Notes On The Front

Dismal Numbers: The Recession Diaries - November 22nd

Sometimes numbers tell the best story. They may not tell us why – that comes afterwards, when we try to explain. But numbers are a good starting point. The OECD Economic Outlook has produced a set of numbers with which we can do some charting (I apologise but the Outlook is not accessible on-line -at least, I can't find it; if readers want the full copy please e-mail me I will forward them on).  And a dismal set of numbers this is. Much of these are estimates and so the numbers will change. But the general trend is pretty much set.

Let's start with real GDP growth. For the period 2008-2010, Ireland is a league leader in the recessionary stakes -– by far. The next worst-suffering country – Finland – will only see their economy fall by less than half the Irish rate of decline. The average decline in the other EU-15 countries is estimated to be less than -3 percent; Ireland, over -12 percent. Told you it was dismal.

And 2011? Now here we are really getting into tentative territory – especially with the OECD warning that the global recovery is still too ‘thin’ and the IMF advising countries not to prematurely exit from stimulus measures. So treat these projections carefully. Still, they tell an unsurprisingly similar story. Irish GDP will grow by 1 percent while the other EU-15 countries will on average grow by 2 percent with Eurozone countries growing by 1.7 percent. Ireland will remain the worst performer, apart from Spain.

So we have a situation where the Irish economy was hit hardest during the recession and will lag behind other EU countries coming out. It should be noted that OECD estimates are at odds with most domestic commentators who are predicting higher growth for Ireland in 2011 (with the exception of Jonathan Stenning of Cambridge Econometrics whose numbers tally with the OECD). So, it remains to be seen who will come out right. We should all hope it’s not the OECD.

But you don’t get off that easily. Here are some more numbers to really make your day. In regards unemployment, there we are again – at the top. Our rise in unemployment has been twice the pace as other EU countries. Italy will have suffered least while Spain is the next in line in the dismal stakes. In fact, of the other 14 EU countries, nine will see their unemployment rates rise by less 3% points.

And let’s not forget – most other countries don’t have the safety valve of emigration. If we turn to the EU Commission database (the OECD doesn’t have this breakdown) find that Irish employment will fall by -11.7 percent between 2008 and 2011, compared to the Eurozone average fall of -3 percent. We are shedding jobs at nearly four times the rate of the Eurozone.

We can go through other numbers. Take investment: In Ireland, it will fall by over --70 percent (yes, -70 percent) in the three years to 2010. Compare that to the Eurozone average fall of -12 percent. In 2011, Eurozone investment will rise by 2.3 percent. Ireland will be lagging with a growth rate of 0.5 percent.

Of course, some will point out that this reflects the bursting of our property bubble and, given our over-reliance on construction, this decline shouldn’t be surprising. Well, yes, that’s the point about investment during the last decade. But let’s look at non-housing investment (and here we have to turn to the EU Commission database since the OECD doesn’t have this breakdown). Investment in equipment will fall by over 50 percent in Ireland, whereas the decline in the Eurozone will be less than 18 percent.

Or consumer spending: in Ireland, consumer spending will fall by over -10 percent in the three years while the Eurozone average will be less than -1 percent. And in 2011, while Eurozone consumer spending will rise by 1.1 percent, Ireland will remain in the doldrums with spending still falling at -1.4 percent.

And domestic demand? This is the total amount of purchases in the economy – consumer and business, which reflects a broader level of economic activity. Well, it tells the same grim story. Given all this – all this decline, all this collapse – is it any wonder that by 2011 the OECD is predicting that the Irish government deficit will be -11.2 percent while the Eurozone average will be almost half that, at -6.2 percent?

There are some commentators obsessing over public expenditure levels and whether we should cut child benefit or hammer, again, public sector wages (how many times are we going to that well). But they miss, not only the elephant in the room, but the herd of elephants – the dramatic, almost unprecedented collapse in economic activity.

These are truly dismal numbers. I’m sure that people will have different reasons for how we arrived at this dismal state of affairs and how we might get ourselves out of this. Good. We need that debate. We need it now. All we are getting now is a one-hand-clapping debate where we are bombarded by demands to cut, cut, cut – cuts that have actively contributed to falling growth, employment, investment and consumer spending.

But, hey, let’s end on a positive note. Besides all this, besides all those dismal numbers from the OECD report, everything is just fine. Ireland is in the World Cup, it hasn’t been raining in the last week, and Jedward are, in fact, anti-bourgeois avant-garde artists, inspired by the Dada experience that swept European culture early last century.

Oh, and, yes, the Government’s policy is working.

Putting the 'Workable' Back into the Economy: The Recession Diaries - November 19th

One could despair. All the major political parties are supporting another round of fiscal contraction, though they may differ on the balance of tax increases and public spending cuts. In this respect, Fianna Fail has won that particular battle, we are just fighting within the parameters they have set. There is seemingly no challenge to the deflationary orthodoxy on the horizon. Except . . . .

Sinn Fein has published its 2009 pre-budget submission, ‘The Road to Recovery’. In short, it poses a more sophisticated approach to our economic and fiscal crisis. On the one hand, an investment stimulus to generate growth; on the other hand, a range of mostly taxation measures to start to repair the public finances. Sinn Fein proposes to use different instruments to attack the distinct parts of the deficit – the cyclical and the structural.

It’s a ‘walk-and-chew-bubble-gum-at-the-same-time’ fiscal policy; not only is it workable, it has the potential to bring the economy back to some sort of ‘workable’.

Let’s start with the investment stimulus, or the cyclical side of things. They are proposing a €3.9 billion stimulus, or 2.5 percent of GDP (pointing out that this is equivalent to the Anglo-Irish Bank give-away). The main components include:

• a job retention scheme with a potential to save 90,000 jobs
• increasing and modernising CE schemes
• Investment in state infrastructure (labour intensive work in construction, insulation, etc.)
• a National Development Scheme to directly employ people on ‘public works’
• a temporary ‘Front Line’ services initiatives to employ people in ‘civilianising’ work in the Gardai and nursing sectors
• The establishment of a state childcare and pre-education sector, along with employing a range of specialist teaching assistants.

These would be supplemented by a range of fiscal stimulus – reducing alcohol duty over the Christmas period, reintroducing the Christmas bonus, and a ‘cost of living’ package that would reduce everyday expenditure items (utilities, public transport, insurance policies, etc.).

There’s a lot of material here that would need to be developed. For instance, I’m not sure what modernising CE schemes would look like – especially with a National Development Scheme running alongside it. The Front Line services initiative looks extremely worthwhile – so much so, why make it temporary? This has the potential of substantially increasing public sector productivity. And Sinn Fein might have benefited from examining the ICTU/Fine Gael proposals for promoting public enterprises as an engine of infrastructural investment to raise long-term productivity (next generation broadband, green technology, etc.).

But the broad thrust is correct: public sector expansion (especially in the areas of education), job retention, infrastructural investment. This will boost output, create jobs and start the economy back on the road to recovery which, in itself, is the most sustainable means to bringing the deficit under control. That’s the ‘walking’ part.

Now for the ‘chewing gum’. Sinn Fein proposes a range of taxation measures and spending cuts to achieve savings of €7.6 billion – a larger amount than any other party is proposing. These can be broadly broken down into:

Taxation: a new third tax rate of 48 percent for those over €100,000, a wealth tax (or, as I like to describe – a comprehensive property tax), standard-rating tax reliefs while getting rid of property-related ones along with the private hospital co-location relief, abolish the PRSI contribution ceiling, increase the tax on ‘second homes’ along with other capital income measures, etc.

Spending Cuts: apart from a couple of innovative suggestions such as establishing a state wholesale distribution of drugs and the wider use of generic drugs (on top of saving money, it could actually be little money-spinner), this section mostly focuses on public sector pay and salary reductions, including politicians and professional fees.

There’s no sense in going over each detail. We can always find something to disagree with. For instance, I wouldn’t support capping public sector pay at €100,000; this would disadvantage the public sector in the specialist labour market and, in any event, as CSO researchers have shown, higher paid public servants suffer a wage disadvantage, especially males, compared to their private sector counterparts. And I would prioritise the effective over the marginal tax rate. But in the main, the proposals go in a positive direction.

Sinn Fein proposes to pay for their stimulus programme by: (a) taking a proportion of the revenue raised from their tax/spending measures (about €1.9 billion), and (b) dipping into the National Pension Reserve Fund (€2 billion).

Again, I would be cautious about resorting to the Pension Fund. There may well be a lot of calls on that fund through future bank capitalisations. I would have rather seen Sinn Fein make more of our strong debt profile – the combination of a relatively low debt level combined with our strong Exchequer cash balances. They did make insightful comments:

‘ . . . we should not be afraid to sustain some level of deficit financing – borrowing for infrastructural development – something which most other countries use as a matter of routine . . . The claims that we are over-borrowed, that we cannot sustain the current level of borrowing and that public spending is the cause of all fiscal ails, are untrue . . . ‘.

Nonetheless, to the extent that resources for stimulus can be obtained from low-deflation tax resources and public spending efficiencies, that is clearly an advantage. The argument for debt-financed stimulus has never rested on ‘we borrow because we can’, but rather, ‘we borrow because we must’. Stimulus that is partly financed from own-resources is preferable.

But let's take a step back for a moment. Because there is something more going on here than just a new calculation, a catalogue of different policies. Franklin Roosevelt once said, ‘There are many ways to go forward, there is only one way to stand still.’ At present, the current economic debate is standing still, stuck on this contraction. There is no dialogue, no conversation – merely a hectoring, a lecturing: how we must fact reality, how we must take the pain up-front, how hard decisions must be taken.

Sinn Fein is pointing to a new dialogue, one consistent with going forward; where more and more people are encouraged to present all sorts of ideas to grow the economy – from business supports to social protection measures, from state spending to incentivising private investment, from increasing taxes on some to decreasing taxes on others.

Not all of them will be good measures, not all of them will stand up to scrutiny, and not all of them can be accommodated. But to have a growing pool of walking-forward ideas – we would be engaged in a new dialogue, over what will work best 

Indeed, a new dialogue could have an energising effect, raise confidence and act as a stimulus in and of itself. We should never overlook the psychology of economies – of the people who work in them, of the consumer, of the investor. A new dialogue could produce, in the first instance, a substantial rise in the output of ideas. If that happens, material output will follow.

Now compare that to today, when every idea, every suggestion no matter how worthwhile is met with a ‘We’re broke, can’t do it, where’s the money coming from.’ My favourite is ‘We must cut our living standards to improve our living standards.’ That would depress any economy regardless of its potential.

Sinn Fein has provided, not only a clear and coherent alternative to the deflationary orthodoxy, a more sophisticated fiscal platform from which to launch recovery. They have demonstrated a new way of how we can talk about our economy.

All in all, not a bad day’s work.

Be Afraid, Be Über Afraid: The Recession Diaries - November 3rd

The discussion on Frontline last night at some points bordered on the surreal. Take the discussion on taxation. The question was posed – how high would tax have to rise in order to generate €4 billion tax revenue (as opposed to cutting €4 billion). The first thing that struck me was – why was this discussion taking place? Is there anyone in the current debate who has called for an increase of €4 billion in taxes in the upcoming budget? If there is, I must have missed that meeting. It could be an interesting hypothetical laboratory question – much can be learned by such exercises. But I would have thought that Frontline was more interested in discussing the specific issues in the current economic and fiscal crisis. Essentially, panellists were asked to find an answer to a question that no one has asked.

Of course, such unasked questions provide an opportunity to mislead the debate. For instance, Suzanne Kelly, a tax lawyer, stated:

‘If you want to collect €4 billion through the income tax mechanism . . . I would say to you, the way you’d have to do that would be to raise the 41 percent higher rate to 75 percent and it would have to be applied principally to married couples at €75,000 or more. So if you have a Guard married to a nurse and they earn a €1,000 over €75,000 you would have to collect €750 in tax from them . . .'

Oh, my. A top rate of tax of 75%. And on a married couple (who are likely to have children). And at the current thresholds we have today. Well, you won’t find many people relishing that prospect. And that’s the point. These are scare stories, nothing more; frightening the children at bedtime to ensure they dream of public spending cuts.

Even Minister Lenihan dons a Halloween mask to haunt the crèches of our nation:

‘Mr Lenihan said the marginal rate of tax is 53 per cent and that if the Government was to increase it further to raise an extra €1 billion “everyone or every couple earning over €100,000 would pay tax at a marginal rate of 63 per cent’.

What Kelly and Lenihan are doing, in presenting this fright-fest, is deliberately manipulating figures and concepts. In particular:

• The marginal rate of tax refers to the amount of tax you pay on every extra Euro you earn. For instance, if you’re on the higher rate of tax, combined with the levies, you’re marginal rate of tax rate is 53 percent. For every extra Euro you earn, you pay 53 cents in tax.
• The effective rate of tax refers to the amount of tax you pay as a percentage of your income.

Many commentators want you to ignore the latter and concentrate on the former. That’s because the former, the marginal tax rate sounds, well, more frightening. But it doesn’t tell the true story.

Minister Lenihan embarrasses himself when he trots out numbers like these because it is clear he hasn’t even read the reports his own Department produces. The Department produced a survey – a sampling of 439 high earners – and assessed how much actual tax they paid as a percentage of their income (the effective tax rate). The results make for some sobering reading.

When we look at how much actual income tax is paid by higher earners, the perspective changes dramatically:

• 10 percent paid less than 5 of their income on income tax
• Nearly a third paid less than 15 percent
• Only 11 percent paid more than 20 percent
• But: no one in this survey paid more than 25 percent

In 2007, the marginal tax rate would have been 43.5 percent. But that figure is a long ways away from the reality of those who pay less than five percent of their income on income tax. Or 10 percent. Or 15 percent.

How does this happen? The survey publishes a list of tax breaks that primarily only high earners can access – about 54 of them. These reliefs, allowances, exemptions all reduce the tax liability for those on high income.

Let’s put these in perspective. In 2007 the effective tax rate (these don’t include discretionary reliefs such as mortgage interest, VHI, etc.) was for a single person PAYE person on:

• €30,000: 8.3 percent
• €40,000: 14.5 percent
• €50,000: 20 percent

Now compare that to the chart above.

Minister Lenihan and many commentators don’t want you to see any of this. And, indeed, it is hard to see. The level of secrecy and opaqueness in the tax system is part and parcel of Ireland’s world class standing as one of the most secretive tax havens (take a look at this – personally, if I have to live in a tax haven, sipping Pina Coladas and frying prawns on a beach in Bermuda seems preferable).

How can this be addressed? We already have a structure in place. For the super earners – those on €500,000 or more – they can avail of tax breaks until the cows give beer. But no matter how many they avail of, they must pay a minimum effective tax rate of 20 percent.

So why not increase this small amount and lower the thresholds. Is it too much to ask that those who earn €100,000 per year pay an effective tax rate of 25 percent? For those on €200,000, 30 percent? For those on €500,000, 35 percent?

This wouldn’t raise a pot of gold. But it wouldn’t be a pot of nothing. And the great thing is – you wouldn’t have to raise the marginal tax rate one cent.

The really frightening thing is the way that Ministers and commentators work so hard to conceal these basic facts from the national debate. But that doesn’t mean we have to follow suit. 

A little night-light will keep those scary monsters at bay - even Government Ministers.

It's the Economic Growth, Stupid: The Recession Diaries - November 2nd

IBEC’s recent quarterly review should give us pause. They are one of the few groups who attempt to project economic growth up to 2013 – and the numbers are not inspiring. They suggest that Government projections are wholly optimistic and that, on current trends, the 2013 target date to bring our public finances into order will be missed. Indeed, they suggest that the current fiscal policy will continue to land us with ever higher debt levels.

Of course, these are only projections and should be treated as such. They may seem reasonable now but, well, events. Still, it’s a useful exercise because too much commentary takes a static, detached view of public finances. Progressives, however, argue (or should argue) for a more dynamic relationship between the wider economy and budgets. So let’s run these IBEC numbers and see what comes out.

IBEC is not as pessimistic as the Government in the short-term (this is consistent with other commentators' caution optimism for next year). However, coming off the trough, IBEC suggests that growth will be much moderate than the Government is projecting. In nominal terms, this could mean a GDP level some €15 billion lower than the Government is projecting for 2013.

What’s more worrying is the economy’s ability to generate employment and investment. On the jobs front, IBEC suggests that employment will remain sluggish and won’t return to peak levels until 2015. On the investment front, IBEC’s projections are considerably below that of the Government. In fact, they project investment to keep falling in 2011 and warn that the economy could still be negative if other sectors don’t pick up sufficiently.

So what’s all this mean for public finances? Taxation can’t defy the laws of economic gravity. If growth is negative or marginal, there is a limit to how high it can go. Between 2009 and 2013, the Government projects taxation to rise from 20.6 percent of GDP in 2009 to 22.3 percent in 2013. That’s on foot of, at that time, planned increases in taxation which, for next year, have been largely ditched.

Let’s keep the Government’s tax revenue ratio and plug it into IBEC projected growth. If public expenditure stays the same, what would the deficit look like?

In this calculation, we can see that with lower projected economic growth and, consequently, lower tax revenue, the Government will miss its 2013 target by a wide margin. There are a couple of caveats:

IBEC projects that unemployment will be slightly lower than what the Government expects by 2013 – by about 1%. This should ease pressure on expenditure, though this may depend on the numbers choosing to emigrate as opposed to staying here on the dole.

