Sunday, 1 November 2009

Ignorance is not strength

Michael Taft: I would say this debate is turning for the worse, but that would be incorrect. You need to have two sides in a debate. All we get is an orthodox drumbeat, calling forth the animal spirits of just one side. Still, let’s at least celebrate some of the more surreal contributions in this one-sided debate.

Take Cliff Taylor, for instance, writing in the Sunday Business Post. He warns that too much agitation in the streets will undermine international investor confidence. No surprise there – spooked international markets is a basic ingredient in the deflationary stew. What is really eyebrow raising, though, is this little treat:

‘We got some international kudos for taking steps to get our public finances back in order.’


I didn’t realise that was what Fianna Fail has been doing. I didn’t realise that’s what it’s called. Let’s run through the chronology

• In October last year Fianna Fail introduced an income levy and some cuts to social welfare in order to hold the fiscal deficit at -6.5 percent

• A few week later they said they would hold the fiscal deficit at -9.5% by cutting public sector pay by €1.4 billion and some education cutbacks

• In another few weeks, fearful that the fiscal deficit would blow out over -12 percent, Fianna Fail introduced even more levies, cut spending even more to maintain a new fiscal target: -10.7 percent

26 weeks – three different fiscal targets, one lower than the other.

And now? Well, that last target has bitten the same dust. The ESRI projects the fiscal deficit to be 12.9 percent at year’s end. They project next year’s deficit to be 12.8 percent – and that’s counting the €4 billion contraction planned for the upcoming budget.

Only in Ireland, only when discussing public finances, would missing three targets in one year, would seeing your original target balloon over double its size, be called ‘getting our public finances back in order’. There are other phrases that more readily come to mind – gross incompetence, failure, public finances disorder.

There are two processes at work here in this one-sided debate presented in the media. No one should be allowed to question the desirability of pursuing fiscal measures that actively cut growth during a time of contraction (or if they do, they are to be accused of not being serious, of being a vested interest, of not facing reality).

No one should be allowed to ask why, when investment is collapsing, the government should cut investment further. Or why, when consumer markets are being hit, the government should cut disposable incomes through either tax increases or public spending cuts. Or why, when unemployment is rising, the state should do nothing to create new jobs – even if for a short period.

Essentially, no one should be allowed to question the desirability or the workability of deflationary measures in deflationary times.

But there’s another, more unnerving process at work: we are being asked to forget. There is an insistence that we forget about all these targets that were set and missed. If we remembered, we might start asking those inconvenient questions – about growth, investment, consumer spending and jobs. If we forget, then commentators can call what is happening ‘putting our public finances back in order’. And we all nod and go back to sleep.

So, even if we disagree about how to proceed, at least let’s remember. War is not peace, freedom is not slavery, ignorance is not strength,

And a fiscal shambles is not fiscal order.


Tomaltach said...

Whatever the merits of attempting to correct the fiscal crisis now, it is very very hard to accept your line that 'no-one is allowed to' say this or that. Every time you turn on the radio or open the paper there is a union leader telling us that there is another way, that they have solutions for the problem that allows senior public servants to keep their tiger era salaries: postpone the correction, borrow more, tax the pot of gold. Every solution is proposed except the only one that can help us long term: admit the celtic tiger is over, and start trying to live within our means.

I go along with criticism of the current government: their chronic economic mismanagement during the tiger has left us where we are. But I think you are wrong to argue that their inability to stop the deficit ballooning was because they decided on cuts and taxes. True these latter have deflationary effect, but the fact is that over the months you describe the Irish economy was suffering an economic shock and things were pretty much in freefall. Had no cuts been made, the deficit would still have been running far ahead of projections.

Michael Taft said...

Tomaltach - first off, with the majority of public sector workers earning below the average industrial wage; how is that tiger-era salaries. If you cut the wages of low and average income workers - whether in the public or private sector, whether through tax increases or spending cuts - you will hit domestic demand, hit enterprises, hit turnover and profit, hit employment. I'm sure you don't want that to happen.

