Wednesday, 20 May 2009

Keep cutting and hoping?

Slí Eile: If anything the atmosphere at today's 2nd 'Economic Crisis' conference in Dublin was gloomier than the first one last January. It was a more serene gloom as people are becoming more accustomed to recession psychology. One recalls audible gasps in the audience at the January conference when the more rash were predicting a 15% unemployment rate later this year and a 10% fall in national income. Some of the papers for the conference can already be downloaded at But don't expect any huge surprises or variations in view. The chorus can be distilled down to:

  • we got to price ourselves back into world markets

  • nominal wages must be cut - especially those of the public sector

  • fiscal balance must be restored quickly – primarily through continuing expenditure cuts and targetted tax hikes

  • everything else must be driven by the above or wait on the above.

Economist Philip Lane commended 'all political parties are showing a responsible approach to fiscal policy … none have espoused extreme views such as repudiation of debt' Hmmm

The overwhelming consensus and underlying assumption from the podium of 6 speakers and virtually all persons who asked questions from the floor is that 'there is no other way' than austerity and severe fiscal adjustment to right the economy over a number of years. The media lapped it up and the experts qua economists are revered as people with special knowledge and insight to whom lesser mortals look up for wisdom. John Fitzgerald suggested that we will know when the recovery has arrived when such conferences are not packed out (this one was full for about 4 weeks due to pre-booking). was referred to by more than one commentator in such reverential terms as to suggest a required daily meditation.

The consensus is overwhelming.

On the 'what to do' (economists unlike others are not shy about policy recommendations – but these are of course value-neutral):

  • move very quickly towards fiscal balance – front-load nominal pay cuts (and another sizeable pay cut in the public sector except this time a proper plain vanilla one and not one dressed up as a pension levy)

  • raise taxes and prioritise those on property and carbon emission (by now an ESRI favourite)

  • encourage more competition (move parts of state-holdings into direct competition)

  • adjust social welfare payments and the minimum wage (downward of course)

  • use supply-side measures to activate the unemployed and re-skill or up-skill the long-term unemployed.

Inequality got a mention in one paper (Brian Nolan) suggesting that inequality in household income (after tax and transfers) has been fairly static over time in Ireland but that we are towards the high end of inequality in OECD. Without any data it was alleged by more than one speaker that the recent Supplementary budget was strongly ('remarkably' was the term used by Brian Nolan) redistributive (in favour of those on low incomes or welfare).

One journalist gave John Fitzgerald a grilling on whether he supported pay cuts in the public sector to remove the '20% premium' to the latter over the private sector (where does that figure come from?). Fitzgerald said politely 'it would be nice …' Another journalist asked a question about some website ('progressive economy – ever heard of it?) claiming that Irish wages are about average. Oddly enough throughout the proceedings there was scant reference to profits and their role in driving inflation (in parts of the non-traded services sector). Karl Whelan concluded that the structural-cyclical deficit distinction is not so useful after all – a view not shared by Philip Lane.

Lane's key argument for pro-cyclical deflation now was based on the fact that our initial state is so bad (in other words so pro-cyclical during the boom times) that a fiscal stimulus is neither affordable or desirable now. In chilling tones he spoke of the 'unallocated corrections' in 2011 and beyond not to mention the harsh medicine in store this coming December (that is if an earlier budget is not forced by some new international meltdown). Along with others, Lane is very explicit: 'significant reductions' are needed in public spending this coming 2010 budget and beyond.

Colm McCarthy's (of Bord Snip fame) paper discussed the pension crises. With ageing populations, people living longer and the meltdown in private equity and Defined Benefit schemes (including the large private sector employers) McCarthy believes that the retirement age needs to be raised and more encouragement for private savings. In direct response to a question about tax relief for pensions (at the higher marginal tax rate) he said that he had problems with the line of argument that such tax concessions were 'reliefs' and he seemed to favour keeping many of these be kept in place (lets see what the Commission on Taxation says line). He said that he had 'less faith in capitalism when it came to DB schemes' than many in the Trade Unions.

