Is Ireland Getting More Equal?

James Wickham:  Latest CSO figures...
 
On February 1st the CSO released the latest Irish results of the EU-SILC (European Union Survey on Income and Living Conditions).   It’s important to notice that these figures are for the year 2015 so they don’t necessarily describe the situation today in February 2017.  If the trends identified in these figures in 2015 have continued, the situation today should be even better.

Things are getting better?

Overall these figures show some welcome improvements: employment of course has been rising, but also for nearly everyone income has risen and for most people deprivation rates have fallen.  Crucially there has been a small but significant reduction in income inequality.

Do these results challenge the claim that inequality and deprivation continue within the recovery?  In terms of the Gini coefficient as a simple measure of inequality, certainly inequality has fallen somewhat:  in 2015 the Gini coefficient for annual equivalised income was 30.8, down from 32.0 the year before (Chart 1). 

Chart 1

But there is an enormous caveat.  These figures refer to the amount of disposable income that people have.  They say nothing about what people spend this money on.  If essential services (childcare, health, education, public transport) are effective and free, then the society will be more equal than in a society with a similar level of inequality in disposable income.  Furthermore, it may be the case that specific price increases (or increased taxes or charges) effect those on low incomes most.  In Ireland this seems to have happened with housing costs increasing – but most for those in the lower income groups. Nonetheless it is certainly possible that there has been some small reduction in income inequality. 

Measuring poverty

A crucial aspect of inequality is the extent of poverty.  This gets us closer to people’s actual experience.  The simplest measure of poverty is the so-called ‘at risk of poverty rate’, that is to say those people whose income is less than 60% of the median.  That hardly means that the poor are always with us.  It’s perfectly possible for nobody to have an income less than 60% of the median. Indeed in these terms some societies with broadly similar GDP to Ireland do better than us    – and many do worse (Chart 2).  Unsurprisingly, the at risk of poverty rate is lower in Denmark and Sweden than in Ireland.  Equally unsurprisingly, the rate is dramatically higher in Greece.  According to the latest CSO figures, the proportion of those at risk of poverty in Ireland stood at 16.9% of the population in 2015 – a non-significant fall compared to 2014.

Chart 2

Source: Eurostat [from EU-SILC]

Measures of material deprivation get us closest to the real experience of inequality.   The CSO defines the deprivation rate as the proportion of the population unable to afford two or more items from a list of eleven basic requirements (e.g. heating the house, a warm waterproof coat…).  This deprivation rate did fall from 2014 to 2015 but was then still 25.5% of the population.  The deprivation rate is significantly higher in households with children.  As Chart 2 shows, in Ireland the deprivation rate is significantly higher than in Scandinavia and indeed marginally higher even than Greece.  However, if we focus on extreme deprivation, the lack of four or more items, then Ireland appears more like a normal European country and now very different to Greece (and indeed most of the New Member States).    

A final statistical measure is that of ‘consistent poverty’, that is to say, the proportion of the population who both have an income below 60% of the median and live in a household without two or more of the list of basic necessities.  The new data shows the rate of consistent poverty staying essentially unchanged between 2014 and 2015 (it fell from 8.8% to 8.7% but this is not statistically significant).  As we have seen, overall deprivation rates have fallen, but worryingly for those in consistent poverty they have hardly changed at all.  In many ways therefore, those most at risk of poverty have actually been falling behind.

Comparing what matters

All of this depends on looking at net income – income after tax and social benefits. Every now and then you will hear people claiming that Ireland is the ‘most unequal society in Europe’ because of the inequality of gross incomes (i.e. before tax and transfers). Yet what matters for people’s living standards is not their gross pay, but how much money they actually have to spend – after tax and after any benefits.  To focus on gross income inequality while ignoring tax and benefits is like saying that Ireland’s summer is sunnier than Spain’s. Well, if you just count the hours of daylight that’s true, but there is the little matter of clouds and rain…

Chart 3

Source: Eurostat

In these terms the problem in Ireland is not that compared to other European countries we are uniquely unequal.  Chart 3 shows the Gini coefficients for all EU28 member states and ranks them from left to right in terms of inequality of disposable income:  states range from Slovakia, in these terms the most equal, to Lithuania, the most unequal.  Ireland is roughly in the middle.  Just a normal European country you might say.  However the right hand column shows the inequality of gross income, excluding transfers, and here Ireland is clearly the most unequal.  Furthermore, we have the largest gap between gross income and disposable income.

