National Income and Expenditure 2011

Michael Burke: The argument in favour of ‘austerity’ measures is that the overriding objective of policy must be to reduce the government deficit, that this must be done by cutting spending and that there is no alternative to current policies. The release of the latest Irish National Income and Expenditure for 2011 should serve to dispel the several fallacies contained in that argument.

GDP has contracted by €30bn since 2007 in nominal terms, down 6.8 per cent in real terms (Tables 5 and 6). GNP, which excludes the distortions of multi-national corporations who book profits in Ireland to avail of its ultra-low corporate taxes, has fallen by €35bn since 2007 - a contraction of 11.1 per cent in real terms. If the overriding objective of policy were the optimum sustainable prosperity and well-being for all citizens then clearly the current measures would be a spectacular failure.

However, the objective to cut government borrowing on a sustainable basis is also not being met. ‘Austerity’ measures began towards the end of 2008 (unprompted by any international agency, but as a domestic policy choice). From 2008 to 2011 government current receipts have fallen by €6.3bn while current expenditure has risen by just €0.5bn, a total increase in the deficit of a little over €6.8bn despite all the fierce ‘austerity’ measures (Table 21). Worse, in relation to GDP this current deficit (excluding capital spending and receipts) has risen from 2.2 per cent of GDP to 6.7 per cent. Even if debt interest payments are excluded, the ‘primary deficit’ has risen by €4bn.

The only reason supporters of current policy can claim success in deficit-reduction is because the huge one-off payments to rescue the bank bondholders have come to a halt. These ‘grants to enterprises’ have amounted to over €43bn in the 4 years to 2011. But, even if they have now come to an end (which is at least questionable), they cannot be taken as evidence of any underlying improvement in the deficit arising from economic policy. That can only be gauged with reference to the government current income and expenditure, which is deteriorating.

What Is Policy For?

These data are of course well known in the Department of Finance, whose officials advise Ministers. It is improbable that both government and the Troika are unaware of the underlying state of government finances. If current policy even closely matched the success claimed for it, there would hardly be any need for the threatened further ‘austerity measures in the forthcoming Budget.

Yet current policy will be maintained and even deepened. This is because there has been some success, of a kind, for policy. In Fig.1 below data from Table1.1 of the NIE is shown (click to enlarge).

Source: CSO

Even though GDP has been contracting throughout the period, profits have risen in the last two years. At the same time employees’ remuneration has fallen sharply. In a recession the natural tendency is for profits to fall. This is because profits are the surplus after fixed costs and costs of labour and other input costs are deducted. Since fixed costs for firms are often unchanged, the fact the wages do not fall faster than sales means profits decline. This is what happened to profits in both 2008 and 2009. However, after ‘austerity’ measures were introduced in 2008, wages fell in 2009 and have continued to fall since. This has allowed the natural fall in profits to be reversed, at the expense of wages.

To put this in perspective, labour’s share of national income has fallen so far in 2 years that it could be increased by 8.7 per cent over 2011 levels and this would still only have the effect of returning its share of national income to the crisis levels of 2009.

It is argued that the policy measures which have the effect of lowering wages and increasing profits are necessary in order to generate recovery, often described as ‘restoring competitiveness’ even while there is incessant and misplaced boasting about the rise in Irish exports.

But it is impossible to engineer a sustained recovery without an increase in investment. The decline in Gross Fixed Capital Formation (GFCF) is greater than the total decline in GDP, €32bn versus €30bn (Table 5). Yet, from 2009 onwards, when profits rose by €8.6bn, GFCF fell by €9.5bn. The policy of transferring incomes for labour and the poor to capital and the rich, which is the real content of austerity, has been an utter failure in reviving growth.

Policy ought to be aimed at the optimum sustainable growth in prosperity for all citizens. The policy of transferring incomes to capital and the rich does not achieve that, nor does it foster investment, the determinant of all future prosperity. Meanwhile the bluster about an improving deficit position should be recognised for what it is, just bluster.

(V) Curbing growing income inequality

Paul Sweeney: No public servant is worth more than £1,000 a year. So said De Valera in 1931 (He paid himself more - £1,500 in March 1932 - but this was a reduction of £1000 or 40%). No man is worth more than €200,000 so declared Brendan Howlin in 2011, as the Government tries to limit the pay of top public servants. Howlin’s move will a) help the public purse, b) help narrow a growing pay gap for the first time in decades, c), it should also have a major demonstration effect and d) its popularity may help in addressing the crisis in a radical way by actually changing the pay gap and thus improving social solidarity.

It has been seen that gross Irish incomes doubled over 20 years in the boom but are relatively stable now. For most at work, they are not falling and for some, in the export and other dynamic sectors, there are small wage rises of around two per cent. Yet Ireland is one of the more unequal societies in the developed world. Financial insecurity and precarious incomes are becoming more commonplace.
Yet it is in time of crisis that some of the most progressive moves have been made. Just after the war, Britain brought in the National Health Service, and Rab Butler, a conservative, radically reformed education in 1944, making secondary education free for all pupils. With vision and leadership, it is possible that this government could steer us out of this deep crisis in a way which makes Ireland the best place in the world in which to work, live and grow old.

It has been seen that the labour market is also becoming polarized between “cool jobs and crap jobs”. At the top, owners and top executives are paying themselves obscene and utterly undeserved sums, as shareholders are unable to govern them. They have rewritten the rules of corporate governance, of “shareholder capitalism”, in their favour and that is what makes government policy on top pay so important.

While we have had endless debate on “public sector reform”. there is no debate on private sector reform. The rot was in the boards of the private banks.

Even US corporate investor Carl Icahn is scathing of US corporate governance, saying “Many US companies are very poorly run and non-competitive because corporate governance in the US is, to a large extent, dysfunctional. Boards do not hold managements accountable, and corporate elections for the most part are travesties.” (Fortune 4 July,2011).

The fight back against reform of top pay has began with the utterances of Michael Somers, who called for the boss of the state-owned AIB to be paid more than half a million because, in his view, this paltry sum may not attract talent.

