Saturday, 15 August 2009

How to distract from the main issues

Slí Eile: The right have uncovered evidence that, with the average rate of price deflation accelerating, the 'real' value of social welfare rates to the unemployed, sick, children, pensioners etc has increased by some few percentage points since the 'pre-October 2008' position (post by Colm McCarthy on irisheconomy Friday 14 August). And they're going to town on this. A number of observations are in order:

1 The real value of SW rates, as measured by changes in the CPI and HICP, has increased (as have some other forms of income, by the way as CSO earnings data series confirm). So what?

2 Cutting nominal SW rates is clearly on the agenda of those determined to shift the burden of fiscal adjustment wide and far. Lets say the Snip Report was a spray-gun approach. The actual impact socially, fiscally and economically has not be tested or seriously debated (see points raised by Michael Taft on Notes on the Front). In other words, the deflationary impact of these cuts is an issue that is not being dealt with by those arguing for cuts.

3 In a very good article in yesterday's Irish Times (Minimum wage debate is a fatal distraction), Ray Kinsella points out that:
So, at the level of the individual, the family, and the firm, the issue of the minimum wage matters. But at the macro level – ie turning the economy around – it is distracting attention from what really needs to be done.
I very much agree. Ray Kinsella could have also said 'social welfare rates' for 'minimum wage'.

4 The fundamental issue in the ensuing debate about SW rates is one of justice. Significant gains were made in recent years, not least thanks to the campaigning by some of the social partners. The appalling economic mess we find ourselves in was not caused by those who now find themselves without employment and very often without hope. But, as Kinsella observed:
...there is the devastating decline in self-esteem of those who lose their job, for reasons beyond their control. The significant increase in the number of people presenting at GPs with psycho-social stress would seem to confirm this.
5 Why should some well-paid economists in relatively secure positions of employment pursue - relentlessly - a campaign to reverse the gains made (including the unforeseen very small gain of recent months - notwithstanding the rise in overall SW numbers and cuts in welfare to young people)?

6 Nobody calling for SW cuts is dealing with the wider social trauma and the fundamentally unjust distribution of income and wealth at the heart of the now defunct Celtic Tiger.

7 Lets get back to a debate on how to get people into work through new employment. Lets give hope, not continuing despair and threats of Latvian punishment on those least able to afford it.

Kinsella wrote:

The only way out of the growth and competitiveness cul de sac into which the economy has been driven is a strategy for growing the economy. The Government doesn’t have one.

I couldn't agree more. But, does the 'left' have one?


Tipster said...

"The actual impact [of the McCarthy Report] socially, fiscally and economically has not been tested or seriously debated"

I heard the Tanaiste say on radio at the time that the McCarthy Report was published that the Government has referred it to Forfás for an assessment of the economic impacts of the proposals. I haven't seen that discussed, and it seems to me it could [note: "could", not "will"] be an important process. In particular, I would like to know exactly what the terms of reference for Forfás are.

Anonymous said...

Sli Eile,

"Does the 'left' have one [i.e., a strategy for growing the economy]?"

I expect your question is rhetorical, but, to be one the safe side:
1. Increase Government borrowing up to average EU debt/GDP levels;
2. Nationalise the banks;
3. Issue additional bonds "off-balance sheet" for investment in the economy - primarily by existing, but expanded, and new semi-state bodies;
4. Close all tax loop-holes and massively increase marginal rates of tax on higher earners;
5. Maintain social welfare rates and current public sector pay;
6. Increase expenditure on health, education and training; and
7. (to the last person leaving) please switch off the lights.

Slí Eile said...

@Anon Not a bad take! Except keep the lights switched on. That will be a stimulus to thinking!! Any ideas yourself on how to grow the economy for poeple, environment and the future?

Anonymous said...

