There are many people in the world who hope that someone else can, with a few waves and strokes of an implement, make all their troubles go away. The vast majority of these people are children and they grow out of believing in fairy-godmothers and genies by the age of eight.
There is no entity that can make our sovereign debt go away, nor is there one that can assume responsibility for it.
The right to borrow money is granted to those who have demonstrated legal and economic capacity to repay it. People (investors, speculators, call them what you will) buy bonds from entities that have:
1) assets that produce an income;
2) a track record of repaying their debts;
3) are not currently overburdened with debt.
There is NO entity in the EU that matches any one of those criteria, let alone all three.
Now, we could create one but that would imply tax gathering powers granted directly to some arm of the EU, probably, the Commission because tax-gathering is the only way for sovereign or supra-national bodies to raise revenue in a reliable or efficient fashion. Other ways have been tried in the past which usually employed the legions of Rome or the divisions of the Wehrmacht but this was not only inefficient but was exactly what the EU was founded to prevent.
Further, such a debt-management body would not have a track record of repayment and would probably be seen as being overburdened with debt and so would worsen the situation rather than improve it.
The history of this entire crisis from American sub-prime mortgages onwards has been one of the commingling of good debt risks with bad ones to the eventual and ever more rapid deterioration of both. "Gresham's Law - red in tooth and fang."
A further lumping of the good with the bad and the ugly will only make it harder for debt-buyers to distinguish good from bad. It would therefore, most likely, cause bondholders to seek a higher return or abandon the Euro altogether.
So, please, would those advocates of 'debt federalization' be so kind as to complete the circle of their prognostication and tell us what institution they see as being in charge, how much of their taxes they want to send to it, what they see happening to the yield on current debts and, lastly, how would they arrange the disbursement of new debt to the huddled masses of the EU?
Friday, 12 August 2011
Thursday, 11 August 2011
A suggestion for Summer Schools
Slí Eile: An interesting suggestion is made here. Perhaps it might be extended to reviews of macro-economic policy, conferences think-ins etc. We all need to listen to the people who are taking the brunt of this crisis.
NESC Report on Responses to Unemployment Crisis
Sinéad Pentony: Earlier this week NESC published its latest Report on Supports and Services for Unemployed Jobseekers: Challenges and Opportunities in a Time of Recession. The report states that the labour market will take years to recover and it rightly points out that “the exporting sectors play an indispensible but limited role in attaining high employment rates...until there is a revival of domestic demand, a large proportion of those now unemployed face bleak employment prospects.” Solving the jobs crisis requires interventions that address issues relating to the demand and supply of labour.
On the demand side, the jobs crisis cannot be solved in the absence of maintaining and increasing demand in the domestic economy. The current programme of austerity continues to ravage the domestic economy, which will lead to further job losses, ever-growing queues and accelerated emigration. Efforts to achieve short-term financial gain will have long-term social and economic costs.
In the context of the current phase of the global financial and economic crisis there are renewed calls for measures to stimulate economic activity. Demand can be maintained and increased by protecting incomes, especially those at the lowest level because they have the highest propensity to spend everything they earn in order to meet their basic needs; maintaining and increasing the rates of social spending e.g. Iceland. There are also the old reliables of increasing investment in human and physical capital.
On the supply-side, the NESC report highlights the need for improved activation strategies and acknowledges that changes are underway with the reconfiguration of delivering employment services. However, the report states that further reforms should be guided by a long-term vision of what constitutes an effective unemployment regime in a knowledge-based economy, and be imbued “with greater empathy and less suspicion towards those who have lost their jobs or the misfortune to be seeking a first one” at this time.
A long-term vision of an effective unemployment regime should be informed by a wider goals of achieving strong economic performance and combining it with a welfare state that offers comprehensive protection against social risks and investment in lifelong learning. There is a large body of literature in this area, and a recent paper on Scandinavian Labour and Social Policy provides a useful overview of how it is possible to integrate employment policy with active labour market measures and social services that support families and healthcare policy. Of course all of this comes at a price “...Nordic tax and finance policy extracts enormous sums from the economy and redistributes them in accordance with policy guidelines.” Is it not a price worth paying?
On the demand side, the jobs crisis cannot be solved in the absence of maintaining and increasing demand in the domestic economy. The current programme of austerity continues to ravage the domestic economy, which will lead to further job losses, ever-growing queues and accelerated emigration. Efforts to achieve short-term financial gain will have long-term social and economic costs.
In the context of the current phase of the global financial and economic crisis there are renewed calls for measures to stimulate economic activity. Demand can be maintained and increased by protecting incomes, especially those at the lowest level because they have the highest propensity to spend everything they earn in order to meet their basic needs; maintaining and increasing the rates of social spending e.g. Iceland. There are also the old reliables of increasing investment in human and physical capital.
On the supply-side, the NESC report highlights the need for improved activation strategies and acknowledges that changes are underway with the reconfiguration of delivering employment services. However, the report states that further reforms should be guided by a long-term vision of what constitutes an effective unemployment regime in a knowledge-based economy, and be imbued “with greater empathy and less suspicion towards those who have lost their jobs or the misfortune to be seeking a first one” at this time.
A long-term vision of an effective unemployment regime should be informed by a wider goals of achieving strong economic performance and combining it with a welfare state that offers comprehensive protection against social risks and investment in lifelong learning. There is a large body of literature in this area, and a recent paper on Scandinavian Labour and Social Policy provides a useful overview of how it is possible to integrate employment policy with active labour market measures and social services that support families and healthcare policy. Of course all of this comes at a price “...Nordic tax and finance policy extracts enormous sums from the economy and redistributes them in accordance with policy guidelines.” Is it not a price worth paying?
Is Ireland heading into a slowdown, too?
Michael Taft: The global recovery is now expected to ease off in the latter half of this year with a range of data suggesting a slowdown in the manufacturing sectors. This is not good news for Ireland as external demand has been one of the few lights in the recessionary darkness. Exports have held up well during the crisis. However, in line with the global easing, we may find that this section of the economy may not be making the contribution to growth we need to compensate for domestic demand that is still in decline.
The CSO’s recent Industrial Production Index gives some clues. Manufacturing production mirrors goods exports. In 2010 production in the ‘modern’ sector (primarily multi-nationals in the capital intensive sectors such as chemicals/pharmaceuticals) increased by nearly 11 percent in volume, while the ‘traditional’ sector, where indigenous enterprises are strongest, experienced a more sluggish 2 percent increase.
Since December of last year, however, production has been sluggish:
In volume terms there has been little change. When we look at the turnover (or value) index we find as similar small drop-off from December in both the modern and traditional sectors.
The CSO also provides a ‘New Orders’ index which measure trends in new orders accepted in the manufacturing sector, including those received and filled during the last month. Between December 2009 and June 2010, new orders increased by nearly 17 percent, reflecting the strong performance last year. However, for the same period this year, new orders have not increased at all.
For those ‘banking’ on an export-led jobs recovery, it’s not likely to be driven by the goods sector. Looking at the provisional figures for production and employment growth between 2009 1st quarter and 2011 1st quarter we find the following:
• Modern Sector: volume production increased by 6.1 percent but employment fell by 9 percent, shedding over 6,000 jobs
• Traditional Sector: volume production fell back fractionally while employment also fell by 9 percent, shedding over 12,000 jobs in this more labour-intensive sector.
These are all just snapshots of the situation today so we must be cautious in extrapolating over the year. Goods exports are still expected to put in a good performance next year, though its impact on the domestic economy is a little more debatable. But with European, US and global forecasts easing off, we shouldn’t expect Ireland to escape unscathed. Already, the Central Bank is revising downwards its manufacturing output projections for this year and next, compared to what they were estimating six months ago. This mirrors their downward revisions of GDP and GNP growth for next year.
If the European and US recoveries begin to stall (and already the US has experienced the weakest recovery since the Great Depression), our open economy will be affected. And with domestic demand continuing to struggle, the last thing we need is to catch a cold from the sneezes coming from the global economy.