In Ireland the state has to work extraordinarily hard even to ensure our ‘normal’ level of inequality.  So much state expenditure has to go on income support that there is little left over for services and capital investment.  And in turn, the resulting deficiencies in education, childcare and health mean that as soon as they can afford it (and even if they can’t), people opt for private provision.  Rather less obviously, there is the question of state competence.  In some areas the Irish state is efficient and effective, but it clearly lacks the competences skills and institutional knowledge to organise effective healthcare and social services and is notoriously incompetent in physical planning and infrastructure.

Prof Brian Nolan on Inequality - A complex issue explained.

At TASC, the main focus is on inequality and most readers of Progressive Economy probably have a good understanding of this complex issue. We publish an annual series on inequality which is part of a long-term project by TASC to monitor trends in economic inequality in Ireland. We present key economic inequality indicators in Ireland, which year-on-year will provide critical information for the public. In 2016, the book was Cherishing All Equally 2016.

A Progressive Development (growth) Policy for Europe

Paul Sweeney: Did you know that last year 22.9 million people in the EU were unemployed, of which, a staggering 10.9 million people were long-term unemployed. At the current pace of reduction, the unemployment rate would take 7 years to return to its pre-crisis level in Europe. This is one of the many interesting points in a new economic study from European progressive economists.

The authors of the Independent Annual Growth Study “The Elusive Recovery”, expect that economic growth is going to slow down in the EU in 2017 to 1.6% after 1.9 % in 2016 and to 1.5% in 2018 because “tail-winds are turning into headwinds.” Brexit, higher oil prices and especially the slowdown in trade will impact negatively, along with uncertain politics.

Has the OECD abandoned its neo-liberal taxation policies?

Paul Sweeney: The OECD has relentlessly pursued a neo-liberal taxation policy. It seldom uses the word taxation without the appendage “burden” For its tax department, tax is not a “charge” or a “payment”, but nearly always a “burden”. On taxation, the OECD seemed like a Koch Brothers’ funded think-tank rather than one funded by governments. So when it revises its thinking in a new paper, it has to be welcome. 

Economic Inequality: Frequently Asked Questions

Cormac Staunton: Since launching our report Cherishing All Equally: Economic Inequality in Ireland we have received a number of questions from a wide range of people interested in the subject. We are encouraged by the level of debate the report has generated and look forward to continuing to discuss this important topic. 

In the meantime, here are our answers to some of the most common questions. 

Unequal societies do encourage criminality

Colm O'Doherty: According to Dan O'Brien there is no relationship between inequality and law breaking (Irish Times 24/08/12). This bogus statement is grounded in the same kind of statistical modelling which economists relied upon to predict ‘soft landings’ for economies with sound ‘fundamentals’ . The predictive capability of economics here is based on a positivism which seeks generalizations which are independent of culture. For Dan O’Brien and other neo-liberal commentators the hubris of positivism is manifested as a fetishism of numbers, an illusion of precision and the donning of the status shield of science. As we now know the so called pragmatism of economics as trumpeted by a large technocratic mainstream was nothing more than a policy driven skate on the thin ice of casino capitalism.

There is more than a whiff of this neo-liberal policy agenda in Dan O'Brien’s promotion of a mechanistic relationship between objective conditions and human behaviour. There is no natural science of society, and of crime in particular. The perspective on social order which is espoused in this article is well known to us all : it is the ‘orthodox’, the ‘conventional’ the ‘taken for granted ‘ world carried by mass media and the establishment. Namely that society is a fundamentally rational and consensual arrangement where deviance and crime is seen as a marginal and minority category. The deviants and criminals are seen as different from the ‘ normal’ population and there is generalised agreement on what constitutes criminal behaviour.

