Wednesday, 25 February 2015

Aer Lingus Watch #5

Paul Sweeney: I began Aer Lingus Watch 3 by saying that the government will not sell its stake in Aer Lingus. The Taoiseach had said that he wanted “a cast-iron guarantee” on the slots from IAG. That will not be forthcoming, I said. Cast-iron means no, if it is plain English because such a guarantee can't be given and enforced. And I thought the case was closed. For a time it appeared as if it might be opened again when a few key players in positions wavered. But the government has now sensibly rejected this bid.

That is not to say another won't materialize.

More importantly Aer Lingus is important as an indigenous Irish firm in industrial policy, for those of us who care about such matters.

What the Labour/Fine Gael government must do now, through NewERA is to buy Ryanair’s shares to bring the state’s shareholding up to 50.1%. This would give the state control again, although it must run the company at arms-length.

The time to move is soon, as the share price will fall when the bid fails. Government should fund the purchase of the additional tranche of shares through NewERA, which was set up to be a developmental board for state enterprise. If Aer Lingus is so important as the Transport Minster said on rejecting this bid, why not take control?

Talk that we don’t have the money - for what is capital investment - is not the case when it came to bailing out the banks or when Exchequer receipts exceeded projections, as recently, or when other sums are found in the coffers, as they are.

Is such decisiveness so alien to politicians that they cannot take such a logical and indeed popular step? But then they must then step back and leave the running of the company to its board, and leave any future investment decisions to NewERA.

The government said “The information and commitments that have been set out to date do not at present provide a basis on which the Government could give an irrevocable commitment to accept an offer to dispose of its shares, should one be made by IAG.” Regrettably it did not close the door, with Transport Minister Mr Donohoe saying “the Government remains open to considering any improved proposal which IAG may bring to the steering group.”

He said the government wanted extended guarantees beyond five years in relation to the use of Heathrow slots for services to Ireland. Indeed, if in say 2 years IAG was to give the slots to BA, who would enforce these “guarantees” in law? The then government would say it is not a shareholder and is not directly involved and cannot spend taxpayers’ money fighting a big Multinational. That is why such cast-iron guarantees would be seen to be actually made of plastic.

Mr Donohoe said that the Government wants “firm commitments and details” on IAG’s plans to grow transatlantic traffic out of Ireland. This is what excited one union official for a while and indeed if the opportunity is so good, why can't Aer Lingus seize it? What is the obstacle to such expansion?

The government was skeptical of the promise by IAG that it would “look at” other opportunities to grow at Cork and Shannon and that, through the re­lationship with British Airways at Gatwick, it might enhance the Knock-Gatwick service.

Was the IAG price a good offer? Aer Lingus just announced that it had €545m in net cash at end-2014 (its gross cash was €936m). This means that the net price is substantially reduced. Further, the slots are worth a lot. One report put them at up to €925m.

Some will tell us Aer Lingus does not own the slots and so they should be discounted. But there is a grey market in Heathrow slots and they are selling for real cash. Stephen Kavanagh, the new boss of Aer Lingus, who favoured the bid along with the rest of the board, (though he wont get a bonus but his shares are worth a lot) claimed the slots are worth less than €500m, perhaps as little as €300m. Still a lot of money. And on the basis that AA paid £20m pounds sterling for a pair last year, Aer Lingus’ 23 pairs are worth £460m sterling or €626m.

So taking the net cash and say €500m for the slots, then the offer price of €1.3bn becomes a net offer price of €255m.

IAG are not generous. They want the slots as well as the company.

But the slots are more valuable and important to Ireland’s connectivity and they are tied in to three airports in the company’s rules as AL Watch No 1 pointed out.

I will return to the promised blog on airline consolidation in the next watch. There is a lot of worry by many people over the need – the imperative – for airlines to consolidate. This is a view which should be considered.

But I have heard this siren call of consolidation over and over in the 15 years I spent advising the unions at Aer Lingus on financial and aviation matters. And while it is a powerful argument in a capital-intensive industry, I will argue that there is room for well-run regional airlines - particularly like Aer Lingus - which has so much going for it.

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Tuesday, 24 February 2015

Why ‘gross’ income inequality matters

Cormac Staunton: Cherishing All Equally has prompted a discussion of economic inequality in Ireland. In a previous post I discussed why looking only at incomes is insufficient, and why we also need to look at public services and the cost of living.

In this post I want to show that when talking about income in the context of economic inequality it is important to look at gross income inequality (before taxes and social welfare), not just net income inequality (after taxes and welfare).

Net versus Gross
Ireland’s level of net income inequality is about average for the EU/OECD. For many people this is the end of the discussion of inequality in Ireland. We do enough already. Move along, nothing to see. 

Ireland has average net-inequality because our system is focused on cash. Social welfare payments play a vital role in this, reducing Ireland’s income Gini from 0.53 (pre-welfare) to 0.29 (post welfare), a highly redistributive system. As a result, measures that look only at net-income inequality (or net-income poverty) show Ireland in a positive light.

But these statistics ignore the drag that a high cost of living and paying for public services has on people’s incomes. They don’t include the level of investment in public services. And they don’t address the root causes of inequality.

In Cherishing All Equally we show that this is only one part of the story. When we look at gross-income inequality we see that Ireland is the most unequal country in the OECD, and this has direct implications for the economy and society.

The growing concentration of income
Gross income inequality is the inequality of incomes from the market - including wages, self-employed incomes and investments. When we look these incomes in Ireland over a period of time we see a growing concentration of income in the Top 10%, and in particular the Top 1%.

During the period of economic growth from the early 1990s, the share of income earned by the Top 10% in Ireland rose, meaning that the vast majority of people, the ‘Bottom 90%’ of the population, lost a proportional share of the national income. The Bottom 90% share of national income fell from 71.4% in 1975 to 63.9% in 2009.

We therefore can see a trend towards rising income concentration in Ireland. Nat O’Connor has previously discussed the possible causes of this.  Here I want to expand on some of the consequences.

Economic Impact
Rising gross inequality is related to the declining share of national income going to those at work. Robert Reich demonstrates that during the ‘Great Prosperity’ in the US from 1947 to 1977, there was a virtuous cycle where wages increased, workers bought more, companies hired more, employment grew, tax revenues increased, government invested more, the economy expanded and productivity grew. What we are experiencing across the developed world (including Ireland) is a reversal of this.

Thomas Piketty’s work has shown the negative consequences of gross income inequality for growth. According to OECD data, Ireland has had the third largest decline in the labour share of economic growth between 1990 and 2009: from 65.1% of national income to just 55.6%.

The danger is that it leads to a lack of demand in the economy. Those on low and middle incomes spend more of their money, which drives the economy and creates jobs. With a declining share going to them (and a greater share going to the Top 10%) we have a problem of a lack of consumption. 

While social welfare payments put money in the pockets of those who would otherwise have nothing, these payments are all made at the bottom of the income distribution. While this reduces overall net inequality, it does nothing to address the declining labour share, or the unequal distribution of market incomes. Ireland has 1 in 5 workers on low pay. The high deprivation rate (almost 30%) shows that many people cannot afford to purchase basic goods and services. This implies that welfare payments alone do not drive consumption to a sufficient degree.

As ‘gross’ inequality continues to rise, the question is: how much harder does our tax and social welfare system have to work? How much harder can it work in order for it not to have negative economic consequences?

As the IMF points out, more unequal societies tend to redistribute more. Ireland’s situation (high gross income inequality, offset with welfare cash payments) relies on political will to redistribute cash. But how sustainable is this?

In recent budgets we have seen a reduction in income taxes for those on higher incomes, and stagnation of welfare payments for some, with cuts to others. We have also recently heard discussion of the sustainability of the state pension. Rather than discuss how the pension can be funded into the future, many analysts assume that we will have to cut the state pension.

This highlights another danger from the concentration of income: the political power it can bestow. The Top 10%, and in particular the Top 1%, have the political power to fight against economic policies that will require them to pay more. This power can be used against attempts to increase the level of tax for those on high incomes, or to reduce their income share.

Going Beyond Income
While some of the effects of gross income inequality can be mitigated by taxation and social transfers, there is likely to be a point where growing inequality of market incomes cannot be contained by current, conventional policies.

Some categories of government spending—for example, public investments in infrastructure, spending on health and education, and social insurance provision—can reduce inequality and increase growth. Focusing only on net-income inequality ignores the need for such investments.

