Notes On The Front

Subsidising Thinking: July 3rd The Recession Diaries

The Irish Times can claim it is stimulating debate on important issues. After all, didn’t one of their columnists provoke debate on the ‘generosity’ or otherwise of our social welfare system? And isn’t that same columnist provoking a debate on job subsidies? What I find curious is the mode of provocation: rather than investigation, examination and analysis, we get inaccuracy (to put it mildly), distortion and slipshod analysis dressed-up as commentary.

Sarah Carey’s latest subject? Job subsidies. Certainly, a subject calling for considerable debate, with people across the ideological divide offering legitimate contributions and criticisms. But that’s not our Sarah’s way. She is not interested in the subject per se. She only wants to have a go – and not a very well-targeted go (after all, its easier just to air one’s prejudices). Somehow, an initiative supported by IBEC, ISME, ICTU; an initiative that is being pursued in 14 other EU nations; an initiative that has been operating in countries for years – somehow this has become a sop to public sector unions. Public sector unions? Employment-retention subsidies? The head spins. Best to leave our Sarah to her ways and move on to a world where debate and legitimate disagreements are evidence-based.

David Begg made an effective reply yesterday – with a reference to a helpful analysis in the Financial Times.

‘ . . .government-funded schemes allow companies to introduce subsidised short-time working. Faced with a dip in demand, businesses can send workers home and governments will pick up the large part of the tab for a set period, which in Germany is up to two years. The effects are profound. In Germany, 1.25m were on short-time working in March against 3.45m unemployed. About a third less time is being worked, so authorities reckon that without short-time the unemployment figure would be close to 4m; 200,000 workers were on a similar scheme in France in the first quarter compared with 3.7m unemployed.'

The FT concludes that state-subsidised short-time schemes operated by continental European countries are ‘more effective in the short-term in restraining unemployment’ than private sector initiatives in the US and the UK. However, there is a sting in the tail.  The FT refers to European Central Bank’s findings on employment-retention schemes:

‘If the downturn is short-lived such schemes can be "efficient tools" but "over time, these measures generate a major fiscal burden without creating incentives for investment to foster recovery".

That’s about right. Over time, many things cost – including unemployment.

The EU Council has drawn up an informative summary of the various employment retention schemes operating in the EU, from 14 countries. And that’s the first thing to note: when discussing employment-retention, one is discussing schemes that differ considerably. There is no single fit. Some are well-crafted; some are desperate throws of the dice. Some will work, some won’t. But the Council – in an ‘on the hand, on the other’ analysis - puts forward the following:

‘The rationale for systems of temporary unemployment/reduced working time during a crisis is based on the critical success factor of maintaining employment, which itself is, of course, linked to a range of economic benefits. Indeed, such systems are considered less costly in the long run than making workers redundant, and then re-hiring them after a period of unemployment.’

Hmmm. Economic benefits. Less costly than redundancy and re-employment. That’s worthy of further investigation.

‘Furthermore, firms save the costs involved with redundancies and the subsequent costs of recruitment . . . (and) retain experienced and skilled workers and preserve human capital. If complemented with targeted training . . the measures can bring long-term benefits to both workers and companies, not only in terms of the company driving up its individual skills base, but also in terms of how the company image can be improved, both internally and externally. In addition, such measures assist in the prevention of redundancies, the maintenance of purchasing power, the preservation of functioning plants, and the bolstering of staff morale during economically difficult times.’

These substantial benefits should not be dismissed out of hand. But the EU Council also goes on to state:

‘ . . there is the potential to inadvertently introduce perverse incentives, which may encourage some companies to avail of financial support and assistance, even though they may have no real need to avail of such funding . . whereby financial support for company activities that would have taken place in any case (e.g. training), and may have been funded by the individual employer.’

Deadweight.

‘It should also be considered whether the scheme is being imposed unilaterally on workers or is a result of bilateral agreement.’

Partnership or ‘sit-down-and-shut-up-management’.

‘The most pertinent shortcoming of the reduced working time/temporary unemployment mechanisms is that they may not be able to differentiate between cyclical and structural problems within individual companies. Some companies may find themselves in such a precarious economic position, that receiving support from the State would only prolong the inevitable closure of the company/plant. This point underlines the need for clarification as to whether the problem facing a company is cyclical or structural.’

Postponing the inevitable or saving a viable company.

‘There may also be the potential for increased displacement, which could result in a focus on one single policy issue, thereby deflecting necessary attention from other relevant policy areas where remedy is also required, such as those currently seeking employment.’

Can scarce resources be better employed to the same effect?

It is important that all these are taken on aboard. Indeed, ICTU does just that, by providing a broad range of measure rather than just a reductionist one-size-fits-all proposal imposed on all sectors. The difficulties of designing and implementing programmes should not be used as an excuse to do nothing (a point well madeby WBS over at Cedar Lounge Revolution). Nor should such programmes be seen in isolation. Rather, it should be part of a range of measures to address one of the most important challenges to our economy – unemployment.

Stephen Kinsella of NUI Limerick makes a thoughtful contribution on the nature of this debate:

‘Even though I happen to agree with Karl (Whelan) on the narrow issue of employment subsidies (i.e. very skeptical) . . . there isn’t a dichotomous relationship between ’spend’ and ‘not spend’ on active labour market policies. There is a diverse mix of options which may be explored, effects estimated, and perhaps even enacted. There is a curious rhetoric running through many of the posts about the employment ’subsidy’ issue which seems to make it clear from the outset that whatever is tried will fail, and whatever is mooted is just for short term political gain. Samuelson, in his Principles text (reissue of the first edition, 1997, p. 7), cautions against this: “. . . words may be treacherous because we do not react in a neutral manner to them. Thus a man who approves of a government program to ration housing will call it a program of “social planning,” while an unsympathetic opponent will describe the same activity as “totalitarian bureaucratic regimentation.” Who can object to the former, and who could condone the latter?” ' 

Exactly. One of the main problems we are faced with is that we don’t know what we are debating. Does the government have a concrete programme in mind? What does it look like? How will it be administered? Will it look like any of the programmes surveyed by the EU council?

Karl Whelan has madea number of considered objections to employment-retention subsidies (and to ‘job creation subsidies’ which I am in agreement with). We ignore those objections at our peril. But at all times we must remember that the biggest distortion of our labour markets and the economy is the recession itself. There is no more deadweight than joblessness, no more substitution effect than substituting inactivity for activity, no more social distortion than the massive distortions brought by poverty, low incomes, ghettoisation, alienation.

ICTU has brought forward a compelling programme to address many aspects of growing unemployment – of which employment-retention is one element of a broad and considered mix. That there are disagreements on this or that particular shouldn't blind us to the agreed context, as spelt out by Donagh Brennan. But to my mind, there’s something missing – a next step that waits to be taken. There is a broader narrative to be written that would give new meaning and coherence to the various programmatic initiatives being urged by ICTU, the Labour Party, Sinn Fein and progressives. It is now time (and I will provide further arguments in subsequent posts) to throw down the gauntlet.

The state should become the employer of last resort.

Histories At Dawn: June 30th The Recesion Diaries

History is such a malleable thing. It can be twisted this way and that to support or oppose any contemporary position. Take An Bord Snip Nua – this is a grand thing altogether. How do we know this? Because, sure, its predecessor was such an outstanding success. Yes, it brought pain but it set the groundwork for the Celtic Tiger economy. So goes the history; if we gird our loins, cut and hack away, we too can replicate this outstanding success. Suffer a couple of years of fiscal pain, and economic paradise awaits.

But history is not so straight-forward and certainly not so reductionist. Was it really the case that the ‘cutbacks’ endured under Mac the Knife (Finance Minister Ray McSharry) were (a) successful and (b) set the preconditions for the growth explosion in the mid-1990s? Let’s take a look at some provocative facts for clearly there is a lot of myth making about that period – a period that ran from 1987 to 1989, encompassing three budgets.

First, how much was cut? In nominal terms, public expenditure wasn’t cut – it increased. During the three budgets, total expenditure increased. Current expenditure increased. Even excluding interest payments, current expenditure increased by over 5 percent. The main target of the knife was that ol’ standby – capital expenditure. Cutting investment is the easiest option. It doesn’t take away from what people already have – it only defers something we don’t have. This started a period of long-term chronic under-investment in our economic base.

But that’s only Irish public expenditure. Don’t forget – this was ‘begging bowl’ days, when Ireland was one of the poorer performing economies in the EU. So what about public expenditure in Ireland? Between 1987 and 1989 we received over £1 billion under the EU Social and Regional Development Funds - a substantial 38 percent increase in the previous three years under the hapless Fine Gael/Labour government. Now, £1 billion might not sound much but were we to receive the same proportional amount it would come to nearly €6 billion over the next three years. That would subsidise a lot of cuts, but it’s doubtful if the EU today would play ball.

Second, there is much talk about how the minority Fianna Fail government brought down the public spending/GNP ratio. In 1986 public expenditure amounted to 54.7 percent of GNP (if you think that’s because we had some kind of super-Nordic government, remember – it was largely due to interest payments and social welfare). By 1989, spending was brought down to 45.1 percent. But this was only the continuation of a trend that was already in place since 1983 when expenditure was over 62 percent of GNP.

But there was one thing that saved Fianna Fail’s bacon. The numbers on the Live Register started to fall. Was that because all this fiscal contraction started producing jobs? Hardly. Between 1986 and 1992, the economy was generating an average of only 14,000 new net jobs, and while unemployment didn’t rise it didn’t fall either. Between 1988 (the first year of the ILO calculation) and 1993, unemployment fell by less than 1% leaving nearly 16 percent still unemployed. So what happened here?

Yes, you guessed it: emigration. Between 1987 and 1989 over 100,000 emigrated. While not all of these would have been of working age, it’s a fair bet most were – the overwhelming majority. The numbers emigrating amounted to 8 percent of the entire labour force in 1989. To put this in perspective, we’d need over 180,000 to leave over the next three years to reach this level.

Emigrants are great. You don’t have to pay them any dole. They reduce demand on social services. They don’t end up clogging our jails. It’s a great solution, and it certainly gave the Government at the time a real dig out. Expansionary fiscal contraction? Try expansionary demographic contraction.

There is no question about the impact of some of the cuts during that period. But, as always, there were choices. Fianna Fail did choose – they chose to abolish the Land Tax – just as they abolished the Wealth Tax a decade earlier. When it came to patients being moved out of closed hospital wards or the IFA, Fianna Fail certainly knew whose side it was on.

Whatever about our ‘historians’ today, what did contemporaries think of this policy? They couldn’t ditch it fast enough. First to go was Mac the Knife himself – kicked upstairs to the EU Commission. During the 1989 election campaign – resulting from a lost vote on a non-economic private member’s bill – Charles Haughey apologised on an RTE phone-in show for not realising the damage being done to cutbacks in the health services (what’s new?). The election result put the seal on Fianna Fail’s historical anti-coalitionism, and for the first time they entered cabinet with another party – the right-wing PDs. What happened then? More of th same?  Don't you believe it.

The Fianna Fail/PD government went on a spending spree. In the very first budget spending cuts were reversed – and how; public spending rose by 7 percent. In the three budgets under this government, spending increased by over a quarter while capital spending increased by a third.

And then there was that EU dosh. It really started flooding in – over £2.2 billion in the three year period. This was more than double the amount received in the previous three year period. Public expenditure in Ireland leaped and bounded ever upwards. 

And this was done against a pretty bleak fiscal situation. While spending was being increased, the debt/GDP ratio was over 85%, though falling; interest payments on the debt soaked up a quarter of tax revenue and over 7% of GDP (compare that to payments in 2008 which made up only 1 percent of GDP). Still, they kept spending.

And then the 1993 devaluation – which made our exports cheaper.

And then the fruits of years of work by the IDA – the multinationals swept in, bringing mega-growth.

And the direct state investment into the high-tech domestic sector.

We never hear that narrative – one that poses spending, investment and public policy as the driving force in the emerging economic boom. Rather, all we get is a selective and reductionist recitation of history, skewered to fit a set of pre-conceived policies.

And just remember, when you read reports of today’s Bord Snip proposing cuts in social welfare, that throughout the late 1980s and early 1990s, social welfare increased every year.  And public sector workers received pay increases.

History has much to teach us.

Dates with the Devil: The Recession Diaries June 28th

What would be your reaction if it could be shown that a set of policies would result in deepening the recession, increasing unemployment, reducing domestic demand (meaning more business closures) while having only a minimal effect on the fiscal deficit? What would you say to the political party or the Minister who offered you such a programme? You’d probably say:

'Get thee away from me, fiscal Satan!'

And you’d be right. But hey, this is Fianna Fail country, where economic demons rule and the orthodoxy hail them as angels, even saviours.

The ESRI has done us a considerable service by showing what the impact of certain budgetary policies will have on economic activity. This is all the more urgent with the IMF report calling for a gigantic smashing ball to be hurled at society - repeatedly. And today’s Sunday Tribune suggesting that An Bord Snip will come out with a swinging programme of cuts, cuts, and more cuts.

The ESRI takes a number of policy proposals and shows how they will affect a range of economic categories – GNP growth, unemployment, private consumption, the borrowing requirement, etc. Here’s one example. The Minister comes into the Dail and in solemn tones announces the Government will have to fire 10 percent of all health and education staff (okay, provocative; he will reduce the payroll through redundancies, wastage and vacancies left unfilled). Oh, he will be sorry, he will wish he didn’t have to do it, but times are hard and we have to reduce that ol’ fiscal deficit, so there’s no alternative; yes, he’s possessed by the demons. So, what will be the effect of reducing the health/education payroll on the economy? The ESRI provides hard numbers for the first year:

• GNP will decline by 0.9 percent 
• Unemployment will rise by 0.9 percent 
• Consumption will fall by ½ percent in the first year, falling by over 1 percent in the third year
• While the public sector wage bill will fall – by €1 billion, the effect on the borrowing requirement (and, so, the deficit) will be negligible. This will fall by less €500 million, or 0.2 percent of GDP.

Wow. Getting rid of all those lazy, unproductive workers – which we are told is an absolute virtue – sends all the indicators in the wrong way. And we only end up cutting the borrowing requirement by a 0.2 percent (remember, the IMF and their deflationary cheerleaders here want the borrowing requirement cut by nearly 10 percent in four-five years).

Let’s say the Government (a) cut public sector wages by 5%, (b) cut health and education employment by 10%, and (c) cut capital investment by €1 billion. What would be the reaction? It would be called a victory, proof to the ‘international markets’ (those grand bazaars lodged in the boardrooms of hedge funds and pension funds and banks) that we are ready to take ‘courageous action’. After all, this would cut €3 billion off Government expenditure – nearly two-thirds of the amount An Bord Snip is looking for.

Now, in the real world, what would be the economic effect of this ‘victory’? According to the ESRI, in the first year (2009) the economy declines by 1.5 percent, consumption falls by slightly less, while unemployment increases by 1.3%. Just what we need – more recession, more unemployment and falling domestic demand (why isn’t the Small Firms Association jumping up and down in protest against these policies, rather than supporting them). And with the deficit expected to be between -12 and -13 percent, how much do these measure reduce that figure? By 0.9 percent. More pain, more misery and minimal effect on the budget.

We would still have an unacceptably high deficit but, now, by reducing growth and domestic demand, while increasing unemployment, we would find it an even greater burden to generate the growth needed to overcome our mounting debt problems.

A second finding of note from the ESRI calculations is that tax increases have a less deflationary effect on the economy. This is important since we are constantly being lectured that public spending cuts are more ‘beneficial’ than tax increases. Let’s take the following three taxes:

• A rise in income of tax approximately equivalent to a 1% rise in the standard and higher tax rate) 
• A carbon tax of €34 per tonne, and 
• A lump-sum house property tax, averaging roughly €600 per house

The combined effect would be to lower GNP but only by 0.3 percent (five times less than public spending cuts), increase unemployment by only 0.3 percent (four times less) and reduce the fiscal deficit by 1.4 percent - ½ percent more than spending cuts. But, unsurprisingly, these tax increases would reduce consumption – by 2%, substantially more than spending cuts in the first year.

Now, I wouldn’t push this distinction too far. These tax increases are still deflationary and their impact on the fiscal deficit is still insignificant. And, like, spending cuts, we may end up years hence struggling with a stubbornly high deficit and a reduced capacity to bring it down. But it shows that more carefully crafted taxes – focusing on high income and wealth sectors – can have even less deflationary effect. True, they wouldn’t immediately raise the same level of revenue. But now we know.

That continuing with the Government’s policies, the policies of the Right, the policies advocated by orthodox commentators will only sink the economy further with marginal effect on the deficit. The ESRI’s conclusions confirm a truism, which somehow gets lost in translation here: that you can’t cut or tax your way out of a recession. You can only grow.

Anyway up for an exorcism?

The IMF Rules OK: The Recession Diaries June 25th

Great. Coming home from a few days break and there’s the IMF, holding open the cell door. The projections are worrying enough, though hardly new.  Still, to be reminded one more time that the economy is crashing through the double-digit barrier - it doesn’t really perk up your day. The real worry is the prescription, the ‘medicine’ they propose. This will be a real fillip for the government, the orthodoxy, the Right. For the IMF is proposing nothing less than a massive hollowing out of the economy and public realm. With international blessing, Fianna Fail will up the ‘cut’ stakes while the Left and the trade union movement is in danger of marking time.

Ah, the IMF; its track record of interventions doesn’t fill one with warm, fuzzy feelings. Just ask Argentina or Kenya or most other countries that have had to slash n’ burn their economies to get a ‘bailout’ (never mind the dictators that the IMF supported – dictators that ran parallel slash n’ burn policies against their own populations). And, so, the IMF and Ireland:

‘. . . the execution of their ambitious consolidation plan (i.e. the Government’s expenditure cuts) will require a continuing commitment to address sensitive expenditures, including the public wage bill and the scope of social welfare programs. . . To bear fruit these efforts will require determined execution over several years.’

What a future. First, they propose that ‘social welfare expenditures must better target the vulnerable’. This is code for wide-scale means testing. Indeed, the IMF welcomed the Government’s commitment to move away from universalism. This is a bit of a hoot.

Ireland has the least amount of universal payments in the EU – by a wide margin. Whereas, only 11% of all social benefits are means-tested in the EU, Ireland leads the means testing league at nearly 25% (compare this to Denmark and Sweden where only 3% of benefits are subjected to means testing). Moving away from universalism? We’re already there.