However, in reality, during the boom years, when inequality between the bankers, speculators and property developers and the rest of the population spiralled, particular types of criminal behaviour flourished. Consider anti-social behaviour. The concept of anti-social behaviour which has been disseminated by the media and the establishment in recent years is focused on a whole range of behaviours such as begging, neighbourhood disturbance/nuisance, public drunkenness etc. It is fair to say that poor and socially excluded populations are portrayed as the culprits here and that cracking down on anti-social behaviours is viewed as an exercise in the creation of social order in such neighbourhoods. If we examine anti-social behaviour using an interpretative rather than a mechanistic and positivistic orthodoxy lens we will see that the fallout from the anti-social behaviour of the bankers, speculators and developers has major repercussions for everybody. Our health services are in crisis, our education system is under stress and the vulnerable are abandoned. So the figures and statistics used to advance the arguments in the piece are concealing the reality that as inequality has increased in the US, the UK here and in other highly marketised economies so has the incidence of serious white collar crime. During the boom years poverty decreased but the crimes of the wealthy – as we are now discovering- increased. Crime statistics do not reflect this increase.

Apart from the conceptual limitations of his arguments Dan O’Brien also takes some liberties with the available statistics. There is a large body of evidence showing a clear relationship between greater inequality and higher homicide rates –see Heisch and Pugh’s (1993) review and Wilkinson and Pickett’s (2006) review.

Fiddling while Europe burns

Paul Sweeney: Today’s Financial Times tells us that in an effort to persuade Spain to accept a bailout, “unlike earlier bailouts for Greece, Portugal and Ireland, the proposed Spanish rescue would require few austerity measures beyond reforms already agreed with the EU and could even dispense with the close monitoring by international lenders that has proved contentious in Athens and Dublin, according to people familiar with the plans.”

It is reported that the oversight of the support to Spain would be dependent on increased outside oversight and faster restructuring of the banking and financial sector.

Why should Ireland and Greece have severe austerity imposed under the Memorandum of Understanding with the Troika of the EU, ECB and IMF while Spain gets off more lightly in comparison?

The answer is of course, size and importance. Ireland is unimportant in the order of things and this hard lesson is being driven home in the wake of last week’s referendum vote. We can be the model of goodness and obedience and the veritable “Poster Child of Austerity” but it still does not matter to the kingpins in Europe.
Not that austerity at this level is working. It is exacerbated by European and world conditions, but still is too severe in such a short time period. Yes we are heading towards target - if not acutely to hit it - on the deficit level, but little else is working. Growth is anemic and at last year’s level of GDP growth of 0.7 per cent, (if it's not revised downwards by the CSO later) it would take 15 years to get back to the level of 2007 GDP. It would take far longer on GNP and a very long time for the recovery of domestic demand to reach the level of five years ago.

Unemployment is at a very high level of over 14 per cent and it is at 25 per cent by the wide measure – officially. Emigration is very high too and participation in work has fallen dramatically especially for women and the young.

It is excellent that FDI continues to flow in and jobs are created. This shows that the fundamental economy in Ireland is working. Indeed it is working very well – very well!

But it is not enough. Domestic demand has fallen massively. And it is not just the collapse in investment (due to lack of confidence but also lack of state-led investment) but especially its main component – consumer spending.

What would help? If the so called leaders in Europe (largely a bunch of conservatives hide-bound by 1920s economics) could get their act together before the whole edifice falls apart, that would be most helpful. The edifice that is collapsing is both the euro, the European Social Model, the Single Market and the European Project itself. They have been fiddling while Europe burns - for four years now.

The election of Hollande has changed the balance, somewhat. The EU is no longer dominated by Germany and France. (It may seem like it is now just Germany, but Merkel is increasingly isolated). This gives some hope. If the left is elected in Germany and Italy within the next year, all may change. But social democracy and socialism in Europe is in crisis too.