The CSO’s recent Industrial Production Index gives some clues. Manufacturing production mirrors goods exports. In 2010 production in the ‘modern’ sector (primarily multi-nationals in the capital intensive sectors such as chemicals/pharmaceuticals) increased by nearly 11 percent in volume, while the ‘traditional’ sector, where indigenous enterprises are strongest, experienced a more sluggish 2 percent increase.
Since December of last year, however, production has been sluggish:
In volume terms there has been little change. When we look at the turnover (or value) index we find as similar small drop-off from December in both the modern and traditional sectors.
The CSO also provides a ‘New Orders’ index which measure trends in new orders accepted in the manufacturing sector, including those received and filled during the last month. Between December 2009 and June 2010, new orders increased by nearly 17 percent, reflecting the strong performance last year. However, for the same period this year, new orders have not increased at all.
For those ‘banking’ on an export-led jobs recovery, it’s not likely to be driven by the goods sector. Looking at the provisional figures for production and employment growth between 2009 1st quarter and 2011 1st quarter we find the following:
• Modern Sector: volume production increased by 6.1 percent but employment fell by 9 percent, shedding over 6,000 jobs
• Traditional Sector: volume production fell back fractionally while employment also fell by 9 percent, shedding over 12,000 jobs in this more labour-intensive sector.
These are all just snapshots of the situation today so we must be cautious in extrapolating over the year. Goods exports are still expected to put in a good performance next year, though its impact on the domestic economy is a little more debatable. But with European, US and global forecasts easing off, we shouldn’t expect Ireland to escape unscathed. Already, the Central Bank is revising downwards its manufacturing output projections for this year and next, compared to what they were estimating six months ago. This mirrors their downward revisions of GDP and GNP growth for next year.
If the European and US recoveries begin to stall (and already the US has experienced the weakest recovery since the Great Depression), our open economy will be affected. And with domestic demand continuing to struggle, the last thing we need is to catch a cold from the sneezes coming from the global economy.
Wednesday, 10 August 2011
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’.
A long malaise
Michael Taft: With years of austerity ahead, resulting in weak growth and high unemployment, freezing interest rates and another round of quantitative easing in the US will do little to solve the crisis, writes Joseph Stiglitz.
We need more investment, more bank lending to SMEs and a determination to use all the fiscal tools at our disposal to create jobs. Without this, all we will have to look forward to is a long malaise.
We need more investment, more bank lending to SMEs and a determination to use all the fiscal tools at our disposal to create jobs. Without this, all we will have to look forward to is a long malaise.
Tuesday, 9 August 2011
Different takes ...
These two posts from Social Europe Journal are worth a read. George Irwin bemoans the lack of progressive political leadership, while Zygmunt Baumann examines the concept of 'defective consumers' in the context of the London riots.
Seperately, Paul Krugman summarises the 'power of a stupid narrative' in 84 words here.
Seperately, Paul Krugman summarises the 'power of a stupid narrative' in 84 words here.
Friday, 5 August 2011
Panic on world markets
Michael Burke: International business news and other TV channels are offering a Babel-like interpretation of the current slump in world financial markets. European (including British) stations are reporting the Wall Street-led declines as a response to the continued debt crisis in Europe. But this makes no sense. An EU crisis would have been felt first in EU markets, and perhaps not at all in the US - US stocks had been rising over a prolonged period while Europe has been in turmoil. (And, despite what we may think, Greece or Ireland might fall into the sea while causing barely a ripple in the Hang Seng and the other plummeting Asian stock indices).
US channels have no explanation at all for the crisis - and analysis is limited to individual stocks, the scale of losses for investors and a generalised antipathy to Washington.
The Asian networks come closest to identifying the source of the current crisis- which isn't in Europe at all. Their consensus is that markets are plunging because of the slowdown in the US economy.
But, why now? We are repeatedly told that financial markets react instantaneously to new information. The US GDP data for Q2 were truly awful, up just 0.7%. As the BEA annualises quarterly data (multiplies by 4) this means that the US economy grew by under 0.2% from Q1.
On closer inspection the data were even worse. Large downward revisions to both the prior quarter and further back mean that economy fell by 5% in the recession, and has not recovered that prior peak in activity yet, as had been previously thought. This is the weakest US recovery from recession in the post-WWII period. Yet these data were published last Friday. If they were the immediate cause of the panic, it is a slow motion reaction.
No, the new news is the compromise agreement in Congress on Tuesday to raise the Federal debt ceiling in return for large scale cuts in Federal spending. This can only have one consequence - slower growth. Since the anticipated profits derived from growth drive stock prices, it is natural for stocks to fall when growth prospects are lowered. As Wall Streeters say, the US has just suffered a derating.
The crisis is driven by 'austerity'- US austerity.
EU financial markets are caught in the backwash of this, as slower US growth certainly harms global growth prospects. This is felt most keenly in their weakest link, the sovereign debt markets, since these have assumed all the stresses of the EU economies and financial systems. But we should not expect stock and other markets in Europe to remain unscathed, especially bank stocks.
In particular, as reaction to the latest bailout of Greece's creditors shows, bond markets do not reflect any confidence in these repeated prescriptions. Instead a first bailout of the economy is required, in Greece, Ireland and elsewhere.
There was a fondness before for asserting that Ireland was closer to Boston than Berlin. With the German economy recovering far more robustly than the US, we will hear less of that in the years ahead.
It might be wise instead to focus on the German and other answers to the crisis. This was not just short-term economic stimulus, but long-term productive investment.
For too long this economy has been a weigh-station for US companies counting their profits. Instead of listening to their self-serving advice on economic policy (while following German strictures on fiscal policy) policymakers in Ireland should emulate what works, in Germany, Sweden and most of Asia, investment-led growth initiated and guided by the State.
US channels have no explanation at all for the crisis - and analysis is limited to individual stocks, the scale of losses for investors and a generalised antipathy to Washington.
The Asian networks come closest to identifying the source of the current crisis- which isn't in Europe at all. Their consensus is that markets are plunging because of the slowdown in the US economy.
But, why now? We are repeatedly told that financial markets react instantaneously to new information. The US GDP data for Q2 were truly awful, up just 0.7%. As the BEA annualises quarterly data (multiplies by 4) this means that the US economy grew by under 0.2% from Q1.
On closer inspection the data were even worse. Large downward revisions to both the prior quarter and further back mean that economy fell by 5% in the recession, and has not recovered that prior peak in activity yet, as had been previously thought. This is the weakest US recovery from recession in the post-WWII period. Yet these data were published last Friday. If they were the immediate cause of the panic, it is a slow motion reaction.
No, the new news is the compromise agreement in Congress on Tuesday to raise the Federal debt ceiling in return for large scale cuts in Federal spending. This can only have one consequence - slower growth. Since the anticipated profits derived from growth drive stock prices, it is natural for stocks to fall when growth prospects are lowered. As Wall Streeters say, the US has just suffered a derating.
The crisis is driven by 'austerity'- US austerity.
EU financial markets are caught in the backwash of this, as slower US growth certainly harms global growth prospects. This is felt most keenly in their weakest link, the sovereign debt markets, since these have assumed all the stresses of the EU economies and financial systems. But we should not expect stock and other markets in Europe to remain unscathed, especially bank stocks.
In particular, as reaction to the latest bailout of Greece's creditors shows, bond markets do not reflect any confidence in these repeated prescriptions. Instead a first bailout of the economy is required, in Greece, Ireland and elsewhere.
There was a fondness before for asserting that Ireland was closer to Boston than Berlin. With the German economy recovering far more robustly than the US, we will hear less of that in the years ahead.
It might be wise instead to focus on the German and other answers to the crisis. This was not just short-term economic stimulus, but long-term productive investment.