While Child Benefit is usually held up as the main ‘universal’ payment – one to be targeted through means testing or taxation – there is another target: social insurance. We can expect the Government to dilute the insurance principle and move towards means-testing Jobseekers’ Benefit, Disability Benefit, etc.

Secondly, the IMF calls for further public sector wage cuts and/or cuts in employment. Surprise, surprise. The IMF is deeply, deeply concerned that public sector employment grew from just under 14% of total employment, to just under 16% in 2008. Now, you might not think this sounds like much. That’s because it isn’t. But it’s enough to get the IMF worked up – never mind that Irish public sector pay costs lag behind most other countries as a proportion of GDP; never mind that Irish employment of civil servants is the fourth lowest out of 26 OECD countries (civil servants as a percentage of total employment).  New report - same ol' scapegoats.

The IMF doesn’t even bother assessing the negative impact (i.e. multipliers) of large-scale cuts in wages, Government consumption/investment, social welfare, etc. on the economy. Instead, they offer us a faith-based approach to fiscal correction; that somehow hollowing out the economy will lead to growth and consumption and investment. How? They never quite say. They focus on one thing and one thing only: the deficit. And what an accountancy-inspired focus it is.

They are proposing the Government – if it is to reach fiscal nirvana – will have to cut current public expenditure by over 23% by 2014. To give you a snapshot idea of what this means, it calls for the Government to cut expenditure by over €12 billion in 2009 terms. You could abolish the Department of Education and still fall well short of the intended target.

In one respect, this is all nothing new. We’ve been feeding off a steady diet of cuts and contraction since this recession gig got hopping. So what’s one more ‘expert’ commentary? Little in itself. It’s the impact on an alternative dialogue, though, that makes one depressed.

ICTU is otherwise engaged, trying to find some traction in talks with the Government to reach an agreement that will, regardless of minimalist measures to protect jobs and pensions, reflect the broad thrust of the IMF.

Labour’s reaction to the IMF report was to use its analysis to bash the Government over past mistakes. This is a fine as far as it goes but the fact is that even the dogs in the street are familiar with the arguments over the property bubble. What the Left has failed to do to date is mount a fundamental challenge to the very premises of the IMF report and the orthodoxy’s prescriptions; namely, the cuts agenda. The Dail debate can give the Left an opportunity to correct this. Let's hope the jump in with both feet. 

For without that fundamental critique, we allow the IMF to rule us by default, by setting the mood music, by establishing the most rigid of parameters. We are trapped, prisoners. We get to choose our warders but we don’t get to leave. We get to decorate our cells but we must pay respect to the walls. We get the semblance of choice but really, there is only one choice.

The IMF’s choice. A logical end to a desultory debate.

Taking a Break

Apologies for being off-line for so long - the local elections, work; and now I will be away for a few days.  You may want to check out 'Growing the Economy' - UNITE the union's proposals on economic recovery (a synopsis can be read at Irish Left Review and a discussion of it can be found on Progressive-Economy, Cedar Lounge Revolution and Irish Economy).

Will be back blogging on the 25th. 

May 28th Lunchtime: The Recession Diaries

Over at Cedar Lounge Revolution, WBS is doing a good job tracking the ongoing campaign against Ireland’s borrowing capacity and, in particular, the performance of the National Treasury Management Agency. On a recent post, I agreed but received this challenge from barratree

Michael, - I’ve yet to see you addressing the point that most people are concerned about. Its the medium to long run ability to finance the country not right now in the present. If we undertook a massive stimulus plan in would completely undermine any trend towards a sustainable budget. After 2 years we would be looking at laying off all those people taken on by the state to build railway lines etc and there still being no jobs for them. And the deficit would be sky high. B

I accept that, in arguing for an expansionary investment approach, I might not have comprehensively addressed the issue of fiscal sustainability. However, I question whether ‘most people’are concerned about long-term budgetary issues. People I come across are more worried about losing their jobs, or getting a job, or losing their business or their pension, etc. Nonetheless, barratree has asked legitimate questions. So here goes.

May 25th Afternoon: The Recession Diaries

Boy, was Senator Fergal Quinn taken in. Or was he? In his recent column, ‘Getting people work a priority’ he attempts to make two real-life comparisons – one based on a letter he received and one from what he read in the paper. Senator Quinn forgot the first universal rule of life: don’t believe everything you read in the paper. And certainly don’t be drawing policy lessons from what could be mere fiction. It leads you down all the wrong roads.

Senator Quinn had received a letter from a recently qualified solicitor who had been let go from work. She found part-time work in a dairy business but offered to work free in a small legal firm. She was so successful that the firm hired her. Sen. Quinn rightly praises the persistence and success of the young solicitor (though his contention that ‘supply creates its own demand’ doesn’t’ quite translate to the larger economy which is suffering from a lack of demand regardless of the growing supply of unemployed).

The problem, however, starts when he compares this with another ‘real-life’ situation:

‘Compare this . . . to that displayed in a recent letter to the Irish Independent, in which the letter writer spoke of a friend who had recently been made redundant. Far from being spurred to seeking a new job, the friend said he was better off on the dole: by drawing on various welfare payments available to him as a father of four with a mortgage, he said he now received the equivalent of €39,000, a sum well in excess of the €35,000 he had been earning before losing his job. This allowed the newly unemployed man to spend most of his greatly expanded free time on the golf course, all at the expense of the taxpayer.’

This story has been doing the rounds. The letter writer claims his unemployed friend is better off by

‘ . . €10,034 per year for working on his golf handicap . . (this) could even drive our small economy to collapse as the welfare bill gets bigger and bigger as more people, including myself, ask: why should I bother to go out to work when it is basically costing me money to work? Unless something radically changes, I will be joining my mate on the golf course very soon.’

I wouldn’t start polishing those golf clubs just yet, though; at least not until we examine this story a little further. For the story is riddled with mistakes and misconceptions. First, the golfer’s work income.

He had a net income of €28,854 according to the letter. Not a whole lot, certainly not with four children and a dependent spouse. But here’s the first problem: if this were real life, the golfer would be in receipt of Family Income Supplement(it seems clear he was a PAYE worker – working overtime, losing his salary, etc.). In general, the golfer would have been entitled to €147 per week, or over €7,600 per year. He would also have been entitled to €8,856 in Child Benefit, if his children were under 18. In other words, his net income could have exceeded €45,300 per year – not the €28,854 as the letter writer assets.

[As well, the letter-writer didn’t think this situation was a little curious – that with less than €29,000 net income, the golfer was apparently paying a mortgage of €18,000 per year. This can happen in extremis – such as when a partner loses their job. But there’s nothing to suggest our golfer was hit with this double-whammy.  Rather, he still managed to get his 18 holes in, despite the fact that, after housing costs, this family of five would have been living on €211 per week before paying for utilities, telephone, medical bills, etc. How did this golfer afford the green fees?]

Now the golfer is unemployed and working on his putting. What’s his income now? The letter claims he's on Supplementary Welfare Allowance (though an insured PAYE worker would probably be on Jobseekers’ Benefit or, at least, Allowance). But let’s go with it. SWA is a tough means-tested gig. And you have to register for work with FAS. But if you satisfy the conditions, you will get, as the letter claims, €23,083.

In addition, as the writer correctly calculates, the golfer would be eligible for other schemes (Back-to-School allowance, medical card, etc.). However, another problem – and this is a big one – is the claim that

‘As he also has a mortgage, he is entitled to mortgage interest supplement which pays all the interest on your mortgage. In his case, this was €1,200 per month of his €1,500 mortgage, or €14,400 per annum.’

Is our golfer being paid over €14,000 a year in Mortgage Interest Supplement (MIS)? This is another means-test, tough and complicated. If you don’t believe me, get your head around this. However, the guiding rule is:

‘Generally the Community Welfare Officer will ensure that your income after paying the interest on your mortgage does not fall below than a minimum level. This level is the Supplementary Welfare Allowance minus €18 (€24 from 1 June 2009).’

Even at a minimum, with the weekly write-off, MIS doesn’t pay all the interest, despite the letter’s claim. It is difficult to calculate what the supplement might be (even the Social Affairs Department claims ‘calculating your Mortgage Interest Supplement can be difficult’). Assessed means (savings, investments, etc.) will reduce payments further.

But the Annual Statistical Reportreveals that the average MIS payment was €60.22 per week. No doubt, average payments are rising, as more mortgage holders are being made unemployed. It’s a big jump, however, from an average payment of €60 per week to the letter’s claim of €277 per week, which is incorrect anyway. Look at this discussion where someone with far less income was entitled to nothing. Though the situations aren’t completely comparable, it shows how difficult it is to get MIS – even with people on low incomes.

Where does all this lead us? First, the letter is incorrect, to the point of fiction. I’m not suggesting the letter-writer is making it up. He may well have a friend in the situation he has described – but between the mistakes relating to social welfare entitlements, in both work and in unemployment, and the very real likelihood that his friend is not being completely forthcoming on all aspects of his situation, you have the makings of an urban myth.

It’s not unlike those myths from the 1980s, when people ‘knew for certain’ that single mothers were getting free colour TVs from the health board. Or the myths from the 1990s when ‘non-nationals’ were given cars from that same generous health board.

But it suits Senator’s Quinn agenda just fine:

‘The welfare state that this golf lover is relying on has been one of the greatest achievements of developed countries in the 20th century. It has mitigated some of the worst side-effects of capitalism, by assisting the unemployed and ensuring that access to health and education are not based solely on inheritance or family income.’

Doesn’t that just make you feel fuzzy all over? But now the sting:

‘But it is also right and proper that the State makes it attractive and financially worthwhile for people to take a job rather than live off the State, whatever their personal situation. This means that the State must modify our benefits system to ensure that it is always more worthwhile to work than to stay inactive.’

Of course, Senator Quinn could be referring to how the state could intervene to help raise low wages (introduce right to collective bargaining, pressure IBEC in social partnership talks, raise minimum wage and JLC rates,etc.) but I doubt it. Rather, it’s the ‘modify our benefits system’that Senator Quinn is getting at; making it tougher to get basic payments, reducing welfare rates, confiscating golf clubs, tennis rackets and football boots from those made unemployed. This argument works, after a fashion, if you first buy into the notion that people are somehow living high on the hog on welfare.

But that isn’t the case. With high rates of low-pay and, compared to other EU countries, low social welfare rates; combined with a woeful level of social protection measures and universal services (free health, low-price public transport, etc.) – it’s tough and getting tougher for a lot of people whether in work or on the dole.

Senator Quinn may be easily misled. But maybe he wants to be. It serves a simplistic and wrong-headed politics. This is one more contribution to the ‘most generous social welfare rates in the EU’ argument, sizing up those on low incomes for cuts in their living standards, preparing to rain a deluge of golf balls upon them.

Fore!

May 22nd Morning: The Recession Diaries

Jim Stewart has come up with a provocative idea to stimulate one small part of the economy:

‘Some possible measures to stimulate spending could be vouchers which must be spent within a limited time period, or vouchers which can only be spent in hotels / guesthouses (accredited by Bord Failte). This latter policy has the advantage of minimising leakage, and most likely stimulating spending of a multiple of the value of the voucher.’

Interesting. There is a tendency to conceive of economic solutions as silver bullets, big ideas. The orthodoxy wields a big axe. Even stimulus arguments have a ‘big-cheque’ sense about them. However, Jim’s proposal raises the prospect of economic recovery as a series of small, targeted endeavours - in this case, a series of forensic stimulus initiatives.

It raises, however, another question – what role can consumer spending play in recovery? This is, unfortunately, complicated by another concern – the role of materialism and ‘consumerism’. This can lead us into a bottom-less pit of debate over general statements like – ‘We’ve become too materialistic’. Does this refer to the quality of our consumption? The wastefulness? The longing for some ideal of a slower, richer quality of life that existed (or not) in the past? A critique of the ‘keeping-up-with-the-Jones’? Such phrases can mean anything you want.

In any event, it is an old debate. Karl Marx, the comeback kid of the 21st century, put it first and probably still best:

‘The extent of the power of money is the extent of my power. Thus, what I am and am capable of is by no means determined by my individuality. I am ugly, but I can buy for myself the most beautiful of women. Therefore I am not ugly, for the effect of ugliness is nullified by money. I am lame, but money furnishes me with twenty-four feet (a horse and carriage). Therefore I am not lame. I am bad, dishonest, unscrupulous, stupid; but money is honoured, and hence its possessor. Money is the supreme good, therefore its possessor is good. Money, besides, saves me the trouble of being dishonest: I am therefore presumed honest. I am brainless, but money is the real brain of all things and how then should its possessor be brainless? Besides, he can buy clever people for himself, and is he who has a power over the clever not more clever than the clever? Do not I, who thanks to money am capable of all that the human heart longs for, possess all human capacities? Does not my money, therefore, transform all my incapacities into their contrary?’

I spend (if I have the dosh), therefore I am. So to what extent have the Irish bought into rampant consumerism? And should we incentivise people to spend more? On the first question, international comparisons don’t really put us in the big spender league.

Private consumption makes up less of our GNP than the EU average (and even below the frugal Germans). Private consumption makes up less than 49 percent of our GNP compared to an Eurozone average of 57 percent. It’s not much different from other countries with small home markets (e.g. Luxembourg, Netherlands, etc.).

When it comes to spending per capita we’re again well down the league. The Irish spend, per capita, 13,500 (PPP) compared to the average in other EU-15 countries (14,560 PPP). Every man, woman and child could spend 8 percent more and they’d still be only average spenders.

Maybe the Irish, though, are irresponsible spenders – blowing our money on shoes and lotto tickets while our children starve in rags. It’s a theory but, again, the statistics are more interesting.

Since 1995 overall Irish personal spending more than trebled as you would expect – rising to over €91 billion before taxes. For every €100 of that increased consumer spend, a third - €34 – went on housing, food (excluding eating out) and utilities. This is fairly necessary expenditure. But there are other little nuggets.

We spent nearly as much on public transportation as we did on clothing and footwear. Of course, the volume of clothes purchased increased substantially – but we can thank exploitative world trade for that; all those sweatshops in Asia driving down prices.

Okay, we probably spent more on booze and fags than what was good for us – but in monetary terms, we didn’t go crazy. And all those cars and petrol, it still doesn’t make up a significantly high proportion – especially give land-use policies that forced people further into the hinterlands with few public transport options.

We can have a lot of fun dissecting these numbers (and getting a breakdown by household income would be fascinating) but the one thing that is noticeable that a substantial proportion of our increased spend is on services – personal, professional (medical, education, etc.) and others. This is noteworthy because one of the arguments against stimulus is that people would spend it on imports. However, services have a high labour-content and in many areas – education for example – a low import-content. If one excludes necessary items (food, housing, utilities), more than 35 percent of our extra spend went on services.

That’s not to dismiss the ‘import’ argument in our spending patterns. The cars, petrol, clothes, washing machines – they all have to be imported. But there are a couple of points to remember:

• First, most imports are purchased by the business sector to produce their goods and services. Clearly, no one would argue that we should dampen enterprise in order to avoid leakage.

• Second, even those items imported for private spending have a high domestic content. Take clothes – the primary product is imported. But how much of the primary product is reflected in the final price and how much the domestic output? After all, it has to be brought on shore, transported, warehoused and shelved, sold and bagged, etc. This all is home-grown activity. And what about the services the retail enterprise purchases – legal, financial, advertising, cleaning; again, largely domestic activity. Of course, the picture looks different when examining car sales – where the primary product comprises most of the final price.

A more thorough examination would show us to what extent spending is ‘leaked’ and what stays here – but on the CSO numbers a large part of it stays put. All that said, we have to do something about consumer spending. It wasn’t very large to start with – in comparison with EU averages. And, if the Retail Sales Index is anything to go by, it is collapsing – with all the downside that has for employment and enterprises reliant upon domestic demand.

Excluding motor sales, retail spending is falling – in value terms – by 11 percent annually. And it’s accelerating. The collapse is more severe here than in almost any other EU-15 country (only Spain is suffering more). That’s where Jim’s proposal comes into play. A voucher for hotels has a number of advantages:

• First, it increases ‘sales’ in a sector heavily reliant upon labour – probably the most labour-intensive sector we have.

• Second, other services benefit in the locale where the hotel voucher. I stay at a hotel/B&B in Westport. I’ll be spending money in restaurants, shops pubs in the area. It becomes a stimulus for the local area beyond just accommodation.

• There are other down-stream benefits. Instead of consuming ‘transport’ abroad (private or public), I consume it here, via my car or CIE. Yes, there is leakage here but the money goes to an Irish transport company, an Irish petrol station.

Of course, there might be issues regarding state-aid rules. But I suspect this is going to be less severely applied than in normal times. After all, nationalisation is all the rage while payroll subsidies paid out by some countries like Germany and the Netherlands could be distortive of competition – but they’re going ahead anyway. Making vouchers available to all EU citizens to spend in Ireland might get over that problem - and be a welcome boost to export earnings.

From Jim’s simple proposal we could – if we had the data (e.g. import content, labour content, domestic output and activity – survey the whole range of domestic activities (even down to hairdressers) that could be boosted with forensically targeted stimulus measures.

This is what the Obama administration has done – broken down its stimulus package into a series of targeted measures; businesses from all sectors are lining up to get a piece of the action. For ultimately, stimulus is the most pro-business activity you can have in a downturn.

None of this implies that there aren’t issues regarding our spending. Socially-conscious spending, ethical spending, sustainable spending, consumer conscious spending; we need to assess how we spend and what impact it has – on the environment, on society, on community bonds. A stimulus package could become the first in a series of lessons on responsible spending (we could even extend Jim’s vouchers only to those establishments that recognise their employees right to collectively bargain, pay ‘living wages’ and are tax-compliant).

So let’s spend wisely, spend well and, with the help of state resources, help spend our way out of the recession.

May 19th Lunchtime: The Recession Diaries

Be under no illusion – the economic debate is now morphing from an obsession with debts and deficits into a full-blown assault on the public realm that has more in common with Thatcherism than it does with mere fiscal prudence. For some time, the more extreme fringes of the Irish Right have been steadily moving centre-stage. Meanwhile, the Left and the trade union movement find themselves slowly being pulled into this maelstrom, at best shoring up defensive arguments that will easily be breached.

The latest assault has been on social welfare rates and the minimum wage. Dan O’Brien of the Economist Intelligence Unit is reported in the Irish Times speaking before ISME:

‘Welfare, he argued, is “the elephant in the room” in the Irish public finances . . “We’ve got to bring expenditure closer to revenue,” said Mr O’Brien. He also said a reduction in the minimum wage from €8.65 was “an open and shut case” because the current rate “hinders” job creation rather than protecting employees.’

