Sunday, 29 November 2009

Principle 5 - Up the Game - Compete on new knowledge and Services

Slí Eile: The current economic crisis is forcing us to move away from strategies that rely on a combination of dependence on foreign direct investment with patterns of indigenous development that still rely too much on low-skill and low-wage competitive advantage. We need to up the game. What worked in the past may not work in the future.

The Government report ‘Building Ireland’s Smart Economy’ envisaged a move towards 70% of Irish exports in traded international services by 2025. To realise this goal would call for a huge change in the way we organise production and the distribution of skills and knowledge. An active, engaged State working hand-in-hand with private and voluntary interests needs to invest in new areas of value-production. These could include new areas of long-term huge potential such as:
- International education services
- International health services
- Consultancy services in sustainable planning and habitation
- Green technologies and services for export
How will these new growth areas be planned for now? What is the role of education and training?

Paper by Niamh Hardiman - Impact of the Crisis on the Irish Political System

Slí Eile: The paper by Niamh Hardiman last Thursday has been widely acclaimed as a signficant contribution to the debate on political economy. You can download it here.

Ireland and Dubai

Paul Sweeney: The Irish economy could collapse? Is this possible? The editorial in Saturday’s Financial Times (28th November 2009), on Dubai, implied that it was possible.

It said: "Markets will not soon return to the panic of September 2008: the financial sector now has state backstops. But because of these guarantees, fearful investors have started to worry about how safe sovereign debt is. Investors are growing nervous about Greece and Ireland in particular."

Last week, interest rates on Greek and Irish government bonds rose, whereas they fell for many other states.

The fall of Dubai is another blow to the neo-liberal economic paradigm. Dubai was hailed as the golden boy of free market capitalism ... which it was not. The myth of free markets, low taxes and no regulation was underwritten at every turn by the Dubai state itself.

Only a few weeks ago, Dubai was selling itself as a threat to the 'over-regulated and over-taxed' City of London. Not alone had Dubai weathered the global financial hurricane, but it was the place for mobile firms to go to avoid regulation and taxes, according to the Dubai International Financial Centre, in a gig two weeks ago in London.

The link between Ireland and Dubai is that Dubai's collapse has focused attention on Ireland (and Greece) as potential defaulters on sovereign debt.

This is not likely. Yes, the government’s guarantees to the banks were risky, NAMA is risky; but we are in the EU; in the Euro; sit on the ECB board; we already have €31bn in state borrowing ready for next year, and don’t really need to go to the markets for more borrowings. Most of the economy is still sound (aside from banking and construction, and both are being sorted - sort of). But markets are fickle. They are too often run by lemmings who all follow each other (over the cliff, occasionally), and the current scare on Ireland is misplaced.

Dubai is an autocratic desert state which only gets 2% of its revenue from oil and gas. The rest is construction, retailing and wholesaling – hardly leading economic sectors.

Dubai was also hoping to attract investment in its banks. It was planning to be a safe haven for rich people running from volatile areas. By implication, it was after illicit money from drugs, tax evasion and crime. Now that Switzerland is finally being hammered on its bank secrecy laws by the OECD, the US and the EU, new havens like Dubai were not welcomed by those of us who pay our taxes and want to continue the move from casino capitalism.

It is run by an autocrat, Sheik Mohammed al Maktoum, who has a few horses here. It is run with little transparency.

The indoor desert ski resorts, palm-shaped reclaimed islands - not to mention the 'World of Islands' - should, like Sean Dunne’s Ballsbridge ego-mania, have warned off any potential investors with sense. It had tried to diversify into tourism, property, tax free zones, trade, transport and banking, but was wildly over-optimistic.

Dubai has debts of $80bn - a huge amount for a small country. It is now (after a delay) being helped out by Abu Dubai, within the United Arab Emirates, because it is thought the autocratic ruler Maktoum did not want to admit the model of free-wheeling desert capitalism had failed.

Dubai’s collapse wiped a significant 2.3 per cent of the FT100 and 3.8 per cent off the Nikkei, and yields on bonds also fell significantly.

Ireland has a sea of troubles but, if we can pull together and deal with them equitably, we won't fall as far as Dubai. The extension of the Recovery Period beyond 2013, advocated by the Congress of Trade Unions, opposed by all classical economists (we [we?] must have lots of harsh pain, quickly, for redemption!) and quietly conceded by Government, is a very hopeful sign. A less deflationary Budget will also help us recover faster.

Thursday, 26 November 2009

4th Principle: Defend public services in health, education, welfare and housing

Slí Eile: In recent previous blogs I have suggested a number of high-level Principles to inform a progressive alternative to the current TINA.

Here is a fourth principle for debate, disagreement and action.

Next to a right to a basic income, every citizen of this Republic has a right to continuing education, health services and housing – regardless of their individual incomes. Such a scandalous notion is founded on human rights and the capabilities of societies endowed as we are with rich resources of human skill, community, institutions and physical capital. The notion of a right to a basic income or consumption of public service goods flies in the face of conventional wisdom which dictates (to borrow a McCarthy phrase) that ‘when the harvest fails the elders must take a cut in their allowance’. In other words, the conventional wisdom says that fairness or human rights is not the issue – it is down to ‘what we can afford’ and presently we cannot afford 2008 spending levels at 2003 levels of revenue flow. In this way of looking at things ‘what we can afford’ is a relatively fixed quantum determined – ultimately - by conditions in world export markets, the EXISTING DISTRIBUTION OF INCOME AND WEALTH (which is always a datum and not something to question) along with ‘market sentiment’ (be afraid you plebs !) and the gentlemen from the Ministry otherwise known as OECD, IMF and EU who have the poor to advise and punish – especially the latter two.

The pre-modern notion before the modern welfare state was founded stressed family, charitable societies and community should pick up most of all of the cost when harvests, health and employment fail. Well in theory, perhaps, but not in practice because not since in the real world families and communities don’t have the same access to the harvest.

In many ways, Ireland is bankrupt politically, morally and institutionally but it is not bankrupt in terms of its skills and communities. Even if national income (which is only one limited measure of human progress and well-being) were to decline by much more than is expected this year and next (plus 12% from peak Output in 2007), we can still continue to provide at least the current level of public service to citizens – if we chose to raise taxes through closing off specific reliefs, widening the tax base and increasing effective rates on capital gains, high salaries income and windfall profits in specific sectors. Cuts in the quality and quantity of public services in key areas would represent a devastating and unwarranted attack on social infrastructure – which as matters stood before the recession – was and is hugely inadequate. We risk undermining the very conditions for future growth in prosperity by failing to invest in a healthy and well-educated society for your children.

Public sector workers should be protesting not just over pay, jobs and pensions but together with private sector workers should all join together to protest over education, health and social welfare because at the end of the day we will know sickness eventually, vulnerability and the learning needs of a new generation. Consumers and producers need each others in public and private sectors to re-start the economy. And we are more than just consumers and producers. We are citizens of Republic meant to be founded on principles of solidarity and defence of the weakest.

Yes, we can create a more dignified society and one that is more just, caring and equitable founded on principles of democracy and genuine respect for human rights. The unrealistic ones are those who constrain choices to the Iron Law of the Market and imagine no alternatives. Lets shake off the pessimism, divisiveness and apathy engendered by the illusions of such an Iron Law.

Guest post by JJR: Shifting the tax burden from business to employees will not create jobs

JJR: Fine Gael frontbenchers may not take their lead from the Obama administration, but when White House Chief of Staff, Rahm Emanuel, said last year that one should ‘never waste a good crisis’, they seem to have taken this to heart.

In advance of the 2010 budget, the party has proposed a permanent €900m tax cut for business, financed by matching tax hikes for workers. This is not a tax cut ‘targeted at the most vulnerable jobs’ as they suggest; it is a tax cut that will boost corporate profits with only minimal and incidental job creation. The net effect would be a significant and regressive re-distribution of wealth.

The proposal includes a 20% cut to the standard rate of employers’ PRSI, costing €830m, and a 50% cut in the lower rate, costing €57m. This is to be financed by abolishing the PRSI ceiling for workers earning more than €75k, supposedly bringing in €470m, and through a carbon tax, bringing in €480m, disproportionately from the lower paid. Incidentally, the Department of Finance insist that abolishing the PRSI ceiling would raise €120m, some €350m less than asserted by Fine Gael.

According to Fine Gael, this tax cut will benefit 1.7 million workers. In actual fact, this near €1bn tax cut is aimed solely at improving the bottom line for business. Even accepting that FG’s costings are accurate, half of their tax cut is to be paid for by those earning over €75k as PRSI would be applied to their income over this level. The other half would be financed by a regressive carbon tax with no compensating measures for low income workers.

