Notes On The Front

Class Matters: The Recession Diaries - September 29th

What kind of recession are we having – or rather, how is it impacting on different sectors of the labour force? Some time ago we heard talk of a middle-class recession – how particular ‘middle class’ occupations were being badly affected. Architects were one such profession and clearly there’s not much use for this group of people if buildings are not being built. But as the recession winds down it is clear this cannot be considered a ‘middle class’ recession.

In truth, we should be a bit wary of using this term as it is likely to add more confusion than light. It opens up questions of ‘class’ and relations in the production process – important questions. Unfortunately the CSO only provides a few labour force categories from which to work with. In so doing, we have to use broad brushstrokes.

The CSO’s Quarterly National Household Survey(QNHS) for the 2nd quarter gives breakdowns that are useful and if they can’t be necessarily equated to ‘class’, they can be equated to income and greater control of working conditions. For instance, a professional is likely to earn considerably more than a sales worker or a plant operative. Similarly, a manager is likely to have more control (though by no means total control) over their working and employment conditions than someone on the factor floor. So let’s examine two categories and find out who’s suffering the most (this builds upon Sean O'Riain's survey of the first quarter results).

Employment by Occupational Status

From the table below it can be seen that managerial and professional groups have experienced the least decline in employment while traditional ‘working class’ occupations – craft and plant operatives have suffered the most.

• The managerial / professional classes saw their employment levels fall by less than 2 percent
• The combined craft / plant operatives sectors experienced a decline of nearly 23 percent

Of course, a considerable number of craft workers would have been working in the construction sector. But plant operatives also experienced a high level of decline as well. As well, the ‘Others’ sector tend to be made up of service workers that don’t fit into the above categories (e.g. hotel and restaurant, cleaners, etc.). They are the lowest earning of all the categories and experienced an above average decline as well.

No doubt, there are certain managerial and professional categories that are suffering – such as the aforementioned architects and other property-related professions. Still, taken as a whole, it is the lower-paid manual occupations that are taking the worst hit.

Employment by Educational Attainment

Again, though we can’t automatically assume educational attainment is directly associated with class, there is correlation between educational levels, skill sets, profession and earnings. In this respect, we find those with the least educational attainment having suffering the most from unemployment.

Those with third level honours experience a substantially lower unemployment rate than those with low educational attainment. This, though, doesn’t tell the full story. The overall participation rate stands at 71.3 percent (per Table 23A), rising to 89 percent for those with third level honours. However, among primary and lower secondary, the participation rate stands at 41.1 percent and 54.8 percent. This is compounded by the fact that one-in-six students still leave school without a Leaving Certificate qualification.

While this should not be all that surprising it, along with the above finding, raises important questions regarding the labour market and job creation going forward out of the recession. With some commentators predicting an early exit from the recession (as early as the first quarter of next year), there will be a growing emphasis on up-skilling and moving up the value-added chain with knowledge and skill-intensive employment, especially as internationally tradable services will play an increasing in Irish and world trade. As a consequence, we will find manual manufacturing work to play less significance (at least as a proportion of the workforce) and where employment does increase it will, again, rely on high-skill work.

Unless substantial intervention is undertaken – in education and (re)training, combined with job creation measures that don’t necessarily rely on the private market – we may be facing into a perverse apartheid at work in the labour market, where those with less skills and educational attainment will suffer a lifetime of low living standards. This in turn will continue to be a drag on economic growth going forward and undermine our attempts to maximise the economic and social benefits coming out of the recession.

In other words, we may be facing a return to the same ol' equation – squared.

Hunting for Woolly Mammoths: The Recession Diaries - September 27th

In a previous post on Progressive-Economy.ie, where I disputed the economic benefits of cutting wages, Professor Alan Mathews and Pavement Trauma questioned aspects of my analysis, raising important issues which deserve a considered response. For this goes beyond ‘what wage levels are best’; it is about defining what the critical issues behind our competitiveness and prospects for future employment really are. For we may put a lot of time, energy and resources going down one path only to discover that is dead-end, that we should have gone down an altogether different path. We may go hunting for woolly mammoths and may end up finding ourselves being the hunted.

