Monday, 18 January 2010

Who benefits from current policy?

Michael Burke: There is a clear disparity between the economic policies of the Irish government and those of the other industrialised countries. While every single country in the G20 adopted in some sort of stimulus measures last year and (with one exception) will do so again in 2010, Ireland's unique contractionary experiment continues to depress activity and tax receipts, boosting only the unemployment level and the budget deficit.

Supporters of government policy argue There Is No Alternative, having learnt their economics from Mrs Thatcher. But, clearly the G20 have a myriad of alternatives, even though many have deficits as large as Ireland's and most still have higher levels of government debt. Separately it is argued that adding to the deflationary trend in the economy is good for business, helping to improve competitiveness.

But Sean Quinn is the latest serious business leader to bemoan the fact that government policy is depressing activity and forcing a revival of mass emigration. He also argues, in complete contradiction of government spokespersons and their supporters, that wages are not an issue and speaks of his own experience with a highly competitive workforce in re-orienting to export markets: "Policymakers should focus on investment for the creation of sustainable jobs".

This follows an intervention by Jim O'Hara, general manager of Intel in Ireland, who has previously criticised the downgrading of Irish manufacturing capacity and argues that the key to competitiveness and new job creation is investment in education and in R&D. "We are competing in a global market to create, attract and retain the highest quality jobs. Unless there is the foundation of a highly educated workforce and an internationally recognised commitment to and reputation for research and innovation, Ireland will not be considered competitive."

As the heads of two of the largest employers in the country, one multi-national and the other indigenous, you would think their views might hold sway with a pro-business government, or at least with IBEC. But that isn't the case.

IBEC has over 7,500 members, very few of them as large or as dynamic as Intel or the Quinn Group. It has led the calls for across-the-board wage cuts, which stand in sharp contrast to the representatives of major firms such as O'Hara and Quinn. In effect, IBEC represents the views of comparatively small producers; a shopkeeper mentality that hopes to stay in business by pay cuts for the shop staff. It was disastrous for 1,406 insolvent businesses last year, with barely a murmur from IBEC.

The current government represents an alliance of these forces with those of the property speculators and their banks. Their disastrous showing in the opinion polls suggests they have, for now, been numerically reduced to these layers along with some of their traditional rural base. Their supporters are the minority.

For all progressives, the key task is to build an overwhelming majority around the axis of 'Investment, Not Cuts'.


Paul Hunt said...


Apologies for seeking to inject a small dose of reality. Both of the gentlemen you cite are not unaware of the impact of Ireland's high cost base. But for them as employers it doesn't impact hugely on wage costs as successive governments have gone for a combination of low marginal rates of taxation and high "point-of-use" charges. But the collapse of the false boom has exposed the narrowness and shallowness of the tax base and the high "point-of-use" charges remain. Much of these are implicit taxes on consumers to cover inefficient financing of investment and provision and expansion of utility services. And they provided cover for price-gouging by the private sheltered sectors.

There is now an implicit, unholy alliance between the state, semi-state and private sheltered sectors to protect the gains they made during the false boom at the expense of the najority of citizens. And by failing to recognise this progressives are proving to be extremely useful idiots for this reactionary consensus.

paul sweeney said...

"Pay hikes for 60,000 workers reported by IRN" is a sub headline in an article in that magazine, the respected IR trade paper, in the current edition. It has a major study of pay trends in the private sector. It says that "a significant number of employers remain 'in process' with their unions on claims for payment of the increases" agreed with IBEC, but from which IBEC subsequently withdrew. It finds the majority of private sector firms are freezing pay, with a significant minority cutting pay and a smaller minority of mostly unionised firms, many of them MNC manufacturers or larger companies, paying small increases, in line with the Transitional Agreement." Core pay is holding up in the private sector (in contrast to substantial cuts in the public sector), while overall labour costs are being reduced.

Paul Hunt said...