For too long this economy has been a weigh-station for US companies counting their profits. Instead of listening to their self-serving advice on economic policy (while following German strictures on fiscal policy) policymakers in Ireland should emulate what works, in Germany, Sweden and most of Asia, investment-led growth initiated and guided by the State.
Stiglitz on a 'contagion of bad ideas'
"The Great Recession of 2008 has morphed into the North Atlantic Recession: it is mainly Europe and the United States, not the major emerging markets, that have become mired in slow growth and high unemployment. And it is Europe and America that are marching, alone and together, to the denouement of a grand debacle. A busted bubble led to a massive Keynesian stimulus that averted a much deeper recession, but that also fueled substantial budget deficits. The response – massive spending cuts – ensures that unacceptably high levels of unemployment (a vast waste of resources and an oversupply of suffering) will continue, possibly for years".
You can read the rest of Nobel laureate Joseph Stiglitz's article for Project Syndicate here.
You can read the rest of Nobel laureate Joseph Stiglitz's article for Project Syndicate here.
Thursday, 4 August 2011
Education cutbacks bad for economy
Sinéad Pentony: Today’s news that class sizes are set to increase highlights the shortsightedness of responses to the fiscal crisis.
As in many areas of public expenditure, Ireland has consistently lagged behind other OECD and EU countries both in terms of spending and performance. Ireland spends 4.7 per cent of GDP on education compared to the OECD average of 6.2 per cent. Even during the boom, education spending remained one of the lowest in the OECD. Our class size average is 24 pupils, compared with an EU average of 20, which is the second largest in the EU. The Minister for Education has said that our education system is not ‘fit for purpose’ and he’s right – our reading levels (OECD/Pisa survey results) have fallen from 5th place in 2000 to 17th place in 209. Our ranking in mathematics tumbled from 16th in 2006 to 26th in 2009. So the proposal to increase class sizes will reduce our low level of spending even further and will undoubtedly have a knock-on effect on our performance. Also, the impact of increased class sizes will be felt disproportionately in schools and communities that are already struggling with reduced resources. These schools tend to be concentrated in deprived areas where there is limited scope for parents to make “voluntary contributions” to their local schools.
However in the medium-long term, cutbacks in education will impact on our ability to compete at a global level in new industries that are driven by innovation. An education system that is ‘fit for purpose’ requires:
• a major reduction in class sizes at all levels in the education system
• proper equipping of all schools with educational technology
• a radical movement away from rote learning and mass testing at all levels of the system towards group-based project work.
Our recovery is predicated on investment in our future – education.
As in many areas of public expenditure, Ireland has consistently lagged behind other OECD and EU countries both in terms of spending and performance. Ireland spends 4.7 per cent of GDP on education compared to the OECD average of 6.2 per cent. Even during the boom, education spending remained one of the lowest in the OECD. Our class size average is 24 pupils, compared with an EU average of 20, which is the second largest in the EU. The Minister for Education has said that our education system is not ‘fit for purpose’ and he’s right – our reading levels (OECD/Pisa survey results) have fallen from 5th place in 2000 to 17th place in 209. Our ranking in mathematics tumbled from 16th in 2006 to 26th in 2009. So the proposal to increase class sizes will reduce our low level of spending even further and will undoubtedly have a knock-on effect on our performance. Also, the impact of increased class sizes will be felt disproportionately in schools and communities that are already struggling with reduced resources. These schools tend to be concentrated in deprived areas where there is limited scope for parents to make “voluntary contributions” to their local schools.
However in the medium-long term, cutbacks in education will impact on our ability to compete at a global level in new industries that are driven by innovation. An education system that is ‘fit for purpose’ requires:
• a major reduction in class sizes at all levels in the education system
• proper equipping of all schools with educational technology
• a radical movement away from rote learning and mass testing at all levels of the system towards group-based project work.
Our recovery is predicated on investment in our future – education.
Wednesday, 3 August 2011
Time to start working on Plan B
Michael Taft: The recent Central Bank quarterly report confirms (as if we needed
confirmation) that the economy remains in slow bleed mode. That they have revised downwards key domestic indicators is in keeping with other forecasters. We have an economy that is spinning its wheels in a deflationary trough, with no sign of relief in the short-term.
You can read the rest of this post here.
confirmation) that the economy remains in slow bleed mode. That they have revised downwards key domestic indicators is in keeping with other forecasters. We have an economy that is spinning its wheels in a deflationary trough, with no sign of relief in the short-term.
You can read the rest of this post here.
Thursday, 28 July 2011
The latest installment of Euro crisis
Slí Eile: Reactions to last week's Euro summit conclusions have been generally positive with much focus - at least in the Irish media - on the reduced interest charge. However, a range of authoritative commentaries are less enthusiastic including the following from Harald Hau writing on the excellent VOXEU website site here.
Wednesday, 27 July 2011
Questions that should be put to the Minister
Michael Taft: The Cabinet has approved the interim Household Charge of €100, designed to ‘raise’ €160 million from 1.8 million households. There are some exemptions: those in receipt of mortgage interest supplement, social housing tenants, commercial property and premises owned by a charity. Otherwise, the charge will be universal.
Is it inequitable? Yes, it is. Even Fine Gael opposed such a tax in opposition:
‘. . . flat rate charge means that houses in standard neighbourhoods worth a fraction of some mansions will pay the same rate of tax. It will be difficult to pay for asset-rich but income poor households, particularly the elderly and the unemployed; and it will be deeply unfair for a young generation that paid exorbitant amounts of stamp duty and VAT on the purchases on over-valued houses, many of whom now find themselves in negative equity.’
Question 1: Why is the Minister performing a U-turn, - committing to one thing before the election, and doing the exact opposite afterwards?
The Minister has claimed he had no choice – that it’s in the EU-IMF deal. Interesting, though, that Fine Gael published the above after the deal was signed. In addition,
There is no mention of a flat-rate charge in the EU-IMF deal.
Second, a property tax is stipulated for next year and the following year. But as Minister Noonan pointed out, the Government is free to substitute one fiscal measure for another as long as it yields the same fiscal result. The Government has done this already – with the Jobs Initiative. It has also announced there will be no income tax increases, even though the EU-IMF deal explicitly calls for such increases this year and next. So merely stating that something is in the EU-IMF agreement is not a sufficient explanation.
Question 2: Why is the Minister introducing a regressive, flat-rate household charge when (a) there is no reference to it in the EU-IMF deal, and (b) the Government has declared that it is free to substitute measures in the deal?
The imposition of the household charge is, to put it bluntly, a political choice. It is also, in economic terms, a highly irrational one.
Already, the spin being put out is that it’s only €2 a week. However, if we are to believe the findings of the ‘What’s Left’ tracker published by the League of Irish Credit Unions, that €2 will impose a further substantial burden on households and the economy.
The tracker found in July that 750,000 people (or approximately 20 percent of the adult population) had only €70 each month after paying bills. A €100 charge will reduce this discretionary spend by 12 percent.
A further 250,000 had no money left after paying their bills. The €100 charge will send them into negative balance.
For a million people, the charge will reduce their discretionary budgets by 12 percent or more. Of course, a proportion of these will be either tenants – public and private – while others will be receiving mortgage supplement. Still, many, if not most, will be liable to the charge. So when you hear someone going on about ‘only €2 a week’, just remember: there are significant sections of the population who only have €16 a week or less to spend after essentials.
Even if people had twice the amount left after paying bills - €140 – the charge will still amount to a substantial cut of 6 percent.
Question 3: What is the Minister’s Department (or the Department of Finance) economic impact assessment on households’ discretionary spending budgets (that is, after bills and essentials are paid for)?
There are other losers. What about the businesses dependent on the spending power of these households? Using the ESRI’s impact of an income tax, we should expect the household charge to result in a consumer decline of approximately €100 million next year. However, this figure is likely to be higher: the ESRI was estimating a rise in a progressive tax (income tax); the household charge will disproportionately hit low-average income earners.