In fact, the biggest problem with this bumper business tax cut is that it is not targeted. It is a blanket cut that would reduce labour costs for employers for all existing jobs. And now for the ‘science bit’: Economists call this a ‘deadweight loss’; Fine Gael propose costly incentives for businesses to hire people, regardless of whether they were going to hire them anyway. The focus of Fine Gael’s proposal is on ‘infra-marginal’ rather than ‘marginal’ hiring decisions and, in economic terms, that is its core weakness. Acknowledging this fact, party spokespersons nonchalantly brush off this vast waste of money by saying ‘doing nothing would cost more’.

The party insists that ‘these changes are particularly targeted at lower-paid and entry-level jobs’ and the young unemployed. This is clearly not the case. Cynically, they are proffering the limited economic rationale for halving the lower rate of employers’ PRSI, at a cost of €57m, as justification for a blanket cut to the standard rate at 15 times the cost.

If Fine Gael were serious about protecting and creating jobs, they would be proposing tax breaks focused on jobs created or saved; they would focus on the ‘margin’. Reducing or suspending employers’ PRSI for people taken off, or kept off, the dole would be truly targeted and far more cost-effective. But this isn’t about job creation; This proposal is about securing tax breaks for business supported by spurious claims that this would support jobs.

Fine Gael’s proposal implies ESRI endorsement. In terms of tackling the jobs crisis, the ESRI concludes, in the Recovery Scenarios document cited by the party, that ‘priority needs to be given to labour market initiatives that will effectively tackle this skills deficit among many of the unemployed. In preparing for a recovery, the economy would also benefit from increased policy attention to measures to enhance productivity and innovation in the tradable sector of the economy.’ At no point does the ESRI propose a blanket cut in employers’ PRSI as an appropriate policy response to the crisis we face.

PRSI, whether it comes from workers or employers, is not really a tax at all. It is the social contribution made by workers so that they will receive state support if they fall on hard times; it is paid by employers to provide a safety net for staff in times of economic hardship.

Ireland has among the lowest level of social contributions in any advanced economy. Fine Gael cite other countries where reducing social security contributions have formed part of fiscal stimulus packages, but this overlooks the very low base at which Ireland is already operating. Our welfare system is barely keeping its head above water.

In Ireland, social contributions are paid into the Social Insurance Fund, out of which are paid employment-linked welfare payments. When the economy was booming, and at full employment, this Fund was billions of euro in surplus. With unemployment heading for half a million, it is set to move into deficit in 2010. Slashing PRSI contributions would undermine the viability of Ireland’s welfare system altogether and render the Social Insurance Fund defunct. Clearly, Fine Gael’s answer to this conundrum is to slash welfare rates for people who have already taken a hit by losing their jobs.

Make no mistake, this big business tax cut is a Trojan horse for slashing welfare and public services. Fine Gael want to cut the 2010 budget deficit by €4bn, €3.8bn of which would come from cuts to current spending. This would take slash-and-burn economics to a level that even the Fianna Fáil government considers to be beyond the pale.

Under this proposal, ordinary working people would carry the entire burden while corporate Ireland gets a near billion euro handout. This is not compassionate conservatism, or even so-called ‘common sense’ conservatism – this is cynical conservatism at its worst.
JJR is, obviously, anonymous.

Wednesday, 25 November 2009

New report shows over €8 out of every €10 of pensions tax relief goes to top earners

Gerry Hughes: In a series of reports on our pension system, TASC and the TCD Pension Policy Research Group have argued that the tax relief on pension contributions should be given at the standard rate of tax, in the same way as are the tax reliefs on health insurance and mortgage interest payments.

A report from the ESRI provides new evidence on key pension policy issues which shows that over 80 per cent of the tax relief accrues to taxpayers who are in the top 20 per cent of the income distribution. The report estimates that if the tax relief were given at the standard rate of tax it would provide revenue of over €1 billion per year which could be used to sustain State pension levels in the future as the population ages.

It could also be used to sustain the income of current pensioners. A report from Older & Bolder on older people’s experience of the recession notes that older people have been adversely affected by a range of expenditure cuts including the suspension of the Christmas bonus and reductions in frontline health and social care services. In addition the fear factor for older people has been increased by suggestions that social welfare should be cut in the forthcoming budget and the likelihood that tax revenue which could have been used to improve public pensions, long-term care and primary health care will be used instead to pay interest on the national debt.

Tuesday, 24 November 2009

Getting behind the Madoff Curve?

James Wickham: One convenient justification for high pay is that the more people are paid, the harder they work and the greater their output will be. Ok but only up to a point...

The banking crisis is sometimes said to have been caused by bankers having the wrong incentive structure: they were rewarded for short term gains and encouraged to take excessive risks. Arguably something more fundamental was involved. After a certain point, the gain from higher pay may actually be negative. We could call this relationship the Madoff curve after a well-known American entrepreneur. Consider for example doctors: after a certain point paying doctors (and especially surgeons) more money probably attracts people into the profession who simply want to make more money rather than having any commitment to healing people.

Mrs Thatcher claimed that 'Greed is good'. By contrast, Max Weber, the German sociologist, wrote that it should be taught 'in the kindergarten of cultural history' that modern rational capitalism has nothing to do with greed. Maybe part of our problems is that in the last twenty years capitalism has increasingly become equated with greed, in other words, with immediate short term gains? Clearly we have become accustomed to thinking that the only possible reward is monetary reward, denigrating the rewards of public esteem. Hence the absurdity of government ministers and very senior civil servants demanding parity with the private sector. Traditionally in democracies such people have been rewarded with a modest salary and public respect for public service. Pay them more, and you get less (or people who behave like bankers, which probably is the same thing).

The hall of mirrors

Michael Taft: A number of commentators have referred to the fact that Irish public expenditure is ‘rising faster’ than almost any other European country; that it now gobbles up over 50 percent of our GNP. In stating this, the assumption is that to rectify the deficit we should cut public expenditure. However, when we subject this to closer inspection we find ourselves in a hall of distorting mirrors, seeing reflections of a reality that is so distorted we are in danger of losing perspective.

Yes, public expenditure, as a proportion of GNP, is rising to over 50 percent though to what extent depends on how you calculate the numbers. The following excludes payments to the Pension Reserve Fund (including the payment for this year slightly exaggerates the level of spending as it includes the 2010 payment as well). How much of the GNP does total government spending make up?

2007: 37.8 percent
2009: 51.2 percent

That is a big jump – an increase of well over a third. But what are the numbers behind the numbers – what is the real image that is potentially being distorted by this spend/GNP ratio? There are two sides to this ratio.

Side One: between 2007 and 2009, total government spending increased by €8.8 billion, or 14 percent. What are accounted for this increase? 66 percent was due to the rise in the Social Affairs budget, while 21 percent was due to the extra cost of debt service. All the rest of the Government’s budget (including public sector pay) made up only 11 percent. In other words, the increase in public expenditure is mainly recession-driven.

Side Two: and what a recession. Between 2007 and 2009, GNP has contracted by a massive €25 billion, or -13.6 percent. Compare that to a Eurozone average contraction of -3.5 percent. With the economy falling that fast and that far, public expenditure, even if it remained static, would still be rising at a relentless pace.

So let’s break down all the contributing factors to this rising GNP/debt ratio.

Nearly half the rise in the public expenditure/GNP ratio is down to the contraction in the GNP itself. Social welfare and debt servicing – both recession driven – make up another 46 percent. Public expenditure increases in all other areas make up only 6 percent.

Now here’s the kicker – the deflationary impact of public expenditure cuts mean that the actual cut actually contributes little to reduced the spending/GNP ratio. While spending may be reduced somewhat, GNP is also reduced (e.g. cutting public employment by 5 percent will save €488 million but will come at a cost of a decline in the GNP of €1.1 billion).

What we have to do is step out of this distorting hall of mirrors. The proposition that you can cut your way out of recession means we will be trapped staring at mirrors only to see shapes so distorted that they bear no resemblance to the real world.

Privatisation costs

"Privatising healthcare is a costly business. Increasing privatisation in Ireland has coincided with an increase in health spending of, on average, 8.8 per cent per annum between 2000 and 2006 – the second-highest rate of increase in theiv thirty OECD countries, after Korea".

You can read the rest of Gerry Burke's editorial in the Irish Medical Times here.

Monday, 23 November 2009

A Social Dis-Grace

Slí Eile: "Why, then, is there such an emphasis on cutting public expenditure and on the McCarthy Report (when services in health, education, prisons and so on are often so inadequate), and so little emphasis on the Report of the Commission on Taxation?’ asks Jesuit Gerry O’Hanlon at a recent Citizenship service in Dublin. He goes on to say:

'Given the behavior of our banks, given NAMA, why are we talking about reducing social welfare rates, in effect suggesting that ‘Ireland’s poorest people are being forced to pay for the recklessness and corrupt activity of a number of extremely wealthy people and institutions’ (Social Justice Ireland, Budget 2010)

The entire talk can be downloaded here.