There is no shortage of talented executives who would gladly work for less than half a million. Further, it is clear that the more the bank executives were paid, the more reckless they became. They did not just destroy three big banks worth around €66bn, but also contributed to bankrupting this country. So any nonsense in favour of widening the pay gap should be dismissed.

The outrage in Ireland on executive pay and wealth accumulation will probably be temporary, as it has been in the UK and US, and even Germany. The ex-head of Germany’s Bundesbank, Axel Weber, was “rewarded” with SFr2m ($4.4m) ‘hello money’ when he became deputy chair at the UBS of Switzerland. It had been one of the first banks to fail in the financial meltdown. There is a long and growing list of “excessive rewards,” peer-endowed, by the supposed “masters of the universe” in the corporate world.

In my view, people should be paid a good salary to do their job. Bonuses should only be for exceptional performance. Most performance-related pay can be, and is, rigged by “peers”. Nobel economist Akerlof is highly skeptical of performance-related pay. It is just a way for those at the top to take more for themselves under the pretence of some kind of good performance. Unless these mega-rewards, which can so distort corporate performance, are stopped, the capitalist system will crash again.

Goldman Sachs (GS) has paid its employees $125bn during the past ten years, twice what it made in net profits. It is to pay them a further £8bn, or an average of £238,000 each. for 2011. That is a good illustration of how perverted the current capitalist system has become, and how far it has moved from its old risk-reward model.

The investors’ Lex column in the Financial Times, commenting on the GS results, said “The reality, however, is that banks also support a thick layer of second tier executives, as well as legions of pen-pushing, meeting-loving, middle- and back-office workers who are paid multiples of their worth and contribution, especially compared with other industries. And market dynamics matter. If the whole financial sector started paying less, the bargaining power would fall for even star employees.”

There is a wide debate about the capitalist system abroad, but little here. Here it is about “public sector reform”. Even the Financial Times is running a long series called “Capitalism in Crisis.”

Mr. Howlin has made a radical move on closing what was a growing gap in pay between those at the top of the public service and those below. What is now needed, to improve economic performance and its sustainability, is reform of private sector governance. The National Competiveness Council calls for such reform in governance in its Competitiveness Challenge, recently published.

Some of the reforms on governance which could be implemented to narrow the pay gap in the rest of the economy would include:
1. Cease all tax subsidies to companies who pay excessive amounts to high earners. For example, no pay of over, say, €200,000 can be offset against a company’s tax (the US has such a limit on offsetting high pay against corporate tax).
2. Curb excessive tax breaks for executive pensions.
3. Limit bonuses to between one-third and one half of salary, otherwise they cannot be offset against tax, and maybe also impose a tax surcharge on them.
4. Reform Irish company law to make it more transparent, by removing the option for all large companies to avoid disclosure by a) going unlimited or b) by merging Irish businesses into European consortia or c) any other means.
5. All public interest companies should have to disclose the full accounts of those individual subsidiaries which are deemed to be of interest to the public.
6. The Irish subsidiaries of European companies which are public interest companies should no longer be able to lump all their assets and sales into one big company.
7. Companies should no longer be allowed to operate in Ireland by profiting from activities here if they are registered in tax havens like Liechtenstein or the Bahamas, without also having an Irish registered base and disclosing all information in accordance with Irish law.
8. There should be a higher tax rate on very high incomes, when we recognise that there are many who “earn” over a million a year.
9. A systematic and vigorous pursuit of Irish tax exiles must begin, to ensure that they are tax compliant on residence
10. Reform company law on transparency of executive remuneration with tighter legislation for all large companies in Ireland. It should be similar to the SEC (the regulator) in the US, where there is a clear statement of annual remuneration for top executives. Thus there would be a single total figure for the year, with simple disclosure rules covering all top executive remuneration, including pensions, share options, chauffeured company cars, use of helicopters, aeroplanes and other benefits. This should apply to all senior positions in the public sector too and to published in the State Directory (which must be brought back and published electronically again - by Dept Public Expenditure and Reform).
11. Introduce a law to set broad parameters under which top executive pay is to be set by company boards in Ireland. This would include measurable objective criteria, including financial performance, employee welfare, consumer satisfaction, environmental protection, etc.
12. There must be the appointment of at least two or one- fifth of the board of real outsiders as non-executive directors of all major companies. These would be appointed by a government corporate appointments body and/or an investor grouping, and/or by a pension fund.
13. At least two worker representatives should be on every board. This is the rule in Germany and most Nordic countries. In the light of the excessive remuneration and poor performances of many of those at the top of the corporate world, stakeholder in companies need representation on the boards and who better than representatives of the company’s own employee? (e.g. Norwegian Airlines, the up and coming European low cost airline, has two employee reps on the seven person board.)

On the broader side,
1) we need to reform the private sector by change from the Anglo American model of company law which is purported to be dominated by the interests of shareholders. In reality shareholders are diffused and too often have little or no say in the governance of companies. The power is “captured by the top management”. That is what happened the banks. We are reforming bank regulation but not even discussing this core issue.
2) Trade unions must be facilitated – not blocked - by the state in building up as the progressive force they were in the past to shift the imbalance where power is tilted in favour of corporations / capital. .This can be done by changing the laws which have made it so much more difficult for workers to have the civil right to join trade unions. Monti 2, a forthcoming Directive on collective bargaining from the EU Commission, now in the grip of the right, will make is even more difficult for workers to have the civil right to join trade unions.
3) There is need for greater education on why progressive tax systems are a key to redistribution, fairness, sustainable economic demand and social progress.
4) Finally there is a need to return to Social Europe. It is being unwound by the current Commission, the Council of Ministers and Merkozy.

In conclusion, Brendan Howlin’s move to cap the remuneration of top public servants is an historic move, reversing what seemed to be an inexorably growing gap between the top and bottom. The collapse in all six Irish banks has meant there is less excessive pay in them, and the crisis has reined in the remuneration of developers and other business executives. But events in UK show that, as soon as they can, the current business elite cannot wait to get back to the remuneration trough.

