Frontline and Hunting For Mice. The Recession Diaries - May 19th

Monday night’s Frontline discussion was an object lesson in how to miss the point – a really big point in a really big way. In discussing spending cuts we were treated to all sorts of suggestions – from getting rid of Minister’s drivers to shaving departmental estimates; all with a view to saving a few bob. Thankfully, almost all participants were agreed that old age pensions should be exempt from cutbacks (though the Government representative did leave open the possibility of cutting back on ‘millionaire pensioners’ however few they may be and how little would be saved after the administration of a means-test). In essence, we were treated to the spectacle of great white fiscal hunters chasing down mice, while the elephant stood beside them – unnoticed, unremarked upon, unharmed.

No one mentioned the cost of unemployment. No one mentioned anything about reducing the cost of unemployment.

This is a substantial cost, spilling over into adjacent line-items and throughout the balance sheet. It imposes all manner of economic costs which can be measured, and social costs which we are not so amenable to the slide-rule, but costly nonetheless. Let’s take a road trip through the valley of the unemployment elephants.

First stop is the actual cost of unemployment supports. The 2010 estimates show that Jobseekers’ Benefit and Allowance will cost nearly €4.5 billion, more than doubling since the onset of recession. But this is only the start.

Many unemployed take social welfare payments through other categories – Lone Parents, for instance. One Family showed that over 60 percent of those on Lone Parents Allowance wanted to work but couldn’t find a job. When many recipients exhaust their Jobseekers’ Benefit they go on to or return to the Lone Parent scheme. We will also find unemployed on Pre-Retirement Allowance – essentially a scheme for over-55s who have little hope of finding work. In addition, those who have only been marginally attached to the labour force or waiting for their payments to come through might themselves in Supplementary Welfare Allowance. And then there’s the cost of redundancy payments – which have doubled over the last three years.

Second, there are a range of secondary supports for the unemployed: rent supplement, mortgage interest supplements, exceptional and urgent needs payments, back-to-school allowances, fuel allowances, etc. There are supports from other departments, most notably medical cards; others include school books grant scheme.

Third, there is a range employment supports – programmes designed to get the growing number of people back into work: back-to-work allowances, back-to-education allowances, etc. We might include here community supports – funding groups trying to deal with the fall-out of growing unemployment (though, to be fair, the Government is desperately cutting back on these pesky mice).

Fourth, is the growing demand on public services, in particular the health sector: unemployment creates higher susceptibility to malnutrition, illness, mental stress, and loss of self-esteem, leading to depression; poor health outcomes stretch into later life such as heart attacks, etc. Alongside this are costs associated to the relationship between unemployment and social degradation – crime, vandalism, environmental damage. All these drive up costs.

Fifth, let’s not forget the administration of this growing ‘client’ sector – the public sector workers who pay out, ensure compliance, etc. More unemployed mean more workers servicing them.

So when we factor all these in, we will find the direct costs of unemployment well above the headline line-items. But we haven’t yet reached the bottom of the valley.

Taxation: unemployment leads to loss of tax, constituting a fiscal double-whammy. Given that the deficit has been driven by a collapse in taxation, this is of particular importance. It’s not just income tax; there’s income levies, Health Contribution levies, VAT and Excise. And it’s not just taxation: there’s social insurance – employees’, employers’ and self-employed PRSI. With the Social Insurance Fund in deficit, this imposes a new cost on the Exchequer – subsidising the Fund.

Loss of Demand: Unemployment reduces demand in the economy. Less money spent means less profit means less business taxes. This has a number of knock-on effects. If a business closes down from loss of demand, it means loss of rates for the local authority. If a business stays open, it may have to cut back on its employees’ wages or hours: less tax and PRSI revenue, less VAT/excise because the employee can’t spend as much. In turn, the business struggling to survive cuts back on purchases (destocking, etc.). This in turn reduces the output of suppliers. The cycle turns further downwards as suppliers cut back on their employees’ wages or hours. Further loss of demand comes from those not ‘officially’ regarded as unemployed – those whose Benefit has run out but fail the means-test for assistance. Emigration has the same effect.

Wages and Incomes: Unemployment keeps wages low. Low wage growth results in sluggish tax and social insurance receipts. This keeps pressure on demand. At the extremes, employers play hard-ball – especially in the hospitality sector, demanding that workers take pay cuts below the JLC rates, work overtime and holidays for free, etc. All this contributes to further demand loss and costs. In addition, a study carried out in Britain found that a spell of unemployment carries a wage penalty of 6 percent on re-entry and after three years, earnings were 14 percent less compared to what they would have received absent unemployment. Slides in income will feed back into rising welfare costs as people may find themselves eligible for Family Income Supplement.

Investment and Job Creation: All this will impact on investment – businesses won’t invest in a sluggish climate with little hope of recouping their outlay. All this will delay job creation which in turns keeps unemployment costs high with all the negative impact on tax, demand and income going forward.

Take all these together – the direct, social and wider economic costs – and the outlay on unemployment is in the billions squared.

But did any of this make it into the discussion on Frontline? The biggest public expenditure item? The biggest revenue loss item? The biggest economic cost item? Did we get any bold, imaginative (or in the words of the orthodoxy - 'tough', 'courageous') proposals for creating jobs, creating investment, creating growth and, so, reduce the biggest cost item on the Government's balance sheet? 