Many thanks for the invite. Just a few observations:

1. Do not be afraid of markets: efficient competitive markets subject to effective policy and regulatory control are the worst way to allocate economic resources other than all other ways that have been tried from time to time (apologies for paraphrasing Churchill on democracy). Those on the right who hijacked Adam Smith (and others) to promote the dominant international consensus in pursuit of the blessed trinity of "free markets, liberal democracy and the rule of rule" were, in reality, focused on subverting markets to eliminate competition, to create monopolies and to capture surplus profits. Governments need to be smart and to hire the best to design and implement market rules and regulations that will ensure that profits reward those who produce goods and provide services most efficiently and not those who secure and abuse market power. Remember those who shout loudest for free markets hate genuinely competitive markets.
2. Every large business is a conspiracy against the public - and frequently its staff (even if unionised) are infected by this conspiracy. Extremely powerful competition policy is required to ensure businesses do not get too large, destroy competition and exploit consumers. And the empowerment of consumers is vital.
(to be continued)

Anonymous said...

continuation of previous comment

3. In modern developed economies everyone over 18 is a capitalist. Not all have physical or financial capital, but all have human capital. This should be the focus of investment in education, health and societal well-being. Maximising the output of human capital generates the demand for investment in the physical environment.
4. Private sector provision of goods and services normally organised by the state should be encouraged. But every effort must be made to curtail the primeval urges to capture power, unearned profits and prestige. For example, Pres. Obama’s US health reforms include a publicly funded provider to compete with and set a benchmark for private sector providers. Naturally it is loathed by the existing profit gougers.

The left will have to recast itself to deal with these realities - and opportunities. Then we can look at Ireland.

Michael Taft said...

Anonymous, your summary of a Left agenda and the points you make in response to Sli Eile dovetail remarkably. Let’s go through your points:

1. You’re correct (and I know many on the Left get annoyed by terms like ‘competitiveness, but not me). For instance, it would be great if the Energy Regulator would allow the ESB to compete; instead it is forced to sell it’s product at higher-than-market rates, while being prevented from investing. Public enterprises can (and should) operate to market criteria in order to, where appropriate, compete internationally. So should private enterprises. So should public-private partnerships, as well as private enterprises with public equity, and private enterprises with public grant-aid, as well as private enterprises in receipt of cash subsidies through the tax system, as well as private enterprises reliant on public procurement (there are few if any Robinson Carusos in complex modern economices – such is the interpenetration of the public and the private). There’s nothing in this point that goes against your own summary of a Left agenda.

2. Again, yes to your second point. Given the Competition Authority’s views on the grocery trade, it might be advisable to ‘abolish it’ since it takes up position that only consolidate oligopolistic tendencies in the market. Markets and competition are socially constructured and require the intervention of the public realm to ensure they operate in an efficient, competitive and accountable way. No disagreement there.

3. Re: your point about becoming 18, does that mean we are all born socialist and only turn capitalist after puberty? Maybe, we must truly become like children to enter the kingdom of heaven. Just joking, but the point you make on investing into people – isn’t that the rationale behind increasing investment in health, education, etc. in your summary of the Left agenda?

4. This is a bit more problematic. While a number of countries delegate the provision of services to the private, voluntary, local enterprise sector – the issue should be examined on a case-by-case basis. I doubt there is a case to be made that, ab initio, the private sector is more ‘efficient’ than the public sector in general public service provision (we’d first have to come to an agreed definition of ‘efficient’). Services can be well run or badly run – the US prison system is an example of dubious results from private sector provision. I’m certainly not ruling out further constructive discussion on this issue, and merely stating that one sector or another is best suited to running public services doesn’t help the debate. My own starting point is that if people collectively consume goods and services, then structures should be put in place to ensure the highest level of accountability and input into running these services. If we can agree on that starting point – then we’re halfway there are arriving at a consensus.

All in all, Anonymous, I don’t see both your excellent summaries are contradictory.

Anonymous said...

