Wednesday, 28 April 2010
Could the people who have to pick up the bill please have a full, transparent and detailed account of who owns what to who. If we are to gamble with €20bn plus in capital transfers and thereby add to EU-measured Government debt, could we have a full cost-benefit analysis accesible to the Oireachtas and civil society? Too much to ask?
The credibility of the ratings' agencies ought to have been dealt a fatal blow by the sub-prime debacle. But, as far as sovereign debt is concerned, it seems financial market participants like to have an additional, outsourced voice of neo-liberal orthodoxy as well as their own. The FF-led government has done everythng demanded of them by the ratings' agencies, and more, so it might be impolitic to downgrade Irish government debt too.
However, the bond markets reflect the nature of the crisis. The yield levels at 10yr maturities for govt. debt were as follows as of close of business Tuesday (%, FT bond table);
Greek yields rose 81bps yesterday, Portugal up 59bps and Ireland up 46bps. Portugal is widely thought to be next in line from the ‘contagion’ effects of the Greek crisis. If so, in terms of both level and change in yields, Ireland cannot be far behind.
Of course, Ireland’s unique experiment in fiscal contraction was designed to “reassure the financial markets”. It has clearly done nothing of the kind. No-one, not even Greece, has a higher projected general government budget deficit this year. And many countries with higher levels of debt now have considerably lower yields, including Belgium, Italy and France.
Yield levels which exceed nominal growth rates, or more accurately the growth rate in taxation revenues which derive from them, cannot be sustained indefinitely. Perhaps, post the German elecions all will return to normaility and yields subside. Perhaps not.
But even in the optimistic scenario, it is clear that Irish government policy has failed in its own terms. Growth has not resumed, taxes continue to decline and the deficit continus to widen. Unsurprisingly, none of this has reasured financial markets and relative borrowing costs have continued to climb.
Perhaps it is worth trying to learn something from the Greek experience, as well as from others. The Greek recesion had been milder than the EU average, and recovering, before austerity measures were adopted, as both the PMI and GDP charts here show.
Now the Bank of Greece warns that the austerity measures themselves have lowered taxation revenues and argues therefore (!) for greater austerity measures. This sounds depressingly familiar.
By contrast, other EU countries adopted fiscal stimulus measures. Their debt has stabilised along with economic activity and they have been rewarded with much lower bond yields than Ireland.
Tuesday, 27 April 2010
Hover over any country and it will give the IMF’s projection for economic growth in 2011. For example, for Ireland it is 2.5% and say for Vietnam at 7.5%. Click on a country for more information.
I have added Ireland under dataset (on the right) and it comes up with the three main groups (advanced emerging etc) showing the biggest collapse in GDP on the graph to 2015 ...
So what are the likely effects of this contraction? An ESRI working paper presented by Thomas Conefrey at the Irish Economic Association’s Annual Conference this weekend in Belfast gives us some idea (The Behaviour of the Irish Economy: Insights from the HERMES Macro-economic Model). The ESRI paper uses a medium-term macro-economic model called HERMES to forecast the effects caused by a shock (such as an expenditure cut or a tax increase) on economic aggregates such as employment, GDP and government borrowing. As the authors acknowledge, the HERMES model does not handle how households’ expectations are formed and does not take into account how concerted policy changes alter perceptions about the Irish economy. A further caveat is that the paper is a little out of date in so far as it forecasts the effect of a shock occurring in 2009. Nonetheless the findings are still of more than academic interest.
So what are the medium term effects of a menu of possible shocks? The ESRI calibrated property, income and carbon taxes to raise €1 billion in tax revenue in 2009 and the forecast effects generated for year 6 are shown below (I use year 6 here because it is the longest range forecast). If the shock occurs in 2010 then year 6 refers to 2016.
Table 1: Year 6 effects of a €1 billion increase in tax revenue
(% change relative to benchmark)
Based purely on these forecasts it would appear that both the property tax and the carbon tax on the non-tradable sector are superior alternatives to an increase in the personal tax rate. Raising income tax appears to have the most damaging impact on employment; the most damaging impact on GNP and the smallest positive effect on the general government balance. The choice between a property tax and a carbon tax is less clear cut; however what is clear is that either option will negatively impact both growth and employment. The carbon tax will be more successful in minimising the damage to economic growth (an impact of -0.1 on GNP compared to an impact of -0.4 from the introduction of a property tax). Thus if output is the policy goal then a carbon tax seems preferable. However, pursuing a carbon tax in lieu of a property tax will come at the cost of extra jobs lost. The latest Quarterly National Household Survey estimates that there are currently 1,887,400 people in employment. Thus a decline of just 0.1% in employment is equivalent to a decline of almost 1,900 jobs.
Table 2: Year 6 effects of a €1 billion cut in public expenditure
(% change relative to benchmark)
Tables 3, 4 and 5 summarise the year 6 effects of the five comparable policy options.
Table 3: Year 6 Effect on GNP – Ranking the Policies
% Change in GNP relative to benchmark
Table 4: Year 6 Effect on Employment – Ranking the Policies
% Change in Employment relative to benchmark
Table 5: Year 6 Effect on the Government Balance – Ranking the Policies
% Change in the Balance relative to benchmark
In a different paper presented by Vincent Hogan at the IEA conference (Expansionary Fiscal Contraction: Deja Vu All Over Again?), the author found that there is no real evidence for the historical existence of expansionary fiscal contraction. Certainly the year 6 estimates generated by the ESRI’s HERMES model bare that conclusion out. The conclusion is that contractionary policies will have negative effects on output and employment. If contraction is the policy then the goal becomes one of minimising this damage. What the rankings in Tables 3, 4 and 5 show is that the damage can be minimised by focussing fiscal rectitude on the revenue side i.e., the least damaging long term economic impacts will be obtained through tax increases rather than through expenditure cuts.
The carbon tax and property tax options appear to be the most compelling options. However it is important to also consider the effects on the real economy. For example a carbon tax (depending on how it is designed) can have adverse distributional effects. In a recent study by Callan et al., (2009) published in the Journal Energy Policy; it was found that the distributional impact of a carbon tax in Ireland is indeed regressive. From a social policy perspective carbon and property taxes should be calibrated in such a way as to avoid any regressive effects occurring. If incorrectly designed property and carbon taxes have the potential to greatly increase poverty levels and to magnify Ireland’s already high level of inequality. Thus it isn’t enough simply to decide that a carbon/property tax is the best option. There are numerous ways that €1 billion can be generated through a property/carbon tax and careful consideration must be given at the design stage to minimise any regressive impact and to ensure that such a tax does not adversely impact the poorest in society.
Monday, 26 April 2010
The OECD has, recently, released data showing both the level and the ratio of youth unemployment (to the total) for OECD countries. See here. Ireland (the Republic) comes third behind Spain and the Slovak Republic in the absolute level of unemployment among 15-24 year olds. Taking account of emigration and the trend towards lower levels of labour force participation the true rate of non-engagement is under-stated. This represents a huge waste of human potential, a massive indictment of failed political policy and a wake up call to all to treat this matter as a national emergency. Where are the indices, the emergency measures, the bail-outs, the think pieces ....Does anyone care? Why is the issue of youth unemployment not treated with the same urgency as was the case in the mid-1980s when it reached high levels?
