Tuesday, 30 June 2009

Class and Employment Decline

Sean O Riain: It is worth taking a closer look at the Quarterly National Household Survey results from last week. The difference between the public and private sectors has attracted some comment but there is much more going on here. In particular, the major trend that stands out is the disastrous collapse in working class employment with growing differences between the position of those with third level education and those without. The need for serious commitments in enterprise and employment policy, education and training policy, and housing/ mortgage support is clear.

The table here gives the full results for employment changes by sector, rather than the aggregated version in Colm McCarthy’s post at irisheconomy.ie (full details from CSO are in the report and tables).

What do we see?

First, almost as an aside at this stage, a useful reminder of the progress of the crisis. Long-standing problems in manufacturing, the bubble bursts in construction and then collapsing demand. It is worth remembering that it was lax regulation, financialisation of the economy, a construction bubble and subsequent collapsing demand that generated this crisis.

Second, some interesting findings within the private sector. Information and communication increased over the last quarter and over the past year transportation/logistics, information and communication, and finance etc remained stable. The collapse is first in industry/ construction, then in hotels and retail, and most recently in services to firms (prof/tech and admin/ support services – which includes temporary employment agencies).

While we can expect retail and producer services to recover if and when economic activity is restored, we can’t expect construction and industry to return at the levels they were at previously. Our ‘informational’ sectors show some degree of resilience and will loom larger than ever in any economic recovery.

How does this translate into labour force change? While employment for those with third level education has remained stable over the past year, the collapse for all others has been in the range of 10 to 20%. Unemployment has increased for those with third level education but employment has largely held up.

Click here (and scroll down) for Table 2, showing the numbers employed by level of education.

This is not just a matter of those with higher education competing for jobs they would not have previously been interested in (although there is some of that here). It is also due to the pattern of occupational change (Table 2). Professional employment has begun to drop sharply in the first quarter of this year but the declines are still smaller than in craft, sales, operative and other (generally relatively low-skilled) occupations. The drop in managerial employment is most likely largely due to small businesses going to the wall (these businesses partly accounting for Ireland’s high comparative proportion of such managerial employment), although it may be that larger businesses are laying off large numbers of managers.

Click here (and scroll down) for Table 3, showing employment by occupation.

The class divide in the impact of the recession stands out. While the pain is being felt all around, the sectoral, occupational and educational data points to both the particularly disastrous short-term and long-term effects of the recession on those in manual and service occupations. Given what appear to be high rates of intra-class marriage in Ireland (Brendan Halpin and have an interesting article on this using data from the mid-90s), the worst effects of the recession are likely concentrated in particular classes and households. If we add in the heavy impact of recent unemployment in the 25-34 and 35-44 age group then the implications for housing and household solvency are very serious, as noted on this site previously.

The effects of the recession are tied up with structural changes in the economy. Any recovery is likely to happen in different sectors than in those currently facing the greatest decline – although construction and industry face the greatest decline, it is informational and service sectors that will be the basis of future growth. So we need policies that will tackle both the recession’s impacts and the need for structural change. These will involve at a minimum a serious enterprise and employment policy to promote sectoral recovery and educational and training policy to invest in the skills and knowledge of those worst affected by the recession and put them in a position to benefit from the recovery.

Monday, 29 June 2009

The Pro-Nuclear bias of the Irish Academy of Engineers review of Irish Energy Policy

John Barry: The Irish Academy of Engineers Review of Ireland's Energy in the Context of a Changing Economy has been discussed over on irisheconomy.ie. I was amused to see in the report itself lots of references to the need for non-ideological and 'evidence based' science to underpin energy decisions in Ireland in more recessionary times. I was amused in that looking at the expert panel there are not one, but two 'ideologically' committed pro-nuclear advocates, which rather em.. undermines the 'non-ideological' 'evidence base' for the report's conclusion that, guess what, Ireland needs to scale back renewables and promote nuclear! One of the recommendations of the Review is that the government, "Support the consideration of all feasible mainstream technology options with long term potential and remove inappropriate constaints such as the legislative barrier against nuclear generation." That both Ed Walsh (former president of University of Limerick and well-know pro-nuclear and climate change sceptic) and Frank Turvey (founder of BENE - Better Environment through Nnclear Energy - though of course not listed as such in the report) were part of the expert group which produced the report does weaken its claims of objectivity. In fact, I've nothing against ideologically motivated debates about energy and technology - anyone who thinks one can seperate the two are fooling themselves.

More Cutting Times (Rent Supplement)

Nat O'Connor: Today’s Irish Times suggests that rent supplement (along with child benefit) is being targeted for cuts by the Special Group on Public Service Numbers and Expenditure Programmes (aka 'An Bord Snip Nua').

Rent supplement is a reasonably large area of expenditure in the national budget. The 2009 Revised Estimates for Public Services give a total spend of nearly €11 billion for Social and Family Affairs, of which the package of supplementary welfare allowances make up €1.1 billion or around 10%. Rent supplement is estimated at €490 million; that is, 4.5% of welfare spending. This represents a steady increase in recent years; for example, it has increased from €151 million in 2000, when rent supplement represented 2.8% of a total social welfare expenditure of €5.3 billion.

The Comptroller and Auditor General conducted a value for money exercise about rent supplement, published in April 2006. Without going into the detail here, the report noted that the payment was not being used for its original, temporary purpose, but is relied on for long-term housing by many households. The long waiting time for social housing can partially explain this situation.

Now, it is generally acknowledged that rents are currently in decline, although there is a lack of available data. Frustratingly, the state body, the Private Residential Tenancies Board (PRTB) has a great deal of information in its database about the actual level of rent paid that could provide a detailed rental index. Likewise Revenue and the Department of Social and Family Affairs may have data on rent levels that could be used to construct a rental index. A limited picture of current rents is available through DAFT, but this data is limited to asking prices not actually paid rent, and only applies to properties currently to let through the DAFT website. Nevertheless, it is possible to use the DAFT report (Quarter 1, 2009) to show the limits of the current level of rent supplement.

DAFT gives an average monthly rent for every county in Ireland, with a breakdown of this information for the larger cities. Although Rent Supplement might be expected to be paid to properties at less than average rent levels in some cases, it is reasonable to assume that rent supplement will provide an equivalent level of support across the country.

This does not appear to be the case, as there is a wide range of difference in how much of average rent will be covered by rent supplement in different areas.

For example, maximum rent supplement for a single person or couple sharing a dwelling varies from €66 to €92 per week. Although this variation is meant to be in line with different rent levels across the country, the payment – plus the €24 weekly contribution the household makes – represents anything from 37% of the average rent level of South County Dublin or 46% in Galway City to 78% of average rent levels in Leitrim or 79% in Laois.

A single person on his/her own is paid a maximum of €85 to €122 per week, depending on the area. Adding the €24 weekly contribution, this equates to 47% to 103% of average rents, depending on where the person is living.

What this variation shows is that there is seemingly a poor alignment of rent supplement with local rent levels (despite the regional rent supplement maximums). This means that households in some areas are much less well supported than households in other areas. One basic anomaly is the fact that average rent levels vary considerably in the city versus the county in Cork, Galway, Limerick and Waterford, but rent supplement remains the same. Similarly, rent levels vary enormously across Dublin, yet there is only one level of rent supplement for the capital, which essentially means that people who rely on rent supplement are effectively excluded from living in large sections of the city.

In this context, it is worth reminding ourselves of the overall aim of Government’s housing policy, which is to “enable every household to have available an affordable dwelling of good quality, suited to its needs, in a good environment and as far as possible at the tenure of its choice”.