It is a case of forgive us our debts but not as we forgive those who owe us – prison for non-repayment of loans and fines and bail outs for those at the top of the pile.

Quite correctly the Jesuit did not mince his words in drawing on liberation theology:

Truly all this is a social dis-grace

He does also endorse public sector reform and draws attention to the ‘fact’ that ‘we’ have been paying ourselves ‘too much in both public and private sectors’ (well depends on who the ‘we’ is … but he is right if you look at the big earners in each sector). As Garret Fitzgerald keeps saying we are an under-taxed country as Government focuses exclusively on cutting spending (and to a large extent Fine Gael as it plumps for a ratio of 3:1 on spending cuts: tax hikes within the annual €4bn fiscal adjustment that the three major political parties are now committed to (part of the Dublin Consensus now melded into a Brussels-Paris-Washington Consensus for the Irish = cut your way out and do it by 2014).

Finally, Noel Coghlan, has some thoughtful things to say in a recent article in Studies(‘What now for Ireland?’). It deserves to be read in its entirety here.

He observes that ‘A low tax economy had relentlessly dismantled the social safety nets upon which so many now depend.’

But we have seen nothing yet. All the fuss over how much blood will be drained out of Welfare, Health and Education (the big Social Three) this year is only one year in a now-to-be five year purgatory to lead us back to fiscal balance and competitiveness. The poor don’t count. In an eloquent display of positivist economics, Jim O’Leary, in a piece directly aimed at the ICTU, reminded us last Friday ‘Notions of Fairness Should not Dictate Fiscal Policy’ Don’t worry. They don’t.

Authoritarian Capitalism

Nat O'Connor: A Wall Street Journal article raises the question of whether authoritarian capitalism is a robust alternative to liberal democratic capitalism.

In the first ten years after the Berlin Wall fell, there was an initial rush of democratization, but since 1999 to 2009 there has not been an increase in the proportion of liberal democracies in the world (which remains at 46 percent). And countries such as China and Russia, as well as highly developed countries like Singapore, are examples of resilient authoritiarian regimes despite the fact that they adopted capitalist economic systems.

I think this is an important 'big picture' question. For example, it challenges the long-held assumption that global free trade with non-democratic regimes is OK. It was always assumed that internal prosperity and a growing middle class would lead to more freedoms and ultimately democracy in those countries. (Note, I wouldn't throw out this argument just yet, but it is open to challenge as the evidence develops).

One particularly interesting comment came from Prof. Francis Fukuyama. Talking about China's unexpected success at developing a capitalist economy while keeping one-party rule, Prof. Fukuyama said: "They've mastered economic development under authoritarian circumstances, and you can argue they've done it faster because they're authoritarian,"

If it is the case (and it's an 'if') that authoritarian regimes can be more effecient at capitalism than liberal democracies, than we perhaps need to make it very clear that we are not willing to sacrifice democratic freedoms for more efficiency. This may sound obvious, but it is not an argument that has been much discussed or fully articulated, because of the assumption that liberal democracies have the most efficient capitalist economies. That is, we've never had a situation where the indicators of capitalist success were in tension with the indicators of democratic strength.

Of course, the relative 'success' of capitalist economies around the world depends on how they are measured. And much of the success enjoyed by China and Russia may rely on GDP growth measures (which include for example polluting industries, resource depletion, arms manufacturing and poor labour conditions) rather than more nuanced socio-economic measurements. This in turn reinforces the arguments for finding and developing other ways of measuring economic performance and social progress, such as the recent work of Stiglitz, Sen and Foutoussi.

We may ultimately need alternatives to GDP, not just to direct our economies in a more progressive direction, but also to explain why we regulate capitalism to protect democracy.

IMF chief warns on exit strategy

Michael Burke: Report in the Financial Times, Monday November 23:

"'Economic stimulus programmes, including those in the UK, should not be withdrawn too soon, Dominique Strauss-Kahn, managing director of the International Monetary Fund, warned on Monday.

He stepped into the intense debate about how quickly to tackle the UK’s £175bn budget deficit by telling the CBI employers group that “this kind of support will have to last some time more until we are sure the recovery is firmly established."

“It is too early for a general exit. We recommend erring on the side of caution, as exiting too early is costlier than exiting too late,” he said.'

He had nothing to say, though, about an economy which had not engaged in any reflation at all, but had only enacted a sharp fiscal contraction.

Saturday, 21 November 2009

The debate elsewhere

Michael Taft: With the Government and opposition parties all supporting another round of fiscal contraction (with the exception of Sinn Fein), it's worth noting the success of stimlulus programmes in other counries and the continuing debate on whether they intensify those efforts: see this piece in the New York Times.

Thursday, 19 November 2009

Deal fairly and immediately with the fiscal crises

Slí Eile: The fiscal deficit mirrors at least two other deficits -a deficit in non-Government investment and spending and a deficit in social infrastructure to meet the fundamental human needs and rights of all members of society. The key to fixing the fiscal deficit is to address all of these deficits at the same time. In fact, I can't see another way.

Fixing the fiscal deficit by means of a massive and prolonged deflation (=€12bn over three years by current plans) will takes its toll humanly and economically over time - even if it is done purportedly with a 'human face' (more anon in a later blog). Leaving the public sector deficit stand at its current level is not an option either for all sorts or good reasons including the cost of repaying debt for future generations. The public sector deficit needs to be tackled now and not later but it needs to be tackled in a way that is credible, fair and workable from the point of view of maintaining social cohesion and democratic norms of debate and cooperation. In essence it needs to be tackled by a three prong approach:
A Using Public enterprise holding companies to borrow 'off balance sheet' to invest in new technologies, broadband and infrastructure upgrade (transport, early childhood care, primary health care...) - this is the capital portion of the public sector deficit;
B Using the current account to undertake a forensic, targeted stimulus to raise public and private consumption in sectors such as health, education, tourism (where the multipliers are higher than elsewhere) - the contra-cyclical response to a cyclical deficit;
C Close the structural deficit by raising taxes through a combination of measures on asset-rich and income rich groups coupled with broadening of the tax net.
Very approximately (estimates will vary) A, B and C account for about one third of the current annual borrowing level. There is scope to increase these with a view to generating recover in tax revenues. What is striking about the difference in estimates of tax between the Pre-Budget Outlook document for 2010 and the April Supplementary Budget macro-economic outlook is the collapse in revenues and GDP.

There is a job of work to be done in convincing the EU institutions. However, the schedule is already slipping and there is mounting evidence that we are deflating ourselves into a fiscal deficit trap by neglecting the non-government investment and consumption deficit.
We are confronted with a rapidly evolving situation and one in which could seriously undermine social cohesion, democracy and any prospects of a rapid recovery. A number of critical steps are involved under C:
- Fast-track reform of taxation through an emergency budget by immediately ending all tax breaks and non-standardised tax relief except where there is an immediate administrative or economic imperative to do otherwise;
- Raise the top income tax rate to at least 48%;
- Stop postponing carbon taxes - phase in a significant shift to consumption energy-using taxes over a three year period beginning now;
- Raise Corporate taxes to 15%;
- Introduce property taxes on second homes as well as property over €1million;
- Fast-track local revenue raising and linking these explicitly to local services where people can see where their tax money is going (early childhood care, local health centres, community facilities);
- Introduce a higher super tax rate to apply to salaries over €250,000;
Under A
- Fast-track those elements of the Capital Programme that are labour-intensive and that will yield quick gains in terms of schools, hospital facilities and social housing.
Ideas and objections welcome.

Unit Labour Costs fall in Ireland in 3 consecutive years

Slí Eile: Data released by the OECD shows that Unit Labour Costs (ULC) in Ireland fell in each year 2006, 2007 and 2008 while it grew in nearly all other OECD countries. Check the data here.

Changes in productivity when combined with unit labour costs provides a guide to trends in competitiveness. Also, of note are comparisons in the level of compensation per employee here ($US @ PPP per annum) where Ireland is placed about half-ways in a comparison of OECD country. Other comparisons show relatively little change in ULC in manufacturing since 1998 in Ireland here. Damn statistics!

Multipliers then and now

Michael Burke: There is further evidence that fiscal stimulus works. Kevin O'Rourke has (re)posted here a very interesting piece by Barry Eichengreen et al here - on the parallels between the period of the Great Depression and the current 'Great Credit Crisis'. Taking into account the global economy (not just the US) then and now, the authors find close and very disturbing parallels; that global industrial production has fallen as fast now as then, that global stock markets have fallen more now and that the collapse in world trade is even graver now.