Gross-income inequality is not inevitable. The forces that lead to rising inequality are the similar for all advanced economies, but gross income inequality does not manifest in the same way in every developed country. Understanding pre-welfare inequality gives us an insight into the root causes of economic inequality and allows us to look more deeply at our economic and social system.

Cormac Staunton is Policy Analyst at TASC. You can follow him on Twitter @Cormac_Staunton

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Friday, 20 February 2015

Five Progressive Views on Greece

Nat O'Connor: Queries: The European Progressive Magazine circulated five articles about the Greek crisis, all of which are relevant to Ireland.
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More on Ireland's Low Taxation and Income Tax Progressivity

Nat O'Connor: The OECD provides a table of its member states showing total tax revenue as a percentage of GDP. In 2012, Ireland's total tax revenue was 28.3% of GDP. The lowest in the OECD was Chile on 20.8%. The highest was Denmark on 48%. Of all EU members of the OECD, Ireland has the lowest total tax revenue.

Ireland's low overall taxation is mostly due to very low social insurance charged on people's incomes. As shown in the three charts below, people on low and average incomes in Ireland pay much lower taxes than what they would pay in other countries. People on above average incomes pay less tax than they would pay in European countries, but slightly more than they would pay in English-speaking countries (including the UK).

AW stands for Average Wages. All charts are for taxation of single people. All the data is from the OECD Taxing Wages: Comparative tables.

Chart 1 compares personal taxes in Ireland with the Nordic countries. Clearly, someone on two-thirds of average wages (67% AW) pays far less tax and social insurance, and likewise someone on average wages (100% AW). However, the progressivity of Ireland's income tax system is visible for those on one-and-two-thirds of average wages (167% AW).

Click to enlarge

As shown in a previous blog post, the comparison between the tax paid on 67% AW and 167% AW is the main definition of income tax system progressivity that keeps being talked about. However, the progressive 'jump' from paying less tax to paying more tax is not the only thing that matters. As Chart 1 shows, despite this progressivity, the tax paid by those on higher incomes is still less than what people on equivalent incomes pay in the Nordic countries.

Chart 2 shows a similar scenario when comparing Ireland to continental European countries. In fact, several of these countries have higher income taxes/social insurance than the Nordic countries. Tax in Ireland is lower in each case, but the taxes on those earning 167% of average wages comes close to the next lowest, which is the Netherlands.

Tax reliefs: An important note is that these are all theoretical amounts of tax to be paid as they only count standard tax credits, not optional tax reliefs or tax breaks (such as Ireland's pension tax relief or health insurance tax relief). Ireland has more tax reliefs than other EU countries, except the UK. In fact, a feature of the English-speaking countries is that not only is a lower rate of tax/social insurance charged, but there are more tax reliefs available in these countries to further lower the effective amount of tax paid.

Chart 3 shows that tax in Ireland is most similar to the other English-speaking countries. Yet even in these cases, taxes on low and average incomes is still the lowest in the group. However, the progressivity of the income tax system does make those on 167% of average incomes the highest taxed of this group.

Chart 3 is really important to understanding the tax debate in Ireland. The talk of Irish emigrants staying away due to high tax is presumably based on the comparisons in Chart 3 and the assumption that all Irish emigrants are in English-speaking countries.

Yet, data on trade and migration (in an earlier post) question the validity of this assumption.

Ireland cannot improve infrastructure or provide more comprehensive public services without higher total tax revenue. This must mean increased taxes on lower and average incomes given how low those taxes are in Ireland, but this will obviously only be politically acceptable if people see clear evidence of costs lowering or new free-of-charge or subsidised services in exchange for higher taxes/social insurance.

Higher earners in Ireland would pay a third more tax, or even half again more tax, in other European countries. But lower earners would pay at least double practically everywhere in Europe. Even in the UK, people on low incomes pay half again as much tax/social insurance as in Ireland.

As noted above, the OECD data does not take into account the important role of tax reliefs in reducing these theoretical tax levels, but the overall picture of low personal tax in Ireland is pretty stark. The charts also don't include property taxes or other local taxes, which are typically higher in other European countries but also higher than Ireland in the USA and other English-speaking countries too.

Of course, this does not mean that people on low or average incomes necessarily have a better life in Ireland. As shown in TASC's report, Cherishing All Equally, the cost of living is 20% higher in Ireland and people on low incomes are worst affected by charges for public services, as the cost of GP fees, schoolbooks, public transport, etc. take a larger slice of low incomes.

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Thursday, 19 February 2015

Aer Lingus Watch #4: Did Privatisation Make Aer Lingus Profitable?

Paul Sweeney: A number of commentators have claimed that privatisation was the best way for Aer Lingus and that it was the making of the company because it became more profitable. The facts demonstrate that this is patently not true.

Timmy Dooley of Fianna Fail defended that party’s un-strategic decision to privatise Ireland’s strategic aviation bridge to the rest of the world, claiming that the company had performed poorly before it was sold off and he claimed that it has done better since their mistake of privatisation.

In a book, “The Politics of Public Enterprise and Privatisation” written back in 1989, I analysed the accounts of all commercial state firms and argued that as they had been made profitable in the 1980s, they would be more attractive to privatise. I demonstrated in “Selling Out: Privatisation in Ireland” published in 2004 by examining the accounts of all the state companies which by then had been privatised - that they had been profitable and performing well under state ownership prior to sell off. This is usual.

There is no great performance improvement after privatisation. On the contrary, in some cases, the performance after can be far worse than in public ownership. For example, it was the lack of investment (due to asset-stripping by new owners) which led to Eircom’s collapse just ten years after privatisation. The company is struggling to find it feet and the taxpayer had poured vast subsidies into the sector since. We privatised four financial companies, Irish Life, ACC, ICC and the mutual TSB. All collapsed since.

In the years before Aer Lingus’ privatisation in 2006 – which were just after 9/11 which really hit aviation, Aer Lingus still made profits before taxation as the chart shows.

Aer Lingus’ Profits before Tax
(Source: Annual Reports. Privatisation was in 2006)

In the four years before the privatisation these totaled €203m. Total losses in the four years from 2006 - the year of privatisation - amounted to €283m. It can be seen that in particular in 2008 and 2009, Aer Lingus made huge losses. While this is selective, it does illustrate that the supporters of privatisation have either ignored the facts or got it wrong and/or did not bother to check them.

Not long after 9/11 which devastated aviation, profits before tax in Aer Lingus were back at €37 in 2002, and €79m in 2003. The low profit in 2004 of 5m when the operating profit of €107 was almost wiped out by restructuring (redundancy etc. costs of €102m) when a big hit was taken. Profits in 2005 then rose to €79m and but plummeted to a loss of -€79m in 2006, the year of privatisation.

In the 2007 report, profits before tax were €127m but the two next years saw major losses of €161m in 2008, and losses rose even further to a very high €170m in the newly privatised company in 2009. These were due to exceptional costs. There has been the issue of an under-funded pension scheme too (at least the workers have a pension scheme in Aer Lingus). The company got a Corporation Tax rebate of €25m to soften the blow of its losses in that year. Since 2009, its 75th year, the accounts have become much less clear, much more opaque. There was a return to profit in 2010 of €27m before tax and the company has been profitable since.

It would be more honest if Mr. Dooley admitted that Fianna Fail made a major mistake from a national perspective in privatising Aer Lingus. Why cannot politicians admit to mistakes? Bertie Ahern said - quoted at the front of Aer Lingus blog No 1, that he would not be pushed into the privatisation of the company by some right wing economists. He of course, did not take long to change his mind, regrettably.

Colm McCarthy economist and opinion writer in the Sunday Independent also claimed “Had Aer Lingus not been privatised when it was, it is fair to speculate that it too would have been prevented, by politicians, from responding to the new commercial realities.”

The facts demonstrate otherwise, but Colm did appear to make assertions that suit his line. It was McCarthy who was put in charge of deciding what state assets to sell by the last government and his report was largely superficial, perhaps reflecting the very tight times after the Crash of 2008. My main disagreement with Mr McCarthy is his lack of strategic thought… he takes the simplistic view that the market will always provide. This is the standard conservative view but it is inadequate for a globalised trading island economy where aviation is the key to connectivity in this instance.

Ownership does matter for key strategic companies and Ireland can well afford to hold a majority share in Aer Lingus (the government should increase its shareholding to 50.1% by buying most of the Ryanair holding when the share price collapses after the IAG bid fails).