A real problem, though, is that the above uses the Government’s April ratio of tax revenue to GDP. It will be lower – in 2009 to 2010. The Government is ready to concede that tax revenue will only bring in €31 billion this year, a ratio of 19 percent, not 20% as under their April projection (and which the above table uses). If this is a portent of sluggish tax revenue in future years – the deficit could be widened even further.

The ESRI is projecting deficits higher than the above table. Therefore, we will be starting on even on IBEC's  minimal growth path from an even worse starting point. Of course, the deflationist reaction can be heard:

‘We’ll just to have cut spending even further.’

Well, there’s that, but then you depress growth further and end up in a similar situation. That’s the deficit-trap that the orthodoxy has landed us in.

The key thing here, therefore, is growth. If you grow the economy, then a lot of pieces start falling into place; not all of them, but enough to spring ourselves out of the deficit-trap and on to growth path.

To rework that well-worn phrase: it’s the economic growth, stupid.

The Many-Legged Irish Recession: The Recession Diaries - October 28th

Professor Terry McDonagh made an interesting point at the recent TASC conference when he pointed out, using the US experience during the Great Depression, that a statistical end to economic decline doesn’t mean an end to the recession. Let’s chart this and see what it might mean for the Irish economy. But first, let’s nail down the nomenclature. While there are no international agreed definitions, the rule of thumb is that:

(a) You have a recession when an economy’s GDP is negative for two consecutive two quarters (six months). This is a very narrow definition and others would include unemployment, consumer spending, income, industrial production, etc. But let’s run with the narrow definition.

(b) A depression, however (and remember, this is a rule-of-thumb) is when an economy falls by either 10% or for three years or longer.

The Irish economy certainly is in a recession and, by the rule-of-thumb definition, we’re in a depression. The economy will fall by more than 10% from peak to trough. However, it is understandable that we don’t use the word ‘depression’ – as that word conjures up scenes of mass deprivation and extreme poverty in a time before a modern welfare state.

The issue of when the economy returns to quarterly growth will be more than just a statistical fact – it will be highly politicised. Optimistic forecasters predict the economy – on a quarter-by-quarter basis – will go into the black as early as the first quarter of next year. Others suggest it will occur later. Whoever is right, we will probably see GNP increase on quarter-by-quarter basis sometime next year.

No doubt the Government will make great play of this – pointing out that their ‘policies’ have worked, how they have stabilised the situation, the clouds dissipating and we can all look forward to blue skies. [I love that phrase – stabilised; at dinner a man and woman discuss the fact they have lost their jobs; but then the man pipes up: ‘Well, at least the situation has stabilised’. Yes, of course – they have no more jobs to lose].

However, this is where Terry’s point becomes relevant. Let’s examine the US depression experience.

In 1933 the depression had troughed – after losing nearly half of its GDP in nominal terms. With the New Deal activist polices, the GDP started rising, continuing up to 1937 (in 1938 the economy took a dip following a premature budgetary contraction – what has been called a recession within a depression; Irish budget fundamentalists, take note).

The point here is that American economy started growing in 1934: GDP, consumer spending, private investment, exports – all boosted by a massive increase in state expenditure. But no one says that the US’s Depression ended in 1934 even though the economy was in growth. GDP, while growing, remained well below 1929 levels. It wouldn’t exceed those levels until the eve of war – so calamitous was the decline during the years of Hoover’s fiscal conservatism. That’s why we say the Great Depression lasted for years – even though for most of that period the economy was in growth.

The Irish economy, while not suffering the same level of collapse, has managed to fall more than any other EU-15 country – by a wide margin. GNP topped out at €161.2 billion in 2007 when it started to fall. The Government projects the GNP won’t return to this level until 2013, when GNP is projected to be at €163.7 billion. In other words, the Irish economy won’t pull out of the recession for another four years. But even this speed of return is debatable:

• For 2009, the Government projected GNP to be €144 billion; the ESRI’s recent projection is €136.2 billion
• For 2010, the Government projected GNP to be €140.3 billion; the ESRI’s recent projection is €133.1 billion

If the Government is to make it’s 2013 target, the economy will have to grow much faster after next year then the Government has projected – a daunting prospect when they got this year and next so wrong

However, if nominal GNP growth after next year is consistent with the Government’s April projections – then we will not return to 2007 levels until 2014 at the earliest; if growth is below those projections, then it won’t be until 2015.

Therefore, we will not emerge from the recession for another four to five years. No wonder that Davy Stockbrokers – predicting an early return to quarterly growth – qualified this by saying:

‘It may not feel like the economy is recovering as strongly as the bottom-line numbers.’

So, sometime next year, when the quarterly economic numbers come out positive, when both GDP and GNP growth don’t have a minus sign in front of the numbers – just remember, this represents a bounce from the trough; that’s all. No way will it constitute an ‘end to the recession’, no matter how much the Government Ministers and their allies among commentators may spin it.

The Irish recession has a lot of legs and a lot of ground to run on.

Our Battle at Boots: The Recession Diaries - October 23rd

Sometimes, something happens that takes your breath away. The chain store Boots is engaged in a deplorable assault on their employees’ wages and working conditions – employees who are some of the lowest paid in the economy. Not only that, it constitutes an assault upon other enterprises, the Exchequer and the Irish economy.

Let’s do some background. Over the summer Boots and the representatives of their employees – Mandate – met on a number of occasions to discuss a range of cost saving measures. In particular, management demanded:

• 15.5% wage reduction at the top scale of pay from €14.20 to €12 per hour
• 25% reduction in public holiday pay
• 25% reduction in Sunday Premiums
• Increased flexibility in weekend work for full time staff

Unsurprisingly, the negotiations didn’t go too well, especially given that Boots is a profitable enterprise. Mandate requested the company attend the Labour Relations Commission (LRC) to sort matters out. Suddenly, in August, Boots management wrote to the union stating that unless Mandate accepted the new pay and working conditions, Boots would terminate all existing collective agreements negotiated with the union over the past fifteen years. In addition, the management stated they would not attend the LRC. This action certainly wasn’t intended to build an atmosphere for constructive dialogue.

Eventually, management relented and attended the LRC with Mandate in October. However, such was their attitude, they might as well not. All they were prepared to do was remove the threat to the collective agreements if the union unconditionally accepted the new conditions of employment in full.

Currently, Mandate is balloting Boots employees for industrial action. The ballots will be counted on November 6th – ICTU’s National Day of Action.

It doesn’t get much worse than this. A full-time 39-hour per week employee at the top of the scale earns €28,800 – about 30 percent below the average industrial wage. Boots management is demanding a pay cut of nearly €4,500 a year. That’s savage. But Boots management isn’t just targeting those at the top of the scale – they’re demanding 25 percent cuts in holiday and Sunday pay for all employees.

This isn’t a company in trouble. In 2008, the Irish division in Boots earned €20 million in 2008 with current cash reserves in excess of €70 million. Worldwide, Alliance Boots posted an EBITDA of over £1 billion in March this year (that’s trading profit before depreciation and amortisation) while their underlying profit – excluding finance costs – is a healthy £236 million.

Okay, but what now? How has the recession and the decline in consumer spending affected Boots? Probably not much. The CSO’s Retail Sales Index shows all businesses suffering a drop of 7.5 percent in sales (from a 2005 base year). But sales in the Pharmaceuticals & Cosmetic Articles group have actually increased by 17.1 percent – the biggest increase of any retail grouping. That doesn’t’ necessarily mean that Boots turnover or profits have increased by that amount. But since it is a major player in this grouping, we shouldn’t be too surprised to see them staying relatively dry in this recessionary storm.

To be fair to Boots (which is owned by a private equity firm), they’re not just having a go at their own employees. They have recently withdrawn from the Ethical Trading Initiative, which was established 10 years ago to tackle the use of sweatshops in the developing world (members include, Tesco, Sainsbury's and Marks & Spencer to name a few). A Boots spokespersons explained their decision this way:

‘The reasoning for this is because it (the Ethical Trading Initiative) only concentrates on labour standards and at Boots we focus on all aspects of sustainability, with labour standards only one aspect of many that we need to consider.’

Yeah, sure, whatever.

The treatment of employees is bad enough – it rightly offends most people’s sense of justice and fair play. The issues, however, spill out of the workplace and into the larger economy. For instance, Boots is not just attacking its workforce – its attacking the Exchequer.

A full-time employee on the top of the scale is paying a little over €4,700 in income tax, PRSI and levies. In addition, employers’ pay a little over €2,900 in PRSI. The total benefit to the Exchequer is about €7,650.

If, however, Boots succeeds in cutting wages at the top of the scale, the benefit to the Exchequer falls by over €2,700. Even including the potential increase in corporate tax revenue (if Boots pays at the nominal 12.5 percent; it should be pointed out the real effective tax rate, when allowances and reliefs are included, is less), the net loss to the Exchequer would be over €2,100 for each Boots worker in this category.  Now calculate the tax loss (and this doesn't count lost VAT revenue from reduced spending) from the full range of pay cuts that are being demanded from the 900+ employees in the chain. 

The owners of Boots gets the gain; the workers – both in Boots and throughout the economy – take the pain.

And it doesn’t stop there. Staying with the full time Boots worker at the top of the pay scale, her/his disposable income would fall by nearly €40 per week. If we accept that most of this money would have been spent (those on low and average incomes have a higher propensity to spend, unlike those on higher incomes who have a higher propensity to save), then that’s money not flowing to the proverbial local shops.

Businesses reliant upon selling goods and services into the domestic economy will suffer a loss of turnover. Many of these businesses are genuinely in trouble. This decline in sales will hit them even harder with all the consequences this may hold: lower profits tax, reduced wages and/or hours, job losses: this is the deflationary process set in train by Boots. It’s not just their own workers who get slammed, it’s not just the Exchequer that gets hit – other businesses, their owners and workers, also suffer.

[Note: this is just one more example of why those economists who claim that wage cuts will automatically increase employment are wrong. The actions of Boots management is not about saving jobs, never mind creating more. It’s about enhancing profits for a private equity firm.]

That’s why the looming battle at Boots is not just a fight that only concerns those who work there. It’s our battle as well. It’s not just about ‘an injury to one is an injury to all’. This is a battle over public finances, this is a battle over economic growth, this is a battle over all our living standards.

That’s why, if the employees at Boots vote to take industrial action, they deserve our fullest support.

If you want to help create public support for the Boots workers – and hopefully force management to step back from their damaging course of action before it comes to industrial action – please spread the word.

You can circulate this e-card from Mandate to family, friends and work colleagues

The NTMA's New Pitch: The Recession Diaries - October 21st

Such is the success of the National Treasury Management Agency, it has created a new economic and fiscal pitch for us – one that progressives should now seriously consider playing on. I won’t go over the tedious and ill-founded arguments – that Ireland’s fiscal plight is such that the international markets won’t continue lending to us. I don’t have to. The NTMA has settled that argument, if not once and for all, then certainly for the foreseeable future.

In the first week of October the NTMA successfully launched a 15-year bond which raised €7 billion. There are a number of noteworthy things about this:

First, they received €14 billion in bids. This showed considerable interest market appetite for Government debt. In fact, this was the largest bid for any bond in the Eurozone this year.

Second, over 90 percent of the investors were foreign – so this wasn’t a case of domestic banks returning the Government a favour.

Third, no one can question (at least in the international markets) Ireland’s ability to repay its debt. If there was any doubt, no one would invest in a 15-year bond.

So on the specific issue of Ireland’s ‘capacity to borrow’, which is different from the issue of how much we should borrow, there is no question: we have that capacity. Everytime the NTMA throws its net into the bond pond, it pulls out a lot of fish.

So what does this mean in fiscal terms going forward? It changes the situation substantially. Such is the scale of the NTMA’s pre-borrowing (borrowing, not for current, but for future needs) that by year’s end, they will have around €30 billion in ‘free cash balances’ – that is, the Irish Government will have access to €30 billion already borrowed.

What’s the purpose of having all this money sloshing about in a Central Bank account? When this strategy was published – just after the April Budget projections – the NTMA expected that its cash balances would be €20 billion (or 12 percent of GDP) in 2010. In the subsequent three years, part of the borrowing requirement would be funded, not by going to the international markets, but by drawing down on the reserve. This was the projected amount of ‘draw-down’:

• 2011: 2 percent (€3.5 billion) leaving a cash balance of 10 percent
• 2012: 3 percent (€5.5 billion) leaving a cash balance of 7 percent
• 2013: 3 percent (nearly €6 billion) leaving a cash balance of 4 percent

In these three years, nearly €15 billion would be drawn down – reducing the NTMA’s cash balance of €20 billion in 2010 to approximately €8 billion by 2013 (this would involve some topping up of the cash balance during those three years).

This, of course, was based on April projections. Already, under Fianna Fail’s woeful fiscal mismanagement, this has gone awry. Instead of annual deficits of 10.75 percent this year and next, we are looking at deficit of 13 percent for both years – with the risk for next year being on the downside. Therefore, we may need that extra padding the NTMA has provided. However, let’s just keep to the April projections for illustrative purposes.

Now, instead of having a cash balance of 12 percent of GDP, we have a cash balance of over 18 percent. If the drawdown schedule remains the same as above, by 2013 we’d still have a cash balance of 10 percent (not as the current strategy has it– at 4 percent).

In other words we’d have €10 billion more than planned for.

This is the new €10 billion pitch for us to play on.

This is the pitch from which a new fiscal policy could be launched – a policy that seeks to drive growth, not deflation; that seeks to invest in the economy to grow it, not depress it. This fiscal policy, in turn, would drive up tax revenue (through increased employment, aggregate wages, consumption, and investment) and, as a consequence, reduce demand on social welfare payments and social services – thus driving down the deficit.

And all this would be financed – not by deflationary spending cuts or new borrowing; it would be financed by money we have already borrowed. We’d be putting that additional cash that the NTMA has sourced to work.

It’s too early to say how much of that €10 billion we could prudently access – much will depend on the Government’s new projections in the upcoming budget (will they continue to hold to the 2013 target date for Maastricht compliance? Will they accept reality and adopt David Begg’s suggestion?).

But the NTMA has given us considerable fiscal flexibility. It would be a shame to squander that opportunity by continuing failed fiscal policies.

The NTMA has built a new pitch for us to play on. Let’s put on our jerseys and go have fun.

Teddy Bears Picnic: The Recession Diaries - October 16th

‘Minister Lenihan) warned the cuts proposed by An Bord Snip Nua would be a picnic compared to what future governments would have to implement.’

As we are all frog-marched down to the Finance Minister’s picnic, let’s see what effect cutting Child Benefit will have. For all the indications are that this payment is in the firing line. Many have argued that it’s a no-brainer – sure, doesn’t Child Benefit get paid to rich folk? Doesn’t that mean it’s regressive? We could cut the payment without harming (too much) low and average income groups – and save the state a lot of money.

The ESRI has done the debate a considerable service by analysing the effects on different income groups from (a) a cut of Child Benefit of €26 per month, and (b) including Child Benefit in taxable income. Briefly, this is there conclusions:

• Cuts in Child Benefit rates will impact much more severely on low/middle income groups, resulting in a rise of 17 percent in child poverty. This would reduce expenditure by between €400 and €450 million.
• Taxing Child Benefit will impact less on low income groups (though its effect on middle income groups will be the same) with only a small rise in child poverty of 3 percent. This would reduce expenditure by €370 million.

If one had to choose between the two – you’d pick the tax route: less regressive, less impact on child poverty, and approximately similar levels of reduced government expenditure. Even so, there are issues.

While cutting Child Benefit would be woefully regressive, the effect on middle incomes – the 2nd and 3rd quintiles - will still be slightly more regressive than those on higher incomes. It’s a matter of the least worst solution.

Bear in mind, the ESRI doesn’t model these proposals to assess the actual net savings that would be gained nor the impact on the economy. The net savings would be less, of course – arising out of reduced spending taxes, the knock-on effects of reduced consumption and a slight downward revision of the GNP. Therefore, the savings would not equal the reduction in expenditure.

However, there are two fruthe important considerations that should be factored in before passing judgement on the issue of taxing Child Beneft. This not a criticism of the ESRI researchers – their findings advance our understanding. But let’s advance that even more – by using the CSO’s Household Budget Survey. This cannot be neatly integrated into the ESRI’s model – so it should only be treated as indicative. And the latest data comes from 2005. But it indicates that the impact on low and middle incomes will be much greater than merely measuring the effect on disposable income.

Deficit Rising: The Recession Diaries - October 13th

Over the next few days there will be considerable analysis of the ESRI’s current quarterly review. I’d like to highlight just one projection – the rising annual deficit.

There are two things to remember: the one and only goal of Government fiscal strategy has been to contain the deficit. They have set no targets for job creation / retention, investment, consumer spending or even a timeline on shortening and lessening the impact of the recessionary dive. The exclusive objective of fiscal policy has been to contain the deficit.

In keeping with this strategy, the Government brought in the supplementary April budget out of fear that the deficit would rise to -12.75 percent. Only weeks earlier they had published the Addendum where they had set a 2009 deficit target of -9.5 percent (this itself was a downward revision of a target they had set, yet again, only weeks previously in the October Budget – a target of -6.5 percent).

The April budget’s measures, combined with the earlier pension levy, was intended to contain the annual deficit at 10.75 percent for this year and next year – winding down to the Maastricht threshold of -3 percent by 2013.

So what is the ESRI projecting for this year and next? In 2009, they project the annual deficit to be -12.9 percent. That is considerably above the Government’s target for this year. In 2010, the deficit will remain pretty much the same, -12.8 percent.

While we may debate the benefits of varying fiscal approaches there is one thing that stands out: the Government has failed to achieve the one and only target it has set for itself. It has failed – by a wide margin – to control the deficit. Simply put, its fiscal strategy is not working. If anything, it's getting worse.