Michael, you have skated over the thrust of my points with exquisite style and skill. I'm afraid I don't have the space in these tiny comment boxes to engage as I would wish. But just a few observations:
1. The achievement of the policy desires in my first list requires a continuing supply of government debt finance with no increase in spreads or roll-over risk. It would be unwise to tread this path again. We were there during the '80s and I don't want to go there again.
2. Even if there were a limitless supply of government debt finance, it makes sense for governments to examine every area of their involvement in the economy and ask "can we use, channel corral, indeed exploit, the self-interest (even the greed) of the private sector to generate socially and economcially useful outcomes?".

Anonymous said...

There are few things more satsifying to me than seeing private sector businesses competing vigorously to generate these otucomes.
3. I don't think I can bridge the gap to enjoy your collective consumption. And I think the social construct nature of markets and competition came after the basic exchange conducted by two self-interested individuals. Amartya Sen's latest book, "The Idea of Justice" brings Adam Smith's "Wealth of Nations" and his "Theory of Moral Sentiments" into the modern era, but I suspect it would be repellent to the innate collectivism and determinism of the left. This, however, is where I stand.
4. The left in Ireland may advance at the next election, but elsewhere in Europe it is in decline or disarray. Time to recast the intellectual basis.

Slí Eile said...

@ Anon

Interesting conversation this. I don't think that such a conversation would have been possible or necessary just 18 months ago. The shattering impact of a global crash in markets together with the weakness in State institutions response to this calamity marks out this new phase of history as unlike anything we had before. It is question of back to fundamental questions, assumptions and prognosis.

My guess is that the gulf in positions is not as wide as first seems to be the case. Like Michael I woulde be an enthusiast supporter of a mixed social economy model with a strong social security net and strategic investment by State companies in open markets allied to public owndership and control where necessary.

One matter on which the left has won the argument - its seems to me - is banking. When you see a mix of economists of all hues but particularly blue arguing for nationalisation - albeit temporary - you know that the left got this argument hands down. I would go further say and that decent people in businessses, farms and public services can never again trust a finane sector almost entirely in private ownership. With our without strong regulation the case for a strong State-owned retail bank offering services to depositors, borrowers and businesses is overwhelming. In competition of course ...Finance is just too important to allow it to be dominated by market interests alone. Regulation is not going to be enough even when we return to 'normal times'. There is no returning to 'normal times' any way.

Anonymous said...

Sli Eile,

Yes. A refreshing exchange, but I'm constrained by the size of the comment box. Just three quick points:
1. There seems to be widespread denial about the seriousness of the public finances. The current level of spending cannot be sustained because the potential to increase the tax-take to close the gap is not there. We must convince external lenders of the ability to meet debt service on a growing debt and this requires an early closing of the gap.
2. Additional borrowing to finance investment in growth will be constrained until a sustained ability to service debt is established. I have no problem with semi-states per se. Most have served Ireland well. But, referring to Michael Taft's example, the ESB could borrow much more to finance network investment and reduce the financing burden on consumers - reducing prices.

Anonymous said...

BGE could apply its borrowings to the networks in a similar way, rather than subidising false competition in electricity. The East-West electricity interconnector should be accelerated and the gas and electricity markets on both islands integrated. The SEM should be suspended and replaced by bilateral contracts and the supply businesses of ESB and BGE merged and built up to compete in the bigger markets. But I propose privatising the networks (with strict regulation) and using the proceeds to finance investment in modern infrastructure. I am confident that STT (given its Sinapore parent Temasek) will show the way in telecoms. I'm all for a mix, but it's time to move on majority state ownership in some sectors and focus on the new areas where the private sector isn't willing - or can't be trusted.
3. All Irish banks are bust and we can't afford to nationalise and recapitalise them. But we can nationalise them temporarily with external investment, sell some off and extract a genuine mutual, national bank with all citizens having membership run at arm's lenght from the government.

Anonymous said...

I expect this exchange has stuttered to an end. Just one final point: the left in Ireland is just the breaking of a few (time-hallowed, but now irrelevant) taboos (e.g., no selective privatisation, no forward-looking fiscal discipline, no promotion of genuinely competitive markets that reduce the requirement for direct state involvement in the economy) away from securing the allegiance of the natural left-of-centre progressive constituency that FF has purloined since the Treaty and of FG's social democratic support.