It is true that rent supplement levels for families with two or more children can be above the average market rent in some cases. However, caution must be exercised in interpreting this, as rent levels for larger houses are also going to be above average.

It is a very simplistic argument for the Government to make that rents have decreased across Ireland, hence it can universally reduce rent supplement. Cuts across the board will fail to address the fact that rent supplement is already distributed in an illogical and unfair manner. Not least, some of the most vulnerable people (especially single people) already do not receive sufficient assistance to pay for decent housing in many areas. Organisations such as Threshold and the Peter McVerry Trust have long pointed to the fact that many households are required to top-up their rent with additional payments, leaving them with very little to live on.

The Government may have some margin to reduce rent supplement in a few cases. The Comptroller and Auditor General’s value for money report noted that landlords have no incentive to ask for less than the maximum payable and it is possible that the maximum may now be above average in a small number of areas. But the Government can only reasonably proceed to lower rent supplement if its decision is based on good evidence of local rent levels. The current wide variations suggest that the levels of rent supplement are not evidence-based.

Given that the Government has access to data with which it could generate a much more sophisticated national rental index, why is it not using this data in order to more fundamentally revise the level of payments based on local rent levels?

If the Government simply introduces cuts across the board, this indicates to me that not only are they unfairly punishing some of Ireland’s most vulnerable households, but they are incapable of the basic competence required to operate the rent supplement system as it stands, never mind developing an alternative housing policy that would be more sustainable and give the taxpayer a tangible asset (like social housing) for the large amount of money currently paid out to private landlords.
Dr. Nat O'Connor is Policy Analyst with TASC

Sunday, 28 June 2009

Cutting times?

Today's Sunday Tribune leads with leaked reports of the cuts likely to be proposed by 'An Bord Snip Nua'. Click here to read the story, and here to read Michael Taft's take on the likely consequences of such cuts, over at Notes on the Front.

Saturday, 27 June 2009

Krugman on macroeconomics and the 'Great Ignorance'

"Doing what I think of as real macroeconomics — the tradition that runs through Keynes and Hicks — actually involves thinking about interdependent markets, in a way many economists never learn to do. At minimum you have to keep straight the relationships among the markets for goods, bonds, and money; if you try to think about either interest rates or the price level in terms of just a single market — interest rates determined by supply and demand for lending, price level by quantity of money, full stop — you get it all wrong, especially in times like the present."

You can read the rest of Paul Krugman's post here.

Thursday, 25 June 2009

"The only show in town?"

Slí Eile: In recent days, there has been a rush of reports (including EMU Public Finances 2009, IMF Report on Irish Economy, OECD Economic Outlook comments on Ireland), data, analysis and media reaction on the state of the economy, banking and public finances. One important part of the background landscape is the social partnership talks still going on, passing one deadline after another. Disclosures to the media leave one wondering what may or may not emerge. According to today’s media reports, the ICTU has 'doubts over aspects of plan for recovery’ but argues that the Government proposals were ‘the only show in town’.

Lets hope not. Can we get back to some parts of the ICTU ‘Ten-point plan’ of last February? Remember. It advocated:

  1. Protecting Jobs & Tackling Unemployment (including ‘reprioritising the Public Capital Programme to support job protection and labour intensive activities’)
  2. Sorting the Banking System & overhaul of corporate governance (with ‘public control, either through Recapitalisation or Nationalisation’)
  3. Competitiveness (through reduction in energy prices, professional fees and other costs plus productivity-enhancing investments)
  4. The Pay Agreement 2008 (ICTU has made the case that wages have not been cut in 2008 as claimed by some)
  5. Fairness & Taxation (our tax system is woefully skewed and unfair with large tax breaks for the better off and widespread legal avoidance)
  6. Restoring Consumer Confidence (‘Surely the most sensible option is to stimulate the economy, rather than dampen spending and growth?)
  7. The Public Service ‘Pension Levy’ (‘Workers did not create the problem, but will contribute to resolving it - as long as the wealthy also contribute. The problem with the course currently being pursued by Government and employers’ organisations is that the weakest suffer, while the wealthy contribute nothing.’)
  8. Pensions (use ‘a state backed annuity and the possibility that private pension funds could have the option of voluntarily surrendering their assets to the state, in return for a certain level of guaranteed pension.)
  9. Employment Rights Legislation
  10. National Recovery Bond (‘ It could also be targeted at specific sectors such as school building or public transport, so people could see tangible gains’)

If – according to media reports – the main carrot on the table during the current round of Partnership talks is an employment subsidy, one is forced to ask:

  • Is there hard and compelling evidence from the recent past, internationally, that such subsidies work in terms of creating genuinely new jobs or saving existing ones?
  • Even if the answer to the above is yes, how much would it cost on average – per job, per firm and in the aggregate? Would alternative expenditures of the same amount be more effective?

As matters stand, the latest EU figures on taxation indicate Irish taxes on labour are way out of line (very low reflecting a poor tradition of widespread social insurance). Irish employers’ contributions to social protection were 9.7% of total taxes in 2007 compared to a (weighted) EU average of 18.0%.

And we are talking about subsidies to employers?

Would it be easier to just drop payroll taxes on particular groups (say unemployed or particular types of employment and sectors). The problem with targeted interventions is not only deadweight effects, but the problem of excluding some sectors and categories and not others (like why would non-traded sectors be entirely excluded if they were producing sustainable social value?)

Karl Whelan has argued on irisheconomy.ie (with good reason I think) that:

….the principle reason for rising unemployment is a sharp reduction in labour demand owing to the steep nature of the recessions. Policies that are looking to offset this reduction in demand using wage subsidies are unlikely to have more than a marginal effect.

He goes on to argue:

one of the lessons emphasised by Jim Poterba in last week’s excellent Geary Lecture was that if we need to raise more revenue, it is best to do so by broadening the tax base while keeping rates low. Measures like this, which erode the tax base and have little effect on employment, are a step in the wrong direction.

Read his entire comment on these issues along with many comments on wage subsidie here.

Wednesday, 24 June 2009

The burdens of a low tax society

Sli Eile: Received wisdom in political economy establishment thinking here in Ireland is that taxes are a ‘burden’ (in other words not nice and to be avoided if you pardon the pun) and that the way out of the present calamitous budgetary situation is via spending cuts more than tax hikes (which, it is claimed, would further damage competitiveness, work incentive and add to deflationary pressures).

Writing in the Irish Times, recently, Ray Kinsella asserted that:
Now let’s examine revenue, which has collapsed over the last two years. Let’s assume that it will grow by 2 per cent on average for the next five years. That’s pretty generous for an economy dependent on international recovery and a domestic economy that is running on empty. This would result in revenue of about €38 billion after five years.
Kinsella, in common with most other economists, does not see raising taxes to any significant extent as part of a recovery-with-fairness strategy. In fact, he states
this will require cuts in public expenditure, not the kind of counter-productive and socially insensitive cuts which we have had to date. Somebody is going to have to ask the elephant, very politely, to leave the room. For elephant, read size of public sector.

So, the elephant is the public sector wage bill which equals numbers employed (including most professional economists) multiplied by average salary per unit. This assumes a number of things including:

Our public sector is ‘bloated’ in terms of unproductive workers; and
Pay, on average, in the public sector is too high to allow the private (especially traded) sector to regain competitive advantage.

Suffice it to say that the evidence for a bloated public sector in Ireland is very thin indeed. The OECD Review of the Irish Public Service published in 2008 found that the overall level of public sector employment and spending was modest in Ireland compared to other OECD countries.