Thursday, 22 April 2010
In short, the Government keeps two sets of books: one for the EU which determines our General Government Balance (GGB or annual deficit) and our General Government Debt (GGD or overall debt) for the purposes of the Maastricht guidelines; GGB must be kept below -3 percent and our GGD must be kept below 60 percent of GDP). That’s one set of books – the other is for us. There’s nothing shady about this – there are a number of expenditure items that don’t appear on the EU books (e.g. payments into the Pension Fund), while there is revenue that appears on the EU books but not on our own (e.g. Social Insurance Fund surplus).
As a rule, expenditures in the form of bank recapitalisations don’t count in the EU books as they are considered equity investments. For instance, recapping Bank of Ireland through equity purchases should, in theory, be recouped. The Government had hoped that recapping Anglo-Irish would also be considered as an equity purchase and, therefore, not appear on the books they keep for the EU. Eurostat put paid to that. The money flowing into Anglo-Irish, according to Eurostat, could not realistically be considered an equity investment. Instead, it is now considered a straight-forward capital transfer. This transfer now appears on both sets of books.
Does this make any difference to the bottom-line? In one sense it is merely re-aligning statistical methodology with economic reality. At the end of the day, regardless of whether the capital transfer to Anglo-Irish appears on the EU books or not, it certainly will weigh down the economy’s books. This is money that has to be borrowed on the bond market. These borrowings will have to be serviced. For every €1 billion we borrow, we increase our debt servicing costs by €45 million at current rates. If the Government transfers the maximum amount - €22 billion – this debt servicing cost will rise to nearly €1 billion a year. It doesn’t matter whether the debt appears on this book or that; it will be a very real item on the current budget.
How will Eurostat’s reclassification impact on the Maastricht guidelines and the Government’s target of reducing the annual deficit to below -3 percent by 2014? Be prepared to receive two new words into the popular economic debate: the ‘headline’ deficit and the ‘underlying’ deficit. The Government will make this distinction to downplay the official (for EU purposes) GGB, or annual deficit, level.
For instance, prior to the reclassification, the Government estimated the GGB to be -11.7 percent. After today, it is 14.3 percent. The Government will claim that the former is the true, or ‘underlying’ figure; while the latter, the ‘headline’ figure, is merely the product of a one-off – in this case, the one-off capital transfer to Anglo-Irish.
The problem with this is that there may be considerably more one-offs in regards to Anglo-Irish. Philip Lane points out that such transfers will count on the EU books at the time of the commitment. While the Government may drip-feed the capital transfers into Anglo-Irish over a number of years through promissory notes, it will nonetheless be recorded in the year the decision is made. So if the Government commits €8 billion, it will be recorded immediately.
Still, the Government will hope to have done with these commitments so that by 2014, no such liability for the purpose of determining that year’s GGB, or annual deficit will arise. In that sense, they hope the ‘underlying’ reading will prevail.
But there is no such distinction when it comes to calculating our GGD, or overall debt. This will be a permanent feature. The Government had hoped to keep the GGD below 80 percent of GDP. If they have to hand over the full €22 billion to Anglo-Irish, the GGD will balloon to over 91 percent. Both the optics and the reality of that ballooning debt will not be good.
And here is where the Government is on a slippery slope. This reclassification will invite further scrutiny and this kind of scrutiny rarely has a favourable conclusion. Regardless of Eurostat rules, investors into our debt will start examining NAMA’s impact and may start their own mental reclassifications.
Further scrutiny may be made of the Government’s credibility in regard to their strategy. Already, the EU Commission has recently given a thumbs-down in its update on their excessive deficit procedure against Ireland. They have concluded that (a) the Government’s growth projections are too optimistic (and if this is the case, unemployment, tax revenue and the deficit will all go south); (b) the Government’s future fiscal consolidation plans are too vague; and (c) even if the Government somehow manages to hit their targets, they will still have to make more fiscal adjustments than planned for.
In short, this reclassification by Eurostat could prompt an opening up of Pandora’s deflationary box. Independent forecasters are already predicting lower growth and higher debt than the Government is doing – and that’s without today’s decision.
So the Government has no choice but to keep up this glorified shell game – continually reassuring all of us that nothing has changed. But it has. It is. It will.
And don’t forget – shell games are just a confidence trick. If you buy into it, you will lose.
Wednesday, 21 April 2010
The study is done as part of LSE CEP election analysis. This group does interesting studies of productivity, but currently is conducting reviews of the British election economic policies.
Hopefully, some of our economists will undertake a similar study for Ireland. From the CSO data for Ireland, hourly earnings are stable in the private sector, except in construction and, in financial services, where they have fallen, especially the bonuses. But not entirely for public servant Richie Boucher and too late for Fingleton, Sheehy, Drumm, Fitzpatrick, McAteer …………..and the rest!
In the UK, the LSE CEP found that, by 2008, the increased share that bankers were taking amounted to an extra £12 billion per year in wages alone. It says that “The size of these bonuses and their structure may have been a contributing factor to the financial crisis. Bankers paid large cash bonuses on the basis of short-term returns often unadjusted for risk have incentives to take on excessive risk.”
The British Labour Party proposed tax increases on big earners, and the LSE study finds that “There is very little evidence whether such tax rises will cause a significant number of firms and workers to leave Britain.”
The study concluded by saying that “The financial crisis raised awareness of the sheer size of bankers’ bonuses over the last decade. This group of workers have been the biggest gainers in the labour market, and they have significantly increased their presence at the top of the income distribution. The structure of bonuses has come in for sustained criticism as it allegedly increased risktaking in the financial sector to dangerous levels and contributed to the unravelling in 2007/8. The evidence suggests that simply changing the cash/equity split of such payments will not solve these problems nor will deferral if not associated with clawbacks.”
It argues that the recent sharp rebound in bonuses during 2009/10 “is likely to increase the popularity of higher marginal tax rates – or special bonus taxes – in spite of the potential negative effects from international mobility of workers and firms.”
So higher taxes will be both popular, but unfortunately, also necessary. Here we are already levying them, not for increased public services, welfare etc., but largely to bail out the banks and also to meet the basic day to day bills of the ship of state!
Tuesday, 20 April 2010
In particular, there is no evidence that any minister challenged the increasingly dangerous financial policies being pursued by minister for finance Charlie McCreevy in his budgets of 1999, 2000, and 2001. Those three budgets increased current public spending by more than one-half within that very short period of three years, at an annual rate of almost 15 per cent a year.The evidence is otherwise. Check out the latest downloadable Eurostat data (and go to Government statistics) Taking 2000 as a starting point - total spend was 31.3% of GDP. This figure moved up, during the Bertie years, to reach 36.2% by general election time 2007. By contrast, our already socialist afflicted Berlin-inclined EU neighbours (EU15) suffered a small increase from 45.4% in 2000 to 46% in 2007 - the year before the crisis broke and unemployment started increasing.