However, the owners must also ensure that it is well run and it needs to be run at arms length. But on strategic issues, it is normal for a shareholder like the government to ensue it serves the national interest. The fact that it flies into Cork and Shannon from Heathrow is important to these regions and should these should be protected. Profits will continue to be made, but they may not be maximized, within the arms length operation of the company.

In short it was seen that Aer Lingus was in profit and re-structured before it was privatised in 2006, as is always the way with commercial state enterprises in Ireland. They are profitable and performing before privatisation – not as a result of privatisation.

In the next Aer Lingus Watch #5, I will examine the line that “consolidation is inevitable” -  the old TINA line of Thatcher - There is no alternative.

Paul Sweeney is Chair of TASC's Economists' Network 

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Wednesday, 18 February 2015

Getting Beneath the Surface of Gross versus Net Income Inequality

Nat O'Connor: TASC's new report, Cherishing All Equally: Economic Inequality in Ireland, is designed to provoke deeper debate about what is and is not working in Irish economic and social policy.

The report points to the international debate on the problematic growth of income and wealth inequality to show that the issue is important and needs to be talked about in a different manner. Part of the problem in Ireland is that any mention of inequality is treated as left-right politics as opposed to a description of a major social or economic problem that merits serious analysis by everyone in the political spectrum. (An 'inconvenient truth' about our economy perhaps?)

One of the technical puzzles highlighted in the report is why does Ireland have such high gross inequality of wages and salaries before welfare reduces net inequality to EU average levels.

First of all, here’s what John FitzGerald (TCD, formerly ESRI) had to say on this point: "A really important research question, to which I do not have an answer, is why market incomes in Ireland are the most unequal in the OECD area. That is the puzzle. The welfare and taxation systems have to do considerable running to make a really big difference. I do not know whether the members have an answer to the question. It is an important question that deserves a response but I am afraid I cannot answer it." (Oireachtas Joint Committee on Education and Social Protection)

Unfortunately, despite its length, the report only scratches the surface of some of the complex issues to do with economic inequality. We wanted to describe and join the dots rather than get into theory. Nonetheless, my best guess of why Ireland has such high pre-tax pre-welfare income inequality is as follows:

1. The relatively large number of jobless households in Ireland means that when gross income in counted there are a lot of zero or near-zero household incomes. That affects the calculation of the Gini coefficent and makes Ireland more unequal than other countries that might have similar wage differences but fewer people on zero incomes.

Explaining jobless households requires much more in-depth analysis, but most of the people affected are not unemployed but are people unable to work due to disability, long-term illness or care duties. Part of the explanation is probably due to the social and economic exclusion of people in peripheral social housing estates in the larger urban areas (Dublin, Limerick, Cork) where there was a lack of support service infrastructure to get people into working lives. I would also note that in Eurostat statistics Ireland does poorly for employment of people affected by disability.

2. Ireland has a smaller proportion of the working age population in work (65.5% in 2013) compared to the EU average of 68.4%. And many North West European countries with comparable wage differences have employment levels of 70% to 80% or more (Eurostat). So Ireland's Gini coefficient of market inequality will also be affected by the somewhat smaller labour force.

Ireland does not subsidise childcare, which means many parents can’t work (mostly women). That means more zero-income stay-at-home parents whose earnings would have been more than offset by childcare costs. In other countries, both the childcare workers and more parents would have non-zero earnings, because childcare is affordable to more people.

3. There seems to be a big contrast between wages in MNC and IFSC jobs compared to non-Dublin domestic jobs. Top pay among professionals and senior public servants also may skew the distribution. Likewise, the work done by younger people with third level degrees is high value add and higher paid, compared to traditional work done by middle and older generations, many of whom had limited secondary education never mind third level.

4. There may be a lack of ‘mid-high income’ jobs (40-70K) due to the relative lack of manufacturing/light industry compared to other countries. The chance of getting a ‘high skill’ as opposed to ‘high education’ job was always less in Ireland than in more industrial countries. The high rate of young people not in education, training or employment in Ireland compared to Germany shows the effectiveness of the German system of apprenticeships in providing an alternative pathway for people for whom more academic third level education is not suitable.

5. We have under-development of the economy in many parts of Ireland (e.g. a lack of middle-income manufacturing or services jobs, based in turn on weak infrastructure). Weak local government helps explain the lack of development as well as the clustering of foreign direct investment in only some regions.

6. The tax systems in North West European countries seem to deter higher gross pay, as much more of it will be taken in tax. Higher tax and social insurance creates incentives for employers to hire more people or keep the money for investment, rather than paying out tens of thousands of euro in order to create a post-tax incentive for a executives or professional employees. (Evidence of this is in the tables on pages 20-21 of the report, which show that NW European countries have seen much less growth in the top 10% of gross/market incomes).

It’s hard to weight these factors, and there may of course be additional factors. But this is where I’d start when trying to explain the underlying market inequality in the distribution of wages, salaries, etc. in Ireland.

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Super rich or super angry: where are you on Ireland’s income pyramid?

Paul Sweeney: Many of us did not care how much others earned during the Celtic Tiger and bubble years. But now we are rightly angered about growing inequality.

How do your earnings compare to others? For the 1.9 million people at work last year, average annual earnings were €35,600. But it’s a bit more complex. This Central Statistics Office (CSO) data does not include many of the highest paid, e.g. many sole practitioners, doctors, accountants or solicitors in partnerships, nor the incomes – including gains made – of the very wealthy.

The data also includes the 450,000 part-time workers and is based on an average working week of 32 hours. Full-timer workers on 36 hours would have average incomes of about €40,000.

A more useful figure than the average would be median earnings – the amount earned by those right in the middle of all earners. The average is skewed upwards because a smaller number earn a great deal more than that earned by the majority of people.

Median earnings are estimated at €28,500 last year for all those at work. So half of those at work – 964,000 people – earned less than €28,500 and half earned more. For full-time workers, median earnings were estimated at €32,000 in gross income. The minimum adult wage of €8.65 an hour, unchanged since 2007, equates to an annual wage of €17,542.

Then there are those who are not at work, those who depend on welfare or are on occupational pensions. Of the two million tax cases, which represent 2.85 million adults, two-thirds have gross annual incomes of under the average earnings of €35,600. The top 10 per cent of tax cases, representing 200,000 households, report incomes above €75,000.

According to European Union survey data, in 2012 the top 10 per cent of households had 23.5 per cent of all income while the bottom 10 per cent had only 3.1 per cent. Revenue Commissioners data suggests a significantly higher concentration of income at the top in the Republic.

Income boost
If you want to earn a good income, work for a large firm, get an education and join a trade union, for all three boost incomes, according to CSO data.

Public-sector workers are paid more than private even after their recent average pay cut of 14 per cent but have on average a greater level of educational attainment and qualifications.

The Taoiseach earns €200,000, which is the pay ceiling for top public servants, with the exception of chief executive posts within commercial State companies (€250,000) and the chief executive of State-owned AIB (€500,000).

Some 28,500 people – including thousands of graduates and postgraduates – applied for entry-level Civil Service jobs on a starting salary of just over €11 an hour last July.

The entry salary of about €22,000 is down to 2004 levels and it takes 18 years to reach the top of the scale (€36,000). Principal officers earn between €80,000and €99,000 and the top public servant gets €185,000.

This may seem generous but is modest compared with similar private-sector positions.

In the public sector all information on payments is available, while most private firms do not disclose anything about their pay policies, even to their employees. The big exception is those few companies quoted on stock exchanges. There we can get data on remuneration but only for the top executives.

Chief executives of major Irish publicly quoted companies are very well paid, with remuneration packages running into the millions of euro, including valuable share options and pension arrangements.

Excessive executive remuneration has been highly criticised for distorting corporate performance. Executives’ high pay compares with wage stagnation for most workers.

It would take a person on the minimum wage hundreds of years to earn what the highest-paid Irish chief executives can earn in a single year.

Yet even these executives are not at the very top of the pyramid. We do not know what the bosses of private or unlimited firms such as Dunnes Stores or ABP Food Group earn.

At the apex of the earnings pyramid are the very wealthy who “earn” money even as they sleep. A lot of nonsense is written about the supposed richest “Irish” people who have nothing to do with this country other than having Irish passports.

