity as a result of the reduced stock of infrastructure.
Then they spell this out:
Thus the longer-term impact of this cut on output and employment would be substantially greater than shown here.
The impact on public finances is large (reducing borrowing) for a cut of €1billion in the public capital programme. The net impact on national output is very small in the medium-term (to 2015) allowing for some positive impact on private manufacturing and services in the ESRI model. However, the long-term impact on the ‘supply-side’ is unknown and unquantifiable. Put another way, cuts in the PCP (like in the Ireland of the 1950s), along with cuts in public services such as health and education, will have lasting effects and these effects will interact with the rest of the economy and society. Have we not learned the lessons from the lasting impact of health cuts in the late-1980s?
The ESRI paper standardises all the impacts into a monetary-based multiplier Table 9 (p25). The biggest long-term negative impact is -1.35 in respect of a €1b value cut in public sector employment and the strongest positive impact is 0.15 from a carbon tax hike of €1b. Underlying the ESRI analysis is:
An inherent assumption that deflation is a necessary part of the medicine to get back on track – (real) pay cuts, a mix of tax increases and some pruning of public investment is assumed appropriate in the circumstances; and
A hope that improved trade conditions in conjunction with a moderately conservative domestic fiscal stance will lift the Irish boat – in 2011 if thing go well and later if not – eventually the storm will subside and how quickly we bounce back depends on things outside our control and things inside our control.
The Paper does not deal with issues around supply-side initiatives such as training and labour market flexibility – but this can be factored into a package as well.
A problem with the ESRI one-off ‘ceteris paribus’ shocks is that in the real world everything is changing and interacting and a policy stimulus to lower unemployment and improve competitiveness and reduce borrowing in the medium-term and raise national output needs to combine a range of measures into a coherent package. However, the ESRI exercise is useful at least analytically in quantifying the separate effects of one-off shocks on the assumption that everything else on the ‘policy instrument’ side is held constant.
In conclusion one could ask why the ESRI authors chose to try some particular set of scenarios and not others. They probed the impact of cutting expenditure and wages as well as raising taxes. And, they probed the impact of improved international trade and Irish competitiveness on global markets. But, they did not probe the impact of a fiscal stimulus and still less a forensic one targeted at particular sectors and spenders within the economy. Moreover, nobody can quite model the impact of a political stimulus based on a new leadership, new hope and reform of democracy and governance in the corporate and political worlds. It could surprise everyone – even for a small open economy like Ireland with some leverage in Europe and the wider world.
As always, comments, corrections, disagreements, suggestions from the blogosphere on the above welcome.
Thursday, 14 May 2009
'There was no supervision, no regulation and wild excess'
Slí Eile: “There was no supervision, no regulation and wild excess. Ireland saw the biggest building boom since the pyramids and this is going to be a painful adjustment,” said Prof Buiter, a former member of the Bank of England monetary policy committee and professor of European political economy at the London School of Economics while addressing the sixth Mercer European Investment Forum.
'It is only because of the implicit guarantee of euro zone partners, particularly Germany, that Irish banks and the State itself were likely to emerge from the present crisis.' he is also reported by the Irish Times as saying 'Recovery, in part through recapitalisation and new lending, would only be possible when banks disclosed fully the scale of their bad debts. He was hopeful that, “by the end of the year, we will truly know who has been swimming without trunks”.'
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.
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