No. All we got were great white fiscal hunters bringing home trophy mice. All the while, the elephants of unemployment are running amok in our national china shop, smashing up the place, leaving us with nothing to buy or sell.

Our great hunters don’t want to know.

Comments

[Barry]

Unemployment benefit(s) are a cost to the state. But state intervention to create jobs is also a cost.

This is fast becoming an article of faith debate. You are either in the camp that says we are simply too indebted already to borrow more money for stimulus.

Or we can borrow the money, or get it through increased taxes or whatever.

The two camps dont seem to be finding common ground sadly.

[Mack]

Hi Michael,

I think the core problem (and hence objection to) with statist solutions is that the state tends to behave differently than private corporations.

#1 The state rarely sells up. The sale of statist industries tends only to occur when those idealogically commited to privatisation take power.

#2 Continues to subsidise failing entities (i.e. holds onto once successful entities for too long)

#3 Failures are a scandal (e.g. e-voting etc). If you take a look at Techcrunch or any similar site, you'll find details of dozens of startups trying to create similar companies. Most will fail. Failure shouldn't be a scandal, but a learning experience.

There is an opportunity cost to the state holding on to state companies. If the state could achieve a fair price, representative of future cash flows - where is the problem in selling state assets to invest in new state companies now? (i.e. Could statism become more like private enterprise, just at the point we need public investment to take up the slack?).

E.g. If we need a next generation broadband infrasctructure - could we sell some of our semi-states and create a new semi-state to provide that infrastructure (which itself could be sold off in future)? Wouldn't this create jobs?

Is it possible for people on both sides to move out of the idealogical trenches to produce rational solutions (even if this one is a non-runner?)

[Michael Taft]

Mack - not every boost to investment or job creation is 'statist'. If the state had backed the management buy-out of SR Technics, this would be state-supported but I doubt anyone would call this 'statist'. Simialrly with temporarily reducing VAT on labour-intensive activies as the French did with the restaurant sector - to maintain demand and, so, jobs.

Let's take the example of creating a new public enterprise company to roll-out Next Generation Broadband. Here is an opportunity to leverage in private sector investment as Donal Palcic refers to in the Singapore example. Indeed, this model should probably be rolled out in other areas as the private sector, as Davy reports in its analysis of investment over the pas 10 years, can't be relied on to make smart productive decisions.

In this case, there is no need to sell off current public enterprises to fund this one. As Fine Gael rightly suggests, the 'public' funding could come via a single holding company which would have the power to debt-finance; something many public enterprises are already doing to good effect.

As to selling off a public enterprise, the issue should be examined in light of past experience. It's not just a matter of holding up Eircom all the time (though it is salutory). If we had the ICC / ACC we would have two instruments ready to extend credit to SME's, something we don't have.

The larger question is whether privatisation would enhance our productivity base. Again, Palcic and Reeves suggests our own experience is not very good. You might be interested in this paper: http://www.tara.tcd.ie/bitstream/2262/8758/5/JssisiVolXXXIV1_27.pdf

If the long-term goal is to develop a strong indigenous sector, then it might be counter-productive to start selling off strong indigenous companies. Rather, we should be expanding them.

[Michael Taft]

Barry - I would argue that job creation as per an investment into the productive economy is not a cost. If it were, no business would ever invest. Investment earns a return. The ESRI estimates that the return (based on their analysis of various NDP and EU funding) is somewhere in the region of 10-15%. If this were achieved (of course, dependent on a sound investment project), this would provide returns in excess of interest payments, with the investment itself paid for within seven to ten years. If this is the case, the issue then becomes what investments into what part of our economy; and from where do we source the investment resources (i.e. the cheapest source).

[Mack]

Michael -

I'll take a read of that article - thanks. But surely the issue now is the funds aren't there for the state to invest in new industries, or stimulate the economy by tax cuts or tax rises (magical bank bailouts not withstanding)?

How likely is it that we can conjure up private investment at home or abroad for risky new investments such as a next gen broad band network (esp. when Eircom don't seem willing to invest in it themselves)? They might invest in established state industries - and we could use the funds raised to invest / stimulate.

I'm not sure the eircom experience was a complete disaster either - we have a decent (but not spectacular) telecoms network in this country. Much better than what existed 20 years ago. There is competition the telecoms market (to such an extent I don't have to use the behemoth Eircom at all). The state appears to have gotten a decent price - given that the share price collapsed shortly after the sale. Broadband uptake levels are significantly above those in the north (BT's domain).

But even if it is held to be an unmitigated disaster - the privatisation of Aer Lingus seems to have worked out very well. I doubt we need the state to keep a 30% stake in this day age either. If worst comes to the worst (and every airline were to pull out of Ireland, why??) we're not a poor country, I'm sure we could purchase some new planes..

I'm not trying to persuade you to idealogically accept the benefits of privatisation, just to consider it as part of a package that might help deliver jobs. Part of the problem with the alternatives suggested thus far is they haven't been holistic, they've defended special interest groups and left big holes in terms of how they'd be funded. If you won't raise money by selling state assets, and the bond market is effectively closed, and the EU are on our back, then how?