Indeed, we have to be sure we are addressing the same issue. The argument that we should reduce wages to increase employment is not quite the same as we should reduce wages to increase competitiveness. The first assumes that wage ‘correction’ will facilitate new, more employment-friendly market conditions. The second assumes that wages are a structural part of the ‘loss of competitiveness’. So which are we addressing – or, if we cut wages, do we get a twofer?

Better Means to a Better End: The Recession Diaries - September 14th

In European terms, local taxation in Ireland is almost non-existent. The EU-15 average local tax take is 4.9 percent of GDP; in Ireland its 0.8 percent of GNP. Even Luxembourg, half the size of the Dublin metropolitan area and its population, has a larger local taxation base than all of Ireland. So I was interested to read what the Commission on Taxation had to say on the issue, bearing in mind that a report on local taxation itself could take up 500 pages or more.

Nat O’Connor over on Progressive-Economy noted that, given its reluctance to introduce a property tax, the Government had better have a ‘Plan B’ for local authority financing. Otherwise it risks, as Nat rightly points out, a general degradation of municipal services and local areas while putting disproportionate strain on ever decreasing commercial rate base. Unfortunately, and I may be unduly pessimistic, Fianna Fail will risk just that, so obsessed are they with deflationary policies. Besides, if councils, which are for the most part made up of opposition and independent councillors, take the heat then blame can be shifted or at least mediated.

In any event, the Government can take cover behind the Commission on Taxation Report. For in keeping with its overall revenue-neutral approach at the national level – the Commission recommends no net increase in revenue at the local level. It’s main recommendation – that an Annual Property Tax (APT) be devolved to local government – looks fiscally beneficial at first glance (for local governments, anyway). Except that the Commission recommends that current funding based on motor tax revenue be withdrawn from local government and returned to central funds, leaving local government just as impoverished as before. The only silver lining is that in the future, local governments may be able to adjust the property tax upwards. However, given that the APT is potentially regressive, this is not an option that progressives should get too enthused over.

The problem with local government finance is that it is intricately intertwined with structural reforms and the issue of devolution of powers. The sad reality is that if we aspire to little more than what we have – a local government system rooted in the 19th century, with less powers and responsibility than almost all other European countries, and a managerial-based (rather than democratically elected councillor-based) decision-making process; if that’s all we want, then we don’t have to get too worked up over new financing powers. A bit of tinkering here and there – with some more charges thrown in for good measure should do the trick.

But if we aspire to something more – a modern local government regime, democratically accountable and armed with new powers and responsibility; in other words, an engine for public services, enterprise development and social protection, then we’ll have to think deeply about the best revenue base.

And this means getting over the idea that enhanced local government financing must automatically mean a house property tax. There are other options, namely income tax. I would argue that this could be a more acceptable revenue base. The Commission examined this option briefly and, just as briefly, dismissed it. They should have spent more time on it.

The Commission concedes that a local income tax has considerable strengths:

‘ . . it would be a potentially buoyant source of revenue and would be linked directly to a person’s ability to pay.’

However, they listed a number of objections. Let’s go through each of them to see how they stack up.

‘Locally determined income tax rates are not consistent with national employment policies.’

Why? This cryptic one-line objection clearly needs elaboration but I can see positive examples. Let’s say a local authority increased their income tax in order to employ or train people in depressed areas – how does that undermine ‘national employment policies’? (Actually, I didn’t know we had ‘national employment policies’ – if anyone know about them, please let me know.)

‘A local income tax system would lead to considerable additional compliance costs on employers and on individual taxpayers.’

The original Commission on Taxation considered this issue and concluded that all that was needed would be to establish an address on the tax certificate. They also stated that the Revenue Commissioners would collect the tax on an agency basis and return it to the local authority - so no revenue-collecting duplication. This hardly implies ‘considerable additional compliance costs.’

‘There are difficulties in taxing non-PAYE income, such as investment income and dividends, which would give rise to anomalies. These could prove difficult to address in implementing an equitable local income tax system.’

There’s no difficulty at all. Through a process of negotiation between the combined local authorities and the central government, a tax equivalent to the average local tax liability, could be levied by the Exchequer and returned to the local level as part of an equalisation fund that benefits the more impoverished areas. This would dovetail into the same resolution that applies to the next objection.