But, the real elephant in the parlour is taxes. There is, I would argue, considerable scope for raising taxes as one part of an overall strategy to re-start (and reform) the economy? Colm Keenan reports that Irish taxes as % of Gross Domestic Product are low by EU standards:

The ratio for Ireland was 31.2% in 2007 compared to a (weighted) EU average of 39.8%. You can download the tables in Excel here

and the full Report there

It may be objected that comparing taxes to GDP is inappropriate for Ireland since we have on the highest gaps between GDP and GNP arising from profit repatriation (and transfer-pricing of multinationals). Even if this argument is accepted (which I don’t) taxes as % of GNP in 2007 in Ireland was 36.9 – still below the EU average in 2007.

However, it is not legitimate in my view to base total tax comparisons on GNP since all of GDP including profits of multinational companies can be taxed by Irish public authorities. Alternatively, if people insist on using GNP for comparisons of tax take as % of national income then they should deduct corporate taxes paid by MNCs. You can't have it both ways.

Expect a lot more hot air on taxes with the publication of the long-awaited Commission on Taxation soon as the ground is prepared for more public spending cuts in December and further tax hikes on PAYEE earners.

Tuesday, 23 June 2009

Irish Industrial Policy: Strategic Obsessions

David Jacobson: Since the end of the 1950s industrial policy has evolved around two main objectives, the encouragement of foreign direct investment and the development of high tech industries. Both of these objectives have become obsessive, to the detriment of the long term stability and advancement of the Irish economy. This is not to say that policies and programmes aimed at supporting these twin aims are inappropriate; however, concentrating too intensely on them, without adequately realising that there are substantial opportunity costs, may have harmed the long term prospects of the economy and may be partly why Ireland is now in such deep economic crisis.

Counter-factual analysis is fraught with dangers but it is reasonable to ask what the consequences would have been if even 20 percent of the total cost of encouraging foreign direct investment (FDI) had been spent, instead, on various ways of incentivising the development of indigenous firms. The usual answer to this kind of statement is that we tried – and failed – to encourage indigenous industrialisation during the 1930s, 1940s and 1950s. This answer is spurious for at least two reasons. First, there were some successes, and developments that laid the foundations for modern infrastructure. Second, the industrial policy of that period was extremely weak. There was no logic, for example, in supporting large numbers of car assemblers when the minimum efficient scale would have made it difficult for even one assembler to survive on the basis of domestic demand. Somehow, we’ve forgotten both the successes and the weaknesses of our 1930s-1950s version of Import Substituting Industrialisation and seem to believe that it is a waste of time, money and effort to encourage Irish firms. The star of Irish industrial policy has been the IDA; Enterprise Ireland does not have the same caché. Sectors dominated by indigenous firms are treated as second-class corporate citizens.

As the recently-appointed chair of the Print and Packaging Forum (http://printpackforum.wordpress.com/) I have been made sharply aware of the disadvantages under which this so-called low-tech, indigenous sector labours in the context of the current industrial policy regime.

The Forum (through its Director, Gerry Andrews) has been struggling to achieve parity for Irish firms with foreign suppliers in relation to VAT and procurement. In addition, excellent – cost neutral – ideas for training programmes to upgrade skills of sector workers on three-day weeks have been proposed. The printpackforum website provides evidence of the months and years of knocking on doors, of approaches to Ministers, of presentations to the Joint Oireachtas Committee on Enterprise, Trade and Employment that it takes before any changes in public policy are achieved. The changes requested are not irrational, protectionist retrogressing to the failed policies of the1930s; they are reasonable adjustments to reduce the discrimination against indigenous firms.

The demands of the Forum – representing some 17,000 workers – are met by delays, inflexibility, and inertia. What would happen if a multinational, considering establishing a subsidiary in Ireland to employ only 500 workers, made the same demands? It would be responded to by Government departments, the Revenue Commissioners, FÁS and the IDA, with alacrity, agility, flexibility and dynamism.

Given that the USA is going to make transfer pricing more difficult, given the ongoing pressures within the EU to harmonise corporate profit tax rates, and given increasing competition for mobile capital from Eastern Europe, Ireland’s attractiveness as a location for FDI is waning. We should level the playing field for indigenous firms now, before it’s too late.

Monday, 22 June 2009

E-book for download - The crash: A view from the left

Edited by Jon Cruddas and Jonathan Rutherford, The crash: A view from the left offers an alternative perspective to the dominant economic paradigm. Contributors analyse and explain a range of issues related to the current economic crisis, including the credit crisis, the housing disaster, secrecy jurisdictions, the practices of private equity firms and the intellectual failure of orthodox economics. While some of the issues they address are UK-specific, the ideas proposed - including a new kind of agriculture to ensure food security, a People's Post Bank, and a Green New Deal for tackling global warming - are of relevance to Ireland as we try to chart our way out of recession. Contributors include Jon Cruddas, Clive Dilnot, Bryan Gould, John Grahl, Colin Hines, Adam Leaver, Toby Lloyd, Lindsay Mackie, Robin Maynard, Richard Murphy, Carlota Perez, Ann Pettifor, Michael Prior, Jonathan Rutherford and Göran Therborn. Adam Leaver's piece on 'Private equity and the credit crunch' offers a particularly illuminating take on the private equity industry:

"The best way to understand the industry is as a series of commitments and rights based on three ratios: ’70:30’, ‘2 and 98’ and ‘2 and 20’. Before the credit crunch of 2007, private equity funds would buy out firms with a mixture of equity and debt. Roughly 70 per cent of the purchase price was debt, and 30 per cent was equity (this is the 70:30 ratio). The debt raised for the buyout was loaded onto the company’s balance sheet, and so responsibility for repayment lay with the bought-out company, not the private equity fund. The ‘2 and 98’ ratio refers to the fact that approximately 2 per cent of the 30 per cent equity stake is generally committed by the GP, while the remaining 98 per cent is provided by the LP. Despite the relatively small equity commitment, however, the private equity GP is politically positioned to take disproportionate rewards. This is because of the ‘2 and 20’ fee structure: the private equity GP receives a non-performance-related management fee of approximately 2 per cent on funds invested, and a performance fee of 20 per cent of the profits from the divested".

The entire book is available for download as an e-book.

Friday, 19 June 2009

Can Anglo-Irish be saved?

Question: Should Anglo’s debts have been guaranteed, i.e. should it have been allowed to fail in September and guarantees extended only to other viable / systemically important banks?

* Would it have been practical / feasible to treat depositors and (senior and subordinated) debt providers in the different banks differently? Yes on debt but probably political issues with depositors.
* Logically would have to treat INBS similarly to Anglo.
* Would have required a decision as to which banks were systemically important and which were not.
* Would have amounted to a clear admission of failure of regulation in those banks which the state was not prepared to support, which of course was in fact the case.
* How would international providers of debt and deposits have reacted? Would they have been spooked and withdrawn funds from other Irish banks even if they had a guarantee?
* Government etc saw crisis as a funding / liquidity crisis and not a capital adequacy problem. The solution was to provide a guarantee to restore confidence and resolve the liquidity issue. The bolder the guarantee the greater the sign of government confidence and the more powerful the market impact. Arguably a selective or diluted guarantee could have been seen as a weakness and could have given rise to confusion and not resolved the liquidity issue which threatened the whole system.
* If Anglo and INBS were excluded from the guarantee they would have gone bust immediately and the depositors, debt providers and creditors would have taken a bath.
* Anglo and INBS going bust would in turn have accelerated the fall in property values – the liquidation could not have been controlled or managed (as NAMA hopes to do) to minimise collateral damage to other banks – and would have added further to the concerns as to the extent of possible property loan impairments in the remaining banks and the impact on their capital adequacy.

