Notes On The Front

Why We Don't Need More Elon Musks

Greg Bensinger has some strong words.

‘Twitter’s board of directors [decision] to accept a takeover bid from Elon Musk means the company thinks the social media company would be best served by the ownership of a man who uses the platform to slime his critics, body-shame people, defy securities laws and relentlessly hawk cryptocurrencies.’

He goes on to highlight Musk’s corporate track record.  During the pandemic and lockdowns, Musk forced Tesla workers back to work, violating local health regulation.  The same company has been the subject of allegations of racist abuse, discrimination, and sexual harassment.  Similar allegations occurred among SpaceX employees.  A California regulator sued the company over reports of racial discrimination against hundreds of employees [Musk told the workers to be ‘thick-skinned’].  Is anyone surprised that Musk was found guilty of threatening people – even illegally firing one – for attempting to organise a union at Tesla?

But, hey, isn’t our Elon an ‘entrepreneur’ – mercurial, maybe; but a visionary, an example of what the private sector can do if only those darn government regulators would get off its and his back? 

No. 

The classic definition of entrepreneur, first formulated by Kerry-born economist Richard Cantillon in the 18^th century, is someone who organises and risks their own money pursuing a business venture.   

This is not what Elon Musk does.   He has built a career living off other people’s money; notably, the US taxpayer.  He is a sponge capitalist, soaking up whatever public subsidy is going.  His reliance on government handouts is chronic and long-standing.  There’s just one twist:  the public pays the money and he keeps the profit.

[Note:  sponge capitalism should not be confused with SpongeBob SquarePants which apparently contains many anti-capitalist messages.]

Let’s start with the now famous Los Angeles Times investigation into Musk’s financing. 

‘Elon Musk has built a multibillion-dollar fortune running companies that make electric cars, sell solar panels and launch rockets into space.  And he’s built those companies with the help of billions in government subsidies.’

Jerry Hirsch compiled data showing that, by 2015, Tesla, SolarCity and Space X received nearly $5 billion government (US) subsidies.  This included grants, tax breaks, factory construction, discounted loans, and environmental credits and rebates.  Some of these are subsidies are particularly remarkable.  Again, according to Hirsch writing in 2015:

‘New York state is spending $750 million to build a solar panel factory in Buffalo for SolarCity. The San Mateo, Calif.-based company will lease the plant for $1 a year. It will not pay property taxes for a decade, which would otherwise total an estimated $260 million.’

A $1 lease and no property tax.  And Nevada agreed to provide Tesla with $1.3 billion in incentives to help build a massive battery factory near Reno.

And none of this accounts for the $5 billion-plus in public procurement contracts Musk’s companies received.  No wonder a hedge fund manager stated:

‘Government support is a theme of [Musk’s] companies, and without it none of them would be around’.

All that comes from a 2015 investigation.  What has our Elon been up to since then?  Old habits are hard to break. Business Insider points out that Musk received a public sector contract last year from NASA worth $2.9 billion to bring "commercial" humans to the moon.  He got another contract worth $653 million from the US Air Force in 2020.  And while Tesla was grabbing some of the stimulus corporate grants during the pandemic in 2020, Musk tweeted that a government stimulus is not in the best interests of people. 

Jacob Silverman identifies more public subsides:

‘[A government] program designed to spur new investment in impoverished areas has done little of the sort, instead providing tax breaks for space-travel moguls like Musk, Jeff Bezos, and Richard Branson. The Qualified Opportunity Zones program has been criticized for doling out its benefits to huge businesses seeking the latest tax advantage, rather than the scrappy local entrepreneurs it was supposed to help . . .  By moving to Texas and pushing more of his money into opportunity-zone ventures, Elon Musk may save billions in taxes.’

Silverman also doubts Musk’s entrepreneurial foundation:

‘It’s entirely possible that this carnival barker of a CEO will continue finding crafty ways to extract tax breaks and favorable contracts from government entities for the rest of his career. But we should be alive to the ways in which Musk’s reputation is built on a faulty foundation of borrowed money and worker exploitation . . . For all his supposed brilliance in developing electric vehicles and rockets, this may be his greatest talent: grifting the government.’

What lessons can we draw from all this?  Going beyond Musk-bashing, there are three issues.