'Start trying to live without our means' - what does that mean programmatically?

The deflationary measures pursued by the Government have embedded high levels of deficits and debts going forward by cutting economic growth even more than what would have happened otherwise, by cutting economic activity. In this vein, you might be interested in my latest blog post (can't seem to paste the link here).

Michael Burke said...

Michael makes the entirely valid point that the slash and burn approach to public spending is not only disastrous socially and economically, but it isnt even working on its own terms, that of getting the budget deficit down.

That's precisely because the cuts and claw-backs are deflationary (Tomaltach, thanks for recognising that, many others in this debate refuse to do so). Deflation produces lower activity and lower tax receipts as a result.

The Irish economy was in a trauma, so our men in the white coats decided to hit it with a hammer.

Perhaps we should all learn to speak a little German? "We must pursue a growth path otherwise we cannot generate the needed (budget) savings", said the new Finance Minister Schauble when unveiling a new huge stimulus package. Oh, and asked about Maastricht related deadlines, he simply shrugged it off and said it wouldn't happen under this government, ie definitely not before 2013.

Surely, he must be in the pay of David Begg, as only a "vested interest" could say such a thing. Or maybe it's the consensus in Ireland that's wrong.

Tomaltach said...

I have never advocated a flat cut - but at the top third of the public service the salaries are completely off the sustainability scale. So fine. Let's protect the lower earners in the PS - I'm with you there. But let's look at the top - the DGs earning more than the British PM, the heads of quangos, the county managers, and indeed the higher grades in many of the public services. Let's assume I agree it is bad timing to reduce demand now by making these salaries reflect our economic reality - can you agree then, that after growth stabilises that these top public sector salaries should be cut?

Michael Taft said...

Tomaltach - I take your point (and apologies if I was a bit tetchy in my last response). However, if I could point out: the top third of public service salaries include those earning €50,000 a year. This is hardly off the sustainability scale. There is a view that there are masses in the public sector on 'high salaries'. Less than 3% earn six figures, 85% earn less than €60,000. My own view is, sure, go ahead and cut top salaries; but don't think it will make any difference to the fiscal situation. THere's too few of them.

Going forward, yes there has to be a fundamental rethink on wages and incomes in society. We have one of the most unequal income structures in the EU-15 and it would be very strange if the public sector wasn't part of that inequality. I would like to see (a) a flat-rate wage agreement, to boost low/average incomes, (b) a greatly expanded social wage (free GP/prescription medicine, earnings-related pensions, etc.), (c) tax increases on high incomes / wealth for redistribution purposes, (d) enhanced labour rights (right to collective bargaining, information, etc.) to strengthen workers' ability to increase living standards, (e) active labour market policies to ensure employment, training, education for those disadantaged in skill-sets. We can start on these now - we don't have to wait for the recession to be over. It will help generate growth and equality - indispensible to a prosperous soceity.

Michael - thanks for that referene to the German Finance Minister. He might want to delay any visit here. For if he said such things he would be 'not a serious participant in the debate' (Jim O'Leary), 'an ostritch' (Garret Fitzgerald), 'living in fantasy land' (Colm McCarthy), and generally an economic wrecker (IBEC, ISME, Fianna Fail, Mary Harney). Oh, those German Christian Democrats - they'll be the death of sound fiscal policies.

Tomaltach said...

Agreed regarding the income distribution and the bulk of your proposals.

I agree too that cutting public sector pay - especially if limited to the top only - would not go anywhere near fixing our fiscal problem.

But it is important for the same reason that it is important to remove tax shelters and make tax progressive: it is that those in the most privileged position have to be seen to be taking on their share of the burden or the rest of society will retreat into defensive mode and the whole re-adjustment of our fiscal situation is going to be horrendously fractuous and prolonged.

One area where we differ is that I would go much further down the PS scale in the adjustments than you. I think for example that our teacher salaries are too high.