‘As an alternative to central government financing, a local income tax would not give an even distribution of income to each local authority given the varying density of population throughout Ireland. Central government would still have to transfer significant resources to provide equalisation of funding to some local authorities.’

This is an odd objection since the Commission acknowledges this problem when discussing devolving a property tax to local areas. To solve it they propose an equalisation fund be established to assist those authorities with higher social-economic need. So, ditto under a local income tax. In principle, no difference.

‘A genuinely local income tax that would possibly be levied at different rates by various local authorities could lead to some taxpayers choosing to live or work in areas where a lower tax rate applies.’

Ditto with a locally determined property tax.

‘It would increase the burden of tax on labour income.’

Indirectly, so does a property tax. For the most part only those in work would pay - and the overwhelming majority people at work own a house in this house-owing democracy of ours.

* * *

There are problems with any new system. But I suspect the Commission didn’t spend much time on the issue of a local income tax. There’s an automatic equation: local government finance = property tax. All I’m suggesting here is that there are alternatives – alternatives deserving of more discussion.

Of course, we could really do the democratic thing and establish a system of both property tax and income tax for local levels. And let local authorities decide – or, rather, let local people decide. They could opt for one or the other, or a combination of the two.

But first we have to debate all the alternatives in depth, assess the local revenue bases and the impact on different incomes. In other words, a lot more study needs to be done.

And complementing that work we will have to start debating what kind of local government we want, its structures and powers. Or whether we’re happy with the status quo. For that will help us determine what reforms we will need in local government financing. If any at all.

The Great Squeeze: The Recession Diaries - September 8th

The Government now has its bookends. On the expenditure side, the McCarthy Report; on the taxation side, the Commission Report. Now we can stack the economy between the two and . . . squeeze. The only problem is that one of the bookends may not be so reliable. Indeed, it may fall off the bookshelf. And if that were to happen, the other bookend may find its function redundant.

The Commission Report is the dodgy endpiece. The Report is at great pains to highlight its remit, notably that its recommendations must be placed in the context of continuing Ireland’s low-tax model. But sometimes it doesn’t sound too excited by this:

‘In keeping with our Terms of Reference these recommendations have regard to the medium to longer term and, in aggregate, they are compatible with keeping Ireland a low tax economy.’

Compatible, yes. Inevitably so? That is more problematic. The Report protests that its recommendations would be ‘revenue-neutral’ – Peter and Paul would balance out. Except that, while we get a lot of proposals to raise money, there isn’t a comprehensive schedule of tax cuts to balance. They’ve left that exercise, by and large, to the Government. If I were a Minister, I wouldn’t be thanking the Commission.

All this suggests that reading the Commission report is a more nuanced affair than the McCarthy Report which was just a blunt instrument to hammer, for the most part, low and average income earners by cutting social transfers. The McCarthy Report is bad melodrama, the Commission report approximates a more confusing film noir.

Our starting point is to separate out the political context from the actual content. SIPTU Vice-President Brendan Hayes has done the public debate an enormous service by refusing to sign the report. His letter which appears in the Appendix lays out the primary reason:

‘The Commission’s Recommendations reinforce a low-tax model of the economy and of society that I do not support.’

All his other objections flow from this fundamental premise. By highlighting this, Brendan goes to the heart of the matter and elevates the ‘politics’ of the report in a way that makes clear the real and substantial difference between a progressive and a conservative economics (his interview on Morning Ireland is worth listening to for an elaboration on his letter). Paul Sweeney also makes useful points in this regard over at Progressive-Economy. This is where the battle lies.

But encouragingly, in fighting this battle, we can turn much of the content of the Report against this political context and, in many cases, against the regressive recommendations in the Report itself. Let’s take one example: tax expenditures.

The section on tax expenditures is by far the largest section in the Report and arguably the most detailed in terms of highlighting revenue and costs. There is much progressive meat here. The Report acknowledges the regressive impact of much tax expenditure – in addition to their inefficiency, deadweight, lack of cost control and lack of transparency. For instance, 50 percent of the revenue foregone under mortgage interest relief, which costs the Exchequer over €700 million, goes to the top two income deciles. There is considerable revenue gain to be made through the reform of tax expenditures with less deflationary impact and much benefit to both equity and the Exchequer.