The thing is spending tracks revenue and revenue tracks the economy along with the business cycle and different electorates and different countries have different preferences and tastes for public spending. Some folks like to spend lots on childcare, hospitals and schools from various revenues - local and national. Other folks like to spend less and boast about us (us) while leaving the private sector, business, households and individuals take on the burden (for those who can better afford of course). Its down to political economy and there are no magic solutions. As for me I am more Ich bin ein Berliner than Bostoner. By the way, Germany’s public spend went from 48.4% in 1997 to 43.7% in 2008. So, if the Germans have to bail out some time we can say that we want their level of taxes and spending in equal measure.
Not only was there no rampant and runaway public spending in the noughties contrary to established wisdom, taking account of income growth and our depleted social infrastructure, there was retrenchment. The year Ruairí Quinn left office in 1997 public spend was 36.7% and it fell to 31.3% by 2000 due to the arrival of that other socialist Bertie. Neo-liberalism was having a party in Ireland at this time and the Seanies and the Fingles were laughing all the way before any accelerated property and lending boom in the 2002-2007 period.
In a previous blog by Nat O'Connor mention was made of a 'low tax target' of 34.9% of GDP.
However, we need to distinguish between total revenue (taxes plus social insurance plus other revenues to central and local government) and total taxes. Using latest Eurostat data, the % of GDP raised in total revenue was 34.9 in 2008. The corresponding total public spend ('Total general government expenditure') was 42.0%. Of the 34.9% in total revenue about 30.8 percent points was accounted for by taxes (referred to ideologically in Government accounts as tax BURDEN!). Moving forward to 2010 the latest estimates (from the Stability Programme Update SPU issued by D/Finance in December 2009) show 35.2% for total revenue for 2010 for Ireland of which 29.4% points is tax revenue.
If Social Justice's proposal for 34.9% points 'low tax' target were implemented right now (2010) it would push total government revenue up towards 40%. Keeping at that level for next 4 years would generate a lot of extra revenue (which could be used for higher spending). However, it would suggest a level of spending coming down gradually from 46.8% of GDP in 2010 (source: SPU update) towards what I estimate would be 42.8% in 2014 per Social Justice Ireland. This would be still short of the 'John Fitzgerald' benchmark of 45% and well short of the EU average (which was 47% in 2008 for EU15 average and is probably higher in 2010) and way way short of the 'Nordic' model used in France (!), Sweden, Belgium and Denmark (all above spend of 50% of GDP in 2008).
On the other hand, it may be argued that - all going well and avoiding another financial volcano and double dip etc - a gentle increase in revenue while keeping Ireland in the 'low tax' club can raise spending on welfare and public services. However, I would not like to sell a 'low tax' solution and comfort to the poor, the unemployed and children in schools and hospitals all in one breath. I'd aim for the top and compete with those Nordics. After all they have the highest well-being, best health and most cohesive societies and levels of civic participation. Now that's where we need to compete - on inequality and quality of life!
Monday, 19 April 2010
It appears to be due to Section 10 of the Official Languages Act 2003, which requires major documents to be published simultaneously in both Irish and English. The work of translating the Act will take several weeks. Hence, it could be well into May before it is available in either hard copy or online.
Meanwhile, the Act is law. On 9 April, the Minister for Finance signed Statutory Instrument (SI) 147 of 2010 bring the VAT changes into force. This SI refers to the original Act, yet interested parties cannot look up the sections mentioned because the Act is not available yet.
This all creates a transparency gap, which could last anything up to two months, given that this Finance Act is particularly long.
Now, it is not as bad as all that, because the Oireachtas website publishes each stage of the Finance Bill as it went through both houses. The final version ("as deemed to be have been passed by both Houses of the Oireachtas") is the same text as the Finance Act. (This document is also available in print from the Government Publications Office).
So the practical part of the transparency gap is resolved because the provisions of the Official Languages Act are neatly side-stepped. Although Irish speakers are currently denied the ability to discuss the technical detail of the final version of the Bill as Gaelige, as it is in English.
But does all this really create a major lack of transparency? Not in practical terms, once I learned that the final Bill on the Oireachtas website text won't be further amended. Maybe this was obvious from the 'deemed passed' label, but as someone looking at the later amendments of the legislation, I want to see the definitive text of the Act, so I can be absolutely certain there will be no more last minute changes.
I have a lot of sympathy for frustrated Irish speakers, who for decades were denied the ability to interact with public bodies in their native language. But there is a basic 'rule of law' requirement that if a new law is brought into force, then on principle the text should immediately be available, without delay.
The Official Languages Act doesn't state that legislation must be published simultaneously, only the more general heading of documents of "major public importance". Yes, I think the Finance Act 2010 is of major public importance. But I think the principle of transparency of the law, that laws must be published when they come into force, must take precedence.
In which case, one option is that the translation must take place before the Act becomes law; which means that this too must be completed within the strict time limits established by the Constituion for money bills.
Saturday, 17 April 2010
How long will the eruption last, will it impact on the food supply and on the world's climate?
The problem with volcanic eruptions is that you really don't know what they're going to do.
Sally Sennert, a Smithsonian Institution volcano expert, says that the eruption could last for months, just as Eyjafjallajokull's previous one did back in 1821-23. But she said, "there's no telling how long the eruptions could last." This volcano is Eyjafjallajokull and its eruption of ash doesn't contain much sulphur, which is needed to generate the sulphuric acid droplets that could linger in the upper atmosphere and have a cooling effect on climate.
In 1991, Mount Pinatubo in the Philippines, the second-largest eruption of the 20th century (much larger than Eyjafjallajokull), sent a sulfuric acid haze into the stratosphere, reducing global average temperatures about 0.9 degrees Fahrenheit over the following year
Back in 1783, Laki in Iceland erupted over an 8 month period during 1783-1784 from its fissure and the adjoining Grímsvötn volcano, pouring lava and also poisonous acid and sulphur clouds. These clouds killed over half of Iceland's livestock, leading to famine which in turn, killed a quarter of the population.
But it had a big impact in Europe too and some say it contributed to the French Revolution taking place. This was because it caused extremes in climate for several years with frosts in summer, droughts, clouds etc and led to food shortages all over Europe but particularly in France.
Ben Franklin wrote in 1784:
During several of the summer months of the year 1783, when the effect of the sun's rays to heat the earth in these northern regions should have been greater, there existed a constant fog over all Europe, and a great part of North America. This fog was of a permanent nature; it was dry, and the rays of the sun seemed to have little effect towards dissipating it, as they easily do a moist fog, arising from water. They were indeed rendered so faint in passing through it, that when collected in the focus of a burning glass they would scarce kindle brown paper. Of course, their summer effect in heating the Earth was exceedingly diminished. Hence the surface was early frozen. Hence the first snows remained on it unmelted, and received continual additions. Hence the air was more chilled, and the winds more severely cold. Hence perhaps the winter of 1783-4 was more severe than any that had happened for many years.