Question 4: What is the Minister’s Department (or the Department of Finance) economic impact assessment on consumer spending and, so, economic growth?
And while the Government hopes to ‘raise’ €160 million, the benefit to the Exchequer will be less. Once you factor in the fall in consumer demand and, so, spending taxes; and the impact on employment (firms coming under pressure may reduce hours, pay and even let people go), the actual savings will be less. Again, based on the ESRI’s simulations, the actual benefit could be of the order of only €100 million. Again, as noted above, this figure could be lower because of the regressive and, therefore, more deflationary nature of a flat-rate tax.
Question 5: When the deflationary impact of the charge is assessed, how much will the Exchequer actually ‘save’, as opposed to how much the charge will ‘raise’?
The Government wants to promote growth, employment and demand. Yet they seem determined to do the opposite. A regressive flat-rate charge on top of pay cuts for JLC workers? These questions could help determine exactly what the Government’s strategy is.
And the answers could tell us a lot about what we can expect in the budget later this year.
Is it inequitable? Yes, it is. Even Fine Gael opposed such a tax in opposition:
‘. . . flat rate charge means that houses in standard neighbourhoods worth a fraction of some mansions will pay the same rate of tax. It will be difficult to pay for asset-rich but income poor households, particularly the elderly and the unemployed; and it will be deeply unfair for a young generation that paid exorbitant amounts of stamp duty and VAT on the purchases on over-valued houses, many of whom now find themselves in negative equity.’
Question 1: Why is the Minister performing a U-turn, - committing to one thing before the election, and doing the exact opposite afterwards?
The Minister has claimed he had no choice – that it’s in the EU-IMF deal. Interesting, though, that Fine Gael published the above after the deal was signed. In addition,
There is no mention of a flat-rate charge in the EU-IMF deal.
Second, a property tax is stipulated for next year and the following year. But as Minister Noonan pointed out, the Government is free to substitute one fiscal measure for another as long as it yields the same fiscal result. The Government has done this already – with the Jobs Initiative. It has also announced there will be no income tax increases, even though the EU-IMF deal explicitly calls for such increases this year and next. So merely stating that something is in the EU-IMF agreement is not a sufficient explanation.
Question 2: Why is the Minister introducing a regressive, flat-rate household charge when (a) there is no reference to it in the EU-IMF deal, and (b) the Government has declared that it is free to substitute measures in the deal?
The imposition of the household charge is, to put it bluntly, a political choice. It is also, in economic terms, a highly irrational one.
Already, the spin being put out is that it’s only €2 a week. However, if we are to believe the findings of the ‘What’s Left’ tracker published by the League of Irish Credit Unions, that €2 will impose a further substantial burden on households and the economy.
The tracker found in July that 750,000 people (or approximately 20 percent of the adult population) had only €70 each month after paying bills. A €100 charge will reduce this discretionary spend by 12 percent.
A further 250,000 had no money left after paying their bills. The €100 charge will send them into negative balance.
For a million people, the charge will reduce their discretionary budgets by 12 percent or more. Of course, a proportion of these will be either tenants – public and private – while others will be receiving mortgage supplement. Still, many, if not most, will be liable to the charge. So when you hear someone going on about ‘only €2 a week’, just remember: there are significant sections of the population who only have €16 a week or less to spend after essentials.
Even if people had twice the amount left after paying bills - €140 – the charge will still amount to a substantial cut of 6 percent.
Question 3: What is the Minister’s Department (or the Department of Finance) economic impact assessment on households’ discretionary spending budgets (that is, after bills and essentials are paid for)?
There are other losers. What about the businesses dependent on the spending power of these households? Using the ESRI’s impact of an income tax, we should expect the household charge to result in a consumer decline of approximately €100 million next year. However, this figure is likely to be higher: the ESRI was estimating a rise in a progressive tax (income tax); the household charge will disproportionately hit low-average income earners.
Question 4: What is the Minister’s Department (or the Department of Finance) economic impact assessment on consumer spending and, so, economic growth?
And while the Government hopes to ‘raise’ €160 million, the benefit to the Exchequer will be less. Once you factor in the fall in consumer demand and, so, spending taxes; and the impact on employment (firms coming under pressure may reduce hours, pay and even let people go), the actual savings will be less. Again, based on the ESRI’s simulations, the actual benefit could be of the order of only €100 million. Again, as noted above, this figure could be lower because of the regressive and, therefore, more deflationary nature of a flat-rate tax.
Question 5: When the deflationary impact of the charge is assessed, how much will the Exchequer actually ‘save’, as opposed to how much the charge will ‘raise’?
The Government wants to promote growth, employment and demand. Yet they seem determined to do the opposite. A regressive flat-rate charge on top of pay cuts for JLC workers? These questions could help determine exactly what the Government’s strategy is.
And the answers could tell us a lot about what we can expect in the budget later this year.
Monday, 25 July 2011
All roads lead to Berlin
Michael Burke: The details of the latest EU Summit remain sketchy and on the surface overwhelmingly relate to Greece alone. The Agreement reached by the Euro Area heads of state only relates directly to both Ireland and Portugal via the cut in interest rates being applied. At the same time, there was great emphasis laid on the declaration that the other measures, including ‘haircut’ for bondholders was a wholly unique event, applying to Greece once and once only, and never to AN Other EU member state.
President Sarkozy was particularly adamant on this point. But it should also be clear that he doesn’t run in the EU, nor does M Trichet. Chancellor Merkel does, and what she says goes.
This is because the EU and especially the Euro Area is a project which allows a tremendous development of production across a continental scale. In a host of industrial sectors, even the German economy alone is too small to compete with key international rivals, the US, Japan and now China. The creation of a single market facilitated the development of transnational industries within Europe and the single currency deepened that integration not least by ruling out competitive devaluations.
Germany is the main beneficiary of that increased potential, even if it and others fail to realise it. The leadership of the main German political parties were all united that the Euro Area would not be broken up because German industry has the most to lose.
As a result, Mrs Merkel got her way that the private sector would take the haircut, against the fierce opposition of Messrs Trichet and Sarkozy, who represent the EU banks and the French banks exposed to Greece respectively. This is a start, a small beginning in rational policymaking in Europe.
At the time of writing, the heavens have not fallen in and the world still turns on its axis. This is despite claims both in Ireland and in continental Europe that similar calamities would follow any losses for the banks. In addition, the Agreement initiates a preventative measure to recapitalise ailing banks in the non-crisis countries. The banks in this jurisdiction are long past saving, and this State is very much in the thick of the crisis. But what the measures (of unspecified size) mean is that default can take place without bringing down the whole of the European banking system.
Trichet and Sarkozy may regard Greece’s selective default as equivalent to The Fall. But the political and banking systems cannot return to a pre-lapsarian state. Default is now on the table.
The actual size of the cut in the interest rate for Ireland is the subject of much heated debate over at Irish Economy. Karl Whelan has come in for some particularly harsh criticism merely for pointing out that the interest rate reduction owes nothing to the prostrate negotiating position of the Dublin government. He is correct. Instead, it arises from the fact that Italy was being drawn into the maelstrom and Chancellor Merkel does not want to allow the break-up of the Euro Area.
Separately, Michael Taft has a series of very useful suggestions as to how the possible €800mn to €1bn annual windfall could be used to stimulate economic growth and thereby increase tax revenues and reduce welfare outlays.
Clearly, that too would be a rational innovation. We shall see, but point 4 of the Agreement refers to the need to stimulate growth and create jobs. Unfortunately, this remains couched in terms of competitiveness, which for the EU Commission usually means deregulation, privatisation and wage cuts- which are the opposite of a growth and deficit-reduction strategy. What is clear is that deficits are rising in all the ‘bailed-out’ economies. Public spending cuts have had the opposite effect to that claimed- the deficit has risen as the economy has deteriorated.
So will this package work for Greece and stop contagion? In my judgement, not a chance.