Banking received attention with Patrick Honohan's paper. NAMA in its current incarnated proposal got mixed support signals. The view is that a refined version of NAMA would eventually take shape. While the risk to taxpayers was acknowledged (by Honohan) he is not for nationalisation.

All in all it was not an encouraging event – more cuts, no end in sight and a very cold and calculating 'markets must clear' as we hope for an international recovery – eventually.

Nobody was asking the question – by how much does unemployment need to increase and how much do wages need to fall to price us back into international markets?


Jane Gray said...

The 'evidence' that public service workers enjoy a 20% wage premium over private sector workers can be found in a special paper by Gerry Boyle, Rory McElligott and Jim O'Leary within the ESRI 2004 Quarterly Economic Commentary.
I would be very interested in any comments from the subscribers to, or readers of this blog on the paper in question - since the evidence is clearly considered incontrovertible by most 'mainstream' commentators. How convincing do you find their models? It is very important that this evidence is scrutinized by a wide range of researchers since the implications for social and economic policy are so important.
I apologize that I don't seem to be able to copy the link from the esri webpage into this comment!

Michael Taft said...

Fair dues to for organising this event. They are driving the economic debate - so much so that many in the trade union movement and Left political parties have accepted, however reluctantly, many of their premises (e.g. fiscal contraction). In short, progressives are losing this debate. Full stop. Recognising this is the first step towards rectifying this unacceptable situation. It is not just a matter of redoubling our efforts (though we should - trebling and quadrupling). We must become smarter, more innovative and, most of all, more combative in the way we present our arguments.

It's not that our arguments are weaker - far from it. What can one make of the reasoning that states that, since pro-cyclical fiscal policies in the early part of the decade got us in this mess, then we should . . . pursue more pro-cyclical policies now? Demands for real devaluation have no empirical basis. Fiscal contraction during an economic contraction is like running in quicksand (didn’t anyone point out that recent EU Commission projections suggest that our fiscal deficit could balloon to over 15% as a result of self-defeating deflationary policies?). The attacks on social welfare recipients and the low-wage – which we have witnessed in recent days by ‘revered’ commentators – betray a vicious political ideology (cut welfare, cut wages, cut public service – but for god’s sake, keep tax relief for high income pensions).

The arguments on have repeatedly been shown to hit the mark. It’s imperative that all those concerned with the conduct of the debate start discussing how we can recover this situation.

As to Jane’s comment, the paper can be found at It puts the ‘public sector premium’ at 13 percent – compared to a range 4.6% in France, Italy, and UK. This is a useful and comprehensive analysis. But it fails to account for two important factors: (a) it doesn’t examine the ‘trade union premium’. It is well established that trade union membership has the benefit of higher wages. This is particularly relevant to Ireland as, unlike almost all other industrialised countries (including the US) we do not have the right to collective bargaining. This has a depressing effect on private sector wages vis-à-vis the public sector – which has the proverbial ‘good’ employer – and, therefore, skewers international comparisons. Indeed, the paper turns the trade union premium on its head – focusing on the bargaining strength of public sector trade unions without once mentioning the private sector.

Just as importantly, it is also well established that Irish private sector earnings are below average earnings in other European countries. If, for instance, our private sector earnings approached EU averages, then the wage differential might be significantly less – approaching the European norm for private-public wage differentials (in the period that the above ESRI paper was examining, our private sector wage levels would have been even further down EU tables).

This is not to suggest there are not issues that need to be addressed in terms of public sector pay – especially at the top end. However, we must ensure that such examination takes into account all factors, especially when making international comparisons (one example of how such comparisons can be distorted can be found here in relation to teachers’ pay):

Pat Donnelly said...

One reason why the private sector salary figures are suspect is that tax evasion is rampant. See my comments at the site.
Ireland's industrial policy was based on the stroke type of tax attractiveness, so the policy has permeated the entire country.
Does anyone realize how much extra government revenue could be raised by a more active tax policing operation? When is there too much tax gathering? Why have the Revenue Commissioners consistently applauded tax amnesties instead of actually enforcing tax law?
The public service deserves what pain it receives as they are complicit in this dishonesty.