We must agree on one thing: our standard of living (all workers, public and private) during the celtic tiger rose above a point which could be, and will not be, sustained. This makes a very significant reduction in standard of living unavoidable. The challenge is not to pretend we can remain close to where we were, but to face the problem and try to make what is going to be a large and sustained transition as equitable as possible.

Martin O'Dea said...

Soory for taking you off message, by the way I agree with you regarding public sector paycuts and I agree with Fintan O'Toole's comments on the box last night, begging people to stop this conversation for a while and let’s try to look at other elements of society/economy/or.any.e just not public v private, again.
I thought I would have a stab at getting a handle on what the government here spends our money on as a nice starting point, and also how I feel about the whole set-up at this juncture.
Forgive me, for asking you to do my work but I can't understand exactly what we do spend money on.
We seem to have a comparatively low spend on everything, I think we are bottom and third bottom in E.U. for health and education, so I figure we must be high for social welfare - yet it looks like in Luxembourg you get 2.5 times what we get here on unemployment and only U.K. is lower. I know that Luxembourg is richer than us in almost every measure, and that a number of other countries like The Netherlands, Denmark and so on are also of the wealthy variety. But still, so are we! and we seem to be low on all spends that I can see percentage wise. Any idea on where we spend our money?
So, as I understand it our situation looks as if we have spend about 62 billions and this was alright when our economy was thriving, because we were making enough to cover it - a big portion of this came from stamp duty, which clearly is gone as a long term source.
I would have thought with a deficit you can either spend less or make more.

Perhaps in the past there were arguements to spend less, and undoubtedly reform of public expenditure should always be up for constructive review, but in an environment where we no longer operate, in the main, on limited natural resources and where the potential for economic growth via technological endeavour is vast we really should be looking at ways to get the growth side going here.

One might argue that in the short term we need a correction to reduce borrowing (and that you can probably cut spending quicker that you can increase income) but I must say that I accept your many arguements outlining our real borrowing position and also our reserve funds which one really wonders are being reserved for how rainy a day (and also, Michael, your presentation of how this strategy is clearly and evidently not working here).
We know that there are cures for a range diseases in the pipeline and that investment in Bio-tech and genetics are no-brainers, we know that there is a vast robotic industry in the pipeline, we know that with Nano-Technology fundamental shifts in substances and vast impacts on most forms of production and, in fact, everything else are in the pipeline. In short, we know that investment will reap dividend.

So the route we go down is to cut spending, ignore borrowing and investment, and have private and public fight instead of collaborate in new and imaginative ways? The global economic recovery which will facilitate these developing industries is already under way, and yet we stay on track.

The difficulty in reversing the spending cuts when our earnings increase is apparent and the social discord that will arise from this measure is glaringly obvious.

Does one have to ban reducing spending? No. Should reductions be very carefully sought in a manner where they only eliminate inefficiencies and do not harm future projects and general economic activity? Yes.
Should we borrow and spend in industries where the dividend is clear and the consumer is always ready such as health? Yes.
Is the current government compromised from two decades of marriage with status quo agents such as developers, banks, civil servants who feel cornered by the need to defend themselves? Yes.
Does there need to be an election? Yes.
Are we powerless? Well, if one also watched the intellectual giant and gentleman that is Noam Chomsky last night on the same box, one would have clearly been informed that if we don't get what we want; i.e. an election - there is always the streets!!

Proposition Joe said...


On the question of what is or isn't deflationary, is there any money more dead than that paid over to foreign bond-holders in the form of debt servicing?

Moore McDowell made a back-of-the-envelope calculation on Frontline last night that streching out the adjustment to 2017 as recommended by ICTU would require 85 billion in new borrowings. At 4.5%, we're talking nearly 4 billion a year in interest on that extra debt alone! Never mind the existing debts and the NAMA bonds.

This would be equivalent to deflating the economy by the same amount as envisaged in the upcoming budget, every single year for the foreseeable future.