In April of this year, the ESRI projected the annual deficit for 2010 to be -11.5 percent.  In July, their projection was pretty much the same:  -11.4 percent.  Today's release shows a considerable deterioration at -12.8 percent.  The ESRI calls this 'stabilisation'.  I can think of other words.

This has significant implications going forward. Government strategy has been to hold the deficit this year and next at 10.75 percent. Over the following three years they intended to reduce this deficit to -3 percent – closing the deficit by 7.75 percent. This was always going to be a big ask. However, if the Government persists with their failed strategy, they will be starting from a worse position. If the ESRI projection holds, the Government will have a -9.8 percent gap to close in three years. With the deficit going in the wrong direction – what chances of reaching the Maastricht guideline by 2013?

ICTU’s David Begg received a lot of criticism for suggesting the target date for Maastricht compliance be postponed a few years. Whatever about the desirability of this proposal (and I believe it is highly desirable), the fact is this is going to happen anyway on current trends. To attack someone for espousing a common sense position shows the extent of denial that is at work in Government circles and among certain commentators.

Perversely, though they won’t admit this, the ESRI vindicates the progressive critique of the Government’s fiscal policy. The ESRI supports the continuation of further fiscal correction. In their projections they have factored in a €4 billion correction – made up of tax increases combined with current and capital expenditure cuts (they acknowledge that now the burden will fall more on spending cuts). What is the result of this €4 billion cut in spending and people’s disposable incomes?

In 2010, the annual deficit will be reduced by 0.1 percent, or nominally by €550 million. €4 billion in cuts to achieve a reduction of €550 million only proves the old adage: pursuing deflationary policies in a recession is like running in quicksand – you use up a lot of energy, you tire yourself out, but you still keep sinking.

Even more provocatively they make the following observation:

'The consequences of such a further sharp correction are, by our estimation, significantly deflationary. Were there to be a neutral budget in 2010, then our estimates would suggest that the recovery in GDP would occur much earlier in the year leading to positive growth in GDP for the year as a whole.’

In essence, they admit that the fiscal correction planned by the Government will be deflationary. More importantly, it will lengthen and deepen the recession. If these cuts didn’t proceed, the recession would not only end much earlier – but the economy would be in overall growth for the year 2010 (if the correction go ahead, GDP will fall by -1.1 percent and GNP by -1.7 percent next year).

To get around this, the ESRI takes up a ‘straw-person’ argument. They pose only one alternative to their preferred deflationary strategy – a revenue-neutral budget; that is, a budget that doesn’t take out any money from the economy. However, no one realistically believes that any Government should sit on its fiscal hands and let the recessionary fires burn themselves out. Too many other things in the economy would be burned down as well.

The alternative, as outlined at the recent TASC conference, is to pursue an expansionary fiscal policy based on crucial investment in our economic base – investment that we would have to make in any event if we want to improve our competitiveness and productivity going forward.

The ESRI doesn’t refer to this alternative, never mind model it. Whatever (though I would have thought that one of the most important roles an institute can do is provide a range of alternatives with an accompanying fiscal and economic assessment).

We are, therefore, only left with one course – a deflationary course. And as the ESRI report shows – it is a failed course.

I Don't Get It: The Recession Diaries - October 9th

Some arguments I just don’t get. For instance, if I were an owner or manager of an enterprise that sold goods and services into the domestic economy (that’s most enterprises) I would be concerned at falling consumption. After all, if people cut their spending, my sales fall. If people are worried about holding on to their jobs, my sales fall. If people’s wages or hours are cut, my sales fall. And if people are made redundant, my sales really fall.

The best thing for my business would be to see more money in people’s pockets, more people at work, more confidence in the economy.

Therefore, the last thing I’d like to see is some of ISME’s proposals being implemented; namely cutting social welfare, cutting public sector wages (at least those on low and average incomes who make up the bulk of my customers and the bulk of the public sector payroll) or see any worker – public or private sector – lose their jobs. All these would represent a real blow to consumer spending and consumer confidence.

But ISME seems to be acting less like a representative of the interests of their members and more like a PR machine on behalf of certain neo-liberal nostrums. They seem intent on pursuing policies that would directly impact on their members – and not in a good way.

Just yesterday, ISME’s Mark Fielding was on the New at One, having a go at David Begg’s recent call for a new fiscal policy. Fair enough – how else would you know it’s an ISME representative if they’re not attacking trade unionists?

Interviewer: What is your reaction to the trade unions’ declaration that the sky is blue?

ISME Representative: This is just one more example of trade union bullying and intimidation. They threaten to paralyse the economy. Now they're making demands on the sky. The Government must ignore them.

Okay, tongue in cheek but the following real exchange wasn’t that much less surreal.

RTE: From your own point of view . . . if there’s less money circulating in the economy your members are going to have less money coming in the door to their businesses.

FIELDING: Yes. And at that moment that is happening as well. But it’s happening because of economic uncertainty and because of a lack of consumer confidence. People are afraid to spend at the moment because we don’t know where we are going at the moment. They’re look at the Government dithering at the moment and wondering – are we going to see a Bord Snip or not, are we going to water it down.

This is strange even by ISME’s standards. In essence, Fielding is saying there is less spending in the economy because people are concerned that the Government might not have the will to cut people’s disposable income which would result in . . . less spending.  Hmmm.

Now, if I were an owner or manager of an enterprise, I would be seriously concerned. Here’s why.

Even with the recession slowing down – tax increases and public spending cuts will hamper consumer spending. The ESRI provides some indication of the likely impact on consumption.

  We see that, in both expenditure cuts, consumption falls considerably. Combined, they total nearly a 2% cut. To put some numbers on this, based on ESRI projections for next year, we could eventually see a fall of €1.5 billion by the second year. That’s a lot money taken out of consumer circulation – and this will be felt in firms’ turnovers.

This is not a good time for this to occur. Though some forecasters are now a bit more upbeat about consumer spending (Davy forecasts consumer spending to increase by 1.5 percent next year), the Retail Sales Indexhas yet to stabilise according to the latest data.

The last month we have data for, July, shows a month-on-month decline. That this occurred after a volume increase in June (the first monthly increase Since September of last year), shows that consumer spending remains fragile. This is confirmed by Exchequer returns which saw VAT revenue coming in well under target. In September, VAT receipts fell 13% below the monthly target. We have some ways to go before consumer spending stabilises.

Yet, rather than address the fall in consumption, ISME ups the deflationary stakes by calling for social welfare cuts, including Child Benefit cuts. If the McCarthy Report recommendation is implemented – the cut in €850 million in social welfare cuts will make another dent in consumption, especially as this will hit people who have a higher propensity to spend.

The CSO is still recording a fall in prices. This will force businesses to (a) drive down prices, or (b) drive down their costs – of which wages will be one. In the former, revenue will fall further if it is not being recouped through an increase in volume. Of course, it can get to such a stage that a business can’t cut prices anymore and goes out of business.

In the latter, while it may seem ‘penny-wise’ at the firm level to cut wages (reducing costs), it would be ‘pound-foolish’ at the national level because it would lead to a further reduction in consumption – spiralling ever downwards.

And in both cases, public finances worsen as deflating prices and falling wages undermines tax revenue.

If I were an owner or manager of an enterprise I would know this instinctively. I would want the Government to reflate the economy – to do everything possible to maintain and enhance incomes, maintain and expand employment. Because that will increase my turnover and end the need to cut margins to attract volume, traffic, football. The deflationary pressures would stop and the economy could start spiralling upwards.

That’s when you pursue fiscal consolidation strategies – after the economy is on growth path. That’s when it will get produce positive rather than negative returns.

If I were an owner or manager of an enterprise, I would cancel my membership to ISME.

Hitting a Raw Nerve: The Recession Diaries - October 5th

David Begg’s suggestion that the target date for returning the Irish budget to Maastricht compliance (that is, bring the annual deficit to below -3% of GDP) be postponed for four or five years certainly did get a response. Even Chairman Colm McCarthy felt moved to pen his thoughts on the suggestion (he wasn’t terribly enthused). And the Government moved quickly to stomp on the idea as well.  Other commentators waded in over the weekend as well - running as far away as possible from the notion.

No sooner had David left the Morning Ireland studios last Thursday – where he made the suggestion – than Brian Lenihan was dismissing any notion of postponing the 2013 target date. He cited a number of reasons: higher interest payments, agreement with the EU Commission, the 2013 target was already a ‘long time’, etc.

Now this could be a bottomless pit debate over target dates (is 2017 better? What about 2016? What about September 31st 2015?). But a bigger picture is being missed. And that is, regardless of whether postponing the target date is a good or bad thing, how realistic is it that public finances can recover by 2013? This is a debate about realism. Let’s do some chronology:

• In October last year, the Government projected an annual deficit of 6.5 percent, with the budget returning to Maastricht compliance by 2011. That was a long time ago in a galaxy far away.
• By January, the Government rewrote their budgetary projections in an Addendum. They projected a deficit of 9.5 percent with public finances returning to Maastricht compliance by 2013.
• Prior to April, they were concerned that the deficit was spiraling downwards to 12.75 percent.
• Therefore, they introduced the April budget to hold the deficit at 10.75 percent.

What’s the projection now? The Government will probably announce that the year-end deficit will be -12 percent. This is certainly the consensus of independent forecasters.

Do you see a pattern? The Government, so fearful of seeing the deficit plummet to -12+ percent introduced a number of deflationary measures which pretty much ensured the deficit will plummet to -12 percent and possibly lower.

A big story is being missed here. With many commentators clamoring for more cuts in the upcoming budget (it really is becoming a machismo thing for some of them), they’ve all missed the fact that the Government has failed to achieve the only target it has set for itself. They never set a target for employment or consumer spending or investment – only the fiscal deficit. And it failed. It was always going to fail. Because it violated a fundamental rule of recession economics:

During a recession, fiscal strategy must be focused on ending the recession as soon as possible. ONLY once the economy has come out of recession and back on a sustainable path can fiscal consolidation strategies be effective.

Pursuing fiscal consolidation during a recession is like running in quicksand. During the past year the Government increased taxation by €1.8 billion and cut spending by €3.2 billion (capital expenditure, April measures, pension levy) – an ‘adjustment’ of €5 billion; and still the deficit rose.

We are now in a dark place – a much weakened economy saddled with a high deficit. And the Government is preparing for another assault on the economy - €4 billion mostly in public expenditure cuts. As we have seen, public spending cuts will weaken the economy further with little benefit to the deficit.

But do these machismo commentators glimpse this fact? Not a bit. They see neither the woods nor the trees nor the broken bodies from all that timber falling.

I suspect the reaction to David’s comments is not so much about his proposal to extend the target date. After, all the Government has done that already this year. Rather, he has touched a raw nerve - that there is little chance the Government can reach its target because their fiscal strategy, to date, has been wrong.

In the April budget forecast, the Government not only projected a deficit this year of 10.75 percent, this is their projection for next year as well. In other words, they only left themselves three years to close the gap– a gap of 7.75 percent. That was always going to be big ask – cutting the deficit by over 2 ½ percent each year.

Now their starting point is much worse: -12 percent. And the fiscal deficit is going in the wrong direction.

Of course, the recessionary fires are abating somewhat. With emigration climbing, unemployment costs are rising less rapidly (this is what saved the Fianna Fail bacon back in the late 1980s).

But now we have we have a weaker economy – more unemployed, less spending, less investment. If, as per the April projections, the Government can hold next year’s deficit at this year’s level, it will be looking to close a 9 percent gap in three years. We desperately need a debate, not in some kind of ‘wouldn’t-it-be-nice’ world, but whether it is realistic or even desirable.

If David’s intervention introduces a dose of reality in the debate, it will have been a good day’s work. For at the end of the day, it is process – not targets – that counts. If you get the process wrong, you can set yourself all the targets you want.

They will be just so many falling trees.

If the Unions Fight, They WIll be Right: The Recession Diaries - October 1st

Imagine you’re walking a high-wire. You’re nearly at the end of line. You’re doing everything possible not to fall – balancing with your arms, moving snail-like, praying; the last thing you need is for some messer to start shaking the wire. That’s exactly what the Government is preparing to do as it mulls over its €4 billion worth of cuts in the upcoming budget - shaking the wire.

With ICTU’s launch of a campaignto stop the cuts, commentators will be queuing up to have a go at trade unionists – particularly public sector workers. You can write the script now – ‘privileged’, ‘sheltered’, ‘bloated’, ‘over-paid’, etc. That workers are engaging in action to protect the quality of public services and the living standards of the poorest is no matter; they are ‘not in touch with reality’ as Colm McCarthy might say (actually, he did).

Yes, there is the issue of protecting public services – which rank well below the EU-15 norm; and there’s the issue of protecting living standards – another vital issue given that the McCarthy Report wants to cut nearly €2 billion in transfers to low and average income earners. And, yes, many public sector workers will protest over wage cuts– but after social welfare cuts, levy increases, and the pension levy, this is reasonable.

But there’s another reason why trade unionists should be marching – to prevent the Government from shaking the economic wire and causing more people to fall off.

It appaears that the recession will end (at least in a statistical sense on a quarterly basis) anytime between the 1st and 3rd quarter of next year.  If these cuts are implemented, the end of the recession will be postponed, national output will fall further than it would have otherwise, more people will be on dole, more enterprises will go the wall – with only a minimal benefit in the fiscal deficit.

If the trade unions really engage the fight, they will be doing so, not on behalf of a sectional interest, but on behalf of the nation’s economic interest.

Let’s turn to the ESRI’s multiplier simulations. They modeled three public expenditure measures – cutting public sector wages, cutting 17,000 public sector jobs and cutting public investment. Each of these would reduce current expenditure by €1 billion each, or €3 billion combined. What would be the effect?

• GDP would fall by a further 1.2 percent, or €2 billion
• Unemployment would rise by nearly 29,000 – just as the recent Live Register figures showed almost no growth in seasonal terms.

And the reduction in the borrowing requirement? Less than €1.9 billion. Not €3 billion – that’s only the reduction in Government expenditure. When account is taken of the impact those cuts will have (on output, consumption, employment, etc.), the net gain is seriously eroded. At the end of the day, the annual deficit would fall by 0.9 percentage points. So, we have

• Knocked off another €2 billion of our GDP, thus postponing the end of the recession and making it harder to generate the growth needed to absorb high borrowing costs in the future
• Thrown nearly 29,000 on to the dole queues, ensuring higher social welfare expenditure going forward
• Degraded public services further just at the point demand is growing
• Cut people’s living standards and consumer spending
• Reduced investment in an infrastructure that is one of the worst in the industrialised world (the Global Competitiveness Index ranks Irish infrastructure 65th out of 133 countries)

All this, to reduce borrowing by less than 1 percent of GDP? If that sounds irrational it’s because it is. And that’s why hardly any other government in the industrialised world is pursing this absurd course.

There are alternatives. For instance, using the ESRI’s simulations we find that €3 billion in tax increases (increasing income tax along with introducing a property and carbon tax) would:

• Reduce borrowing by €2.5 billion (or €600 million more than public expenditure cuts)
• Reduce the GDP by €800 million (compared to €2 billion under spending cuts)
• Increase unemployment by 6,600 (22,000 less than under a cuts strategy)

The annual deficit would fall further if a tax strategy were used. The end of the recession would not be postponed and everyone would be better off. That is not to endorse the particular tax proposals used by the ESRI. They merely serve as an indicator.

Of course, we could get really creative – less deflationary tax increases on high incomes and wealth, public enterprise infrastructural investment (off the books), necessary social investment with high economic returns (early childhood education), front-loading the drawdown of the €20 billion in the NTMA’s coffers; a whole range of measures to stimulate the economy while at the same time setting the foundations for a fiscal consolidation that can only be effective once the economy has returned to growth.

But, really, the idea that this government, which has pursued deflationary policies from day one, is somehow going to change direction at this stage is pure fantasy. Inertia, not rational economic thinking, is propelling Fianna Fail. We can’t expect them to make things better, but we can try and prevent them from making things worse.

That’s where the trade union campaign enters. It is imperative that it succeeds – that it derails the Government from its determination to push through €4 billion in cuts. It is both an economic and social imperative. And if, in the meantime, the action derails the Government itself – who will complain?

If the trade union movement, in alliance with community and social organisations, and progressive political parties can prevent the Government from prolonging the recession and increasing unemployment– then they will have done the economy enormous benefit.

If the trade union movement and their allies fight – and I mean really fight – then they will be right. And all of us will reap the benefit.

Class Matters: The Recession Diaries - September 29th

What kind of recession are we having – or rather, how is it impacting on different sectors of the labour force? Some time ago we heard talk of a middle-class recession – how particular ‘middle class’ occupations were being badly affected. Architects were one such profession and clearly there’s not much use for this group of people if buildings are not being built. But as the recession winds down it is clear this cannot be considered a ‘middle class’ recession.

In truth, we should be a bit wary of using this term as it is likely to add more confusion than light. It opens up questions of ‘class’ and relations in the production process – important questions. Unfortunately the CSO only provides a few labour force categories from which to work with. In so doing, we have to use broad brushstrokes.

The CSO’s Quarterly National Household Survey(QNHS) for the 2nd quarter gives breakdowns that are useful and if they can’t be necessarily equated to ‘class’, they can be equated to income and greater control of working conditions. For instance, a professional is likely to earn considerably more than a sales worker or a plant operative. Similarly, a manager is likely to have more control (though by no means total control) over their working and employment conditions than someone on the factor floor. So let’s examine two categories and find out who’s suffering the most (this builds upon Sean O'Riain's survey of the first quarter results).