Capital gain income
On the other hand, Irishman Denis O’Brien has extensive interests although is not tax resident here. His estimated worth of €4.4 billion would have generated a capital gain income of €220 million last year at 5 per cent growth. It would take 6,875 years for a person on full-time Irish median earnings of €32,000 to make this sum. Ryanair chief executive Michael O’Leary’s reported worth of €450 million would give an annual income of €22.5 million in capital gains. It would take 703 years for a median worker to make this income.

The wealth of these super-rich individuals is in stark contrast to the median gross earnings of €28,500 for those working (including part-time) or the €32,000 of full-timers. Half of the population lives on less than these two figures. Those with some assets, houses and savings are better off. Where are you on Ireland’s income pyramid?

This post appeared as an opinion piece in the Irish Times on 16 February.

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Tuesday, 17 February 2015

IAG: Predator or Saviour?

An Lámh Eile: Once again the full privatization of a state company is on the agenda.

Much is being made of connectivity. Connectivity is an issue for two key segments, tourism and business. But will connectivity be affected by an IAG takeover? There is substance in the comments that argue that if the demand is there for connectivity, the market will provide it. And if that is true, the IAG takeover of Aer Lingus is immaterial to connectivity. Private airlines decide on the basis of the bottom line in initiating a new route or further development of an existing one. In the short-term, the bottom line rules in the market. But are there cases where loss-making connectivity should be sustained for some long-term broader reasons than short-term profit?

In the past, Aer Lingus has often sustained routes or frequency on the transatlantic route, even when not profitable, with a view to the connectivity issue and also because the transatlantic route is more volatile. This latter issue is particularly so in the tourist segment, super sensitive to any disturbance in international affairs that might have even a remote effect on flying or the safety of destinations. So there was a good bet business would pick up again. But it was an approach that often brought Aer Lingus close to the brink. A new parent will almost certainly take a more rigorous short-term approach.

Aer Lingus provision of connectivity to Ireland does relate to the business sector of US FDI companies in particular. Slots in Heathrow are also an important part of business sector connectivity. But tourist connectivity is now largely provided by Ryanair. And Ryanair also provides good connectivity for Irish and European emigrants and immigrants respectively. Thus, overall, the connectivity issue may be overstated.

The biggest issue and fear relates to what IAG will do with Aer Lingus in the long term. It is very clear that IAG wants a completely free pair of hands. They are not interested in a takeover where everyone else accepts their offer but the Government retaining its share and possible consequent constraints on IAG behaviour. This should raise alarm bells. To reassure the government, unions and a somewhat skeptical public, there is talk of guarantees, either on the employment front, on branding or other issues. But what is the value of these guarantees? How would enforcement be sought if they are breached five or ten years down the road?

Leaving aside Ryanair, IAG is the only suitor at the moment. But is IAG the best parent option if there is a decision to sell? IAG is a combination of British Airways, Iberia, the former BMI and sundry other elements. BMI was fully integrated into IAG in 2012 with the disappearance of the BMI brand. BMI at one stage had an annual passenger throughput of 10 million, approximately equal to that of Aer Lingus in 2014. A consistent pattern in the takeover of many companies, at international level, is due recognition of distinctive importance in the early years, including brand recognition, but ultimately the centralization to corporate HQ of better paid managerial jobs, slimming of operational staff numbers and integration of brand image to a single identity in the medium to long term. As the case of BMI demonstrates, this may happen very early, but later in other cases, depending on acceptability. The long-term result is the same.

The two largest elements of IAG, BA and Iberia, are airlines where long haul is of great importance. This is rooted in history, flights to former colonial destinations for British Airways and South America for Iberia due to historic and linguistic factors. Aer Lingus is dominated by short haul. Where exactly is the mutual benefit or synergy here for a Dublin-based largely short haul airline? In what way for example could Aer Lingus benefit from Iberia’s South American network?

It is argued that Aer Lingus needs a big kindly funding rich parent in case of future turbulence in the industry - almost inevitable. But shareholder driven companies are not in the business of bailing out loss making subsidiaries or refusing to wield the knife on subsidiaries that don’t fit into the global corporate plan. How often have we seen FDI parents shower us with praise when the Irish branch fitted neatly into the corporate plan? But this has never prevented closure of unprofitable subsidiaries when the corporate necessity arose. We have even seen them close profitable subsidiaries in Ireland because of lack of fit with some new global corporate strategic perspective.

In the long run IAG will make decisions in the interests of IAG. For example, over the past few years Aer Lingus has developed Dublin as an important hub for those who don’t wish to use Heathrow to fly to the US. The immigration clearance arrangements at Dublin have been important in this development. But would this hub role have developed to the benefit of DAA and Aer Lingus, if Aer Lingus had been acquired by an international airline company five or ten years ago?

Ultimately a key question is how often and for how long will the interests of IAG and the interests of Ireland coincide? The answer is probably on some occasions but it will be as a result of an unusual coincidence of interests, rather than a commitment to Ireland. It is almost certain there will be many decisions made by IAG that will be detrimental to Ireland’s interests.

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Monday, 16 February 2015

Ireland's 'Progressive' Income Tax System

Nat O'Connor: Some commentators keep referring to the progressivity of Ireland's income tax system, as if it was the silver bullet that makes economic inequality in Ireland OK, or at least as good as it can get. This is vastly over-simplified.

Focusing in on the effect of income tax, USC and PRSI, the progressivity in Ireland's income tax system is real - but it is NOT due to taxing high incomes more than in other EU countries.

Progressivity of income taxation is measured (by the OECD) by comparing the tax paid by someone on two-thirds of average earnings with someone on one-and-two-thirds of average earnings.

The OECD reports an average wage for Ireland of €32,381. The average wage in France is €36,980 and in Germany it is €45,170.

Someone on two-thirds of average wages is therefore on €21,695 in Ireland, €24,777 in France and €30,264 in Germany.

At this wage level (based on the tax payable by a single person), the Irish person pays €4,567 in taxes (21.05%), the French person pays €11,293 in taxes (45.58%) and the German pays €20,390 in taxes (45.14%).

Someone on one-and-two-thirds is on €54,076 in Ireland, €61,757 in France and €75,434 in Germany.

The Irish person at this higher salary level pays €20,803 in taxes (38.47%), whereas the French person pays €28,006 in tax (54.11%) and the German pays €38,637 in tax (51.22%).

Data sources: OECD on average wages and OECD on average taxation.

The Irish person on €54,076 pays a lot more tax than the Irish person on €21,695. That's what makes Ireland's income tax system 'progressive'. The jump from paying 21.05% of tax to 38.47% is a jump of 17.42 percentage points.

Tax goes up on higher earners in France and Germany too, but the jump isn't as big. In France, tax on higher earners is 8.53 percentage points more and in Germany it is 6.08 percentage points more.

But the Irish person on one-and-two-thirds of average wages does not pay anything like as much tax as his or her French and German counterparts. There is plenty of scope to increase tax on higher earners. However, providing a comprehensive system of quality public services in Ireland would also require low and middle earners to pay a lot more tax and social insurance too.

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Response to Dan O'Brien's 'Bunkum' Article

Nat O'Connor: Dan O'Brien writes that "claims about great inequality in Ireland are just bunkum". Having had a look at the arguments in support of this position, there is much data Dan O'Brien is ignoring.

DOB: "it has always been clear from the available data that the gap in Irish incomes between the richest and the poorest at any given time has been in line with averages in peer countries."

We have data on the Gini coefficient of overall income inequality, which shows us that it is slightly lower than the EU average. But this statistic doesn't give us fine detail about the mix of high, low and and middle incomes across society. Different countries can share the same overall level of income inequality, but have different combinations of high and low income.

Even when we look at Gini statistics (and there is more than one), we know that before taxes and welfare, Ireland has the highest (most unequal) spread of income in the OECD. That means that wages, salaries and other incomes go to fewer people, and more people have low or zero incomes. (In this respect, Ireland is very different from peer countries).

Dan O'Brien argues that "those figures show no trend toward higher income inequality in Ireland over the decades, as has been the case in many other developed countries."

If O'Brien means Gini after welfare, than it is fairly constant. But Gini before welfare has been rising, according to OECD data here.

And, using another common measurement, the top 20% has 4.1 times the income of the bottom 20%. That's up from 3.4 times in the period 2004-2006, which is a large increase (Eurostat). But O'Brien doesn't name the statistics or sources he is relying on when he claims "available data" shows no rise in inequality.