 Stephen Collins also has the public realm in his sights:

‘Tackling the public service pay bill and the social welfare bill can hardly be avoided and neither can new revenue raising measures like property tax, third level fees or a tax on child benefit.’

Whatever about a property tax (a large part of which will fall upon average income groups who are already getting hit by levy increases, falling wages and job losses), public services and social protection are clearly the target.

Is this a new twist in the debate? No. It was signalled very early on in the influential series of articles in the Irish Times back in January. The ESRI’s John Fitzgerald called for cutting public and private sector wages, along with social welfare rates.

If this wasn’t part of the mainstream yet, then certainly Richard Tol’s contribution was absolutely off the pitch – calling for the slashing of business supports, wages, social welfare, along with privatising ESB, CIE, An Post and anything else that smack of the public realm. He did say that ‘Protecting the vulnerable would be nice . . . ‘ but, hey, what can you do; in the war against the public realm, there is unfortunately collateral damage.

They are not off the pitch anymore. What was once the fringe is now mainstream. Fine Gael has enthusiastically joined in. They want to privatise Bord Gais (great, handing over a natural monopoly to the private sector); cut rent supplements, freeze the minimum wage for two years, slash the public sector payrolls and open up health and training to ‘competition’.

So the attack on the living standards of those on the lowest incomes and the low-paid should come as no surprise. On This Week in Politics, this attack featured in questions put to the candidates in the Dublin South by-election:

‘RTE: As part of improving competitiveness, would you cut the minimum wage?

George Lee: No, I wouldn’t cut it straight off.

Shay Brennan: Wages across the board have to be reduced in order to allow for competitiveness. (Cutting the minimum wage) should be open to debate.

Alex White: I would not be in favour of cutting the minimum wage. Absolutely not.’

The responses are interesting. Fianna Fail’s Brennan fully buys into the real devaluationist argument. Fine Gael’s Lee is more cagey – ‘not straight off’ (oh, how that will warm the low-paid on those cold economic nights). Only Labour’s White was categorically opposed.

What’s more intriguing, though, is the premise of the question – improve competitiveness = cut wages. And that’s exactly what it is: a premise that requires no elaboration. It just is – like the orbiting of the earth. The hypocrisy is rank.

Finfacts’ Michael Hennigan provides a tour de farce of those that supported the economically criminal policies of Charlie McGreevy in the early part of the decade – when he effectively created the property boom and crippled the state’s tax base. Guess who supported ol’ Charlie:

‘Economists such as Jim O’Leary, Dan McLaughlin, Eoin Fahy, and Alan McQuaid all called for cuts in both the top rate of tax and the standard rate, with Dan McLaughlin (calling for) new medium term targets of 30% and 10% respectively (for top and standard tax rates).’

A few economists and commentators pointed out that this was all come to a bad end. But Goodbody’s Colin Hunt, who later joined Brian Cowen as a special adviser said:"Minister, don’t let the doomsayers get you down. Bertie Ahern put it more quaintly, suggesting that those doomsayers go off and commit suicide.

Many of the same people leading the attack on the public realm were some of the cheerleaders for those very policies that created the burst bubble and hamstrung the State’s fiscal powers to address it. And they are still invited on to current affairs programmes, still write newspaper columns, are still sought out for their wisdom on today’s events.

The hypocrisy is not just past tense. Even when their arguments are caught out, many are unrepentant and indifferent. Emblematic of this is Sarah Carey of the Irish Times; she claimed we had the most generous social welfare payments in the EU. When challenged on this, when asked to substantiate her claim, when presented with the facts – not only on Irish Left Review but also from John Downes of the Sunday Tribune – she couldn’t pull up one piece of evidence in support of her position. All she could say was:

‘Let’s say I acknowledge that perhaps we are not the MOST generous.’

But she didn’t say. She didn’t acknowledge in a subsequent column that she was wrong or misled. Instead, Carey goes on her merry ideological way, indifferent to evidence or facts or substantiations. Within a few weeks she complained that bank nationalisation would spread the contagion of the public sector.

‘I accept that there are talented people in the public sector, but the inertia of government is more than they can usually bear. Worse, it’s contagious. Turn bank employees into public servants and I guarantee the malaise will seep in.’

Inertia? Malaise? What would Carey say when confronted with the study highlighted by the National Competitiveness Council – that the Irish public sector is the fourth most productive public sector in the EU, a ranking supported by the EU KLEMS database? She wouldn’t. She doesn’t have to. She has her platform. And informed debate isn’t part of it.

Carey isn’t an exception. Peter Connell exposed Ed Walsh’s limp arguments. Cathal O’Loghlin, likewise, was challenged and found wanting. But don’t expect these people to drop off the radar. They will be with us. Their premises will go unchallenged, their conclusions taken as read.

This is not some vast conspiracy.  It's merely a logical working out of basic right-wing premises.  It started with calls for public expenditure controls, then moved on to the 'bloated' public sector and 'overpaid' public sector workers, proceeding to private sector wage cuts - and so on until it cascaded into a full blown attack on the public realm, making those on the lowest incomes scapegoats for the failed policies of past right-wing governments.

What has been the progressive response to this evolving debate? With a few exceptions, timid at best. After an initial burst of expansionary arguments, progressives have to a large extent been drawn into the premises of this desultory debate. ICTU, in agreeing the Framework Document back in January, signed up to the following:

‘The Government and Social Partners are agreed on the necessity to reduce . . . Exchequer borrowing over the next five years in order to reduce the General Government Deficit to below 3% by 2013 . . . The Government and Social Partners agree that a credible response to the fiscal situation requires a further adjustment at this stage of the order of €2 billion in 2009.’

ICTU didn’t get an agreement, being forced out of the talks by the Government. But they got the €2 billion ‘adjustment’ - in the form of the public sector pension levy. And the leading party of the next government has called for more of the same – more public sector payroll cuts, more public sector job losses. The debate has moved a long ways away from where ICTU wanted it.

Similarly, with the Labour Party. Calling for a major stimulus late last year, they reversed this position and accepted the need for fiscal contraction in their pre-April budget submission. And now, while rejecting any engagement with other Left parties and individuals who might help bolster the case for stimulus, Labour has stated its intention of agreeing a programme for government with Fine Gael– the party of privatisation, public sector cuts and wage freezes for the low-paid.

One could get despondent but what’s the point of that? We must continue putting forward the progressive case on the economy and highlighting the limited policy differences between the two major parties of the Right. We have to give both policy and strategic substance to the argument that Senator Alex White made on that same This Week in Politics programme:

‘There’s no question the Labour party propping up . . into what is essentially now a corpse (Fianna Fail). Nor does it follow that we are in the business of propping up either the two parties . . . . there is a high measure of agreement between Fianna Fail and Fine Gael . . frankly, I do not believe that either Brian Cowen of Fianna Fail or Enda Kenny, leader of Fine Gael, is providing that vision.’

We must start, from a ruthless acknowledgment that progressives are not only losing the economic debate – in many senses, we are not even at the debate. We must acknowledge our lack of political and industrial strategy.  If we pretend that ‘we are making a difference’, whether it be in social partnership talks or, in the future tense of coalition negotiations with Fine Gael, we will only be fooling ourselves and find ourselves co-opted into policies which fly in the face of our values and principles.

But just as importantly, we must become passionate. Clear-headed and incisive, but passionate all the same. For the battle is not just about graphs or projected growth percentages or debt levels. The Right is drawing the battle line and their target is nothing less than the public realm – that vast social space through which people participate in determining their own future, participate in the economy and the society.

Are we up for it? Or are we too busy washing the white flags?

May 18th Morning: The Recession Diaries

The ESRI’s recent ‘Recovery Scenarios for Ireland’ offers us a glimpse of the ‘nirvana of the return to normal’ – a set of projections that could see the economy, if not flying high, then at least gliding well above ground level within a couple of years. It assumes that ‘if-only-we-can-get-through-this-spot-of-bother’ we can resume high levels of growth and relatively low (relative to today) levels of unemployment. Is it plausible? Maybe, except that the ESRI, chasing the chimera of ‘real devaluation’ and budget fundamentalism, doesn’t tell us where all this growth is going to come from.

In short, the ESRI predicts that, if we can only bring the public finances under control and cut wages, the Irish economy, on average, will grow by 5.5 percent annually between 2010-2015 if the world economy recovers next year (short recession). If the world economy suffers a prolonged recession (recovers in 2011), our economy will still grow by nearly 5 percent. In addition, in both scenarios, unemployment will fall from a high of over 17 percent to an average 6 to 7 percent between 2010-2015 – more than halving.

This seems too good to be true. In 2010, they are projecting the economy will still be losing ground (-1 percent). But in the succeeding five years, it will suddenly turn around and average something like 5 percent. This compares favourably with recent periods of growth.

While not reaching the dizzying heights of the mid-90s – when foreign investment fuelled the economic boom – the ESRI is projecting the economy will clearly match the run-in to first Celtic Tiger boom and the years of the property boom.

Their projections regarding unemployment also compare favourably. Between 1995 and 2000, unemployment fell from 12.2 percent to 4.3 percent – a decline of 7.9 percent. The ESRI projects that unemployment will fall by an even higher rate – over 10 percent in a five-year period.

No doubt Fianna Fail Ministers will be taking great comfort from all this. If only they can survive the upcoming democratic exercise (i.e. the elections) and the Greens tetchiness over the Programme for Government; if they can just get to 2012, the economy will not only have turned the corner but will starting to grow rapidly. They can go to the electorate and say - yes, it was tough, but it was worth it. It’s all coming right.

Yet, there is this nagging question – where is the growth, where are the jobs going to come from?

In the mid-90s, one out of every eight jobs created were due to multi-nationals – as foreign direct investment flooded into the country. Is the ESRI suggesting that we will experience a similar FDI renaissance? This is not likely. Not just because we are facing into more competition from other low-tax countries, not just because we should expect FDI expansion to be more risk-averse in the years ahead; but also because the character of FDI is changing – to more capital-intensive, high value-added employment. While this is a good and inevitable development, it will not be as labour-intensive as the mid-90s; better paying but fewer new jobs.

We cannot – and wouldn’t want to – return to the property-based job creation starting in the early 2000s, when nearly one-in-six people were employed in construction/property-related sectors.

The ESRI takes some solace in the reduction of the savings ratio and, so, an increase in consumer spending, we should be more cautious. However, in the years ahead, with disposable incomes being reduced by increased taxation – people will be trying to get out under a mountain of debt. The ESRI doesn’t address this problem of household deleveraging.

In addition, public sector job creation contributed to employment growth. If anything, this is going to be reversed under current policy (a policy that the ESRI enthusiastically supports).

There is a serious question  over where our growth - economic and employment - will come from.  If we can't return to the halycon days of FDI, don't want to return to a property bubble, if there is little likelohood of future credit-fuelled consumer spending, and with public sector employment likely to contract - that leaves us relying primarily on the indigenous sector.  Yet, only 10 percent of the jobs growth in our traded services sectors came from this sector.  Our indigenous sector has always been reliant on the downstream of FDI, property and retail, and the public sector (either direct or through public procurement). 

The ESRI has taken into account none of these developments. They have relied on textbook models. But we don’t have a textbook economy (no country does, by the way). They claim, again without any substantiation, that wage cuts will give our export base a boost - even though we are a relatively low-wage economy.  They call for drastic adjustments (read: cuts) in public expenditure - even though this is the only sector capable of undertaking the economic investment to give our indigenous sector a boost.

In short, I don' get it.

This doesn’t make the ESRI’s report and worthless exercise. We may still learn from it. And one of the main lessons is to be sceptical, very sceptical of models that project a return to normal.

For the sad reality is that, when examining the real economy sector by sector, there is no normal to return to.

May 14th Morning: The Recession Diaries

Here is my challenge to the real devaluationists. Will any of them take it up? Real devaluationists claim that, since we can’t devalue our currency, we must devalue other inputs into the economy. Wages feature prominently as in cutting wages will increase our competitiveness. Many of these ‘real devaluationists’ are grouped around Irisheconomy.ie (Alan Ahearne was a leading figure until he went off to advise Brian Lenihan). Garrett Fitzgerald, one of the few commentators who have distinguished themselves in the debate over the recession, has unfortunately fallen into this thinking, too.

So here’s my challenge: please explain the devaluationist argument in the context of facts, rather than assertion. I will offer space on this blog to any or all of them to write a guest post on this subject. For much of the arguments regarding wage cuts rests on the assumption that wages are uncompetitively high. Is this the case?

Let’s start with two databases. First, AMECO – the database of the European Commission's Directorate General for Economic and Financial Affairs – compares annual industrial employee compensation, a key figure in that it incorporates major sections of our export base.

As can be seen, Ireland ranks well down the league tables when it comes to average industrial pay – 10th out of the 13 countries reporting for 2007. Irish industrial wages are 4 percent below the other EU-15 average and over 9 percent below the average of top-ten EU economies (of which Ireland is one). In addition, we rank well behind other advanced industrial nations – Norway and the US.

The following, courtesy of a link from a friend, comes from Destatis, the German Statistical Board. This examines labour costs per hour in the 4th quarter, 2008 and covers private sector earnings.

Again, we see Ireland coming in slightly below the EU-15 average, but significantly behind the top-ten EU average – 12 percent below.

Of course, we have to be careful regarding some the national figures. The UK, for instance, experienced a fall of 10 percent in labour costs in 2008. However, this is due to statistics being enumerated in Euros. The UK fall is a result of currency exchange rather than cuts in labour costs (there own devaluation experience). But there is another little insight in these figures.

While German labour costs come in below the top-ten EU average, the national distribution varies considerably. For instance, the former German Federal Republic (i.e. West Germany), manufacturing wages average over €46,000 while in the New Lander (i.e. formerly East Germany) the average wage comes in at €29,600. In the powerhouse region of the German economy, therefore, labour costs are higher than is stated in the above table.

'Real devaluationists’ (along with IBEC, ISME, Forfas, etc.) may point out that Irish wages have been increasing at a faster rate than other EU countries. In one respect, they are correct.

Between 2000 and 2007, Irish industrial wages increased by 38.9 percent while the other EU-15 average increased by 24.4 percent. So do they have a point? Not as much as this stat might initially suggest. There are three things to look at:

First, individual workers’ wages did not necessarily rise by that amount. A contributing factor is the changing character of the industrial base is changing. A number of indigenous enterprises and low/mid-skill multi-nationals have closed down or left. These would have been relatively lower-paid. They have been replaced by enterprises with higher-skilled, higher-value added jobs.

Second, there is a catch-up or ‘convergence’ factor at work. A crucial part of the argument to enter the EEC back in the 1970s – and to continue approving subsequent EU-based referenda – is the benefit of the Irish economy converging with the rest of the EU; in particular, with the top economies. Though we have some ways to go, this process is in train. So if convergence was a laudable goal in the past, why is it considered an obstacle now? It’s only an obstacle if we believe that Ireland will prosper only if we remain a relatively low-waged economy.

Third, there is considerable statistical manipulation going on here. For instance, in 2008 overseas ‘tourist trips to Africa increased by 39 percent while trips to Europe only increased by 5 percent. So are the Irish abandoning the romance of Paris for the challenging terrain of the Niger hinterlands? Hardly. Actual trips to Africa rose to 56,000, while trips to Europe increased to over 1.3 million. That’s the fun and games you can have when playing with statistics. So let us get up to our own fun.

Between 2000 and 2007 Belgian industrial wages increased by 25 percent while Irish wages increased by 39 percent. Obviously, our wage competitiveness has deteriorated substantially vis-à-vis Denmark. Or has it? Actually, Danish wages increased by €11,300 while Irish wages increased by €12,000. The actual cost difference to Irish employers is €100 annually. No one can seriously argue that €100 a year constitutes a ground for ‘real devaluation’.

At the end of the day, when wages make up approximately 6 to 8 percent of the manufacturing base, it’s hard to imagine how the real devaluationists think that lower wages will make any difference to Irish competitiveness – especially as Irish industrial wages are below average to start with.

Not only do the real devaluationists avoid this they avoid another consequence of wage slashing: the fiscal damage. With the Government flailing about over the collapse in tax revenues, real devaluationists want to cut revenue even further.

Let’s say we cut wages by 7.5 percent. Using Colm Keena’s table of income and tax revenue for 2008, this could, on average, reduce tax revenue by €1.2 billion. And this doesn’t count reduced PRSI contributions and spending tax revenue. And this doesn’t count the negative multipliers – reduced economic activity, driving enterprises dependent on domestic demand even further to the wall, or through it. And this doesn’t count the proportional rise in debt.

The real devaluationists count none of these things in their pursuit of the wild goose of competitiveness. And that’s the real problem – for if we go down their road, not only will we find ourselves in a cul de sac very soon, we will be amassing even more problems for ourselves.

So this is my challenge. Please explain how cutting wages will improve competitiveness when – on a cost basis – we have are a relatively low-waged economy. Please quantify the direct cost to the Exchequer and how exacerbating the fiscal deficit will help. Please examine the cost to the economy, through the negative multipliers and their impact on those parts of the economy dependent on domestic demand.

And please explain how slashing our living standards in pursuit of a highly contestable proposition will do anything else but impoverish people more.

So, to all the real devaluationists, you have been invited.

May 11th Morning: The Recession Diaries

Like many people, when I heard that George Lee had been recruited by Fine Gael to stand in the Dublin South by-election I thought that was it – game, set, match. After all, he’s George Lee, tutor of the nation. So, when I saw that George Lee had penned an article in the Evening Herald entitled ‘How I would fix the economy’. I bought a copy, rushed home, popped up a bowl of popcorn, kicked the cat off the sofa, and hunkered down to what I expected to be an original and thoughtful contribution to the debate. As I started reading, I wasn’t disappointed:

‘I believe we will never fix the deficit in public finances unless we reverse the hemorrhage of jobs in our economy and get people back to work. Every job lost adds another €20,000 to Government borrowing.’

Bouya, George! This can only get better. So on to his ten points.

1.     I would finance a massive job-intensive investment programme in green energy, broadband and clean water, financed in part by selling off state companies like Bord Gais and parts of ESB that the State no longer needs to own.

Interestingly, in proposing this Fine Gael policy on investment, he omits that (a) it was originally an ICTU policy and (b) it constitutes setting up new public enterprises and expanding existing ones. Mentioning this might have confused people – selling off the very enterprises that are created in the first place to generate growth and recovery, selling them off to the private sector that is not capable of creating companies to generate growth and recovery. Sound coherent?