The cause of this universal fog is not yet ascertained... or whether it was the vast quantity of smoke, long continuing, to issue during the summer from Hecla in Iceland, (it was Laki) and that other volcano which arose out of the sea near that island, which smoke might be spread by various winds, over the northern part of the world, is yet uncertain.
What if this volcano continues to spew or if others erupt? We are have much better seed crops, farm systems, etc. than in 1783, but in the end, we need the sun to generate plant life.
The economic impact on the European aviation industry has already been dramatic (and on shipping in reverse), but if prolonged, it could have a bigger impact on agriculture and food prices. And this is on top of NAMA and the 20% collapse in national income (GNP) since 2007!
Friday, 16 April 2010
The Department of Sociology and the National Institute for Regional and Spatial Analysis at NUI Maynooth are holding a symposium on May 6th on “Liberalism in Crisis: US, UK and Ireland”. The conference is free but we are asking that people register before Wednesday April 30th.
Registration form and details at:
Further details of the event below.
Department of Sociology, NUI, Maynnoth
Liberalism in Crisis: US, UK and Ireland
Renehan Hall, South Campus, NUI, Maynooth, Thursday May 6th,
Paper titles provisional
9.30 -11.15 Liberal states and responses to the crisis (Chair: Mary Murphy, NUIM)
Prof Fred Block (Dept of Sociology, University of California, Davis)
- Global Crisis, US Responses
Prof Colin Hay (Dept of Politics, University of Sheffield)
- UK and Irish responses to the crisis – a comparative assessment
Prof Seán Ó Riain (Dept of Sociology, NUI, Maynooth)
- Liberalism, Politics and Capabilities: The Dilemmas of Crisis in Ireland
Coffee 11.15 -11.45
11.45 -1pm Institutional and governance responses to crisis (Chair: Bill Roche, UCD)
Joe Ruane (UCC) The Nature of the Irish Political Economy
Joe Larragy (NUIM) Partnership in Crisis?
Niamh Hardiman (UCD) Politics in Crisis?
1 - 2 Buffet lunch in venue
2-3pm Re-Constructing the political economy (Chair: Seán Ó Riain, NUIM)
Teresa Hogan (DCU) The Smart Economy
John Barry (QUB) The Green Economy
Ann O’Brien (NUIM) The Tourism Economy
3- 4pm Economic restructuring, impact on working lives. (Chair: Peter Murray, NUIM)
Aphra Kerr (NUIM) Working in I.T: Irish Games and Animation Industries
James Wickham (TCD) Migration and Restructuring of the Irish Labour Market
Mary Murphy (NUIM) Unemployment, Activation and Gender
4.00- 4.15 Coffee
4.15 – 5 Roundtable
Spaces limited. Free of charge Register by Wednesday 28th April.
Booking form and further information at http://sociology.nuim.ie/LiberalismInCrisis.shtml
The BBC provides a General Election page where summaries of the policies of all the UK's parties can be compared, with links to their full manifestos.
I won't repeat the details here, but familiar questions arise in the UK debate: How fast to cut the deficit and national debt? What efficiencies and cuts in public service can be made without impairing frontline services, especially health? What minor tax/social insurance changes can be made to raise revenue and/or promote economic activity? What further reform of banks is required? Should banks' retail and investment arms be separated? etc.
There are not too many new suggestions, even from beyond the main threesome. The Greens are championing Tobin Tax (aka Robin Hood tax) on financial transactions. UKIP have taken up the flat tax argument (replace all income tax and national insurance with a single rate of tax). Plaid Cymru propose to "create a council of ministers, business leaders, industrialists and trades unions leaders to take a strategic overview of debt reduction". The Scottish Socialist Party propose replacing Council Tax with an income-based "Scottish Service Tax".
The DUP are contining their policy of a business rates freeze, whereas Sinn Fein want to "force banks to allow mortgage holders to reschedule repayments and allow movement from fixed to variable rates without financial penalties".
Meanwhile, the newer TUV (Traditional Unionist Voice) "Oppose moves towards an all-Ireland economic policy" but "believe that a 'low taxation economy', with 'optimum business freedom', will maximise growth." So what part of Southern economic policy are they not converging with?
The third TV leaders' debate, to be held on BBC 1 on Thursday 29 April, will focus on the economy. The BBC will also be hosting a debate between Northern Ireland's party leaders, which may give insight into the future policies likely to be adopted by Northern Ireland's Assembly.
Wednesday, 14 April 2010
The book, as its title indicates, is a fierce attack on how the adherents of free market economics brought the global economy to its knees. Stiglitz is scathingly critical of the conservative (free market) view and argues that it is far better to raise taxes on those who can afford them than cutting expenditure and welfare in a depression.
It is again deeply disappointing that an august body like the ESRI continues to devalue its otherwise excellent analysis and research by equating wage movements with “competitiveness.” A cursory glance at the reports issued by the National Competitiveness Council would demonstrate that the issue of competitiveness is far more complex than wage movements. (See for example, the NCC’s Benchmarking Ireland’s Performance, posted below, where wage costs, unit labour costs, etc. are compared and not found to be as vital as some would have us believe, p59-63).
A clear understating of the complex issue of competitiveness is vital if we are to get ourselves out of this deep hole.
It is also deeply disappointing - and perhaps disingenuous - that the ESRI and many other conservative economic commentators, who are “wage movement obsessives,” neglect to look at comparative international labour costs. Could this be because Ireland, in spite of rises in recent years, is still down the list on total labour costs? And what about Irish productivity? Not booming in recent years, but still high.
The ESRI has been quite obsessive about falling wages in the private sector. In its latest report, it admits that “there was no conclusive evidence of falls in hourly earnings in the private sector.” Yet it desperately wants such cuts in wages – to fit in with its crude wages=competitiveness model. In spite of the evidence to date, it then predicts “our expectation is now that wages across the economy will have fallen by 2 per cent in 2009 and that they will fall by 3 per cent in 2010 and by a further 1 per cent in 2011.” However, this will be due largely to the imposed cuts in public sector earnings and reduced working hours all over the private sector. They got it wrong so far on wages in the private sector, and maybe they will be wrong again on this projection.
In fairness to John Fitzgerald of the ESRI, some time ago he said that the justification for the cuts in public sector wages then being mooted in Government was weakened by the fact that private sector earnings (per hour - the way to evaluate such movements) had not fallen. This is still the case.
The ESRI says that “our forecasts suggest that labour’s share of GNP will fall from 54.6 per cent in 2009 to 50½ per cent in 2011. This demonstrates that we are optimistic with respect to the competitiveness challenge which built up in the years leading up to the economic collapse.”
This fall in labour’s share of national income, of course, means a greater share for capital, including the banks. What is interesting is the simplistic tie-in of falling workers’ incomes with improved “competitiveness”. Why would one be so “optimistic” when the fall in wages will further reduce plummeting domestic demand and, thus, employment?
The ESRI report itself shows how consumption fell by 7.2% in 2009, and while they hope it will fall by only 1 per cent this year, they seem to be doing their best to cheer on a greater reduction engendered by pro-cyclical, deflationary polices.
Today’s retail figures are not good when one strips out the state subsidies to car buyers. The fall is a substantial -6.8% in the year, up from under -3% in 2008.