The authors also examine the effectiveness of monetary policy then and now, focusing on short-term interest rates. They also examine the effectiveness of fiscal policy changes.

Their key conclusion is also the most interesting and relevant one;

“[Scepticism suggested that] monetary policy is ineffective when the banking sector is in distress. Fiscal policy is ineffective when the need is to reduce the level of indebtedness and when much previous output in the declining sectors is unsustainable; it simply cannot be replaced by replacing demand.

“Our results push back against this scepticism. They suggest that fiscal stimulus made little difference in the 1930s because it was not deployed on the requisite scale, not because it was ineffective” (p.25).

The authors go on to add that their mathematical estimates for the government spending fiscal multipliers were 2.5 in year 1 and 1.2 thereafter.

Now, we are repeatedly told that Ireland is a small very open economy, where the fiscal multipliers would not work in the same way; that government expenditure would leak abroad in the form of increased import demand. Yet many of the leading economies discussed in the Eichengreen paper were large very open economies in that they were centres of vast established political and economic empires, or putative ones. Furthermore, the colonial possessions were the destinations for huge capital outflows and the source of ultra-cheap labour and imports. Therefore, it would be reasonable to assume that the 'leakage' overseas of any fiscal stimulus would be fairly high, certainly no lower than 21st century Ireland.

But we do not have to rely on supposition in that regard. Bang up to date, the government's Pre-Budget Outlook (PBO) tells us what some of the multipliers are for the output that has been lost to date in the Irish recession and their effects on government finances.

The PBO states that, in the past, the official expectation was that a 1% change in nominal growth would lead to a 1.1% change in tax revenues (strangely low by intenational standards, but perhaps reflecting Ireland's very narrow tax base). But in the last 2 years, tax revenues have declined by 32% while the value of GDP has declined 13% (p.20.). That is, a revenue multiplier of approximately 2.5 over 2 years.

Now, no doubt, there will be those that argue that this is previous taxation data based on the housing bubble, as if that was an argument for maintaining the current narrow tax base. But the decline in Ireland's tax revenue is not wholly attributable to housing as there has also been a commensurate decline in other areas of investment, notably machinery and office equipment, which had a peak-to-trough decline of over two-thirds. In any event, it is entirely possible to adjust the tax base to reflect any areas the government chose to target for reflationary measures.

But that's only one part of government finances. The other side is expenditure. Here, the PBO states that there will be a rise of €4.5bn between 2008 and 2010, "predominantly the rising cost of social expenditures due to an increase in unemployment." This represents a rise in spending of approximately 8.5% in response to a decline in GDP of 13%. Even this total significantly understates the effects on spending given the large number of cuts already enacted.

Based on the PBO's current spending total of €56bn in 2009 and tax receipts of €32bn and the effects on government finances to date, a 1% rise in GDP could yield increased taxes of €790mn and lower spending by €350mn to give a total saving of €1.14bn over two years.

The alternative, attempting to cut your way to a balanced budget has already been tried and has already failed, as the PBO inadvertently admits. The increase in unemployment noted above, and the increasing costs associated with it, predictably, "have more than offset the expenditure economies already announced."

Wednesday, 18 November 2009

Social Justice Conference on Measuring Well-being

Slí Eile: Social Justice Ireland hosted a conference on measuring well-being (Beyond GDP: What is progress and how should it be measured?). All the papers are available from the website here.

Defend the poor and the marginalised

Slí Eile: Even when Ireland recently enjoyed the status of being the sixth wealthiest country in the world in terms of GDP per capita it was not, and is not, a fair society.

Many live in absolute and consistent poverty by any reasonable objective measure.
Defending those on low income is a moral imperative and the second principle proposed. See previous blog on first principle here.

Too few wealthy individuals pay tax and what they pay is a fraction of what is paid by low-paid workers. Many within our society continue to be treated with disrespect and are systematically excluded from the places of power and decision-making. A combination of fiscal and other measures should guarantee no reduction over the next three years in real living standards of those at 60% of median income. A root and branch reform of the Tax system is called for to allow for the creation of a Basic Income Guarantee for all citizens of this Republic. Allied to this a moratorium on all house repossessions should be a condition of any re-structuring of the banking system.

Rebuilding Trust: Priority Number One

Slí Eile: There is an urgent and unavoidable need to generate hope at this time. In a previous blog here, there is a series of principles which need to be debated. Too many people are losing, not only their business, their jobs and their homes but too many are losing all hope for themselves and their families. We are in danger of talking and thinking ourselves into a deflationary trap brought on by an imbalanced public debate in which TINA (There-Is-No-Alternative) is dished out 24/7 to a public that has many very angry and very fearful individuals, groups and communities.

Any international agency, Government or partner to the process of consultation and deliberation which grew up over the last 20 years needs to reflect on the long-term economic, social and personal risks in pursuing a very partial and extreme response to the current economic crisis. In the stampede towards ever-rising house prices, incomes, tax cuts and conspicuous consumption for sections of society many of us started thinking or assuming, implicitly, that this could more or less go on indefinitely (soft landing accepted). This was dangerous. It typifies the bad effect of ‘group think’ dished out in big Property Supplements, wages-chasing-house-prices spirals, inflated salaries for top execs entitlements culture. Individuals stepping outside this group think were treated as pariahs and eccentrics in some cases. All that hubris and false confidence has, suddenly, given way to denial, shock, anger, fear, paralysis and a deadening hopelessness and passivity in the face of the economic and political onslaught unleashed by the Great 2008 Recession. Now, we have a continuation of ‘group think’ in the opposite direction.

The first principle of any economic and social recovery is a recovery of TRUST and COOPERATION. Informed by the values of democracy, solidarity and equality I would argue that we need a new Social Solidarity Pact to replace Social Partnership in its recent form. While there are sharp and seemingly irreconcilable positions adopted by various partners from ISME to ICTU to IBEC to others, the situation now calls for courageous and imaginative leadership from all progressive forces committed to rebuilding a new Ireland and one where common interests can be identified. Part of this must involve ‘doing no harm’ There is a real danger that fiscal stance, uniquely in EU terms, will go overboard in the coming 24-36 months as additional cuts will drive up unemployment, further erode tax receipts and barely make a dent in the overall fiscal deficit (indeed as pointed out on numerous occasions on this website the deficit keeps rising above the anticipated level as each fiscal correction takes its toll on consumer income and confidence).

Tuesday, 17 November 2009

Buses are not widgets

James Wickham: In a recent article in the Irish Times (29/10/2009) Sean Barrett criticised the new Public Transport Regulation Bill. He claimed it was like a situation where 78% of widgets were produced by one supplier, and this was then enforced by law. James Leahy and James Nix had a good reply last week in the Irish Times (11/11/2009). But let's look more closely at these widgets...

Actually, buses are not widgets. Just like its human counterpart, the rational economic man, the widget is a convenient fiction. But just like the rational economic man, the widget can often detract from reality. Whereas widgets are bought by consumers in a market free of institutions, buses are used citizens in a market defined by institutions.

There are actually three different ways buses can be operated:
  • (A) By a publicly owned company which has a legal monopoly. This is effectively the current Dublin situation since other operators are very limited (Aircoach etc.).
  • (B) By competition in the market (competition 'on the road'). Here operators do what they like, and regulation is just minimal safety requirements. This is what Barrett wants for Dublin and this is effectively the situation in the UK outside of London.
  • (C) By competition for the market (competition 'off the road'). The regulator specifies routes, standards etc. and actively plans the network. Companies bid to provide routes ('bundles') or the whole network. This is the situation in London, but crucially it's also the situation in many continental European cities.
Option (A) gives power to trade unions. Historically it also created 'good bad jobs' - jobs that were boring and not especially well paid, but were at least secure and free from arbitrary authority. Deregulate and you get cleaners and other support staff working at minimum wages as in London. Preventing low wage casualised jobs is important, but most of us would probably say that subsidising inefficient monopolies is a rather expensive way to do it.

But it's not that simple. A state-owned monopoly can (not must) ensure a reasonably efficient and above all integrated system, especially because there is only one owner. German and Austrian cities would be a classic example of this, as would be the RATP - the Paris public transport company. The problem in Dublin is that we have the worst of both worlds - state owned companies which do not provide an integrated service.

The problems of option (B) are well known and well described by James Leahy and James Nix. This is a world in which the bus is treated like a widget, users like consumers, there is no integration: ridership falls, and the service declines. This is a world in which the role of public transport as ensuring the right of citizens to move around their city cannot be discussed. It is a world in which the role of public transport in creating European public spaces and European cities is quite simply incomprehensible.