First, if investors should be rewarded for the proportion of resources they put into a venture (a simple business maxim), this should be applied to taxpayers’ money.  If a public agency provides a subsidy - either through direct grants, tax breaks or an in-kind contribution – they should receive a proportionate amount of equity or stake in the company or venture.  This is a simple business maxim.  We wouldn’t expect the private sector to invest without any stake.  Why do we allow this to happen with the public sector?

Second, public procurement contracts should come with clauses regulating best-practice behaviour. How can public agencies award contracts to businesses that are being sued by public agencies for discrimination, that break labour laws, and whose executives conduct themselves publicly in shameless attacks on individuals?  Public procurement should be a tool to create high-road, efficient and socially-responsible companies that are democratically accountable.

Third, yes, we need entrepreneurship (however that is defined) and entrepreneurs.  That is why we need greater democracy in the workplace and more employee involvement in the firm-level decision-making process.  We need to mobilise the ideas and contributions of people working across the economy – something that doesn’t happen now because capital, not labour, is privileged; companies are organised around top-down hierarchical structures; and people are just treated as just another commodity or input.  Instead of celebrating publicly-subsidised, bonus-soaked CEOs and owners, we should be acclaiming the entrepreneurial abilities of all workers, and pursuing policies that promote them.   

We need direct returns on public investment, more efficient and socially-responsible companies, we need more entrepreneurs.

That’s why we don’t need more Elon Musks.

Public Sector Pay and Facts of Life

Pat Leahy, in describing the ‘intricate dance of the pay deal’ (referring to the upcoming negotiations over a new public sector pay deal), refers to the ‘hefty public sector (pay) premium’:

‘When it comes to average rates of pay it’s a fact of life that public sector workers are better paid than their private sector counterparts . . . ‘

Better paid?  A fact of life?  Hardly.  This particular fact is not a fact at all. 

The CSO publishes average rates of private and public sector pay from its Labour Force Survey (Table EHQ08). 

Pre-pandemic, public sector pay was 35.4 percent higher than private sector pay, while last year this gap was closed to 30.5 percent (though pandemic wage volatility may not have fully washed out).  So does this prove the ‘fact of life’?  No.

The most fundamental rule of comparisons is that they must be done on a like-for-like basis – otherwise, you could end up with apples, oranges and mangoes.  For instance, in the public sector there are no occupations comparable to hospitality and retail.  Conversely, there are no equivalent occupations such as Gardai and defence forces in the private sector. 

Mr. Leahy seems to get some of this. He points out that large enterprises pay more than small ones, and that there is a premium associated with trade union membership – things that characterise the public sector.  Fortunately, we don’t have to rely on anecdote or intuition.

The CSO has done (on three occasions) a like-for-like comparison between public and private sector pay.  

In 2018, public sector pay was, on average, nearly 4 percent below private sector pay.  There was a public sector premium back in 2011 but at 3 percent, it could hardly be described as ‘hefty’.  The ‘fact of life’ that public sector pay is higher than private sector pay hasn’t effectively been a ‘fact’ for years.

Why the difference between the straight comparison between public and private sector pay and the like-for-like comparison?  In producing the latter, the CSO does a deep-dive into the variables that impact on the differential:

• Gender
• Nationality
• Age
• Full-time/Part-time status
• Supervisor status
• Temporary/Permanent status
• Shift work status
• Usual Hours worked
• Overtime Hours
• Length of service with current employer
• Union Membership Status
• Occupation
• Size of Enterprise

While overall public sector workers earn nearly 4 percent below their like-for-like counterparts in the private sector, the gaps widen when we focus on gender.

• Males in the public sector earn 10.3 percent less than their private sector counterparts
• Females in the public sector earn 3.3 percent more

For males, that is quite a gap.  For females, the public sector still retains a small (not hefty) premium but this may be due to the fact that the public sector has been more successful in reducing the gender pay gap. 

• Total gender pay gap throughout the economy: 3 percent
• Private sector gender pay gap: 0 percent
• Public sector gender pay gap: 1 percent

A contributing factor to the low (but still too high) gender pay gap in the public sector is collective bargaining – something that exists throughout the public sector but which private sector workers are largely denied.  It should also be noted that the gender pay gap in the Irish public sector is the 6^th lowest in the EU.   However, the Irish private sector pay gap is the 8^th highest. 

The latest like-for-like data we have is from 2018.  What’s happened since then?  We have to be careful regarding data for 2020 and 2021 given the pandemic-impact on the composition of the labour market.