There has been much talk and action on public sector reform. What is now required is reform of the private sector – of the corporate governance of private companies, of company law to radically reform their boardrooms and practices – whereby the wider stakeholders interest must become paramount. Such reform of the private sector could, if done effectively, bring an end to corporate greed, risk-taking and huge value destruction.

But private sector reform – the end of Irish Crony Capitalism - is not even on the government’s agenda.

(IV) The rise of the new aristocracy

Paul Sweeney: Mitt Romney’s pay of $42.5m – all unearned – in two years on which he paid an effective income tax rate of only 14.65 per cent summarises all I am saying in these five blogs on living standards. We have a new aristocracy, new barons and earls who live in splendour, whose children will live in untold luxury while most of us struggle. But unlike the barons of old who had contributed to crude welfare systems, many of these guys see it as their duty to contribute as little as possible to society. The post-war Social Contract is broken.

In the last post, it was seen that the middle is being squeezed. In this one we will have a look over the pay, or more accurately the remuneration, that some of the biggest and best of our great corporate leaders have paid themselves, and issues around why they get away with it.

It will be seen that even with the Crash of 2008, and the poor performance of many firms, they are a paying themselves far too much. And the shareholder value system which is supposed to govern them is clearly broken. The top executives run the top firms as personal fiefdoms – not to generate added value for shareholders, workers and communities, but mainly for themselves. The post war business model of “shareholder value” is broken too.

Indeed, in just five or seven years at the top of a major corporation, many top executives pay themselves staggering amounts. Such are the “rewards” extracted from the firms that they have become a new aristocracy, whereby, after a life of untold luxury, they can leave vast sums, often untaxed, to their descendants.

As the typical company board resembles a retirement home for the great and the good, usually male and from the same social background, with many cross-directorships (as shown so clearly for Ireland in Mapping the Golden Circle published by TASC in 2010). Boards are filled with retired businessmen, ousted politicians and, more recently, retired senior public servants from regulators or economic departments, all of whom are selected, by each other, on the basis of their unwillingness to challenge each other or the company’s executives.

In the UK there is a raging debate on executive pay and particularly on top bankers' pay. The UK public is incensed at the pay the bosses of the state owned banks are paying themselves.

RBS is 83 per cent state-owned and has been the target of the UK Chancellor's calls for restraint as the banks announce their bonus awards next month. Despite being under strong pressure to pay less to their bosses, and the fact that its share price fell by almost half in 2011 and that it has sacked thousands of employees – RBS’s board is going ahead with plans to pay big bonuses to its top executives. CEO Stephen Hester is getting the maximum pay-out of 6m shares for 2011 – worth about £1.5m on the closing price of a week ago. That is 25 per cent less than the £2.04m bonus he accepted last year. This is on top of his basic salary of £1.2 million.

John Hourican, head of its investment banking business, is about to receive a £5m share bonus that was awarded in 2009. The latest bonus round comes as RBS makes thousands more job cuts after deciding to close large parts of its investment banking business.

Bob Diamond, Barclays’ chief executive announced in line for a £10 million bonus, leading to renewed anger about the excessive rewards enjoyed by bankers. Barclays shed 3,000 jobs across the group last year.

Mr Diamond, once described by Lord Mandelson as ‘the unacceptable face of banking’, is “entitled” to a bonus in shares of up to seven and a half times his £1.35million salary.

Diamond introduced what he calls 'the no-jerk rule' and has encouraged at least 40 executives at his firm to find jobs elsewhere. The American-born chief executive of Barclays said he does not care how good people are at what they do, if they are not suitable, they will be told to go. He said dozens of executives have been shown the door after behaving like jerks or spending lavish amounts of money.

The median income of FTSE 100 bosses has soared from 47 to 102 times employees’ median earnings since 2000. Similarly, senior executives’ pay has quadrupled since 2002, while the FTSE 100 index has stagnated and employee pay has gone up by a fraction of the amount.

FTSE 100 directors had a 49 per cent increase in their total earnings the last financial years. This gave them an average pay of £2.7 million each.

Top earners at some of the world’s biggest banks are still taking annual bonus equal to their salary according to a survey by the Financial Stability Board, a Basel-based committee of regulators. The use of bonuses is particularly pronounced in the US and the UK, where bonus payments account for between 80 and 96 per cent of the total pay awarded to US banks’ highest-paid employees, and between 78 and 93 per cent of the total pay awarded to UK banks’ highest-paid executives, according to the survey.

The world’s super rich are taking delivery of ever larger and more motor yachts this year with the biggest being “Topaz” a 147 metre yacht built in Germany for the Al Nahyan family of Abu Dhabi. These cost over $100m and can cost $1m a week to charter. Topaz will be the fourth in length with Roman Abramovich Eclipse a 164m being the largest. In spite of the recession, more of these super yachts were sold last year than in 2010.

Let’s have a quick look at some of the remuneration packages which the executives of top companies are “earning”. And remember, there are then of thousand of staggeringly wealthy people, who like Mitt Romney have such vast wealth that it is generating incomes of tens of millions a year, without having to work. And most pay little tax, under the regimes which have become acceptable in even “social” Europe. Such is the level of acceptance of low taxes for rich people that some regular folks even are heard to “praise” Michael O’ Leary for paying his income tax here. But if his wealth is €600 million and it generates 5 per cent a year, that’s another €30m. What is the rate of tax he pays on this?

The highest paid UK executives in 2010/11 were Mick Davis of Xstrata who paid himself £18.4m, followed closely behind by Bert Becht of Reckett Benckiser at $17.9m. Next was Michael Spencer of ICAP at $13.4m and our own Sir Terry Leahy of Tesco at a mere €12m. Tesco refuse to publish separate accounts for their Irish operations in case we see how well they are doing here (with Government approval). Close behind was Tom Albanese of Rio Tinto at $11.6m.