Of course, George the economist will be aware of Ireland’s poor privatisation experience. One word: Ericom. Two more words: ICC and ACC. If we still owned the latter two, we could be extending credit now, this morning, to hard-pressed businesses. But we can’t. Because we privatised them. Now George wants to sell-off a natural monopoly (gas) and the highly successful ESB International, thus undermining a successful Irish multi-national. Why? For purely ideological reasons. It has no economic rationale.

2.     I would fight for a fairer sharing of the burden of rising taxes. Middle income families on an average wage should not be paying 51pc in tax on every extra euro earned . . . This is hardly the strategy needed to encourage people to put in the effort and initiative needed to create new jobs and economic opportunities.

I think I know where this is going, sort of. I, too, believe the levy increases are harmful. But George is apparently of the school that believes ‘high taxes’ reduce incentives to set up businesses and create new jobs. If that were the case, then all other European countries would have been broke a long time ago. The reason why the levy increases are wrong is that it will reduce spending and squeeze enterprises reliant on domestic demand. George is essentially taking a low-tax argument and giving it a make-over for the current crisis.

3.     I would reverse the increase in the VAT to 21.5pc . . . which has combined with the weakness of sterling to see a deluge of hard-pressed Irish shoppers crossing the border, at the expense of thousands of Irish jobs and hundreds of millions in lost tax revenues.

It’s the currency exchange which is driving cross-border shopping.  VAT is just a passenger (there’s no VAT on food here in any event). Yes, in the long-term, we should reduce regressive indirect taxes. But does George really think that reducing a €100 basket of non-food items to €99.50 is going to make a whiff of difference? C’mon, now.

4.    I would cut the reduced 13.5pc rate of VAT to just 10pc between now and the end of 2010. This would stimulate labour-intensive services like construction, help the tourism industry through the downturn, and give a huge incentive for first time buyers to bring forward purchases of new houses, helping to resolve crises in banking and the public finances.

Again, George confuses cause and effect. Reducing VAT will probably not lower prices (they’re in deflation anyway) but it will ease business cash flow – which is fair enough since many businesses can’t get credit. It’s a crude instrument, though, since this ‘credit easing’ helps out businesses that don’t need it just as much as those that do. It doesn’t target enterprises in need which are, in any event, suffering more from reduced demand.

But the real kicker is that reducing VAT on some construction inputs will get the punters to buy houses again. Fact: people who fear for their economic future (or are unemployed or short-timed) don’t buy houses. Fact: the fearless few are waiting, quite rationally, for house prices to fall further. Fact: many who want to buy now can’t get mortgages because of the credit squeeze. Reducing VAT will have no effect on any of this. We are in the middle of a vast stock-clearing exercise - and much of the stock will never be bought as know one will want to live in half-built estates miles from anywhere.  As an economist, George knows this. As a candidate, he’s promoting gesture politics.

5.    I would freeze local authority rates for at least five years.

Fair enough – but where is the alternative source of revenue? Below the national media radar, local authorities are cutting back at a ferocious pace – capital programmes, services, etc. Cutting off more revenue oxygen will only asphyxiate local government everywhere with further deflationary effects.

6.     I would legislate to make upward only rent reviews for small businesses illegal.

Of course. But this won’t address the real problems behind high commercial rents, which are high because many landlords are so heavily leveraged. They can’t afford to reduce rents but if they don’t their tenants will walk or close down. It’s a vicious trap. Amending rent reviews won’t resolve this.

7.     I would exempt employers who take on additional staff from additional employer PRSI obligations until the end of 2010.

Let me get this straight. A profitable company with expanding output (and therefore requiring extra labour) will now get a state subsidy for doing something they were going to do anyway. Talk about deadweight. The issue is about subsidising hard-pressed enterprises that are on the verge of letting people go. Talk about getting it arse-backwards.

8.     I would make sure that taxpayer support for banks is used only to support new lending to small businesses and families, not to nurse along dodgy property related debts to Fianna Fail's developer friends. The banks, the professional investors who funded them and developers should between themselves take care of the mess they have created. They made the big profits in the good years. They should now eat the losses.

First, George wants taxpayer support for banks conditional on opening up credit. But he wants banks, investors and developers to sort out their own problems. If banks eat the losses, they will end up throwing up all over us. There won’t be new credit, just hoarded credit to make up the losses. In any event, can someone explain to me how banks, operating on commercial criteria (even the best criteria), are going to increase lending in a recession? It’s populist but its nonsense.

9.     I would fight to make performance, accountability and thrift core values of our public service once again, starting with the political system itself, and cut top-end public sector salaries, including those of TDs, by at least 5pc.

Yeah, sure, why not. Cut them by 10 percent. Won’t do anything for public finances. Won’t create one single job. Might have a demonstration effect. Yawn. Move on.

10.     I would overhaul the massive public sector quangos like the HSE, CIE and FAS and expose them to more competition in order to deliver vital health, transport and training services more effectively and at less cost to the taxpayer.

Oh, just great. We’re going to either privatise whole areas of public services – or allow private interests to cherry-pick the most profitable parts of the public market. Isn’t that what’s happening in the health sector anyway? And if anyone thinks this has anything to do with competition – just look at the electricity market, where the one company that can compete internationally, invest in new generation plant, and lead a national strategy for new green technologies is actively prevented from doing so. Rather than engage in hard thinking and core solutions, we get knee-jerk responses.

* * *

I tossed the paper to the floor, finished my popcorn and kicked the cat some more. This is the prescription by a leading voice on the Irish economy? It is a collection of populist clap-trap that relies on the failed strategy of privatisation, incoherent VAT cuts, wasteful subsidies, and public market liberalisation.

I had thought that when George Lee entered the race that was it. But progressives like Senator Alex White shouldn’t fear this nonsense – if they have the courage to call it for what it is, go on the offensive and expose Fine Gael as just another deflationist privatising party of the Right with little to say about economic recovery or social equity.

Progressives can turn this by-election battle into what it always was – before the celebrity diversion: a contest between the Left and the Right, a contest between two qualitatively different economic alternatives.

For there is no question that Fine Gael’s new recruit, George Lee, will have no problems getting along with that other new recruit, Michel McDowell.

Like peas in a pod.

May 8th Afternoon: The Recession Diaries

Higher taxation is now on the agenda. The Left has long argued the virtues of higher taxation: more resources for health, education, infrastructural modernisation, childcare, social protection, elder-care, etc. We had little success – so enthralled has the nation been to the low-tax, low-spend model. Even social partnership was premised on cutting taxation (maintaining low wage increases in return for tax cuts to increase take-home pay).

Now everyone accepts taxes will have to rise – if, only, to help close the fiscal gap and, afterward, to pay for all this borrowing. This is not quite how the Left envisaged the debate. We wanted European-level of taxation to pay for European-level of services and living standards. Now, we’re going to get the high taxes but even worse living standards. So, perversely, the principle has been won – but not on the Left’s terms. So how do we get back into the debate?

There are two stages. During a recession I have argued that the last thing you do is increase general taxes on low and average income groups – those cohorts with a propensity to spend. Rather, you find less-deflationary sources of revenue, even as temporary measures.

However, on the other side of the recession what kind of tax system do we want? Falling back on ‘tax the rich’ and ‘close the loopholes’ demands, will only get us so far. We have to present a clearer picture – one that distinguishes us from the Orthodoxy and can win popular support.

As an initial contribution to this debate, I have examined the tax structures of other EU countries with the help of Eurostat's comprehensive Taxation Trends in the European Union. After all, we want to move in their direction. But what do their structures look like and what can we learn. There might be some surprising lessons here – and ones that the Left can exploit to its advantage.

Ireland’s Perverse Low-Tax, High-Tax Model

Ireland is a low-tax economy. In comparison with the top-ten EU economies (I’m using the top-ten because there is little sense in comparing ourselves with poorer countries es like Greece and Portugal where the average industrial wages are less than half of our own). Ireland is almost rock bottom. Only the UK is lower. We would have to raise nearly €8 billion more in taxes just to reach the average – and this doesn’t take into account the necessity of having to fund disproportionately higher capital investment to catch up with European levels of infrastructure.

But while total Irish taxation is low Irish central taxation is high. According to the Eurostat report:

'Ireland is one of the most centralised countries in Europe . . . '

Central taxation covers those taxes that go directly to a country’s Exchequer and includes personal, corporate, indirect and capital taxation. Only the UK has a higher level of central taxation. Let’s turn to some of the main categories of Irish central taxation and see where the disparity lies.

Indirect Taxes: In this category, including VAT, Excise duties and other taxes on products, we are nearly the top of the table. We have a disproportionately high level of indirect taxes – one of the more regressive taxes that states impose. We could reduce these taxes by 15 percent (reduce the standard VAT rate by 18 percent) and we’d still be at the EU average.

Corporate Taxes: Despite Ireland’s low tax rate, we have one of the highest levels of corporate tax receipts. There’s no contradiction here. A massive amount of ‘profits’ taxed here are earned somewhere else, courtesy of transfer pricing. As Michael Hennigan constantly, and correctly, points out:

'Two of Ireland's biggest companies by revenue are owned by Microsoft. They have no direct staff and are operate from the offices of a Dublin law firm.'

There may be a number of reasons to raise corporate tax rates and end our tax-laundering system. But not because we don’t get enough corporate tax revenue.

Personal Taxation: Here we fall behind the EU average but not by much. The Eurostat figure understates the level of personal taxation because it assumes that the Health Contribution Levy is part of social insurance when in actual fact it is paid into the Exchequer. So, abolishing those regressive tax expenditure and shelters would probably bring us close to the average. There are still questions of balance within personal taxation – for instance, average income earners enter the top tax rate far too early.

When we examine central taxation and, for Ireland, its sub-categories, we find that we’re not low-tax; we’re relatively high-tax – in some cases the highest taxed. So how do we end up being a low-tax economy? There are two main categories.

Social Insurance

We are at rock bottom when it comes to social insurance. Actually, rock bottom doesn’t quite capture it. In fact, Ireland’s social insurance take is over-stated since it includes the Health Contribution Levy, as mentioned above.

PRSI rates – employees, employers and self-employed – would have to be increased by more than 2 ½ times just to reach the top-ten EU average. That would mean increasing the PRSI rate for employees from 4 percent to nearly 10 percent, the employers’ PRSI rate from 10.75 percent to over 20 percent and the self-employed by a similar proportion.

[A little note: it’s interesting that, given our anaemic social insurance system that both Fianna Fail and the Greens campaigned in the last election on a platform of cutting social insurance levies even further.]

Local / Regional Taxation

There is no sense in putting up a graph on this one. Ireland hardly features. For the EU top-ten, local and regional taxation makes up over 8 percent of the GDP. In Ireland, it makes up a minuscule 0.8 percent. We’d have to increase this taxation base by over eight times and we’d still fall short of the average. But in other EU countries it is local and regional government that delivers many of the services and programmes that, in Ireland, is delivered by central government.

A New Basis for the Left’s Taxation Programme

So what can we make of all this? First, it is noteworthy how close we are to the UK’s centralised model. Like Ireland, the UK takes little in local/regional taxation and social insurance and is quite high in centralised taxation. The Left should argue for a profound break from this model – and centre it’s ‘tax’ demands on two areas – social insurance and local taxation.

Social Insurance: In most EU countries, a significant proportion of social protection and public services is delivered through the social insurance system. For the Left to adopt this model would have considerable advantages. People consider increased taxes as going into some kind of black hole. However, social insurance implies a specific contract: for x amount you pay, you will receive y amount of benefit. Here are two examples:

• If PRSI was increased to include a specific ‘Health Insurance Levy’ (say, 2.5 percent) that might be more acceptable if people knew that they would receive free (or extremely low-cost) GP and prescription medicine. That’s a specific contract.

• Further, if PRSI was increased to include a specific ‘Earnings-related Pension Levy’, again, this might be more acceptable if people know, as part that contract, they would receive 50% of their pre-retirement income in a pension.

We could go further – a small insurance levy for elder-care, including nursing homes, highly-subsidised childcare in best practice crèches and early education centres, pay-related unemployment and disability benefits. In addition, redirecting expenditure through an enhanced Social Insurance Fund would relieve pressure on the Exchequer finances, allow for increased investment in other areas such as social housing, etc., while providing a quicker route to fiscal stability.

Local Taxation: this would require even more radical surgery as our local government system is feeble, unaccountable and largely powerless. On every level, it is not fit for purpose. Before we could even begin contemplating higher local taxes, we would have to reconfigure a system of local governance that was devised in the 19th century. I will elaborate on this in a later post.

But, like social insurance, people might be more amenable to increased taxation if it went to greatly enhanced local/regional government. For they would see the benefit of their taxes in improved local services, enterprise supports, social programmes, amenities, etc.

* * *

A new Left programme begins to emerge:

• Radically reform social insurance to deliver the benefits of free health, earnings-related pensions, income protection and other services such as childcare, etc. This will mean increasing PRSI rates but only as part of an identifiable contract that delivers the benefits.

• Radically reform the local government system into a rational network of governance capable of employing greatly increased, and democratically accountable, powers. This is a pre-requisite to substantially increasing local/ regional taxation.

• Reduce indirect taxes over the long-term (and put in the institutions that can ensure that the benefits of reduced VAT get to the consumer). This would reduce a regressive tax on low-average income groups.

• Re balance personal taxation to ensure that average income earners do not enter the top tax rate. This would also mean tackling the difficult issue of when people enter the tax rate. This is a highly emotive issue – taxation on the low-paid; but it’s coming down the line. The Left has to argue for a progressive approach, otherwise the Orthodoxy, who just want to slap high tax levels on low incomes, will dominate the debate.

That’s the vision in broad outline. That we are in a recession doesn’t mean postponing the debate - it means we have to integrate transitional strategies into that long-term version.

So let’s get to work. And let’s, finally, lead the debate.

Just To Let You Know, Shane

This article was originally written for Irish Left Review

Shane Coleman writes:

‘ . . . the reality is that if there was a general election tomorrow and Fine Gael and Labour became the new government, there is probably no decision of the past nine months that they would reverse.’

I fear he might be correct. Of course, there would be changes at the edges. We should expect the educational special needs allocation to be restored, we would probably get some extra spending in job-intensive infrastructural projects, there would be fresh faces with their fresh-looking expressions, even competence. Broadly speaking, however, there wouldn’t be much of a change – certainly not with Fine ‘George Lee’ Gael in the ascendant.

RTE: In terms of squaring up to the difficulties in the public finances, is there any avoiding tax increases and major cutbacks in public spending?

Richard Bruton: No there isn’t. I think the issue is the balance you strike between those.’

Thus spake Fine Gael’s Finance spokesperson on This Week. Even Labour, against its better instincts (and against what it was prescribing for the economy only a few months ago) has accepted the need for fiscal contraction – at the same time as the economy is contracting even further. Of course, it will probably be a ‘fairer’ set of deflationary policies but deflationary nonetheless.

So, given what is on offer today, Shane is probably, unfortunately, spot on. But its one thing to prognosticate a wrong set of policies, it’s quite another to cheerlead on those same policies. That’s what Shane does:

‘Any responsible new government would have to take the same course of action (as Fianna Fail) . . . Regardless of who is in government, the tax net has to be broadened and public expenditure has to come down so that at some point over the next five to seven years, the exchequer returns to a balanced budget . . . let's not kid ourselves that there is any alternative to the kind of policies currently being implemented.’

Apparently, Shane is not keeping up with the news. The ESRI has predicted that under current policy – tax increases and spending cuts – we won’t get a balanced budget; not anytime soon. The EU Commission reinforced this with a vengeance – stating that under current policies the fiscal deficit will rocket out of control. John McManus quotes Jaakko Kiander of the Labour Institute for Economic Research speaking about the Finnish strategies when their economy collapsed in the early 1990s (which, Mark helpfully pointed out):

‘ “In response to the crisis, fiscal policy (in Finland) was tightened in 1992-95: public-sector expenditure and employment were cut, social benefits were frozen or reduced, and taxes on employment were increased. But in spite of these measures there were large government deficits in 1992-1994, and the cutbacks and increased taxes further reduced demand and employment,” says Kiander.’

McManus summed it up nicely:

‘ . . what jumps out from Kiander’s paper is that the Finnish government initially adopted the same policy response as we have and it didn’t work.’

Shane is flogging that ol’ dead horse and dressing it up in some kind of Dr. Rambo economics (‘The only cure for the disease currently crippling the Irish economy is some particularly tough medicine.’). Fair enough – there’s a lot of it going around. But then he says

‘ . . . no one – political commentators, economists, dissident government TDs, opposition TDs – has come up with a credible course of action that is markedly different from what the government has been doing since October.’

Okay, so Shane doesn’t drop into Notes on the Front. Again, fair enough – there’s a lot of that going around, too. But a number of commentators over at Progressive-Economy have been arguing for a different course of action for some time. So have some trade unions. So have some individual politicians.

Maybe it’s that Shane only reads those who affirm his world-view. Or maybe he feels that those of us who think differently from him – and Fianna Fail – are so marginal to the debate that we deserve no mention, no acknowledgement. Maybe he was partying all week and had to pull an all-nighter to write this particular column, which didn’t give him enough time to study alternative perspectives.

Whichever, I will come to Shane’s assistance and provide him with an alternative – one that he’s free to rubbish. But at least he can’t say there are ‘no’ alternative courses of action. Here’s a set– abridged and limited – but Shane can contact me anytime and I can fill him on the details.

May 5th Morning: The Recession Diaries

I’ve been trying to get away from this topic – the whole deflation thing and its impact on the economy and the budget. There are, after all, a hundred and one other issues in the Fianna Fail playbook to consider, deconstruct and reconstruct in a progressive fashion. But it seems that everyday we are drawn back to the Government’s fundamental failure by new reports, projections and analysis. Now the EU Commission’s Spring Economic Forecast is pulling us back with a ferocious wrench. Let’s recap.

Back in October, the Government introduced the Income Levy, along with spending cuts (e.g. medical cards for the elderly, etc.) to bring the deficit under control.

In January they had to rewrite the budget numbers because the October projections were overtaken by a rapidly contracting economy (in October, the Government actually believed GDP would fall by less than 1 percent). Shortly afterwards, they imposed the public sector pension levy to cut expenditure further.

Still, as the economy contracted, the deficit grew. At the time, the Government projected that if they did nothing, the deficit would grow to 12.75 percent. So the April budget was introduced to try to hold the -9.5 percent line (which had apparently been agreed with the EU Commission) but this proved impossible. They set a new target of -10.75 percent and, to this end, introduced further levy and other tax increases, combined with more spending cuts.