Many of the political leaders of social democracy and socialism have forgotten their core values. Instead, they espoused what is now fairly clearly a failed market system. Most have now recognised this. Yet most these leaders still seem immobilised. Intellectually and politically.

The immediate answer should be the message that – “the European Social Model is alive and well. When sustainable growth returns, it will be enhanced.”
It’s a simple message which would give hope to hundreds of millions in Europe. It also needs to be accompanied by policies to stimulate growth, now. For them, it seems the European Social Model is under deep threat. It not just that ECB boss Draghi said the Model is finished, but the conservatives have decided to end the Post-War European Social Contract.

They simply want to keep the money. Sharing is out. The cake is no longer growing. The Soviet tanks are no longer in Germany. The alternative socialist vision is blurred. What impetus is on the elite and owners of capital to share but the minimum, with labour?

The European elite have decided, along with their US cousins, that inequality does not matter. But they are very wrong, as Joe Stiglitz says in the blog below. He says “Inequality leads to lower growth and less efficiency. Lack of opportunity means that its most valuable asset – its people – is not being fully used. Many at the bottom, or even in the middle, are not living up to their potential, because the rich, needing few public services and worried that a strong government might redistribute income, use their political influence to cut taxes and curtail government spending.”

In conclusion, it does seem that we are heading back to naked class war in Europe.
If you do not believe me, then why are the European elites and the ECB saving the banks and letting sovereign states sink? Why, after four years, are there still no solutions?

Joseph Stiglitz on the price of inequality

[...] America has the highest level of inequality of any of the advanced countries – and its gap with the rest has been widening. In the “recovery” of 2009-2010, the top 1% of US income earners captured 93% of the income growth. Other inequality indicators – like wealth, health, and life expectancy – are as bad or even worse. The clear trend is one of concentration of income and wealth at the top, the hollowing out of the middle, and increasing poverty at the bottom.

Click here to read the rest of Joseph Stiglitz's piece on the price of inequality, courtest of Social Europe Journal.

Some inequality stats

Jim O'Donnell: For inequality Stattos, some interesting reading while you wait for the Government to publish its Pre-Budget Outlook.

The US Congressional Budget Office has reently published its Trends in the Distribution of (US) Household Income between 1979 and 2007. The top 1% saw their household income increase by 275% over the period (Fig I, CBO) with the increase for the top 0.1% being even more dramatic (Fig II, sourced here).

Clearly, Emmanuel Saez's Evolution of Top Incomes in the US could do with updating!

Fig I

Fig II

Elsewhere, the Bertelsmann Foundation published the OECD Social Justice Index by the Social Governance Indicators Network. The usual suspects - Iceland, Norway, Denmark, Sweden, Finland, Netherlands - top the social justice weighted index. Ireland is just below the OECD average and proudly ahead of Italy, US, Mexico etc.

Oddly enough, or perhaps not, the same countries topped the Sustainable Governance index produced by the SGI earlier this year. These similar ratings may of course be unrelated and either score may be because it's cold up there in winter! Ireland again comes in half way at 16th out of 31.

Finally, in the UK, Income Data Services report that FTSE 100 Directors increased their earnings by 49% to £2.7m in the last financial year. This comes on top of a 55% increase in the previous financial year.
CEOs saw their income increase by only 43%, to £3.9m, and 35% respectively.

A scattering of tents in the City or Wall Street seems a lonely and inadequate response.
Jim O'Donnell is a member of the TASC Board and currently a Senior Administrator with the GUE/NGL Group in the European Parliament

Inequality and Budget 2012

Sinéad Pentony: In the run up to Budget 2012, the discourse is going to be dominated by the scale of the fiscal adjustment (€3.6 billion) and the breakdown of taxation and spending cuts. Currently, the position is that the adjustment will be made up of €2.5 billion in cuts (€2.1 billion in current and €0.4 billion in capital spending) and €1.1 billion in taxation measures. The adjustment is part of the agreement with ‘troika’ – EU/IMF/ECB. However, the breakdown of the adjustment is at the discretion of the government.