This week the UK government watered down its plans to tackle executive pay. It is now only seeking to get shareholders to change company policy with a binding vote on remuneration. It eschewed direct regulation and the mild reforms were welcomed by the likes of PWC, the CBI employers’ group, and the Institute of Directors. Mr Cable, the Business Secretary, was under pressure from Downing Street, and withdrew the proposal that most worried companies’ bosses – putting an employee representative on the remuneration committee. He also backed off the reform to require companies to publish a standardised ratio between executive pay and employee earnings, which would have been more transparent. A single pay figure for total pay of each director is to be published, which is one small step forward. Cable is still unsure about barring executives from one company from sitting on the remuneration committee of another.

The British Labour Party recently promised a new regime of transparency and the publication of a league table of companies that have the biggest pay gaps between bosses and shopfloor staff and to have employee reps on the remuneration committees.

Francisco Luzón, a senior director of Santander, the eurozone’s biggest bank by market capitalisation, is retiring with a pension pot of €56m. He ran the Americas division for 15 years as an executive director. Santander remained profitable throughout the western world’s economic and financial crisis thanks in part to its lucrative operations in Brazil and elsewhere in Latin America.

The annual salary of Lloyd Blankfein, Goldman’s chief executive, more than tripled in January, from $600,000 to $2m. Bankers at other groups have had their fixed pay increased by between 30 and 100 per cent, depending on their seniority, according to headhunters.

A few years ago the head of Porsche Wendelin Wiedenkin was Europe’s highest paid businessman with €67m in 2007. There was outrage in Germany as CEOs who had “earned” 14 times average employees salaries ten years earlier, were by then pulling 44 times the average.

In an unusual move, shareholders at Cairn Energy’s blocked plans to award its chairman an extra £2.5m share incentive this week.

Moving to Ireland, just a few years ago, here was the pay of the Anglo Irish Bank Bosses in 2007.

Sure was not every cent of the 8.4 million paid to these guys warranted? Look at the value they added to the banks and to Ireland. But did not the Irish taxpayer pay just one of the debts run up by these immensely rewarded men on 25th January for a staggering €1.3bn.

Here was the pay of some top executives back in 2006

The above pay of Irish bosses is from “Narrowing the Pay Gap”, published by Irish Congress of Trade Unions back in early 2998. When it was published, few were interested in high pay, as the Crash, well underway, was hardly noticeable. Today, we have an inordinate focus on what our money as consumers or taxpayers is paying our betters/servants.

Andrew Smithers, an interesting UK financial commentator, of Smithers and Co, quoted in the FT on 6th January 2012, has suggested that “the whole corporate culture in the boardroom has changed with the rise of the bonus culture and share options for business executives. They have not responded by cutting prices and competing like fury, they’ve responded by cutting staff.” The average chief executive of an S&P500 company is only in the job for five or six years and their pay is often closely linked to the share price of their corporation or to its returns on equity.

That creates strong incentives to keep profits high in the short term, and Mr Smithers suggests that “these incentives changed the way in which management has acted in the recession. Instead of hoarding labour and cutting prices to increase market share, companies are sacking workers, holding prices and choosing to buy back their own equity rather than make new investments.”

In the next and final post on living standards, we will see what can be done to reform the scandal of the rise of this new aristocracy at the top of companies in our democratic societies. One which has distorted the management of these companies, often into losing billions, leading to many job losses and which contributed so much to the financial crisis.

Draft heads of Personal Insolvency Bill out today- at long last!

Marie Sherlock: The long awaited heads of the Draft Personal Insolvency Bill was published today and at first glance, there is much to welcome.

For too long Ireland has stood far behind most other advanced industrial countries in not having a non-judicial framework in place to address contemporary problems of over- indebtedness, but Ireland will now move ahead of the curve by including not only unsecured, but also secured, typically mortgage debt in the new debt settlement institution. The problem of addressing the debt overhang problem could only ever be achieved by adopting a holistic approach to all forms of debt currently borne by Irish households, and I’m glad to say that today’s draft is a vital first step in the right direction.

There are three new forms of non-judicial debt resolution proposed (i) debt relief certificates to cater for unsecured debt under €20,000, (ii) debt settlement arrangements to cater for unsecured debts over the value of €20,001 and (iii) personal insolvency arrangements which will cover unsecured and secured debt up to a value of €3m.

Ultimately, it would seem that the success or failure of the non-judicial system to function as a less costly, more effective and more humane system for dealing with the problem of over-indebtedness in this country, will rest on five key measures.

The first is that debtors wishing to enter a non-judicial process will have access to appropriate advice and representation. The draft bill sets out clear guidelines for each of the three debt resolution processes on how the intermediary (for the debt relief certificate) or personal insolvency trustee (for the debt settlement and personal insolvency arrangements) will advise the debtors and mediate in the debt resolution process.

The only concern is that debtors should not be saddled with excessive costs for this service, but the draft bill states that other the initial fee, the debtor will not have to bear the costs of the process. There is some mention that the Insolvency service will “recover costs”, but does not state from whom. I would firmly share the view of the Law Reform Commission which was set out in their 2010 Report on Personal Debt Management in Ireland that the State should not be made bear these costs (for a task that if the Banks were doing correctly, there would be no need for these new processes) and that the creditors should be held liable.

The second key measure will be the success in forcing the banks to the negotiating table. There is some concern that the banks have an effective veto over their participation- the personal insolvency process depends on the agreement of 75% of “secured” creditors- which is typically the mortgage lender. Given what we know about the practises of some lenders in this country and that some 50% of those mortgages in arrears are with banks outside the “covered” institutions, there is a danger that some mortgage lenders will not engage. However it must also be noted that failure to participate in the non judicial process will be factored into consideration in the awarding of costs if a bankruptcy petition goes to the Courts.