The government had little time to act in September 2009 and were faced with a huge crisis in the banking sector. It is important to remember this was an international crisis peaking just two weeks after the US government decision to let Lehmans Bros go bust. A decision, which in hindsight, was a mistake. The Irish government (like almost all other governments) had not a planned end game for the sector which might have informed a different and more sophisticated approach to the type of guarantee scheme adopted. The overwhelming imperative was to deal with bank liquidity which the blanket guarantee did effectively. There were huge uncertainties as to how providers of funding would react and the clear, bold (if ultimately expensive) stroke had the intended effect on markets. If international investors believed at that time that the sovereign could not support all the banking system (as a limited guarantee could most likely have been interpreted by them given the total fragility of confidence and panic in debt markets) then the liquidity crisis would have continued and AIB and BOI and the rest of the Irish banking system would have collapsed, just like Iceland, as debt providers withdrew funding. This was a risk that the Irish government could not take.

It is also the case that in September 2009 neither the government nor the banks (or most others for that matter) had any idea how far wrong they were on the likely level of loan impairments and the implications that would have for bank capital. Both government and banks completely underestimated the pace and severity of economic decline that was in train and probably genuinely believed that the guarantee would not be called on in reality.

[It is worthwhile noting that the ESRI Qtly Economic Commentary, Autumn 2008, which was released on October 7th, was at that point forecasting GDP growth of minus 0.7% for 2009 and clearly they were behind the curve along with everyone else.]

Question: Following the disclosure of governance failures in Anglo, and the resulting collapse of confidence, the government abandoned its plans to inject preference capital into Anglo (as it has done for AIB and BoI) and instead nationalised the bank in January 2009. The decision now is what should be done with Anglo? Should it be wound-up immediately or wound-down over time in an orderly manner? What would be the consequences of a wind-up? Alternatively can it be re-invented as a viable bank?

* Anglo is not a systemically important bank for Ireland in that if it wasn’t there we wouldn’t need to create it. It is a specialist property lending bank that was a creation of the property bubble and a period of unprecedented cheap credit. To the extend that there is a demand and a requirement for commercial property lending in the economy this can be met by the large universal banks as part of their diversified lending activities.
* However given that Anglo is a reality and given the wider crisis in the Irish banking sector the resolution of the Anglo problem – in whatever fashion – has consequences for the rest of the banking system as well as direct costs to the Exchequer. This reality makes it systemically important.
* The policy objective in resolving the issue should be to minimise the cost to the taxpayer whether in the form of direct support to Anglo or as a result of knock-on effects on other Irish banks where the state ends up picking-up the tab.
* What would be the consequences of a decision to wind-up immediately?
o The externally provided funding of Anglo would dry-up. It’s impossible to say how much and how quickly. Any funding that could go would do so by Sept 2010 when the government funding guarantee expired and the government would have to borrow the monies instead.
o There would be outflows from commercial deposits (€16.1bn), commercial paper / CDs (€2.8bn), MTN bonds maturing before Sept 2010, non-CB inter-bank funding (€7bn) and a loss of retail deposits (€18bn) would also be likely. The Central Bank, i.e. the government, would have to make good this shortfall as all these funding sources would be covered by the government guarantee.
o If Anglo were to be wound-up it would by definition no longer be a going concern. It would be funded by the government and ECB. That would make its liabilities part of the overall government debt giving rise to funding issues for government in debt markets and to issues with the EU on fiscal policy.
o The only providers of debt who would not be automatically repaid would be senior debt providers and subordinated debt holders, where the debt matures post Sept 2010, and other providers of loan capital. Anglo’s subordinated debt and other loan capital amounts to €5bn and this would probably be written-off in full in a wind-up, bearing some of the cost of the bank’s loan losses. It is not clear how much of the senior debt, €11bn, would not be covered by the guarantee and therefore likely to be written off or down.
o Debt holders would clearly not be happy but there is a strong case for them sharing the cost of the bank’s failure. To the extent that other Irish banks are holders of this debt then they would record these losses in their books which may be painful and add to their existing capital problems which the government would probably have to make good. Don’t know how big this exposure might be.
o There is an argument that liquidating Anglo and reneging on large amounts of debt would be bad for Ireland’s reputation with international investors in the long term, and therefore should be avoided. However this debt is already trading at distressed levels in the market and investors are realistic. They expect to make losses, the issue is how much.
o A further problem with an accelerated wind-up would be that it could force the sale of assets – the bank’s liquidity portfolio – at distressed prices and crystallise losses. An orderly wind-up over a longer time frame should result in better value being realised as bonds are held to maturity.

Conclusion: In terms of minimising the cost to the taxpayer it doesn’t make sense to liquidate and wind-up Anglo. It would quickly create a massive funding problem for the government. On the other hand it is next to impossible to envisage any viable future for the bank. An orderly and managed exit seems to be the best option. It maintains the funding lines to the bank without adding directly to the public debt burden. The transfer of assets from Anglo into NAMA will further significantly ease the bank’s liquidity position.

Equity holders have already been wiped out. The taxpayer will bear an indeterminate amount of costs. It makes sense that providers of debt capital also share the pain. This can be done by buying them out at very significant discounts which the bank has announced it will do. Whether other lenders to Anglo, whose loans are not covered by the guarantee (e.g. MTN bond holders), should also take a share of the losses is an open point. Would this create more collateral damage in terms of reduced access to funding and damage to our international reputation?

It may be possible to dispose of parts of Anglo’s business over time, e.g. the US and / or UK loan books. This would make sense. All of the foregoing implies major cost reductions are necessary to reflect shrinking revenues and the reduced scale of operations in the bank. It may be that the resized and reconfigured operation could merge into something bigger but it is not clear who or what that might be.

Anglo is a mess and a major cost. But we are where we are and have to extricate ourselves out of this mess carefully and astutely to minimise the cost to the taxpayer. Precipitate action could be very costly. It is clear that the government and the board of Anglo are looking to manage the problems in an orderly fashion over time. Talk of creating a new banking business is more about creating the semblance of an ongoing business which provides a better context in which to manage the wind-down rather than any great conviction that Anglo has a future as a real bank.

Thursday, 18 June 2009

What did you do during the Great Recession, Grandad?

Slí Eile: Some time in the future this question will be asked and, perhaps, the answer will be (at least in an Irish context):

A small number of us discussed a domestic fiscal stimulus and likely multipliers. And then what? In what could be considered an extraordinary article (‘ Instead of a stimulus package we have gone in the other direction. It could be the worst own goal in our history’) written by Michael Casey (formerly of the Central Bank) and tucked away on page 10 of the ‘Innovation’ Supplement published by the Irish Times the fall-out from not pursuing a fiscal stimulus package is considered. You would think that the subject might get a bigger airing in domestSearch in vain for a considered view on this. Economic textbooks produced for the Irish market deal with Keynesian multipliers like an elderly relative in a nursing home to be rounded off with the assertion that ‘it doesn’t apply here’ (small open economy and all that). Neither recent Economic Crises workshops in Dublin, or publications of the ESRI or other macro-economists deal with the issue in any depth. An exception is to be found in the current edition of the ESRI Economic and Social Review, where Philip Lane concludes that the appropriate response, here, is to stick to the medicine with - at best targetted investment in key infrastructure areas - even though the US, EU and other jurisdictions are following some form of fiscal stimulus approach to a greater or lesser extent (1.5% of GDP in the case of the EU as a whole). Michael Casey writes:

Evidence from the IMF and World Bank indicates that the majority of countries fail to complete three-year stabilisations; the pain and civil unrest almost invariably throws the programmes off track. In the few cases where programmes have been successful, the governments involved have been able to convince people that there is light at the end of the tunnel. In Ireland, the absence of a plan is regrettable.

