Notes On The Front

Most Middle-Income Earners Won't Benefit

The Taoiseach is making a big play for ‘middle Ireland’.  In an interview with the Irish Times he stated:

‘. . . our basis for participation in this Government is that middle Ireland gets looked after, and that’s looking after working people. . . So we’d be very clear in this Government that we want income taxes reduced.’

To this end, Fine Gael is proposing:

• A major tax cut: an increase in the standard rate tax band of €4,000 – from €40,000 to €44,000 for a single person. Everyone earning above €44,000 would get €800.  Anyone earning below €40,000 would get nothing.

• A minor tax cut: an increase in personal tax credits of €200.  This would mean an additional €3.86 per week for all workers in the tax net.

Fine Gael is claiming these cuts will bring considerable benefit to middle income earners: €1,000.  However:

• Most workers will get less than €4 per week as they won’t benefit from the increase in the standard rate tax band.

• The majority of middle-income earners will not receive the major tax cut and will have to content themselves with less than €4 per week as well.

Let’s look at the evidence that most middle-income earners will not be the primary beneficiaries of Fine Gael’s tax cuts.

Survey of Income and Living Conditions (SILC)

SILC measures all income – from employment and social transfers –broken down into deciles.  If we take the 5^th and 6^th deciles as ‘the middle’ we find:

The average weekly income from employment for households is €718 – or an annualised €37,400; below the top rate tax band which is the entry level to Fine Gael’s major tax cut (i.e. €40,000).  A problem with SILC data, however, is that it is based on household income.  So we don’t know how many people in the household are in-work or are working full-time or part-time.  So this €718 could be earned more than one worker.

It should be noted that in the higher 7^th decile, weekly employee income is approximately €1,100.  However, if two persons work in this household, they, too, may be well below the €40,000 benchmark.

So while we can’t estimate how much an individual earns from the SILC data, household market income doesn’t suggest that this particular ‘middle’ would benefit from Fine Gael major tax cuts.

CSO Data

The CSO’s Administrative Data Sources shows that in 2021, median earning was €644.55 – or an annualised €33,600.  We can project earnings in 2023 by applying the 3.3 wage increase last year and the Government’s projected 5.6 percent wage increase this year.  Median is an important metric as it represents that point at which 50 percent above and 50 percent earn below.

• In 2023 we can project median earnings to be a weekly €703 – or an annualised €36,700.

That ‘middle’ income earner is well below the top rate of tax; well below Fine Gael’s main tax cut threshold. 

The CSO also produces the Earnings Hours and Employment Costs Quarterly Survey.  This is the main database for earnings.  What does this tell us?

In 2022 average weekly earnings was €881.   Again, if we apply the Government’s projected wage increase of 5.6 percent this year, we find:    

• In 2023 the estimated average weekly earnings will be €931 – or €48,500 annually.

However, this is the average and doesn’t tell us what the middle, or median, income is.  The Administrative Data source suggests that the median is 20 percent below the average. If so:

• In 2023 the estimated median weekly earnings will be €745 – or an annual €38,800.

Again, this ‘middle earner’ won’t benefit from Fine Gael’s main tax cut.

Revenue Commissioner Data

The Revenue Commissioner provides detailed data on the range of income from employees.  But there are problems:  first, the latest data is 2019; second, a high number of low earners are actually pensioners not in employment (though some would be); third, about a quarter of the data comes from the combined income of ‘married couples’ so we don’t know what they individually.  So we should treat the following as indicative. 

In 2019, the middle cohort (the middle third) earned between €16,000 and €37,400.  The median income was €25,800.

If we adjust the income range by the increase in wages up to 2023 (20 percent), we find that the middle cohort earned between €19,200 and €44,900.  The median income is estimated to be €31,200.

This shows that while most of the upper third of income earners would benefit from Fine Gael’s main tax cut, most of the middle third wouldn’t.

If we could adjust the Revenue Commissioners table by removing pensioners and disaggregating married couples’ joint income, we’d probably find that range of income for the middle third and the median income to be higher.  But it wouldn’t change the main story-line; namely, that the majority of middle-income earners wouldn’t benefit from Fine Gael’s main tax cut.