Anonymous said...

Given the current situation in Ireland there may be a surge in support, but it won't be sustained as other political forces won't stand still and the left will end up preaching to a dwindling band of the converted as in the rest of Europe.

An opportunity like this won't come again.

Anonymous said...

Oops! I seem to have touched a raw nerve or two. Many moons ago when I was a Labour Party member my principal concern was the transformation of the left into a political force that would break the stranglehold of the post-Civil War parties. However, I see the eternal verities and the taboos still hold sway. You may think the argument has been won, but the argument has changed and the world has moved on. The Washington Consensus, for good reasons and bad, squashed the left's position and there is no widespread popular demand to reconstitute it. Principles are of no value if their application doesn't adapt to use the tools available.

T G MacAmhloaibh said...

What I read here is a debate about returning to some sort of 'normal' and benign capitalism as it was supposedly practised in a golden by-gone era before the financiers became prominent. These same sentiments are being expressed across the internet; not least by quite a few Americans.

I frankly don't buy the thesis that a dollop of regulation here and a tad more investment in human 'capital' will return us to the garden of Eden capitalism. What all economic debates lack is a realisation that humans are not economic machines and capitalism by its very definition is working better than it ever has. The entire raison d'etre of capitalism is to accumulate capital - everything is else is a by-product of the capital accumulation process.

I'm no pie-in-the-sky socialist and haven't any hang-ups with market economies. Market economies are the means by which working men and women survive. At the very least, we have to extend ownership through share investiture and other capital accumulation programs so that working people (the vast majority of the world's population) are fully incorporated into the economic system.

Once we all realise we already have the means and technology to support our populations, we may really mature as a species and realise that we don't have believe in coercion of labour or silly bouts of excess accumulation and wasting of resources for the sole sake of accumulation.

Ethical considerations are the foundation of society; economics the mere means through which we survive. Any donkey can labour. The question is: how much longer, given environmental exogenous factors, can humans act like asses?

Anonymous said...

T G MacAmhloaibh,

Excellently put. I have no disagreement. My focus is on the future and the ethical foundations of economics. Where disagreements have arisen on this thread they relate to the extent of State provision of goods and services, the role of markets under effective

Anonymous said...

Continued: policy and regulatory control to generate beneficial outcomes and to restrain the unwarranted accumulation of power, unearbned profits and prestige and the appropriate economic recovery policy in Ireland.

Michael Taft said...

Anon - didn't mean to splutter out on this exchange. I would just make couple of points:

(a) It is axiomatic that cutting public expenditure or increasing general taxation (in effect, cutting people's disposable income) during an economic contraction will only exacerbate that contraction with little effect on the fiscal deficit. In effect, we will continue to pile up the debt but in the meantime weaken the economy's ability to generate the growth necessary to adequately deal with that debt. Investing into the economy (stimulus) is an attempt to get to grips with the fiscal deficit which can only be done by a quick return to sustainable growth. Given that we are a low-debt economy (relative to Eurozone countries) and given that we have resources at hand (the NTMA's cash balance), we have the resources to launch that growth investment - out physical and social infracture sure needs it. Of course, if you're asking whether the current Government is capable of managing this anti-cyclical policy, I would say no. They only do pro-cyclical - whether during growth or in recession.

(b) A commitment to a competitive, efficient market economy does not exclude pubic intervention - indeed, it is an absolutely essential requirement. Especially, given our historically poor-performing indigenous sector. To conflate efficient markets with private capital is merely the flip side of conflating efficient markets with public capital. This either-or approach runs counter to modern economies in which the public and private realms interpenetrate to a high degree (though which realm holds the disproportionate power is a political one). A social democratic mixed-market economy, imbued with a high level of social protection is not inconsistent with efficient markets (as so many European examples show). One may not agree with it, but that again is a political quesiton.