The ESRI’s Spring Quarterly Report is now predicting that the -10.75 percent deficit target is history. They project it will be 12 percent (just shy of the do-nothing line the Government was so afraid of weeks earlier). The EU Commission makes the same projection.

But, the EU Commission, based on current policies, is now projecting the deficit to balloon (swell? distend? bloat?) to an incredible 15.6 percent by next year, This is on the basis of the economy contracting by nearly 12 percent over the next two years with unemployment rising to 16 percent.

Hello! Hello! Is anybody taking this on board?  Are the great economic gods trying to tell us something? (P O'Neill over at Irishelection.com has twigged it.) The problem with the EU Commission’s projection for next year’s deficit is that we can’t be exactly sure if they are including the Government’s intended ‘adjustments’. They announced in the April budget that they would take another €4 billion out of the economy: €1.75 billion in tax increases, €1.5 in current spending cuts and €750 million in capital spending cuts. There’s an argument that the EU Commission has factored this in (their projections include the new April budget targets).

If this can’t convince anyone that the deflationary policies are failing, not only to reverse the economic slide, but the fiscal slide as well (which they were intended to arrest) I don’t know what will. This does not, ipso facto, mean that the only recourse is stimulus policies – but, in truth, there are not a lot of options.

But what it does mean that we should give it up. It’s one thing to flog a dead horse. It’s quite another to dress up the poor beast, prop it up at the Cabinet table, and pretend that it has something constructive to contribute.

Deflationary budgetary strategies are dead. Let’s get over it. Now can we please have a debate on the strategies that get to the heart of our crisis – economic contraction, rising unemployment, falling consumer spending and collapsing investment. We may still disagree but there is a better chance of something productive coming out of such a debate.

In the meantime, let’s give the deflationary horse a decent burial.

April 29th Afternoon: The Recession Diaries

Do you remember why the Government introduced the emergency April budget? Rising unemployment? Collapse in economic growth? Mass depression over the weather? Let’s refresh our memories:

‘Without this supplementary Budget the general government deficit would have been 12¾% of GDP reflecting the large gap needed to fund the difference between spending and revenue. In the prevailing economic circumstances the natural preference should be to leave expenditure and taxation as they stand. This is not an option . . . because of the scale of the deterioration of the public finances. It is the considered view of the Government that a borrowing target of 10¾% strikes the correct balance.’

At the same time, the Minister also announced a number of future measures to reduce borrowing targets going forward. For instance, next year more ‘adjustments’ will be made: tax increases and reductions in current and capital spending - an additional ‘adjustment’ of €4 billion. This was to ensure that borrowing that borrowing would be held at 10¾ next year.

So – the entire machinery of Government is working towards one goal and one goal only: 10¾.

Along comes the ESRI’s Spring Quarterly Report:

• GNP collapsing by over 11% at current market prices 
• Unemployment to average nearly 17 percent next year 
• Consumer spending down nearly 8 percent this year 
• Investment plummeting by over 30 percent

There is considerable rancid meat here to get sick over but initial commentary has focused (belatedly, thankfully) on the spectre of mass unemployment and the prospect of a lost generation due to joblessness and emigration. Even today’s Live Register figures – showing a slight falling off in the rise in unemployment – will not bring much comfort (as I have pointed out before – wait until the signing-ons in May/June and the lack of signing-offs in the autumn; that’s where the real bloodbath will happen).

But let’s return to the Government’s magic 10¾ percent – the raison d’être of April budget. What does the ESRI have to say about that? The Government balance will be 12 percent. Hmmm. The Government increased taxes and cut spending to reduce the balance from an unsustainable 12¾ and now it ends up pretty much back at their starting point.

All that work, all those late nights in Government buildings, all that red penciling and Excel tables – and the Government further away from their goal than ever (let’s not forget that the Government had originally agreed a target of 9.5 percent with the EU Commission – not much chance of that happening anytime soon).

Why is the Government standing still – even though it is running like hell? Well, there are all those people on the dole; and no one is spending any money – fearful of future job losses, pension losses, wage cuts; and the only investment businesses are making are in redundancies. But there’s something more – which the ESRI quantified by didn’t elaborate on in its discussion of the impact of the April budget:

'Overall, and including the February measures (public sector pension levy, etc.), the full year effect is to raise taxation (3.6 per cent) and cut expenditure (3.8 per cent) by similar amounts. These cuts are equivalent to 4.4 per cent of GDP.'

So, the Government takes 4.4 percent out of the economy at the very moment the economy is contracting. Does anyone wonder why everything is going pear-shaped? I’ll offer each of the readers of this post a bet. I’ll give good odds. I’m betting that this causal relationship will not be mentioned in any serious, analytical way whatsoever (except the few lonely outposts of progressive thinking that exist, mostly on-line).

Going forward (and remembering the Government’s magical 10¾), what does the ESRI predict the balance will be in 2010? 11.5 percent. In other words, we still won’t reach the target next year that the April budget was intended to achieve this year. The Government is running, but we’re in quicksand. We’re not just standing still. We’re sinking.

But there’s a little catch in all this. The ESRI is bullish about our prospects next year. While the government claims the economy will decline by nearly 3 percent in 2010, the ESRI thinks it won’t be so bad – only a contraction of 1 percent. This must be a first – Government projections being more pessimistic than independent commentators.

I wouldn’t put much stock, though, in the ESRI’s, or anyone else’s, projections for next year. This is not a reflection on their abilities but with the Irish and world economies in such flux– even short-term projections have a limited shelf-life (don’t forget, the ESRI predicted a decline of 4.5 percent for this year; and that was only 13 weeks ago). We’re on a roller-coaster – and the fun-park operator is out to lunch.

You’d think this would be grist to the Left’s mill. You’d think. Yet, both Labour and Sinn Fein – against their better instincts – played the adjustment game. Both argued in their pre-budget submissions for measures to reduce the budget deficit without including the cost of their proposed measures to boost economic activity. This should stop – and the Left should take solace in the lessons that that the ESRI current projections are teaching us, lessons which the dunce-Government has failed to grasp.

For the Government is trying to convince us that there must be order in the public finances before any recovery can begin. But what we are seeing is that public finances cannot be put in order until the recovery begins.

If we learn that simple fact, then we can start putting our better instincts to work.

And, thus, the economy.

April 27th Morning: The Recession Diaries

Ronan Lyon has written an instructive post on the ‘Thorny Issue of Teachers’ Pay’. So useful, in fact, that it was highlighted on Irish.economy and in the Sunday Business Post. And boy has it stirred comments on both websites. Cutting to the quick, Ronan concludes that Irish primary school teachers are paid too much – at least, when compared with teachers in other EU countries. Therefore, in these cash-strapped times, if we want to increase investment in education then we must address the issue of those over-paid teachers. This might be valid if Ronan’s conclusion on pay is correct.

There are three basic statistics derived from the OECD’s Education at a Glance upon which Ronan bases his conclusion.

First, he highlights the fact that Irish school teachers – after 15 years of service – earn considerably more than their peers in Eurozone countries. He doesn’t put exact numbers on this, but his graph tells his story.

Second – and here he does put numbers on it – Ronan shows that Irish teachers earn more per day than teachers in Eurozone countries. Even after the pension levy, Irish teachers are the highest paid. Ronan says:

‘ . . . the amount paid for every day spent teaching in Ireland looking pretty unsustainable. Factoring in the pension levy only scratches at the surface of the problem.’

Third, he calculates teachers’ net pay – after tax and PRSI. This, if anything, shows that Irish teachers’ pay is higher still.

Do his arguments stand up?  Let’s investigate - using primary school teachers' pay scales.

April 20th Evening: The Recession Diaries

Pat Leahy examines the impact a Left-led government might make on the economy and concludes . . . well, I’m not quite sure what the conclusion is. Indeed, I’m not any wiser about what the impact might be. He does ask the relevant question:

‘But what does the advocacy of a left-wing government actually mean? Does it mean simply that people don’t like the current government, or is there a characteristic left-wing alternative in gestation? And what would such a government do about the principal - in some ways, the only - question of the day: the economic crisis?’

Good question. To my mind, one of the most important questions. The problem is that Leahy treats us to a discussion on taxation and, while this is an important sub-component of economic strategy, it is only a part, not the whole. In short, if I thought the whole debate over the policies of a Left-led government boiled down to where we shift the incidence of taxation, I’d say it’s not worth the effort.

I don’t blame the various individuals quoted in the article – representing the broad spectrum of the Left. When the questions are framed within a set of restrictive parameters, it’s hard to break out and address the core issues of the crisis. Leahy (and I don’t think this is being unfair to him) is one of many, the majority in fact, who believes the crux of the debate is about what combination of tax increases and spending cuts need to be implemented to reduce the fiscal deficit. As it happens, I don’t. The debate should be about generating economic growth – saving and creating jobs while stimulating spending and investment. And when you look out at the world around us there is only one agency that can do that at the moment – the state.

So, while Leahy treats us to a sometimes surreal discussion - how much tax must be imposed, definitions of ‘well-off’, protecting public serivces that were starved of resources even before this recession kicked-in (concluding with that totally discredited McDowellist-line of juxtaposing efficiency and equality) - there are different, outside-the-orthodox-box responses to be made:

‘Mr. Leahy, the first thing a Left-led government will do is massively roll-back the levies on all incomes save for the highest – slash both the income and Health levies. That’s what a Left-led government will do.’

Now Pat’s teeth may fall out if he hears this from a high-tax, high-spend leftie - but then there’s that report from his same newspaper about falling retail spending.

Emperian, a global information services provider, has calculated that while in January the number of people visiting shops fell by 0.8 percent compared with the previous January; falling by 3.8 percent in February – the number fell by 8 percent in March.

'Mark Mullally, property services manager at Experian, said that the increased income and health levies in the budget earlier this month would exacerbate the situation for retailers, as people would have less disposable income.'

 Exacerbate might be an understatement.

Moving on, Leahy, after he picks up his teeth, will then ask – If you’re going to reduce levies, you’re going to have to cut spending; what would you cut?

‘Actually, Mr. Leahy, a Left-led government would do just the opposite. It will increase public expenditure – considerably. It will generate jobs in the public sector and, through public procurement, in the private sector. It will invest in infrastructure and public services. It will subsidise jobs to prevent redundancies. It will pursue wage and income maintenance strategies to stimulate demand. It will dare to spend, borrow, invest and lend.’

I can see Pat’s hand reaching for his mobile to ring the emergency psychological hot-line service for his interviewee. But he won't resist one more question – How can this be done? We can’t afford to borrow anymore. In that name of all that is holy, what are you talking about?

(sigh) 'The Government tell us we can’t afford a stimulus programme because it would mean higher borrowing, which we allegedly can’t afford. But they’re increasing borrowing because of rising unemployment. And they’re proposing a massive borrowing splurge to bail out the banks. So, we can borrow to maintain people on the dole and buy worthless assets. But we can’t borrow to put people back to work and invest in productive assets.' (shrug)

Once we step outside the narrow, deflationary parameters imposed by the orthodoxy, we can conceptualise an alternative programme for the economy. We must first, however, take that step. The Left has good instincts, the better instincts, but for some reason it hesitates to act on them.

Late last year, Labour called for a major stimulus programme and has consistently made the point that the fiscal deficit is the result of economic contraction and rising unemployment, not the other way around. Sinn Fein launched a comprehensive job-creation and training policy document. Such investment programmes would cost billions. This is what almost every other industrialised country, large and small, is doing in one form or another – growing, not deflating economies.

However, in the run-up to the budget, everything got terribly foggy. Labour stated, in its pre-budget submission:

'This deficit is unsustainable, and a major fiscal correction is required.'

From this, Labour argued for a deflationary approach, albeit far less than what the Government had been rumoured to be considering. Nonetheless, the bottom line figures – in terms of borrowing – ended up being rather similar. Sinn Fein produced a range of ‘fiscal’ measures to reduce the budget deficit but still ended up pretty close to where the Government ended up.

The proposals that each party made were far, far better than what the April budget produced: the tax increases focused on higher income groups and wealth, rather than reducing the disposable incomes of low and average income groups. In this respect, it was progressive. However, both parties failed to integrate their stimulus expenditure costs, which would in the short to medium term substantially increase Government spending, into their proposals for the April budget.

No question that progressives must argue for fiscal consolidation measures as part of a total package of economic investment. Those measures must limit the deflationary effect. But at the end of the day, any stimulus programme will cost. For example, a minimal programme would cost 2 percent of GDP – or €3.5 billion. There is no getting around or hiding the fact that calls to increase investment to save and create jobs will mean a higher deficit in the initial stages – more borrowing, more borrowing costs. Neither party factored this in.

The Left’s arguments for stimulus investment and fiscal measures are disconnected. They hang separately, not together. I would suggest this is not because Labour or Sinn Fein, the trade union movement or progressives in general, accept the deflationary programme proposed by Fianna Fail and supported by Fine Gael. They don’t. In fact, they know it won’t work.

Unfortunately we have, so far, failed to integrate the fiscal and the expansionary into a self-support stimulus strategy, failed to start the difficult, challenging work of creating a macro-economic alternative. Because of that, we are trapped, unable, unwilling to step outside the parameters laid down by the deflationary orthodoxy.

Realising this, knowing that our instincts are correct, is a start. It’s not a substitute for work but it is a motivator. Unless we begin this work, however, and step outside the trap, we can talk all night about realignment, political cooperation, a new progressive front that challenges the conservative political consensus for the first time in history.

But come morning time we still won’t have anything to say.

April 16th Evening: The Recession Diaries

In time, the acronym NAMA may enter into everyday language, much like Catch-22. But we don’t know,yet, with what inflection it will be used. It could end up something like this:

‘Go NAMA off, you low-down, double-dealing, good for nothing son of a NAMA!’

Only time, Peter Bacon and Brian Lenihan will tell. Early indications aren’t encouraging. How much are the assets worth? How much is the proposed discount? How much will the Government have to borrow? How much will this cost? How much of this will we be able to recover – through asset-sweating and/or a levy at the end of the process we don’t know how long will take? How much will the banks have to write down? How much will the state have to fork over to recapitalise? Will this mean nationalisation, part-nationalisation (?) and will the state act as an active or passive owner? And then there’s the billion Euro question: when all these questions are answered and all the state cheques have been written – will this do the trick, will this get credit moving again? We’re rolling some pretty loaded dice here. We could crap out leaving us without even a bus ticket back home.

I don’t intend to run through all the criticisms of NAMA. Ever since the Minister announced the establishment of the body, the media has been filled with analysis (WBS over at Cedar Lounge Revolution provides a good sample). With so few details, it is hard to get a complete picture of the process.

Rather, I’d like to establish alternative premises from which the Left can develop a coherent and progressive alternative and, so, help our critique of current Government policy.  It is one thing to curse the darkness, quite another to light a candle.  So this is where we might start from:

• We need to accept reality. As opposed to aspiration
• We need a vision of a new financial system, not a return to a failed one; there is no ‘normal’ to go back to, not an economically-desirable one

The end game is simple (if highly difficult to reach): to engineer a viable banking system that is subordinated to the needs of the economy.

April 14th Afternoon: The Recession Diaries

That wild and whacky outrider of neo-liberalism, Constantin Gurdgiev, has taken a scalpel to the Government’s budget numbers and I find myself . . . agreeing with him. No surprise there. People from wildly varying perspectives can still agree the sky is blue. Even if the great Fianna Fail sky-gods are doing everything possible to paint it black and blacker.

In my piece on Indymedia, I suggested the Government’s deflationary policies wouldn’t work, even on their own terms. If the goal is to reduce the annual budget deficit to less than -3 percent by 2013, it will fail. And this can be deduced from the Government’s very own numbers. While the Government accepted the collapse in output this year and next, they are bullish from 2011 on. From projecting a decline of nearly 8 percent this year the Government is proclaiming (and basing fiscal policy on this hosanna) a great turnaround – nearly 3 percent growth by 2011. Hurrah!

Have they read the runes? Have they studied the forecasts? No. They merely cut the headline growth rates from the January Addendum figures and pasted them into the new April growth projections; the same January figures which were so implausible they had to be torn up (back then they predicted a decline of less than half than what they are now). They took these discredited numbers, slapped them down in the current framework and reworked the percentage increases in the sub-components. Neat, eh?

Comrade Constantin saw this, too, and went off a-calculating. Here’s what he returned with:

• -11.5 percent to -12.5 percent decline over the next two years (compared to the Governments -10.6 percent projection)

• For 2011 to 2013, modest growth of 5.5 percent (Government: 10.9 percent)

This may seem just numbers on the page, but Constantin’s projections (and they are just that, projections) would certainly spell failure for the Government’s fiscal deficit by 2013 – a spectacular failure.

Already the Government’s fiscal ship has been blown off course. Because of the deflationary impact of the budget, Ulster Bank wrote down it’s projections the very next morning – now projecting a -9.5 percent fall in GNP compared to a pre-budget figure of -8 percent. What does this mean? The Government will not be able to maintain it’s deficit target of -10.75 percent without even more cuts later this year.

I projected, at a minimum, that the deficit will fall back to -11 percent this year. Constantin is more pessimistic. He projects the deficit to deteriorate further – to between -12.5 to -13 percent. Now remember – the very reason why we had an emergency April budget was the realisation by the Government that the deficit was running out of control – at -12 percent. They rejected the -9.5 target as being too uber-deflationary and settled on -10.75. If, however, Constantin is correct, or even close, then we will be right back where we started. But worse.

That’s the problem with pursuing deflationary policies in the middle of a recession: it’s like running in quicksand. Yes, you work up a sweat, even work the muscles; you give the sense of action and exercise but in truth, you are going nowhere. You’re just sinking faster. It’s a mugs game.

But where is the alternative? And who is proclaiming it? The Left seems content to exploit the Government’s difficulties but is giving these difficult calculations a wide berth. The trade union movement is preparing to re-enter ‘dialogue’ with the social partners after Easter; what are they going to talk about? How to distribute the pain more evenly? How to equalise everyone’s share in a collapsing economy?

What is so frustrating is that the instincts of the Left and the trade union movement are correct – that you can’t cut and tax your way out of a recession. You have to grow and pursue policies that generate and sustain that growth. In the first instance, this means putting the brakes on the decline, stabilising the economy and then prepare it for growth. Progressives throughout this island know this. Why, then, the hesitation?