* * *

While each data source has its own challenges, they tell a similar story:  namely, that most employees, and most middle-income employees, would get less than €4 year per week from Fine Gael’s tax cut proposals.

Even if one didn’t care about the impact of such tax cuts on inequality, the ability to fund European-level of services, the resources to fund in-work benefits (which would really benefit middle-income earners), on economic and social investment – even if you didn’t care about any of this, you would still have to conclude that Fine Gael’s tax cuts for most workers is pretty minimal.  The big winners would be higher earners – those that have a better capacity to absorb the current cost-of-living crisis.

We need a better, more informed debate on ‘middle Ireland’.

 

 

 

The Current Cost-of-Living Crisis is Not Temporary

The background noise in the public debate is that since inflation is ‘easing off’, prices should start coming down. We have heard this in the coverage over the meeting between the Government and representatives of the food sector.  However, this misrepresents how inflation impacts on living standards.

If the rate of inflation falls this doesn’t mean prices fall.  It just means prices are rising at a slower level.  The inflation of last year and this year becomes embedded in our living costs going forward. 

Last year, inflation ran at 8.1 percent.  This year inflation is projected to slow to 4.9 percent.  However, this only means that prices are rising at a slower pace.  Over the two years, inflation will rise by 13.4 percent.  By 2026, while price rises are projected by the Government to settle down to 2 percent annually (a manageable and desirable level), prices will have risen by 21 percent over the five-year period.

Of course, within this mix there will be some products or services where prices actually fall back.  For instance, energy products have fallen by 6 percent since their high point in October 2022.  Still, non-energy prices have continued to rise.

Inflation’s legacy will be a drag on household living standards for years to come. 

There are two ways to overcome this crisis:  reduce prices and/or increase income.  That profits have been driving prices is discussed here.  Increasingly, the debate has turned to price controls though it is hard to see the Government going down this route.  They refrained from doing this with energy costs.  What chance they will start with bread?

The second way is to increase incomes.  Gross wages will have to rise by 5 percent each year between 2023 and 2025 to match inflation by 2025. Even if this were achieved, this would only bring employees back to 2021 levels in real terms.  A number of years of income growth will have been lost.

Even so, wage increases of 15 percent between now and 2025 looks to be a steep hill.

During the period of recession and austerity, average weekly earnings fell.  They started rising (slowly) in2013.  In 2019, the year before the pandemic, average earnings increased by 3.6 percent.  They increased further in 2020 and 2021 but this would have been affected by compositional changes.  Last year average earnings rose by 3.3 percent.

Wage growth of 5 percent for an extended period might be achievable in the context of a tight labour market – low unemployment, full capacity.  An increase in union membership would also help.  But it will be challenge.

Some will argue (as the Taoiseach has) that cutting income tax will ‘put more money in people’s pockets’ and, so, assist in fending off price increases.  This is a poor argument.

For the single average earner on €46,000, the gross wage increase was 3.3 percent.  When tax cuts are factored in, the increase rose slightly – to 3.5 percent.  For the single average earner in the wholesale/retail sector, the tax cuts made only a fractional difference.

The dangers of going down the tax-cut route are two-fold: first, it diverts resources away from reducing prices in public services (e.g. public transport fares, childcare, free textbooks at secondary level, etc.).  Second, such tax cuts are potentially regressive.

Let’s say we were able to increase wages across-the-board over the next three years to bring them back to inflation.  We have another, larger problem.  Namely, that we already have the highest living costs in the EU.

In 1995, Irish prices were below the EU average.  However, over the years, living costs have increased to the point that they are now the highest in the EU.  They are even above Denmark which has always been a high-cost economy.  The Danes, however, have compensated their high costs through higher nominal wages, better resourced public services and a more generous social protection system.  We haven’t. 

The current cost-of-living crisis will subside, either through market equilibrium or the ECB raising interest rates even if they push European economies into recession.  This crisis will pass, though it will leave considerable economic and social damage in its wake.  

The point is this.  Even after the current cost-of-living crisis we will still be in a . . . cost of living crisis.  We will still have one of the highest living costs in the EU, if not the highest.