In the mid-1950s there was a fiscal stabilisation that lasted only a year. The economy nose-dived. But it led to the momentous First Programme for Economic Expansion - a plan that gave hope and a feeling that someone was minding the store. What are the chances of that kind of enlightened follow-up this time?

Wednesday, 17 June 2009

How much can Ireland inc afford to pay those on welfare?

Slí Eile: Irish Times journalist, Sarah Carey, writing on 17 June ('State's own welfare must determine level of payments') has taken up the welfare issue - again. Climbing down from an earlier assertion, in March, that Irish welfare payments were the highest in Europe, she now offers an apology for misleading people. She seems to shift some of the blame on to the Department of Finance for feeding her incorrect information in a briefing. It would appear that the story - like what Churchill once said about a untruth - has gone half ways round the world with Ministerial pronouncements yet again recently on the matter in the Oireachtas - only in the last two weeks.

Michael Taft has dealt with the issue over on Irish Left Review.

However, the issue in the most recent column by Carey is not over the facts about Irish social welfare and how it compares with the rest of the EU (in fact typical payments to a single unemployed person are decidedly bottom of the table and payments to a family with children etc are average in a list of EU15 countries) but rather the amazing assertion that we simply cannot afford present levels of payments and should not seek to match other State welfare systems. Oh Dear. An Béal Bocht - the poor mouth. She writes:
"We should not yearn for another state’s social system – instead we must base payments on what Ireland can afford"
But, what we can afford is a function of what and who we chose to tax. With a below-average (yes, whether you measure it by GDP or GNP or GNI or an average of these ...) you get a lower-than-average take in taxes across EU countries (and that includes low-tax Latvia presently undergoing the economic horrors like its Western neo-liberal cousin). So we chose - implicitly - to spend less on social infrastructure and social protection even in good times. In hard times when we chose to bail out bankers and the banks (and goodness knows why in the case of Anglo-) we hear a chorus calling for welfare cuts. Expect a rising chorus up to the next Budget and beyond.

Sarah Carey rounds off the article as follows:
"Last year, we could afford the early childcare supplement – this year we can’t. Apparently, we can’t afford special needs assistants, but we can afford to recapitalise Anglo Irish. One person’s injustice is another’s pragmatism. The winner of the argument is quite simply the one who happens to be in power. Right now, that power lies in Merrion Street. As harsh as the current regime might seem, the imperative is to prevent that power shifting to Frankfurt or Washington DC. That has to be our focus now and yearning for some other country’s welfare system is a waste of time"
Rather - we should say that the winner of the argument is the side that seeks the common good within available resources with a preferential option for those most vulnerable. It is about morality not just power and stylised, selective facts. (At least Sarah Carey has retracted the earlier assertions.)

Markets and morality

Paul Sweeney: Markets and morality is an interesting subject. It should be on every economics course, but is probably absent under the narrow regime of the neo-classical economics which dominates Irish universities (to our cost).

On BBC 4, Michael Sandel, Harvard Professor of Government, delivers four lectures about the prospects of a new politics of the common good. The series is presented and chaired by Sue Lawley. He is critical of economists and economic commentators.
He reviews three decades of market triumphalism, and argues that it is not sufficient to curb greed and set up new regulations. He argues that markets are not mere mechanisms, but have moral impacts. Market incentives can crowd out other norms, he says.

He says the incentive payment of $2 to read a book for US children in some schools has other impacts. He argues strongly against the marketisation of migration policy by influential right wing economist, Gary Becker. Becker advocates that US citizenship should be sold for $50,000 and this will bring in the best of foreigners – those who are skilled and ambition.

In the first lecture, given on Tuesday 9th June 2009, Sandel considers the expansion of markets and how we determine their moral limits. Should immigrants, for example, pay for citizenship? Should we pay schoolchildren for good test results, or even to read a book? He calls for a more robust public debate about such questions, as part of a 'new citizenship'.
In Sandel’s latest book, The Case against Perfection, Ethics in the Age of Genetic Engineering (2007) he argues against the use of genetic engineering to create designer children, and suggests that the genetic revolution will force spiritual questions back onto the political agenda. His new book, Justice: What We Owe One Another as Citizens, will be published in the autumn. He is also the author of Liberalism and the Limits of Justice (1997), Democracy's Discontent (1996), Public Philosophy: Essays on Morality in Politics (2005.

The lecture is 45 minutes long, is not taxing at all and is worth a listen.

Tuesday, 16 June 2009

Get ready for the next big thing

Sli Eile: This is the conclusion of a writer in the current edition of that internationally respectable journal, Foreign Policy, under ‘Why bad times lead to great ideas’: If the 1930s gave us plastic, the 1940s nuclear power and the 1970s/80s micro-computers then it could be argued that economic destruction played its part in laying the seeds for entirely new discoveries and innovations. However, with destruction came mass poverty, homelessness and unemployment in US of the early 1930s. And the ultimate fruit of the 1929 crash – along with other factors – was 1939-1945.

We shouldn’t take Western liberal democracy for granted. We should protect (what is valuable within it) and change it by extending democracy in the workplace, in corporate regulation and in empowerment of citizens and various communities. That way, the boom-bust-boom cycle doesn’t necessarily have to destroy individuals, communities and societies in its relentless march. The 20th Century saw the failure of various forms of socialism and now capitalism. Marx was about half right. What next? A new political economy based on human values can offer something.

Leo Panitch writes a thought-provoking piece (all of which is worth reading but here is a key passage):

Despite the depth of our current predicament, Marx would have no illusions that economic catastrophe would itself bring about change. He knew very well that capitalism, by its nature, breeds and fosters social isolation. Such a system, he wrote, “leaves no other nexus between man and man than naked self-interest, than callous ‘cash payment.’” Indeed, capitalism leaves societies mired “in the icy water of egotistical calculation.” The resulting social isolation creates passivity in the face of personal crises, from factory layoffs to home foreclosures. So, too, does this isolation impede communities of active, informed citizens from coming together to take up radical alternatives to capitalism.

Marx would ask first and foremost how to overcome this all-consuming social passivity. He thought that unions and workers’ parties developing in his time were a step forward. Thus in Das Kapital he wrote that the “immediate aim” was “the organization of the proletarians into a class” whose “first task” would be “to win the battle for democracy.” Today, he would encourage the formation of new collective identities, associations, and institutions within which people could resist the capitalist status quo and begin deciding how to better fulfill their needs.

Provocatively, Panitch writes:

Marx would insist that, to find solutions to global problems such as climate change, we need to break with the logic of capitalist markets rather than use state institutions to reinforce them.

Growing our way out of the trap

This from Ray Kinsella in the Irish Times this morning:

"[...] We need to grow our way out of this trap. This means listening and responding to real businesses: removing constraints on them and incentivising them to maintain, or even increase, employment. The scale of the task can be seen from the figures above. We need to more than double the size of the economy to make ends meet based on our current spending trajectory. That is a measure of what it will take to return to sustainability and to relieve pressure on political, let alone, economic, stability.

Misconceived fiscal policies, conformed to a failed and humbled economic orthodoxy, are part of the problem. The last three budgets have bled the economy of domestic demand at a time when international trade and foreign direct investment are contracting. Equally, the costs of recapitalising financial institutions, whose business model and corporate modus operandi precipitated the crisis in the first place, is now equivalent to half of the costs of funding the health system."

Any comments?