Option (C) needs a strong regulator to organise the network, and even more, it needs overall political direction. The example of London is quite good here. The elected mayor makes the political decisions and raises the funds. Transport for London (TfL) delivers the service through contracts with private companies.

Originally it looked as if the planned Dublin Transport Authority was going to come close to Option (C). But before the DTA was even set up, it's now merged into the new National Transport Authority. Like Barrett, but for very different reasons, I think this will be just another mess.

In all this, what are the unions doing? The paradox is that if we had no unions on the buses, most buses would have disappeared and we probably already would have the disastrous public transport system of most American cities. Yet union pressure now seems to have created a situation where Dublin Bus keeps its existing routes, but new companies can enter the market on new routes. As Barrett also says, the Bill also seems to mean there is no transparent contract for the services Dublin Bus will provide. This means there will be no political pressure to improve services. At the same time, the NTA will have no overall planning power. The unions have protected their existing members' jobs, but have made the provision of a better transport system for Dublin even more difficult.

Where will the jobs come from?

Michael Taft: Such is the focus of the debate on deficits, borrowing and related fiscal issues, we are in danger of consigning the issues of recovery to some far distant place, or even to cliché. There is a sense that, if only we can put our public finances right, then investment and growth will follow (‘if you cut it, it will grow’). This is contestable.

Another generalised prescription is that we must return to ‘export-led’ growth. While, of course, a small open economy depends to a much larger extent on its export sector, and while there is no doubting that the economic boom was initially rooted in export-led foreign direct investment, there is little analysis of ‘how much’ and ‘to what benefit’. Here’s one small example.

Much emphasis is put on the future role of service exports or internationally trade services. Davy, for instance,is quite upbeat about the prospect of ITS growth:

‘Ireland is ideally placed in this area as a result of its ready supply of graduate-level labour. . Service exports have been quite resilient since the recession began . . . We expect services exports to recover in the next year as global recovery gains momentum, albeit that growth may not be quite as stellar as in the period 2002-2007. The expansion will initially be led by software/IT, business services, transport and tourism.’

Hopefully, this will be the case but can we extrapolate from past performance to see what this will mean for employment creation – for that is the ultimate bottom-line. For we may end up with export-led GDP growth, but if it has little job-creation content, we may end up ‘holding our position’ but otherwise enduring a joyless, jobless recovery.

The following is taken from Forfas’ agency-assisted statistics. The agency-assisted data doesn’t include the IFSC, tourism, transport and communication sectors. Still, the Forfas data captures nearly 60 percent of total service exports, covering computer and related activities, R&D, financial services, education and business services.

During the 1990s, employment in this area increased substantially. Between 1996 and 2000 employment increased from 25,000 to 63,000, reflecting the substantial influx of FDI on a small base. However, between 2000 and 2005, agency assisted employment increased by less than 8,000 in this sector. This is despite a strong export performance of a 30 percent increase.

Davy suggests that growth in this sector will not be as ‘stellar’ as the 2002-2007 period, which is a reasonable assumption since global demand will struggle to return to pre-recession growth rates. If so, what does this say for employment creation prospects in this sector? During part of this stellar period, 2000 to 2005, agency-assisted employment increased by less than 2,000 per year. Even counting down-stream job creation, we’re not look at heavy numbers for sectors that make up nearly 60 percent of total exports.

And this is the problem. When we examine export-led employment growth prospects for the future, we come up against limited numbers. This is not an argument for neglecting or abandoning this area; indeed, it is an argument for taking a closer look at the composition these sectors. One thing we come up against is that, like the goods sector, service exports are dominated by foreign-owned multi-nationals. Indigenous enterprise made up only 7 percent of export value.

Even more unnerving is that during the entire period 1995-2005 – capturing the substantial increase of the 1990s and Davy’s stellar period –indigenous enterprise only managed to create 16,000 jobs, or 1,600 per year. Again, even with spin-offs, we’re not talking substantial job creation.

The usual prescription is that, when global demand increases, our economy will start to take off (especially if we can knock off about 5 percent of our nominal wage bill – despite the fact that wages here already relatively low). That may well be the case, but it may not automatically translate into job creation if historical patterns are anything to go by.

What will be needed is more interventionist policies into our economic base – particularly, our indigenous sectors. Relying on ‘market-led’ growth will only take us so far and not very far at that.

But, more importantly, we will have to go beyond the reliance on export-led growth. This will certainly be part of the equation. But without the construction/property-led employment growth during the middle part of the decade, where are the jobs going to come from?

That’s a question we haven’t even started asking.

Monday, 16 November 2009

Its all down to political choices informed by values

Slí Eile: We are in the midst of a global, European and national crisis – economically, politically and morally. Decisions made in the coming days and weeks as well as those made since the onset of this current recession will have profound effects on future generations. The roots of this crisis lie in the systemic nature of global unbridled capitalism – greatly exacerbated in the Irish case by an inept political and business class that traded short-term gain for long-term sustainable prosperity with fairness. If economics is about ‘who gets what’, politics is also about ‘who gets what’ except that political institutions should help to provide, redistribute and moderate in a mixed economy of public, private and community enterprise governed by the rules of democracy, law and human rights. A new political economy is long overdue.

There has been much public debate over the last 15 months about the nature and causes of this economic slump. There has, also, been much debate and analysis about how Governments can kick-start banking, credit, the ‘green economy’ and – here in Ireland how Governments can deal with the fall-out from a skewed taxation system, a fragmented and inadequate social security net and dysfunctional banking system. Much less attention has been given to:

- An attractive long-term vision of what type of society we wish to construct in the 21st Century
- A coherent, realistic and popular strategy to move from where we are today to where we envision a future.

Hard choices and decisions are needed at every step of the way and these will work if they are well thought out, tested and – popular. yes popular because we must trust that in the end people have a sense of fairness and wisdom and that however imperfectly in the longrun this will win out. People, communities and their elected representatives must be fully engaged with the process of deliberation, adjustment and progress. Unless a decisive and united approach is adopted the poor, migrants, women, young people, those dependent on public services and social welfare will suffer more than those at the top of the income and wealth pile who have escaped the full rigours of the market (and the law in some cases).

Currently, markets and politics tend to be value-free. Still, we have to deal with the realities of what is there now while sticking to a vision of where we need to go and how, broadly speaking, we can get there. It is proposed by this contributor, in a series of short blogs over the coming week, to outline a number of ‘non-negotiable’ points – perhaps 8 or 10 in all – of moral principle beyond which a progressive consensus should not go. Any political trend competing for a share of political economy at the cabinet table in the next one to 20 years needs to be very, very clear about where they are coming from, where they aim in terms of long-term goals and what exactly they would agree to do and put up with in any political coalition arrangement. Voters and supporters deserve to know even if (as always) the macro-economic environment continues to be very uncertain.

To use a phrase of David Begg, lets call these ‘non-negotiables’ ‘lines of decency’ beyond which nobody should go unless they have swallowed the Dublin Consensus Pill in part or in whole. Dealing with the disciplines and political realities imposed by Eurozone membership (as well as EU membership) is yet another political constraint that must be dealt with (but creatively and not slavishly while effectively prompting EU bodies on what to say). I hope to follow this up by a further series of blogs outlining up to 7 alternative approaches to dealing with the crisis from the Government’s position, on one extreme, to that of the ‘far left’ on the other and plenty of permutations and combinations in between. Views, counter-arguments and corrections of fact are, as always, welcome. Let the debate re-start if it ever properly started! And let nobody assume that the one not with them is necessarily against them. There is plenty of scope for convergence and common ground as well as differences on detail and the how and when exactly.

Saturday, 14 November 2009

Likely tax yield in 2010

An Saoi: Earlier this year in April the Dept. of Finance estimated that the tax take for 2009 would be €34,400M. Now, just seven months later they are suggesting a figure of €32,200M. My own view is that they will be very lucky to reach that figure, and that the final outcome will be in the region of €31,600M. However for the purposes of looking at 2010, let us assume that they are correct this time. The Department’s opening estimate for 2010 is €30,800M, a fall of €1,400M or 4.375%.

The tax yield is generally calculated by the Dept. using their macro economic projections, which are expecting a decline of 2% in GNP (1.5% in GDP) and a decline of just 0.75% in prices. In principle, the reduction looks reasonable based on their macro projections, as net tax yield moves at about twice the rate of economic growth (or decline) in the economy. Unfortunately, a detailed analysis by tax head is not provided and this is what I want to look at in more detail and see how the sum of the parts may change the whole.

Unfortunately detailed figures in relation to the Social Insurance Fund are not published on a monthly basis. I will try separately to do an analysis, based on the available information on the state of the Fund in the next few weeks.