The Report lists 96 tax expenditures, not including personal credits. This is by no means an exhaustive list – it omits discussion on 17 property-related schemes, though some of these are being phased out (the Labour Party has estimated that these property-related schemes still cost the Exchequer over €500 million).

Of these 96 tax expenditure programmes, 29 could not be costed. However, of those that could, the revenue foregone amounted to nearly €11 billion. That’s equivalent to all the revenue obtained in the income tax system and a third of all tax revenue. The Report breaks down these tax expenditures into two three categories:

• those they would continue as is: these cost €4 billion (though over half of this come from one tax relief – the exemption of the sale principal private houses from capital gains tax)  
• those they would discontinue: this would save over €700 million,(more than half of this, though, comes from the controversial taxation of Child Benefit), and  
• those they would reform in some way: these cost over €6 billion.

Let’s examine one small area in housing tax expenditures: namely the operation of mortgage interest (MIR) and rent relief. The starting point is the Report’s general recommendation regarding tax expenditures:

‘We have concluded that, in general, direct Exchequer expenditure should be used instead of tax expenditures. This allows greater transparency and control of public resources and avoids many of the aforementioned undesirable characteristics.’

This is a correct and progressive perspective. Unfortunately, the Report didn’t apply this principle to housing tax reliefs. Instead, they propose that:

• MIR be confined to first-time buyers only, and 
• Rent relief be abolished

While the first is fair enough, removing rent relief will disproportionately affect those on lower incomes (tenants are generally poorer than owner-occupiers) while creating an imbalance between the home-owning and rental sector. There is another way, however, using the Report’s general recommendation. If the MIR and rent relief were wrapped up into a taxable Housing Benefit, this could reduce the cost of these housing supports, progressively direct the subsidies to low and average income groups while achieving considerable social welfare savings.

For instance, the average cash subsidy to those in receipt of MIR and rent recipient is €840 annually, at a cost of over €840 million per year. Setting the new Housing Benefit at a level substantially higher than the average cash subsidy, and taxing it, would still reduce the overall costs (especially if second-house purchasers were excluded).

As well, this would reduce the social welfare costs of rent and mortgage interest supplements as home-owners and tenants would keep the Housing Benefit whether employed or not. This Benefit would be subtracted from the social welfare subsidies.

We could go further and extend the Housing Benefit to all first-time buyers and tenants – public and private. This would have progressive knock-on effects for local authority tenants – comprising some of the lowest income groups in society – while at the same time allowing local authorities to readjust the differential rent scheme to recoup more of their construction and maintenance costs. Tenant and public landlord would both gain.

This is one small example of how the Report’s recommendations can be transformed in a progressive manner. That doesn’t take away from the larger political context – the low-tax model it espouses and which is a direct contributor to the economic and fiscal crisis we find ourselves in. But disentangling the context from the content frees us up to be more creative. I’ll return to other aspects of the Report in subsequent posts.

For at the end of the day, progressives are going to have to write their own Taxation Report – one which shows how we can increase taxation to facilitate economic growth and social infrastructure development, consistent with the economy’s ability to absorb such tax increases.

We can turn the Commission on Taxation against the Right and even against their Report’s own regressive recommendations.

And in so doing, remove one of the bookends that threaten to squeeze the economy.

Missing Numbers: The Recession Diaries - August 5th

First, the good news. The rise in unemployment is contracting. From a monthly high of 36,500 new people on the Live Register, the rise last month was a mere 4,300. Okay, still far too high but if unemployment is ever to be reversed it must first be slowed down. And slowing down it is. That’s the good news.

There is a problem, though, in all this. Namely, some of the numbers are missing. Let’s remember that the Live Register does not record unemployment per se. It records those signing on – which will also include part-time, short-time and casual workers, including those signing on for credit. So, while there are 440,000 signing on (not seasonally adjusted), the number of unemployed is, according to the Live Register is 12.4 percent – or probably between 255,000 and 260,000. I use the word ‘probably’ because we won’t get the actual Labour Force numbers for August until late this year so we can’t be sure the exact number this 12.4 percent represents.

