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« February 27 Lunchtime: The Recession Diaries | Main | March 5th - Helping Out the Brians: The Recession Diaries »

March 03, 2009

Comments

Pablo2009

Great post. One question, what about prices wouldn't they fall too? This is already happening in the property rental market.

James

The consensus that you are attacking is the idea that we imperatively need to take immediate action to reduce the deficit by raising taxes (and cutting spending). The foundation of this consensus in turns rests on two assumptions:

1) that we are in serious danger of being shut out of international capital markets if we don't convince those markets that fiscal retrenchment is underway (and that any IMF/EU rescue package would be far worse than the retrenchment we would perform ourselves)

2) that by cutting nominal wages even more than real wages we can deflate our way back to competitveness and growth (or at least mitigate the recession)

I know that you contest both these assumptions, which are technical and/or factual questions - not ones over values - either you're right or the consensus is.

However, the arguments you make in this post are relatively independent from these. It seems to me that whether or not you think that it is utterly inmperative that we immediately and substantially reduce the deficit, the arguments in this post (i.e. about the need to retrench in such a way that does the least immediate damage to our already dire economy) are valid.

One possible implication is that we could actually similtaneously reduce the deficit and give some (modest) stimulus to the economy by auditing every euro spent by the government for its "Keynesian multiplier".

For example, use revenue from increased taxes (or, yes, public sector pay cuts for the higher paid) to create employment (eg by expanding and accelerating the isulation programme).

If the consensus is right, then we really can't afford to go borrowing more money in order to provide stimulus. But that doesn't mean it's impossible for the government to do what Keynesianism is essentially about - seizing idle resources (money and labour) and putting them to work.

D_D

Thanks Michael again.

This consensus has, to a great extent, been cleverly spun out of the demand of those opposed to the cuts and the levies to increase tax instead. Tax on the rich that is. It was expressed in general terms of increased taxation but the intention was that the rich and not the low to middlle paid workers should pay for the crisis (the crisis the super rich and their acolytes caused in the first place). Even CORI made a modest proposal to up tax to the EU average and so cover all the deficit (or the €16 billion as it was then).

The spin said, 'sure we need to incease tax' and simultaneously began a campaign of repetition around the fact that a big proportion of workers paid no tax at all. So the target became those who paid no tax because they - such a big proportion - earned too little to pay tax! The original intention of the 'cuts no, tax yes' position, to take it from the shelters, the fugitives, the billionaires, the millionaires, was spun out.

It is now clear that 'fairness' is to be used for taxation as it was for the cuts. That is to make the ordinary people pay, including those not too well off, and to minimise the cuts and tax to business and the wealthy. Even the great Colm Rapple is saying that the 20% rate will go up to to 21% Why?

Three points on the new taxation focus:

This morning the RTE 'Morning Ireland' interviewer put it to David Begg (who did not dismiss it) that taxing the rich would get very little and that increased taxation lower down was needed.As if this was a given. The front page of today's 'Irish Times'reports that "Paddy Power announced that its online [gambling] operating profit grew 34% to €42.8 million last year.." That should be €40 million to the Exchequer and €2.8 million to Paddy Power. Are we in a Crisis or are we in a Crisis?

Garret Fitzgerald said it directly on Saturday in the 'Irish Times', and furnished a table of figures to illustrate, that there isn't a crisis of spending (to which cuts would correspond) but a crisis of revenue (to which tax increases would correspond).

Finally, would the drop in income tax in the past two months have any connection with the change in the online payment of PAYE and PRSI from a monthly to a quarterly basis? Many millions that would have been paid before in January and then February will not be paid until April. Or was this factored into yesterday's figures?

Finally, finally, in relation to the zero tax status of the lower paid. There is a history to this and it has a lot to do with substituting tax cuts (as distict from tax reform)for bigger pay rises in the boom years , by which the social partnership deals delivered take home increases without correspondingly bigger wage cost rises to employers. Opponents of social partnership, of which this was a 'win-win' component, warned that this was not sustainable for social provision, never mind a revenue crisis.

Alec

Great piece again, but at what point will the deficit become too large? Is the threat of IMF/EU rescue package the biggest threat to a left wing economic response?

Finally, what are economists like you doing to get your message out there, because unfortunately I ain't hearing it.

Michael Taft

James - in a post that I have put up today, I have tried to address the issue of dove-tailing the need for stimulus with the need for putting a ceiling on the defict, as a runaway deficit will squeeze out resources for a stimulus.

As to a 'multiplier' audit - that is a great idea and I will certainly give some more thought to that in upcoming posts. This is a crisis - all issues are on the table (including public sector pay). A multiplier audit combined with stress testing for social equity, could allow us to come at the problem with a different set of eyes. Needless to say, I wouldn't trust this Government to do it - they are blind.

D_D - a couple of points to reinforce the points you make. Fitzgerald's article did rightly refer to the fact that spending wasn't the problem and that there isn't a whole lot more to cut (especially with rising unemployment costs). However, his comment that the problem behind the fiscal deficit was low taxes begged a further question - why are taxes low? The reason for that was in the top line of his table - the drop in national wealth (a related issue is the fact that the deficit is based largely on structural tax problems - the over-reliance on property related taxes which have gone and won't come back, unlike other taxes that will come back once employment growth returns.

But most definitely yes, the core principle of wage agreements has been to limit wage increases (a subsidy to employers) in return for reductions in tax. This was always unsustainable over the long-term and was inevitably going to come undone. It is also a major contributor to our degraded physical infrastructure and poor social services. The complete ignoring of the 'social wage' will haunt us for a long time to come.

Alec - I can assure you, from discussions I have had with PR people on behalf of progressive organsiaions, there is almost a complete closed door when it comes to progressive opinions. I have never been a conspiracy theorist, but I could start subscribing to the newsletter. The Prime Time show I mentioned on bonds and borrowing, the Pat Kenny show when Moore McDowell was allowed to savage Fintan O'Toole, a number of radio programmes where conservatives outnumber progressives (if there is one) by two-to-one with a hostile presenter added-in.

I can assure you, from the people and organisations that I know, it isn't for want of trying. But it doesn't help, either, when some progressive groups send it mixed signals on the economic crisis - as if it all comes down to fairness. It doesn't. It comes down to policies that work and policies that don't. Personally, I don't know what more to say because I ain't hearing it either.

Michael Taft

Pablo2009 - thanks for the commnet. I think the deflationary effect - which operates differently in different markets - is more likley to be exacerbated by falling disposable income, thus forcing businesses to drive down their prices even further. Another contributing factor - which is stronger in Ireland than other countries - is the high level of household debt. Even if income wasn't falling, people would be trying, quite understandably, to pay off those debts. This has the same effect as general tax increases, since ther eis less income to spend. Now put tax increases with develeraging together and you really get a deflationary double whammy. That's why there is concern over how far deflation will go here in Ireland, especially as it is already the worst in Europe.

As to rents - which works at a different level since shelter is not discretionary - I suppose there is the phenonemon of over supply of rental units. This could be due to apartments, second houses available for rent. Also, emigration will contribute to this - especially the emigration of non-naitonals who imagine were disproportionately tenants. So put all that together and you have landlords competing with each other by reducing rents.

Where will this all end? Hard to know. But its not good. And I don't see anyone courageous enough to make a prediction.

מכשירי שמיעה

Great post says strict attention to the gross benefit of a tax increase, and ignore the effects of economic recession, it is a betrayal of a static view of the economy less general ledger sheet.

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