Corporation Tax:
This is the only heading which looks positive. The 2009 figures were influenced by a number of things: a once off positive of around €400M because of fiddling with preliminary tax payment dates and then by a series of negatives. Companies making losses in 2008 paid no preliminary tax in 2009 received a refund of 2008 preliminary tax and also a refund of 2007 liabilities by setting losses back to that year.

The good news is that most of those refunds have been made and no further losses can be set back, other than be terminal relief. Almost all Corporation Tax is now paid by perhaps just 50 multi national firms, and the improving European market is likely to see them continuing to pay us our danegeld for allowing the laundering of their EMEA profits through Ireland. I am expecting Corporation Tax for 2010 to be around €3,700M.

Excise Duties: This heading covers a myriad of different charges, including VRT, various Excise duties on fuel, alcohol and cigarettes etc. The yield has fallen by over 20% since 2007 and it is hard to see any improvement in 2010. I cannot see any improvement in car sales, as this a purchase mainly funded by borrowed money and the purchase of a new car is for most people a vanity purchase. I would also argue that much of the decline in new car sales arises from corporate purchases, which have collapsed as much from the change in Benefit in Kind legislation some years ago,

Alcohol sales continue to decline. There are probably three different reasons, drop in consumption, less consumers because of emigration and smuggling. In the case of cigarettes and tobacco, smuggling is running at well over 30%.

Yield for excise duties was €5,443M in 2008 with a Govt. target of €4,635M in 2009, but with a probable outcome of €4,250M. It is hard to see the figure exceeding €4,000M in 2010.

Capital Gains Tax: The yield in 2007 was €3,105M and the Dept of Finance projection for 2009 is €625M. I would expect an outcome in the region of €430M. There are so many losses forward at this stage it is hard to see it breaking €350M in 2010. Most of the CGT currently paid is likely to be in place of income tax as withdrawals from businesses are structured accordingly. The increase in rate to 25% is unlikely to increase the yield without some restriction on losses forward.

Capital Acquisitions Tax: This is an intriguing tax, which with very little adjustment could become a major source of tax. In 2007 the yield was €392M with a 2009 target of €295M. I would expect the 2009 outcome to be in the region of €260M. The 2010 yield is likely to slip due to property prices, despite the cutting of the tax free threshold. There may also be substantial unpaid CAT because of the inability to dispose of assets. I would estimate a yield in the region of €240M for 2010.

Income Tax: In 2007 it was €13,572M and the Government’s expected yield in 2009 is €12,475M. However the outcome is looking like €11,550M. The Dept. of Finance is suggesting that employment will fall by 3.75% and is also intent on cutting €1,300M from the Public Sector wage & pension bill, though there is some overlap. The restructured levies will also hit from January. However assuming a 5% decline in wages would reduce the tax yield by between 9 & 10%, it is hard to see the figure breaking €10,500M in 2010.

Value Added Tax:
The Dept. of Finance is estimating a 3.5% decline in personal consumption and a decline of 0.75% in prices. This suggests that VAT will decline by at least 8% over 2009. However zero rated goods such as food are likely to decline by less than say, bottles of wine, chargeable at 21.5%. Assuming an outcome in the region of €10,400M, a decline of 8-10% would put us in the region of €9,300-€9,500M. Split the difference and we get €9,400M in 2010.

Stamp Duties: This also a heading which includes a variety of different duties. The yield in 2009 was expected to be €980M, but even with the Health Insurance Levy it is unlikely to break €825M. Let us assume €750M for 2010.

Customs: Customs duties belong to the EU, with a small amount retained by the home country for costs of administration. The expected yield in 2009 was €230M with the likely outcome being €185M. Let us assume the same amount again, €185M for 2010.

This gives a final total of €29,125M, or already a differential of €1,675M from the opening figure of the Finance officials. There is a further caveat which I would like to enter – bad debt. Assuming that the Revenue branch of the AHCPS are correct then new additional bad debts of €400M can be expected, dragging the figure below €29,000M. I throw the floor open for discussion.

Public Sector Pay - new data insights

Slí Eile: In a recent paper to the Statistical and Social Inquiry Society of Ireland, Statisticians at the CSO have presented further analysis of differences in earnings for employees in the public and private sectors (note that nobody is attempting to compare all types of income including shares, rent etc for all types of households). The paper is entitled "Investigating the Public-Private Wage Gap in Ireland using data from the National Employment Survey 2007" and may be downloaded here

The CSO paper may be viewed as a dampener on the claims by various commentators, including some economists at the ESRI, that the gap in pay 'comparing like with like' is over 20% using 2006 data. The data sources are the same (in CSO and ESRI papers) but the modelling and the exclusion of various sub-groups makes a big difference to the results - really big as the latest CSO paper shows. Readers will recall that the ESRI confidently announced a premium as if there were one way only of estimating and modelling pay in each sector. The ESRI paper entitled "Benchmarking, Social Partnership and Higher Remuneration: Wage Settling Institutions and the Public-Private Sector Wage Gap in Ireland" (Kelly et al. 2009) can be downloaded here.

They confidently concluded that:

The results indicate that the public sector pay premium increased dramatically from 9.7 to 21.6 per cent between 2003 and 2006. Furthermore, we found that by 2006 senior public service workers earned almost 8 per cent more than their private sector counterparts, while those in lower-level grades earned between 22 and 31 per cent more.

The CSO paper does not overturn the key ESRI claims. It confirms that:

* There is, indeed, a positive premium to public sector workers in all these various studies and regression specifications; and
* The premium in favour of workers in the public sector is higher at the lower end of the pay scale

Where the CSO paper differs is that:

* Different model specifications give different (and significantly different) results
* If enterprise size is included along with a focus on 25-59 yr olds permanent employee and particular occupational groups excluded you can get a very significantly reduced premium.

CSO is not convinced about the propensity score matching methodology beloved of the ESRI researchers. They state that:

'Due to the lack of systematic guidelines on the selection of a comparison group, this study does not use propensity score matching to estimate the public-private pay gap. We have found that the estimated premium using propensity score matching is highly sensitive to the criteria used to discard sub-samples without a common support.'

The bottom line in the CSO paper is as follows: 'we advise caution in attempting to estimate one definitive “answer” for the average premium'

Perhaps the most telling finding of the entire paper was the following (I have added bold):

Furthermore, in the Irish context, there are a number of occupations within the public sector that really have no comparable occupation in the private sector, and vice versa (most noticeably Gardaí, Prison Officers, and members of the Defence Forces). To highlight the consequences of ignoring this lack of comparability in some occupation sectors, this study also estimated the public-private wage gap on a sub-sample excluding personal and protective services employees.

The impact of excluding this sector was to dramatically reduce the average public-private wage gap, especially for males (from 7.2% to 2.7% using OLS). The size of this reduction was even larger when the analysis was conducted using weighted data.

Table 3 is the key table. It shows a premium of 2.7% for males when personal and protective service employees are excluded. This is hardly anywhere near John O'Hagan's presumption of a 20% cut (surely linked to the ESRI factoid). For women the premium was just over 11%. In other words to compare employees in public and private sectors a number of significant complicating factors cut across a crude comparison:

* Enterprise size (disputed by ESRI)
* Gender differences within each sector (with greater inequality in the private sector)
* Particular differences applying to groups such as Garda, prison officers.

Aside from all this various types of income are not factored in. Essentially, rental income, income on shares, dividends and other property are not included as are 'irregular bonses' - a major difference in some private sector occupations and sectors. Also worthy of note is the fact that 'irregular bonsuses' or 'benefits in kind' are not included.

In the CSO published supplementary analysis of data from the 2007 National Employment Survey (download here) P21

Earnings are 'defined as gross earnings (before the deduction of tax, PRSI, superannuation) payable by organisations to its employees. It includes normal wages, salaries and overtime, taxable allowances, regular bonuses and commissions, holiday and sick pay. It does not include irregular bonuses and commissions, employer’s PRSI, redundancy payments and back pay.'

CSO state that 'A regular bonus is defined as a bonus received every pay period although the amount may vary from period to period.'

A useful addition to the analysis is the work by John Geary of UCD and Anthony Murphy of University of Oxford. In a comment in a long thread on their research on here
we get a glimpse of an alternative view. The main article appeared in the current issue of Industrial Relations News. (Cutting public sector pay: an alternative view - …THE JOB DESCRIPTORS USED BY CSO ARE NOT RICH AND REFINED ENOUGH…). They state that:

The risk of imposing wage cuts across the board in the public sector is that it will result in industrial strife with huge costs both in terms of the country’s economic fortunes and social cohesion. There is no single, best measure of the public sector wage premium. The estimated premium varies over time and across occupations. It also varies across the income distribution and at the upper end of the distribution, is often a discount. It is also difficult to find good “like-for-like” comparison groups for some public sector occupations. Thus, the basis on which public sector pay might be cut is not as sound as some people claim on the basis of headline figures.