On the basis of the current breakdown of taxation measures and spending cuts, we are likely to see further cuts to social welfare as well as reductions in health and education services. If this comes to pass, the budgetary measures will have a disproportionate impact on low income groups – again. These measures are also likely to reduce aggregate demand even further, lengthen the dole queues and suck more money and confidence out of the Irish economy. So we will have growing inequality combined with a stagnant economy, with the exception of the export sector, which has the features of an ‘enclave economy’. And even the export sector is also under threat with the uncertainties that exists across the global economy.

Income inequality has been shown by the IMF to be one of the major contributing factors to the onset of the crisis. More recently, Stiglitz has said that “to understand what needs to be done, we have to understand the economy’s problems before the crisis hit”. He identifies a number of problems including the fact that “shifting income from those who would spend it, to those who won’t, lowers aggregate demand”. He also identifies the need for the “structural transformation of the advanced economies, implied by the need to move labour out of traditional manufacturing branches”, but notes that this is occurring too slowly. He goes on to say that “the prescription for what ails the global economy follows directly from the diagnosis: strong government expenditure, aimed at facilitating restructuring [of the economy], promoting energy conservation, and reducing inequality, and a reform of the global financial system...”.

On the issue of inequality, FEPS has recently publish a paper on the relationship between inequality and wealth, and it finds that a comparison of the levels of wealth and inequality in different countries shows that countries with a high degree of inequality in general have lower levels of wealth. While this might sound counter-intuitive, the paper sets out the empirical evidence that supports the hypothesis. It finds that rising inequality results in a lower level of prosperity. In addition, higher inequality also results in a lower level of economic prosperity, lower levels of education and poor institutions that have more corruption, more political instability and lower levels of democracy.

The government is undoubtedly in an economic straightjacket – but there is always wriggle room. The government may not be Houdini, but there is most certainly sufficient wriggle room to make budgetary decisions that can reduce inequality and start the process of reversing economic decline.

Mental well-being and inequality

Tom McDonnell: Richard Layte of the ESRI reports some interesting results on the association between income inequality and mental well-being here.

He finds that more unequal societies are characterised by lower levels of social trust and by greater feelings of inferiority at the bottom of the income scale. He forwards the argument that his empirical findings suggest these factors explain the lower levels of mental well-being in more unequal countries which contribute to higher levels of mental illness. High levels of inequality also stack the odds against poorer children succeeding.

The pro-inequality arguments were perhaps most memorably articulated by Michael McDowell.

While some of the privileged six-figure-salary brigade are conveniently quick to justify high inequality on economic growth and ‘incentive’ grounds, the actual empirical evidence does not appear to corroborate their arguments. As Layte points out, the more equal societies in Europe are also on average richer.

"This is a system in deep trouble"

Sinéad Pentony: In The Guardian, Larry Elliott argues that “only a new way of managing the global economy can prevent more mayhem in the market and on the streets”.

He identifies a number of ingredients that have contributed to the crisis, namely the US decision to break-up the Bretton Wood system and abandon the ‘gold standard’. While this system wasn’t perfect, it acted as an anchor for the global economy. Its demise paved the way for the liberalisation of financial markets in the 1970’s.

He describes the currency system as “an utter mess”, particularly since almost every country in the world is now trying to manipulate its currency downwards in order to make exports cheaper and imports more expensive. The role of sub-prime mortgage scandal in the current crisis is well documented – the conditions for which were created through the liberalisation of financial markets.

Finally, Elliott points to the breakdown of the social contract under which the individual was guaranteed a job, with decent pay that rose as the economy grew. Over the last 40 years, the benefits from growth have been disproportionately accruing to companies and the wealthy.