So let’s give our instincts their collective head. Start from where we know is right. That doesn’t diminish the challenge – not only do we have mounting unemployment; now we have this NAMA lark (which I will be discussing in a couple of days) to contend with. Every indicator is going the wrong way but the Left and the trade union movement are in danger of being dragged along in the orthodox undertow for want of a concrete alternative.

If this is not the moment for the courage of our convictions – I don’t know when it will ever be.

Easter Sunday Morning: The Recession Diaries

Easter Sunday. An odd subject to for a blog on political economy to consider? I don’t think so. I have referred to religious-ethical issues before and on the way revealed that the first book I read, and the first book that was read to me, was the Bible. My mother was a fundamentalist protestant Christian. So was Dr. Martin Luther King. So were many of the first trade unionists, gunned down by para-military agents of employers. So is President Barack Obama. In my birth-home, much progressive politics arose, and continues to rise, out of faith and a profound engagement with all of creation.

Some time ago another blogger asked the pertinent question – is socialism an economics, a politics or an ethic? In truth, I cannot so easily compartmentalise. I may have let go of the form of my mother’s faith but I remain wedded to that profound affirmation – that we are all equal. Whether that is expressed ‘in the eyes of God’ or ‘in the eyes of the law’ or ‘in the complex relations of the economy’ – it is all one in the same to me. Economics is the political exploration of how we, as a society, make a living. Politics itself is derived from the Greek πόλις – meaning the city. We can choose. We can build a city of horror – of inequality, poverty, oligarchy and oppression. Or we can build a different city – one of democracy and equality. What foundation stone will we lay? That is the first question. All others – economics, politics – flow from that.

So, Easter Sunday. Christians celebrate Jesus’ physical resurrection and eventual return to the Creator, his Father, charting a path for all of us to follow. It is a profound and liberating story. All great religions contain such narratives: the Jewish migration from slavery to the promised land, Mohamed’s first revelation in the cave outside Mecca, Buddha’s awakening under the Bhodi tree, Krishna’s counsel on the battlefield of life, Lao Tsu’s final advice before he leaves into exile. These stories contain great struggles and sacrifice, great defeats and ultimately, great victory. If we are, first, builders we are also storytellers. It serves us well to listen.

Maybe because I grew up with it, but the Christian story strikes me as particularly thought provoking. For though there are mythological precedents, in the Easter narrative God, the Word, actually dies. It is a brave faith that contemplates that. For three days we are alone, truly mortal, without hope of salvation. Darkness descends, earthquakes rip open the tombs and the dead walk the city; chaos and arbitrariness rules.

The first Christian telling of that Easter morning was not, however about how Jesus appeared to the many. In truth, all references to Jesus’ physical re-appearance were later interpolations. That’s why none of the Gospel writers agree on the main points of what happened after the Resurrection: Jesus ascended to heaven on the day of his resurrection or he spent 40 days on Earth, he appeared in his own form or many forms, he ascended from Galilee or maybe from Jerusalem, and so on. Confusion? Yes. Important? No.

The earliest Christian manuscript, the writer of Mark, actually ends with Jesus’ disappearance, not reappearance – a more ambiguous but, for me, a more provocative ending. For on that first Easter morning, when Jesus’ mother, Mary Magdalene and Salome went to Jesus’ tomb to perform the death rituals they did not find him there or anywhere else. All they found was a ‘young man’ telling them that Jesus wasn’t there, that he had risen. And what was there reaction? The last line of the original Christian story puts it this way:

‘And the women went out and fled from the tomb, for trembling and astonishment had gripped them and they said nothing to anyone, for they were very afraid.' (Mark 16:8)

The Christian message is founded on an empty tomb, a cryptic message from an unknown, unnamed man . . . and fear. And who brought this story to the world? Women – who in Biblical times were (and still are in so many places and households throughout the world) treated as second-class, without rights, chattel. The Christian story of salvation starts with a confused message brought to us by the downtrodden.

Today, people celebrate the evolution of that Easter story – evolved not by hidden or supernatural forces – but by men and women throughout the ages: that death has no domain but, rather, is finally defeated, that the cryptic message is now clear as the darkness recedes; and that our original fear is not only conquered but transformed into celebration. It is a breathtaking story – told by every man and woman for the salvation of every man and woman, without prejudice or precondition.

On this Easter morning, so many in the world will wake up to hunger and war, exile and dispossession, knowing only despair. On this Easter morning, so many in Ireland will wake up to their own despairs – the fear of recession that is darkening our economy and society. On this Easter morning, we have a choice.

We can hide in our rooms as the Apostles initially did, dismissing the confused message brought by fearful people who were, after all, mere social and economic subordinates. Or we can go out – raise up the poor, make clear the message, invite all to the good news; and prove conclusively – that recession’s tomb can become empty, that there now can be a gaping hole in a previously small dark space of decay. It need not be filled with the economic and social casualties we are now creating.

We can build a new city – for we are builders. It can be a better city – for we can learn from our past mistakes. It will be a city for all in equal measure – for we now know that if one person is left behind we are all left behind.

And most of all we can tell a new story – of prosperity and hope, democracy and equality; a story in which everyone is invited to contribute to, a collective rewriting of a, so far, desultory narrative.

It is our choice. It is in our power. That, for me, is the Easter message.

So enjoy the break. For when we are rested, we have a lot of work to do.

April 10th Lunchtime: The Recession Diaries

More and more people will have loads of time on their hands to study the fall-out of the emergency budget – the growing numbers who will become redundant or get short-timed. Thank you, Fianna Fail, for giving us the time to brush up on competing theories of expansionary fiscal contraction. For we are certainly living the last two words, but not the first.

Unemployment ultimately drives everything – economic decline, lower consumer spending, business failures and, of course, more unemployment. That’s why, when crafting stimulus packages, other governments focus on jobs. Take President Obama’s initiative – it was expressed, not in higher company profits, or more export growth or even higher consumer spending; it was expressed in job creation. In fact, they have estimated where the jobs will be created on state-by-state and even congressional district basis.

Of course, our Government is not stimulating; they are deflating. So what does their new Macroeconomic Framework tell us abut the future rate of unemployment? It will rise to 12.6 percent this year and flat-line at 15.5 percent next year and 15 percent in 2011. You have to go back to 1986, when unemployment reached 17.3, to find unemployment rates this high. And this doesn’t count the short-timed, casual or under-employed workers.

However, the projected unemployment rates are annual averages. It doesn’t tell us how it will be at the end of the year. For example, in 2007, the unemployment rate was 6.4 percent. However, this was the average of all twelve months. Unemployment rose from 4.8 percent in January to 8.6 percent in December. So, while the unemployment rate was 6.4 percent, 2007 ended the year at the higher rate.

So, using the Government’s 12.6 percent average, where can expect unemployment to end up at this year?

[NOTE: I’m using the Liver Register’s Standardised Unemployment Rate. While the Live Register, in numerical terms, includes more than just the unemployed, the Standardised Rate is consistent with the more authoritative Quarterly National Survey, which unfortunately lags.]

Since September last year, the average monthly increase – in percentage terms – has been 0.6 percent. In the last three months, the increase has averaged higher – 0.8 percent per month. With these types of increases, we should expect unemployment, depending on the monthly variations, to reach something in the region of 14 to 16 percent by December. This would set up a flat-line for 2010 and 2011.

Okay so far. Looking further ahead, however, the figures become problematic. Between 2011 and 2013, unemployment is projected to fall from 15 percent to 11.8 percent. That’s a significant drop of 3.2 percent a two-year period. Are there precedents? Yes, but they are not very helpful.

There are four two-year periods where unemployment fell substantially. But, as can be seen, these were during the salad days of the phenomenal Celtic Tiger growth. The Government is projecting similar levels of unemployment decline based on GDP growth rates nearly half of what pertained back then. Good luck.

The Government is hoping for a V shape to the recession – a sharp fall followed by a sharp rebound. This is based on wholly optimistic assumptions which are probably not sustainable (doesn’t mean it won’t happen; after all, who among us predicted the scale of the collapse in the last year).

So, for unemployment they are relying on an upside down V shape – a sharp rise followed by a significant fall. The problem is that it could be an upside down L shape – a sharp rise followed by a flat-line. And there are historical precedents for this.

• Between 1989 and 1992, GDP growth increased by 12.2 percent. How far did unemployment fall? It didn’t.

We could be entering into a long phase of stubbornly high unemployment rates.  All the more so if the Government’s macroeconomic projections fall flat on its face – as I discussed here. With domestic demand being hollowed out by Government tax policy, with our export platform being whittled away through relocations, outsourcing, downsizing and liquidations, with Government consumption contracting – and the Fianna Fail expects this all to have a positive impact on employment?  Big ask, big wish.

All these questions will be answered in time – at the beginning of each month as the growing roll call of the unemployed is published in the Live Register. But we should pay particular attention to one part of they year.

A source in Social Affairs told me the Department is dreading the autumn figures. The usual seasonal variations suggest that unemployment will rise in the summer months and fall back in the autumn.

• 2006: unemployment rose from 153,000 in May to an August high of 170,000 and then fell back to 148,000 in October

• 2007: again, unemployment rose from 154,000 to 174,000 between May and August, falling to 157,000 in October, just short of the May level.

But a new, disturbing pattern emerged last year. Unemployment climbed from 201,000 to 247,000 between May and August – the usual pattern if at a higher level. Instead of falling in October, however, it rose still further – to 252,000. And continued rising until the end of the year.  If this occurred in a period where unemployment was only beginning to rise, what can we expect this year with unemployment soaring out of control?

A ‘bloodbath’ my departmental source said.

Of course, there is one economic activity that may yet save the day. It is an activity that past Governments have relied on with some success. It has saved a lot of Ministerial bacon. Our current Ministers may well be hanging out their bacon in the hopes it will be saved again.

Yes, that old reliable, that friend and succour of all Irish Governments in times of woe.

Emigration.

Aer Lingus may yet turn in a profit by the end of the year.

Deflation's End

This article was originally written for Indymedia

I don’t intend to list the outrages that Fianna Fail has perpetrated in yesterday’s budget. We all have scars to show each other. And let’s leave the bank bailout for the moment (but everything about it is one more argument for immediate nationalisation).

Let’s get to the heart of the matter. What was this budget all about? Closing the deficit this year by a couple of percentage points? Proving our machismo to the international markets (if wiping 8 percent off the gross income of an average-income couple with two small children or abolishing the Christmas bonus isn’t macho enough, I don’t what will satisfy foreign hedge funds)?

The whole point of this budget is that, whatever happens (mass unemployment, increasing poverty, a hollowing out of our enterprise base, degrading an already degraded infrastructure), we must ensure, at all costs, that by 2013 the number that appears in the line item ‘General Government Deficit as a % of GDP’ is -3 percent or less. It’s that simple. Nothing else matters. -3 is the magic number. People can eat stale cake.

Please continue reading this post at Indymedia.

April 6th Lunchtime: The Recession Diaries

Dare to spend. That is my advice to Brian Cowen in advance of tomorrow’s budget. Dare to borrow, to invest, to lend: now is not the time for timid measures, trimming here, paring there in the vain hope it will rescue an economy veering dangerously out of control. Reject the deflationists – many of whom cheer-leaded the low-tax, low-spend, low-regulated model, a failed model; many of whom ignored the billions that fled out of the country into property portfolios abroad while our infrastructure and enterprises were starved of investment. Dare to challenge the orthodoxy – you owe it nothing, Brian.

Take the bold action you know is necessary and inevitable. By tomorrow evening, bring all the Irish banks into public ownership. Does anyone really think these walking dead will ever be reanimated to normal? (Since the day of the bank guarantee, Bank of Ireland shares have fallen by 80 percent; AIB by even more). Under public ownership, all the competing strategies to flush out toxic assets and recapitalise clean balance sheets will be under direct and accountable control. This, alone, will instil confidence and shorten the reconstruction period.

Focus on unemployment. Already, commentators are speculating on a 20 percent unemployment rate by the end of next year. With the economy collapsing at the speed it is, this speculation is not without some foundation. Set-up every possible programme to maintain employment – subsidise jobs, subsidise part-time work, subsidise career breaks, subsidise the Sterling exchange rate. Spend whatever it takes to stop the job haemorrhage. This employment is the bedrock upon which recovery will happen.

And go further. Fianna Fail has a history of creating public enterprises where markets were broken and private capital reluctant or incompetent. Look to that history for inspiration. If key enterprises are falling down – enterprises with world wide-brands, key skill-sets, pivotal to our national and regional economies – don’t hesitate. Supply the necessary public equity, negotiate the public-private partnerships and, if needs be, take the companies and turn them into public enterprises. Without those brands, those skill-sets, those companies pivotal to our national and regional interests, our recovery will be that much harder, that much more incomplete.

Be creative. Invest billions into our infrastructure – physical and social – but keep it off the books. Plunder, raid, induce, incentivise investment pools and redirect them through non-Exchequer mechanisms (but still under the public control). This investment will create jobs, incomes and economic activity, which will reduce the fiscal deficit while the costs won’t show up on the deficit. Even employ sleight-of-hands – like the New Dealers: set up shadow budgets, twin-tracked budgets, side-by-side budgets where temporary stimulus borrowing is separated out from the regular budget. One side gives, the other side receives. A ruse? A ploy? A wile? Yeah, sure, why not, who cares? Keep it all above board, let the numbers speak for themselves – just do it. We’ll be all the better for it.

Don't tax income that might be spent in the economy - this is a lose-lose game:  less spending, less business revenue, falling economic activity, more short-timing, part-timing, unemployment.  Tax unproductive capital, unearned income, the high-earning groups.  Most of all, go after capital assets.  The top 100,000 households each have millions in wealth.  They accumulated this during the boom years.  Take it back, now that we are busting.  Don' t prune, chop the tax expenditures that benefit high-income groups with no economic benefit.  There are literally billions to be had.  This is not a 'soak-the-rich' suggestion; just a proposal to give them a good splash.  They'll still have their houses and their cars and their accouterments and their life-styles; what will the rest of us have?

Reject the cutters but drive the efficiencies. Is there a programme not working? Cut it, reform it, transform it. We have one of the highest levels of child-income support and, yet, one of the highest levels of child poverty in the EU; something is not working. We have a ‘childcare supplement’ that doesn’t supplement childcare, which, in itself, is the most expensive in Europe. We spend billions on a health care system that segregates our citizens into those that can and can’t pay. We spend billions subsidising private pensions while those same private pension funds are falling all about the place. There has got to be a better way. Can you find it?

Drive the efficiencies – open up the capital budget to the light of day. Do we know how much is spent to this or that effect? Do we have a cost-evaluation system? Do we a benefit-evaluation system where we can see whether this road-build will have a better or worse return than that road-build? Do we have a system of analysis that can weigh and distinguish the import-content as opposed to the domestic output multipliers so that, in the recessionary years, we can focus on capital projects that accentuate the latter and (temporarily) postpone the former – to maximise direct and indirect job creation and economic activity? Maybe we do. But if so, we are hiding these analytical lights under a bureaucratic bushel. Open it up, let’s have a debate – you will get better ideas, better analysis, better results.

Reform the public sector – but make sure you know what you’re reforming. Is it what public sector workers do themselves? Or is it what they do as dictated by government and ministerial policy? Remember: the EU KLEMS database shows that the Irish public sector produces more value added per employee than the EU-15 average. The National Competitiveness Council has produced tables showing that Irish public sector productivity is one of the highest in the EU, only coming in behind the super-efficient Nords. Is the public sector under-performing? No doubt, of course, is anyone surprised that any in large organisation – whether in the public or private sector – there are inefficiencies? But if Irish public servants are so productive, where does the problem lie? Maybe, policy; maybe ministerial inertia.

Above all – take on the begrudgers. We have self-appointed spokespersons on behalf of the ‘international markets’ predicting that any day now investors will refuse to buy Government debt. On television and radio programmes, in our newspapers they aid and abet speculators in the bond and credit default swap markets. They are either ill-informed or so ideologically-driven they don’t care about the reputational damage they are doing. There’s a name for this: economic sabotage. Denounce the saboteurs, expose them (they're being found out already - long-term bond yields have fallen by over 80 base points in just the last two weeks).  Tell them to f*** off (no better man than you, Brian, to unleash this earthy censure).

We need a FDR moment – that juncture in time that defines whether we take control of our destiny or passively endure it. I am not a Fianna Fail supporter, never will be. But at this moment such partisan differences are a luxury. We all sink or swim in the same economy. We need leadership and vision to navigate the rising tides.

You have that opportunity tomorrow.

Please don’t blow it.

April 5th Lunchtime: The Recession Diaries

Yes, it does look rather one-sided. IBEC, representing some of the most powerful financial and corporate interests, have called for payments to the weakest interests in society to be cut, i.e. cuts in social welfare. It’s like a bunch of ruffians getting tanked up in a pub on Saturday night and then going out to pick fights with the homeless.

I can understand that IBEC might be confused with all the blowback they're getting.  After all, they are just being consistent. In their recent pre-budget submission, they have called for wage reductions of 10 percent, along with increases in income levies – leaving even average-paid workers pretty destitute. IBEC wants everyone one to share the pain. So why not social welfare recipients; they should be happy to swallow the IBEC pill. Take that cut, take it happily – you’ll feel better knowing you have made your patriotic contribution.

IBEC is aghast that the poor are making a killing in this deflationary market. This was pointed out by the joint stockbrokers’ submission:

‘Inflation-adjusted social welfare rates are set to rise sharply this year due to lower prices across the economy. The Consumer Price Index . . will drop by 4% in 2009 and may fall another 2% in 2010. Yet social welfare rates increased by about 3% in the Budget of last October. That translates into a real jump in welfare payments of 7% this year.’ 7 percent?'

My god, granny’s fleecing us. But before we start spilling out of the pub looking for people people to roll, let's examine the numbers.

First, one of the main drivers in falling prices is the decline in mortgage interest payments. They fell over the year by 25 percent. The impact of this fall is likely to be limited among low-income groups, especially among over 55s (if they own a house have probably paid it off by now) and young people. Another significant proportion of low-income groups are tenants and, while rents are falling, they are falling at only half the level as mortgages (local authority tenants receive no benefit in falling housing costs).

When the CSO excludes mortgage interest, inflation is still rising if only marginally. No doubt, this category will succumb to deflation but it will lag considerably behind the headline rate.

But there are categories that low-income groups disproportionately spend their money on. The big one is food. While, according to the CSO weighting formula, the population spends 10 percent of their income on food, we can reasonably assume this percentage is higher among low-income groups. Food prices are still climbing – nearly 1 percent over the last twelve months (meat has climbed 1.5 percent while oil and butter has shot up by over 8 percent). Electricity and gas has increased by over 17 percent in the last year – another category representing a disproportionate spend by low-income groups.