And that’s the first problem we encounter. While the Live Register is published monthly, we don’t get the actual Labour Force numbers until months later. And this means that when we come up against the following set of figures we have to start interpreting (thanks to An Saoi for pointing me to these numbers).

The Department of Enterprise and Employment publishes redundancy notice figures each month. Briefly, you are entitled to redundancy if you have worked for the same employer continuously for at least two years. Therefore, the Department’s redundancy notice figures represent job losses for those in work for at least two years.

So, in January of this year, when the numbers on the Live Register went up by 36,500, the number of ‘actual’ redundancies was 6,601. Given that there might be some time-lag between actual redundancies and signing on, we can see that those with two years service plus made up 18 percent of the increase on the Live Register. Fair enough – the remainder may have been unemployed with less than two years service (e.g. young people), those short-timed, etc.

However, something curious is happening between the numbers increasing on the Live Register and actual redundancies.

While monthly increases in the Live Register have fallen considerably since the beginning of the year, actual redundancies have remained fairly constant. So much so, that redundancies exceeded the increase in the Live Register in August. This might seem peculiar – the increase in the numbers signing-on are less than the number of those receiving redundancies.

Another problem we have is that we don’t know the inflows and outflows on the Live Register. It only gives us the net situation. For instance, in August the Register increased by 4,400. However, if 10,000 new people signed on, but 5,600 signed off – it would leave us with the balance of 4,400.

Why would someone sign off? First, they found a job (and, yes, there are jobs to be found). Second, they returned to education. Third, they left the workforce; this is likely to happen with young people and women in households where there is working income. Under means-test rules, they might not get any assistance but could still sign-on for credits. But these credits are largely for pension benefit and people may not feel it’s worth the trouble.

Or, people have started emigrating.

The problem is we can’t really tell at this stage and the numbers that would let us breakdown the problem won’t start arriving until much later. The Quarterly National Household Surveyprovides information on the size of the labour force and overall employment. The problem is that we only have data up to the end of March. However, this is what they tell us about the labour market. In the six month period between the 3rd quarter of 2008 and the 1st quarter of 2009:

• The labour force – which includes employed and unemployed – fell by over 78,00 
• Employment fell by 141,500 
• Unemployment increased by 63,400

The question is – what is happening to all these people. The labour force is shrinking and the participation rate (which includes employed and unemployed) is falling – from 64.2 percent to 62 percent in the six month period.

One can’t help but conclude that a large proportion is emigrating but we don’t know by how much. The CSO will be publishing migration figures later this month – but it will only take us up to April. Still, we it will give us some insight into trends.

A Department of Finance official told me some months ago that Ministers are praying for emigration. Emigration can solve a lot of problems. It can reduce social welfare costs, reduce demands on social services (e.g. health, education, housing, etc.). It can massage a whole load of figures. We may find that while the numbers of people signing on is increasing, the net figures will look better – because people are leaving, or dropping out of the Labour Force. 

Based on the figures to date, it looks like the Ministers prayers are being answered.

Discourse of the Caves: The Recession Diaries - September 2nd

The Commission on Taxation is about to descend upon us – six hundred pages worth, apparently. The Commission report is of a different order than the McCarthy report. The latter was set up to find ‘savings’ in order to reduce the high borrowing requirement (it failed to do this as we discussed previously – the level of savings is highly inflated). This is not the Commission’s remit. It was set-up to review taxation issues in the context of maintaining a low tax regime – not discover new sources in pursuit of increasing revenue in order to reduce the borrowing requirement. Therefore, the two reports are not comparable.

And if the limited remit wasn’t sufficient (though it was enough to ensure that one Commission member – SIPTU’s Brendan Hayes – has refused to sign on), we have Minister Lenihan claiming that tax is high enough. In terms of dealing with the fiscal deficit, he won’t be looking to increase revenue. He’s got his sights firmly on public expenditure – in effect, social welfare, health, education and public sector wages/employment.

Let’s examine two aspects of this argument. First, is the Irish economy taxed too much? From a comparative perspective, this argument that can hardly be sustained.