First, while bondholders get an estimated 21% haircut on the face value of their bonds (if they participate - the FT reports that many won’t) Greece will only see an estimated 7% reduction in its total debt. This arises because Greece will participate in the recapitalisation of its own banks and from other measures. If a 7% debt reduction were enough, there would have been no crisis.
Second, the growth-sapping cuts remain in place. They will be joined by privatisations, leading to lay-offs and bigger welfare outlays, while removing revenue streams from the government’s accounts (but probably not the state-owned enterprises’ debts). The latest Italian cuts will only produce weaker growth and higher deficits. Spanish and Italian yields are still pushing up towards 6% again.
After Britain (equivalent to US$ 135bn) German banks have the highest exposures to Irish debt (US$118bn). Leaving the Euro and disorderly default would be a disaster for this economy. We know that the British Tory ‘friends of Ireland’ insisted their bilateral loan at punitive rates could only be repaid in Euros, and no other currency. It seems likely that others have as well. Irish indebtedness would soar with a Euro exit.
But the same scenario could equally prove disastrous for German banks; a lose-lose calamity. Chancellor Merkel is willing to face down powerful opponents to ensure that does not happen. A government of the Irish Republic worthy of the name would use all these new developments to the advantage of its own citizens: negotiated default, an end to cuts, stimulus measures, job-creation.
President Sarkozy was particularly adamant on this point. But it should also be clear that he doesn’t run in the EU, nor does M Trichet. Chancellor Merkel does, and what she says goes.
This is because the EU and especially the Euro Area is a project which allows a tremendous development of production across a continental scale. In a host of industrial sectors, even the German economy alone is too small to compete with key international rivals, the US, Japan and now China. The creation of a single market facilitated the development of transnational industries within Europe and the single currency deepened that integration not least by ruling out competitive devaluations.
Germany is the main beneficiary of that increased potential, even if it and others fail to realise it. The leadership of the main German political parties were all united that the Euro Area would not be broken up because German industry has the most to lose.
As a result, Mrs Merkel got her way that the private sector would take the haircut, against the fierce opposition of Messrs Trichet and Sarkozy, who represent the EU banks and the French banks exposed to Greece respectively. This is a start, a small beginning in rational policymaking in Europe.
At the time of writing, the heavens have not fallen in and the world still turns on its axis. This is despite claims both in Ireland and in continental Europe that similar calamities would follow any losses for the banks. In addition, the Agreement initiates a preventative measure to recapitalise ailing banks in the non-crisis countries. The banks in this jurisdiction are long past saving, and this State is very much in the thick of the crisis. But what the measures (of unspecified size) mean is that default can take place without bringing down the whole of the European banking system.
Trichet and Sarkozy may regard Greece’s selective default as equivalent to The Fall. But the political and banking systems cannot return to a pre-lapsarian state. Default is now on the table.
The actual size of the cut in the interest rate for Ireland is the subject of much heated debate over at Irish Economy. Karl Whelan has come in for some particularly harsh criticism merely for pointing out that the interest rate reduction owes nothing to the prostrate negotiating position of the Dublin government. He is correct. Instead, it arises from the fact that Italy was being drawn into the maelstrom and Chancellor Merkel does not want to allow the break-up of the Euro Area.
Separately, Michael Taft has a series of very useful suggestions as to how the possible €800mn to €1bn annual windfall could be used to stimulate economic growth and thereby increase tax revenues and reduce welfare outlays.
Clearly, that too would be a rational innovation. We shall see, but point 4 of the Agreement refers to the need to stimulate growth and create jobs. Unfortunately, this remains couched in terms of competitiveness, which for the EU Commission usually means deregulation, privatisation and wage cuts- which are the opposite of a growth and deficit-reduction strategy. What is clear is that deficits are rising in all the ‘bailed-out’ economies. Public spending cuts have had the opposite effect to that claimed- the deficit has risen as the economy has deteriorated.
So will this package work for Greece and stop contagion? In my judgement, not a chance.
First, while bondholders get an estimated 21% haircut on the face value of their bonds (if they participate - the FT reports that many won’t) Greece will only see an estimated 7% reduction in its total debt. This arises because Greece will participate in the recapitalisation of its own banks and from other measures. If a 7% debt reduction were enough, there would have been no crisis.
Second, the growth-sapping cuts remain in place. They will be joined by privatisations, leading to lay-offs and bigger welfare outlays, while removing revenue streams from the government’s accounts (but probably not the state-owned enterprises’ debts). The latest Italian cuts will only produce weaker growth and higher deficits. Spanish and Italian yields are still pushing up towards 6% again.
After Britain (equivalent to US$ 135bn) German banks have the highest exposures to Irish debt (US$118bn). Leaving the Euro and disorderly default would be a disaster for this economy. We know that the British Tory ‘friends of Ireland’ insisted their bilateral loan at punitive rates could only be repaid in Euros, and no other currency. It seems likely that others have as well. Irish indebtedness would soar with a Euro exit.
But the same scenario could equally prove disastrous for German banks; a lose-lose calamity. Chancellor Merkel is willing to face down powerful opponents to ensure that does not happen. A government of the Irish Republic worthy of the name would use all these new developments to the advantage of its own citizens: negotiated default, an end to cuts, stimulus measures, job-creation.
Our disappearing corporate taxes
An Saoi: Stand up and take a bow, the tax team of Microsoft Inc! You managed to reduce the effective corporate tax rate to just 17.53% for the year ended 30th June 2011 from 25% in the year ended 30th June 2010. This reduction saved the company $2,097M or $0.247 a share of the $0.60 increase in income per share. You have therefore contributed 41% of the increase in net income. I hope that Mr. Ballmer remembers you all at bonus time for your stakhanovite efforts on his behalf.
Let us not forget the helping hand of their Irish advisors KPMG for their consistently top class advice. This reduction in the effective rate was managed despite an increase of 25% in your headline Irish tax rate from 10% to 12.5%. Microsoft’s Irish operations account for between a quarter and a third of worldwide sales so Dutch sandwiches and Bermudan barbeques seem to be heavily on the menu.
It is a pity that Ireland seems to have been one of the countries that suffered at the hands of your new found ueber-aggressiveness where tax planning is concerned. I thought our May corporate tax figures were very low and it seems that you have now provided a good deal of the answer. You have of course protected most of your Irish operations, leaving just one company open to public scrutiny.
Historically, Microsoft was not an overly aggressive tax planner. The 2009 effective rate was 26.5% and 2008 slightly lower at 25.75%. Deferral seemed to be the name of the game rather than the over the top activities of Google. However corporate pressure seems to have changed the rules and you certainly have done your bit for earnings per share.
What is left for Ireland? Very little it seems. A few bones will continue be thrown from the table to the lazy dog lying underneath. But when the dog wakes he may find that all he is left with is an itch from some unwelcome visitors. Perhaps it was Microsoft that M. Sarkozy had in mind when he spoke about tax theft. Who would blame him for kicking such a lazy flea infested dog?
Let us not forget the helping hand of their Irish advisors KPMG for their consistently top class advice. This reduction in the effective rate was managed despite an increase of 25% in your headline Irish tax rate from 10% to 12.5%. Microsoft’s Irish operations account for between a quarter and a third of worldwide sales so Dutch sandwiches and Bermudan barbeques seem to be heavily on the menu.
It is a pity that Ireland seems to have been one of the countries that suffered at the hands of your new found ueber-aggressiveness where tax planning is concerned. I thought our May corporate tax figures were very low and it seems that you have now provided a good deal of the answer. You have of course protected most of your Irish operations, leaving just one company open to public scrutiny.
Historically, Microsoft was not an overly aggressive tax planner. The 2009 effective rate was 26.5% and 2008 slightly lower at 25.75%. Deferral seemed to be the name of the game rather than the over the top activities of Google. However corporate pressure seems to have changed the rules and you certainly have done your bit for earnings per share.
