Tuesday, 4 August 2009

Let them eat Cake

Slí Eile: Economics is a neutral science - don't you know. ESRI authors Anne Jennings, Seán Lyons and Richard Tol have just completed a working paper 'Price Deflation and Income Distribution'. Writing, today, on irisheconomy.ie Richard Tol sayings that declares that:
A 3% cut in nominal benefits would therefore mean that the poorest people in Ireland would see a rise in their real income.
They argue that:
Therefore if one wishes to justify a reduction in social welfare rates by falling prices, a 3% reduction might be more appropriate.
Just - if one wishes - here is our best advice like. No doubt we will hear about 'research by the ESRI shows...' for the coming months as the ground is prepared for a cut in welfare payments in December (by 3% mind you instead of 5%).

They acknowledge, however, that price deflation has been less for lower income groups than for higher income groups but the extent of price deflation in the 12-month period ending June 2009 is such that a cut of 3% in nominal benefits allied to income-related adjustments to public authority rent would leave welfare recipients better off - just a tiny bit but enough to exceed 0% by a few decimal places when the adjustment is factored in. charming.
How many readers of this site and irisheconomy are in the bottom income decile? Could we hear from such persons about what it is like to live on something like €200 to €500 per week?
A major deficiency in the timely approach by the ESRI authors is that nobody knows for sure how incomes have evolved over the last 12 months. We have a measure of price inflation (or deflation) across 13 household spending categories but we don't have up to date measures of income - wage and other sources - over the last 12 months. Another major deficiency is that no account is taken of the existing distribution of income. Is it just, acceptable, workable? And who is to say that a 3% reduction for the bottom decile is the same as a 3% cut for the higher top income decile?
I regard any suggestion of a cut in social welfare payments to be an immoral 'haircut' - especially coming from sections of society who haven't got a clue what it is like to live in income poverty already.


Slí Eile said...

I should add that comparisons of changes in household income over the last 12 months do not take account of the impact of education, health and other public service cuts on the poor - whether achieved, being implemented or pending.

Slí Eile said...

Forgot to mention the following new and very welcome initiative:

Richard Tol said...

@Sli Eile
The paper responds to An Bord Snip Nua, which recommends that benefits be indexed on the average consumer price index. The paper shows that the average consumer price index is an inappropriate measure.

The Dail decides on the appropriate level of redistribution. We only note that the income distribution has become decidedly flatter in nominal terms, and flatter in real terms over the last 12 months.

I think you should be more careful when speculating about the income and history of people you do not know.

Slí Eile said...

Thanks for your comment. No personal implications intended in what I wrote. I was making a point about the thrust of economics especially in recent months - pressing for cuts in pay, PS spending, etc.
Just two queries - 1 'The Dáil decides on the appropriate level of redistribution'. Is that not an over-statement?
'the income distribution has become decidedly flatter in nominal terms ... over teh last 12 months' How do you know? We have only very partial income data against which to apply CPI component price deflators. In terms of measures like relative income poverty, gini coefficient, S10/S20 you may very well be right - only time will tell. In the meantime many people cannot eat statistics. Suppose the income distribution has shifted towards equality in the last 12 months, does that justify nominal cuts in SW rates as well as other income payments to (relatively) low paid workers? How do you compare a cut of say 5% for someone on €15,000 p.a. with a cut of say 10% for someone on €150,000 p.a.?
We need to be careful in assuming shifts towards equality against a background of what could be considered a very partial and determined campaign in media to shift the cost of adjustment on those least able to pay. Today's Irish Times cartoon says it all.

Slí Eile said...

I might add the cartoon makes a good point in that it points to the irony of a rebound on profits and shares (although not AIB in the case of their recent profit performancde)

Brian Woods said...

Economics is a science - methinks not. Galbraith (pere), thought it was somewhat Astrological!

We are in a slow-motion deflation spiral - with 'sticky' prices (in some sectors) and wages (in some sectors).

If cuts in public expenditure have to be made, then those in charge have to lead. Those with the greatest incomes will have to pay more. Taking the cuts to the less well off is guaranteed to increase the velocity of the deflation spiral.

I have mentioned this before several times, but no one seems to be interested - yet. We have a looming energy crisis (possibly several years ahead). When this kicks in, as it assuredly will, it will capsize the 'growth' paradigm that is being used to justify our current massive borrowing. The problem has been masked (deferred) by the current downturn which has reduced demand only.

Economic models assume 'growth', but they are hardly valid in a 'transition' and a completely new set will be required for the 'decline' - say, after 2012 or so.

Brian P

Richard Tol said...

@Sli Eile
Callan, Keane and Walsh estimate recent trends in the income distribution.