This point is reinforced by research recently published by the Resolution Foundation (UK think tank), which found that workers in the bottom half of the earnings scale received £12 out of every £100 rise in national income in 2010, compared with £16 in 1977, while the top 10 per cent received £14 out of every £100 in 2010, up from £12 in 1977.

Elliott says that growing inequality, global imbalances, manic-depressive stock markets, high unemployment, naked consumerism and the riots are telling us something – that the system is in deep trouble and it is waiting to blow.
While we haven’t had any riots in Ireland, we are part of the same system, which is displaying many of the same symptoms. Policies to address these symptoms domestically and globally remain in short support.

Inequality and the UK Riots

Aoife Ní Lochlainn: Amongst the acres of news coverage devoted to the UK riots, comes an interesting piece of work in the Guardian, ‘Mapping the Riots with Poverty’. Using Indices of Multiple Deprivation which are published by the Department of Communities and Local Government, the researchers mapped poverty and the location of the riots. Unsurprisingly, the majority of the incidents took place in or adjacent to the poorest areas. Elsewhere in the Guardian, Nina Power looks at the riots in the context of child poverty and inequality, writing that Haringey (the borough that includes Tottenham,) has the 4th highest level of child poverty in London. Over at the New Economics Foundation Blog, riot-related discussions centre on inequality and how our ‘materialist economics’ encourages us to work and thus yearn for ‘tat’.

Cutting Human Rights

Tom McDonnell: It was good to see the Council of Europe's Human Rights Commissioner Thomas Hammerberg wade into the austerity debate (See Here).

He talks about his recent visit to Ireland and about Governmental decisions to erode funding and structures used to support human rights and protect the most vulnerable.

His last paragraphs are important:
"In a longer perspective there is no contradiction between measures to ensure economic growth and stability and to protect and care for the most vulnerable. Austerity measures which exacerbate inequalities will only postpone problems and in some fields make it even more costly to resolve them at a later stage.

At stake are essential values of basic justice and social cohesion. Those already disadvantaged have no belts to tighten and must not be asked to make sacrifices for a crisis which was not of their doing."

Executive directors, other employees and pension inequality

Gerry Hughes: In 2007 employer contributions to occupational pension schemes on behalf of employees amounted to €1.4 billion and the estimated cost of tax relief and the exemption from benefit in kind taxation were €150 million and €540 million respectively. The tax reliefs were concentrated on the top 20 per cent of earners. As neither the pensions industry or the pension regulator publish any information on the distribution of pension contributions or pensions in payment we know very little about who benefits from employer contributions or how the pension entitlements of high earners compare with those of other employees. However, publicly quoted companies are obliged to publish in their annual accounts information about the pension arrangements for each of their executive directors. Using information for 2009 for 147 executive directors in 48, mainly publicly quoted, companies in conjunction with national data on pension arrangements for other employees makes it possible to compare (see here) how pension arrangements for executive directors differ from those of other employees. The comparison shows that:

• The average annual employer pension contribution in 2009 for executive directors in large publicly quoted Irish companies is nearly 36 times more than for other covered employees (€100,000 versus €2,700).
• The average employer pension contribution rate for executive directors is almost 26 per cent of salary whereas the average employer rate for other private sector employees is around 7 per cent;
• On average an executive director would have been entitled to a pension of almost €200,000 if he or she had retired in 2009, or nearly 17 times more than the State pension on which the great majority of pensioners are dependent for most of their income in retirement;
• The average value of an executive director’s pension fund amounts to €4.1 million or 34 times more than the average value of the pension fund of €120,000 for other employees:

Pension inequality is much greater in the private sector than in the public sector. Research by Jim Stewart (see here, behind paywall) shows that top civil servants received an average pension of €125,000 in 2009 or about six times more than the average pension payment for retired civil servants.