Monday, 15 June 2009

Guardian article on Green New Deal for Ireland

John Barry: Larry Elliott, the Guardian's Business editor, has just written this article 'Emerald Isle plots green revolution', outlining a possible Green New Deal path for the Irish economy out of the recession and into the beginning of the transition to a low carbon, green economic path.

In this article, Elliott notes that on the basis of interviews with politicians and policymakers he has had, that "Ireland appears quite keen to act as Europe's guinea pig for the green new deal concept, and is likely to reap a considerable dividend as a result" and that "the Celtic Tiger period of the 1990s provided Ireland with a core of hi-tech expertise in sectors such as IT, pharmaceuticals and medical equipment. The intention is to use this strong industrial platform as the springboard for a green manufacturing revolution."

His argument is similar to the one I posted here a couple of weeks ago, but of course what we need alongside or following such 'big picture' macro-economic strategies are more detailed policies about how to make it happen. Nevertheless, it's clear the Green New Deal does capture something of the economic thinking we need to get out of this current mess....

Guest post: Growing the economy

Michael Taft: UNITE the union has published a set of economic proposals – Growing the Economy – as a challenge; both to the orthodoxy which dominates the current debate, and to progressives, to start constructing an alternative framework. It is a first step towards a new narrative – but only a first step.

Its starting point is the failure of current Government policy to stop the recessionary slide (indeed, it argues that Government policy has actually deepened and lengthened the recession). Its alternative is rooted in identifying very real deficits of our productive capacity and how, by addressing these, we can at the same time create/save jobs and, so, address the fiscal deficit. In other words, it is unemployment and the lack of productive investment that is the disease, the fiscal crisis is the result:

• Our physical infrastructure is ranked as one of the worst in the industrialised world, while our social infrastructure is European in name only;

• Whatever the fall-out in the banking crisis, the immediate priority is to establish a bank dedicated to extending credit to SMEs – the first step in a broader reform of our banking structures.

• That people’s income and living standards are not an obstacle to growth but rather part of the solution – particularly those on low and average incomes; therefore, it calls for a new wage agreement, which disproportionately benefits these income groups through flat-rate payments.

• That it is cheaper to save jobs rather than create them; therefore, we need payroll subsidies for enterprises that short-time workers rather than resort to redundancy.

• That the development of an indigenous enterprise can start with an expansion of public enterprises to modernise our physical infrastructure through ICTU’s proposed State Industrial Holding Company (something Fine Gael has copied to argue that new public enterprises can create up to 100,000 jobs).

These measures can ensure that on the other side of the recession we will have a stronger infrastructure from which we can better exploit the eventual recovery in global demand; we will have saved a number of viable enterprises that would have otherwise collapsed owing to the credit crisis; that key skill-sets will have been saved through payroll subsidies and public equity; and we will have new enterprises under ICTU’s proposal – with the downstream jobs created/saved as a result.

Of course, there is a question of financing. However, as UNITE points out, our deficits and borrowing requirement are on the verge of spinning out of control under current policy (the EU Commission predicts the deficit to rise to over 15% next year). However, even on current trends, our overall debt level will remain under the Eurozone average for the next two/three years. This, in effect, is our window. By increasing our borrowing levels to European averages, we can direct expenditure towards these investments – which will reduce unemployment and increase economic activity, thus lowering the annual deficit.

A range of other measures would accompany this: increasing taxation on less-deflationary sources of revenue (unproductive capital, unearned and high incomes); reform of regressive tax expenditures; and the issuing of Economic Recovery Bonds to take advantage of our growing savings ratio.

Ultimately, UNITE claims that the way out of this crisis is productive investment, employment and growth. It has put forward a menu of other proposals (some developed here as Jim Stewart’s proposed consumer vouchers). It challenges the deflationist orthodoxy. But it is not the last word, merely the first.

Most importantly, it invites other progressives – trade unionists, left political parties, social organisations – to get into this debate with enthusiasm. There are, no doubt, other and better ways to achieve what UNITE is attempting to sketch out.

We won’t know that, however, until we engage in the hard work of constructing an alternative, a new narrative. The quicker we start that task, the better it will be for the economic debate – and for the future of the Irish economy.
Michael Taft is research officer with UNITE

Hutton and Krugman

Will Hutton's interview with Paul Krugman in the Observer is available here.

Sunday, 14 June 2009

Green shoots, slugs and the banking sector

Paul Sweeney: I’m sceptical of all the talk around “Green Shoots.” As a bit of a gardener, my green shoots this year have been eaten by slugs. That’s why I believe that, unless we put up barriers to the slugs in the enterprise sector in Ireland, green shoots wont take deep roots. All our endeavours will, in the long run, be in vain.

The Financial Times headline on Friday, June 12th shouted about “Green Shoots”. It said that the pound surged to its highest level this year against major currencies. It was boosted by increased “investor confidence that the British economy is on the road to recovery.”

Sterling's strength “comes as City analysts are tearing up their forecasts of a prolonged recession, increasingly convinced that tentative signs of economic "green shoots" show the worst of the downturn is past,” the headline FT article said.
“Green shoots” is the term used to indicate signs of economic recovery during a recession. Its overuse by desperate optimists is getting a bit tiresome. It was first used by Norman Lamont, Chancellor of the Exchequer in the United Kingdom, during the 1991 Recession. Lamont got it wrong!

This week the pound rose 2.8 per cent against the currencies of the UK’s trading partners and was 14 per cent higher than where it started the year. This was its biggest gain in a single week since January, “demonstrating optimism around the UK's possible prospects for recovery.”

"It seems increasingly likely that the UK recession will end soon," said Michael Saunders of Citi, previously one of the most gloomy forecasters, the FT said.
Japan also revised its first-quarter GDP fall to a 3.8 per cent contraction, slightly better than the estimate of 4 per cent. Also Australia reported better-than-expected jobs figures. South Korea and New Zealand left interest rates unchanged, pointing to positive signs in their economies, also according to the FT
Commodities have been rising recent months, but it should be noted that they are way down on a year ago when they were at a major peak. Crude oil reached an eight-month high this week because it seemed that investors continued to speculate on an economic upturn. Oil has doubled in price in six months, but at the same time is half what it was a year ago. Metals were up 50 per cent from their base and agricultural commodities are up 34.3 per cent from their low.

It may be that demand is now exceeding supply. Manufacturers did cut production last year, with less demand and or because of the crisis meant poor access to loans. The FT admitted it was basing it headline on “anecdotal signs of recovery.” It claimed that carmakers are restarting production lines and hiring staff and to a few other positive indicators.

However, it could be that we are just at the beginning of an inventories/stocks recovery. As the business cycle turns, when companies which may have cut too much during the financial crisis last year and producing again. If it is just a re-stocking, then don’t expect the green shoots to take root.

Being a bit of pessimist as yet, one must note that a sudden rise in commodities prices could stifle the economic recovery. First, higher oil prices depress economic activity. Second, they create inflation, and help to drive inflationary expectations.

Last week the stockbroker economists hogged the news in the compliant business sections of the newspapers on the fall in Irish inflation, asserting also that wages are also falling… which the evidence so far shows is an untruth. But a huge proportion in the CPI was the fall in interest rates, a fall of 42% in the year and energy products which fell by over 10%. (interest rates have a weighting of 7% and energy of 8% in the Irish CPI).

Now interest rates will not fall any more and oil is rising ... so expect inflation to rise. And the recent rise in Sterling, if sustained, will push up prices too.
Further, on average, contrary to the opinions of Garret Fitzgerald and the bevy of stockbroker economists, nominal wages are not falling, but appear to be standing still, though the evidence is yet to be produced by the CSO. Last year, wages rose by 4.6% per hour, according to CSO data last week. So one cant be so sure that another green shoot is that workers’ wages are falling in nominal terms and so costs will fall. Further, most commentators leave out the business elite and professionals classes contributing (non employees who make up a good one-third of the remuneration bill) to the deflation of Ireland’s high costs. Could there possibly be a bias with economists / commentators?