What is left for Ireland? Very little it seems. A few bones will continue be thrown from the table to the lazy dog lying underneath. But when the dog wakes he may find that all he is left with is an itch from some unwelcome visitors. Perhaps it was Microsoft that M. Sarkozy had in mind when he spoke about tax theft. Who would blame him for kicking such a lazy flea infested dog?
Friday, 22 July 2011
Thomas Palley on a global minimum wage system
Thomas Palley is Bernard L. Schwartz Economic Growth Fellow with the New America Foundation. This piece was originally published in the FT Economists' Forum. The proposal is drawn from his forthcoming book, From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economic Ideas, Cambridge: Cambridge University Press.
The global economy is suffering from severe shortage of demand. In developed economies that shortfall is explicit in high unemployment rates and large output gaps. In emerging market economies it is implicit in their reliance on export-led growth. In part this shortfall reflects the lingering disruptive effects of the financial crisis and Great Recession, but it also reflects globalization’s undermining of the income generation process. One mechanism that can help rebuild this process is a global minimum wage system. That does not mean imposing U.S. or European minimum wages in developing countries. It does mean establishing a global set of rules for setting country minimum wages.
The minimum wage is a vital policy tool that provides a floor to wages. This floor reduces downward pressure on wages, and it also creates a rebound ripple effect that raises all wages in the bottom two deciles of the wage spectrum. Furthermore, it compresses wages at the bottom of the wage spectrum, thereby helping reduce inequality. Most importantly, an appropriately designed minimum wage can help connect wages and productivity growth, which is critical for building a sustainable demand generation process.
Traditionally, minimum wage systems have operated by setting a fixed wage that is periodically adjusted to take account of inflation and other changing circumstances. Such an approach is fundamentally flawed and inappropriate for the global economy. It is flawed because the minimum wage is always playing catch-up, and it is inappropriate because the system is difficult to generalize across countries.
Instead, countries should set a minimum wage that is a fixed percent (say fifty percent) of their median wage - which is the wage at which half of workers are paid more and half are paid less. This design has several advantages. First, the minimum wage will automatically rise with the median wage, creating a true floor that moves with the economy. If the median wage rises with productivity growth, the minimum wage will also rise with productivity growth.
Second, since the minimum wage is set by reference to the local median wage, it is set by reference to local economic conditions and reflects what a country can bear. Moreover, since all countries are bound by the same rule, all are treated equally.
Third, if countries want a higher minimum wage they are free to set one. The global minimum wage system would only set a floor: it would not set a ceiling.
Fourth, countries would also be free to set regional minimum wages within each country. Thus, a country like Germany that has higher unemployment in the former East Germany and lower unemployment in the former West Germany could set two minimum wages: one for former East Germany, and one for former West Germany. The only requirement would be that the regional minimum wage be greater than or equal to fifty percent of the regional median wage. Such a system of regional minimum wages would introduce additional flexibility that recognizes wages and living costs vary within countries as well as across countries. This enables the minimum wage system to avoid the danger of over-pricing labor, while still retaining the demand side benefits a minimum wage confers by improving income distribution and helping tie wages to productivity growth.
Finally, a global minimum wage system would also confer significant political benefits by cementing understanding of the need for global labor market rules and showing they are feasible. Just as globalization demands global trade rules for goods and services and global financial rules for financial markets, so too labor markets need global rules.
In sum, globalization has increased international labor competition, which has contributed to rupturing the link between wages and productivity growth. That rupture has undermined the old wage based system of demand growth, forcing a turn to reliance on debt and asset price inflation to drive growth. It has also increased income inequality. Restoring the wage – productivity growth link is therefore vital for both economic and political stability. A global minimum wage system can help accomplish this.
The global economy is suffering from severe shortage of demand. In developed economies that shortfall is explicit in high unemployment rates and large output gaps. In emerging market economies it is implicit in their reliance on export-led growth. In part this shortfall reflects the lingering disruptive effects of the financial crisis and Great Recession, but it also reflects globalization’s undermining of the income generation process. One mechanism that can help rebuild this process is a global minimum wage system. That does not mean imposing U.S. or European minimum wages in developing countries. It does mean establishing a global set of rules for setting country minimum wages.
The minimum wage is a vital policy tool that provides a floor to wages. This floor reduces downward pressure on wages, and it also creates a rebound ripple effect that raises all wages in the bottom two deciles of the wage spectrum. Furthermore, it compresses wages at the bottom of the wage spectrum, thereby helping reduce inequality. Most importantly, an appropriately designed minimum wage can help connect wages and productivity growth, which is critical for building a sustainable demand generation process.
Traditionally, minimum wage systems have operated by setting a fixed wage that is periodically adjusted to take account of inflation and other changing circumstances. Such an approach is fundamentally flawed and inappropriate for the global economy. It is flawed because the minimum wage is always playing catch-up, and it is inappropriate because the system is difficult to generalize across countries.
Instead, countries should set a minimum wage that is a fixed percent (say fifty percent) of their median wage - which is the wage at which half of workers are paid more and half are paid less. This design has several advantages. First, the minimum wage will automatically rise with the median wage, creating a true floor that moves with the economy. If the median wage rises with productivity growth, the minimum wage will also rise with productivity growth.
Second, since the minimum wage is set by reference to the local median wage, it is set by reference to local economic conditions and reflects what a country can bear. Moreover, since all countries are bound by the same rule, all are treated equally.
Third, if countries want a higher minimum wage they are free to set one. The global minimum wage system would only set a floor: it would not set a ceiling.
Fourth, countries would also be free to set regional minimum wages within each country. Thus, a country like Germany that has higher unemployment in the former East Germany and lower unemployment in the former West Germany could set two minimum wages: one for former East Germany, and one for former West Germany. The only requirement would be that the regional minimum wage be greater than or equal to fifty percent of the regional median wage. Such a system of regional minimum wages would introduce additional flexibility that recognizes wages and living costs vary within countries as well as across countries. This enables the minimum wage system to avoid the danger of over-pricing labor, while still retaining the demand side benefits a minimum wage confers by improving income distribution and helping tie wages to productivity growth.
Finally, a global minimum wage system would also confer significant political benefits by cementing understanding of the need for global labor market rules and showing they are feasible. Just as globalization demands global trade rules for goods and services and global financial rules for financial markets, so too labor markets need global rules.
In sum, globalization has increased international labor competition, which has contributed to rupturing the link between wages and productivity growth. That rupture has undermined the old wage based system of demand growth, forcing a turn to reliance on debt and asset price inflation to drive growth. It has also increased income inequality. Restoring the wage – productivity growth link is therefore vital for both economic and political stability. A global minimum wage system can help accomplish this.
Wednesday, 20 July 2011
New Deal for Europe
Slí Eile: An extremely lucid and timely contribution by Miguel Carrion from at Eurointelligence here. He writes:
The "New Deal for Europe" would begin to address the trade imbalances by funding productive investment in the deficit countries through the European Investment Bank, a healthier way of recycling internal trade surpluses than fueling asset price bubbles. There would be a true "structural fund" spent on proactively improving the productive structure of the chronically underinvested areas in the eurozone. This is a way out of the crisis which will deliver the "growth and jobs" that the European Union has been promising with great fanfare for over a decade, rather than the biting austerity currently on offer, and which may last "for decades".
Enclave-led recovery
Michael Taft:The Enterprise Minister was extremely upbeat about the recent CSO report that the trade surplus had grown. Mind you, it was not due to rising exports – in value terms they fell back slightly over the previous month; rather, it was the reduced imports which could indicate depressed domestic activity (machinery and transport made up approximately 50 percent of the fall in imports). Still, with the growth in service exports in the first quarter, the Minister believes we are back on the path of export-led recovery. Let’s examine the first quarter numbers and see what this growth is likely to mean for the economy.