Employment by Occupational Status

From the table below it can be seen that managerial and professional groups have experienced the least decline in employment while traditional ‘working class’ occupations – craft and plant operatives have suffered the most.

• The managerial / professional classes saw their employment levels fall by less than 2 percent
• The combined craft / plant operatives sectors experienced a decline of nearly 23 percent

Of course, a considerable number of craft workers would have been working in the construction sector. But plant operatives also experienced a high level of decline as well. As well, the ‘Others’ sector tend to be made up of service workers that don’t fit into the above categories (e.g. hotel and restaurant, cleaners, etc.). They are the lowest earning of all the categories and experienced an above average decline as well.

No doubt, there are certain managerial and professional categories that are suffering – such as the aforementioned architects and other property-related professions. Still, taken as a whole, it is the lower-paid manual occupations that are taking the worst hit.

Employment by Educational Attainment

Again, though we can’t automatically assume educational attainment is directly associated with class, there is correlation between educational levels, skill sets, profession and earnings. In this respect, we find those with the least educational attainment having suffering the most from unemployment.

Those with third level honours experience a substantially lower unemployment rate than those with low educational attainment. This, though, doesn’t tell the full story. The overall participation rate stands at 71.3 percent (per Table 23A), rising to 89 percent for those with third level honours. However, among primary and lower secondary, the participation rate stands at 41.1 percent and 54.8 percent. This is compounded by the fact that one-in-six students still leave school without a Leaving Certificate qualification.

While this should not be all that surprising it, along with the above finding, raises important questions regarding the labour market and job creation going forward out of the recession. With some commentators predicting an early exit from the recession (as early as the first quarter of next year), there will be a growing emphasis on up-skilling and moving up the value-added chain with knowledge and skill-intensive employment, especially as internationally tradable services will play an increasing in Irish and world trade. As a consequence, we will find manual manufacturing work to play less significance (at least as a proportion of the workforce) and where employment does increase it will, again, rely on high-skill work.

Unless substantial intervention is undertaken – in education and (re)training, combined with job creation measures that don’t necessarily rely on the private market – we may be facing into a perverse apartheid at work in the labour market, where those with less skills and educational attainment will suffer a lifetime of low living standards. This in turn will continue to be a drag on economic growth going forward and undermine our attempts to maximise the economic and social benefits coming out of the recession.

In other words, we may be facing a return to the same ol' equation – squared.

Hunting for Woolly Mammoths: The Recession Diaries - September 27th

In a previous post on Progressive-Economy.ie, where I disputed the economic benefits of cutting wages, Professor Alan Mathews and Pavement Trauma questioned aspects of my analysis, raising important issues which deserve a considered response. For this goes beyond ‘what wage levels are best’; it is about defining what the critical issues behind our competitiveness and prospects for future employment really are. For we may put a lot of time, energy and resources going down one path only to discover that is dead-end, that we should have gone down an altogether different path. We may go hunting for woolly mammoths and may end up finding ourselves being the hunted.

Indeed, we have to be sure we are addressing the same issue. The argument that we should reduce wages to increase employment is not quite the same as we should reduce wages to increase competitiveness. The first assumes that wage ‘correction’ will facilitate new, more employment-friendly market conditions. The second assumes that wages are a structural part of the ‘loss of competitiveness’. So which are we addressing – or, if we cut wages, do we get a twofer?

Better Means to a Better End: The Recession Diaries - September 14th

In European terms, local taxation in Ireland is almost non-existent. The EU-15 average local tax take is 4.9 percent of GDP; in Ireland its 0.8 percent of GNP. Even Luxembourg, half the size of the Dublin metropolitan area and its population, has a larger local taxation base than all of Ireland. So I was interested to read what the Commission on Taxation had to say on the issue, bearing in mind that a report on local taxation itself could take up 500 pages or more.

Nat O’Connor over on Progressive-Economy noted that, given its reluctance to introduce a property tax, the Government had better have a ‘Plan B’ for local authority financing. Otherwise it risks, as Nat rightly points out, a general degradation of municipal services and local areas while putting disproportionate strain on ever decreasing commercial rate base. Unfortunately, and I may be unduly pessimistic, Fianna Fail will risk just that, so obsessed are they with deflationary policies. Besides, if councils, which are for the most part made up of opposition and independent councillors, take the heat then blame can be shifted or at least mediated.

In any event, the Government can take cover behind the Commission on Taxation Report. For in keeping with its overall revenue-neutral approach at the national level – the Commission recommends no net increase in revenue at the local level. It’s main recommendation – that an Annual Property Tax (APT) be devolved to local government – looks fiscally beneficial at first glance (for local governments, anyway). Except that the Commission recommends that current funding based on motor tax revenue be withdrawn from local government and returned to central funds, leaving local government just as impoverished as before. The only silver lining is that in the future, local governments may be able to adjust the property tax upwards. However, given that the APT is potentially regressive, this is not an option that progressives should get too enthused over.

The problem with local government finance is that it is intricately intertwined with structural reforms and the issue of devolution of powers. The sad reality is that if we aspire to little more than what we have – a local government system rooted in the 19th century, with less powers and responsibility than almost all other European countries, and a managerial-based (rather than democratically elected councillor-based) decision-making process; if that’s all we want, then we don’t have to get too worked up over new financing powers. A bit of tinkering here and there – with some more charges thrown in for good measure should do the trick.

But if we aspire to something more – a modern local government regime, democratically accountable and armed with new powers and responsibility; in other words, an engine for public services, enterprise development and social protection, then we’ll have to think deeply about the best revenue base.

And this means getting over the idea that enhanced local government financing must automatically mean a house property tax. There are other options, namely income tax. I would argue that this could be a more acceptable revenue base. The Commission examined this option briefly and, just as briefly, dismissed it. They should have spent more time on it.

The Commission concedes that a local income tax has considerable strengths:

‘ . . it would be a potentially buoyant source of revenue and would be linked directly to a person’s ability to pay.’

However, they listed a number of objections. Let’s go through each of them to see how they stack up.

‘Locally determined income tax rates are not consistent with national employment policies.’

Why? This cryptic one-line objection clearly needs elaboration but I can see positive examples. Let’s say a local authority increased their income tax in order to employ or train people in depressed areas – how does that undermine ‘national employment policies’? (Actually, I didn’t know we had ‘national employment policies’ – if anyone know about them, please let me know.)

‘A local income tax system would lead to considerable additional compliance costs on employers and on individual taxpayers.’

The original Commission on Taxation considered this issue and concluded that all that was needed would be to establish an address on the tax certificate. They also stated that the Revenue Commissioners would collect the tax on an agency basis and return it to the local authority - so no revenue-collecting duplication. This hardly implies ‘considerable additional compliance costs.’

‘There are difficulties in taxing non-PAYE income, such as investment income and dividends, which would give rise to anomalies. These could prove difficult to address in implementing an equitable local income tax system.’

There’s no difficulty at all. Through a process of negotiation between the combined local authorities and the central government, a tax equivalent to the average local tax liability, could be levied by the Exchequer and returned to the local level as part of an equalisation fund that benefits the more impoverished areas. This would dovetail into the same resolution that applies to the next objection.

‘As an alternative to central government financing, a local income tax would not give an even distribution of income to each local authority given the varying density of population throughout Ireland. Central government would still have to transfer significant resources to provide equalisation of funding to some local authorities.’

This is an odd objection since the Commission acknowledges this problem when discussing devolving a property tax to local areas. To solve it they propose an equalisation fund be established to assist those authorities with higher social-economic need. So, ditto under a local income tax. In principle, no difference.

‘A genuinely local income tax that would possibly be levied at different rates by various local authorities could lead to some taxpayers choosing to live or work in areas where a lower tax rate applies.’

Ditto with a locally determined property tax.

‘It would increase the burden of tax on labour income.’

Indirectly, so does a property tax. For the most part only those in work would pay - and the overwhelming majority people at work own a house in this house-owing democracy of ours.

* * *

There are problems with any new system. But I suspect the Commission didn’t spend much time on the issue of a local income tax. There’s an automatic equation: local government finance = property tax. All I’m suggesting here is that there are alternatives – alternatives deserving of more discussion.

Of course, we could really do the democratic thing and establish a system of both property tax and income tax for local levels. And let local authorities decide – or, rather, let local people decide. They could opt for one or the other, or a combination of the two.

But first we have to debate all the alternatives in depth, assess the local revenue bases and the impact on different incomes. In other words, a lot more study needs to be done.

And complementing that work we will have to start debating what kind of local government we want, its structures and powers. Or whether we’re happy with the status quo. For that will help us determine what reforms we will need in local government financing. If any at all.

The Great Squeeze: The Recession Diaries - September 8th

The Government now has its bookends. On the expenditure side, the McCarthy Report; on the taxation side, the Commission Report. Now we can stack the economy between the two and . . . squeeze. The only problem is that one of the bookends may not be so reliable. Indeed, it may fall off the bookshelf. And if that were to happen, the other bookend may find its function redundant.

The Commission Report is the dodgy endpiece. The Report is at great pains to highlight its remit, notably that its recommendations must be placed in the context of continuing Ireland’s low-tax model. But sometimes it doesn’t sound too excited by this:

‘In keeping with our Terms of Reference these recommendations have regard to the medium to longer term and, in aggregate, they are compatible with keeping Ireland a low tax economy.’

Compatible, yes. Inevitably so? That is more problematic. The Report protests that its recommendations would be ‘revenue-neutral’ – Peter and Paul would balance out. Except that, while we get a lot of proposals to raise money, there isn’t a comprehensive schedule of tax cuts to balance. They’ve left that exercise, by and large, to the Government. If I were a Minister, I wouldn’t be thanking the Commission.

All this suggests that reading the Commission report is a more nuanced affair than the McCarthy Report which was just a blunt instrument to hammer, for the most part, low and average income earners by cutting social transfers. The McCarthy Report is bad melodrama, the Commission report approximates a more confusing film noir.

Our starting point is to separate out the political context from the actual content. SIPTU Vice-President Brendan Hayes has done the public debate an enormous service by refusing to sign the report. His letter which appears in the Appendix lays out the primary reason:

‘The Commission’s Recommendations reinforce a low-tax model of the economy and of society that I do not support.’

All his other objections flow from this fundamental premise. By highlighting this, Brendan goes to the heart of the matter and elevates the ‘politics’ of the report in a way that makes clear the real and substantial difference between a progressive and a conservative economics (his interview on Morning Ireland is worth listening to for an elaboration on his letter). Paul Sweeney also makes useful points in this regard over at Progressive-Economy. This is where the battle lies.

But encouragingly, in fighting this battle, we can turn much of the content of the Report against this political context and, in many cases, against the regressive recommendations in the Report itself. Let’s take one example: tax expenditures.

The section on tax expenditures is by far the largest section in the Report and arguably the most detailed in terms of highlighting revenue and costs. There is much progressive meat here. The Report acknowledges the regressive impact of much tax expenditure – in addition to their inefficiency, deadweight, lack of cost control and lack of transparency. For instance, 50 percent of the revenue foregone under mortgage interest relief, which costs the Exchequer over €700 million, goes to the top two income deciles. There is considerable revenue gain to be made through the reform of tax expenditures with less deflationary impact and much benefit to both equity and the Exchequer.

The Report lists 96 tax expenditures, not including personal credits. This is by no means an exhaustive list – it omits discussion on 17 property-related schemes, though some of these are being phased out (the Labour Party has estimated that these property-related schemes still cost the Exchequer over €500 million).

Of these 96 tax expenditure programmes, 29 could not be costed. However, of those that could, the revenue foregone amounted to nearly €11 billion. That’s equivalent to all the revenue obtained in the income tax system and a third of all tax revenue. The Report breaks down these tax expenditures into two three categories:

• those they would continue as is: these cost €4 billion (though over half of this come from one tax relief – the exemption of the sale principal private houses from capital gains tax)  
• those they would discontinue: this would save over €700 million,(more than half of this, though, comes from the controversial taxation of Child Benefit), and  
• those they would reform in some way: these cost over €6 billion.

Let’s examine one small area in housing tax expenditures: namely the operation of mortgage interest (MIR) and rent relief. The starting point is the Report’s general recommendation regarding tax expenditures:

‘We have concluded that, in general, direct Exchequer expenditure should be used instead of tax expenditures. This allows greater transparency and control of public resources and avoids many of the aforementioned undesirable characteristics.’

This is a correct and progressive perspective. Unfortunately, the Report didn’t apply this principle to housing tax reliefs. Instead, they propose that:

• MIR be confined to first-time buyers only, and 
• Rent relief be abolished

While the first is fair enough, removing rent relief will disproportionately affect those on lower incomes (tenants are generally poorer than owner-occupiers) while creating an imbalance between the home-owning and rental sector. There is another way, however, using the Report’s general recommendation. If the MIR and rent relief were wrapped up into a taxable Housing Benefit, this could reduce the cost of these housing supports, progressively direct the subsidies to low and average income groups while achieving considerable social welfare savings.

For instance, the average cash subsidy to those in receipt of MIR and rent recipient is €840 annually, at a cost of over €840 million per year. Setting the new Housing Benefit at a level substantially higher than the average cash subsidy, and taxing it, would still reduce the overall costs (especially if second-house purchasers were excluded).

As well, this would reduce the social welfare costs of rent and mortgage interest supplements as home-owners and tenants would keep the Housing Benefit whether employed or not. This Benefit would be subtracted from the social welfare subsidies.

We could go further and extend the Housing Benefit to all first-time buyers and tenants – public and private. This would have progressive knock-on effects for local authority tenants – comprising some of the lowest income groups in society – while at the same time allowing local authorities to readjust the differential rent scheme to recoup more of their construction and maintenance costs. Tenant and public landlord would both gain.

This is one small example of how the Report’s recommendations can be transformed in a progressive manner. That doesn’t take away from the larger political context – the low-tax model it espouses and which is a direct contributor to the economic and fiscal crisis we find ourselves in. But disentangling the context from the content frees us up to be more creative. I’ll return to other aspects of the Report in subsequent posts.

For at the end of the day, progressives are going to have to write their own Taxation Report – one which shows how we can increase taxation to facilitate economic growth and social infrastructure development, consistent with the economy’s ability to absorb such tax increases.

We can turn the Commission on Taxation against the Right and even against their Report’s own regressive recommendations.

And in so doing, remove one of the bookends that threaten to squeeze the economy.

Missing Numbers: The Recession Diaries - August 5th

First, the good news. The rise in unemployment is contracting. From a monthly high of 36,500 new people on the Live Register, the rise last month was a mere 4,300. Okay, still far too high but if unemployment is ever to be reversed it must first be slowed down. And slowing down it is. That’s the good news.

There is a problem, though, in all this. Namely, some of the numbers are missing. Let’s remember that the Live Register does not record unemployment per se. It records those signing on – which will also include part-time, short-time and casual workers, including those signing on for credit. So, while there are 440,000 signing on (not seasonally adjusted), the number of unemployed is, according to the Live Register is 12.4 percent – or probably between 255,000 and 260,000. I use the word ‘probably’ because we won’t get the actual Labour Force numbers for August until late this year so we can’t be sure the exact number this 12.4 percent represents.

And that’s the first problem we encounter. While the Live Register is published monthly, we don’t get the actual Labour Force numbers until months later. And this means that when we come up against the following set of figures we have to start interpreting (thanks to An Saoi for pointing me to these numbers).

The Department of Enterprise and Employment publishes redundancy notice figures each month. Briefly, you are entitled to redundancy if you have worked for the same employer continuously for at least two years. Therefore, the Department’s redundancy notice figures represent job losses for those in work for at least two years.

So, in January of this year, when the numbers on the Live Register went up by 36,500, the number of ‘actual’ redundancies was 6,601. Given that there might be some time-lag between actual redundancies and signing on, we can see that those with two years service plus made up 18 percent of the increase on the Live Register. Fair enough – the remainder may have been unemployed with less than two years service (e.g. young people), those short-timed, etc.

However, something curious is happening between the numbers increasing on the Live Register and actual redundancies.

While monthly increases in the Live Register have fallen considerably since the beginning of the year, actual redundancies have remained fairly constant. So much so, that redundancies exceeded the increase in the Live Register in August. This might seem peculiar – the increase in the numbers signing-on are less than the number of those receiving redundancies.

Another problem we have is that we don’t know the inflows and outflows on the Live Register. It only gives us the net situation. For instance, in August the Register increased by 4,400. However, if 10,000 new people signed on, but 5,600 signed off – it would leave us with the balance of 4,400.

Why would someone sign off? First, they found a job (and, yes, there are jobs to be found). Second, they returned to education. Third, they left the workforce; this is likely to happen with young people and women in households where there is working income. Under means-test rules, they might not get any assistance but could still sign-on for credits. But these credits are largely for pension benefit and people may not feel it’s worth the trouble.

Or, people have started emigrating.

The problem is we can’t really tell at this stage and the numbers that would let us breakdown the problem won’t start arriving until much later. The Quarterly National Household Surveyprovides information on the size of the labour force and overall employment. The problem is that we only have data up to the end of March. However, this is what they tell us about the labour market. In the six month period between the 3rd quarter of 2008 and the 1st quarter of 2009:

• The labour force – which includes employed and unemployed – fell by over 78,00 
• Employment fell by 141,500 
• Unemployment increased by 63,400

The question is – what is happening to all these people. The labour force is shrinking and the participation rate (which includes employed and unemployed) is falling – from 64.2 percent to 62 percent in the six month period.