Investment, they also tell us, collapsed by a staggering 30% last year, and they take comfort in that it will only fall by a massive (is that smaller than staggering?) 20% in volume terms this year. Imports have fallen so much - due to reduced earnings and increasing joblessness - that the balance of payments is improving substantially. This is also aided by the very strong performance of Irish exports (why have exports done so well, if Irish wages are so high?). With no jobs policies, a quarter of a million more people (244,000 per ESRI) will be out of work at the end of this year than just two years ago. Thus, demand will fall further. Why is the deflationary impact of government policies not seriously considered by the ESRI?
Yet if one reads the report, one can see that the collapse in the banks, (the ESRI’s own figure is a gross cost of €73bn in taxpayer bailout) and and the fact banks are still not lending to small businesses etc., are the real issues hitting competitiveness.
Perhaps the ESRI should be more precise in its use of English and talk of “wage competiveness”. It should perhaps really be “wage movements”, if one is not including productivity and the impact of exchange rate movements. This is a much more precise definition - more accurate and informative. But perhaps less ideological?
The ESRI commentary admits it got it seriously wrong on the cost of the public bailout of the banks. “The revelations in respect of the scale of losses in Anglo Irish Bank and the consequent needs for recapitalisation were well beyond anything that we, like many others, (but not all) had anticipated.”
It predicts that the net cost of the bank bailout will cost Irish workers and other taxpayers a staggering €25bn. This is 80% of this year’s total tax receipts of €32bn. And it could be much more. This is what is really hitting our competitiveness in my opinion! Why is this issue dominating media? Because it is the key economic issue. Not wage movements.
The optimism regarding a hoped-for recovery of 2 or 3 per cent growth next year pales significantly when one realises that the Irish economy will be a huge one-fifth (20 per cent) smaller (GNP) this year than at its peak in 2007.
Tuesday, 13 April 2010
In order to increase employment and reduce unemployment starting almost immediately and further reduce unemployment in the years to come, I suggest(ed) three stimulus packages costing €5.23 billion between them.
The first involves the government injecting money directly into viable new high- knowledge industries as put forward by the Expert Strategy Group report Ahead of the Curve (2006). These are in biomedical devices, sustainable energy, food ingredients and high quality food products, telematics, and Information and communications technology. There are currently 250 research clusters which have spent almost €3 billion in government funding for research under Science Foundation Ireland, and very few are being mainstreamed. The best of these should be mainstreamed and vetted in advance. They must start very big to compete with foreign competitors, and should be looking to employ several hundred people. As such, each should receive tens of millions in state investment through the quadrupling of the budget of Enterprise Ireland and the establishment of a state development bank. These indigenous exporting companies would not repatriate profits, and there would be very little leakage of resources out of the economy.
- Government needs to invest at least €5 billion in stimulus 2010 + 2011
- Companies should be vetted and viable ones aided within 3 months
- Government should give 50% in grants in return for shares to be redeemed over 10 years and 50% in loans
- High quality retraining should be provided in parallel through state training agencies to match the relevant skills needs
- Re-training allowance of €330
- Priority should be given to indigenous enterprises
- Should include viable and strong state-owned enterprises which would pay dividends to the state
- A state Development Bank should be established, working alongside higher budgets for Enterprise Ireland
The second arm of the stimulus package involves investment in social, health and educational infrastructure:
- Schools building programmes (extra €400 million)
- Revolutionising mental health services as provided for in Vision for Change (2006) = €750 million.
- Publicly provided geriatric facilities (extra €300 million)
The third stimulus package exploits the low cost of housing for the government, and proposes having the banks fund €100,000 per housing unit enabling the Government to purchase 50,000 low-cost affordable homes to eliminate the housing waiting list. The government would initially provide over €5 billion, and when the saving in rent allowance and the recouping of the cost of €35,000 in mortgage proceeds by the banks is taken into consideration, the net cost to the state would be about €1.5 billion. This would equate to the cost of the state holding on to 15,000 of the 50,000 housing units to increase the local authority housing stock for those who would not be in a position to pay €800 a month to afford the mortgage of €100,000 in respect of the 35,000 affordable housing units provided by the state and mortgaged with the banks. Given that the government is injecting an extra €9 billion at least into the two big banks, with the government now becoming the biggest shareholder, one quid pro quo would be for the banks to grant 35,000 mortgages to those on the housing waiting lists. The data is as follows:
- Government purchases 50,000 housing units for 5 billion @100k each
- 35,000 sold to those on waiting lists at 100k each.
- 15,000 rented by local authority
- Banks finance the purchase of 35,000:
- Govt gets back €3.5 billion, and saves € 270 mill on rent allowance. Net cost = €1.23 billion
Monday, 12 April 2010
Let’s assume that pay cuts are not reversed but that the agreement stays in place until 2014 – in particular, the clause:
‘There will be no further reductions in the pay rates of serving public servants for the lifetime of this Agreement.’
This clause, of course, refers to nominal pay rates – not pay rates in the real world. In the real world, what would happen to pay rates?
The Government is projecting an inflation rate of 8 percent between 2010 and 2014. Therefore, if the agreement is strictly adhered to (‘no further reductions’), public sector workers will face substantial real (i.e. after inflation) pay cuts.
Those on low pay could face up to €2,800 in real pay cuts between 2010 and 2014 (or €700 per year) while those on average pay would experience pay cuts of €3,600 (or €900 per year).
These numbers depend on the level of inflation. The Government projects it will be approximately 2 percent per year starting in 2011. The Central Bank, however, projects inflation in 2011 at 1.1 percent. The lower the inflation rate, the smaller the real pay cut. But cuts there will be.
That only tells part of the story. Some workers will face more cuts than others. Already, workers with mortgages (in particular, younger workers, many with families) are experiencing rising interest rates with more increases on the way. This will not affect older workers as much.
Nor does any of this count any extra taxation or further spending cuts. Again, in an inflationary context, some of this could take the form of freezing tax credits and tax bands. It won’t look like a tax hike, but in real terms it will be.
If pay were to say constant in real terms – using the Government’s projections – then it would have to rise by 8 percent over the next four years. If there is to be a negotiated reversal of pay cuts, this would be additional to the 8 percent. None of this is likely.
Public sector workers are not only being asked to sign up to real pay cuts, they are being asked to lock themselves into a long-term agreement. I am open to correction, but this four-year deal is one of the longest, if not the longest, agreement negotiated since 1987. That only the Government has an opt-out clause only reinforces this lock-in.
Public sector workers will face a difficult choice when it comes to voting on this agreement. However, for there to be an informed choice, all the facts should come out. And one of them is that, on current trends, acceptance of the pay agreement could lead to substantial real pay cuts.
Fine Gael has published a number of economic policy papers recently, including New ERA (its stimulus plan - revised November 2009), A Fresh Start for Jobs in Small Businesses and Hope for a Lost Generation (a plan to cut youth unemployment by a third). These documents are a fair place to start, to look at what Fine Gael proposes to do in office and to see to what extent this represents a break from the economic paradigm that got us to where we are today.