When we combine two different CSO reports (not always the most satisfactory) we find that combined goods and service exports increased by €3.4 billion in the first quarter this year over the first quarter in 2010 – a healthy 9 percent. For a small open economy this is good news. However, this good news is somewhat tempered when we go into the details.
On the goods side, the Chemical/Pharmaceutical sector was the main driver of exports. It increased by €1.7 billion out of a total goods increase of €1.8 billion. There were still other sectors that gained – notably the Food sector – with the main decline coming from ‘unclassified commodities’. The point is that the multi-national dominated Chemical sector was responsible for most of the growth.
It is commonly accepted that export growth in this sector will have little impact on the domestic economy. There is the benefit of high-skilled, well-paying jobs – and continued growth will help. However, this sector imports nearly all its inputs – the goods and services it needs to produce their products. And the direct employment gain will be minimal – according to Forfas, Chemical exports increased by 69 percent between 2000 and 2008. However, there was no direct employment increase. This is not surprising – it is a highly capital-intensive sector. So we shouldn’t expect much of a knock-on benefit to the domestic economy – nor a tax gain, given our ultra-low corporate tax rates.
On the services side, growth is less concentrated. Nonetheless, the computer services sector, which grew by 14 percent, accounted for 56 percent of all service export growth. The computer services sector is a key service export sector – making up 40 percent of all service exports. So how connected is this sector with the domestic economy?
First, among Forfas-clients, computer services exports are dominated by multi-nationals – over 97 percent. In the period of 2000-2008, total exports from this sector grew by 62 percent, or €14.6 billion. However, employment – in both the foreign and Irish sector – actually fell by 4,800 or 9 percent. This was due to substantially increased productivity – as measured by employees per sales.
Second, the amount of inputs sourced from Ireland is falling in both nominal and percentage terms. In 2000, Irish companies supplied over half (52 percent), providing €9.2 billion in goods and services. By 2008, this had fallen to a third, falling to €7.6 billion. More and more of the inputs into the computer services sector are being imported.
So we have a problem: as our export sector increases their sales, we may not expect either a direct employment gain in the medium-term (though there may be a short-term post-recession increase) or increased activity from downstream Irish companies supplying these export companies. Our GDP will rise, of course; but the increase in exports may, ironically, increase employment in other countries – from companies that are supplying ‘our’ export sector.
This is not to dismiss the value of growing our export sector. But just as every industrial/enterprise strategy report has highlighted – since the Telesis report in the early 1980s: if it is not rooted in the indigenous sector, the gains to the domestic economy will be limited.
Just take one example: for the service export sector as a whole, Irish firms purchased 65.3 percent of their inputs domestically; multi-nationals purchase only 30.1 percent. And while this percentage has remained the same for Irish firms since 2000, foreign firms used to purchase over 50 percent of their inputs domestically in 2000.
This is not to dismiss the role of multi-nationals – their size alone dwarfs the Irish sector and, so, while the percentage is smaller, the total amount is much higher. We need the IDA and other public agencies to succeed in bringing multi-nationals to Ireland, of only because there’s not much happening domestically.
However, we should appreciate that we get a bigger employment and domestic benefit from indigenous companies. This where the real gains can be made but promoting indigenous start-ups and expansion requires considerably more work and will take much longer to bring on stream.
If we’re not careful, we’ll be wondering why export growth is not translating into an equivalent amount jobs and domestic activity. And the last thing you’ll get from official sources is the reality – that instead of export-led growth, what we’re mostly getting is, as described by the IMF, enclave-led growth.
[For an incisive historical survey of our distorted industrial and enterprise strategy, read Conor McCabe’s recently published ‘Sins of the Father’. If we repeat the past, we shouldn’t be surprised that the future is no different.]
When we combine two different CSO reports (not always the most satisfactory) we find that combined goods and service exports increased by €3.4 billion in the first quarter this year over the first quarter in 2010 – a healthy 9 percent. For a small open economy this is good news. However, this good news is somewhat tempered when we go into the details.
On the goods side, the Chemical/Pharmaceutical sector was the main driver of exports. It increased by €1.7 billion out of a total goods increase of €1.8 billion. There were still other sectors that gained – notably the Food sector – with the main decline coming from ‘unclassified commodities’. The point is that the multi-national dominated Chemical sector was responsible for most of the growth.
It is commonly accepted that export growth in this sector will have little impact on the domestic economy. There is the benefit of high-skilled, well-paying jobs – and continued growth will help. However, this sector imports nearly all its inputs – the goods and services it needs to produce their products. And the direct employment gain will be minimal – according to Forfas, Chemical exports increased by 69 percent between 2000 and 2008. However, there was no direct employment increase. This is not surprising – it is a highly capital-intensive sector. So we shouldn’t expect much of a knock-on benefit to the domestic economy – nor a tax gain, given our ultra-low corporate tax rates.
On the services side, growth is less concentrated. Nonetheless, the computer services sector, which grew by 14 percent, accounted for 56 percent of all service export growth. The computer services sector is a key service export sector – making up 40 percent of all service exports. So how connected is this sector with the domestic economy?
First, among Forfas-clients, computer services exports are dominated by multi-nationals – over 97 percent. In the period of 2000-2008, total exports from this sector grew by 62 percent, or €14.6 billion. However, employment – in both the foreign and Irish sector – actually fell by 4,800 or 9 percent. This was due to substantially increased productivity – as measured by employees per sales.
Second, the amount of inputs sourced from Ireland is falling in both nominal and percentage terms. In 2000, Irish companies supplied over half (52 percent), providing €9.2 billion in goods and services. By 2008, this had fallen to a third, falling to €7.6 billion. More and more of the inputs into the computer services sector are being imported.
So we have a problem: as our export sector increases their sales, we may not expect either a direct employment gain in the medium-term (though there may be a short-term post-recession increase) or increased activity from downstream Irish companies supplying these export companies. Our GDP will rise, of course; but the increase in exports may, ironically, increase employment in other countries – from companies that are supplying ‘our’ export sector.
This is not to dismiss the value of growing our export sector. But just as every industrial/enterprise strategy report has highlighted – since the Telesis report in the early 1980s: if it is not rooted in the indigenous sector, the gains to the domestic economy will be limited.
Just take one example: for the service export sector as a whole, Irish firms purchased 65.3 percent of their inputs domestically; multi-nationals purchase only 30.1 percent. And while this percentage has remained the same for Irish firms since 2000, foreign firms used to purchase over 50 percent of their inputs domestically in 2000.
This is not to dismiss the role of multi-nationals – their size alone dwarfs the Irish sector and, so, while the percentage is smaller, the total amount is much higher. We need the IDA and other public agencies to succeed in bringing multi-nationals to Ireland, of only because there’s not much happening domestically.
However, we should appreciate that we get a bigger employment and domestic benefit from indigenous companies. This where the real gains can be made but promoting indigenous start-ups and expansion requires considerably more work and will take much longer to bring on stream.
If we’re not careful, we’ll be wondering why export growth is not translating into an equivalent amount jobs and domestic activity. And the last thing you’ll get from official sources is the reality – that instead of export-led growth, what we’re mostly getting is, as described by the IMF, enclave-led growth.
[For an incisive historical survey of our distorted industrial and enterprise strategy, read Conor McCabe’s recently published ‘Sins of the Father’. If we repeat the past, we shouldn’t be surprised that the future is no different.]
Monday, 18 July 2011
Plan A for austerity; Plan D for default and devaluation
Slí Eile: Events are moving fast on the European monetary plains. Suddenly, various 'unthinkables' are being mentioned as real possibilities rather than impossibilities. Whatever the coming days and weeks hold a number of inconvenient truths are emerging:
European political leadership is at an all time low since the foundation of the European Coal and Steel community in the 1950s.
National interests are dominating over any sense of collective European 'esprit de coeur' and to the fore in various national interests are national financial interests.
The institutions of the European Monetary Union are not up to task - we have in some respects a house built on sand (and when the gales blew etc)
In the long-term (and possibly in the coming months) you can have a 'transfer union' and growing federalism or you have an EU without a single currency but you can't have both.