One can’t help but conclude that a large proportion is emigrating but we don’t know by how much. The CSO will be publishing migration figures later this month – but it will only take us up to April. Still, we it will give us some insight into trends.

A Department of Finance official told me some months ago that Ministers are praying for emigration. Emigration can solve a lot of problems. It can reduce social welfare costs, reduce demands on social services (e.g. health, education, housing, etc.). It can massage a whole load of figures. We may find that while the numbers of people signing on is increasing, the net figures will look better – because people are leaving, or dropping out of the Labour Force. 

Based on the figures to date, it looks like the Ministers prayers are being answered.

Discourse of the Caves: The Recession Diaries - September 2nd

The Commission on Taxation is about to descend upon us – six hundred pages worth, apparently. The Commission report is of a different order than the McCarthy report. The latter was set up to find ‘savings’ in order to reduce the high borrowing requirement (it failed to do this as we discussed previously – the level of savings is highly inflated). This is not the Commission’s remit. It was set-up to review taxation issues in the context of maintaining a low tax regime – not discover new sources in pursuit of increasing revenue in order to reduce the borrowing requirement. Therefore, the two reports are not comparable.

And if the limited remit wasn’t sufficient (though it was enough to ensure that one Commission member – SIPTU’s Brendan Hayes – has refused to sign on), we have Minister Lenihan claiming that tax is high enough. In terms of dealing with the fiscal deficit, he won’t be looking to increase revenue. He’s got his sights firmly on public expenditure – in effect, social welfare, health, education and public sector wages/employment.

Let’s examine two aspects of this argument. First, is the Irish economy taxed too much? From a comparative perspective, this argument that can hardly be sustained.

• In 2007, the average level of taxation (as a % of GDP) in the other EU-15 countries was 46.7 percent.
• Compare that to Ireland’s 40.6 percent (using GNP).

We ranked rock bottom. We would have had to increase tax revenue by €9.2 billion just to reach the average.

The EU Commission predicts this situation will pertain up to 2010. They project that Irish tax revenue will fall to 38 percent of GNP, a result of the collapse of tax revenue arising from the loss of economic activity combined with the structural deficit. The other EU-15 countries will also experience a slight drop but less than Ireland, owing to the fact that unemployment has not risen to the same extent as here. S

o, on just an international comparison, it can hardly be suggested that we have hit a ceiling – unless we intend to live in a very small house in the future.

However, there is an argument that increasing taxation – especially general taxes on low and average income groups – is not a wise course during an economic contraction. It is deflationary, resulting in reduced domestic demand with all that consequences that entails (e.g. higher unemployment, reduced enterprise activity, etc.). This argument is jumped on by the Right to argue for prioritising public expenditure cuts, without likewise conceding that such cuts are deflationary, too.

That’s why a viable alternative is to dispense with overall public expenditure cuts and general tax increases (this doesn’t exclude minimally deflationary measures – cutting ‘real waste’ or increasing taxes on high income/wealth), and instead engage in sustained investment stimulus to increase economic activity and reduce unemployment.

Even so, looking forward when the economy has moved from recession to recovery – where does the most economically efficient and fiscally beneficial balance lie between cuts and taxes? I’ve referred in the past to the ESRI’s simulation of budgetary proposals, mostly focusing on public expenditure cuts. But they also ran a number of simulations on tax increases such as property tax, income tax and carbon tax. Let’s compare these with public expenditure cuts, to see what would be the better course to take to engage in fiscal consolidation. It should be noted that the ESRI set up similar ‘shock’ magnitudes. Each of these proposals are designed to either reduce expenditure or raise taxation by €1 billion. So we are comparing like-with-like.

First, the deflationary shock to the economy. It can be seen that tax increases have a less deflationary effect – at least, during an economic contraction.

The worse option – in terms of prolonging and deepening the recession – is to cut public sector jobs. However, all tax increase measures have a less deflationary impact than any spending cut – even public investment cuts (which is actually a cut for the future). Indeed, the introduction of a carbon tax of €34 per tonne would actually see GNP rise marginally though this wouldn’t come without a cost (the ESRI predicts a loss of competitiveness and a decline in output as a result).

So which options would be the most fiscally beneficial? Don’t forget, each proposal is designed to ‘save’ the Exchequer €1 billion in gross terms but that’s before a full impact assessment has been performed. The ESRI calculates the net savings arising from their assessment.

As can be seen, tax increases have a higher return to the Exchequer than public expenditure cuts. The worst option is cutting public sector jobs – from a headline €1 billion reduction, the net savings to the Exchequer is only €490 million whereas carbon tax returns a net savings of €900 million.

Of course, more detailed investigation would need to be conducted to more fully assess the impact. For instance, a carbon tax without relief for low income groups could turn more deflationary and result in reduced net savings if it was disproportionately regressive. Similarly with property tax.

But what this does do is give us useful parameters within which to work. For instance, the foundations of a property tax could be established immediately with rates on only the highest income groups at work. As the economy recovers and is in a stronger position to absorb the fiscal shocks, then the tax could be extended to all households. This approach – aligning the introduction of tax increases with the economy’s capacity to absorb such increases – could ensure sustainability without risking torpedoing a fragile recovery.

This, of course, would require a government that is sensitive to the capacity and potential of the economy in both the short and long-term. We don’t have such a government. There is little inkling of such sensitivity from any alternative government led by Fine Gael. Indeed, this sensitivity is lacking in the national debate. All we get is ‘cuts good, taxes bad’.

That type of antediluvian discourse is hardly amenable to nuance.

Ostriches, Democracy and Dr. G.: The Recession Diaries - August 31st

Dr. Garret Fitzgerald is not impressed with the notion that if the majority of legislators believe that Government proposals are wrong or misguided, they should vote against them. No, according to the good Doctor, whatever legislators think of Government policy, whether on NAMA or public expenditure cuts, they should just bite their lip and support it. Because if the Government is defeated a destabilising effect will set it, leading to the takeover of the country by the IMF, the withdrawal of lending by international markets and our inevitable enslavement in the economic salt-mines. Our only salvation is to shut-up and support Fianna Fail. Dr. G. has spoken.

This is the extreme edge of the TINA argument (‘There Is No Alternative’) and Dr. Fitzgerald has been hanging around at the extreme edges of late. In a previous column, he attacked anyone who dared question the desirability of the McCarthy Committee proposals:

‘. . . there is an air of total unreality about most of what has been said and written by many of those who have attacked these proposals and who are still in absolute denial about the scale of the crisis we currently face . . . We are at present a country of ostriches. It is time for everyone to wake up to reality.’

Unreality. Absolute denial. Ostriches. Wake Up. Well, I guess that put some of us in our place. Dr. G. was at it again in his most recent column – this time raising all manner of woe and betide if anyone dared to exercise their democratic responsibility.

‘Responsible opposition is vital if the State is to be kept out of the IMF’s hands . . . No worse fate could befall an opposition than to precipitate themselves into government by defeating measures, the rejection of which could throw our State into the hands of the IMF.’

Dr. G. has moved from a legitimate position of supporting the McCarthy Committee proposals and NAMA to a more extreme position that anyone opposed to such is risking opening the door to the IMF. Okay, a bit robust but it’s a tough debate. However, it turns near-hysterical when such a position denounces the democratic process itself – the very idea of the politics of choice.

For instance, if opposition parties can mobilise public opinion to such an extent that the Government is prevented from implementing the McCarthy Report or setting up NAMA; this would no doubt precipitate an early election. In such a scenario, people may wish to support an alternative approach and elect a government that reflects that desire. It is this process that is deeply disturbing to Dr. G. In any other country, it would be called democracy.

Dr. G. elaborated on his position on Morning Ireland:

‘It’s not the best moment to change the Government because all eyes would be on us . . . If the Government fell on this issue, world financial opinion – the folks that lend us money – they wouldn’t understand what lies behind this; they’d only see that the Government hasn’t got its proposals through. They would be reluctant to lend us any more money at that stage . . . To restart the whole process, to abandon NAMA and restart the approach . . . to do that it would take a long time to sort all that out, put forward and get through new proposals. And during that time we would find it very hard to borrow . . . It’s not the best moment to destabilise things.’

In other words, we must not allow people to exercise choice, we must not allow people to elect a Government that they believe would be best placed to address the crisis. Not because they would make a worse choice. But because the very process of debate and popular decision-making itself would undermine our capacity to borrow. World financial opinion must be satisfied, even if that means denying people the option of electing, in their opinion, a better government.

Of course, Dr. G. doesn’t explain how he knows that it would become ‘very hard to borrow’. We just have to take his word for it. And support, for the time being, Fianna Fail – tolerate their policies no matter how profoundly mistaken or counter-productive we might believe them to be. For at the end of the day, our opinion doesn’t matter.

It is hard to imagine a more profoundly anti-democratic sentiment than this. Indeed, what government in the world wouldn’t want to use that argument to postpone an election or a legislative vote of confidence?

Now, Dr. G. is not proposing some indefinite ‘dictatorship of the financial-ariat’. He doesn’t’ mind elections as long as they can’t affect policy.

‘After these two measures (i.e. McCarthy Report and NAMA) have been successfully implemented, if the Dáil or the electorate so decided, there could then safely be a change of government.’

So we’re allowed to have many parties competing for office, so long as it won’t result in any substantive changes. One state, one policy.

In one sense, Dr. G. should be congratulated for bringing to the forefront what is implicit in the ideology of TINA. It is the logical conclusion of a debate of one-hand clapping. For now we know we don’t need the other hand (it is not a serious participant, as Jim O’Leary previously informed us; the hand is actually not a hand at all but rather an ostrich). Indeed, all that other hand can do is destabilise things. Better to cut it off rather than have it offend the orthodoxy.

This is the final twist in a desultory debate where some commentators are determined that the people should be given neither sight nor hearing of any alternative economic policy. Never mind be given a choice to elect a Government that would pursue such policy.

The Better-Off Shall Be First: The Recession Diaries - August 25th

John McHale of NUI Galway has produced an outline for a fiscal plan. It is well worth reading. It’s a serious treatment. It’s also an unnerving treatment. For it has the capacity to wreck the Exchequer’s finances with little ‘stimulating’ effect on the economy.

On the way to presenting his fiscal plan John makes some highly contentious statements. He claims that falling investor confidence last year meant the Government had no choice but to engage in large fiscal adjustment (i.e. cuts). Of course, last year the National Management Treasury Agency launched the biggest bond issue by any borrower in Europe since 2004. Indeed, such was the level of demand for Irish debt that the NTMA was able to build up a war chest of €20 billion in free cash balances. And in the first few weeks of this year, the NTMA raised nearly 40 percent of all the money we needed to fund our debt this year. So much for slipping investor confidence.

John states that current expenditure cuts are less contractionary than tax rises. The ESRI simulation suggests just the opposite - that tax increases are less deflationary and fiscally more beneficial. 

He also states that it would be better for wages to fall than to let unemployment rise. However, beyond the supply/demand curves of textbook models we find that office and factory floor workers are taking pay cuts (in the process subsidising substantial management pay rises) and at the same time find themselves being laid off as well.

On such shaky premises, we are now ready to examine John’s plan.

Step 1: Implement the McCarthy plan over two years. Never mind that it contains horrendously deflationary recommendations with the centre-piece proposal – cutting 17,000 public sector jobs - having been road-tested by the ESRI and found wanting; implement them. John seems to think the Report provides ‘a useful focal point for shared sacrifice’. 40 percent of the ‘savings’ comes from reducing social transfers, impacting most on low income groups. That’s a lot of sharing by one particular income group in society.

Step 2: Cut public sector wages by 5 percent. But of course. It won’t save much, mind you – only about 0.3 percent of the borrowing requirement, while cutting consumption by nearly a full 1 percentage point. John suggests the savings would be €700 million. The ESRI projected savings of €671 million but that was before the April budget and the imposition of additional levies. The net gain would be, as a consequence, somewhat less.

So far, pretty standard deflationary fare.

Step 4 (yes, I’m jumping ahead here – building the drama so to speak): Postpone the 2010 and 2011 cuts in capital expenditure for two years. John rightly points out:

‘Cutting capital expenditure as the economy falls into a deep recession just continues the pattern of pro-cyclical fiscal policy.’

It’s unfortunate he doesn’t see that cutting current expenditure is similarly pro-cyclical and more deflationary than capital expenditure cuts.

But, now, the piece de resistance.of Step 3:

‘. . a significant roll-back of the income and health levies. These levies have brought the marginal tax rates facing many workers to over 50 per cent. The Government was correct to put the burden on the better-off in the first phase of the adjustment. But continued increases in marginal tax rates will damage incentives and hold back growth. The tax-cutting package should also include temporary reductions in employer PRSI to the extent affordable.’

So the real game is revealed:

• Cut public services, wages, health card entitlements, social welfare recipients living standards, and at the same time

• Reduce taxes and levies – in particular, the marginal rate in order to provide relief to the better off John puts some numbers on this proposition.

John wants the Government to reduce taxation by as much as €3 billion nest year (some of this would be directed to cutting employers' PRSI - an ineffectual deadweight proposal). He seems to go further. He wants the Government's planned tax rises next year to be postponed (though I'm not sure if this is in addition to the €3 billion or is inclusive).  

Why? What is the point of this ‘plan’? I can’t believe it’s a crude ‘take from those who don’t have enough and give to those who have more than enough’. John states:

‘This may be as close as Ireland can come to real economic “stimulus” in the current circumstances.’

So we have stimulus for the ‘better off’ and hard times for those at the lower end. This might be worth considering if John had put forward any argument that such an approach would actually stimulate the economy. But he doesn’t. And it won’t.

Recessions are marked by many things – loss of money to the economy, falling living standards, reduced consumer spending, rising unemployment and falling investment. It’s hard to see how giving money back to the ‘better-off’ will address these issues.

Would it result in a rise in investment? I don’t see how. There are few investment opportunities. Enterprises are retrenching from lack of demand while banks are a basket case. The history of investment in this country is that it has either been led by multi-nationals or the State. The investment of choice for the better-off has been property – both here and abroad. With this route of investment cut-off, is it really being suggested that this money will end up in productive investment?

What about boosting consumer spending? Better-off individuals are more likely to save a larger proportion of their income than spend it. If they do spend it, it’s more like to be import-dense. If you want to boost consumer spending, you find ways to put cash in the pockets of those groups with a higher propensity to spend – those same income groups that John wants to hammer with the McCarthy proposals.

This has to be one of the more peculiar ‘stimulus’ proposals I’ve come across. It could end up wrecking the Exchequer finances. John is hopeful that the €3 billion in tax cuts next year would be financed by implementing half of the McCarthy proposals and the public sector wage cuts.  However, the net savings from these deflationary proposals would struggle to reach €2 billion, while undermining economic performance (cutting consumption, increasing unemployment).  This would leave at least a €1 billion hole for next year. 

All in the hope that the better off would do something productive with that money that they've been gifted.

That’s not so much a plan as a leap of faith.

How Not To Read A Report: August 21st - The Recession Diaries

Stop the Presses!

‘Irish workers earn 4th highest wages in the world!’  ‘Irish workers one of the best paid in the world!’ ‘Wages for Dubliners are among the highest in the world!’

So, all that guff from trade unions and progressives and (and as we will see – just about every official data collection agency) is just that – guff. Misinformed guff. Vested interest guff. For the authoritative statistical report has been published and it shows – Irish/Dublin workers are rolling in it.

Or maybe, just maybe – the people making that claim didn’t actually read that report. For the UBS’s Prices and Earnings report for 2009 makes no such claim. So who’s spinning what? And to what effect?

The UBS report is a triennial affair surveying prices and wages throughout a number of cities across the world. They compile price data on a range of product and on wages in very narrowly defined categories covering 73 cities around the world – from all continents, including developed and developing countries. Dublin is Ireland’s lone representative city.

The UBS report lists 14 ‘professional’ categories in the Appendix – ranging from manufacturing, services, public and private and even managerial categories. In most of them they show Irish wages (in US $) as very high – much higher than the global average and even higher than the average from cities in the EU-15. So surely that should be game, set and match point. It would, if we didn’t read the report.

UBS states very clearly that they are not compiling the data for the purposes of finding ‘statistical averages’.

‘ . . our figures do not represent statistical averages and its collection was limited to just a few companies for each profession and city, data from different sources may differ.’

Indeed, we will see why they make this disclaimer below. But, first, let’s see what more is ‘disclaimed’.

• RTE News at One headlined the report as: ‘Irish workers are amongst the highest paid in the world’. Yet, UBS doesn’t compile data on ‘Irish’ or national wages. It doesn’t compile data on any other national wage levels.

• The UBS report doesn’t compile wage data on economic sectors (industry, services, retail, communications, manufacturing, education, etc.)

• The UBS report doesn’t compile wage data on occupational groupings (sales, clerical, managerial, production, etc.).

So what does it do to allow those who haven’t read the report to make such claims as RTE did? Let’s look at just two of the fourteen categories on which the UBS compiles its data.

Skilled Industrial Worker: this would be a relatively easy category from which to obtain data and compare. But that’s not what the UBS does. It takes data based on:

‘Skilled worker with vocational training and about 10 years’ experience with a large company in the metalworking industry; approx. 35 years old, married, two children.’

First off, it is immediate apparent that there is very little likelihood of getting a scientific sampling of this cohort across a range of companies throughout all the cities. That’s why the UBS didn’t even attempt it.