The best way of creating greater pension equality between high, middle and low earners would be to give the tax relief at the standard rate of tax as is now done in the case of mortgage interest relief and health insurance relief. While the EU-IMF programme contains a commitment to standardise pension tax reliefs the pensions industry is opposed to this and the Fine Gael/Labour government prefers to continue giving the tax relief at the marginal rate of tax. In these circumstances an alternative which could raise as much revenue as standard rating would be to reduce the earnings cap on pension contributions and the lifetime size of pension funds.

In Budget 2011 the government reduced the cap on the annual earnings contribution eligible for pension tax relief from €150,000 to €115,000 and it reduced the lifetime cap on the size of an individual pension fund from €5.418 million to €2.3 million. While these reductions create greater equity in the pension system, neither of the caps is consistent with recommendations by the TCD Pension Policy Research Group, TASC, Social Justice Ireland, the OECD and other commentators that tax relief on pensions should be concentrated on middle and lower income earners. Much greater equity in the pension system could be achieved by targeting pension tax reliefs at these earners. This could be done by reducing the annual earnings limit for pension contributions from €115,000 to €75,000 and by reducing the cap on the size of a pension fund for an individual from €2.3 million to around €0.6 million.

Bankers and inequality

Paul Sweeney: New research from the LSE’s Centre for Economic Performances shows that in the decade from 1998, the top 10 per cent of workers in the UK saw their share of total annual wages rise from 27 per cent to 30 per cent. The majority of this went to the top 1 per cent and can be mainly accounted for by bonuses to financial sector workers.

The study is done as part of LSE CEP election analysis. This group does interesting studies of productivity, but currently is conducting reviews of the British election economic policies.

Hopefully, some of our economists will undertake a similar study for Ireland. From the CSO data for Ireland, hourly earnings are stable in the private sector, except in construction and, in financial services, where they have fallen, especially the bonuses. But not entirely for public servant Richie Boucher and too late for Fingleton, Sheehy, Drumm, Fitzpatrick, McAteer …………..and the rest!

In the UK, the LSE CEP found that, by 2008, the increased share that bankers were taking amounted to an extra £12 billion per year in wages alone. It says that “The size of these bonuses and their structure may have been a contributing factor to the financial crisis. Bankers paid large cash bonuses on the basis of short-term returns often unadjusted for risk have incentives to take on excessive risk.”

The British Labour Party proposed tax increases on big earners, and the LSE study finds that “There is very little evidence whether such tax rises will cause a significant number of firms and workers to leave Britain.”

The study concluded by saying that “The financial crisis raised awareness of the sheer size of bankers’ bonuses over the last decade. This group of workers have been the biggest gainers in the labour market, and they have significantly increased their presence at the top of the income distribution. The structure of bonuses has come in for sustained criticism as it allegedly increased risktaking in the financial sector to dangerous levels and contributed to the unravelling in 2007/8. The evidence suggests that simply changing the cash/equity split of such payments will not solve these problems nor will deferral if not associated with clawbacks.”

It argues that the recent sharp rebound in bonuses during 2009/10 “is likely to increase the popularity of higher marginal tax rates – or special bonus taxes – in spite of the potential negative effects from international mobility of workers and firms.”

So higher taxes will be both popular, but unfortunately, also necessary. Here we are already levying them, not for increased public services, welfare etc., but largely to bail out the banks and also to meet the basic day to day bills of the ship of state!

The inequality cascade

Over on Irish Economy, Philip Lane links to this graph from the Economist website, showing the likelihood of a son with a university-educated father going on to get a degree; the graph also correlates earnings with paternal education. Click here to see how Ireland shapes up.

Rising tides, luxury yachts and leaky fishing boats

James Wickham: Everyone assumes that the aim of economic policy must be to return to "growth". But more than ever, we need to ask what sort of growth?

There is a growing awareness that conventional economic measures of growth are not necessarily related to quality-of-life and correlate with increased ecological damage. However, we also need to discuss the relationship or relationships between economic growth and inequality. The conventional wisdom is of course that "a rising tide lifts all boats". In the Celtic Tiger years everyone felt better off, even though income inequality remained constant or perhaps increased.

