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.

Comments

[Tipster]

There is a need for a public discussion of the ethics of how the IT's comment space is used. Replying on the content of the "argument" as David Begg has done in the pages and you have done here is not enough.

"Balance" and "right of reply" are at times not adequate.

And "functionally illiterate" reporting and comment is a problem with the irish media. If the reporter or op-ed writer does not understand the technical issues they wish to write on, then there is a damned good reason for not letting them have the space.

Actually, we have little space anywhere here in Ireland for discussion or analysis of the quality of what the media does or fails to do.

(Niall Crowley challenged them on the way in which their space was being used by John Waters to campaign against him and the Equality Authority about five or six years ago.)

[t g macamhloaibh]

Fine blog with a well balanced perspective on the issues discussed.

Unfortunately, such analysis which lays out the pros and cons of an issue rarely attract much comment.

Keep up the good work

[Yvonne]

I agree, Tipster and stopped buying it for this very reason. (Paraphrasing Morrisey ) "IT says nothing to me about my life".

Miriam Cotton and David Manning and Miriam Cotton at MediaBite.org (and sometimes in Village magazine) have created just such a space for this type of analysis.

[Yvonne]

... and I think it would be interesting to see (say over the last 10-15 years)what the quantitative shift has been in percentage terms from news content to OP-ED pieces. It seems to me its now more opinion than news but perhaps its cheaper and the controversy keeps readers ... well not this one.

[Alfie]

Michael, what do you think about Eoghan Harris's argument in the Seanad last week that there should be a 20% cut in public sector pay because public servants earn on average 20% more than private sector workers?

[bigred]

Great work Michael,again as before why isn't this analysis brought in to the wider public domain? The only message being pushed by Gov. and media is cut,cut cut.

[Michael Taft]

Thanks, t g macamhloaibh and bigred. And, yes, Tipster, I fear you're right.

Fair dues, Yvonne - working the Smiths into a discussion on media reporting of economic issues. Every time I finish reading daily newspapers I think, Heaven knows, I'm miserable now.

Alfie, to be honest, not much. The 20 percent figure is wholly contestable and fails to take into account a multitude of factors. That's not to say the issue of public sector pay shouldn't be examined. But it has to be examined in all the different lights. And one of them is that the ESRI suggests that such a cut would result in GNP falling 1.3% (on top of the nearly 10% this year), consumption falling by over 3% and would increase unemployment by nearly a half percent. What would be the result in terms of the Exchequer borrowing requirement? It would reduce it from just over -15% to -14% - not much for all the deflation and unemployment it would cause. I wouldn't expect Senator Harris to know this. After all, he wasn't appointed to the Senate becase of his economic skills. By the way, does anyone know what skills he brings to the Senate or why he was appointed?

[Fergal]

Hi Michael,
Don't know what skills he's brought to the Seanad.How many jobs does the bould Harris have?
1 Senator
2 "Newspaper" columnist
3 Lecturer(still?)
4 Writer ?
5 Producer with Praxis for TV
Shouldn't he be advocating job-sharing?

[Tomaltach]

Yvonne,
You are right about the shift to comment and reduction in news. But this reflects what is happening in the print news industry which is under severe strain (worst of all in the state where big titles like the boston globe and SF chronicle are in trouble). It's too long to treat here in a comment but the online and cable news with their 24 hour instant-update have killed off a huge portion of the job that used to be done by the morning paper. Apart from stealing add revenue, there has been a culture created where news is 'free'. But of course 'what quality of news'? Personally I don't mind paying for analysis, but I do mind paying for mere comment.

[Facaderens]

This article is a very interesting article. Thank you for posting it here and keep up the good work.