It’s even worth questioning where they got their data from Dublin. The CSO’s Industrial Production Census shows that in the entire Southern and Eastern regions (from Kerry to Cork to Dublin – all counties outside the BMW region), there are only 16 large (100-plus employees) in the base metal and metal fabricating industry. How many of these are in Dublin and of these how many fit the UBS bill of ‘metal working’? Given that there are less than 3,000 workers (some of them women) in these 16 large companies – how many work in Dublin? In fact, there is a good chance, given that Dublin doesn’t have a large metalworking industry, that there are few if any workers that fit the UBS bill (e.g. 35 years old, married, two children, vocational training, 10 years experience).

The same holds true for the UBS category of Female Factory Workers (‘Unskilled or semi-skilled machine operator in a medium-sized company, mainly in the textile industry; about 25 years old, single’). Textile industry? Dublin? There are only 500 women workers in this sector throughout the entire Southern and Eastern region (and this is the latest figure – from 2006; good chance that some of those companies have shut down as this is a sunset industry in high-income economies).

And, how did they collect their data? From data collection agencies whose remit is to accumulate the information to allow us to make such comparisons? No. It was based on a detailed questionnaire (112 questions) used in the following way:

‘We have drawn on the broad network of UBS branch offices, countless universities and our researchers’ personal contacts . . ‘

Let me stress – I have no problem with this. UBS has been open and transparent about their methodology. The problem is the spin that some have put on this report - spinning without reading.

So, can we get some information on this area? Yes, from agencies whose remit is to collect such data for the purposes of comparison. Let’s take Destatis – the German  equivalent of the CSO. Their information is useful because it is more up to date than most. They examined labour costs (wages, employers’ social security contributions, etc.) in the manufacturing sector in the 4th quarter of 2008. They based their results on Eurostat data ((they have access to the raw data from Eurostat whose own published data lags 2-3 years behind). What did they find?  This is for all manufacturing employees (managers included, who took a pay rise at the expense of all other workers in the first three months of this year):

• Average Irish manufacturing wages are 2.3 percent below the EU-15 average and 17 percent below the average in our peer group (top-10 EU economies).

No, it doesn’t focus on skilled male metalworking workers or unskilled female textile workers – but if overall average wages are 17 percent below our peer group, then we can reasonably assume that these workers’ wages are below average as well (isnt' it amazing how official data never gets the headlines?)

How can we reconcile the findings of Destatis and UBS? We can’t. Not because one methodology is superior to another in pursuit of the same goal – constructing a set of data of statistical averages in order to make comparisons. It’s because they have different goals. UBS makes no claim that it is a surrogate OECD, US Bureau of Labor Statistics, Eurostat, Destatis, etc. It doesn’t function on that turf.

If the UBS results were presented in the media with some degree of accuracy, the lead-in probably run like this:

'Recent data compiled by UBS researchers’ personal contacts shows that wages in a few companies where skilled metal workers with vocational training and about 10 years’ experience with a large company in the metalworking industry; approx. 35 years old, married, two children are working in Dublin are higher than UBS researchers’ personal contacts in a few companies employing the exact same type of workers in other cities.'

Okay, not a very sexy lead in. Best just to run with ‘Irish workers’ wages are one of the highest in the world’.

Not terribly accurate but, hey, when did we ever let accuracy get in the way of a good story.

[You can hear this debate between an IBEC representative and myself on the Last Word -  Wednesday, August 19th, immediately after the headlines on the 5:00 pm slot.]

Here We Go Again: The Recession Diaries - August 18th

‘There are people who are working right now, who are looking at the possibility of losing their jobs, they cannot save, they cannot build up the savings to cushion potential loss, or potential risk of their job. And, yet, they are paying increasing rates of taxation in order to sustain what is in effect, as identified by the OECD in their 2007 report, the second most lavish system of social welfare spending in the entire OECD.’

Good grief.  I had thought that, when Sarah Carey publicly retracted her claim that Ireland had one of the most generous social welfare rates in Europe (after being challenged by Irish Left Review), that that would be the end of the matter. If not that, then Sli Eile’s myth-busting piece using OECD data. But no – Constantin Gurdgiev is making the above claim on RTE’s Prime Time. With the McCarthy Report and IBEC calling for social welfare cuts, it’s clear: some people really have it out for the lowest income group in society. It’s getting obsessive.

So once more let’s pick up our analytical cudgels and see what we can make of this latest claim (all figures are for 2007 – the year the OECD report references.

Money, Money Everywhere (But Here)

This was originally written for Progressive-Economy

If you took some commentators seriously, you’d be excused for believing that Ireland Ltd. is on the verge of going into liquidation. Whether it’s defaulting on our debt, a growing inability to borrow more, or just despairing over that ‘€400 million we’re borrowing every week – yes, you’d assume the country is out of dosh.

But that doesn’t tally with the recent US Treasury release of data identifying the major holders of Treasury Securities – that is, US debt. China is the biggest holder of US debt – about a quarter of the foreign total. Japan, the tax havens in the Caribbean and the UK (with its tax havens) are also up there. But guess who else is. Yes, poor ol’ broke Ireland.

Irish ‘residents’ hold $50 billion worth of US Treasury securities. That’s almost as much as Germany (even though German GDP is nearly 14 times larger than our own) and more than twice as much as French holdings. Our holdings are worth over $12,000 for every man, woman and child. Irish holdings have shot up recently. Only last year Irish holdings amounted to $15 billion. In just 12 months, $35 billion fled Ireland for the safety of US debt. Yes, there’s money swilling around – but it’s not swilling here.

This is of a piece. Irish holdings of foreign portfolio securities throughout the world amounted to €1.3 trillion at the end of 2007, with €440 billion held foreign equity and another €575 billion in bonds and notes. The increase since 2000 has been substantial – up from about €500 billion.

To put this in some perspective, Ireland’s €1.3 trillion held abroad compares to the foreign holdings of French residents of €2 trillion – even though the French economy is more than ten times larger than the Irish economy.

Of course, it will be argued that Ireland’s wealth holdings are too big to be maintained in the limited domestic investment opportunities. Foreign Direct Investment may come here by the truckload, wooed by prospects of high returns – but not high enough to satisfy our own residents. They must go abroad to find financial satisfaction; US debt, for instance.

There’s some validity to this argument but there’s another picture. It’s long been a complaint, by politicians and commentators, that money is tight here, but pretty loose everywhere else. Back in the 1950s Flann O’Brien wrote:

‘It is almost a cliché that this country is chronically undercapitalised, that money for productive capital works cannot be got. The administration recently started capital works concerned with land reclamation and drainage and is about to clear all the rocks out of Connemara. With money borrowed from the banks deposited by thrifty farmers? Not on your life. With borrowed American dollars which are twice as costly as pounds.’

Frank Aiken had his own run-ins. When he attempted to finance an expansionary programme shortly after the war, the Irish banks refused to loan, preferring to keep their money safe in the UK. He declared:

‘I regard their turning down of the request (to loan the government money) . . as an act of undeclared war upon our people’.

The banks won and, Aiken surrendered unconditionally, the people paid the price.

Patrick Honohan wrote only a couple of years before the financial crisis:

‘ . . .despite the emergence of the International Financial Services Centre (IFSC) as a leading player in some subsectors of offshore finance; despite the high profitability and unusually high percentage of the banking system not domestically controlled; and despite the absence of any significant bank failures for over a century; there is little evidence to suggest either that recent Irish growth has been finance-rich in the sense understood by the literature, or that the previous low-growth experience was explicable in terms of a weak financial system.’

Irish banking and financial investment played little role in the Celtic Tiger economy. They were too busy playing away and plotting the eventual chain of events which would lead us to the Carroll liquidation and NAMA.

Michael Hennigan of Finfacts points out that between 2001 and 2007, nearly €41 billion left the economy in search of commercial property abroad, while only a fraction of that was invested in indigenous high-tech companies.

Of course, it would be too simplistic to point out that only a small percentage of these resident holdings abroad would be needed to pay off the entire national debt (of course). Or that even a smaller percentage would be needed to recapitalise the banks without taxpayer intervention (of course). To maintain such a position would betray a profound misunderstanding of capital flows in a highly globalised system (of course).

Besides, it’s not as if Brian Lenihan is unaware of the problem of ‘money flowing abroad’. Only recently, in a fit of patriotic fervour, he called on hard-pressed consumers not to go to Newry to shop. Unfortunately, Lenihan’s ‘Irish money for Irish business’ is a pretty limited. I’ve not recalled him calling on Irish investors to stop crossing the oceanic border and buying US debt.

So the next time you hear a commentator or economist calling on the Government to slash social welfare spending, claiming that we have been paying ourselves too much; the next time you hear some politician saying we have to take ‘tough-love measures’ (usually without the love) because otherwise we’ll go broke; just remember all those hundreds of billions of ‘Irish money’ circulating throughout the world Remember those billions that have fled the country in the last few months to buy US debt. Remember all the money that is going everywhere but here – to invest in our industries, enterprises, and infrastructure.

And if you think this is a curious way to run a modern economy, you’d be right.

* * *

[NOTE:  On Progressive-Economy, Pavement Trauma asked whether 'Irish residents' included foreign enterprises operating here.  Yes, it does.  Is there anyway to separate out indigenous and foreign?  Probably not.  There is an agnostic tendency towards the operation of foreign enterprises from many of our state agencies (Forfas, for instance, hardly ever refers to transfer-pricing, despite the fact this has a tendency to distort business statistics).  So, do Tesco and Argos operations here hold foreign securities?  Probably not.  But it's a sure bet that other foreign enterprises do.  To what extent is a matter that could be debated for a long time and we'd still be no wiser.  However, even if foreign enterprises constituted half of all ownership of foreign securities, Ireland would still rank high as a ratio such holdings to GDP].

Try Your Hand at Stimulus - the Fun Way!

A big thanks to Tipster who provided this link to the Keynes Game - a game of political economy from Dreamscape.  It's very easy.  You have the variables to play around with - tax, spend and money supply.  Okay, so we don't have the option of manipulating Irish money supply; still, if you're a fan of quantitative easing, let rip.  Go to File and and press start game.  See if you can lower unemployment while keeping inflation and interest rates in check.  If successful, you get to be re-elected President. 

I played around with a number of variables.  I managed to get re-elected and, in my wilder moments late at night, subjected the country to runaway inflation.

So have fun. 

[And for you unreconstructed command economy socialists - try your hand the Bukharin Game - a game of economic planning.  But be warned, if you fail you won't just get 'de-elected'; you'll be tortured and sent to Siberia]

Share the Pain? Share This! : August 9th - The Recession Diaries

Maybe it’s the Leveller in me, but when times are hard we should all put our shoulder to the wheel, share out the pain and protect the lesser able in our community. Listening to the great debate over wages you’d think that everyone was a Leveller. There is so much ‘share the pain’ going around you’re likely to keel over on your way to the local newsagent. But, as always, in this crazy, mixed-up world, there is ‘pain’, there’s ‘paaaiiinnn’ and then there’s no pain at all. Now, thanks to the CSO’s latest Earnings and Labour Cost Survey, we can measures these gradations of pain or otherwise.

Our first stop is the manufacturing sector. We find that in the first three months this year basic hourly earnings increased by 2.7 percent. However, these gross figures don’t tell the full story. The CSO helpfully breaks down hourly earnings by strata. What do we find then?

Well, management and professional staff, who make up less than 25 percent of all employees in the manufacturing sector, took a substantial increase. All other employees took a hit:  clerical workers who earn only on a little over €37,000 took a 2.3 percent reduction, while production workers, who make up 60 percent of all manufacturing employees and who earn a little over €31,000, suffered a reduction of nearly 1 percent.

Now, we shouldn't begrudge anyone a pay increase. If an enterprise can afford it, they should do it – good for the Exchequer, good for the economy, good for the employees. But what’s good for some should be good for all in something approximating equal measure.

However, what we seem to be witnessing here is not only that some – who just happen to be at upper end of the enterprise food-chain – get increases while most others don’t; the majority of workers will lesser incomes are subsidising the pay increases of those with more.

Truly, those who have, receiveth more. And those who have less get less, indeed – they get more taken away. So let me speculate – admittedly, without any data to justify this, just a gut feeling; that were the Management strata broken down we would find managers earning more than the professionals and associated professionals; and that their increases would be higher still.

If there is pain to be had, it should be shared; and if there is some small benefit to be had in hard times, it should be shared as well. So what would happen if the total wage increases in the manufacturing sector were shared equally among all employees? It would come to an increase of 34 cents per hour which would, as can be seen, would disproportionately benefit those on the lowest wages.

I’m not proposing some kind of ultra-Maoist, everyone-eat-their-dinners-in-communal-barracks wage structure. But surely, especially in a recession, it makes more economic sense to ensure that those on the lowest wages get proportionally more as they are more likely to spend their money. If it goes to the highest groups, they are more likely to save it, or spend it on import-dense products and services.

The Financial sector paints a similar picture. There was a general 0.6 percent increase in wages. The Management / Professional strata – which makes up nearly half of all employees in the Financial Sector and earns an annualised €72,000 a year – was the only beneficiary of wage increases. Clerical staff, who earn less than their counterparts in the manufacturing sector, and Production workers (yes, there a few in the Financial sector) took a hit.

Again, and this is more pertinent in the Financial Sector, we might well find, if we had the data, that staff at the upper end of the Management strata gained an even higher percentage increase over the remainder in this strata.

Were the total wage increase shared out among all employees, the percentage increase for Clerical and Production staff would be 1.5 percent. This would at least help protect their living standards – which the Government was planning at that time to reduce with increased levies.

Ultimately, it’s a bit galling to hear these lectures from the upper economic echelons – especially as they continue to ‘grow’ their incomes at the expense of lower-paid employees in their own establishments.

And how irritating is it when the representatives of the managerial strata give out about employees’ pay, including public sector employees. As we saw above, the managerial strata gained while others fell. And public sector employees?

The marginal increase in public sector pay shouldn’t fool anyone. During this period the pension levy was applied which, because it’s not counted as a wage shift, does not show up. But cut wages it did. Public vs. private sector workers? The real divide is those that have the power to increase their wages and those that don’t – and most public and private sector employees are on the side of don’t.

So the next time you bump into IBEC or ISME or some Dublin Consensus-ist on the street, urging you to ‘share the pain’ – just laugh in their faces and tell them to sort out their own house first.

You Are Not Worthy: 7th August - The Recession Diaries

‘However, given the enormous scale of the problem, it would be fanciful to suppose that it can be solved without at least some reductions in public spending, and anyone who doubts this cannot really be regarded as a serious participant in the public discourse on the matter.’

Well, that put us in our place. Not only are public expenditure cuts so self-evident, beyond the need for any debate; anyone who argues otherwise is, ipso facto, not serious. Therefore, there is no need to debate with them. What a convenient world– yes, we’ll have a debate; but we don’t have to debate with anyone who disagrees with us because, by reason of the fact they disagree with us, they are not worthy to participate in the debate. 

Jim O’Leary, the author of this ‘non-debate debate’, is a serious contributor to the . . . well, debate. His arguments are worthy of being read and discussed in detail. So, I’m going to do just that. Admittedly, I along with many others won’t be allowed to discuss this at the table – we are not worthy. We won’t even be allowed to discuss it through the keyhole. We will have to stand outside the house, in the cold and the rain and the dark. We will struggle to be heard.

Jim presents two ‘necessary’ measures. The first set is intended to:

‘ . . . reduce the yawning gap between Government spending and receipts (cuts in public services, social welfare and public sector pay) . . this is not discretionary, but an imperative, namely the reduction in the huge budget deficit.’

Note the clever sleight-of-hand here. No one disputes the imperative of reducing the fiscal deficit. But Jim takes primarily one means to this end – cuts – and transforms it into an end in itself.  So intertiwned are the two - cuts and fiscal consolidation - that to question the efficacy of the former is to question the need for the later. 

Yet, there is a data to suggest that not only will cutting public spending fail; indeed, it is failing before our eyes. I won’t rely on the generalised (and according to Jim, ‘naïve’) argument that cutting Government consumption and investment during the middle of an out-of-control economic contraction will only make things worse. Let’s go back – one more time – to the ESRI simulations. Take two proposals: cut 17,000 public sector jobs and cut public sector wages by 5%. What is the result?

• GNP: -1.2 percent 
• Consumer Spending: -1.3 percent
• Unemployment: + 1 percent

So, we prolong the recession, reduce domestic demand (that will do wonders for business turnover) and throw another 20,000 people on to the dole. But what will it do it for that yawning gap that Jim refers to? It would bring down the fiscal deficit this year from -12.2 percent (using the ESRI estimate) to -11.6 percent.

Wow! Slashing public sector employment and wages will close the ‘yawning gap’ by 0.6 percentage points. And what do we have left? A ‘yawning gap’. But now we have a weaker economy (reduced GNP, more unemployment, diminished consumer spending), less able to generate the activity needed to take action on the debt down the line.  Cutting public expenditure provides the facade of fiscal consolidation but that's all. 

This same façade is at work in Jim’s second set of measures – an expansionary fiscal contraction that will facilitate a reduction in wages which will, in turn, increase our competitiveness. I’ve covered this subject before – how a wage reduction of 5% in the manufacturing sector would result in a reduction of 0.4 percent in enterprise costs which would in turn mean that an enterprise could, therefore, cut the cost of a €100 product by 30 cents. Would 30 cents really make a difference to our competitiveness? Maybe it would – but it is, at least, debatable, contestable, worthy of further discussion.

But Jim pulls out another figure – how wages and salaries make up 60% of our GDP. He calls this ‘an eloquent statistic’. That may be the case, but I can’t find where this eloquence is expressed. The CSO’s National Income and Expenditure shows that wages and salaries make up nowhere near 60% of GDP, or GNP, not even when you combine wages and employers’ PRSI (a common measurement). At most, the very most, it comes to 51%. And if you think that the increase in the wages’ share in 2008 is evidence that workers’ are taking ‘advantage of the recession’ to increase their income, consider this.