No argument about "substantial cuts in the public sector" - not sure though where this proposal for "transformational" public sector reform went which was on the table when the Government was considering unpaid leave as an alternative to pay cuts. And it's not all doom and gloom. ESB workers got their pay increases and BGE workers seem to be in line to receive theirs (lucky them compared to other semi-state workers!) - not sure whether they are in the public or private sectors. They seem to be public when ownership is raised, but private when pension levies and pay cuts are being implemented.

I don't begrudge these workers their increases - that's not the problem. I just don't like the excessive additional cost burdens these businesses impose on consumers.

Michael Burke said...

@ Paul Sweeney

You make the key point; outward-facing firms have constantly to deal with competitive pressures. Yet at the same time, and thanks to unionisation, they attempt to deal with those via investment and adaptation, not pay cuts.

This is a great argument for increased unionisation too.

@ Paul H

I absolutely agree that excessive price rises by the state and semi-state entities should be halted and reversed. This would need to be part of a reform of this sector that would include using their cash balances for investment, providing subsidies for increased efficiency, and a major role for consumers, including board membership for representative groups in determining financial priorities, including prices.

I also entirely agree that the tax system needs a complete overhaul; with a rebalancing of tax towards capital gains and higher incomes and away from consumption. Not only would this disproportionately benefit the poor and lower paid, it would also be more economically efficient. That is often the case.

We seem to agree on more than you think.

Damian Tobin said...

The point about wage cuts and who it benefits is extremely interesting and one that has received little attention at policy level.

The reason leading MNCs do not see it as an issue is precisely that. Data from the US Bureau of Economic Analysis indicate that average compensation costs for US MNCs in Ireland are not that much greater than the European average (which includes many low and middle income economies) - in fact average wage costs are similar to our nearest trading partner the UK and lower than many high income European economies. This would of course lead to the obvious conclusion that competitiveness and reputation are based on many factors of which labour costs are just a small part.

Secondly the Department of Finances own Pre-Budget outlook (p.14) acknowledged that private sector wage trends are a source of uncertainty - in other words it did not have adequate information on private sector wage trends but government policy implicitly assumed that public sector wage cuts once implemented would be matched by the private sector. The same report also assumes a strong link between reputation and public pay cuts.

The implication of all this seems to be that wage cuts have been the red herring of recent debates and have as Michael suggests played into the hands of a narrow base of constituents and diverted attention from the real issues that determine competitiveness and reputation.

Paul Sweeney said...

On wages, I see the US Chamber of Commerce asserting that Irish wages are €20k above the average in the OECD. This is contradicted in my OECD data on wages (in Taxing Wages). Its difficult to get good data on wages and with Exchange rate movements in recent times, data of 2/3 years ago, can be redundant. I see Ireland down at 22nd of the 30 OECD states on total labour costs. Well below the average. I do recall seeing an OECD table which put Ireland very high up the wages ladder, but it was crude divison of overall GDP by number of those at word in the economy! I am still waiting for the Devaluationists to present the empirical data on "high" Irish wages. (Then we can argue on productivity; then the on many other the competitiveness factors.........)

Michael Taft said...

Paul, I'm afraid you'll be waiting a long time as the leading databases refute the devaluanist argument. One of the most recent releases - 2008 4th quater - comes from the German Destatis (which works with Eurostat numbers). It shows Irish hourly labour costs in the private sector as a whole well below our peer group in the EU. The average hourly labour cost in the other 10 non-Med countries at €31.40; Ireland is at €27.60 - 12% below average. For the manufacturing sector, the avearge for the other 10 non-Med countries is €32.39; Ireland is at €27.80 - 17% below average. No wonder empiricism doesn't sit well with the devaluationist argument.

Michael Burke said...

In addition, the devaluationist argument is not only factually incorrect in the case of Irish wages, but also incoherent.

Like all similar comparatives it is essentially used to set up a 'race to the bottom', since in any league table someone must be at the top.