It can be concluded that any generalised claims based on crude comparisons and 'one methodology-fits-all' are suspect especially when you know that a particular agenda is at stake.

Friday, 13 November 2009

Facts, foreigners and the Mayor

Earlier this week, Limerick Mayor Kevin Kiely reportedly proposed that EU nationals who fail to obtain employment should be deported, suggesting that some were here to avail of Ireland's 'generous' social welfare system. The 'generous social welfare' myth has already been debunked here on PE and elsewhere. Today, Ronan Lyons scrutinised some of the other 'facts' underlying Mayor Kiely's remarks - click here to read his post.

Thursday, 12 November 2009

The Procrustean bed of statistics

Michael Taft: In Greek mythology the rogue Procrustes had an iron bed in which guests were invited to rest on. He would then hold them down and, if they were too large he would lop off their limbs; if they were too small he would stretch them. The last place you want to be is on Procrustes’ iron bed, especially if you don’t fit.

Suzanne Kelly brings the spirit of Procrustes’ iron bed to her table of statistics in today's Irish Times. She took households with a couple with two children and compared their net incomes in three different situations:

PAYE employee: €36,078
Self-employed: €35,159
Unemployed: €40,261

Wow. It would appear that if a below-average worker loses his or her job, or the self-employed see their business go down the tubes, they shouldn’t despair. They should celebrate their big income increase. These ‘facts’ led Suzanne to comment:

‘A social welfare package where the cash and benefits exceed wages will stop potential staff from returning to work when the economy lifts.’

Maybe. Except that Suzanne has put this set of statistics on a Procrustean bed where she has pulled and chopped them to fit her argument.

To arrive at the income for the unemployed scenario she includes Rent Supplement. This is a big item. It makes up €12,168, or over 30 percent of the total. Without this supplement, the couple would be on an income considerably below both the PAYE employee and the self-employed.

So how valid is it to put this Rent Supplement figure into the total for the unemployed? Not very. Not very at all.

The 2008 Social Affairs Annual Statistical Report shows that 95 percent of all those on Jobseekers Benefit do not receive Rent Supplement. When you add up all those on some form of unemployment payment (benefit and allowance), 90 percent do not receive Rent Supplement.

But for that small minority who do qualify, would they get this amount? €12,168? On average, no. In fact, they would get half that amount. The 2008 Social Welfare report, again, shows the 74,000 recipients of Rent Supplement receiving on average €5,953 a year (there is no breakdown by welfare payment). The reason why this is so much lower than the headline maximum rate is that Rent Supplement is rigorously means-tested.

So, we have a table that includes an item which only a very small minority of unemployed obtain and of those who did get it, on average they receive less than half the amount as the table states.

If Suzanne had included these caveats it wouldn’t have supported here statement. But, hey, if the facts don’t fit – just chop and stretch until they do, just like Procrustes. Of course, not many of his ‘guests’ survived the ordeal.

The future just got worse

Michael Taft: The EU Commission has announced that Ireland will get an extension to the target date for return to Maastricht compliance. Instead of 2013, it will be 2014. But don’t think that feet will be taken off the contractionary pedal. The EU Commission has called for even deeper deflationary measures spread out over a longer period than the Government had intended. The future just got bleaker.

In one sense, the extension was inevitable. The Government’s strategy to reach Maastricht compliance by 2013, outlined in the April budget, was growing more untenable by the day. Back in April, they hoped to hold the deficit at 10.7 percent by the end of 2010. Over the next three years they intended to reduce the deficit by 2.5 percent annually. That, according to the plan, would see the budget home at -3 percent by 2013.

Already, though, this math ahs gotten knocked off-course. The ESRI has projected the deficit will fall to 12.8 percent next year. Further, GDP will be below the Government’s projection. On that basis, the 2.5 percent annual reduction wouldn’t make it. Already, Goodbody Stockbrokers, the NIB and Ernst & Young claimed the Government would fail to reach the 2013 target.

Enter the helpful EU Commission. They are now allowing the Government until 2014 to reach Maastricht compliance. EU Commissioner Almunia tried to put a positive gloss on this – claiming that this extra year was given in acknowledgement that the Government is going down the right course. However, it had little to do with good intentions – it was merely an acknowledgement of cold math.

The bottom-line in all this is not that the Government is being given extra breathing space. Rather, it is that the Government will have to continue its deflationary fiscal strategy – the planned average annual 2 percent contraction up to 2013 – for another year. The economy has not been given a respite – its deflationary sentence has just been lengthened.

How will this play out in the medium term? Despite media reports that the Government is more optimistic about the economic numbers this year (this is in line with all other forecasters), the issue is what are the growth numbers going forward? In April, the Government projected a growth rate of over 10 percent between 2010 and 2013. Some forecasters disagree. IBEC is projecting 6 percent while NIB is slightly more optimistic at 8 percent. Only Ernst & Young, so far, believe growth rates to 2013 will be as strong as the Government projections.

However, extending the deflationary period will only dampen economic growth longer. To put it metaphorically (and much of the debate is played out at this level – ‘take the pain upfront’, etc.), the economy is likely to trough sometime next year. When it hits the bottom of the recessionary sea it will try to swim back up to the surface. However, the Government’s deflationary strategy is acting like an anchor tied around to the economy’s foot, making that upward swim harder and slower.

There are bleaker growth projections. At a recent economic forum organised by Dublin City Council:

‘Jonathan Stenning of Cambridge Econometrics was considerably more downbeat about the prospect of recovery, saying he expected the Irish economy would pick up slowly and grow at an average rate of 1 per cent per annum between now and 2013.’

If Mr. Stenning is correct, the economy will struggle further. It will not be able to generate the necessary tax revenue; it will not be able to generate the jobs to meet the needs of new labour market entrants, never mind those already on the dole; consumer spending and investment will remain depressed; the economy will be mired in a period of low-growth, high-debt.

I really hope the Mr. Stenning is wrong. For if he isn’t, the EU Commission will be coming back to the Irish government again, saying what a good job they are doing, and because of the that they will be giving them another target date extension – to 2015.

But what they will really be doing is lengthening our deflationary sentence. Again.

Wednesday, 11 November 2009

Home truths from abroad

Michael Burke: It’s in the nature of a globalised economy that all economies tend to exhibit a specific combination of global trends. For a small extremely open economy such as Ireland, this is an inescapable truth. It is especially true in a period of crisis. So, despite widespread claims to the contrary, there is little that is unique in the current Irish crisis. And there is nothing which justifies the uniquely pro-cyclical fiscal policy that is currently being implemented. Instead, to treat the Irish patient, what must be diagnosed is the specific combination and strength of the widespread virus that it has acquired in the current pandemic.

The European Commission’s latest biannual economic forecast for the European Union is useful in this respect. It shows, amongst other things, what is and what is not unique about the current situation in Ireland. In doing so, it helps to undermine some the myths that have grown up regarding the features of the current crisis. Below are some of the key issues for Ireland that are worth highlighting:-

* Ireland’s bloated public sector: Before the current recession Ireland’s government spending as a proportion of GDP was the lowest of any economy in the Euro Area, 33.6% in the years 2002-2006, compared to a Euro Area average of 47.4% (Table 35, p.205). A number of countries, France, Belgium and Austria, have a public sector which is proportionately 1½ times greater than Ireland, at over 50% of GDP.

* There is no scope to raise taxes: In the same 2002-2006 period Ireland’s tax take was also the lowest of any Euro Area economy, at 34.9% of GDP compared to Euro Area average of 44.9% of GDP (Table 36).

* Ireland has a uniquely high level of public debt: Even with the disastrous and counter-productive policies currently being pursued, the Commission forecasts that Ireland’s public debt level will rise to 96.2% of GDP in 2011, compared to 135.4% for Greece, 117.8% for Italy, 104% for Belgium and a Euro Area average of 88.2% (Table 42). Shifting the goalposts a bit, it is also often claimed that Ireland’s export successes should be ignored in calculating debt ratios (even though exports can provide part of the taxes to fund deficits). But even if GNP is used, Ireland’s debt ratio is still the second lowest in the Euro Area at 38.4% of GDP, and still way below the average.

* There’s no scope for fiscal stimulus: Ireland’s output gap relative to potential GDP is expected to be up to 8.5% of GDP in 2009 and will still be as high as 5.4% of GDP in 2011, the largest in the Euro Area and compared to averages for the Euro Area as a whole of 3.6% this year and 2.5% in 2011 (Table 13).