Between in 2002 and 2007 gross wage and salaries increased by over 10 percent per anum (that’s the gross amount of wages in the economy, not individual wage levels). Between 2007 and 2008, wages and salaries increased by less than 2 percent – reflecting the massive job losses. The reason the wages share increased in 2008 can be put down to a shrinking economy.

Still, does Jim have a point – that Irish wages, as a proportion of economic output, have risen too much too fast? On the eve of the Celtic Tiger Boom in 1995 – Irish wages (including Employers PRSI) made up 51 percent of GNP – compared to 48.3 percent in the year before the recession kicked in. If anything, even after all that job creation and wage increases, the wage share decreased.

Jim outlines the areas that are permitted to be debated:

‘There is room for argument about the pace at which this reduction should occur. There is also room for debating the composition of that adjustment as between spending cuts and tax increases.’

Now, since the level of public expenditure is not allowed to be debated, I’m hoping Jim will allow another area to be considered. Why is the Government currently missing its fiscal target? Let’s recap.

In October, Fianna Fail brought in an income levy in order to keep the deficit at -6.5 percent. They brought in public sector wage cuts in February to keep the deficit at -9.5 percent. Then they brought in the April budget – more cuts, more levies - to keep the deficit at -10.7 percent. This was supposed to be the last chance saloon, our last opportunity before the international markets got radical on our fiscal backsides.

So how’s the latest new line holding up? The ESRI says the Government will fail again, that the deficit will rise to 12.2 percent. The IMF, the OECD, and the EU Commission project similar deterioration. And next year? The Government intends to go through another round of spending cuts and tax increases. Well, we certainly know they can’t hold the line at 10.7 percent – that’s already blown out of the water. And along comes the EU Commission, projecting that the deficit will spin out of control at nearly 16 percent.

None of this gets much mention – how pursuing deflationary budgetary strategies during a recession is like running in quicksand; you burn up a lot of energy, weaken the body – but still end up sinking.

And you’re not likely to hear much mention. Because there is a danger that it might lead us to the forbidden zone of economic discourse – that, maybe, maybe, there really is an alternative to the current policies of cutting public expenditure.

But we'll never know.  Because one position - a position consistent with mainstream thinking in other modern economies - is deemed a priori ‘not serious’ and, therefore, unworthy of discussion. To put it another way (as a friend did to me this morning), it’s as if it was said:

‘. . . given the enormous scale of the problem, it would be fanciful to suppose that it can be solved without at least some stimulus measures, and anyone who doubts this cannot really be regarded as a serious participant in the public discourse on the matter.'

Now that would be really mean.

The Nirvana of NAMA: 4th August The Recession Diaries

There is a tendency in political discourse to reach for the apocalyptic. Admittedly, when you read the latest Central Bank report, you can hear the sounds of seals being broken. But take NAMA. Will it be a disaster? Probably not. Will it bring the economy crashing down on us? Doubtful. Will it do irreparable harm to the social fabric? No. Any country that has survived Fianna Fail for so long can pretty much weather anything; even NAMA.

But will it succeed? Within its own limited and partial terms, probably. After all, we’re only trying to take bad assets out of the banks and recapitalise them. There is the concern over haircuts – too little, and NAMA (i.e. you and me) is landed with a portfolio whose worth it will never be recovered. Too much, and the recapitalisation will effectively bring the banks into public ownership. The calculations, though, are part economic, part valuation and part political. Guess which is the biggest part?

Besides, the moment of truth will not be in September – when the legislation is debated - or next June by which time all the assets will have been transferred to NAMA. The moment of truth won’t come for a decade or even longer, when NAMA is wound down. In the meantime, the process has been constructed so that the performing loans can meet the interest on the NAMA debt. If there is a problem, it will be some other Government’s problem, well down the line.

By the time NAMA is wound down, the economy should be up and running, the hit will become relatively smaller, the return on capitalisation may be high, and political pressure will demand that banks, now clean and profitable, face a small levy for the remainder, even if that payback time is extended for yet another decade. There’s a lot of political edge to skirt around here.

The banks could still end up in majority public ownership if the valuators find that no amount of calculation can keep the state from having to reluctantly take a sizeable equity stake. Will that change anything? Probably not. The government is not likely to take an activist role when they are fighting so hard not to be active at all (witness their laissez-faire attitude to mortgage rate increase).

Yes, there are issues of accountability and transparency. Yes, there were better way to deal with this – as Karl Whelan has shown in detail. Yes, we could have bought the banks of systemic importance for a real knock-down price.  And, yes, things could still go wrong (will ACC’s solo run throw things off course?). But we are dealing with the politics of postponement – hard to mobilise a progressive politics over an event that may or may not occur for over a decade, even if the facts are on our side.

That’s why if we get mired in the details – important as they are – we will miss the great sleight-of-hand at work here:

'Clean out the banks (NAMA) = Return to ‘normal lending activity’

Oh? There are two contestable assumptions at work here. First, that NAMA’s success will lead to ‘normal lending activity’. By the time the banks have swapped their NAMA bonds for cash from the ECB, hundreds of businesses will have gone under and thousands of jobs lost.

However, even when they get their cash – will they lend? If they are to operate on commercial criteria (and what else could a private sector concern do without state subsidy) they will not lend to businesses they consider ‘risky’. Doing so might create another set of dubious assets that would impair their loan books. And that’s what NAMA is trying to rectify.

But the real problem is whether this nirvana of ‘normal lending activity’ ever existed. Back in the 1950s Flann O’Brien wrote:

‘It is almost a cliché that this country is chronically undercapitalised, that money for productive capital works cannot be got. The administration recently started capital works concerned with land reclamation and drainage and is about to clear all the rocks out of Connemara. With money borrowed from the banks deposited by thrifty farmers? Not on your life. With borrowed American dollars which are twice as costly as pounds.’

This led Diarmaid Ferriter to rightly interpret O’Brien’s comment as:

‘ . . . an Irish bank, in the sense of a banking concern deducted to furthering the interest of Ireland, did not exist.’

Frank Aiken had his own run-ins. When he attempted to finance an expansionary programme shortly after the war, the Irish banks refused to loan, preferring to keep their money safe in the UK. He declared:

‘I regard their turning down of the request (to loan the government money) . . as an act of undeclared war upon our people’.

The banks won and, Aiken surrendered unconditionally, the people paid the price. But what about recently? Surely, the banks were, if not drivers of the Celtic Tiger, would have been knee-deep in it. Patrick Honohan wrote only a couple of years before the financial crisis:

‘ . . .despite the emergence of the International Financial Services Centre (IFSC) as a leading player in some subsectors of offshore finance; despite the high profitability and unusually high percentage of the banking system not domestically controlled; and despite the absence of any significant bank failures for over a century; there is little evidence to suggest either that recent Irish growth has been finance-rich in the sense understood by the literature, or that the previous low-growth experience was explicable in terms of a weak financial system.’

Not only did the Irish banking and financial system play little role in the Celtic Tiger boom; the prior poor performance could not be blamed on a weak financial system. Indeed, it’s as if Irish banking is in a place apart from the real economy.

In this same vein, Sean O’Riain writes of the activities of the banks in the late 1990s:

‘While capital sloshed around, Irish banks did little to guide it toward the kinds of investments that would have supported medium and long term development. . . . The public sector has been crucial to the provision of funds for investment in high tech and innovation, even as it competed with the rush of money to property and financial speculation induced by the tax decisions of its own government and administered by the banks that contributed relatively little to development.’

So, we may get clean banks; we may recapitalise them to international satisfaction. But there’s little in history to suggest this will make a contribution to national recovery. The progressive agenda remains; indeed, it becomes an economic imperative: credit as a social utility, an instrument of growth, subordinated to the needs of society.

For instance, if the Government had not privatised the Industrial and Agricultural Credit Corporations they would have two instruments to relieve the credit freeze. That’s what these institutions were set up to do in the first place. At the very least, these institutions could have guaranteed the loans from private banks.

And we will need capital for enterprise development, innovation investment, capital projects and infrastructural development. This calls for a state banking system created to meet these needs (or as Sean O’Riain suggests, as part of the solution, to enhance the role of Enterprise Ireland as a venture capital provider).

This even calls for a role for public enterprise in retail banking. As private banks withdraw from local communities, centralise their loan policies, remain indifferent to financial exclusion and tighten up credit to local businesses and households for the foreseeable future (all in the name of restoring capital), the opportunities for public enterprise banking based on the community development model in the US become more significant.

Yes, NAMA may succeed according to it lights. But that light won’t necessarily shine on the economy. If history is anything to go by, it won’t - dim-lit banks in a dark time. For what we need –a strategic and cooperative role for credit in economic recovery – is not something it is concerned with.

But we should be.   Otherwise we will be stuck in Avidyā and, so, in the continuing cycle of death and birth and death.

Risking Ayn Rand's Ire

Spare a thought for Mary and Sean. Both work full-time – not great paying jobs but together they pull in 60K with overtime. They need it. They bought a house three years ago, paying over the odds, but with a one-year old child they had to leave their one-bed flat. Their second child came along last year. Difficult, yes; but they were making a fist of it.

That is, until Fianna Fail got worked up. Since October, the Destiny Soldiers have really got stuck in to Mary and Sean. They took nearly €2,000 off the couple in levies. Then they smashed and grabbed another €2,000 by abolishing the Early Childcare Supplement. Mary and Sean didn’t like this but, sure don’t we all have to share the pain (that’s what RTE and the papers tell them everyday).

Now their bank has jacked up their mortgage interest. The Destiny Soldiers won’t interfere even though they practically own the bank.  Then, they read that Colm McCarthy’s committee wants to take another €720 off their Child Benefit. And they’re bracing themselves for the promised tax hikes in the December budget. Mary’s job is more insecure by the day and Sean’s employer has just unilaterally slashed the occupational pension scheme. They’re hanging on by their finger tips.

But now – they read that a property tax will be knocking on the front door.

In their collective nightmare they glimpse their future: Mary, unkempt, sits at the window all day muttering, the kids run around in unchanged soiled clothes, while Sean takes up drink, beating the cat whenever he’s not too drunk to catch it.

This is a family on the edge.

Opinion = Fact = The Whole Truth?: 24th July The Recession Diaries

On the One News at One, RTE’s business editor David Murphy concluded his piece on the National Treasury Management Agency’s Annual Report:

‘The other problem is that the credit rating agencies have downgraded Ireland’s debt. International markets will want to see serious spending cuts so the country can stop bleeding money day after day.’

There are three things wrong in just this last sentence. First, did David actually interview the ‘international markets’ to assess their views on the Government’s budgetary strategy? Indeed, how does one actually interview a ‘market’? Maybe, David meant those institutions that purchase bonds – insurance and pension funds, investment funds, banks (including Central banks) spread throughout the world. Did he interview them? Maybe, David meant the syndicates through which debt is bought and sold? Did he interview any of them?

I suspect not. If he had, he might have got a number of different opinions. Maybe they want to see ‘serious spending cuts’; or, maybe tax increases. Maybe they want to see stimulus programmes to restore growth and employment to the economy (for instance, this whacky employers’ group wants increases in wages, tax increases on the rich, increases in social benefits, and stimulus programmes out the ying-yang). 

Or, maybe, the 'markets' don’t really care about budgetary strategies in wee little Ireland. After all, if you just want to make some money on the six-month paper market, you know you'll get your money back plus interest regardless of what shape the country is in unless the capital is about to fall to economic Khmer Rouge brigades. But we’ll never know any of this because David in all probability didn’t investigate. He just repeated a line that comes straight from The Report.

Second – ‘ . . so the country can stop bleeding money day after day.’ Nice image. But there’s as programmed assumption that ‘serious spending cuts’ will somehow stop the bleeding. Maybe. Maybe not. It’s a contestable position. But David presents this as a ‘fact’ – an automatic cause and effect.

Now, I’ve gone over this ground a number of times but it’s worth doing it again. Because all we get in the media is ‘we’re borrowing €400 million a week’ (horrified tones, shaking of the head) – repeating a phrase used by The Chair of The Committee that wrote The Report. Now if the ESRI’s simulations are correct – that cutting €3 billion off public spending will only reduce our borrowing requirement by 0.9 percent – this would mean reducing that €400 million a week figure to €371 million a week – at best, at absolutely best.

That would stop the bleeding? To be honest, I wouldn’t want the Committee to apply triage to me.

Third is the way that opinion morphs into fact. The debate is no longer about different ways to bring the fiscal deficit under control. We just have the facts: markets want = serious spending cuts = stop the fiscal bleeding. The debate is circumscribed, limited, short-changed.

Let’s look at one fact. David referred to the credit agencies downgrading our debt. This did happen (first, Standard & Poor, then Fitch, then Moody’s). Sounds terrible. Must really be affecting both our ability to sell our debt and driving up the cost of selling our debt. Is either of these true? Let’s test these assumptions.

From an economic perspective, the higher the Bond Index the better. A high index indicates reduced cost of borrowing. A low index indicates increased borrowing costs. For instance, in the last 12 months:

• The lowest point in the Index was on January 26th when tit fell to 91.81 – with a gross redemption yield of 5.74 percent (yes, that was the time when Anglo-Irish was nationalised)

• The highest point was on December 3rd when the Index topped out at 101.43 with a gross redemption yield of 3.97 percent

We want to head back towards the December 3rd point. But surely with all those credit agency downgrades we must be going in the wrong direction. Are we?

No. The graph charts the Bond Index from March 23rd – a week before the first downgrade by Standard & Poor. We find that the credit downgrades didn’t have much if any affect at all. The Index continued to rise after two downgrades (Fitch downgraded the week after Standard & Poor). It dipped starting in May but returned to growth quickly and continued rising after the Moody downgrade.

Where are we now? In the four month period, containing three downgrades, we are edging closer to our previous 12 month high. We are closer much closer to this high than our previous 12 month low. We are moving slowly in the right direction. In the last few months we have closed the spread with German bond yields by a third.

Are we having trouble selling our bonds? Doesn’t look like it. In the last three days, the NTMA auctioned two bonds and Treasury Bills.They took in €2 billion and were over-subscribed by three to four times. In effect, they were turning away investors. The NTMA has pretty much borrowed all we need for this year and, in addition, have a cash cushion of €20 billion. Maybe we should get on to the credit agencies and ask them to downgrade us again (okay, a bit cheeky, but you get my point).

This is not an argument for treating the bond ‘markets’ as a cash cow. We have to take into account issues of debt, interest payments, yields, borrowing sustainability, etc. But a starting point is to, first, identify the real facts on the ground – and not just repeat something we heard and treat it as fact. Second, it is imperative that we separate out fact from opinion. This is not to dismiss opinion – informed opinion is always helpful, even (and especially) when it doesn’t coincide with our own.

When that happens, the quality of the debate improves, different voices are heard and new options may appear.

Unfortunately, that’s not happening now.

Public Sector Workers of Ireland Unite (you have nothing to lose but a shed-load of grief) July 22nd: The Recession Diaries

Boy, have public sectors workers been kicked around the block for drill. They wear the mark of Cain. They are one of the main reasons why the economy is in such rank order. There are too many of them. They are paid too much. They don’t work hard enough. Aren’t you glad you’re not a public sector worker? You can go out at night without fear of being accosted by roving bands of columnists from the Sunday Business Post and Independent House.

This is not much of an exaggeration – if at all. In particular, any chance of having a rational debate on the issue of public-private wage differentials is almost nil. No wonder so many public sector workers just keep their head down. But that’s not good enough anymore. There is a debate going on – and it's about more than just wages in the public sector:  it's about all wages (witness the latest attacks on the minimum wage) and about the public realm.  Therefore, it’s time public sector workers stop being defensive. Indeed, it’s time to go on the attack.

I want to suggest three starting arguments that can be used. These are ‘cut to the chase’ arguments: simple to use, simple to understand. In our attempts to ‘explain’, we can sometimes disappear down an Alice-in-Wonderland hole of occupational and educational variables, regressions, differentiations from the mean, etc. Any time a spokesperson for public sector workers is interviewed after the latest statistical outrage – harassed, harried and defensive – trying to explain, you can hear the interviewer drumming his/her fingers until:

‘Yeah, yeah, yeah – but the point is you people are paid squillions and you’re bleeding the rest of us dry. What do you have to say to that?’

Stop explaining. Stop defending. Present the argument in a way that is immediately comprehensible. Use each argument as a building block to the next. Tell a new story. And most of all, be confident.

Shock! Horror! McCarthy Vindicates Public Sector Efficiency! 20th July: The Recession Diaries

Noel Whelan wants you to read The Report. He wants you to read it now. Call in sick, dump the kids on grandma, kick the cat out – and read it. Mark Hennessy also wants you to read it – to know why you must take that bitter medicine. Ed Walsh wants you to read it because it will open your eyes to the vast range of waste and fat in the public sector. I want you to read it, too. But with a difference.

Don’t read it with it pre-conceived notions, based on previous leaks, spin and the current commentary. Read it carefully. Read what it says –not what others say. For if you do, you might find there is relatively little waste and fat in the operation of the public sector. Though there are improvements to be made – they are in the vast scheme of things, relatively small. You may find that The Report supports the findings published by the OECD and the National Competitiveness Council – that the Irish public sector is small and highly productive. And that in terms of tackling our fiscal crisis, never mind the broader economic crisis, proposed savings in the 'structural and operational reforms’ in the public sector, always desirable, will nonetheless produce little in the way of ‘savings’.