The key argument on competitiveness, accepted by O'Hara and Quinn, is that it is primarily a function of investment. At the state level this includes investment in social areas such a health, housing and above all education, as well in transport and infrastructure.

If it was primarily about pay Bhutan would be the world's biggest exporter.

ILO research here

shows Ireland's wage share of GDP as the sixth lowest of 33 economies (Fig.13) and that it has been declining (Annex Table A1).

Paul Hunt said...

@Michael B & Michael T,

I don't think you're choosing deliberately to misinterpret the points I'm seeking to make; it must be a failure on my part to communicate them effectively.

Just to be clear: I abhor this apparent policy consensus on reducing labour costs. Politically, morally and economically this is precisely the wrong place to start. But we can't ignore the fact that the price level for private household expenditure is seriously above those in Eurozone countries and other major trading partners. My focus is on reducing the domestically controllable costs that contribute to this gap. And the bulk of these excessive and unjustifiable costs arise in the state, semi-state and private sheltered sectors. But these excessive costs are not, to any significant extent, due to excessive labour costs (this is where I deviate sharply from the "deflationists"); they arise from woeful policy decisions (state), gloriously inefficient financing of investment (semi-state) and monopoly profits (private).

So let's go after these costs, increase efficiency and productivity, broaden the tax base and increase real wages and welfare payments.

I can understand why the public sector unions, in the face of the Goverment's brutal decision to cut pay, have taken the offer of "transformational" public sector reform off the table. The unions in the semi-states, at worst, wish to protect the status quo or, at best, return to the status quo ante (talk of allowing the ESB to compete is a fast-track to the previous vertical integration). Progessives have locked themselves into this agenda and by doing so don't have a leg to stand on when attacking profit-gouging in the private sector.

Paul Sweeney said...

Correction - (I should not blog from memory). US Chamber is quite correct on wage cost of manufacuting workers being 20% higher here than in the US (I had said €20k higher). Latest data was actually $20.04 per hour here compared to US at $24.59. But its much more in many EU states - being over $48 in Norway and high in Germany, Denmark etc. More importantly is that the overall cost of employing a worker here is $40k compared to %44k in US (per OECD) or $57k in UK or $61k in Germany in 2008.
Michal T you are right - facts dont influence many influential economists. Some have reverted back to the early 1980s on competitiveness. That is not a good omen for getting out of this deep recession.

Proposition Joe said...

@Paul Sweeney

It finds the majority of private sector firms are freezing pay, with a significant minority cutting pay and a smaller minority of mostly unionised firms, many of them MNC manufacturers or larger companies, paying small increases, in line with the Transitional Agreement.

Excluding the freezers, the cutters out-number the increasers (significant minory as opposed to smaller minority). So how does that translate to core pay holding up in the private sector?

Unless the quantum of increase enjoyed by the smaller number of workers is significantly in excess of the quantum of cut suffered by the larger number of workers. However anecdotal evidence points to the opposite being the case ... T2016 TA rises were in the ballpark of 3.5%, whereas typical cuts would go into double figures.

Paul Sweeney said...

Propositon Joe, we wont know the final result till the Fat Lady sings ie till CSO data, in time. The essential point is that a key supposed justification for the public sector pay cuts was that they were widespread in the private sector - was erroneous. I should again correct myself - hourly pay here is higher here than in the US as stated in my text, but there was a typo. Its $24.59 in the US as stated but should be $29.04 for here (differnece of 18%).

Michael Burke said...

@ Paul Hunt

We are still agreed that prices are excessive in some of the state and semi-state entitities. My answer to deal with that is a formalised role for consumers in setting the financial framework, including prices, increased investment, subsidies for efficient usage and productive use of cash balances.

I believe your answer is privatisation, which in the provision of public goods is usually a disaster for consumers, for workers or for taxpayers. Sometimes all three.

Rory O'Farrell said...