The question, therefore is:  what do we do then?

 

Searching for Profits

There is a growing debate over why prices are so high, why prices aren’t falling, what is driving prices.  Conor Pope has another instalment in his series on price outrages.  Answers vary according to sectors.  But one of them must be rising profits. Profits now take a bigger slice of the price of goods and services in the domestic sector than wages.  In the economic sectors dominated by domestic-owned enterprises in 2021:

• Total profits (gross operating surplus) made up €97.4 billion
• Total employee compensation made up €92.3 billion

This is unusual.  In modern economies, wages (employee compensation) usually exceed profits, though the history of most European countries has seen wages fall as a share of income over the long term, with profits rising.

Of course, when measuring the Irish economy, one has to introduce caveats.  In this instance, profits are boosted by aircraft leasing which are removed by the CSO when assessing national income (GNI*). This is because aircraft leasing, while domestically-owned, has little impact on domestic activity:  aircraft is bought abroad, flown abroad, maintained and warehoused abroad.   We don’t have profit data for aircraft leasing in the CSO’s productivity database but we can remove the Administrative Services sector, where those profits dominate.

When we do this, profits fall below wages – but not by much.

• Total profits (gross operating surplus) made up €81.8 billion
• Total employee compensation made up €86.6 billion

But the story of rising profits remains. 

Prior to the crash, profits and wages rose together – that is, they shared out productivity gains equally.  The crash drove down profits which is usual in periods of economic contraction.  However, since 2012, profits have nearly doubled while wages rose by less than 50 percent. 

Importantly, during the two years of the pandemic, profits, excluding administrative services, increased at an even faster pace.  Between 2019 and 2021:

• Profits rose by over 21 percent
• Wages rose by 8.6 percent

Unfortunately we don’t have data for 2022.  Again, we have to caveat these numbers.  The lockdown period saw considerable changes in sectoral composition meaning that economy-wide data is likely to be volatile.  It is likely this data won’t settle until this year.  But the pattern of rising profits is well established.

We can also get in an insight into the inputs into gross output, or price. Unfortunately, for the domestic sector, we only have data for manufacturing.

Unsurprisingly, materials and services used in production make up the largest amount of inputs.  Energy, in 2021, makes up a small amount but this will have risen in 2022 with the price hikes.

The key point is that profits (capital) make up 22 percent of total output while wages make up only 15 percent.  Profits make up a bigger slice of price than wages. 

It is important to remember that while profits economy-wide are rising, they may not be rising uniformly across all sectors, or across Irish and foreign-owned enterprises.  Unfortunately, the data does not allow us to safely assess profit increases at sectoral level given the data distortions by multi-nationals.

We would probably find that many businesses are also suffering from a profit-price spiral.  One example of this would be businesses that purchase energy as part of their inputs.  If there are ‘excess’ profits in energy, then businesses as well as households will be paying over the odds.

What all this calls for is a greater focus on profits.  When it comes to wages, we get up-to-data on a quarterly basis.  It is possible to bread down this data by sex, age, size of enterprise, sector, public/private sector, region and even county-level, etc.  We get a wall of relatively-contemporaneous numbers when it comes to wages.  And a further benefit is that this data is not distorted by multi-national tax and legal strategies.

However, when it comes to profits the data can lag by two to three years with few details.  You are left with putting together a puzzle with a lot pieces missing.

This is further exacerbated by the fact that many companies do not have to file complete company accounts, laying out their profit-loss accounts and balance sheets.  Full and partial exemptions include small companies (which can still have significant commercial activity), companies based abroad – especially headquartered in tax havens, and private unlimited companies (e.g. Dunnes Stores). 

What we need is Freedom of Economic Information to operate alongside the current Freedom of Information legislation.  This would require:

• The Government to increase resources to the CSO to allow them to gather and publish contemporaneous data on profits on a par with wages.

• All companies that do business in the state publishing their full company accounts in a timely manner.

• Providing free access to company accounts. Currently, people have to pay to get accounts from the Companies Registration Office.  This service should be free.  The UK provides free company information so why can’t we?