We could list a number of categories but suffice it to way it is not good enough to take a headline inflation rate, assume that low-income groups ‘benefit’ from the decline and then call for their rates to be cut. It’s a sloppy deduction.

And, yes, there’s something unseemly about sacrificing low-income people’s living standards on the alter of fiscal consolidation. This is not some abstraction. The EU’s Survey of Income and Living Condition report for 2007 shows the following:

• A quarter of all elderly living alone and private-rent tenants are at risk of poverty
• Nearly 40 percent of the unemployed are at risk
• Over 40 percent of local authority tenants are at risk

There are key categories almost entirely dependent on social welfare income. An incredible 96 percent of elderly living alone and 70 percent of lone parents would be at risk of poverty were it not for social welfare payment.

The main argument, however, is not so much that it would be ‘unfair’ to penalise these groups (it would be, in shed-loads). Nor is it so much about targeting those who ‘can afford to pay’ (though they should, in shed-loads).

The argument here is that increasing social welfare payments would actually help reverse economic decline, restore economic growth, and generally would be one of the better recession-busting policies at our disposal.

In the US, the background papers to President Obama’s stimulus package identified the multiplier effect of a number of different stimulus policies. Here I will use one, the calculations by Mark Zandi, chief economist of Moody’s Economy.com. Multipliers measure the $ dollar growth in the GDP for every $ of stimulus investment in the short-term:

Not only does public expenditure have a higher multiplier benefit than tax cuts, the highest benefit comes from transfers to lowest income groups. For every €1 increase in Unemployment Benefits or Food Stamps, the GDP benefits in the short-term by between €1.64 and €1.73.

Of course, you can’t transplant multiplier effects from a large home-market economy to a small open economy. But the general parameters are supported by IMF findings – namely, that public spending, on infrastructure and social protection, have a more positive impact; the latter especially because low-income groups have the highest propensity to spend.

Conversely, to cut social welfare payments will have similar negative multipliers. People on low-income will have to cut spending. This will reduce income to enterprises reliant upon domestic expenditure and, especially, those business and shops in low-income areas. If this happens, we will see more people laid, more wages cut, more businesses closed down.

So, if we want to increase economic activity and, at the same time, increase people living standards’ – one of the best things we could do is to actually increase social welfare payments; in a targeted and forensic way.

I have argued in the past for re-introduction of the pay-related element of unemployment (Jobseekers’) benefit – to maintain disposable income, reduce consumer anxiety, and provide sufficient income to utilise training and back-to-education schemes. Can we provide help to the low paid, especially those with dependent children – a group that certainly would have a high propensity to spend? Yes, through the Family Income Supplement (FIS).

There are a number of problems with this scheme. First, it’s means-tested and, therefore, has a much lower take-up rate than Child Benefit). Second, its current design has considerable claw-back mechanisms (the withdrawal of payment as income rises): up to 60 percent in worst-case scenarios.

But the scheme has considerable strengths, namely it can deliver considerable amounts of money to a very targeted low-income group. In 2007 there were over 22,000 recipients earning an average of €6,000 per year. The maximum amount you can earn – after tax - and still receive FIS is currently €26,000 (one child), €30,680 (two children), and an extra €5,000 for every child above that.

As well, it’s a pretty cheap programme. It costs only €140 million (though if the take-up rate was nearly 100 percent it would cost more) – only 6 percent of the cost of Child Benefit. So why not extend and increase the payments, to reach average income families, providing a huge stimulus for these families and to the economy.

There are other categories we could focus on – in particular, carers. They have considerable expenditure demands. To increase their payments would be a sure-fire way to increase spending in the economy. And we could look at in-kind benefits.

If the state ever gets around to rolling out a national, low-cost, childcare network they could, in the first instance, income-relate the fees. Given that, according to the OECD, states that lone parents in Ireland face the highest level of childcare costs (45 percent of disposable income), a reduction here would translate to higher consumer spending. There a lot of businesses and shops that would celebrate this policy development - because the parents would have more money to spend.

There is a school of thought that says that social welfare payments, like wages, are part of the economy’s problem. This school is a failed school. It has no proper credentials. It should be shut down. The living standards of low and average income earners are key to the solution, key to reversing the recessionary slide, and can provide us one more weapon in the fight to turn this economy around.

IBEC should pick on people their own size.

April 2nd Afternoon: The Recession Diaries

Warning! If you are lucky enough to be invited on to a national radio programme – for example, the Pat Kenny show – to discuss the economic crisis, whatever you say don’t suggest that those on higher incomes with substantial wealth should pay a little bit more tax. If you do, you will be attacked, labelled, name-called and generally treated as if you were something that people scrape off the soles of their shoes. That’s what happened to ICTU’s chief economist Paul Sweeney. And he only suggested a minor increase. Still, he was roundly abused.

The subject was inheritance tax. Paul, who was joined by Fintan O’Toole, Jim Power of Friends First, and Moore McDowell, UCD economist on the panel, really got the passions going by pointing out the obvious:

‘I would hesitate about raising taxes too much in a deep recession and the deflationary impact . . The key on tax-raising . . . is that you really have to hit the wealthy people. You talked about income but let’s talk about wealth. In Ireland, inheritance tax is really quite low.’

What an understatement. Inheritances are covered under the Capital Acquisition Tax. It is a tax on those receiving the inheritance not on the deceased’s estate. There are three different classes of beneficiaries with different tax-free thresholds (spouses are fully exempt):

• Class A - €521, 308: sons and daughters, stepchildren and grandchildren under the age of 18 whose parent is dead. Also, parents who receive on the death of a child.

• Class B - €52,121: brothers, sisters, nephews and nieces, grandchildren and great grandchildren.

• Class C - €26,060: all those not in the above categories (or, ‘strangers’).

The inheritance above those thresholds is taxed at a flat-rate of 22 percent (compare that to the marginal tax of a low-paid worker – 27 percent). There are a number of substantial reliefs for those inheriting businesses and farms.

That’s the basic framework. It certainly isn’t onerous. Let’s crunch some numbers.

If I inherit €750,000 from my deceased parents, the first €521,308 is exempt so I’m only taxed on the remainder. I end up paying a little over €50,000. Or a 6.7 percent tax on the total income I received. Hardly penal.

Taking Paul’s observation as inspiration, let’s increase the tax rate to 40 percent (the level that pertained before Charlie McGreevy cut it and still well below the marginal tax rate on an average industrial income). How much would I pay? 12 percent. In other words, on my €750,000 inheritance, I would keep after-tax, €700,000. Still not bad.

Let’s go one step further. On top of returning to the 40 percent rate, what if we cut the tax-free thresholds by a quarter? I’d end up paying 19 percent of the total inheritance on tax.

Now, we can argue the toss until the sun goes supernova but if I get €750,000 for essentially doing nothing (that’s why inheritances are called ‘unearned income’) and, after tax, I end up with over €600,000 – I certainly wouldn’t feel hard-done by. Look at it another way. If I get up early in the morning, ambitious, brimming with ideas, work hard until late (maybe, on the way, exploit a few workers) and earn €750,000 per year for my efforts, I’d end up paying a lot more in income tax – on average over a third. Now compare with that with current 6.7 percent under inheritance tax.

So what was the panel reaction to Paul?

Paul: It’s a fairly well agreed principle in international taxation that insofar as you can . . . you should tax income from all sources in the same way. So if you’re taxing work at 41 percent at the margin so, too, we should take taxes on inheritances . . it (inheritances) used to be taxed at 50 percent. It was reduced dramatically in a very regressive move as part of McGreevy’s irrational exuberance that got this trouble into the trouble we’re in today.

McDowell: Paul, you really love sticking it to people who have a few bob. You really take pleasure out of it.

Power: Yeah, absolutely. You’re straight out of the 70’s – an unreconstructed Stalinist.

Stalinist? Dictator? Mass murderer? Wow - increasing ultra-low tax rates on inheritances is now tantamount to calling for the mass starvation of Kerry Kulaks. Is this what national debate comes down to? Name-calling? Apparently. And on the way, a fair bit of misinformation was propounded. Pat Kenny sounded horrified:

‘The notion that someone owns a house and cannot keep it within the family . . . because if you’re suggesting that the kids in order to stay living in that house would have to pay tax . . . . kids who still need a roof over their heads and it happens to be the family home . . . and they have no where else to live . . . ‘

Well, eh, no Pat – sons and daughters who live in the family home that is left to them by their deceased parents pay no tax at all on that home. That home is wholly exempt. Therefore, it’s not an issue. All that horror can be parked.

The fundamental principle should be that all income, regardless of source, should be taxed equally. Any exceptions or exemptions must be justified on the grounds of economic efficiency and / or social equity – which is why we have capital allowances and don’t tax the income of the lowest paid.

Unearned income deserves special attention. It’s bizarre that this type of income should be privileged over income from labour or productive investment (e.g. setting up an enterprise that employs people).

Unlike income tax, we don’t know how much gross income is transferred under inheritances. A friend at the Department of Finance did a back-of-the-envelope job and guessed that nearly €13 billion was transferred through inheritances each year. Yes, this is a guess, an educated one, but a guess nonetheless.

More data on the extent and type of transfers (e.g. property, houses, cash, equity, family possessions, etc.) that are made under inheritances would help us frame a more progressive tax framework and prevent inequities.

But for illustrative purposes, let’s say the amount transferred is €10 billion. So here’s my proposal, comrades.

• Tax gross income from inheritances at the same effective rate as income tax. The effective tax rate on income from work is 15 percent (the percentage of revenue from taxing all income under the income tax code). So, increase the effective tax rate on inheritances to 15 percent. Align tax rates, exemptions, reliefs, allowances etc. to ensure economic efficiency and social equity – but at the end of the process, ensure you get 15 percent in revenue from taxing inheritances.

If this were done, the tax yield would increase from the current €380 million (or less than a 3 percent effective rate) to €1.5 billion (or 15 percent). This would have very little deflationary effect on the economy. More importantly, it would help fund a stimulus programme to employ thousands and save thousands more from poverty.

This is what is meant by tax equity. This is what Paul was pointing out on the Pat Kenny show. He has opened up a vital debate on the nature of taxation and the gross inequalities in society.  Is that Stalinist?

If so, then call me товарищ.

NOTE: Fair dues to Paul for apologising over his remark on the show. It takes an honourable person to do that. Of course, I note that Jim Power, who engaged in name-calling on the programme, has yet to apologise. I guess that’s the difference - not only in politics, but also in character - between the two.

March 31st Lunchtime: The Recession Diaries

My oh my. Standard and Poor’s (S&P) has downgraded the Irish Government’s credit rating – from AAA to AA+. The fiscal reactionaries are in party-mode.

‘We told you so, we told you so, we’ve kept borrowing and now our credit rating has fallen, we gotta cut, gotta cut fast, gotta cut deep or we’ll lose that ‘+’.’

Of course, anything that impedes our ability to borrow on the international markets, anything that increases the cost of our borrowing, is not good news. And there is no doubt the S&P downgrade will make it difficult for us. So how should progressives respond?

First, laugh out loud at S&P. Second, laugh out loud at anyone who takes this type of agency seriously. For S&P, like other credit rating agencies, are wholly discredited to the point that serious analysts suggest they should be abolished.

That anyone anymore takes these credit rating agencies seriously is a mystery – and not just to me. S&P, Moody’s, Fitch’s – aren’t these the same agencies that gave a big two-thumbs up to the sub-prime mortgage investments? Giving the credit derivatives based on these flawed assets the big green light? Weren’t these the biggest cheerleaders for financial products that pretty much sunk the international financial system? Yep, the very same.

Credit rating agencies assigns ‘ratings’ for certain types of debt obligations: corporate as well as Government debt. The ratings are used by investors to asses the creditworthiness of the company or government in question. This is a big responsibility –commenting on creditworthiness. So you’d think they would be pretty careful and, above all, independent of any financial pressures or conflicts of interest. You’d think.

The US Congress held a special investigation into the conduct of these rating agencies The CEOs of the big three – Fitch, Moodys and S&P – were grilled by Representatives about their conduct and business model.

‘Conflicts of interest were largely responsible for the disastrous performance of credit rating agencies in assessing the risks of mortgage-backed securities . . ‘

And

'The three major credit-rating companies assigned some of their highest ratings to mortgage-backed securities whose risks were grossly underestimated. As homeowners began defaulting on subprime mortgages, it became clear that many of those securities were overvalued. The companies finally downgraded thousands of those securities over the past year, contributing to the collapse of major firms and heightening the economic crisis.'

Not only did the agencies help grow the bubble, then they assisted the collapse. What a great bunch. The Democratic chair of the committee, Representative Harry Waxman was blunt:

‘The story of the credit rating agencies is a story of colossal failure. The credit rating agencies occupy a special place in our financial markets. Millions of investors rely on them for independent, objective assessments. The rating agencies broke this bond of trust . . .’

Through testimony of former employees (the former head of mortgage ratings at S&P characterised the failures at that company by saying simply: ‘Profits were running the show.’), access to board minutes and confidential e-mails and memos, the Committee uncovered a cesspool of irresponsibility and culpability.

‘Among the documents uncovered by the committee was an internal board presentation delivered by Mr. McDaniel to Moody’s directors. .. he told his board: Analysts and managing directors “are continually ‘pitched’ by bankers, issuers, investors.” At times, he conceded, “we drink the Kool-Aid.”

The credit agencies became shills for the very people they were supposed to be independently rating. And this is the reference to Kool-Aid.

Everyone knows that Congressional Democrats and Republicans can’t even agree on the colour of the sky. Bi-partisanship is a four-letter word there. But let’s applaud the credit rating agencies – they managed to bring the Congressional Committee together in a unanimous condemnation. Republican Rep. Christopher Shays stated:

"When the referee is being paid by the players, no one should be surprised when the game spins out of control. You have so screwed up the ratings as to not be believable.’

Keep that in mind – a representative from one of the most pro-business political parties in the Milky Way, stating these agencies are not to be believed. No wonder Paul Kedrosky asks:

‘So, do we reform the credit ratings agencies? Sure. . . .But why stop there? Why not reform them right out of existence? We don't have a rating requirement elsewhere in financial markets, let alone in the real world. There are no government-certified equity or mutual fund ratings agencies, even less restaurant ratings agencies, or bicycles. So why do we have credit ratings agencies?’

While Michael Lewis and David Einhorn writes in the New York Times:

‘Given their performance it’s hard to believe credit rating agencies are still around. There’s no question that the world is worse off for the existence of companies like Moody’s and Standard & Poor’s.’

So what does all this mean for government borrowing and the intervention of the rating agencies? Professor Gerard Epstein, co-director of the Political Economy Research Institute, writes provocatively:

‘The credit rating agencies have got us coming and going. First they help cause the biggest economic calamity since the 1930's. And now they tell us we can't take the fiscal measures needed to get us out of this mess. Meanwhile, they are laughing all the way to the bank (that is, if they can find one that is still solvent). Why are we still listening to them? . . . Yet now, S&P and Fitch are sending "credit warnings" to other governments, threatening to downgrade their sovereign debt ratings if they "allow" their fiscal deficits to increase too much.’

Epstein’s analysis is worth noting. He suggests that smaller countries are being targeted, not because of their fiscal situation. Rather, the real target of the agencies is the larger countries – the US, UK, Germany, etc. Smaller countries like Greece, Portugal and Ireland are just collateral damage in what is essentially an ideological-driven attack. For credit rating agencies – ironically the beneficiaries of a US government licensed and protected oligopoly - are bastions of fiscal conservatism with a mission to attack expansionist stimulus:

‘ . . . increasing spending and fiscal deficits in the short run is exactly what governments should be doing. And now, after helping to cause the crisis, the credit rating agencies are blocking the way to the solution. The actions by S&P (threatening to downgrade Government bonds) are therefore profoundly misguided and potentially destructive. . . . This credit ratings fiasco picks off the weakest countries one by one and sends warnings to the stronger ones - an anti-Keynesian divide-and-conquer strategy.’

S&P’s assessment of Irish borrowing risk is not based on any ‘independent’ analysis (any more than their ‘independent’ analysis of sub-prime mortgage assets). Does anyone really believe that Ireland or any other Eurozone country will, or be allowed to, default on its debt? It is political. And it’s not even directed at us. We’re just pawns. Unfortunately, we could suffer depending on how many investors are duped by these Borats of the financial world.

To paraphrase the maxim: ‘Big credit rating agencies do what they want; small nations do what they can’. All we can do is work to our own lights and provide as much support to the National Treasury Management Agency as possible in their work to continue borrowing and at lower costs to the taxpayers. So let’s ring the banks into public ownership (to get the bank guarantee monkey off our backs) and launch a stimulus programme to put a floor on the economy that is sinking like boulder.

And if, on the way, a Government Minister exposes the game that S&P and other discredited rating agencies are playing, telling them they can take their ‘+’ and stuff it – then they will have my fullest, unconditional and grateful support.

March 30th Afternoon: The Recession Diaries

Labour is quickly approaching a crossroads. It is seemingly torn in two directions: a new stimulus strategy that prioritises rising unemployment and declining economic activity; or an accommodation with the orthodoxy, compromising within parameters laid down by the deflationists (or just as worse, paralysed at the crossroads unable to choose). The Labour Party conference provided evidence it was looking in both directions and that’s the problem: soon it will have to choose. And the hope of a progressive economic alternative lies in the balance.

Eamon Gilmore’s Party Leader’s address was an example of this. His premise was firmly set in a progressive critique:

‘And what makes Labour's economic policy different can be summed up in a single four letter word: JOBS . . . That's the problem in the public finances. The cost of job losses and the taxes lost because people are no longer spending. The problem in the public finances was caused by the downturn in the economy, not the other way around . . . the public finances can only be restored to order by getting people back to work. We are not going to solve the economic crisis unless we put jobs at the heart of everything we do.’

Eamon is right. Any critique of the fiscal deficit, the collapse in tax revenues, the dramatic decline in our GDP – all must start with jobs and consumption. This makes it all the more disappointing that, in a week when Fine Gael launched its 100,000 job stimulus plan and Sinn Fein produced a range of employment retention / creation measures, Labour failed to intervene with a job creation policy framework. It’s not that Labour doesn’t have the material. Eamon listed a number of past proposals and unveiled two new ones:

• A Graduate Work Placement Scheme that would place new graduates into temporary work places. 
• An employers’ PRSI cut for eighteen months when a new job is created and filled by someone who has been unemployed.