This is not intended to be a point-by-point critique, as I am only looking to identify Fine Gael's economics, not dispute the detailed costings, etc.
NewERA is essentially about managing the semi-state sector better, including using them to borrow money for investment in infrastructure (and creating 105,000 jobs), for which they will seek a commerical return through charges on customers. The major plank of this is renewable energy (Ireland to use 50 per cent renewable energy by 2020). A major broadband roll-out is envisaged, as is upgraded water infrastructure.
So far, this could be a policy objective from the left, right or centre. However, the proposed mechanism is a commercially driven semi-state company (NewERA Ltd) which will manage five merged/restructured semi-states. It will operate commercially, with the CEO and board appointed by the Taoiseach. A big, cross-utility merged regulator will ensure more powerful, "pro-consumer" regulation.
Fresh Start is sub-titled "18 ways to support small business and save jobs". In an introductory message from Enda Kenny, Fine Gael "commit to preserving our low tax model as the best means to promote growth, enterprise and employment." The 18 specific measures include: employers PRSI exemptions/subsidies; a national recovery bank; reducing VAT; abolishing the travel tax; reviewing Employment Regulation Orders (legally-binding pay agreements in hotels, retail, etc); prompt payment from State bodies; cutting red tape; business and employment units in local authorities; reducing energy costs; freezing local authority rates; and supporting start ups.
Hope for a New Generation includes: a national internship programme; a back to education schmeme; Community Employment schemes; workshare; and the above 'jobs tax cuts' (on employers PRSI).
From this snapshot, I can conclude that Fine Gael intend to refocus the State's involvement in the economy towards jobs. There is a recognition of the high multiplier effect of State investment in capital projects. Likewise, the policies also recognise the fact that SMEs provide many Irish jobs and that supporting them is important. There seems to be a reliance on tax cuts or tax expenditure (credits, allowances, etc.) to stimulate economic activity. There is also some long-term thinking about Ireland's energy security and the potential of a good return from investment in renewable energy generation.
The economics underlying the proposals seem orthodox and do not address the major problems shown by the global economic crisis. Although the decisions of recent government added miseries to the Irish case, the global crisis still requires all parties to re-think the received wisdom of economics in a much more fundamental way.
As an example of such a rethink, Social Justice Ireland have published "An Agenda for a New Ireland" (Full PDF here). They argue that "Ireland’s policy-making for more than a decade was guided by many false assumptions" including the assumptions such as: "Economic growth was good in itself"... "Infrastructure and social services at an EU-average level could be delivered with one of the lowest total tax-takes in the EU." ... "The growing inequality and the widening gaps between the better-off and the poor that followed from this approach to policy-development were not important as everyone was gaining something." ... "Low taxation was good." ... etc.
The failures which stem from these false assumptions include: "Failure to take action to broaden the tax base or to promote tax equity."... "Failure to overcome infrastructure deficiencies,"... "Failure to adequately address high energy costs or to promote competition in sheltered sectors of the economy," ... and "Failure to appropriately regulate the banking and financial services sector or to manage the growth of personnel numbers in the public service."
The SJI document alone poses questions for the Fine Gael policies. And the criticisms of recent Government economics cannot all be dismissed as part of 'crony capitalism'. There are genuine questions to be answered by advocates of the orthodoxy. For example, if Fine Gael are commited to Ireland's low tax model, how do they define that? Does it leave scope for a restructuring of the tax system to make it more egalitarian? Does it leave room for some increase in tax, as you simply can't have average European level of services without average European levels of tax?
Indeed, Social Justice Ireland proposes retaining relatively low tax (35 per cent of GDP, p. 26), versus recent suggestions by the ESRI's Prof. John Fitz Gerald, who would prefer Ireland to move to EU average levels (45 per cent of GDP). Where is Fine Gael on this issue?
On a more fundamental level, what about economic growth? Have Fine Gael seriously considered alternative ways of measuring economic progress, including quality of life, health, education, environment, distribution of wealth, etc? What about suggestions that the economic situation of most people could improve, despite a fall in GDP, if there was better organisation of the economy? In the long-term, a green economy cannot rely on continued growth models.
Fine Gael's policies seem to reflect a belief in the commercial sector and market forces that is not based on the evidence of the global crash. For example: banking regulation failed; corporate governance failed; long-term planning did not occur; and wealth was further concentrated in the hands of fewer people. So, why should we have faith in a "commercially driven" semi-state sector or in continued adherence to Ireland's disreputable low tax strategy?
Looking for more insight into the above, Richard Bruton's blog posts add some more detail. In March 2009 he posts the press release for the launch of the NewERA idea. The familiar buzz word "competitiveness" seems to be the driving force behind it. More recently, in January 2010 he discusses the Competitiveness Council’s Reports. These are referenced as reasons underpinnng the NewERA proposals. For example, "dissipation of responsibility across 34 separate public authorities has resulted in poor planning and appalling waste"... "it is no longer essential that the State owns all of the capacity for producing gas or electricity, though the grids must remain publicly owned." ... "All of the investments will be on strictly commercial terms. The companies involved will commit to servicing their loans without a State guarantee. This will bring a new element of commercial realism into the operation of companies and force new disciplines into their operation." This post has a press release feel to it too, nevertheless it further clarifies what Fine Gael envisage 'competitiveness' means.
A serious consequence of the above policies seems to be a shift from taxation to charges - charges for water, waste, energy at "commercially driven" rates. How will waiver schemes work in this context? Currently, private commercial waste collection firms don't always offer them. There is a real risk of a set of charges being levied on household incomes in lieu of a more broad-based and progressive tax system. This would be regressive in effect, as those on lower incomes would pay proportionately more of their incomes.
Another logical consequence of the above policies include weakening local authorities - by freezing rates for five years and limiting their role in water services to being "agents" of the proposed Irish Water national utility company. There is a pressing need to reform local authority funding, and a rates freeze sends the message of 'no change' for five years, while local services (like roads) continue to deteriorate. How can we have new local politics without funding reform? Also, it is glib to suggest that water leakage stemmed from "dissipation of responsibility" across the authorities. There has been a lack of capital investment in water (and other basic infrastructure provided by local authorities, like sewage and flood protection), which in turn was due to Ireland's low tax base and, in particular, the inadequate funding of local government.
Also, in terms of injecting "commercial realism" into the provision of utilities, what is to stop the State being stuck as the 'insurer of last resort' if commercial power plants threaten to turn off the lights? How will the commercial operation of firms be regulated to prevent short-term profiteering or asset stripping at the expense of long-term investment?
Whether a general election occurs in 2012 or sooner, Fine Gael is reasonably likely to lead the next government. If so, Fine Gael's focus on jobs and stimulus is welcome. But the above documents are more about suggestions for how FG would manage the State's role in the economy, broadly based within current constraints and without challenging the dominant economic orthodoxy.
Hence it is important to begin a more in-depth, open, public discussion about the assumptions Fine Gael (and other parties) make about economics. As a number of posters on this blog have commented, alternative or progressive economics is not the sole preserve of the 'left' (howsoever defined).