The third measure is that a decent minimum level of income must be established for households who enter any of the three non judicial processes and to its credit the draft heads of Bill is very clear on this. But the detail has yet to be ironed out and will be set out by way of ministerial regulation. Imposing a new repayment schedule in a debt settlement/insolvency arrangement should not have the effect of forcing more households into a dependence on social welfare. Already, we have seen that the availability of the mortgage interest supplement has become an implicit subsidy to the Banks, while helping households’ repay some of their mortgage. The Social welfare system and the State must not be made take on any more of the costs of resolving the problems of the banks.

Fourthly, keeping people in their homes, where it is viable to do so will be a key measure of success, so that additional pressure in not loaded on an already over-subscribed social housing waiting list. Remember that as of the end of September 2011, over one in eight mortgages held in this country were either in arrears or had pre-empted arrears by restructuring the mortgage schedule or payment. Personal insolvency will not necessarily result in an individual having to surrender their home and the Bill details how the recommendations of the Keane report on mortgage arrears published last October, must be considered as part of the range of options for the debtor in terms of split mortgages, mortgage to rent and trade down mortgages, even though these proposals are not without their problems in terms of broad assumptions on rising incomes and increasing house values.

In terms of the balance sheet implications for the banks, the draft heads of bill specifies that no write down can be below the current value of the security, so if the bottom up stress testing exercise undertaken by Blackrock was done correctly last Spring, then the corresponding negative impact of a write down on the Bank’s balance sheet should be limited to the rolled up and future interest payments.

On a final note, this legislation has been long overdue but support for its introduction has taken time to gain traction and support, with plenty of doomsayers talking up the risks of moral hazard. Indeed, I remember sometime in late 2008 doing an radio debate against a certain economics professor from NUIG before he took up the role of Special Adviser to the Minister for Finance and was dismissed out of hand when putting forward our (hardly radical) proposals for distressed mortgage holders! But back to the draft heads of Bill, provision has been made for reform of the judicial bankruptcy procedures with the reduction in the discharge period from 12years down to 3years which opens up a significant difference in the discharge period between the judicial and non judicial procedures. Non judicial personal insolvency has a discharge period of 6-7 years. The terms of discharge for a bankrupt appear to be much more onerous, with 50% of all preferential creditors to be paid and a possible extension of the discharge period out to 8 years.

On a superficial level, the lack of a level playing pitch between the discharge periods for these two processes may appear unjust to a public dissatisfied with the pace in which delinquent bankers are being pursued and uneasy about salaries of €200,000 paid to developers co-operating with Nama. The Government will have a significant job to do in communicating its reasons for the distinction.

(III) The squeezed middle

Paul Sweeney: There has been much discussion on what is called the Squeezed Middle. This refers to those middle class families who are seeing declines in their incomes and in additional benefits, like free college fees in the UK or reduced health care. It is a real issue. There is a strong case for what are called middle class people to join with the working class for a rebalancing in society through a downward adjustment in the incomes and wealth of those who are taking too much – those at the top.

This would not just be a redistribution on grounds of equity: a more equitable society also generates more demand and investment in the economy.

As will be seen in other posts in this series, the decline in incomes was hidden or masked by the credit boom when the chattering classes could only talk about the rise in the value of their homes. They believed that they were substantially better off and took longer or more expensive holidays, bought cars they really could not afford, and ate out more.

With the credit boom well and truly over, the middle classes everywhere are now feeling the squeeze. Politicians are raising taxes to pay for big holes in public finances and cutting public services, many of which the middle class also enjoy. It is hurting nowhere more than here in Ireland, as our collapse is the biggest and worst, exacerbated by the gravely erroneous decision to repay all private bank debts, in full and with all interest.

It has been seen that there are harsh lessons from the USA where median incomes have not risen since the early 1970s in real terms. This means that most Americans have not seen any improvement in their living standards for about 40 odd years. Many had the illusion of improvement when they took equity out of their homes during the housing bubble. In contrast, here in Ireland we have seen a great rise in real incomes in the 20 years up to the Crash of 2008.

As there has been substantial growth in the US and also in productivity in the period, where is the rise in national income per head going? As the Occupy Movement correctly reminds us, it is going to the very top. It is the top 1 per cent in the US who are pocketing all the money earned by the majority. Back 40 years ago, this elite pocketed 8 per cent of national income, but now they take almost one fifth of all income in the US.

While there are varying statistics on the infamous top 1 %, I have not seen any reasonable analysis which does not broadly concur that they have been reaping most of the rewards of growth in the US.

In the US the cost of healthcare and of college education has soared. In the States one can go to university in one’s own state for modest fees, but as the public universities are strapped for cash, with the cutbacks in public funding – because of the tax cuts over the decades, they are raising fees. And private colleges charge fees of $30-40,000 and more a year. 75% of Americans now think college is too expensive, according to Pew Research. And when you graduate, all is not rosy. Many graduates have huge debts to repay. Also while college graduates typically earned €20,000 a year more than non graduates in the US, this is changing. Average starting salaries for college graduates in the US have been falling in the past four years.

Owning your own home, and latterly getting a college education, was part of the American Dream. Now both are not repaying in the way that hard working American families expected. They feel very let down by the system.

There are similar trends in many other countries of the Western world, where education is not the social escalator it once was. European states are cutting public services and that includes education and health. Both are labour intensive and expensive. Health inflation has been far higher than average inflation for years. People want better public services but do not want to pay for them. Our government, certainly the FG wing, promises no rise in income tax. The government programme laid out to 2015 for the Troika shows a reduction in public spending from 45 per cent in 2011 to just 38 per cent in 2014 (assuming growth at 4 per cent!).

And we are to repay the bondholders in full, which may knock perhaps up to two per cent off GDP for decades? Meaning less for schools, roads, hospitals and other public services, which are not just used by the working class.

A further insecurity for the middle class, which we have seen very clearly in Ireland, is the reneging on the promises made for employees on retirement. In many middle class jobs, you could expect to retire at 60 or 65 with a good pension of half your final salary - or in some cases even two thirds. And it was linked to rises in salaries (which generally rise faster than inflation) back in the office. The wholesale move by employers, including some of the very best employers and richest firms, to get rid of defined benefit pensions has hit the middle class very hard. Many younger people have not realised how much this action will cost them. And pension adjustments include working longer, though we are all living much longer. But that is cutting off job opportunities for graduates and other young people at the entry scales.