* Ireland has become uncompetitive internationally: In the years 2002-2006, the price deflator for Ireland’s exports fell at an annual average rate of 2.7% and the price deflator for imports fell at an annual average rate of 2.3%, compared to Euro Area average rises of 0.5% and 0.7% respectively (Tables 18 & 19). In addition, Ireland’s growth of per capita labour productivity was an annual average 2.2% compared to just 1.2% for the Euro Area, and 1.6% for Britain and 2.1% for the US (Table 26).

Absolute, historical and relative comparisons are all useful to establish context. It is certainly the case that the pace of the rise in Ireland’s public deficits is the most dramatic of all the OECD economies. According to the EU, there has been a deterioration in public debt equivalent to 12.3% of GDP in just two years, compared to a Euro Area average of just 4.7% (Table 37).

But, as shown above, this had nothing to do with the entirely false assertion that Ireland has a bloated public sector. Instead, it relates to two genuinely unique factors in Ireland, in addition to the very small and narrow tax base which has exacerbated the rising public deficits.

The first unique factor is the depth of the recession itself, a forecast decline of 13% in GDP over the recession and more than double the average decline in the Euro Area (Table 1). This has driven down taxation revenues as well as forcing welfare spending higher. The second is the bank bailout, which at 232% of GDP is greater in Ireland than the next worst 4 Euro Area economies put together.

In relative terms, compared to the Euro Area economies, Ireland is unique in these two particulars; a uniquely severe downturn, as well as a uniquely dysfunctional banking sector which is sucking the lifeblood from the economy. The scope of the economic decline would require uniquely dramatic stimulus measures to revive it, while a rapid exit strategy from the policy of bailouts for bank bond and shareholders is also urgently needed.

Monday, 9 November 2009

Balanced media?

Slí Eile: Scaring? Balanced? A sample of headlines from the Sunday papers last weekend

FW: Main Headlines Today's Newspapers Sunday 8 November, 2009

Tax hikes ' will exile well paid'

Private sector snubbed the protest

Civil Service ' privilege day' perks escape axe

The tides that can pull us back from the brink
What did Friday's day of action achieve for all the rest of us?
Public sector protest had already fallen at Frontline
Stop talking, it's time for action

State pay cheques for the protesters will bounce by March unless Cowen does what he has to do
Willingness to scarifice jobs shows what's important to union barons

Top brains shun Ireland as smart economy withers

War in the workplace
Health spend faces €1bn cut in budget
Revenue denies ICTU claim of €1.8bn in uncollected taxes

No room to manoeuvre- the economy
Cabinet Unites as spending cuts loom
Unions try to delay the evil hour - piece about teacher unions
OECD highlights need to tackle interest groups
Urgent need to stabilise income tax rates
Public service world is different from the rest of society
Country's fate cannot be left to special interests
More must pay their share of income tax

Unions face backlash as pay cuts now inevitable
Workers in 54 state bodies earn average of €70k salary

Contradictions of trade unions are untenable

Union assertions do not make sense, and neither does dithering
Union splits delay deal on pay cuts
ICTU and the wailers- piece on the economy
Put anger to one side. We all have to change
Cutting state jobs will save the public sector

'O make me a Keynesian (but not yet)' ?

Slí Eile: The entry by UK economist David Blanchflower into the domestic economic debate (re-flation versus deflation) created a stir last week. For a moment, it took us away from the narrow, Irish insular debate of ‘public sector versus private sector’, ‘job cuts versus pay cuts’, ‘public spending cuts versus tax hikes’, ‘your grandmother versus your job’ and ‘your left arm versus your right hand’ – all false dichotomies and enforced choices thrown on a public already anxious and dispirited. When you hear the Prime Minister of a country saying that he has a vision for the future and that vision is a smaller public service then you know we have a vision-crisis as well as a values-crises. Blanchflower’s message is simply that we cannot afford to condemn a generation of young people to long-term unemployment with all the devastating consequences that this entrails.

Blanchflower’s talk can be podcasted here.

and his talk can be downloaded here.

(as can all the papers for the Dublin Economics Workshop here)

Blanchflower’s main policy conclusion is
“The time to act is now. The young must be the priority.” (his words)
He also warns that Recovery may not be V-shaped but W-shaped. (IMF and other bodies are cautioning against a premature withdrawal of stimulus measures).
Before considering his menu of policy options, some of the key points he makes at the outset are that:
* The costs of unemployment will vary across countries and between groups within populations. * The young will be hit hard.
* The duration of the slump may be much more prolonged than most people are expecting and … * Much will be changed both in our ideas and in our methods before we emerge.
* During a long period of unemployment, workers can lose their skills.
* Unemployment increases susceptibility to malnutrition, illness, mental stress, and loss of self-esteem, leading to depression and in a few cases suicide.
* The long-term unemployed are at a particular disadvantage trying to find work. People's morale sinks as duration rises.
* As unemployment rates increase, crime rates tend to rise, especially property crime.
* Increases in the unemployment rate, lowers the happiness of the population, not just the unemployed. The fear of becoming unemployed in the future lowers a person’s subjective wellbeing
* Unemployment while young, especially of long duration, causes permanent scars rather than temporary blemishes. He cites solid UK longitudinal evidence to back this up.

His policy prescription is decidedly Keynesian:
1) Maintain or even increase aggregate demand through stimulative fiscal policy
2) Target assistance on the young through active labour market programs and continuing training and expansion of education, wage and employment subsidies for the young, incentives for hiring the young in public sector organisations such as in education and health and ‘lowering the minimum wage for the young’

Blanchflower argues that ‘moves to cut public expenditure or public sector wages or employment’ in the depths of a recession are ‘a mistake and may turn a recession into depression’

Little wonder that there was such a lively and adverse reaction from the economics mainstream here

In that thread Michael Burke asks:

A challenge to all the slash and burn advocates: Name another advanced economy which intends to pursue a course of slashing public spending currently in the way that Ireland intends.

One detects a severe case of Augustinian Keynesianism among the Irish economics confraternity (while we would love to stimulate fiscally we will not because.....):

O Lord make me a counter-cyclical Keynesian - but not yet.

John Baker on The Spirit Level

John Baker of UCD's School of Social Justice has just posted an illuminating review of Wilkinson & Pickett's recent book, The Spirit Level: Why more equal societies almost always do better, on Irish Left Review; you can read it here.

Scaring us into greater inequality

James Wickham: In a recent article in the Irish Times (4 November) Philip Lane warned that higher levels of income taxation could restrict Ireland's ability ' to attract and retain the highly skilled mobile professionals that are key to future economic growth'. This argument needs some discussion.

We could and probably should talk about whether it's desirable to commit ourselves to a form of economic growth that gives 'highly skilled mobile professionals' a veto over taxation policy. But there are smaller scale more empirical issues that can usefully be discussed.

Research on mobile professionals shows that taxation is only one of the reasons why people choose to live in a country. There is evidence that taxation influences location choice, but other things also matter. Issues here range from personal safety to the quality of life. Indeed there is a whole literature in urban geography associated with Richard Florida's claim that young and mobile professionals (the 'creative class') move to cities that offer social, cultural and intellectual diversity. Slightly facetiously, we could say: forget about taxation, just ensure there's some decent music and good craic...

Of course the point is that much 'quality of life' involves public expenditure. A decent health system, a proper public transport system, public broadcasting, even decent public spaces, do not come free. And interestingly, we do have research that suggests these things can attract people to live or stay in a country, and equally we do know that many young and mobile professionals bemoan the lack of such things in Ireland (e.g. Boyle (2006)).

It's also important to disaggregate these 'highly skilled mobile professionals'. For example, we could differentiate between 'visitors' who have no commitment to the country, and 'settlers' who intend to spend much of their life here; we could differentiate between 'experts' who earn say over than €60k (the current minimum income for the Irish Green Card permit) and 'stars' who receive more than (say) €150k. It's clear that what motivates visiting stars is probably very different to what motivates settler experts. Some people (visitors) do move temporarily to Dubai, but it's not clear whether such people are the same as those needed in Ireland - and do we really want to develop Dubai-type expat zones in Ireland anyway?

It can also be argued that relying on visiting stars has dangerous implications for the labour market - it creates a culture of high reward short termism, otherwise known as greed.

Most fundamentally of all, surely it's time to start discussing the disadvantages of inequality. Work such as Wilkinson & Pickett (The Spirit Level - Why More Equal Socieities almost always do better) has alerted social scientists to the detriminetal effects of inequality on all members of the society. In other words, in an unequal society even the better off do worse. And furthermore, these effects are generated by inequality 'at the top' (gap between the very wealthy and the rest) rather than just by inequality 'at the bottom' (gap between the poor and the rest). Facilitating visting stars, in other words, may actually have very detrimental indirect effects on the whole society.