On green shoots - all of my lettuce, which appeared this year as green shoots, disappeared. The exception was in a tray, in the greenhouse. Transplanted out, all the lettuce green shoots were gone the next day, repeatedly. SLUGS! The wet weather.
Don’t expect green shoots to root in Ireland till the slugs in the banks, and in other high places, especially in economic areas of the public sector, are effectively dealt with! A spell of dry weather will help in the short run, but a resort to chemicals/barriers may be necessary. This must be in the form of major governance rule changes, including where the corporate / enterprise elite is supervised effectively, with dual board structures, like in Europe.

Friday, 12 June 2009

Real people real recession

If you didn't see it don't miss RTE TV programme Prime Time investigative programme on how the Great Recession is impacting on real people. Available on RTE site only until Sunday 14 June. Should be seen by all salaried employees, employers, public servants, stock brokers, economists etc

Deflation and Social Welfare Rates

Karl Whelan over on irisheconomy.ie has a useful blog on the latest CSO CPI figures. He cautions against citing deflation in the housing mortgage sector to claim that social welfare recipients are benefiting from deflation as much as some people infer.

Guest post: International competitiveness and the New Economy - the role of equality and diversity

Eoin Collins: This paper on International Competitiveness and the New Economy: the Role of Diversity and Equality has been prepared by GLEN as an input into the Economic Strategy for the Dublin City Region being prepared by Dublin City Council. It argues that the importance of diversity and equality in growing the advanced economic sectors critical to Ireland’s economic future means that our equality infrastructure can be viewed as a part of our economic infrastructure and a component of international competitiveness and economic renewal.

A theme consistently highlighted in a broad range of economic development and recovery strategies produced by Government and policy bodies, including the NESC and the ESRI, is that Ireland has moved to a period where competitiveness will be based on the application of knowledge, creativity and a highly skilled, creative and adaptable workforce. To develop the advanced sectors, where skill has become a more central factor of production, a key challenge for policy makers across a whole range of sectors is how to nurture, attract and retain the skills on which these sectors depend.

Supporting diversity and equality, (for example across the grounds of the equality legislation), is an important factor in meeting this challenge. For example, meeting the targets set by government for education at all levels, including lifelong learning, will be diminished if areas of education are considered appropriate for one age group or gender. Equally, creating the educational basis for critical and creative thinking and developing the personal capacity and confidence for life-long learning will be undermined if bullying or harassment on the basis of any diverse quality is tolerated and not addressed.

The economic significance of equality and diversity can be observed across other policy areas also. Many of companies in the advanced sectors of the knowledge economy have strong diversity policies which are considered essential not only for recruitment and retention, but also for creating the conditions under which innovation can thrive. These policies will be undermined if the city or country in which the firms locate is perceived or experienced by diverse workers as hostile or unsafe.

US economist Richard Florida has identified a broader impact of what he describes as ‘tolerance of difference’, namely that tolerance and acceptance of diversity is seen by companies and people as an indicator of an underlying culture and eco-system that is conducive to creativity, a key quality driving new economic sectors. Florida states: “Economic growth in the Creative Economy is driven by 3T’s: Technology, Talent and Tolerance….. But technology and talent have been mainly seen as stocks that accumulate in regions or nations. In reality both technology and talent are flows. The ability to capture these flows requires understanding the third T, tolerance, the openness of a place to new ideas and new people. Places increase their ability to capture these flows by being open to the widest range of people across categories of ethnicity, race, national origin, age, social class and sexual orientation.”

Viewing equality and diversity in social justice terms and as key components of our economic infrastructure is a kind of policy shift, or at least a change in thinking, that has happened in other policy areas. As Professor Frances Ruane, Director of the ESRI, has noted in relation to education:

“The notion that human capital is our key economic factor is now being acknowledged widely. I was on some government committees in the mid 1990s and expenditure on education was still being seen at that time as social expenditure. It was only when the skills shortages came to light some years later that people began to link education to growth and that led to its economic importance being appreciated”.

Eoin Collins is Director of Policy Change with GLEN.

Towards an alternative economic strategy

As part of its commitment to facilitating the development of an alternative economic strategy, TASC - the think-tank for action on social change - will be publishing a series of papers prepared by a range of individuals and organisations. We will be asking the authors to write a guest post highlighting the main features of the papers in question, which will be available on the TASC commentary page.

The first paper in this series - International Competitiveness and the New Economy: the Role of Diversity and Equality - was prepared for GLEN, and argues that supporting equality and diversity is key to attracting and retaining the skills on which advanced sectors of the economy depend. The paper was researched and written by Eoin Collins, GLEN's Director of Policy Change.

Thursday, 11 June 2009

Climbing out of the Abyss

Slí Eile: Have ‘non-economists’ anything to contribute on how we climb out of this abyss?

In a series entitled ‘Re-imagining the Future’ the Irish Times has begun a series on how creative thinking can offer a way forward as some artists and writers talk ‘about where we’re at and how we can move on’. In today’s piece, Booker Prize- winning novelist and writer, Anne Enright is quoted as follows:If you look at a model of how to do that, the people that have been most successful in doing that are the Scandinavians, and their high-tax economies, the opposite of the road we took in terms of looking after each other. And they’re very good at it . . . It’s a real pity this crash has happened now, because, if it hadn’t, in 100 years’ time we might be really mature, comfortably bourgeois with Scandinavian communal systems, lots of good affordable creches.

What do PE readers think? May be the impetus towards a new social deal arises from the failure of the present one to deliver an adequate quality of life to many or most people.

Bloated public sector wages?: Mythbusters 101 sequel

Sli Eile: In a previous post, Mythbusters 101: Wages in the Irish Public Sector, I examined the available evidence in regard to public sector wages and how they compare to corresponding employee wages in the private sector. The ‘political’ context is clear:

Some well-paid economists and media commentators are concerned about average wages being considerably higher in the public sector than in the private sector – even when other factors are allowed for (gender, education, experience, union membership etc); and

Something needs to be done by Government – they argue – to close the gap by reducing public sector wages (further) and boost competitiveness in the traded sector as Ireland seeks to ‘price itself’ back into world markets (scrambling to compete, also, against the negative impact of falling world trade and demand as well as Euro appreciation against Sterling and other currencies).

So, there you have it. But, their focus is narrow and their implied or explicit solution ‘rich’ especially considering where people are coming from. Lets dig a little deeper.

What sorts of factors has driven salaries in the Irish public sector in recent decades? Lets be honest. Along with a rising economic tide, rising house prices abetted and fuelled by various types of tax cuts made a huge contribution to wage increases in the public and private sectors. Although the information is dated (and not explicitly sourced in official statistics), the following table taken from IMPACT/CPSU illustrates the general point:


1974 TO 2006

House Price

Secretary General

Clerical Officer

GDP (€million)











Increase %





Source: Submission by the CPSU and IMPACT to the Benchmarking Body for the Clerical Officer Grade in the Civil Service, Health Service and Local Authority Sector, July 2006. note that the figures shown for GDP, above, differ from those subsequently published by the CSO.

Another way of looking at this from the point of view of low-paid public sector workers is to say that, over time, we see two parallel developments:

Senior manager premia growing within the public (and private) sectors; and

Strong ‘negative premia’ for some private sector workers in vulnerable sectors (hotels, catering, retail etc) where the international race to the bottom applies – this has the effect of dragging down average employee wages in the private sector compared to their better paid and more strongly unionised peers in the public sector. (see for details on the CSO website for average weekly earnings in 2007 in accommodation and catering at €446 per week compared to €856 in the ‘Real estate, renting of Machinery’ sector).