Fear and Loathing Reading The Report (or, it really is the economy, stupid): July 16 The Recession Diaries

No one should be too surprised about the broad thrust of the report of the Special Group on Public Service Numbers and Expenditure Programmes (here on referred to as The Report, best said aloud in deep, sombre terms). We knew there would be cuts of €5 billion, cuts in social welfare, health and education, cuts in public employment, cuts in programmes in every Department – an orgy of cuts to satisfy even the most insatiable deflationist gourmand. Okay, now we know the details. Now comes the concern, even outrage.

With over 300 pages to pore and sweat over, how do we get an initial handle on The Report without getting lost in the considerable detail contained therein? Can we take a step back and view it – much as we might examine the dark cloud from afar, to get a more comprehensive sense of the oncoming storm.

First, let’s deal with a political issue – and this is not down to The Report and its Authors. There is nothing in this – and I emphasis nothing – that could not have been drawn up by Ministers, their appointed advisors and civil service staff. Indeed, as the section under Methodology points out, many (most?) of these proposals came from the Departments themselves. No doubt, many of these proposals have been hanging around for a while – if only in shorthand.

Fianna Fail is cynically using The Report as a kind of good-cop, bad-cop pantomime. The Report recommends cuts of €5.3 billion. But the Government is only looking for €2.5 billion in current expenditure cuts next year. So when people get all wound up by this or that proposal in The Report, the Government will step forward with a reassuring tone: ‘Yes, citizen, that is awful. We won’t go there.’ See how it works? And, then we’re supposed to be grateful that Fianna Fail is only cutting off one finger rather than our whole hand.

But back to The Report proper. We are, in effect, being sold tainted goods. And the Authors are completely aware of this. The Terms of Reference state

‘Review the scope for reducing or discontinuing Expenditure Programmes with a view to eliminating the current budget deficit by 2011.’

This was written in November 2008. Events have overtaken this term – the Government’s strategy, revised in April, doesn’t envisage the current deficit being eliminated until 2014 or later. Nonetheless, the work of the committee was instrumental – to provide a sustainable basis for eliminating the current deficit.

Here, The Report employs an obvious sleight-of-hand. It talks about ‘savings’ of €5.3 billion but the Authors know full well that this ‘headline’ figure is disingenuous. It is not the same as reducing the current deficit or reducing the borrowing requirement by that amount. Indeed, they know that the fiscal effect of these cuts will fall short of €5.3 billion. The Report calls these cuts ‘savings’, all the while knowing that we will not save the amount they claim. It is misleading – knowingly misleading. Let’s take a look at two areas.

First, the Report suggests reducing public sector employment by over 17,000. Interestingly, the ESRI ran a simulation of reducing public sector employment by this same amount (they culled these numbers from the educational and health sectors; in The Report these sectors accounted for over 75 percent of overall employment cuts). What did the ESRI conclude?

• A drop in the GNP of nearly 1 percent (boy, we need that)
• A drop in consumption of half a percent (more, domestic businesses going to the wall
• Unemployment rising by nearly 1 percent (or an extra 20,000 on the dole queues)

And the fiscal effect? The reduction of 17,000 in public sector employment would reduce government expenditure by €1 billion (headline figure) but would only ‘save’ the government €492 million – less than half the headline figure.

Why is that? Because when you calculate the effect of the reduction on the economy (it is, after all, the economy, stupid) – the drop in output and consumption, the rise in unemployment – you don’t maximise the ‘benefit’ of the cut. In fact, you don’t even get half the ‘benefit’.

The second issue is the attack on the living standards of those on the lowest incomes. This is largely but not confined to the income of social welfare recipients; however, they take the brunt. A cut of 5 percent in social welfae rates is only the start but let’s stay with that. The Report claims a ‘saving’ of €850 million. But would it actually ‘save’ the Exchequer this amount? Hardly – and the Authors know this. Unfortunately, the ERSI did not calculate the effect of reducing social transfers. But we can make logical deductions. Given that those on low incomes have the highest propensity to spend, any reduction in that expenditure will

• Reduce spending tax revenue
• Lower consumption (purchasing goods and services from domestic businesses) which will,
• Decrease business profits tax revenue, and lead to
• Either wage freezes in the business or even job losses

The €850 million is therefore a misleading ‘saving’ figure. However, the Report is full of deflationary attacks on people’s living standards – beyond just reducing social welfare rates:

• Reducing the numbers on the medical card schemes and requiring those with one to make payments for prescription medicine
• Increasing thresholds for the Drug Repayment Scheme (which will impact most on low/average income groups)
• Reducing childcare subsidies to low-income families
• Means-testing the elderly’ Homecare Packages
• Increasing school transport charges

All these will have a deflationary impact. Could the Committee have made an economic impact assessment of all their recommendations? You bet. The ESRI has the computers, the software and the trained personnel to do so. Would it have been conclusive? Not necessarily. But they would have been indicative and given us some parameters to asses the impact.

So why didn’t the Committee do this? Quite simply, because it would have undermined their whole approach and opened it to general public ridicule. Here’s why.

If, say, that the entire cuts package actually only produced savings of 60 percent of their headline figures, then the €5.3 billion ‘savings’ would have melted away. We would be talking about €3 billion. And the simulations would have clearly shown what we intuitively know.

That The Report’s proposals, if implemented, will lengthen and deepen the recession, will cause further job losses, will further reduce consumption and spending.

And after all the pain what would be the fiscal effect of implementing every one of The Report’s proposals?

It will reduce this year’s Exchequer borrowing requirement from nearly €26 billion to €23 billion – maybe, if we’re lucky, if the combined effects of the cuts are not greater than their individual parts.

Can anyone claim that this is anything more than rearranging the deck chairs on the good ship Ireland?

That is why The Report should, after the few obvious common-sense measures have been cut out, be metaphorically placed in a large manila envelope, sealed and stamped with ‘Return to Sender’.

Softening Us Up: July 16th The Recession Diaries

In case you had any inclination, no matter how vague, of expressing concerns that the whole thrust of Colm McCarthy’s cuts committee is somehow mistaken – stop it. Get real. Grow up. Wrap yourself in the flag and sing scripted patriotic anthems to national deflation. Feel the pain – deeply and willingly:

'As Mr McCarthy’s proposals become clearer over the next while it is likely that many of us will need another kind of courage. The kind of courage needed to face unpleasant, uncomfortable realities. If the report (is) to have the kind of impact required then every sector will feel pain. . . It’s time to bite the bullet, make the recovery plan and stick to it no matter what.'

And:

'Let first snip be the deepest: The country is spending almost €50bn a year to struggle along, with just €30bn coming in from taxes, so radical measures are inevitable. The social welfare budget of €21.5bn is the elephant in the phone booth that can no longer be ignored.'

Yes, this is going to be an orgy with esteemed economists and commentators feasting on our economic innards. Cut employment, cut pay, cut programmes and living standards: you know it has to be done so shut up and let us get back to our food. Is there any release?

Fortunately, over at Progressive-economy, they will be commenting on the proposals today – so I strongly suggest you drop in on them later today, if only for much needed tonic. I will be posting later today on the subject as well – and over the next few days.

If progressives let the deflationists and real devaluationists run this agenda, it’s going to be ugly. It’s well past time that we draw the proverbial line in the ground. It’s well past time we took the fight (and fright) to them. Such as SIPTU’s Jack O’Connor, commenting on the ESRI’s broken record proposals to cut pay, welfare and spending:

‘. . . the ESRI has unanimously become nothing more than an intellectual mouth piece for the policies of the establishment. This is the institution which either failed to foresee the collapse of the credit led property boom or saw it and stayed mute about it, like all the other instruments of the establishment, such as the financial regulatory bodies. One would imagine that a good place to start addressing the economic catastrophe, which has been caused by pandering to speculators and bankers, would be to abandon that policy; but no, while virtually every other country in the developed world has embarked with evidently increasing success on such a path, we are condemned to the same old economics, pandering to the wealthy and imposing the burden of adjustment on working people.’

Now that’s what I’m talking about.  See you later today.

Penthouses, Basements and Nervous Sitting Rooms: July 14th The Recession Diaries

Over at Dublin Opinion, Conor McCabe is continuing his excellent analysis of contemporary class relations, this time using the CSO’s new National Employment Survey for 2007. He challenges the sloppy thinking that suggests we have a ‘middle-class’ majority, concluding that nearly two-thirds work in what can be properly called ‘working class’ occupations:

‘From the viewpoint of wages, or occupation, or employment status, or education, we’re constantly coming up with the majority of the population in working class jobs, with working class levels of pay. The middle class majority is a middle class myth.’

Prior to the last general election we were weighed down with simplistic analysis: ‘we’re all middle class’, ‘the aspiring middle class’, and such. We don’t hear these terms being bandied about much anymore. But, then, recessions have a tendency to cut through froth just as they cut through livelihoods.

I want to take a different a different route that nonetheless leads to a similar conclusion. Conor rightly warns us

‘Income is not a determinator of class, and to think of class in such terms is to miss the point that class is a social relation, not a category . . . there are enough commentators . . . who are all too willing to see class purely in terms of income, who maintain that Ireland has a majority middle class, with a working class rump and a lucky few at the top. And they cite Ireland’s wage levels as perfect proof of the middle class majority.’

Bearing this in mind, let’s play a little game. Let’s assume that ‘middle income’ can describe that large grouping between the lowest and highest income groups. Let’s adopt the mistake that many make – to assume that this middle stratum is the amorphous ‘middle class’. For I want to show how little this ‘middle grouping’ makes; and, further, that without the welfare state this middle grouping would be even more impoverished. This will hopefully complement Conor’s work as we head into discussion of pay freezes and social welfare cuts.

The EU’s Survey of Income and Living Conditionsprovides useful decile breakdowns of income from a variety of sources. Our first stop is the household deciles, but we should treat this with caution. Households in the higher deciles have more people working than those in the lower income deciles. Still, what does it tell us?

The top one-in-five households ‘earn’ (income from employment, self-employment and from capital) a lot more than the average middle strata, never mind the lower strata where there would be a disproportionate number of elderly and unemployed living alone. On average, the upper strata earn 3.5 times what the middle strata earn. The range of middle incomes stretches from €114 per week in the third decile to €1,236 in the eighth decile. Yes, the top twenty percent of households contain 37 percent of all those at work.  However, households in the middle 60 percent strata contain 60 percent of all those at work.

The CSO attempts to even out the demographic factors by use of net equivalised incomes. While this is an artificial measurement, it helps us plot the comparative earnings per strata. As we can see, the top 20 percent income earners make nearly three times the average of the middle strata.

It must be stressed that both these measurements are abstractions but what is noteworthy in both of them is how much more those in the top deciles earn than those in the great middle.  And how little those in the great middle earn over those in the lowly lowers.

So how are the majority of household’s incomes sustained if earnings from work are so low? Quite simply, through the welfare state. On average, social transfers (Child Benefit, pensions, social welfare payments, etc.) make up a quarter of households’ incomes. At the lowest income levels, social transfers make up 93 percent of total net income.  But even in the upper middle strata, the reliance on social transfers is not inconsiderable. These are the same transfers that commentators are demanding be cut - cuts that will have a severe, almost devastating, effect on those on the lowest incomes.

Where does all this lead us in practical political terms? That even at higher levels of the middle strata, households are closer to lower income groups than they are to the highest decile group. Households in the 7th highest decile – with more people at work – are twice as close in money terms to the 2nd decile as they are to the top earners. Whatever about the penthouse being not that far from the basement, clearly the case the basement and the middling sitting room are located on the same street.

Conor states that the ‘middle class majority is middle class myth’. Absolutely. And when we look at income deciles, we discover where this myth melts away. For the great middle strata are a long ways from mythical middle class bank accounts, reliant on social transfers, closer to the basement than to the penthouse and balancing on ever more precarious income streams.

Surely, there is a progressive politics in here somewhere.

Economic Shunning: July 6th The Recession Diaries

During the Great Depression, the British King announced he was cancelling the purchase of a royal yacht as a gesture of sympathy towards his beleaguered subjects. John Maynard Keynes claimed this was misguided. Instead of cancelling the order for his yacht, Keynes said the King should have purchased two yachts. His line of reasoning was that these orders would increase employment in the shipbuilding yards, would generate employment in the businesses that serviced the yards and, with the extra wages, would increase demand which would save jobs in local shops and businesses.

In other words, those individuals and businesses that can afford to do so, should circulate money into the economy to generate jobs and enhance incomes which, in turn, ‘enhances’ the initial injection; hence, the multiplier effect.

This is important to remember as the construction industry ends its first day of industrial action. I’m not going to comment on the particulars of the dispute. Those of us not involved hope that a resolution that can be found, that agreements are honoured and that economic justice is done.

However, I am struck by a particular line that is emerging from this dispute which, if universally acted upon, will do considerable harm to the prospects of economic recovery. On Morning Ireland this line emerged three times. First, in an interview with Jack O’Connor, SIPTU President:

Interviewer: ‘Do you anticipate any problems in explaining to your own members why they should support action for more money for one group of workers when so many workers are not getting more money they’re actually getting less if they’re not unemployed?’

And again, with O’Connor.

Interviewer:  ‘There’s no question of more money for these people (i.e. other workers). They’re either getting the same if they’re lucky or their pay is being cut and yet you’re advocating more support for a group of workers who are looking for more pay.’

And once more, this time with a striking worker:

Interviewer: Do you think you have the general public’s support? It’s a tough time to be going on a strike and a lot of people losing their jobs and take pay cuts.'

This ‘line’ – striking for increased pay while others are losing pay and even their jobs – could be applied to any dispute anywhere, from electricians to retail and hotel workers, to factory and office workers, anywhere in the economy. It could be applied to any request for higher income – whether it be pay, social transfer or in-kind increases through the reduced costs of public services. The effect is to ‘guilt-trip’ anyone making such requests/demands, never mind anyone acting on this – either industrially or politically. Such people looking for higher pay are selfish, having no sympathy with those who don’t have jobs. They should be shunned:

'You want more pay?! You should be grateful to have a job. Now get back to work.’

This ‘line’ is exactly what the economy doesn’t need. Higher wages and disposable incomes are a necessary element for economic recovery and, therefore, should be supported; it should be supported by those who want to see us get control of the fiscal deficit and the unemployment crisis; most of all, it should be supported by other businesses who are reliant upon increased domestic demand. Let’s go through the arguments.

On the fiscal level, a pay increase is of more value to the Exchequer than that same money retained by an enterprise. For each extra €100 in pay results in an increase in Exchequer / Social Insurance Fund revenue €40.75 at the standard rate and €61.75 at the top rate (this combines income and PRSI from employees and employers). That’s quite a kick. You would think, therefore, that the Government would be quite anxious to see pay increases in the private sector where affordable. Multiply that €100 and extend it to a few hundred thousand workers, and the money will be flowing in – and all that without unpopular tax increases.

Just as importantly, though, increases in disposable incomes can be translated into higher demand. Quite simply, people with more money in their pockets (either because they got a job, got a pay increase or got a tax cut) are more likely to spend it on goods and services produced by domestic enterprises than people with less money. This is, of course, not a straight equation. People may well take the increased income and save it; or start paying off debts; personally rational, economically inefficient. That is why tax cuts can be hit and miss – with potentially debilitating consequences for the Exchequer.

However, this is not the case with a pay rise. Even without the extra consumer spending, the Exchequer gains. In turn, the Government could use that extra revenue to increase demand (e.g. engage in job-creating investment). Further, there is little doubt that generalised wage increases for average income earners will ‘leak’ into the domestic economy, to a greater or lesser extent depending on circumstances. To the extent that it does, the economy has the potential to get a double benefit.

Where does that leave ‘inability to pay’? It can become a pivotal point in increasing Exchequer revenue and domestic demand. This clause has been used in the past as a defensive weapon for companies to postpone/suspend pay increases agreed at national level. Now it can be turned into a positive weapon for economic recovery.

There is no doubt there are companies that cannot afford to pay wage increases – and therefore, cannot contribute to increased demand. This, in turn, harms other companies – those that sell goods and services into the domestic economy. They receive less sales revenue and experience a decline in turnover, resulting in payroll cuts in wages and/or employment.

Therefore, it is all the more imperative that those companies that can afford to pay, do so. In effect, these companies subsidise those enterprises that cannot afford to pay. This subsidisation increases demand and tax revenue which helps weaker companies in two ways – it increases the prospect of higher sales revenue and increases tax revenue with which the state can promote increased demand.

Of course, this is not how IBEC sees it. They tore up the current wage agreement earlier this year. The only beneficiaries of this act were companies that could afford to pay. It amounted to nothing less than fiscal and economic sabotage. The losers were not just the employees affected; the Exchequer loses out on the extra revenue and businesses reliant on domestic demand lose out – since workers have less money in their pockets. To the extent that this feeds into lower consumer confidence, domestic businesses take a double hit.

When workers engage in industrial action in pursuit of higher pay, there may be many points of legitimate debate. However, the generic allegation that higher wages – and taking either political or industrial action in pursuit of that – is somehow damaging to the economy, and that anyone who engages in it should feel ashamed, only serves to justify deflation.

Hopefully, one day we’ll hear a question on a current affairs programme being put to a company owner:

Interviewer: 'You have a profitable company. Yet you’re refusing to pay your employees a wage increase. How can you justify such an action that depresses demand, short-changes the Exchequer, and contributes to reduced economic activity?'

I’d sure like to hear the answer to that one.

[And, yes, by the way – I support the electricians.]

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.

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.