John FitzGerald (TCD, formerly ESRI) addressed wage inequalities at an Oireachtas committee on 21 January: "A really important research question, to which I do not have an answer, is why market incomes in Ireland are the most unequal in the OECD area. That is the puzzle. The welfare and taxation systems have to do considerable running to make a really big difference. I do not know whether the members have an answer to the question. It is an important question that deserves a response but I am afraid I cannot answer it." (Oireachtas Joint Committee on Education and Social Protection)

TASC's report makes the point that we cannot make the assumption that tax and welfare will continue to doing the necessary running to keep this growing 'market inequality' in check. Especially with political pressure to cut taxes.

DOB: "Ireland's distribution of wealth is very similar to its peers - in this case, other members of the eurozone."

This is true. And Ireland's home ownership does play an important role in distributing wealth. But many of the old routes to home ownership - like purchasing local authority housing - were unsustainable. The current social housing stock is more likely to be flats, or in more peripheral locations. The access to housing for one generation has meant inequality for the next generation, unless policies are introduced to increase the supply of affordable housing.

However, the new wealth statistics released by the CSO/Central Bank also show that the top 20% have 70% of all net wealth assets (page 86 here). Despite home ownership spreading the wealth, it seems likely that both more expensive housing is concentrated at the top of society, and that non-housing assets are also more unequally distributed.

Meanwhile, long-term residential leasing is weakly protected in Irish law and does not offer a secure option for families and older people. If more people rented, than Ireland would have higher wealth inequality (like the Nordic countries or Germany) but they would have their material needs met more adequately, which is the more important end-goal focused on in TASC's report.

DOB: "we now know that claims of Ireland being very unequal are utter bunkum - as measured either by incomes or wealth. The only other aspect of comparative equality that could trouble those who claim this country is very unequal is its limited social mobility - that is, the frequency with which those who are poorest at one point can become richer over time. Alas, nobody yet has the answer to that one - because we don't have any hard data on the extent to which the already rich remain rich and the already poor remain poor. ... my hunch is that Ireland is better than average on mobility. One reason to believe this is education - among the most important, if not the most important, means of facilitating social mobility. [...] But my hunch may be wrong. For instance, the professions are still stitched up by the well-to-do and their offspring."

This is where the TASC report comes to a very different conclusion. Firstly, rather than social mobility being the "only other aspect of comparative inequality" worth looking at, the TASC report looks at seven factors related to economic inequality: Income; Wealth; Public Services; Taxation; Family Composition; Capacities; and the Cost of Goods and Services.

Take the last point, the cost of living in Ireland for actual individual consumption is 20% higher than the EU average, allowing for purchasing power differences (Eurostat). That means housing, energy costs, food costs, etc. It means that someone in Ireland could have the equivalent income to someone in Germany or France (countries with the same Gini coefficient) but would meet less of his/her material needs for the same income. It is in this context that Ireland's Gini coefficient needs to be understood in terms of day-to-day economic reality. Individual consumption in France costs 10.9% more than the EU average but only 2% more in Germany, whereas the latest figures for Ireland shows actual individual consumption costs 22.9% more than the EU average. The higher cost of living in Ireland makes low incomes effectively 'lower' than their cash value, because people on low incomes in Ireland can purchase fewer goods and services than their German or French counterparts.

Another aspect of economic inequality is how public services can meet people's needs directly, reducing the number of things that have to be purchased out of people's incomes. For example, public transport in France is highly subsidised, and Germany has much more extensive subsidised public housing for people to rent (and recently reintroduced rent control to limit housing costs). People on modest incomes in other countries pay more social insurance and more tax than in Ireland, so they may have lower disposable cash incomes. But they can often meet their material needs more successfully because public services and subsidies are provided.

As for social mobility, Dan O'Brien is right to note that people may move between 'low' and 'high' incomes across their working lives, but 27% of the working age population only have lower secondary education. While half of younger age cohorts will go on to third level, that doesn't suit everyone. Are we building an economy that excludes older people (who never had educational opportunities) or younger people (who don't fit the mold)? A very different argument to 'social mobility' is to ensure that every person can meet their basic material needs to a decent minimum standard. This is where Ireland's inequality is most stark: so many people - including people working full-time - are experiencing material deprivation, and cannot meet their basic needs. And the social mobility argument often implicitly blames those who don't have the right mix of capacities and opportunities to do well in the economy.

The TASC report purposefully goes beyond top line income or wealth inequality statistics in order to show that the economic and social policy issues to be addressed are much deeper, nuanced and require a comprehensive strategy. There is much evidence that many people's lives in Ireland are affected by real economic inequalities, whether it is the root causes of low wages and joblessness, or the higher cost of living - including the costs associated with accessing public services.

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Inequality: a Real and Growing Threat to the Irish Economy

Nat O'Connor and Cormac Staunton: Economics has always been about the study of who gets what, when and how. This issue has come into sharp focus due to the problems that growing economic inequality is causing. International bodies like the OECD, World Bank, IMF and World Economic Forum have all stressed the challenges and risks posed to developed economies by economic inequality. Economists and leaders across the spectrum have called economic inequality ‘dangerous’ (free market advocate Alan Greenspan), ‘the most important problem we are facing today’ (Nobel laureate Robert Shiller), and ‘the root of social ills’ (Pope Francis).

TASC’s first annual report on economic inequality, Cherishing All Equally, shows that this global phenomenon is a very real threat for Ireland too.

Income inequality in Ireland has been growing since the 1970s, to the point that we are now the most unequal country in the OECD when it comes to how the economy distributes income before taxes and social welfare. Thankfully, our social welfare system and public services significantly reduce this market income inequality. However, as inequality grows every year, it becomes harder to maintain the tax and welfare system to restrain the underlying inequality from affecting the wellbeing of our society, the functioning of the economy and even the health of our democracy.

Here’s how. Income inequality leads to poverty and social exclusion. But it also lowers demand in the economy in a downward spiral of lost spending. The concentration of income in fewer hands gives the wealthy more power to lobby for tax cuts that will disproportionately benefit them.

One of the important contributions of TASC’s report is to demonstrate that economic inequality can only be reduced if policies join the dots between taxes, public services, family and the cost of living; not just focus on cash incomes.

Globally, the OECD has shown the fall in the share of economic growth that goes to people at work; for many reasons, from new technologies to the bigger role of finance in the economy. Thomas Piketty’s research shows that those in the top one in ten earners are taking an ever greater share of income, even while wages overall are in decline compared to the profits of investors and financiers.

This is happening in Ireland too. The OECD shows that Ireland has had the third largest decline in the share of economic growth going to people at work, down from 65% of national income in 1990 to below 56% in 2009.

It is important to acknowledge that real economic development has occurred over the last three decades. New technologies have helped bring a higher standard of living across society and some living costs are lower now than in the past, such as telecommunications or household goods. Nonetheless, even during recent periods of economic growth, many people’s circumstances have worsened. Essential costs like housing and energy are much more expensive than in the past. And of course, the economic collapse of recent years has devastated the economic position of many people in Ireland.

Up to now we have mistakenly relied on economic growth as the cure-all for economic inequality. But there was no ‘rising tide’. The notion of ‘trickle down’ is a discredited theory, dismissed by the OECD and others. Instead, we need to prioritise reducing inequality and meeting everyone’s material needs, and once we do this growth will follow.

It is a myth that the rise of inequality we are now witnessing is inevitable. Reversing inequality does not hinder economic growth. In fact, there are strong arguments that more equal societies — like the Nordic countries — have more productive, innovative and sustainable economies.

Over the years, as TASC has studied economic inequality, the complexity of the factors involved — and their interaction — are now better understood, as shown in Cherishing All Equally. This analysis provides a foundation for the development of more comprehensive solutions.

The International Labour Organization (ILO), a respected UN agency, has proposed an alternative to the unsustainable debt-based and export-led growth model pursued in many countries. The ILO alternative is for recovery based on wage growth, to reduce household debt and to allow for equitable and sustainable economic development. As Ireland has a fifth of workers classified as ‘low wage’, it is a strategy that makes sense here.

While we need to address the falling share of income and the weakening purchasing power of households, a new ethical economics must also take account of the global impact of climate change and resource depletion. In that context, increasing and broadening the provision of quality public services is a more important way of addressing people’s economic quality of life than increasing their cash incomes.

While all advanced economies are experiencing the same pressures that lead to growing inequality, the levels of inequality are not the same everywhere. Economic and social policy choices — including taxation and the provision of public services — have produced very different outcomes in different countries.