Many of the pension changes represent a unilateral change to a key element of the social contract which people in Western societies had come to expect. Of course, such pensions were based on financial markets. They had been moved from solid investments to more speculative investments by fund managers, and so the schemes got severely burnt. People are also living longer than the actuaries had calculated. For some years, these pension funds performed so well that few considered the possible alternative of paying more for an enhanced and safer state pension. That must be an alternative now.

Of course, if the middle class are being squeezed, spare a thought for the working class. In the US and Europe the mass departure of well-paid manufacturing jobs to Asia has hit this class hard. In Ireland the huge collapse of construction has hit manual and skilled workers (and professionals and others) brutally too. Ireland still has a fair proportion of manufacturing jobs, but many are taken by the middle class. But the manufacturing sector is not as safe as it used to be. Weekly we see the threats from mobile capital to shift abroad unless our government does this or that. The alternative service sector jobs are not as well paid, though here in Ireland, where service exports now almost equal good exports, service jobs can be very good.

But it could be worse. The West has built up a good safety net in social security, healthcare and education for its citizens which has helped. Middle classes also benefit hugely from public spending in these areas. This safety net has also acted as an “automatic stabiliser” in this major recession, boosting demand to a level it would not have reached in it its absence. It is important that the welfare state is preserved and maintained even with the stark challenges which face us here in Ireland and elsewhere.

While the growth in the incomes and wealth of the top 1 per cent has soared to levels which have brought the divide back to around the level of the 1920s in the US, and perhaps also in the UK and some other states, it is unlikely to go back to the level of Victorian times. This is because of the safety net which protects both those at the bottom and many in the middle. What is most interesting is that, with several decades of growing pressure on the Squeezed Middle in the US, as it is they who represent most voters, they have not found a way to rebuild the American Dream. Indeed, astute observes would argue that the Squeezed Middle in the US seems hell-bent on increased, python-like squeezing of itself.

Is this what awaits us in Europe? The current leadership in Europe, while incapable of real leadership and decisiveness on dealing with the Euro and the broader European economic crisis, is very cunningly dismantling Social Europe. Three currently proposed Commission “reforms” will make things a lot worse for the vast majority of EU citizens. First, Monti 2 will curb trade unions greatly in collective bargaining; the Euro Plus Pact will institutionalise the shift in national income from labour to capital under a lot of verbiage about “competiveness” and thirdly, the pre-Keynesian straight jacket which it is designing for “balanced Budgets” will greatly hamper any actions that progressive governments can take in times of crisis.

In conclusion, trends generated by globalisation, technology and de-regulation have rapidly transformed western economies, brought much progress, but also much change which is uncomfortable for many, including the middle classes. Cuts in public spending by governments, which have had to bail out private banks, and the loss of revenue through the general collapse, have engendered greater insecurity. The shifts in jobs to lower cost areas and enabling technology which allows former higher quality jobs to be outsourced abroad is hitting middle class security. Whether the “coping classes”, who are the voting classes, will seek an effective re-alignment in politics to give greater protection from rapid change and recognise the value of taxation, remains to be seen.

In the next post I will look at the great improvements in living standards enjoyed by the new aristocracy, the great “entrepreneurs” - i.e., top executives of top firms.

(II) The first generation to face lower living standards

Paul Sweeney: Ireland’s younger generations may be the first since the Post War period not to have higher incomes than those of their parents. The combined impact of globalisation, liberalisation, and the technological and communications revolution on the labour market are squeezing the working and middle classes as never before.

The young will see no further rises in real incomes unless there are fundamental changes in society. Trends in income distribution and labour markets indicate that they will not have their parents’ lifestyle, security, nor expect to age comfortably.

Young people in the US and in parts of Europe already have lower living standards than those of their parents. It is not only that well paid manufacturing jobs have shifted to Asia, but many middle class jobs are being broken down into segments by technology and are shifting east too. Hundreds of millions are joining the middle classes in Asia, Russia and South America and competing for jobs. Many of the jobs will be servicing consumers in the West from there.

There has been a major shift in incomes to the very top earners, with labour’s share of national income in decline for decades in most advanced countries. The graph below shows how progressive income distribution has been rolled back in the US to levels last seen in the 1920s.

Source: Economist 21 Jan 2012

And those at the very top are reaping most of the benefits. And as they don’t spend all their money – because they have too much – aggregate demand is slowing. Nor do they invest it, as in the past. Many can pass it on, often undiminished and untaxed to their children.

The top 1% in the US had an average income of $1.8m in 2008 and in net worth the top 1% started at $6.9m in 2009 per the Federal Reserve, which was down 23% on 2007. The 1% richest get half of their incomes from salaries, a quarter from self employment and business income and the other quarter from capital i.e. interest, dividends, capital gains and rent (Economist 21 Jan).

There is a hollowing out of the middle with a growth in “Cool Jobs and Crap Jobs”. Solid pensionable jobs like banking and computing, parts of accounting, engineering etc. are being de-skilled and outsourced. One upside to this is that, at present, Ireland is winning some of these jobs, with its growth in export services.

Median male earnings in the US have not risen since 1975, in spite of substantial economic growth and growth in productivity. Nor have average household disposable incomes in Japan and Germany grown in a decade. It is no wonder Germany is not consuming as workers had no extra pay (until recently). The OECD found rising income inequality in 17 of 22 advanced countries.

The share of National Income taken by the top 1 per cent in the US had declined between the 1930s Depression and 1970, but 58% of the increase in total incomes since then went to this tiny group.

Is this because we are evolving into a “winner takes all” version of capitalism? Globalisation and communications have meant that entertainment and sports stars have turned local markets into one big global market, generating vast earnings for themselves and their backers. As stars are much admired in the celebrity society, they lead in the defence of the growing inequity of global income and wealth distribution. They are so unique, entertain us so much they deserve every penny they get. That is the market!