Private sector pay has increased at nearly twice the rate of the public sector.  However, some of this increase could be compositional change (e.g. fewer hospitality workers would slightly increase the overall percentage increase in the private sector).  However, we can safely say that public sector weekly earnings are, on average, not keeping up with private sector earnings.

* * *

None of the above is intended to suggest what pay increase either public or private sector workers should receive this year or next.  It is only intended to show that the so-called ‘fact of life’ – namely, that public sector workers earn more than private sector workers – is clearly and demonstrably wrong. 

It is imperative that commentators and analysts should, when making public statements, attempt to accurately describe the context.  This doesn’t mean we will all agree on the optimal policy position.  However, misstatements of facts skewer and degrade the public debate, and can potentially lead to socially inequitable and economically inefficient outcomes.

The remedy?  Do a little research.

Cutting VAT Will Be Regressive

The Government is proposing to reduce the VAT rate on domestic energy products.  This is likely to lead to more cash handouts to higher income groups as energy consumption increases as household income increases.

This data comes from the 2015/16 Household Budget Survey.  The nominal amounts will have changed.  However, the ratios are likely to be similar today.  The highest income decile spends, on average, nearly a third more than the average and nearly twice as much as the lowest decile.

Since VAT is a tax on spending, it will rise with the level of consumption.  Therefore, a cut in VAT will reflect that consumption structure.  Let’s get a sense of this by selecting some examples from Bonkers.ie based on the Regulator’s estimate of median household consumption.  In these examples, we estimate the annual cash benefit to households.

The regulator estimates that the median level of electricity consumption is 3,500 kWh annually.  50 percent of households consume less than this, 50 percent consume more.  Reducing the VAT rate from 13.5 percent to 9 percent would mean an average savings of €54 per year.  For those consuming lower amounts (e.g. 2/3 of the median), the savings would be €40.  But for those with higher consumption, the savings could rise to €94 and up to €134 for very high consumers.

We can do the same exercise with gas.

Again, using the regulator’s gas average consumption estimate, we get the same ratios.

Overall, combining the savings from cutting VAT on electricity and gas from 13.5 percent to 9 percent, we find:

• Average consumers will benefit by €110 annually
• High consuming households will benefit by €196
• Very high consuming household will benefit by €284
• Low consuming households, however, will benefit by €78.

These should be treated indicatively as savings will vary with provider and the energy plan a household is on.  However, this is the broad ballpark.

It shouldn’t be surprising.  The more you consume, the more VAT you pay.  Therefore, a reduction in VAT (equivalent to a cut of a third in the VAT rate) is likely to benefit higher consumption.

This is hardly equitable.  A better course – if one is determined distribute resources to households via this method - is to distribute an equal amount to each household.  This would be similar to the way the Government credited energy bills in their first round of reliefs.  A credit of approximately €110 to each household would be more progressive – giving extra benefit to half of all households (those consuming below the median), with no additional benefit because a household consumes more.

This course, while being more progressive, would cost approximately the same as cutting VAT for the full year. 

Of course, an even better way would be for the Government to regulate energy prices as discussed here, or set a wage increase target as discussed here.  Instead of reducing the tax yield as a VAT cut would do, a wage increase would increase tax revenue – revenue which the Government could use to help focus resources on fixed-income households (social protection and pensions).  Further, even a small wage increase such as 1 percent would benefit low and average-income earners far more than a VAT cut.

Understandably, the Government wants to be seen as being pro-active, helping out households.  The optics of cutting VAT can look positive. And it can be done quickly.  However, when we look under the hood, we find that cutting VAT could be regressive in cash terms.

We need a better, more progressive and fiscally efficient approach.

Wages are Part of the Solution

Unsurprisingly, wages are struggling to keep up with inflation.  Despite pay rises over the last year, inflation is running so high that, after inflation, wages are falling.  This is called real wages – the real meaning ‘after inflation’.

Between the last quarter of 2020 and the last quarter of 2021, hourly wages rose by 2.6 percent.  However, inflation during this period ran at 5.4 percent.  This means that, in real terms, wages fell by 2.8 percent.

Wage rises differ from sector to sector.  Average real hourly wages fell by nearly 11 percent in the utilities sector (electricity, gas, water and waste) while mining workers managed a marginal increase.  However, sectoral breakdowns have to be treated cautiously.