• In 2007, the average level of taxation (as a % of GDP) in the other EU-15 countries was 46.7 percent.
• Compare that to Ireland’s 40.6 percent (using GNP).

We ranked rock bottom. We would have had to increase tax revenue by €9.2 billion just to reach the average.

The EU Commission predicts this situation will pertain up to 2010. They project that Irish tax revenue will fall to 38 percent of GNP, a result of the collapse of tax revenue arising from the loss of economic activity combined with the structural deficit. The other EU-15 countries will also experience a slight drop but less than Ireland, owing to the fact that unemployment has not risen to the same extent as here. S

o, on just an international comparison, it can hardly be suggested that we have hit a ceiling – unless we intend to live in a very small house in the future.

However, there is an argument that increasing taxation – especially general taxes on low and average income groups – is not a wise course during an economic contraction. It is deflationary, resulting in reduced domestic demand with all that consequences that entails (e.g. higher unemployment, reduced enterprise activity, etc.). This argument is jumped on by the Right to argue for prioritising public expenditure cuts, without likewise conceding that such cuts are deflationary, too.

That’s why a viable alternative is to dispense with overall public expenditure cuts and general tax increases (this doesn’t exclude minimally deflationary measures – cutting ‘real waste’ or increasing taxes on high income/wealth), and instead engage in sustained investment stimulus to increase economic activity and reduce unemployment.

Even so, looking forward when the economy has moved from recession to recovery – where does the most economically efficient and fiscally beneficial balance lie between cuts and taxes? I’ve referred in the past to the ESRI’s simulation of budgetary proposals, mostly focusing on public expenditure cuts. But they also ran a number of simulations on tax increases such as property tax, income tax and carbon tax. Let’s compare these with public expenditure cuts, to see what would be the better course to take to engage in fiscal consolidation. It should be noted that the ESRI set up similar ‘shock’ magnitudes. Each of these proposals are designed to either reduce expenditure or raise taxation by €1 billion. So we are comparing like-with-like.

First, the deflationary shock to the economy. It can be seen that tax increases have a less deflationary effect – at least, during an economic contraction.

The worse option – in terms of prolonging and deepening the recession – is to cut public sector jobs. However, all tax increase measures have a less deflationary impact than any spending cut – even public investment cuts (which is actually a cut for the future). Indeed, the introduction of a carbon tax of €34 per tonne would actually see GNP rise marginally though this wouldn’t come without a cost (the ESRI predicts a loss of competitiveness and a decline in output as a result).

So which options would be the most fiscally beneficial? Don’t forget, each proposal is designed to ‘save’ the Exchequer €1 billion in gross terms but that’s before a full impact assessment has been performed. The ESRI calculates the net savings arising from their assessment.

As can be seen, tax increases have a higher return to the Exchequer than public expenditure cuts. The worst option is cutting public sector jobs – from a headline €1 billion reduction, the net savings to the Exchequer is only €490 million whereas carbon tax returns a net savings of €900 million.

Of course, more detailed investigation would need to be conducted to more fully assess the impact. For instance, a carbon tax without relief for low income groups could turn more deflationary and result in reduced net savings if it was disproportionately regressive. Similarly with property tax.

But what this does do is give us useful parameters within which to work. For instance, the foundations of a property tax could be established immediately with rates on only the highest income groups at work. As the economy recovers and is in a stronger position to absorb the fiscal shocks, then the tax could be extended to all households. This approach – aligning the introduction of tax increases with the economy’s capacity to absorb such increases – could ensure sustainability without risking torpedoing a fragile recovery.

This, of course, would require a government that is sensitive to the capacity and potential of the economy in both the short and long-term. We don’t have such a government. There is little inkling of such sensitivity from any alternative government led by Fine Gael. Indeed, this sensitivity is lacking in the national debate. All we get is ‘cuts good, taxes bad’.

That type of antediluvian discourse is hardly amenable to nuance.