As we begin to see economic recovery in Ireland, decisions made now will determine the kind of society that will develop over the coming decades. Will we truly cherish everyone equally or will we continue to pursue what looking increasingly like the wrong direction. It is vital that a commitment to reducing economic inequality underpins today’s economic policy decisions so that we deal with the root causes and bring about a truly flourishing society.

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Friday, 13 February 2015

The “Two Irelands”

Cormac Staunton: Christian Aid hosted a conference in Dublin yesterday on the “Human Rights Impact of Tax and Fiscal Policy”. There were a number of interesting speakers and contributors on issues of global tax policy and how it links with human rights, sustainable development and equality.

In this post I want to focus on a discussion between two panelists that I found particularly interesting. To many of those present it might not even have been the most interesting discussion in that session. But to me it spoke volumes about the central importance of inequality.

In the final session of the afternoon, Aine Lawlor (RTE) moderated a discussion between John Mark McCafferty of St. Vincent De Paul, Fergal O’Brien of IBEC and John Christensen of the Tax Justice Network. While Fergal O’Brien and John Christensen had a ‘spirited’ debate about business tax avoidance (which I won’t delve into here), there was another more subtle discussion taking place amongst the panelists.

Fergal O’Brien spoke about the role of inward investment (FDI) in creating thousands of real, quality jobs in Ireland. He argued that these were well spread throughout the country: even financial services jobs were located in towns and communities, not just in the IFSC. He spoke of recent falling unemployment and the positive role of business in creating jobs since the crash.

John Mark McCafferty spoke of rising deprivation levels since the downturn. He highlighted the recent child poverty statistics, which show nearly 30% of children living in poverty: and this has increased in recent years. He spoke of the direct impact that cuts to public services are having on families, in particular lone parents. He spoke of precarious employment and in-work poverty. 

Aine Lawlor correctly identified that O’Brien and McCafferty weren’t necessarily disagreeing; they were just talking about two different Irelands. The fact that both Irelands (co)exist highlights the central problem we face: economic inequality. 

The forthcoming TASC report on economic inequality in Ireland Cherishing All Equally looks at a range of factors that determine and explain economic inequality including incomes, employment, wealth, public services, taxation and the cost of living.

While there are two Irelands - good jobs on one hand, poverty and deprivation on the other – the issue is how they connect. The ‘market’ is becoming more and more unequal, to the point that Ireland has the highest levels of market inequality in the OECD. 20% of Irish workers are officially on ‘low pay’, one of the highest levels in Western Europe.

While we redistribute cash through welfare payments, we have an overall ‘low tax’ system which means we have low investment in public services. This model relies on people to purchase many of the services they need, often a quite a high cost. Or they provide the service themselves as ‘unwaged’ work. Or they simply go without.

For those doing ‘well’ this lack of public services is less of a problem. They have access to a private car rather than public transport. They can access private medical care and private schools (or ‘grinds’). 

For those on low incomes, paying for GP visits and school books uses up disposable income, which is money that would otherwise be spent in the local economy, reducing demand and employment. When almost 30% of adults are suffering deprivation, that’s a lot of lost spending… and fewer jobs.

If our model is based on high-value-add, well-paid, high-skilled jobs then we need to recognise that not everyone will be able to benefit from this. FDI may have given us 100,000 jobs, but there are 3.6 million adults in Ireland. 

The alternative is a holistic approach, involving investment in jobs, infrastructure and public services. It is clear that ‘the market’ alone will not achieve this in an equitable way. As Professor Philip Alston, UN Special Rapporteur on Extreme Poverty and Human Rights, warned during his keynote address to the conference: “a low-tax policy can degenerate into a mantra”.

We hope that Cherishing All Equally – report available on TASC's website from Monday the 16th of February – can be first step towards a greater understanding of economic inequality in Ireland, and lead to a debate about how we can create an economy and society in which all can flourish.

Cormac Staunton is Policy Analyst at TASC. You can follow him on Twitter @Cormac_Staunton

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Wednesday, 11 February 2015

Economic Inequality: More than Incomes and Wealth

Cormac Staunton: When discussing economic inequality, there is a tendency to focus on income inequality (or sometimes wealth inequality). This is because there is more data on incomes, and income inequality can be (over) simplified with measures like the Gini Coefficient.

However, economic inequality is about more than just incomes and wealth. TASC’s forthcoming report, Cherishing All Equally, is the first study to take an overall view of economic inequality in Ireland. To get a full picture of economic inequality we need to look at a range of other factors, a few of which are discussed here.

While the price of something might be the same for everyone, the cost of it will be very different. A €100 price tag will take more of the income of a person on minimum wage than it would for someone on €100,000 per year.

Therefore a high cost of living makes the economy more unequal. When everyone faces higher basic costs, those who earn less have to spend a higher proportion of their income. Charges for public services have the same effect.

In Ireland we provide social welfare cash payments, but we require people to put their hand in their pocket for many services (e.g. GP visits) that might be free-of-charge or subsidised in other countries. We also have a cost of living that is 20% above the EU average. 

So while cash payments reduce income inequality, the higher cost of living and charges for public services increase economic inequality.

Public Services
Public services play a major role in addressing economic inequality. In particular, they reduce major costs that most people, regardless of their income, could not afford on their own. This is most obvious in relation to education, old age, job loss, disability, illness and the costs associated with raising children.

Public services are also investments that are central to Ireland’s economic prosperity, including roads, electricity networks, support to businesses and education. 

In order to reduce economic inequality, public services must be high quality, respond to public needs and be affordable for present and future generations. They need to be sustainable and capable of change in the face of future issues like the ageing of the population. 

When people do not receive the public services they need, they often simply go without. And this failure can be invisible in the national statistics. TASC’s forthcoming report finds that the way we currently fund, organise and deliver public services in Ireland is not sufficient to reduce economic inequality and to provide quality outcomes for all.

In order to provide public services and invest in our national infrastructure we need to raise money. The amount of public services that can be provided is directly related to the amount of tax we raise.

The goal of tax policy should be to favour progressive and proportional taxes, which are based on people’s ability to pay. The overall progressivity of tax revenue should be gauged not only in relation to income tax, but by looking at the effect of all taxes, charges and tax reliefs that make up the whole tax system.

Taxes on consumption, which are the same for everyone regardless of their income, make up more than a third of all tax revenue in Ireland, making the system more unequal. Taken as a whole, Ireland has far lower taxes and social insurance as a percentage of GDP than the EU average.

When tax revenue is limited, services will be weaker and this will make society more unequal. If people want more extensive or higher quality public services to be provided in Ireland, greater levels of tax revenue will to be required.

As well as having these direct effects, taxes have other effects on the wider economy and can influence business decision making. There are complex trade-offs between pursuing redistribution through taxation and other priorities such as boosting job creation (which can also reduce economic inequality). However, these goals are compatible and a well-designed tax system can achieve both of these successfully. Ireland’s future tax system will need to be radically changed if it is to take on the challenge of counteracting income and wealth inequality, while also supporting socially-beneficial economic activity, boosting job-creation and providing public services.

Low Tax Triangle
Taking these three together (Public Services, Tax and the Cost of Living) we see that Ireland is stuck in a low-tax spiral. Because we have low overall taxation, we don’t subsidise as many services as other countries. This causes people to put their hand in their pocket for services - GP visits, school books, transport - that would be free-of-charge or cheaper in other countries. Because people in Ireland have less cash after these costs are paid for, they may not see the value of paying more tax. Which means we can’t provide the services… and the cycle continues.

Virtuous Circle
The alternative would be where public services, paid for by taxes, free up cash for people to spend in the local economy and help people to access employment. This creates a ‘virtuous circle’ where more people working and spending in the economy drives economic growth and creates jobs for others. This can be explained using the example of childcare:

Looking after young children is an expensive business, one that cannot be done ‘on the cheap’. Unlike Ireland, most European countries subsidise childcare to make it affordable for young families. This saves families hundreds of euro each month - which is more than any tax cut could do - and gives them more money to spend in the local economy.

And because many parents in Ireland stay home because childcare is unaffordable, subsidised childcare would give more parents the choice to work outside the home. Providing public services (rather than tax cuts) can therefore increase employment and reduce economic inequality, while also making economies stronger and more sustainable.

Cormac Staunton is Policy Analyst at TASC. You can follow him on Twitter @Cormac_Staunton

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Tuesday, 10 February 2015

Immigration: wishful thinking by well-meaning people (4 of 4)

James Wickham: Here the argument is brought to a conclusion, with a full list of references. [Part 1 of these four posts is here]

4. The moral case for immigration
Today in most European countries large scale immigration in its current form probably increases social inequality.