We need to get a better understanding of the role of profits in the economy – who makes how much and what is done with profits (re-investment, retention in the company, dividends, etc.). 

We know that profits are driving prices.  We are in a profit price spiral.  Greater attention on profits will help inform policy, identify price-gouging and, potentially, name and shame.  Most importantly, it would provide the information the Government needs to control and eventually bring down prices.

What the President Said

The President, Michael D. Higgins, has upset some economists.  According to a front-page Business Post article entitled ‘Economists round on President over ‘lazy’ and ‘uniformed spiel’: 

“Economists have rounded on President Michael D. Higgins and claimed comments made about their profession are ‘lazy’, ‘outdated’, ‘uninformed’ and ‘incomprehensible’.

Of course, it was only some economists who made these comments (I spoke to other economists who gave a thumbs-up to the Presidents’ comments). 

So what upset people so?  One was the issue of growth.  The President said:

‘Many economists remain stuck in an inexorable growth narrative . . .  A fixation on a narrowly defined efficiency, productivity, perpetual growth has resulted in a discipline that has become blinkered to the ecological challenge – the ecological catastrophe – we now face.’

This is one of the main themes of his speech – critiquing a growth narrative that fails to acknowledge ecological limits.  I doubt anyone would disagree that ignoring such limits is a really bad idea.  And to be fair, it’s not just that ‘many’ economists remain stuck. Much of the public debate, unfortunately, is stuck in that narrative. 

Some might argue that this is a de-growth argument.  That’s how Jim Power interpreted it:

‘Economist Jim Power said without economic growth it would not be possible to generate the resources needed to create a functioning society and address issues such as climate change.  “Give us a decade of zero growth and see how that works out.”’ 

The President anticipates this argument:

‘Our obsession with inexorable economic expansion expresses, perhaps, a desire to transcend our material limits and rise above the state of nature. Yet this growth fixation paradoxically increases the potency of those very limits.’

Ironically, a growth narrative without ecological limits lays the ground for devastating de-growth for economies and humanity in the not-too-distant future. 

The President didn’t attack economic growth per se; nor did he attack the economic profession as a whole.   On the contrary, he highlighted the work of a number of economic and social academics who have enriched our understanding of the economy and suggested a ‘ . . . real, emancipatory potential for a new, recovered political economy’.  Further, he didn’t dismiss conventional tools of measurement. On the contrary he gave them a new political economy framework:

‘ . . . all of the prevailing ruling concepts in our present economic discourse – flexibility, globalisation, productivity, efficiency, innovation, indeed economic growth itself – are capable of being re-defined within an active citizen participative state context, given a shared moral resonance, reimagined sustainably within the context of the new ecological-social model.’

Given this, I am at a loss to understand the reaction of some economists. The President’s approach holds out the best hope of becoming unstuck from a potentially dangerous narrative.  Thankfully, there is a growing number of economists who believe this repurposing can be done, that we need such limits, and who are working on new tools to help us achieve these goals.

A second issue raised by critics is the state of economic education.  The President called for a

‘. . . pluralism of approaches in teaching economics . . . The question of how economics is taught. . .  is a matter of utmost importance . . . failure to facilitate a pluralism of approaches in teaching economics is a deprivation of basic students’ rights . . . leading, as it does, to a narrow, blinkered and distorted education in economics and the wider social sciences.’

Again, it’s hard to imagine anyone objecting to this. But is this issue relevant today?  Stephen Kinsella described the President’s views as ‘outdated’:

‘The President is critiquing an economics that existed in the 1970s before I was born . . . he’s not engaging with the subject as it exists in 2023, as it is taught in 2023, and most importantly how it is researched in 2023.’

If that economics existed in the 1970s, it continued to exist four decades on in many places.  Following the Great Recession, a group of UK academics supported students who protested against the way economics was being taught, describing it as an ‘intellectual monoculture’ which was ‘heavily biased in favour of orthodoxy and against intellectual diversity.’

‘Students can now complete a degree in economics without having been exposed to the theories of Keynes, Marx or Minsky, and without having learned about the Great Depression.’