These are not so much policies as ideas. The details have yet to be worked out – the operation, the costs, the target number of jobs created. And in the case of the PRSI cut, it may not be a good idea since the deadweight costs may be quite high (i.e. cuts in PRSI may benefit jobs that would have been created without the subsidy). One OECD study suggested that up to 60 percent of jobs so subsidised would have been created anyway. In any event, during a recession where employers are cutting output and jobs, a PRSI-cut to create employment may have few takers.

Still, even without a framework or a narrative, at least this analysis looks in the right direction. But, looking in the other direction, Eamon stated:

‘Getting people back to work, and restoring the confidence to buy among consumers is key to solving the crisis in our public finances. But that crisis is now so bad, and so urgent, that it can not wait for the new jobs and the new spending.’

One can empathise with this, to a point. Fianna Fail’s procrastination and paralysis has hurtled the fiscal deficit into the stratosphere. The whole point of a stimulus is that it should be ‘timely and temporary’. However, even were a stimulus programme – even on the grandest scale – introduced tonight it would certainly be late and it would be temporary only if you stretch the meaning of that word. Nonetheless, Eamon warned against panic:

‘What we need is a plan for the public finances, not just another set of panic measures. Too much harsh medicine (tax increases, spending cuts) all at once could end up killing the patient. Sending the country further into a downward spiral of job losses, followed by cuts, followed by more jobs losses, followed by more cuts.’

Absolutely. But then:

‘Do taxes have to increase? Yes, they do . . . No-body likes that, but there is no choice - that is where Fianna Fáil has brought us. The gap cannot be sustained. . . But when we pay more tax, and deep down we all know we have to, then it must be progressive and on the taxpayer's terms.’

Labour is demanding a new tax rate of 48 percent for incomes above €100,000 and an end to tax exile (or more appropriately, tax fugitive) status. These are standard demands championed by ICTU and other groups. But the key element here is Labour’s acceptance that taxes will have to increase. The Finance Spokesperson, Joan Burton, TD outlined Labour’s current thinking:

‘Let us see a set of measures that incorporate three elements. Higher Incomes: considerably more (taxes). Middle Incomes: definitely more. Lower incomes: a reasonable contribution that does not destroy the purchasing power of the poorest and the elderly. . . Do not underestimate this party's commitment to and willingness to implement sound public finances based on a balanced mix of spending controls and fair taxes.’

So the principle has been accepted – general tax increases, even for those on low incomes. It will be made palatable if those higher up the chain pay more. Never mind that tax increases on low and average income groups will depress economic activity even further which, in itself, will worsen the fiscal deficit; Labour was glancing down another road.

It wasn’t always so: only a few months ago Joan rightly declared:

‘Today a massive public stimulus is all that stands between the nation and economic calamity. . . To get a depressed economy moving, you must have a stimulus, a new deal for new jobs. . . .A stimulus package is necessary for one simple reason. When demand slumps, when deflation is a greater menace than inflation, when consumer and corporate confidence has collapsed, fiscal conservatism makes little sense.’

And Eamon, in his address at Labour’s November Conference – the speech which prefigured Labour’s spectacular rise in the polls, quoted Paul Krugman approvingly (“Government will have to provide economic stimulus in the form of higher spending and greater aid to those in distress") and went on to state:

‘That is the very opposite to what the conservative commentators are recommending. Labour stood alone, to argue for Government intervention . . . to get the real economy moving, to get people back working . . . . Because the crisis in the public finances has been caused by a downturn in the wider economy, not the other way around. The key to getting out of this economic crisis is not how much the Government can cut, but what it can create. That is why Labour, alone among all the political parties, wants a stimulus plan for the Irish economy. That is what a Labour government is doing in Britain. What the European Commission has called for. What President-Elect Obama intends to do in the US. That is what we need to do here.’

This urgency, this analysis, this vision was missing at the recent Labour Conference. One could argue that the deterioration in the budget has now superseded any strategies for stimulus but I’m not so sure. With the economy collapsing by 7.5 percent in one quarter (an annualised rate of 30 percent), the imperative to invest in the economy becomes even more urgent, if only to set a floor on this collapse. Without such a floor the economy will be in freefall and no amount of fair taxes or spending controls will fundamentally alter the deficit dynamic.

That being said, while the arguments for a stimulus become every stronger, we must work harder and more creatively to construct such a programme in these dark days. For there is no doubt the vultures are circling: deflation, job losses, deficit, borrowing costs. But i we throw in the towel, accept the consensus of the orthodoxy, we will all be jumping out of the plane without a parachute. Some will survive, many won’t and the rest will be nursing injuries for a long time to come if not permanently.

Labour knows which road to go down. It knows it must turn Left. Yes, it will be confronting an entrenched and powerful consensus. They will be attacked from both sides of the road – from vested interests, newspaper groups (the Independent will go apoplectic), the right-wing parties. It will take courage, fortitude, imagination and, yes, a little bit of defiance to lead people along that road. But Labour can do it. What they said before remains relevant now and tomorrow – even more so.

The decision Labour makes will not only affect its ability to lead, affect its ability to offer real change in an alternative government, it will affect the very future of a progressive economic analysis.

We can only hope Labour follows its instincts.

March 27th Lunchtime: The Recession Diaries

A good friend made a bet with me in January. He wagered the economy would contract by 10 percent or more by the end of the year. I gladly took the bet. But he rang me yesterday wanting to know if I wanted to pay up now. For the news that the economy contracted by 7.5 percent in the last quarter of 2008 suggests, if anything, that my friend was being too optimistic.

We’ve exhausted the thesaurus. We now have to turn to song to describe this appalling situation, and together sing Elvis Costello’s line:

‘I would rather be anywhere else but here today.’

But, not, let’s light some candles rather than curse the darkness. Brian L seems to be reading the interesting discussion over at Irish.economy on distinguishing between the two parts of the deficit:

• The structuralelement: that part of the deficit that would exist even if the economy were functioning at full potential. We would still have a deficit because we over-relied on temporary property/construction activity for our tax revenue while at the same time cutting more reliable streams such as income tax, PRSI etc.

• The cyclical element: that part of the deficit which will disappear once the economy returns to normal (higher employment, less social welfare costs, normal patterns of consumption resulting in higher spending tax revenue, etc.).

Disentangling these two elements is not easy. But in the early part of the recession, the structural element made up a significant part of the deficit. Now, the cyclical element is growing in proportion as unemployment rises with all its knock-on effects on tax revenue and social welfare costs.

Some at the Irish.economy believe we should focus on the structural element, rather than chase the moving target that is the cyclical element. I don’t agree. A stimulus approach prioritises the cyclical element. We can deal with the structural element later for the simple reason that even in good times, closing the structural element would be difficult (increasing income taxes, etc.). Trying to do this during a recession will only exacerbate the cyclical element. So my advice: forget the structural, it’s not going anywhere, it’s not growing, it’s not the immediate problem.

However, that’s not the point of this post. We should welcome the more sophisticated approach of deconstructing and analysing the individual components of the deficit. So let’s get even more sophisticated, more creative. Let’s take a look at what Franklin Roosevelt and the New Deal did when it came to budget deficits.

FDR was, initially, a fiscal conservative. No surprise there; that was the fundamental discourse of the time. Don’t forget, the lasting achievement of the New Deal was to transform the very nature of the Federal Government’s role in society. Only a few years previously there was implacable opposition to Federal relief for flood victims in Louisiana on the grounds that this was a ‘state’ matter, not a Federal one. The New Deal started in a very conservative period.

So FDR didn’t come into office as a raging Keynesian. In fact, after he met Keynes in 1934, he was none too impressed (he complained that all Keynes did was leave a ‘whole rigmarole of figures’). But FDR was not just the supreme pragmatist; he was also an enlightened activist. He launched a series of programmes – putting people back to work, strengthening the financial sector, introducing pensions and benefits. All this cost money, money that could not be raised by conventional means such as taxation or public expenditure cuts. So how could he balance his initial instinct (and the overwhelming consensus) for a balanced budget with the obvious need to borrow and spend?

His administration came up with a novel solution. They introduced a ‘regular’, or a non-emergency budget alongside an ‘emergency’ budget. The former they tried to balance. The latter, however, funded the Works Progress Administration (a public works scheme to employ 2 million unemployed), the Public Works Administration (which contracted out large public works), the Civilian Conservation Corps (which employed young men to perform unskilled work in rural areas) along with other stimulus and job creation measures. This emergency budget was allowed to run a deficit for the simple reason that that was the whole point - place the deficit outside the regular budget. 

Was this a bit of fancy footwork? You bet. But that was FDR’s great skill. He danced, he tangoed, he waltzed, he even boogied – all to get the economy going. For him, all that mattered was what worked; and anything you had to do to make it work was fair game. Eventually he lost his concern for a balanced budget, becoming almost an accidental Keynesian, when he realised that the sky didn’t fall in just because the Government spent more than it took in.

So how can we do some fox-trotting here, now? We could divide the budget in a similar manner – a regular one, and an emergency or ‘stimulus’one. The stimulus budget would obviously be in debt. It’s only concern would be to borrow or draw down the NTMA’s cash balance, to spend on clearly identified and costed stimulus measures (Fine Gael’s infrastructural investment programme would be one, Sinn Fein’s policy proposals would be another, when Labour produces their stimulus programme, that would be included).

The increased stimulus expenditure would be recorded in the 'stimulus' budget. The success of the stimulus measures, however, would be recorded on the regular budget – with rising tax revenues and reduced social welfare expenditure. This would complement fiscal consolidation measures that would use the least deflationary measures (tax on high income groups, unproductive capital and unearned income; along with cutting regressive tax expenditures). This would reduce the fiscal deficit in the ‘regular’ budget.

Would that mean we will still have a high overall deficit when you combine the ‘regular’ and ‘stimulus’ budgets? Wouldn’t we still have to overcome both? Yes. But by separating out the two elements you would be better able to measure the impact of the stimulus on the regular fiscal deficit rather than lumping them all together in an obfuscatory manner. You would first target the regular deficit over a five-year period while making clear that would address the stimulus deficit at the very end of the process.  When the economy is back on its feet, when we have brought the regular deficit under control, we can start raising general taxation and social insurance in tandem with economic, employment and consumption growth.

Is there a precedent for this type of accounting? Yes. The current Government is doing it – by inserting into the budgetary tables the line item, ‘Cumulative Fiscal Consolidation Objective’. This is pure invention and makes a mockery of the headline expenditure and taxation projections. We should abandon this fiscal subterfuge, make the headline figures credible and insert a new line item ‘Emergency Stimulus Expenditure’. This would be more accountable and more honest, providing us with realistic targets that can be achieved. 

For let’s not be under any illusions. An economy that is sliding by 7.5 percent in a quarter cannot sustain traditional fiscal consolidation measures; indeed those measures will only make it worse. And if the Government tries to walk a high-wire circus line between preventing ‘over-deflating’ the economy and balancing the budget, they will fall off. And it’s a big government. It will crush all of us.

There is only one alternative: stimulus. Smart stimulus, targeted stimulus, forensically constructed and implemented – but stimulus all the same (in a later post, I will put some numerical flesh on these strategic bones).

If we embark on this road – that ‘ribbon of highway’ - we won’t have to return to the thesaurus. We can still stay with song to describe our new situation. But this time, hopeful song. So that when the fog finally lifts we will see, brothers and sisters, that this land, this economy, this world belongs to all of us equally, without prejudice or privilege.

I'm getting ready.  I'm going to learn to play the guitar.

March 26th Evening: The Recession Diaries

Leaving aside the sting in the tail which I will get to below (and it’s a big tail, the sting will really hurt), what would you say about a proposal that combines the strengths of existing public enterprises, along with creating new public enterprises, in order to substantially increase investment in modernising our infrastructure, create 100,000 jobs, and all with the added benefit of keeping it off the Exchequer’s balance sheet (and, so, reducing our fiscal deficit)? You’d say, hey, that sounds pretty progressive. And when you asked, ‘Who came up with that?’ would you be surprised that it was Fine Gael? You probably would. But, then, these are times when Irish politics can get funky.

Fine Gael has launched its ‘Rebuilding Ireland’policy today. It calls for the establishment of a new state industrial holding company, the New Economy and Recovery Authority (NewERA). This will be made up of existing public enterprises: ESB, Eirgrid, An Post, Bord Gais, Bord na Mona, Coillte and the Metropolitan Area Networks (MANS). In addition, Fine Gael proposes to establish ‘new’ public enterprises:

• Smartgrid(actually ESB Networks split off from the ESB Group) that will invest €3.3 billion developing a 21st century smart electricity grid, with emphasis on conservation, renewables, micro-generation and even electric cars.

• Broadband 21to invest €2.5 billion in open-access, high-connectivity fibre-optic and wireless network to support next generation broadband services to every home and business.

• BioEnergy Ireland(merging Bord na Mona, Coillte and the National Council for Forest Research and Development) to invest €800 million in the commercialisation of next generation bio-energy technologies.

• Renewable Energy Ireland which will invest in early stage green energy companies and applied renewable energy research.

• Irish Waterto take overall responsibility for providing safe clean drinking water and treating waste water through an expanded water infrastructure investment programme.

• Greener Home Bank(actually EBS turned into a state-sponsored mutual building society) to unlock credit for households to upgrade their homes to new energy and waste water standards.

This ambitious programme will be financed by equity investment from the Pension Fund, a loan from the European Investment Bank, and bond issues to domestic and international investors.

Fine Gael provides tables showing the impact of this investment on the economy (they even use multiplier outputs – bloody hell, are they in danger of becoming Keynesian!). The investment will, by 2013:

• Add 5 percent to the GDP, of which half will go to wages
• Generate 99,000 jobs, of which 45 percent will be direct employment and the remainder spin-offs
• Reduce Government borrowing by over €4 billion through extra tax revenue, reduced social welfare costs and transferring investment items from the Exchequer balance sheet

Well, yes. That’s what investment in job creation can do.

So what can we make of their proposals so far? Well, it’s lifted wholesale from ICTU’s own proposed State Holding Company which would combine all the assets of public enterprises into one body, with finance coming from almost the same places (Pension fund, private investors, equity and bonds).

I wouldn’t get too undone by this rip-off – after all, if we don’t steal one another’s ideas, how are we ever going to come up with original ideas? Though, it might have been politic (and the teensiest bit candid) if Fine Gael had actually referenced ICTU’s same proposals they made four years ago.

Ah, but here’s the sting. The problem starts with the financing. Fine Gael proposes to tap the Pension Fund for €9 billion, or 50 percent of the total investment. There’s little chance of that happening. The Pension Fund is worth €15 billion. By the end of the year – with equities still taking a bath – it’s likely to end up with less. A significant amount could be siphoned off for bank capitalisation. At the end, there would probably be little of the Pension Fund left to invest in NewERA (though, in principle, Fine Gael is right – to invest in infrastructural modernisation here rather than equities and property abroad).

But that’s only a niggle. The real sting is how Fine Gael proposes to pay back the Pension Fund and other investors. The returns from NewERA investment would only go so far. So the investment will mainly be paid off by a massive privatisation programme. The Pension Fund

‘ . . . will be replenished . . . through the sale by NewERA of existing and new state assets no longer considered strategic to the goals of the NewERA initiative (starting with Bord Gais and ESB International). In this regard, Fine Gael will not repeat the mistake of Eircom by selling critical infrastructures that are strategic to national economic development.’

Well, I don’t know how our gas network could be called anything but ‘critical’ or ‘strategic’. Indeed, when one considers Fine Gael’s last election manifesto – the commitment to provide natural gas to the West and Northwest – one might consider it, at least, pretty important.

If Fine Gael proposes to fund an investment programme into our infrastructure by privatising those companies investing in our infrastructure, it means they haven’t learned from past mistakes. Not only was there the asset-sweating of our telecommunications infrastructure through repeated Eircom owners. Take the example of B&I Shipping. Prior to the privatisation, the company had been turned to profit, largely due to the sacrifices of the workforce who agreed a five-year rescue plan involving hundreds of redundancies, a three-year pay freeze and a pay cut of 5%. Irish Ferries took it over – at a controversial knock-down price and the rest (what’s left of it) is history.

Then there’s Greencore and its transformation from a food manufacturer into a property dealer. And Irish Life and that dance with Anglo-Irish. And now we don’t have a bank to provide capital to small and medium enterprises because the bank we did have – the Industrial Credit Corporation – is history.

Fine Gael’s targeting of ESB is particularly curious – it’s like a vendetta (even though Simon Coveney, the main author of the policy, has accepted that ESB prices are the result of Government policy and not the company itself). It wants to privatise ESB International – a successful public enterprise and world brand that builds, own and operates power stations abroad, earning the company not only a valuable revenue stream (which, in a normal electricity market could be used to lower prices here), but an invaluable knowledge stream as well. The latter is particularly important as the company is an integral part of the ESB’s strategic plan to convert to renewable technologies. Why hobble that goal?

And what’s the point of hiving off ESB Networks, creating duplicate administration and losing competitiveness through loss of scale, to do what it is doing already? Is not our electricity retail network a critical or strategic part of our infrastructure? Or is the exercise wholly instrumental – making it easier to privatise?

This is not a fundamentalist argument against any and all privatisations. But to base a massive investment programme on widescale privatisation (when our history of privatisation is rather poor) seems to be putting at risk the very thing you’re trying to create.

Fine Gael claims that under public enterprise stewardship we can

‘ . . reposition Ireland as the most competitive and sustainable economy in Europe within the next decade . . . and help to drag Ireland’s economy out of recession.’

I agree. Wholeheartedly. But if public enterprise can do that, then why would you liquidate it? If private enterprise can do a better job why can’t they do it now? Fine Gael claims we need public enterprise in one sentence and then in the next says we don’t.

But don’t underestimate the appeal of Fine Gael’s proposal. This could be a winner – a breakthrough policy that can gain considerable support. It ticks a lot of boxes and, most of all, provides hope for economic growth. It is strong at the point where they copied ICTU but don’t think the questionable financing and privatisation will put a whole lot of people off. There are few who will care about the details of the Pension Fund. And I doubt many people will care about long-term privatisation plans if the programme can create anything near 100,000 jobs in the short-term (I suspect some people would turn their grandmothers into Soylent Green if it could create a few jobs).

What a week. First, we had Sinn Fein’s comprehensive list of job creation proposals and strategies. And now we have Fine Gael’s infrastructural investment stimulus. Labour will have a lot of ground to make up this weekend when, in all likelihood, it will unveil its job creation proposals.