The fiscal arguments for continued large-scale immigration involve enormous social change and heavy resource pressure for at best marginal benefits. Not all European countries face population decline, so in these cases (UK, France, Scandinavia) the demographic arguments are grossly exaggerated.

All too often immigration emerges as the easy option for policy makers unprepared to consider more egalitarian solutions to labour market problems. The social benefits of diversity are probably restricted to specific situations and immigrant groups rather than an automatic consequence of all immigration.

Any ‘objective’ social science justification for mass immigration thus turns out to be very, very debatable. The problem with making a normative argument dependent upon empirical arguments is that if the empirical case collapses, then so too does the normative case. However, some aspects of immigration are too important to be decided by economists or even sociologists…

The shadow of the holocaust still hangs across European immigration policy. Before World War II, at the Evian conference of 1938 virtually all participating states - including above all the UK and the USA - refused to accept more refugees fleeing Nazi persecution. They closed the door and the refugees were murdered. This shame explains our hesitancy at any restrictions on asylum (for example in Germany itself the right to asylum was part of the original Basic Law (Grundgesetz) until modified in 1992).

Today civil violence, war, ethnic cleansing, even genocide happen in countries just outside the European Union. In Syria, Islamic fundamentalists – facilitated by citizens from European countries – are now openly committing genocide.

These conflicts can hardly be ‘solved’ by migration. But when the victims and the refugees beg to be allowed to enter our zone of security and freedom, we should be proudly opening the gates – not because we think the immigrants will make us marginally richer, not because we think their diversity makes our lives more entertaining, but because it is the least that we as human beings can do.

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Monday, 9 February 2015

Immigration: wishful thinking by well-meaning people (3 of 4)

James Wickham: The focus in this post is the debate about the benefits of diversity. [Part 1 of these four posts is here]

Problem #8 Not all kinds of diversity create innovation
In his paper, FitzGerald repeats the mantra that immigration creates diversity and so stimulates innovation. He explicitly states that one cause of London’s economic dynamism is its cultural and ethnic diversity, the result of recent immigration. Since ‘innovation’ is seen as fundamental to economic growth, here we have a new and separate economic rationale for immigration.

What is astonishing about this argument is that it is taken as self-evident by commentators, yet the actual empirical evidence is very limited. Since economic growth generates in-migration, there is an obvious possibility that diversity may be a consequence of innovation, not its cause. One detailed analysis of the impact of immigration on the London economy could find no evidence for the claim that the resulting diversity has increased innovation (Gordon et al 2007: 59); a more recent study using firm level data reports a small but significant ‘diversity bonus’ across all types of firms in London (Nathan and Lee 2014).

Certainly, the contribution of specific immigrant groups to innovation is well known historically, from the Huguenot refugees of the 17th century (in Ireland, England and Prussia) to the East African Asians of the 1970s in Britain; the contemporary contribution of Chinese and especially Indian migrants to innovation in Silicon Valley is also well documented (e.g. Saxanian 2006).

In the UK in particular the contribution of so-called ethnic entrepreneurship has been discussed for some time. We can also recall cities of the past such as Alexandria, Salonica or Odessa, known for economic dynamism and for their polyglot and ethnically diverse populations – and now of course homogenised by nationalism and/or religious fundamentalism [1].

However, neither the specific contributions of specific groups nor the peculiar features of entrepôt cities prove that diversity in itself heightens innovation. The next section shows that there are equally plausible arguments that diversity lowers social capital, and given that trust is often seen as crucial for innovation, it could even be argued that immigration is bad for innovation [2].

3. Quite apart from some rather more fundamental sociological problems
The economic ‘benefits of diversity’ thesis is interwoven with the more general if much vaguer belief that diversity is anyway a Good Thing. Nobody now wants to be against ‘diversity’. Recently however this comfortable assumption has been challenged.

Since World War II, European nation states became welfare states. Whereas in the past (male) citizens were defined by their obligation to fight for the state (‘Aux armes citoyens’ in the Marseillaise, ‘The Soldier’s Song’ for Ireland) now they are defined by their involvement in the systems of mutual support (education, health, social welfare…).

And the welfare state actually makes greater demands of its citizens, because it asks them to pay for each other, to look after each other, and to contribute towards the next generation. Although the welfare state involves some ‘vertical’ redistribution (from the rich to the poor), it also involves massive ‘horizontal’ redistribution, from those at work to those either too young or too old to work. The welfare state therefore makes enormous demands on all its members. It is plausible that the more diverse – the more not like me fellow citizens are – then the greater this unwillingness.

Furthermore, where integration occurs through the recognition of difference (‘multi-culturalism’ [3]) rather than through assimilation, this will further weaken this readiness to fund one’s fellow citizens now and in the future.

Such arguments are supported by historical research and by work in political economy. Thus a landmark study of American distinctiveness argues that in the USA, where ethnic or ‘racial’ divisions are strong and politicised, welfare is seen as transferring resources to ‘them’ and has little political support; conversely, the most advanced welfare states in Europe, those of Scandinavia, were built when these societies were remarkably homogenous in terms of religion and ethnicity (Alessina and Glaser 2004).

This general argument was reinforced in a much cited paper by Robert Putnam (2007). Putnam argued that diversity (measured in terms of ethnic origin) leads to what he termed ‘hunkering down’: in diverse areas social trust is lower, not just between the different groups but also within them.

Putnam was careful to stress that new identities can be created from diversity, so that diversity can diminish and trust rise – but this of course is the opposite of the Diversity is Good For You argument. It is after all worth noting that the integration of America’s European ethnic minorities occurred from the 1920s through to the 1960s – the period when there was an effective ban on mass immigration. There is also strong evidence that the combination of multicultural policy and easy access to generous welfare provision works to marginalise ethnic minorities, as measured by low labour force participation and over-representation within the prison population (Koopmans 2008).

Such views are not accepted by all researchers. Others have argued that a strong social democratic tradition can insulate European societies against these fissiparous tendencies (Tayor Gooby 2005).

All of these issues are the subject of extensive debate, but there is now enough historical and social science evidence to suggest that at very minimum diversity, social cohesion and social solidarity are uneasy bedfellows. Probably progressives face a stark choice:

This is America versus Sweden. You can have a Swedish welfare state if you are a homogenous society with intensely shared values…In the US you have a very diverse, individualistic society where people feel fewer obligations to fellow citizens. Progressives want diversity but they thereby undermine part of the moral consensus on which a large welfare state rests (David Willetts in 1998 quoted in Goodhart 2013).

On this basis it’s hardly surprising that the most explicit advocates of continued extensive mass immigration are on the one hand, the lobbyists for multi-cultural policies and on the other hand, advocates of the deregulated free market [4].

[1]The ethnic purification of Salonika (contemporary Thessaloniki) is the theme of the masterful account by Mazowerer (2005). Arab nationalism and now Islamism have largely homogenised Alexandria; the holocaust and Stalin’s ethnic sorting after World War II achieved similar results for Odessa.
[2] Consider here the experience of the ‘third Italy’ based on the innovative small businesses of Emilia-Romagna and Tuscany. Immigration has changed the workforce and undermined one basis for innovation (Andall 2007).
[3] ‘Multiculturalism’ can mean many different things. In everyday parlance in the English-speaking world it now usually just means tolerance. However, multiculturalism as policy means far more than this. It means the acceptance of different communities and their institutions as part of public policy; it will be supportive for example of different education for different minorities and recognition of other languages than the national language. For key early discussion of the problems of multi-culturalism as policy see Joppke (1999).
[4] As exemplified by Philip Legrain’s polemic Immigrants: Your country needs them (2007).

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Friday, 6 February 2015

Immigration: wishful thinking by well-meaning people (2 of 4)

James Wickham: To continue the analysis, looking at broader demographic and labour market issues. [Part 1 of these four posts is here]

Problem #4 The small demographic benefits of immigration depend on massive population change
It is frequently argued that Europe needs immigration because the European populations are ageing and without immigration the population will actually decline. In fact this is only half-true: some European countries do face population decline, but not all. Furthermore, the most serious declines are not in Western Europe, but in some countries of the former Soviet bloc where the ‘transition’ to a market economy has had disastrous consequences for living standards of ordinary people. In Western Europe, the UK and France in particular do not depend on immigration to maintain their population size, the issue is most important in Germany and above all Italy.