• Utility workers didn’t’ actually receive real wage cuts of 11 percent. More likely the composition between highly paid energy workers and low-paid waste workers changed.  

• Public Administration workers saw their nominal wages (before inflation) rise by nearly 5 percent. Again, we may be seeing compositional changes at work within higher and lower paid workers.

• Hospitality wages could still be impacted by pandemic volatility.

Despite the caveats at sectoral level, at national level the differences should wash out.  And that shows, on average, a real wage cut of 2.8 percent.

Another way of measuring the impact of inflation on wage income is to look at weekly earnings.

This tells a similar story.  On average, real weekly wages fell by 3.4 percent in real terms, indicating a marginal fall in the hours worked per week.  Arts & Recreation along with Administrative Services experienced a real wage increase but this was due to an increase in hours worked. 

Back in January the Tánaiste stated that workers should receive pay rises from companies to help deal with the rising cost of living, calling it ‘part of the solution’.  This is welcomed.  However, others have warned against wage increases feeding into a price spiral.  The Central Bank is apparently looking out for 'damaging wage increases’. 

Is there a risk that wage increases could fuel inflation?  Not for the most part.  There are two reasons:

First, we have supply-side inflation, caused by interruptions in production and supply chains throughout the world, now exacerbated by the war in Ukraine.  Increasing or cutting wages won’t produce more oil or wind (energy), steel (construction), fertilizer (agriculture), or reduce shipping costs.  The main drivers of inflation are not due to domestic demand.  That’s why inflation is going up everywhere.

Second, we have been here before.  Back in 2000 the ‘social partners’ negotiated the Programme for Prosperity and Fairness (PPF) which provided a pay increase of 5.5 percent in 2000 and again in 2001, followed by a 4 percent increase the following year.  However, inflation unexpectedly spiked at nearly 7 percent in October 2000.  Unions demanded a re-negotiation and received an additional 2 percent in 2001 and a further 1 percent in 2002.  Did this ‘fuel’ inflation?  No. 

In October 2001 inflation fell to 4.3 percent and by October 2003 it fell to a normal 2.3 percent.  The combined additional 3 percent pay rises didn’t fuel inflation.  Inflation fell regardless of the pay increases.  This doesn’t mean that the same thing would happen today.  Inflationary experiences are different.  However, there is no automatic relationship between a pay rise and inflation.

Heavy Lifting

Wage increases can do the heavy lifting in terms of protecting people from inflation.  A one percent increase for an employee on median earnings (approximately €40,500) will net a single worker €206 after tax.  For an employee with an adult dependent, this would rise to €286.  Let’s compare that to the impact of tax cuts.  Note:  the tax cuts are based on average energy consumption for Electric Ireland, calculated from Bonkers.ie

An additional 1 percent pay increase would be of far more benefit than reducing the VAT rate on electricity or suspending the entire carbon tax on gas bills (some parties referring to carbon tax are only calling for the increase this year to be suspended, not the entire amount).

For low-paid workers (2/3 of median earnings), the pay increase would equal €190.  A VAT cut would save €35 while suspending all carbon tax would save €50 (assuming consumption at 75 percent of average).

One could include the impact of VAT and Carbon Tax cuts on petrol though there are, for many, substitution goods (e.g. public transport, use reduction), unlike domestic energy.  And there is the impact on oil-based heating; though why prices should vary so much – between €560 and €880 per 500 litres of oil – is worth asking.

Increasing pay would allow the Government to focus on those not in work such as pensioners.  It would raise revenue for the Government through higher tax receipts.  It would also raise business income as low-average income earners would likely spend the additional income.

The Government could take the lead on this, and call for a 5 percent pay increase across the economy.  This would incorporate any pay increases that were coming in any event.  Or it could call for a 2 percent increase above what was already planned by businesses.  This is what is described as a ‘pay norm’.   This would, of course, be easier to negotiate for workers under collective bargaining.

Many companies would not be able to afford this hike, but could manage some of it.  In such circumstances the Government could call for low and average-paid workers to get most of whatever benefit is available.

And if the Government fails to do this, it is always up to the opposition parties in the Dail to combine behind a private members’ motion stating that it is the will of parliament that wages rise to help alleviate the currently inflation emergency. 

Increasing wages, increasing workers’ portion of the value-added that they generate, is just one way to help get us through this crisis. It, therefore, requires an official policy to promote it.