James Conran said...

Michael Taft said that there were "[l]ess than 3% earn[ing] six figures" in the public sector.

Cue back-of-an-envelope rough calculations based on from-memory estimated figures:

There are c.350,000 public servants. So let's say there's 10,000 on €100k or more. Let's say the average income in the €100k club is €120k. Bring in a €80,000 cap on PS incomes, as advocated by Fintan O'Toole. Gross saving = €400m. Net saving (after lost tax) is a lot less, probably less than half given current top marginal rates. But it's not negligible and would generate some confidence that public sector fat cats aren't exploiting the rest of society.

The savings can be used to reduce borrowing or as stimulus, to taste.

Any takers?

Michael Taft said...

Proposition Joe - all the more reason why we should be borrowing to invest in the economy, rather than subsidising the casualties of deflation - the unemployed, the liquidated enterprise, the lost skill-base, falling tax revenues, etc. Can't comment on the envelope job but I'll be working up my own numbers. However, I would say that merely extending the target date without employing counter-cyclical policies and smart tax-based consolidation policies, would be a lost opportunity.

James - what would you think would be the effect on the public sector's ability to attract specialist skill sets in the labour market if there was an €80,000 pay cap? Wouldn't taxation be a better course - especially as it would capture all the 'fat cats' - public sector, private sector, PAYE, self-employed, salaried income and capital income? Wouldn't that be fairer and generate more revenue?

Mack said...

James -

It's highly unlikely that the average (mean) of workers over €100k is €120k. There is a defined lower bound and no (theoretical) upper bound. If the median was around €120, the mean would probably be €150 or higher.

Also as you are capping at €80k, there would presumably be more workers again between €80-100k, so bigger savings there.

Pensions are linked to the salaries of current serving employees - so presumably there would be large savings there to.

In taking such an extreme measure, it would be fair to put in place supports for workers with mortgages etc (who might then struggle to pay them)..

Mack said...

@Michael -

what would you think would be the effect on the public sector's ability to attract specialist skill sets in the labour market if there was an €80,000 pay cap?

Surely such a measure would have to be temporary. I doubt many in the public sector fancy jumping ship to the private sector right now, and we're probably not going to be hiring either.

Wouldn't that be fairer

You are right - it would be completely and utterly unfair. Someone has to take the hit somewhere - rightly or wrongly some groups are taboo. If such a measure was introduced, I think we'd have to reward those affected in other ways and/or over the long term. Certainly, if accepted it would be a heroic and patriotic gesture.

Taxation alone would still leave us with 55% or perhaps more of GNP being spent by the government every year.

James Conran said...

Mack - I don't disagree with your amendments to my figures, though I did want to be cautious. You're right that I forgot about the people on €80-100,000. Not to mention that smaller cuts could be made on people between €50k and €80k and you're still not hitting anyone on low pay.

The impact of this on people with large debts is a huge issue, but one which is rightly addressed by a specific, across-the-board policy to help such people, since clearly not everyone falls into this category - perhaps only people who bought since 2005.

Michael - I think the kind of specialists required in the public service are in many cases likely to be less motivated by monetary considerations than those in the private sector. Some may also be somewhat restricted in the number of employers needing their skills, eg if their work is necessarily in the government sector.

Also, as Mack says, if it were a temporary measure there may be few alternatives in the private sector at the moment.

Having said all that I was going to say in my initial post that there would have to be exceptions (on the recommendation of the Min for Finance perhaps) for specific posts, especially where international expertise was being sought (eg in the NTMA, the chief exec of Anglo Irish etc.). I left it out because I didn't think there would be enough exceptions to make a huge difference.

James Conran said...

I also meant to say that besides questions of non-pecuniary motivation and the specific labour market conditions faced by highly-paid public servants, there obvious and very important benefits in the public sector, mainly in the form of pensions and job security.

So rather than dealing with all high-earners uniformly through the tax system, I think special measures specific to the PS are called for.