In the UK, immigration is now the major cause of population growth. For the ‘aging population’ argument the crucial figure is the dependency ratio (the number aged over 65 per 100 aged 16-64). Recent ONS projections assume an annual net migration to the UK of 165,000 [1]. This would result in the population rising from 63.7m in 2012 to 73.3m in 2037 and to fully 86.5m in 2087. In this population the dependency ratio would rise from 26.5 in 2012 to 41.9 in 2037 and to 51.5 in 2087.

Similar projections have been made for the hypothetical situation of zero net annual migration, in which population change is purely the result of births and deaths. In this situation the total population would stay roughly stable (67.5m in 2037 falling down 40 63.8m in 2087). Nonetheless the dependency ratio would rise to 46.2 in 2037 and 61.2 in 2087. Under ‘low’ net migration (100,000 p.a.) the population would still reach 71.6m in 2037 and 80.1m in 2087; under ‘high’ net migration (225,000 p.a.) population would be 75.0m in 2037 and fully 92.9m in 2087, with corresponding dependency ratios of 40.8 and 50.5 (Rowthorn 2014: 32).

Such projections show three crucial points. Firstly, slowing the rise in the dependency ratio requires continued inflows of new migrants and consequently a significant increase in total population. Secondly, reducing the dependency ratio back to anything near its current level cannot be achieved even by completely unprecedented levels of immigration. Finally, continued high levels of immigration would accelerate the ongoing ethnic transformation of the UK and it is difficult to imagine that this will be politically acceptable (Coleman 2010).

All of this assumes that the fertility will remain well below replacement level. However, it is clear that most women in Europe already have fewer children than they would like to have – the so-called ‘child gap’ (Bernardi 2005). There are rather well known policies that can facilitate child-rearing, the most obvious being (a) flexible employment that allows women – and men – to combine parenting with paid labour and (b) adequately funded and publicly available childcare (see Castles 2003). Through such measures the Nordic welfare states have ensured that fertility rates are at approximately replacement level (e.g. Ellingsaeter 2011). Conversely, it is clear that unemployment and employment insecurity make people less likely to want to become parents (Pailhé and Solaz 2012; Vignoli et al 2012).

Finally, there are some obvious reasons to reject the conventional wisdom that the population of European countries needs to grow (Coleman and Rowthorn 2011). Growing populations impose high environmental costs, especially if the population is also affluent. Indeed, there are strong ecological arguments in favour of some reduction of population size over time. There is evidence that growing population is already experienced by some Europeans as damaging their quality of life: population pressure on the environment (‘overcrowding’) is now one reason Europeans give for emigrating (Van Dalen and Henekens 2013) [2].

Problem # 5 Immigration reduces need for training
In the UK there is a growing suspicion that the immigration of skilled labour has reduced the pressure for effective education and training (House of Lords 2008: 31; Ruhs and Anderson 2010: 313). A ready supply of skilled immigrants may make employers less concerned to retain existing skilled employees.

Skilled immigration is a policy option for both employers and governments, a choice to ‘buy not make’. This is a counter-factual argument and difficult to actually prove. However, scholars working within the ‘Varieties of Capitalism’ tradition stress that one feature of Liberal Market Economies, such as the UK and the USA, is that they invest relatively little in occupational training: these countries are also those most prone to facilitate the importation of skilled labour (Devitt 2011).

Despite all the rhetoric of the knowledge society, countries such as the USA, the UK and even Ireland can become dependent on the importation of skilled labour in the IT sector (Wickham and Bruff 2008; Salzman et al 2013; Wickham 2015). Even more problematic is the dependence of the health systems of such societies on the importation of expensively trained medical professionals from poorer countries [3].

Problem #6 Mass immigration can substitute for inclusive labour market policies
Mass immigration may well also function to reduce the pressure for inclusive labour market policies. Most European countries have faced the paradox of high unemployment, especially youth unemployment, and mass immigration into low paid jobs. One review of the literature concludes that there is quite strong evidence that immigration discourages workless natives from entering or remaining in the labour market; comparing Europe and the USA it concludes that effect on wages is larger in the USA, whereas the effect on employment is bigger in Europe (Longhi et al 2008 as cited Rowthorn 2014: 21). What exactly could be involved in this ‘employment effect’ needs further discussion.

Here the experience of the recent ‘Celtic Tiger’ boom in Ireland is relevant. The boom involved a significant expansion of employment within the existing population and a sensational inflow of immigrants, largely from the New Member States of the EU. I have described this as a ‘goldrush’ or ‘bubble’ labour market’ (Wickham 2015). The employment rate also increased for groups with traditionally relatively low employment, namely older people and above all for women.

However, this ignores that at the same time unemployment blackspots continued: unemployment remained high in areas of the North West but also in areas of booming Dublin. Many women continued to leave the labour market after their first or especially their second child, so that labour force participation amongst ‘native’ women only reached moderate European levels. All of this is hardly surprising, for Irish labour market policy was essentially one of benign neglect combined with cash handouts.

On the one hand, cash benefit levels were generous by European standards (and significantly higher than the UK) and universally accessible. On the other hand, labour market activation measures (counselling, repeat interviews, job search support) were almost non-existent (Grubb et al 2009). Even more importantly, there were almost no measures to support groups who traditionally have been most likely to become detached from the labour market – the disabled, the less educated, etc. And after literally decades of debate, nothing was done about Ireland’s childcare provision.

The NESF report ‘Creating a more inclusive labour market’ (NESF 2006) documented all this – and was ignored. Against this background, it is possible to see that labour immigration was the easy option – just bring in work-ready people, instead of developing universal childcare and supportive labour market activation [4].

Problem #7 Mass immigration can lead to settled ethnic minorities with low labour force participation
New immigrants usually have a higher labour force participation than locals (see earlier re fiscal benefits), but this is unlikely to last. In a recession new immigrants will usually be the first to lose their jobs, simply because they were the most recently hired and/or they have taken jobs that were less protected; there may be straightforward discrimination [5]. If they and their families stay, they become an ethnic minority and the ‘second generation’ is likely to have a higher level of unemployment than the native population.

Especially important here is the issue of female labour force participation. In some ethnic minorities women are significantly less likely to enter the formal labour force than native women. It is important to stress that this is by no means universal. Thus as long ago as 1991 UK census data showed that Afro-Caribbean women were significantly more likely to be economically active and in full-time employment than white women, even after controlling for household structure (Holdsworth and Dale 1997). By contrast, women from Muslim ethnic groups (in the UK Pakistani and Bangladeshi) do continue to have low labour force participation.

To this must be added the ‘left behind’ problem. Newly arrived immigrants go to where the work is. However, if the work dries up, they and their descendants are often less likely to move – the reasons presumably range from fear of discrimination to a reluctance to leave the supportive community they have established. Sections of Europe’s established ethnic minorities are concentrated in decaying industrial areas which they once serviced - most obviously the mill towns of the Northern England, but also the erstwhile coal mining areas of the Ruhr and even the manufacturing towns of France.

This makes clear that it is only new immigrants who will be kind enough to provide the flexible labour force desired by employers and governments. Furthermore, discussing labour force participation highlights that ‘immigrants’ are not homogenous, and even the division between low skill and high skill is inadequate. This becomes especially clear when we consider the alleged economic benefits of diversity.

[1] This may be a gross under-estimate. The most recent ONS release (27 November 2014) reports total net migration to the UK in year-ending June 2014 to be fully 260,000. Annual net migration to the UK peaked in 2005 at 320,000 for year ending June 2005.
[2] A bizarre feature of current work on migration is the extent to which the emigration of Europeans is almost completely unresearched. This despite the fact that emigration from the UK exceeded immigration for much of the post World War II period; since 1970 emigration has usually been in excess of 200,000 per annum; the current excess of immigration over emigration only dates from 1994 (ONS).
[3] There is an emerging consensus that in general skilled labour migration from poor to rich countries is a win/win, benefiting both sending and destination countries (skilled emigrants send remittances, transmit new knowledge etc.). The net benefits however are more dubious in the case of medical professionals.
[4] Obviously childcare and labour market activation cost money. However, they also require an inclusive national ideology and effective state institutions. Arguably during the boom these were weakened in Ireland.
[5] All these factors have combined to ensure that in Ireland NMS immigrants are now more likely to be unemployed than indigenous Irish workers.

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