The link is on Irish Economy, on the ESRI website (QEC Spring 2009), and in the Irish Times. I cannot paste a link here.

Their results are not surprising. The private sector has taken severe pay cuts. The public sector has taken mild pay cuts. The semi-state sector has seen pay rises. Benefits are unchanged.

The result is flattening of the income distribution in nominal terms.

Michael Taft said...

Richard, the impact of deflation on decile groups as was done in your paper is a useful contribution to the debate, as are others (www.poorcantpay.ie). However, I can’t help thinking a great opportunity has been, if not lost, then postponed as we await for a more complete ‘response’ to the McCarthy Committee’s proposal to cut social welfare rates. This would involve critiquing the obviously flawed and misleading notion that such a cit would equal savings to the Exchequer. The ESRI has provided useful information on the effect of cutting 17,000 jobs from the public sector payroll – showing it to be highly deflationary, prolonging the recession while substantially increasing unemployment with little impact on our borrowing requirement. Such an exercise would be especially useful with regards to cutting social welfare – which has the capacity (and here I conjecture since I don’t have the assistance of the HERMES programme) to be even more damaging. That this has not filtered into the wider debate is unfortunate.

Indeed, it might lead us to alternative conclusions – and this is surely the great advantage of having independent research institutions such as the ESRI: providing alternatives responses to the current crisis. We might find that, leaving aside the obvious social gain (addressing high levels of relative poverty and the considerable income inequality that afflicts us), increasing social welfare rates is an economic good, stimulating spending and providing respite for enterprises dependent on domestic demand. This could, as part of a complex of stimulus measures, begin to address our underlying economic problems and provide a better and surer strategy to bring the fiscal deficit under control.

While I accept that this was outside the remit of your paper, you may wish to consider following this up – it would be complementary. Otherwise, we are stuck in debating the issues within the narrow framework set down by the McCarthy Committee which failed to provide an economic impact assessment of its own proposals – even though that was open to it.

And, also, you may wish to know that the Irish Industrial News has compiled a lengthy list of private sector companies that have paid the first tranche of the wage agreement (almost all Chem/Pharm companies have done so). Therefore, it’s not just semi-state employees who are benefitting. This is welcome news as wage increases can help stem the recessionary slide fuelled by the Government’s deflationary policies, buttress domestic demand and provide extra revenue for the Exchequer.

Richard Tol said...

@Michael Taft
In a normal recession, you would be right. As the poor save less as a proportion of their income, increasing benefits does more to stimulate consumption than does increasing income taxes.

This is not a normal recession, however. Besides consumption, we also need to stimulate investment -- and for that you want to spare the high earners.

Michael Taft said...

Richard, thanks for the reply though to be honest I'm not sure how it addresses the issues I raised. If Proposal A would result in a further contraction of GNP, reduce private consumption, increase unemployment, all with little effect on the borrowing requirement - surely we should treat such a proposal with extreme caution, regardless of the normality of this recession.

As to stimulating investment - absolutely; though I'm puzzled about 'sparing' high income earners. By increasing tax revenue from high-income and high-asset households we are tapping into a less deflationary pool. Reductions in their income are likely to result in reductions of savings. And since, historically, indigenous high income groups have hardly led productive investment drives there is likely to be little downside. Besides, it’s unlikely that they can direct their investment into upgrading our infrastructure (e.g. bringing Eircom back into public ownership as Donal Palcic has suggested on this blog; establishing a free, universal early education system; waste and water infrastructure, etc.). These investments are likely to be led by the state and one of the sources of revenue, apart from borrowing, are high income groups. If that means these groups reduce their spending (as opposed to saving) it might not be that detrimental as a larger proportion of such spending has a higher import density.

I suppose we may not reach consensus on these issues but would you at least agree that before serious consideration be given to reducing social transfers to low/average income groups of the type and magnitude contained in the McCarthy Committee - we should conduct an economic impact assessment, to establish how deflationary they might be and what, if any, benefit in reducing the borrowing requirement they might have?

Richard Tol said...

@Michael Taft
I fully agree that one should conduct an impact assessment before any major policy change.

My main point was that these are unusual times. Therefore, rules of experience may not hold. For example, in the paper that started this discussion, we show that inflation was roughly equal across the income spectrum for 35 years -- but not so in the last year.

If conventional wisdom comes apart, impact assessments are even more valuable.

Slí Eile said...