CEOs and CFOs may also argue that they are exceptional and talented and must be paid vast sums, untaxed, otherwise they will emigrate. Yet there is a clear inverse relationship between super pay and poor corporate performance world-wide, especially in finance. For example, as the remuneration, especially bonuses and share options, of the top executives of AIB, BOI and Anglo soared, they took bigger and bigger risks – to boost their remuneration packages. They took the risks with shareholders’ funds and they lost, bigtime. Their boards, likeminded men (some token women) who are still running many organisations in Ireland, cheered them on.

Most executives are not outstanding. They have simply “captured executive position.” There are many others just below them to take their place. In Ireland, it was the best paid of our business elite in banking who destroyed enormous value in just a few years. They almost destroyed the country as well, because the government socialised the losses of our “private enterprise” model.

There are hard lessons to be learned from America. The American Dream of real rising incomes and home ownership is dead. The stagnation in incomes was masked for some time because the working and middle classes borrowed against their homes. Now the home ownership dream has turned into a nightmare for many with negative equity and big debts. It was also masked by a dramatic fall in the prices of many goods now imported from abroad.

It was further masked by the growth in dual-income families, where there had only been on earner in the past. Male, unionised and in well paid manufacturing, these American workers had previously seen themselves as firmly in the “middle class.” From 1970, even with two incomes and their homes in hock, many workers in manufacturing and service industries began to struggle. Then came the property and the bank collapses.

Globalisation, accelerated by technology, falling prices in transport, instant communications, and in turn, accentuated by liberalisation of borders and markets, especially labour markets, have facilitated such radical change in incomes.

The decline of trade unions and the paucity of vision and lack of ambition in progressive parties, which should be counterforces to such trends, also facilitated the stagnation of incomes of the majority, in spite of economic growth and growth in labour productivity.

There is also a view that corporations and the rich should not have to pay “too much tax” as it is a disincentive to investment. Yet people are demanding more and better public services, but have been increasingly unwilling to pay for them through taxation. In spite of the outstanding crisis in Ireland, our leaders are terrified to demand that very profitable corporations pay a little more in corporation tax. We cut public services, instead, while we pay the debts of other corporations from worker’s taxes.

It is noteworthy that the very public services which people want more of are health and education, which are labour intensive and more costly. There is a real dilemma here and few politicians lead on it. It also seems that where people are willing to pay taxation, they seem to prefer to pay regressive taxes like VAT instead of progressive taxes on incomes and capital.

On the basis of what has been happening in the USA for thirty years, the stagnation of wages, mitigated for a while by extracting income from homes through credit and dual incomes, we can expect great insecurity. There is likely to be stagnating incomes, increasingly precarious employment and uncertainty - unless there is a radical re-think of key issues like taxation, sound regulation, labour rights and the governance of companies worldwide.

It is not just the recent Crash, with the ensuing immense burden of debt which governments and bankers have hung around our necks, which is driving this pessimistic outlook for incomes and thus living standards. There are the major trends in labour markets, in regressive income distribution, in power relationships between corporations and workers, between capital and labour, between governments, regulators and international bodies. The latter bodies appear to have been “captured” by corporations and these forces are driving down incomes for working and middle class people. These trends have been greatly exacerbated by globalization and by technology.

Ireland’s catch-up with Europe during the real Celtic Tiger period boosted incomes and wealth for many, and modernised our economy, but it has also masked these major trends for us.

A great many have gained from the benefits of technology and globalization, in gadgets and in communications, in lifestyle changes and in lower prices. But the globalization and technology have also brought change and disruption at an unprecedented rate, creating great insecurity as political systems lag behind these changes.

It is now clear that the post-war Social Contract in Europe and the US is breaking down and breaking down fast. This is a major step change in our world.

This is not just an economic and financial crisis. It is an existential crisis for society. We must look at a less consuming and more sustainable economy, which, happily, modern technology allows us to build. We, as citizens, have to decide what kind of society we want to live in. It is increasingly precarious, insecure, unstable, with increasing divisions, but it does not have to be like that.

The next post in this series on living standards will examine the “Squeezed Middle” where the middle classes are increasingly insecure as society changes rapidly.

(I) What has happened to incomes since the crash?

Paul Sweeney: This is the first of five posts examining trends in living standards in the past, present and the likely future. As we explore the polarization of incomes between the top and bottom, it is apparent that the fat cats are getting fatter. The phenomenon of the “squeezed middle” will also be examined. We will find considerable evidence that that the middle classes are indeed being squeezed in the Western countries. It will be seen that the younger generations in Ireland today are the first since WW2 which may not see its living standards exceed those of their parents - unless there is change. Finally, some remedies will be examined which might reduce income polarisation and make society more secure, equal, stable and dynamic.

Part 1 What has happened to Incomes Since the Crash?

The previous government tried to reduce workers’ incomes to improve “competitiveness”. Because there could be no devaluation, as we are in a single currency area, the Eurozone, it tried an experiment in Internal Devaluation. Unlike a regular devaluation of a currency where virtually everyone, bar exporters, suffers somewhat equally, only employees would suffer under the Green Party/ Fianna Fail plan. Happily, it will be seen that this strategy failed.

Had it worked, the recession would be even worse. It would have sucked more demand out of the economy. It would also have been inequitable, transferring part of employees’ incomes to employers. And with demand down, most employers would not have re-invested the surplus.

Irish domestic demand has plummeted by 25 per cent in just four years, leading to many closures and job losses. Irish wages of the 1.5 million employees (of whom over one-fifth only work part time) totaled €68bn last year, down from a peak of €75.5bn in 2008. And it will be even less this year. Most of the decline was due to the fall in employment and in hours worked.

The biggest hit on living standards since the Crash of 2008 has been on the vast numbers – over 300,000 - who lost their jobs; followed by many who are discouraged workers and would like to work; and the many who are under-employed. The crisis has also engendered great insecurity.