What the Kelly et al (‘Benchmarking, Social Partnership and Higher Remuneration: Wage Settling Institutions and the Public-Private Sector Wage Gap in Ireland) and Boyle et al (Public-Private Wage Differentials in Ireland) papers do not address is the much wider issue of:

How do all incomes compare between those working in the public sector and those outside the public sector? In other words, what picture emerges if we were able to account for all types of income including those of the self-employed, investors etc.?

The dispersion of wages in the public sector is different (more compressed) to that in the private sector.

So, ask a question that lends itself to an answer which available data can provide and is part of the conventional response to the current economic crisis:

Cut public sector wages to align more with private

Cut all wages at the same time

Increase profitability

Increase competitiveness

Provide for some trickle-down once public finances, world markets etc recover

The plebs will buy into this since ‘there is no alternative’.

To sum up – yes wages are higher in the public sector than in the private because if you compare salaried employees in the sectors the impact of trade union membership and stable employment contracts has given an advantage to workers in the public service. However, when account is taken of profits and other sources of income the picture is probably very different. Two questions arise here:

Is total household income averaged out for those households where none of its members are working in the public service higher than in other households? (does anyone reading this know of research in Ireland on this issue?)

How have the major aggregates for income fared over the last decade?

The second question is easier to approach. CSO publish national accounts data which show aggregate data for various types of non-wage income (Table 12 in National Income and Expenditure Tables, 1995-2007). Undistributed profits of companies grew from 18 to 20% of total output (Net National Product at Factor Cost) between 2000 and 2006 (it feel to 13% in 2001). Over the same period, ‘remuneration of employees’ increased its share from 63 to 64%. Lets say all employees, on average, were just about keeping pace with other sectors in the economy (CSO data also reveal that ‘sole independent traders’ did not fare as well as wage-employees with average annual increases of 7.7% per annum compared to 10.4% for the latter – Table 12.1). However, we still don’t know how individuals or households compare when all types of income are taken into account. It may be objected that two other factors arise when comparing those in the public and private sectors:

Most (but certainly not all) public sector jobs are secure compared to jobs in the non-public sector;

The present economic value of future pension income for public sector workers compares favourably with that of most private sector employees. The Review Body on Higher Remuneration in the Public Sector in its 2007 discounted average private sector salaries by 15 per cent to account for average differences in regard to pension provision between the public and private sectors.

The first objection is valid and it is hard to put a ‘value’ on this. When economic times are tough the economic value of a public sector job certainly rises, dramatically, compared to most jobs in the private sector. This can give rise to considerable and understandable resentment among private sector workers and their families. The second objection lends itself to a more complex discussion about pensions. The fact is that about one half of private sector employees are not in any occupational pension scheme themselves. However, the proportions among private sector workers participating in some scheme differ dramatically between high and low-income workers. Colm McCarthy has cited data to show that the bottom income decile of persons in employment have a 10% take-up of pension schemes compared to 90% for top income decile (a handy statistic to remember!) – reference 2004, persons aged 20-69 sourced by McCarthy from Pension Board data.

You can take the view that ‘everyone must share the pain’ and everyone must take a cut especially public service workers. However, this line of reasoning leaves out the Elephant in the parlour which is other types of income that are less visible, frequently outside the scope of taxable income and reckoning and absent from the focus of media attention. The other problem with the ‘everyone must share the pain’ line is that those who promote this are in the top income deciles drawing, not infrequently, multiple incomes from academic salaries (€100K p.a. plus) consultancy and investment income (although the latter has probably taken a hammering of late).

Sharing the pain when you are on the breadline is quite another reality.

Next Mythbusters will focus on social welfare rates – the likely target of adverse media and political attention as Budget 2010 approaches. Are rates, here, high by international standards (extending beyond Derry and Newry, that is)?

Wednesday, 10 June 2009

Making the case for pluralism in economic thinking

John Barry: After writing a post asking Where's our 'Green' Whitaker?, I was reflecting on the relationship between the imperative for orthodox economic growth (and the conventional neo-classical economic theory and thinking which accompanies it) and sustainability, (in)equality and well-being.

I'll begin by citing Thomas Friedman, once the cheerleader for unfettered neoliberal globalisation, who has recently become a 'proto- green' (at least from an economic perspective). In an extremely interesting op ed piece for the New York Times in March he states:

"Let’s today step out of the normal boundaries of analysis of our economic crisis and ask a radical question: What if the crisis of 2008 represents something much more fundamental than a deep recession? What if it’s telling us that the whole growth model we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall — when Mother Nature and the market both said: ‘No more’.”

Welcome to the party, Thomas. Us greens have been saying as much for at least four decades.

Couple that with two excellent discussions this week - one by John Woods, director of Friends of the Earth Northern Ireland, and another by Richard Wilkinson and Kate Pickett – both of which spoke to the same key issue, namely that we have the empirical evidence that economic growth is not just ecologically unsustainable (i.e. not compatible with 'one planet living') but also needs inequality which undermines general well-being in society.

John Woods presented a summary, and outlined the implications for Northern Ireland, of Tim Jackson (Economics commissioner of the UK's Sustainable development Commission) and his recent SDC publication Prosperity without Growth http://www.sd-commission.org.uk/publications.php?id=914. John's talk and Tim's argument is, basically, that what the green movement has been saying for decades is true: beyond a certain point, economic growth does not only not add much to general and average well-being but, through positional competition, status competition and 'defensive' consumption, actually undermines human well-being. Here the real challenge is how to design public policy and especially macro-economic policy which aims to enhance human flourishing rather than a narrow focus on one means to flourishing i.e. conventional economic growth.

In the excellent discussion which followed John's talk, it was clear that the dominance of the discourse and myth of 'economic growth' is one of the main reasons for people to misunderstood greens and others who question 'growth'. The issue seems to be that many people cannot but view a non-growth argument as anything but 'bad', whereas the real issue is to separate out growth from 'prosperity' (as Jackson does), 'flourishing' (after Sen) or in my own work 'economic and social security', or to simply draw a distinction between economic growth and well-being. The evidence behind Jackson's report is pretty compelling, drawing on decades of research in economics, behavioural economics, psychology and cultural studies, all of which show that growth after a threshold does not appreciably add to average well-being (the infamous 'crocodile graph', is illustrative here demonstrating rising GNP over decades coupled with well-being flatlining since around 1960).

Wilkinson and Pickett's talk was also robust in its empirical evidence. They were talking about their new book The Spirit Level: Why More Equal Societies Almost Always Do Better http://www.equalitytrust.org.uk/resource/the-spirit-level and presented an impressive range of statistical and cross-country analysis which shows the strong correlation between inequality and a range of issues from obesity, lack of trust, crime, imprisonment, mental health. What I found particularly striking was their evidence that inequality does not simply negatively affect the least well off: in fact, almost everyone does less well the more unequal the society.

So, the upshot? Well... green critiques of economic growth now have a firmer evidence base, the need for more redistributive economic policies is apparent, the creation of less unequal societies not only is inextricably linked to challenging economic growth (i.e. if you are an egalitarian or on the left, you should be in alliance with greens), and what is needed above all is more pluralism in economic thinking. What does public policy look like when it’s free from the imperative of economic growth, competitiveness and all the other guff of 'there is no alternative' economic thinking, and what does public policy look like when its aimed at directly improving quality of life, human flourishing rather than economic growth?