Like marriage single currencies are very attractive and lead to all sorts of mutual gains, lowering of transaction costs and increased market certainty when the partners are 'in it together'. But when communication breaks down so does trust and the current arrangements represent a pact 'til dissolution do us part'. Moreover, when the partners squabble endlessly over what is mine in terms of assets, debts and sharing of these then trouble is on the horizon. Responses at the European level have, to date, focussed on fiscal austerity with the addition of some clumsy attempts to rescue a number of peripheral countries in the Eurozone while all the time denying that there is a larger elephant in the European Euro parlour.
At the end of the day all of this comes down to who gets paid off and who has first claim to the assets of an insolvent corporation. Without wishing to over-simplify the current politico-economic crisis - financial institutions and funds in France, Germany, the UK and the US want to get paid back, the ECB wants to save the Euro and are ready to sacrifice absolutely anything for it, German and French politicians are watching their electoral backs. The IMF is playing good guy but you really would not want to be dependent on the IMF if you can help it. Read up on the last two decades of reform and adjustment in various nations in receipt of its magnificence. As for the domestic political response in the periphery let charity restrain this commentator.
'Plan A' meaning austerity (as Wolfgang Münchau terms it)is not working as it is compounding the problem by embedding debt through automatic fiscal stabilisers. Plan B is a muddle through involving some type of debt relief together with some fiscal transfer and contributions by bondholders. Plan C is Plan B plus a wider EFSF umbrella to save the big ones like Spain and Italy and Plan D is - you have guessed already - default and devaluation to continue with Münchau's terminology.
One way to prepare for the future is to deny it. Another is to assume the worst and prepare for it (secretly or openly). One wonders if policy makers and senior officials in Merrion Street are currently discussing 'what if' scenarios at a more leisurely and studied pace than what happened in September 2008. A good night's sleep would help.
And still more options include hoping for the best and proactively going for it while being prepared for the worst. The Euro is not dead yet. Even it if does not survive in the shape that we know it (in other words some countries exit in a more or less orderly fashion) it may be worth giving it another try. There is a lot to be gained and lost both ways. The protagonists for default and devaluation here in Ireland (the latter meaning the creation of An Punt Nua) need to spell out what that might mean for savings, deposits, capital controls, direct foreign investment, interest rates, mortgages and ultimately - jobs and living standards. They may argue that we are going down the swanny anyway and it is best to exit or threaten to exit before events impose themselves on us. Now they have a point bearing in mind the denial of reality in September 2008 and again in the latter half of 2010. However, the risks involved in wholesale and large-scale sovereign default allied to currency break-up are huge, unknown and without precedent. Ireland, Greece, Portugal, Spain and Italy are not Russia, Mexico or Argentina.
Right now citizens and progressive movements in Europe need to act together and reason out a number of solutions. One modest - very modest - way forward is for a European wide push that henceforth bondholders for insolvent banks should not be paid a cent. It will not - of itself - kick start economic growth and job creation but it points in the right direction and would help countries who desperately need some fiscal elbow room to crowd in investment where economic activity is being crucified by a thousand cuts. The idea of letting these categories of bondholders take the hit is hardly a revolutionary proposal as economist Colm McCarthy argues in the Sunday Independent here that:
Minister Noonan should now be seeking European support for an end to payments to holders of bonds, guaranteed or unguaranteed, in the Irish banks. Every cent paid to them is at the expense of the holders of Ireland’s sovereign debt, who have been treated in quite cavalier fashion at the behest of the European Central Bank and apparently in response to threats from this unique organisation.
Surely progressive economists and commentators can be a tad more radical and courageous than an existing pillar of economic orthodoxy?
Can we hope that at last the cent is beginning to drop on politicians, economists and progressives?
European political leadership is at an all time low since the foundation of the European Coal and Steel community in the 1950s.
National interests are dominating over any sense of collective European 'esprit de coeur' and to the fore in various national interests are national financial interests.
The institutions of the European Monetary Union are not up to task - we have in some respects a house built on sand (and when the gales blew etc)
In the long-term (and possibly in the coming months) you can have a 'transfer union' and growing federalism or you have an EU without a single currency but you can't have both.
Like marriage single currencies are very attractive and lead to all sorts of mutual gains, lowering of transaction costs and increased market certainty when the partners are 'in it together'. But when communication breaks down so does trust and the current arrangements represent a pact 'til dissolution do us part'. Moreover, when the partners squabble endlessly over what is mine in terms of assets, debts and sharing of these then trouble is on the horizon. Responses at the European level have, to date, focussed on fiscal austerity with the addition of some clumsy attempts to rescue a number of peripheral countries in the Eurozone while all the time denying that there is a larger elephant in the European Euro parlour.
At the end of the day all of this comes down to who gets paid off and who has first claim to the assets of an insolvent corporation. Without wishing to over-simplify the current politico-economic crisis - financial institutions and funds in France, Germany, the UK and the US want to get paid back, the ECB wants to save the Euro and are ready to sacrifice absolutely anything for it, German and French politicians are watching their electoral backs. The IMF is playing good guy but you really would not want to be dependent on the IMF if you can help it. Read up on the last two decades of reform and adjustment in various nations in receipt of its magnificence. As for the domestic political response in the periphery let charity restrain this commentator.
'Plan A' meaning austerity (as Wolfgang Münchau terms it)is not working as it is compounding the problem by embedding debt through automatic fiscal stabilisers. Plan B is a muddle through involving some type of debt relief together with some fiscal transfer and contributions by bondholders. Plan C is Plan B plus a wider EFSF umbrella to save the big ones like Spain and Italy and Plan D is - you have guessed already - default and devaluation to continue with Münchau's terminology.
One way to prepare for the future is to deny it. Another is to assume the worst and prepare for it (secretly or openly). One wonders if policy makers and senior officials in Merrion Street are currently discussing 'what if' scenarios at a more leisurely and studied pace than what happened in September 2008. A good night's sleep would help.
And still more options include hoping for the best and proactively going for it while being prepared for the worst. The Euro is not dead yet. Even it if does not survive in the shape that we know it (in other words some countries exit in a more or less orderly fashion) it may be worth giving it another try. There is a lot to be gained and lost both ways. The protagonists for default and devaluation here in Ireland (the latter meaning the creation of An Punt Nua) need to spell out what that might mean for savings, deposits, capital controls, direct foreign investment, interest rates, mortgages and ultimately - jobs and living standards. They may argue that we are going down the swanny anyway and it is best to exit or threaten to exit before events impose themselves on us. Now they have a point bearing in mind the denial of reality in September 2008 and again in the latter half of 2010. However, the risks involved in wholesale and large-scale sovereign default allied to currency break-up are huge, unknown and without precedent. Ireland, Greece, Portugal, Spain and Italy are not Russia, Mexico or Argentina.
Right now citizens and progressive movements in Europe need to act together and reason out a number of solutions. One modest - very modest - way forward is for a European wide push that henceforth bondholders for insolvent banks should not be paid a cent. It will not - of itself - kick start economic growth and job creation but it points in the right direction and would help countries who desperately need some fiscal elbow room to crowd in investment where economic activity is being crucified by a thousand cuts. The idea of letting these categories of bondholders take the hit is hardly a revolutionary proposal as economist Colm McCarthy argues in the Sunday Independent here that:
Minister Noonan should now be seeking European support for an end to payments to holders of bonds, guaranteed or unguaranteed, in the Irish banks. Every cent paid to them is at the expense of the holders of Ireland’s sovereign debt, who have been treated in quite cavalier fashion at the behest of the European Central Bank and apparently in response to threats from this unique organisation.
Surely progressive economists and commentators can be a tad more radical and courageous than an existing pillar of economic orthodoxy?
Can we hope that at last the cent is beginning to drop on politicians, economists and progressives?
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