Since the Crash of four years ago, the incomes of most remaining workers – well over one million employees - have not fallen, but have been stable. A key reason why there has not been more anger on the streets against the Austerity Programmes over the last three years is this fact - that the incomes of the vast majority workers who retained their jobs and that was most of them, have been reasonably stable since beginning of the Crash of 2008, and for some, incomes actually rose slightly in real terms.

This stability in incomes followed a massive rise in incomes during the previous two decades. Disposable incomes doubled in the 20 years of Irish Social Partnership from 1987.

The 20 year boom included a superb economic performance during the Celtic Tiger period which morphed into the bubble during the McCreevy/Cowan era. There were four phases, (each lasting seven years) of the Celtic Tiger Era. The first seven years was “Takeoff”, with social solidarity but “jobless growth” from 1987 to 1993.

Between 1994 to 2000 inclusive, Ireland’s economy performed extraordinarily well. This was the real “Celtic Tiger” phase of sustainable growth and progress.

The “False Boom” / “Bubble” period was the next seven years, 2001 to 2007. It was the ideology of ultra free-market economics which led to the Bust worldwide and especially in Ireland, where McCreevy implemented these ideas in an extreme fashion, with tax-shifting, direct tax cuts, deregulation, no regulation and privatisation.

We are now in the fourth phase which is “Bust and Recovery”. This may be another seven years period 2008 to 2014. However, if we - our government, employers, unions and all do not get it right and if the EU does not pull its act together, the Recovery part will take longer. Today, seven years looks too short. It now seems that Ireland is highly unlikely to recover to our 2007 levels of national income until around 2018-21.

Recovery certainly does not look as if it is happening, due a) to the inability of the EU to act, b) to the continuing worldwide recession and c) the severity of the Austerity programme at home.

Irish living standards doubled in the first three phases of the Tiger years, in less than 20 years. This was a remarkable improvement in living standards for average workers. This doubling of incomes was unique worldwide, particularly as it coincided with a doubling in employment too. It must be noted that incomes continued to rise during the Bubble period 2001 to 2007.

What has happened to incomes since the crash in 2008? The weekly incomes of all workers saw no change since the beginning of the Crash in Q1 2008 to Q3, 2011 (CSO). However, as there was deflation - prices fell in part of this period - most workers had a small real rise in incomes. Hourly earnings rose by a little more in the period, giving a real rise in the period of almost four years.

The figures vary if different categories of workers and different periods are taken, but overall, the average employee saw no fall in real incomes from the beginning of 2008 when the Crash began. For some workers, in the export and other dynamic sectors, there have been small wage rises of around 2 per cent.

This relative stability in real incomes since the Crash of 2008 is one factor contributing to the explanation of why there has been no rioting in Ireland. It has also been extremely important in ensuing that the terrible collapse in domestic demand – of one quarter in less than four years – was not worse. This is because averagely paid workers generally spend most of their incomes.

Labour market experts know that nominal wages and salaries are like a ratchet. They go up or stay still, but seldom fall. They only fall in very exceptional circumstances.

The real losers are those who have lost their jobs. A total of 352,000 lost employment between Q1, 2008 and Q3 2011. This includes many self-employed who have also lost their work, with many now substantially underemployed. Other big losers are all public servants who had their earnings reduced by an average of 14 per cent.

If we now move to the division of the national cake, National Income, we see that there has been a major shift in the share of the national cake, worldwide. This shift has been from labour to capital over the past two decades.

While Ireland has seen a partial reversal of this trend in the past few years, with a shift in some more national income back to employees, their share is still well below that in most countries. However, at 63 per cent in 2011, labour’s share of national income in Ireland is below that of Germany (68.3%), UK (71.3%), or even the US (64.3%).

Some Irish economists actually argue that shifting income from employees to employers will improve Irish “competitiveness”. They have argued for cutting wages in the hope that firms will then make more money which means they become more profitable, and then they may invest. But why would any firm invest when the biggest problem facing them is the huge fall in domestic demand?

Most importantly, this “wage competitiveness” argument ignores the real driver of increased incomes for all, which is productivity. Merely shifting national income from the 1.5 million employees in Ireland to employers, particularly when the employees’ share is low compared to most other countries, is both regressive and will not work.

Productivity is the key to continuing economic success, provided its rewards are shared equitably. After falls in productivity, it is rising rapidly having risen by a substantial 5 per cent last year, on top of rises in previous years. The fall in Irish unit labour costs has been around 15 per cent over the past four years compared to under 6 per cent in the Eurozone. The decline of low productivity sectors like construction and services (including the public) has contributed, as has the growth in the high sectors such as the foreign owned export sector. The lower wage rises here than in Europe in recent years have also contributed (to a lesser degree than the decline of low productivity sectors) to the improvement in unit labour costs. Thus unit labour costs here have fallen very substantially compared to competitors since 2008. But, where are the jobs?

While Irish wages have risen over the past twenty years, total labour costs are 12th in OECD, at $49,830 a year, well below Germany and Belgium at over $61,000 and UK at over $59,000. Irish productivity suffered during the boom, but has since recovered. It is amongst the highest in the world. Ireland’s public service was already small by international standards before the crash and the current reform should improve overall productivity.

However, it will be seen that there is the chilling prospect that the majority of Irish workers may not see any rise in their living standards or real incomes for a decade or more. Prolonged stagnation in earnings could also happen here. It has already begun. It has happened in the USA. The American Dream is dead. US workers have seen no real increase in earnings since 1975. The middle class was squeezed in many developed countries over the past decade and a half. Ireland was an exception to this trend. More recently, wages have stagnated in Germany for a decade till recently (one key reason for the lack of demand there).

In the next post, it will be seen that rises in Irish living standards may be ending, even after recovery. This is because of major external trends. Our young may be the first post-war generation not to achieve a higher standard of living than their parents.

Cork incomes seminar

Videos of yesterday's seminar on 'Incomes - Instruments of Recovery', held in Cork, will be available shortly. Meanwhile, click here to see some of the presentations.