If Fine Gael are seeking to control Ireland's Ministry of Finance for the five or ten years after the next general election, then - especially in the context their proposals on New Politics, including open government - I hope that Fine Gael will publish more about their economic perspective and assumptions so that we can examine alternative options and discuss what economics represent the long-term public interest.
One thing Richard Bruton blogged in December 2009 about the budget was "To successfully implement change, you have to build a broad-based coalition to implement it." I hope this is Fine Gael's belief about economics, because any claim to offer "new politics" is an illusion if the economic paradigm to be adopted is "non-negotiable".
Dan McLaughlin of Bank of Ireland said
"It is true that Irish hourly earnings in manufacturing have risen by 69 per cent over the past decade, against a 39 per cent rise in our main trading partners, but Irish productivity has also outpaced the competition, with the result that Irish unit labour costs in manufacturing have fallen 14 per cent relative to our trading partners over the past decade, according to Central Bank data."
Different versions of the article appeared in the breaking news section and the finance section.
This is more evidence that the government got its diagnosis wrong, and is administering medicine for the wrong condition.
Sunday, 11 April 2010
‘We have not adopted a stimulus package and our banks are more zombified than most. What we have done is precisely the opposite to what the US has done. In the middle of the worst recession in our history we have brought in three of the most deflationary budgets ever conceived. We now realise to our cost that Nama and massive capital injections will not get the banks lending again any time soon. In fact when the banks cash in their IOUs for European Central Bank (ECB) funds they are likely to use them to buy safe Government bonds.
On top of that, the Central Bank is allowing banks to raise their lending interest rates to improve their profit margins without any signal from the ECB. This is the second de facto tightening of monetary policy. The chances are that it will be further tightened by the ECB sometime next year. We are also promised at least two more deflationary budgets, including carbon taxes and property taxes. Because of the massive re-capitalisations of the banks, tax-payers are facing a very bleak long-term future. How can consumer demand recover?
In the middle of the worst depression ever experienced, we are inflicting upon ourselves five deflationary budgets and at least three restrictive monetary policies. In the past, Irish economists have criticised former finance ministers for following pro-cyclical stances of policy. But that was nothing compared to what is happening now.
Admittedly the climate for foreign borrowing is less auspicious today, but it does not appear as if the Government even considered the implications of piling deflation upon deflation. There is a chance that, as a small open economy, the deflationary effects here can be mitigated. But, nevertheless, the Government has taken a huge risk with the economy, without analysing the downside implications.
Ministers keep on saying how the EU is pleased with our economic policies. Of course they are. That is because we have promised to keep to the EU fiscal guidelines. The financial markets are also pleased with us. But none of these institutions cares about the effects on the real Irish economy, on unemployment or emigration. Let us hope and pray that we have not deflated ourselves into the ground to satisfy Brussels mandarins, financial markets and Irish bankers.’
Friday, 9 April 2010
The rational thing to do is to weigh the potential outcomes and then choose the best action as judged by the likely consequences. We cannot expect, and we do not require, certain knowledge of the consequences. Our powers of forecasting and prediction are fallible in the extreme. We are not immune to unintended consequences. The Government’s obligation as responsible decision-makers is thus simply to objectively consider all of the options based on existing evidence and then make a judgement informed by reasoned expectations.
Progress and improvement in the status quo, whether on an individual or a national level, requires constant questioning; investigation; self reflection and judgement. Yet the TINA (There Is No Alternative) mantra that is being promulgated by the Government and by elements of the mainstream media dogmatically rejects even the consideration of alternative strategies. As such TINA is an attack on rationality and the decision-making process itself. This is particularly ironic because economics is supposed to be the science of decision-making subject to constraint. The sheer paternalism and anti-intellectualism of TINA is simply staggering. The philosopher kings have spoken and we are to acquiesce. There will be no consideration of alternative strategies.
Yet the advisors and decision-makers in Government cannot know with certitude what the actual consequences of their chosen actions will be, particularly in a complex system like the macroeconomy. So where does the justification for the claim that there is no alternative come from? Perhaps their record of economic management and forecasting is so impressive that we should simply trust that they know what they are doing? These, of course, are the people that felt it was a good idea to construct budgets whose very sustainability was dependent on the bizarre assumption that a particular asset price would continue to rise indefinitely. Are we now to assume that these people have suddenly gained such an understanding of the probabilistic outcomes of each competing strategy that their judgement is infallible?
What was the argument for the light touch regulation and Thatcherite individualism of the last decade? Was that strategy chosen based on a probabilistic analysis of what was in the interest of the citizens of Ireland? Or was it simply a dogmatic implementation of a laissez-faire economic ideology?
Similarly, what are the intellectual underpinnings for the current Government strategies? Were the current strategies chosen based on a thorough analysis of the likely outcomes of a set of competing alternatives? Or are the current strategies the result of groupthink?
Where are the economists in this decision-making process? There needs to be a full debate within the economics profession in Ireland. What does economic theory suggest, and what does historical experience suggest? Everything should be considered and weighed on its merits, and we must accept that there is probably no best alternative. Choices have to be made and that implies sacrifices. Nonetheless, the goal should be to minimise the hardship.
The economy is broken and appears to be in a vicious cycle of decline. Revenue continues to fall and unemployment continues to rise. Intervention of some kind is required. One suggestion is that a stimulus through Government investment is the best way to intervene. The arguments against investment are, of course, that we simply cannot afford it, and that even if we could it wouldn’t work. The crowding-out argument suggests that no permanent increase in employment can be obtained through state spending on capital projects, and that the only effects of stimulus will be inflation and market distortion. But the crowding-out of private investment is only likely when the economy is already close to full employment, and so this argument is not relevant in the present context.
Identifying the best strategy comes down to correctly analysing whether there is something preventing the proper workings of the economic system, or whether the system will naturally be able to correct itself on its own after a period of time. If the former is true, then we can expect either economic stagnation or for the vicious cycle of decline to continue, but if the latter is true then we may reasonably expect a return to potential output.
The cost to the budget cannot easily be dismissed. However, if it can be shown that a strategy of temporary Government investment can boost economic growth and employment, then investment can lead to a smaller budget deficit as a proportion of nominal GDP. The success of such a strategy will depend on the value of the multiplier. What is important is that a scatter gun approach to investment must be avoided. Investment must be made on a case-by-case analysis of the probabilistic outcomes. Such an analysis can identify where the largest multipliers are likely to be found.
It is time to move away from unquestioning acceptance of the current strategy. A national debate is needed and the economics profession needs to take a lead role. The likely consequences of all the various strategies need to be analysed, and the results of these analyses need to be articulated and widely disseminated at all levels. The TINA mantra can no longer be tolerated.
This detailed report provides both a critique of government policy in the previous year and a set of alternatives aimed at producing a more equal society.
This year's report is entitled An Agenda for A New Ireland and was published on April 6.
Social Justice Ireland argue that a series of ‘false assumptions’ have underpinned government policy in recent years and are directly responsible for our social and economic crisis.
Politicians and senior policy makers believed that economic growth was a good in itself, and that the benefits of economic growth would automatically trickle down to all.