The distributional impacts of Budgetg 2008 (and the Supplementary April 2009 Budget) are discussed - fairly briefly - by Callan, Keane and Walsh in the Spring ESRI QEC at
They use the SWITCH tax-benefit model to examine the tax and welfare changes in the Budgets, only, on income based on EU-SILC data. However, neither they nor anyone else knows for sure how incomes have evolved over the last 12 months (the period over which you measured changes in the components of the Consumer Price Index). They present results showing a 5% increase in the income of the poorest one-fifth of families (Figure B on page 26) and over 7% decline in the position of tghe richest one-fifth of families. However, this is based on the same market distribution of income adjusted for budgetary changes as well as the public sector 'pension' levy. They say that the results are 'updated and adjusted to represent the 2009 situation'. But are they? They acknowledge that the 'the rate of decline in wages is uncertain'. So, they simply assume a 2% average fall. It seems (although it is not clear) that this applied uniformly across all income groups before the effects of the budget changes are applied. Hence, the distributional effects of the budget changes are applied on baseline that assumes an equal fall in incomes. This is an assumption and no more.
The latest CSO data do not enable us to compare the public and private sectors
What is available shows increases in most sectors and occupations in 2008 over 2007 in public and private sectors.
So, how can anyone claim they know for sure that private wages have declined in the last 12 months while wages of public sector workers have increased or fallen but in the latter case not as much as in the private sector.
My point is that you have not demonstrated a shift in income distribution in the absence of up to date data on all types of income.

Richard Tol said...

@Sli Eile
Indeed. We all wish that the CSO would release data earlier. They do not. So we have to work with the incomplete data that we have.

Imperfect and incomplete data are much better than your alternative, which is to pretend we know nothing.

Callan et al., by the way, assume a uniform fall in wages, not in income.

Slí Eile said...

So you are acknowledging that the whole line about income distribution becoming flatter etc etc is based on assumptions and no firm evidence? I agree with you that, sometimes, 'imperfect and incomplete data are much better' than 'pretending we know nothing'. But it is also true that 'imperfect and incomplete data' is better than 'just assuming something because everything says it is true'. I repeat the original question - how do you, anyone know how incomes or wages have evolved in the 12 month period 2007-08? The SWITCH model analysis of Budget 2009+ and the recent data on price inflation is not the whole picture and does not allow anyone to draw conclusions tentative - let alone definitive - about the overall distribution of income over the last 12 months. This is no mere academic debate. Decisions will be made in the coming weeks about how much income the old, the sick, the unemployed will receive next year. Research will be cited to back up the case for cutting welfare rates.
I take your point that Callan et al assumed a uniform fall in wages and not income (it wasn't entirely clear from the text). But, this only reinforces the point that underlying the claims about redistribution is a set of assumptions. Incidentally, I am not taking Callan et al to task. They merely use a model to text the impact of the Budget - ceteris paribus. What concerns me is the way in which this is being used by some commentators.

Richard Tol said...

@Sli Eile
Three things are clear: Benefits were not cut. Public pensions were not cut. Income levies were introduced, and contributions raised. One thing is pretty clear: Wages in the private sector fell.

How can that not have flattened the income distribution?

Slí Eile said...

Thanks for reading and commenting on this site and I trust that you take the exchange in good part as part of an effort to uncover some of the truth about what is happening to the economy and society as well as to inform a public debate about how to create a better and a more just society.
You write that 'Three things are clear':
'Benefits were not cut' (good - SE)
'Public pensions were not cut' (good - SE)
'Income levies were introduced' (instead of widening the tax base on high-income and high-wealth people who pay little or no tax in many cases - SE)
'Wages in the private sector feel' - pretty clear you said (many keep saying this but where is the evidence? Last Thursday CSO Earnings figures do not confirm this)

So, did income distribution shift in favour of the poor and those on welfare? Time will tell. I don't have an enough evidence to support your claim at this point. OK you may be right (and I hope that you are) in which case the data will eventually confirm that a shift in distribution occured over the last 12 month period. If so, good.

All of this is little comfort to people who are already on the bread line or who have lost jobs or who are experiening a lot of anxiety and insecurity at this time. Data on income doesn't measure everything you know.

All of this on welfare payments avoids the principal issues:
banksters and others caused this crisis - not those on welfare
welfare payments here are not overly-generous by international standards (in spite of what the Sunday Tabloids say)
the key to economic recovery is through job creation, innovation, upskilling, targetted stimulus measures and restructuring of spending and taxes (with progressively significant increases in the latter)

Michael Taft said...

Richard, just to note - social insurance benefits / social weflare allowances were cut. In the October budget, the number of PRSI contributions required to obtain Jobseekers' Benefit was extended from one year to two; while in the April Budget, Jobseekers' Allowance rate was cut for those under the age of 20. Admittedly, pretty small stuff but no doubt a precursor of things to come.

Also, as per my post (Economic War and Profiterring) - private sector wages in the industrial and financial did not fall in the 1st quarter of this year. They rose overall - though most workers's hourly earnings were cut to subsidise the substantial increase in management/professional wages.