Similar protests occurred in the US – at Harvard University, for instance.  Students from 19 countries staged a trans-national protest stating:

‘The lack of intellectual diversity limits our ability to contend with the multidimensional challenges of the 21st century – from financial stability to food security and climate change . . . The real world should be brought back into the classroom, as well as debate and a pluralism of theories and methods.’

This speaks to the use of models in economic teaching.  Professor Karl Whelan gave a well-argued defence of economic teaching back in 2014:

‘Why don’t models in economics describe how “real people” act? The answer is that human beings are the most complex thing in the world . . .  so economic models could never be literal descriptions of how people behave.  The purpose of theory in economics is to use a model that is literally false but could help us get a better (if still incomplete) understanding of the world than we would have if we weren’t using the model to organise our thoughts.’

If this is so – the need to use false models to get us closer to describing complex interactions which are inevitably resistant to modelling – then the case for a pluralist approach to economic teaching becomes even stronger. 

These reactions described above occurred in the aftermath of the financial crash.  What about today?  A recent survey of economic students in US universities conducted by Rethinking Economics USA and the Roosevelt Network revealed that 78 percent of students have not learned about environmental or ecological economics while another 92 percent have not learned about Stratification or Feminist economics.  91 percent never heard of heterodox economics. 

It may be that, in Ireland, these issues have been resolved and that they were resolved well before the crash. Clearly, the President believes there has been considerable progress:

‘New ideas are fortunately available . . .   Thankfully, we now have a richer discourse than perhaps we did a decade-and-a-half ago at the last point of crisis . . . ‘

In stating this, he cited the recent contributions of a number of economic and social academics.

Again, given this, I am at a loss as to understand the reaction of some economists.  The President is certainly not describing the 1970s.

Ultimately, the quality and breadth of economic teaching in Irish universities is an empirical issue to be examined and tested.  It would be helpful if some academics took up the President’s challenge and surveyed the breadth and plurality of economics education.  I suspect it would be a mixed bag – dependent on the department, module and lecturer as well as under-grad/post-grad courses.  This would hopefully lead to a more constructive and informed debate.

The key word is constructive.  There have been some reactions to the President’s speech that have been anything but.  For instance, Karl Deeter tweeted:

‘The President is Irelands lefty version of Trump. Statements devoid of meaning and ignoring the fact that economic growth is the path out of poverty both here and abroad. Economic growth and rising life expectancy are two of the best metrics there are.’

Yeah, right – as if President Higgins incites far-right, racists, and neo-nazis to trash Leinster House as Trump did with Capitol Hill.  This type of contribution only degrades the debate.

It should always be remembered – the economics profession, like other academic disciplines, does not speak with one voice.  If some economists take issue with the President, they are also taking issue with other economists who would support the President’s remarks.

Once again, the President has laid down a challenge – to use our sometimes-inadequate tools to a better purpose, to construct a growth narrative within ecological limits, to enrich our understanding of economic and social issues through a plurality of analytical tools.  Many people are up to this challenge, including economists.  And if people are opposed to that democratic and sustainable purpose, fair enough.  That’s a political debate.  

So let that debate begin.  But for goodness sake, read what people have said or written before commenting.

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STOP THE PRESS

Just as I was posting this blog, Minister Paschal O’Donohoe intervened in the debate – in particular, on the issue of economics education.  He stated:

“I think it’s brilliant to see a debate underway regarding how economics is taught, and what is the framework through which it is taught.  I think the President was raising some very interesting points regarding the teaching of economics. And I think all those in the economics community here in Ireland, I’m sure will engage with the substance of the claims that he’s making.’

Of his own experience the Minister said:

‘I was a student of economics in the 1990s, when we were taught to believe that financial markets were rational, and that they were able to process all information that was available to them at all times. And I think we’ve all learned, and I’ve certainly learned that that kind of theory and that kind of framework bears little resemblance to the real world.’

When specifically asked about Stephen Kinsella’s comment that the President’s views were out of date, the Minister replied: 

‘I think the President is well up to date on this. And I think if you look at the reading, and thoughts of our President, I think it is pretty obvious he is on top of many of the different themes and trends in economics.’

And all this from someone who couldn’t be considered an ideological ally of the President.