However, such discussions ignore the new role of the very rich in Ireland and the world. Traditionally, economists and sociologists have assumed that the very rich don't matter as individuals. Economists assume redistributing from the very rich will have negligible consequences overall, since the amounts of money involved are tiny once distributed across the rest of the population. Sociologists assume that what matters are social groups (e.g. "the service class"); they may recognise an elite but assume its members hold their positions as occupants of roles in a structure -- what matters is the role, not the person.

Today however individuals matter as individuals-- if they're very rich. The very rich are now economic agents in their own right. The wealth of somebody like Richard Branson or Michael O'Leary means that they have an impact as individuals, not as representatives of some larger corporation. This has also has implications, such as the importance of individuals of "high net worth" the banks, for economic policy and for philanthropy.

Since the 1970s in the USA and more recently elsewhere, the very rich have been pulling away from the rest of the society. In other words, they have been appropriating a greater share of the results of economic growth. In some cases indeed they have simply been appropriating or transferring resources to themselves. This appears to be the case for "salaries" at the top of the global financial services industry. According to the Financial Times (December 30, 2009) on Wall Street "About half of revenues are diverted to bonuses at many investment banks".
In economic history there have been periods and places where the rich have become richer simply by appropriating more resources: the palaces get bigger, the cottages get smaller. In Africa today the new palaces of the kleptocratic rulers go side by side with deteriorating living conditions of the masses. We are not there yet, but it's worth remembering that sometimes big yachts swamp little fishing boats...

Scaring us into greater inequality

James Wickham: In a recent article in the Irish Times (4 November) Philip Lane warned that higher levels of income taxation could restrict Ireland's ability ' to attract and retain the highly skilled mobile professionals that are key to future economic growth'. This argument needs some discussion.

We could and probably should talk about whether it's desirable to commit ourselves to a form of economic growth that gives 'highly skilled mobile professionals' a veto over taxation policy. But there are smaller scale more empirical issues that can usefully be discussed.

Research on mobile professionals shows that taxation is only one of the reasons why people choose to live in a country. There is evidence that taxation influences location choice, but other things also matter. Issues here range from personal safety to the quality of life. Indeed there is a whole literature in urban geography associated with Richard Florida's claim that young and mobile professionals (the 'creative class') move to cities that offer social, cultural and intellectual diversity. Slightly facetiously, we could say: forget about taxation, just ensure there's some decent music and good craic...

Of course the point is that much 'quality of life' involves public expenditure. A decent health system, a proper public transport system, public broadcasting, even decent public spaces, do not come free. And interestingly, we do have research that suggests these things can attract people to live or stay in a country, and equally we do know that many young and mobile professionals bemoan the lack of such things in Ireland (e.g. Boyle (2006)).

It's also important to disaggregate these 'highly skilled mobile professionals'. For example, we could differentiate between 'visitors' who have no commitment to the country, and 'settlers' who intend to spend much of their life here; we could differentiate between 'experts' who earn say over than €60k (the current minimum income for the Irish Green Card permit) and 'stars' who receive more than (say) €150k. It's clear that what motivates visiting stars is probably very different to what motivates settler experts. Some people (visitors) do move temporarily to Dubai, but it's not clear whether such people are the same as those needed in Ireland - and do we really want to develop Dubai-type expat zones in Ireland anyway?

It can also be argued that relying on visiting stars has dangerous implications for the labour market - it creates a culture of high reward short termism, otherwise known as greed.

Most fundamentally of all, surely it's time to start discussing the disadvantages of inequality. Work such as Wilkinson & Pickett (The Spirit Level - Why More Equal Socieities almost always do better) has alerted social scientists to the detriminetal effects of inequality on all members of the society. In other words, in an unequal society even the better off do worse. And furthermore, these effects are generated by inequality 'at the top' (gap between the very wealthy and the rest) rather than just by inequality 'at the bottom' (gap between the poor and the rest). Facilitating visting stars, in other words, may actually have very detrimental indirect effects on the whole society.