They also believed that a world class social and economic infrastructure could be built on a low tax base.
Alongside these ‘false assumptions’, argue Social Justice Ireland, was a belief that ‘the growing inequality and widening gaps between the better-off and the poor…were not important as everyone was gaining something.’
As a consequence of these assumptions, a series of policy mistakes was made across all government departments.
Government failed to broaden the tax base, leaving it vulnerable to the crash in the housing market, declining consumer demand and rising unemployment.
Government also failed to adequately invest in our social and economic infrastructure, in turn undermining our competitiveness and social-cohesion.
They also failed to adequately regulate key sectors of the economy such as rents, energy and banking, opening the way to spiraling costs and the collapse of the state's entire financial system.
The government's continuing adherence to these flawed policies, argue Social Justice Ireland, is making the current crisis worse.
In place of these flawed policies, Social Justice believe that ‘Ireland needs a new vision to guide policy development and decision making if it is to move beyond the current crises.’
The socio-economic review sets out four core values ‘that should underpin a guiding vision for Ireland in the years ahead’.
Firstly, it argues that every man, woman and child should have ‘what is required to live life with human dignity’, including adequate income, services and opportunities to participate in society.
Secondly, it argues that economic, social and environmental sustainability should be a ‘central motif in policy development.’
Thirdly, it argues that equality and a rights-based approach are placed at ‘the core of public policy.’
Finally, it argues for the idea of the ‘common good’ as opposed to individual advancement, should be a ‘constant goal of policy development.’
The report goes on to outline detailed policy proposals through which Social Justice Ireland believes these four core values can be achieved.
Among the proposals are:
• Raising the total tax take in a fair and equitable manner while keeping Ireland a low tax economy (i.e. below 35% of GDP)
• Investing in the states infrastructure and social services to being them up to EU-average levels
• Reforming public services to ensure it maximizes its capacity and delivers appropriate outcomes
• Addressing short-term and long-term unemployment.
• Reducing poverty with a particular focus on child poverty.
Social Justice Ireland’s 2010 socio-economic review provides a comprehensive assessment of the weaknesses in the government’s current policy agenda. It also provides a wide range of policy alternatives which it believes, if implemented, can make Ireland a more equal society.
A full copy of the report can be downloaded here.
For those who are interested, a book based on the conference containing the contributions of 39 economists has been published.
The introduction is already freely available and the individual contributions will shortly be available for free download from here.
Thursday, 8 April 2010
Two main arguments have been put forward in favour of pursuing a policy of wage cuts.
The first is to cut public sector wages in order to improve the public finances. Some countries that had experienced credit fuelled booms prior to the recession had accrued structural deficits. This was because the credit boom gave the illusion that countries were on a sustainable growth path, and governments cut taxes or increased spending above a sustainable level. Since the credit bubble has burst affected governments are trying to close the deficit by increasing revenue by increasing taxes or by cutting spending and public sector wages. Governments must be careful not to further reduce demand but cutting the wages of those on lower incomes, who tend to spend a higher proportion of their income. Also reductions in structural deficits can be partially offset by increase capital spending, increasing countries’ potential for long-term growth.
The second main reason given for reducing wages is to ensure a competitive ‘simulated devaluation’(1). Prior to the introduction of the Euro, when countries were affected by a recession one available policy option was currency devaluation. This policy was followed by several European countries in the early 1990s and in 1992 lead to the collapse of the European Exchange Rate Mechanism (ERM). When a country devalues its currency the price of its exports to foreign markets falls. This causes its exports to be more attractive relative to competitors, leading to increased employment in the export sector. The price of imports also rise however, so consumers spend less on imports (perhaps substituting imports for domestically produced goods) as their real incomes decrease.
In parlance, with a ‘simulated devaluation’ rather than actually devaluing the currency, its effects are simulated by reducing all prices and wages in the economy. The aim is that by reducing nominal unit labour costs, and the price of other inputs, the output of firms will be more price competitive, boosting net exports. In practice however it is wages that are targeted rather than other prices such as prices for consumer goods, or intermediate inputs to businesses such as rents and energy costs. So whereas with an actual devaluation the burden is spread across the economy (though borne most by those who spend a large proportion of their income on imports) with a simulated devaluation it is workers who bear the greatest burden. As workers tend to spend a higher proportion of their income than other groups, targeting workers incomes will suppress domestic demand to a greater extent than an actual devaluation, exacerbating the deflationary pressure.
Table 1 (to improve legibility, click on table and then click again to zoom)
Table 1 gives a ranking of the relative competitiveness for real and nominal unit costs in the EU. Though nominal unit costs are frequently used for cross country comparisons they ignore that in high wage economies, firms often also benefit from high prices for their output, and high profits. Nominal wage costs would be valid for comparing the wage competitivenss of export sectors across countries if data on wages and price levels specific to the export sector was available. However, this is not the case. Real unit costs are the more relevant figure for cross country comparisons as they account for differences in the sale price achieved by firms. Real unit labour costs are identical to, the perhaps more intuitive, labour share of income, and is calculated by the formula
leading to the price index cancelling, and then adjusted for the numbers of self employed in the economy. For nominal wage costs the formula is given as
and an adjustemnt for the numbers of self employed in the economy. We can see here the crucial role of the overall price index in affecting nominal unit costs.
Table 1 compares real and nominal unit labour costs in 2003 and 2007. Eurostat’s Comparative Price Levels are used as the price index. The years 2003 and 2007 are chosen to examine changes in competitiveness from the year of accession of the New Member States to the EU and the peak of the credit fueled boom. Special attention should be paid to the Baltic States and Ireland, the countries pursuing a ‘simulated devaluation’. Between 2003 and 2007 these countries (except Lithuania) experienced a competitive drop in position with Latvia switching from 2nd to 10th position. Perhaps what is most striking however is that even at the peak of the credit boom all these countries were in the top 10 in terms of real unit costs. Workers were gaining a smaller share of production than workers in Germany, which has been held up as a model of competitiveness (The Economist, 2010). Looking at nominal unit costs (which are of more interest to export orientated firms) we see that these four countries, excluding Lithuania, experienced a decline in comptitveness in terms of nominal unit costs (4), with Ireland moving from 18th to 22nd place. The huge difference in Ireland’s comparative position when looking at real and nominal costs is due to the role of of non-wage factors in the price index, such as prices for rent, material inputs, and the supernormal profits of some firms. This would suggest that rather than focusing on wages, policy makers should focus on how non-wage costs are affecting competitiveness (5). However, policymakers are focusing on wage cuts to improve competitiveness rather than other factors.
(1) See Weisbrot and Ray (2010) for a detailed description of Latvia’s simulated devaluation and its negative effects.
(2) and (3) - see Table 1
(4) It should be noted that both real and nominal unit costs are averages for the entire economy, and do not relate specifically to the export sector, where productivity is usually higher.
(5)Wages are just one dimension of international competitiveness, and absolute wage levels are not included in the World Economic Forum’s ‘12 pillars of competitiveness’ (Sala-I-Martin, et al, 2009, pp4).