August 18th Soggy Sandwich Lunch: The Recession Diaries

Must have been a slow news week.  The Sunday Tribune reported on ICTU's proposalsto combat inflation.  They claimed they were submitted to the national pay talks two weeks ago.  However, the pay talks had already collapsed.  In fact, this is old news.  The proposals were published two months ago: 'The Big Squeeze'.  Still, better late than never.

Inflation is one of those phenomena that is terribly resistant to any particular Government initiative.  Namely because it is inextricably intertwined with a complex of economic activities. And it doesn't help that Jean Trichet, head of the European Central Bank, is Captain Ahab-like obsessed with inflation numbers.  I mean, the Euro economy is in danger of falling into recession and he's still championing high interest rates. 

Anyway, fair dues to ICTU - it's not like anyone else is putting forward a programme to do something.  Would their proposals work?  As always, its a little from column A and a little from column B.

But I have a particular bugbear.  ICTU is proposing a 2 percent cut in the standard VAT rate.  They are right to point out that Ireland's VAT rate is high - 21 percent compared to an OECD average of 15 percent.  They are also right to state that it is a regressive tax - those on social welfare will end up paying 7 percent of their total income on VAT, compared to 2 percent to high income groups.  It's a necessary tax but not a progressive one. 

The problem is that our tax revenues are so reliant on VAT that were we to cut it - especially with the Exchequer finances in crisis - it's hard to know how you would make it up.  The Tribune states that it would cost €300 million to cut VAT by 2 percent and could be made up by higher taxation on incomes over €120,000.  But the ICTU document, which the Tribune article is based on, states it would cost €1 billion.  No amount of taxation on high incomes could make this up.

And would there be any benefit?  This is wholly problematic.  I have written about this problem before but the fact is that there is no guarantee the VAT cut would be passed on to the consumer.  When VAT was cut back in 2000, the Department of Finance found little consumer savings.  Irish indigenous enterprise dont' do 'pass savings on to the consumer' - they pocket them.  In the current state, a general VAT cut would be a huge subsidy to business and enlarge the black hole that is the budget.

Let's not get defeatist, though - we could cut VAT on 'invoiced' items such as telecommunications where you can see the effect of the VAT cut upfront. Cutting VAT on telecommunications from 21 percent to 12.5 percent would benefit households and businesses.  The cost would be limited, the effect would be seen and the benefit would be widespread.

But here's a little gem from Colm Rapple - one of the best commentators on the scene. He writes for the Irish Sunday Mail but you can read his contributions at his website.  Always insightful and thought-provoking.  And on the issue of high retail prices he suggests the following:

'The NCA (National Consumer agency) could start by publishing weekly comparisons of supermarket prices for a range of basic food and household products, quickly followed by a full listing of motor and heating fuel prices. Once-off surveys are no good. Consumers need to have up-to-date information on actual prices when they are going out to shop. There is no good reason why retailers should not be required to feed the information directly into the National Consumer Agency’s computers where relatively simple software could collate it and publish it on its website and, ideally, also prepare it for newspaper publications for those without internet access. That way competition could be made to work a little better than it is at present.'

Could you imagine the howls of protest from our local bourgeoisie?  Interference with the market, regulations strangling entrepreneurs, more public sector when we should be abolishing it; you can write the script yourself. 

Here's a way the public sector can inform and empower consumers - so that they don't have to rely on advertising propaganda.  People wouldn't have to drive miles in flood waters, drowning the kids and the family dog in the back seat, trying to find out whether Tesco's paper towels really are 'low, low, lower' than Dunnes' paper towels.  Mr. Rapple's 'shopping around' would be done people's own terms, not retailers'.

This would't transform the inflation problem - but it would have a much better effect than generalised cuts in VAT since, due to our lack of market transparency, we wouldn't know if the savings are passed on.

In these and other little ways - ones that don' rely on genuflections to the majesty of market forces - we can start to make inroads into inflation. 

Comments

[Ian]

I see your point about what the NCA could do, but I am wary about a state agency giving free propaganda to Tesco or Aldi or Lidl. There is something inherently dodgy about that.

[James]

While this idea does not, indeed, "rely on genuflections to the majesty of market forces" it does require understanding of the way markets work, specifically that large-scale markets do not function as naturally occurring phenomena if only the state gets out of the way. The most fundamental reason for this is the need for a property rights regime but more generally the "institutional" economists argue that absence of perfect information threatens market failure if positive steps aren't taken to reduce "transaction costs" i.e. the costs associated with uncertainty and lack of info that people have to bear in the course of market exchanges.

So this sort of thing would actually be a thoroughly pro-market measure, provided one gets beyond the vulgar conception of markets as existing somehow as seperate entities (if only on a Platonic realm) from non-market institutions (not just state ones).

[Michael Taft]

Excellently put, James. This suggests that markets cannot function on their own and need public sector assistance. Of course, this moves us into the political sphere - who will, or should be the main beneficiary of such intervention to create more smoothly functioning markets. No points for guessing that one under the current regime.

Ian, hadn't looked at the issue from that perspective. Should a public sector agency become a shill for certain companies? In any event, price is not the only criteria. Quality of product and service also play important roles. We could look for a greater intervention such as performed by Germany's Stiftung Warentest - Product Testing Institute. This is a state supported but independent body that tests products and services on the basis of price and quality. It is estimated that up to a third of Germans consult the Institute either through their website (which can perform personalised requests) and their regular magazine publications. To give you just one example: they recently tested face creams and found Aldi's own product (at €2.50 for a 50 ml jar) to be the best - over higher-priced brand labels (Helena Rubenstein's jar cost €78.50). You can imagine how angry this makes some companies. In fact, the Institute has been taken to court on a number of ocasions by companies whose products were tested and found wanting.

This type of intervention could help undermine a vacuous cosumerism that assumes high price = high quality. It could also be a great anti-inflationary instrument. But in any event, it can provide information that consumers will never get - from a body that is beholden to no corporate interest.

[James]

Actually now that one thinks of it there's a good argument for nationalising "Which?", isn't there?! Not exactly the commanding heights but evolutionary socialism and all that...

(Love the sheer Teutonic methodical-ness of "Product Testing Institute" by the way..."