According to Eurostat in 2008 Ireland had the highest comparative price levels in the Eurozone (2nd highest in EU after Denmark), yet had the 6th lowest real unit labour costs in the Eurozone (AMECO database).

To square the circle of high costs, and low real unit costs is simply that non-labour costs such as rent, property, electricity, legal fees are so high.

Unfortunately the government is pursuing a deflationary policy with regard to wages, but is doing nothing to reduce rents,legal fees, or any of the costs that harm business.

Paul Hunt said...

@Rory O'Farrell,

Many thanks. You have expressed my position succinctly and eloquently. I would simply add that the harm is not only to business, but to all citizens. I expect you are aware that Prof. Philip Lane (in the adjoining parish) holds a similar position, but there seems to be little appetite among the academics to follow through with the necessary analysis - and, not surprisingly, no stomach in the political or policy circles to take the necessary steps.

The trades unions and progressives should be purusing this case much more vigorously. But it appears they are hamstrung by an unwillngness to address seriously the inefficiencies that arise in the state and semi-state sectors. Though it makes sense tactically, the prospect of "transformational" public sector reform - which would benefit all citizens - should not be a bargaining chip for exclusive use by the public sector unions. The inefficiencies and resulting excessive costs that arise in the semi-states are not caused by excessive pay; they are caused by serious policy and regulatory failures. But, again, the unions are not prepared to address the implications.

Without recognising the impact of policy and regulatory failures in the state and semi-state sectors - and advancing the case for major reform - unions and progressives cannot exercise the necessary public pressure on the price-gougers in the private, sheltered sectors. It just descends to a slanging match.

The Government is set on pursuing even more wage deflation; the Oireachtas is powerless. It is time for unions and progressives to present an open and honest assessment of the situation and to take steps to remove this Government.

Michael Taft said...

Rory - you make an important point and this is vindicated by the very few detailed sectoral studies undertaken. For instance, Forfas's study of retail enterprise costs show that while it is ostlier to operate a retail enterprise here in relation to Maastricht, wages are higher there. The key difference is rent plus professional ando ther inputs. Similarly with Enterprise Ireland's study of the print/publishing sector - low wages but still an uncompetitive sector benchmarked against other EU countries. Indeed, there is evidence that Irish producer/export prices are quite competititive and that the problem lies, not in the foregin-owned sector, but the indigenous sectors which have not so much become 'uncompetitive' as they have stopped competing in critical areas. I suppose it was easier to turn a fast Euro in property rather than invest in longer-term enterprises that could grow to scale and compete internationally. If this is the case, we have a real problem which no return to growth by our trading partners will resolve.

Paul - for myself, I might be more convinced of your position re: state/semi-state if you could produce some comparative figures on this - numbers that identify the real source of 'uncompetitiveness'.

Paul Hunt said...

@Michael Burke,

Thank you for your response. I am certainly interested in gaining an understanding of an elaboration your views on semi-states - and I suspect you may not fully grasp the extent of mine. I'm not sure that blog posts would do justice to either of us - and might induce tedium in others.

Perhaps it would be possible to arrange a seminar or workshop on these issues with a view to developing an outline policy document. Donal Palcic raised the possibility of this last year, but I have heard nothing since.

Paul Hunt said...

@Michael Taft,

I assume you were addressing me at the end of your last post. Two points: first, I think your focus on "uncompetitiveness" is valid but limited. Comparative or "benchmarking" analysis is but one tool in the economic tool-kit and it often conceals more than it reveals - and not just the usual "comparing apples with oranges". And "competitiveness" has limited relevance in the non-traded sectors. Economics has no shortage of tools to conduct an independent, objective assessment of efficiency.

Secondly, and leading on from this, I have conducted detailed analysis of the excessivley high costs of the electricity distribution networks (which may be extended to transmission and to the gas networks) but which I can't post here. It also possible to assess the impact of wrong-headed gas investment decisisons and of the single electricity market.

As per my previous post, I would welcome the opportunity for a seminar or workshop on these issues.