Ostriches, Democracy and Dr. G.: The Recession Diaries - August 31st

Dr. Garret Fitzgerald is not impressed with the notion that if the majority of legislators believe that Government proposals are wrong or misguided, they should vote against them. No, according to the good Doctor, whatever legislators think of Government policy, whether on NAMA or public expenditure cuts, they should just bite their lip and support it. Because if the Government is defeated a destabilising effect will set it, leading to the takeover of the country by the IMF, the withdrawal of lending by international markets and our inevitable enslavement in the economic salt-mines. Our only salvation is to shut-up and support Fianna Fail. Dr. G. has spoken.

This is the extreme edge of the TINA argument (‘There Is No Alternative’) and Dr. Fitzgerald has been hanging around at the extreme edges of late. In a previous column, he attacked anyone who dared question the desirability of the McCarthy Committee proposals:

‘. . . there is an air of total unreality about most of what has been said and written by many of those who have attacked these proposals and who are still in absolute denial about the scale of the crisis we currently face . . . We are at present a country of ostriches. It is time for everyone to wake up to reality.’

Unreality. Absolute denial. Ostriches. Wake Up. Well, I guess that put some of us in our place. Dr. G. was at it again in his most recent column – this time raising all manner of woe and betide if anyone dared to exercise their democratic responsibility.

‘Responsible opposition is vital if the State is to be kept out of the IMF’s hands . . . No worse fate could befall an opposition than to precipitate themselves into government by defeating measures, the rejection of which could throw our State into the hands of the IMF.’

Dr. G. has moved from a legitimate position of supporting the McCarthy Committee proposals and NAMA to a more extreme position that anyone opposed to such is risking opening the door to the IMF. Okay, a bit robust but it’s a tough debate. However, it turns near-hysterical when such a position denounces the democratic process itself – the very idea of the politics of choice.

For instance, if opposition parties can mobilise public opinion to such an extent that the Government is prevented from implementing the McCarthy Report or setting up NAMA; this would no doubt precipitate an early election. In such a scenario, people may wish to support an alternative approach and elect a government that reflects that desire. It is this process that is deeply disturbing to Dr. G. In any other country, it would be called democracy.

Dr. G. elaborated on his position on Morning Ireland:

‘It’s not the best moment to change the Government because all eyes would be on us . . . If the Government fell on this issue, world financial opinion – the folks that lend us money – they wouldn’t understand what lies behind this; they’d only see that the Government hasn’t got its proposals through. They would be reluctant to lend us any more money at that stage . . . To restart the whole process, to abandon NAMA and restart the approach . . . to do that it would take a long time to sort all that out, put forward and get through new proposals. And during that time we would find it very hard to borrow . . . It’s not the best moment to destabilise things.’

In other words, we must not allow people to exercise choice, we must not allow people to elect a Government that they believe would be best placed to address the crisis. Not because they would make a worse choice. But because the very process of debate and popular decision-making itself would undermine our capacity to borrow. World financial opinion must be satisfied, even if that means denying people the option of electing, in their opinion, a better government.

Of course, Dr. G. doesn’t explain how he knows that it would become ‘very hard to borrow’. We just have to take his word for it. And support, for the time being, Fianna Fail – tolerate their policies no matter how profoundly mistaken or counter-productive we might believe them to be. For at the end of the day, our opinion doesn’t matter.

It is hard to imagine a more profoundly anti-democratic sentiment than this. Indeed, what government in the world wouldn’t want to use that argument to postpone an election or a legislative vote of confidence?

Now, Dr. G. is not proposing some indefinite ‘dictatorship of the financial-ariat’. He doesn’t’ mind elections as long as they can’t affect policy.

‘After these two measures (i.e. McCarthy Report and NAMA) have been successfully implemented, if the Dáil or the electorate so decided, there could then safely be a change of government.’

So we’re allowed to have many parties competing for office, so long as it won’t result in any substantive changes. One state, one policy.

In one sense, Dr. G. should be congratulated for bringing to the forefront what is implicit in the ideology of TINA. It is the logical conclusion of a debate of one-hand clapping. For now we know we don’t need the other hand (it is not a serious participant, as Jim O’Leary previously informed us; the hand is actually not a hand at all but rather an ostrich). Indeed, all that other hand can do is destabilise things. Better to cut it off rather than have it offend the orthodoxy.

This is the final twist in a desultory debate where some commentators are determined that the people should be given neither sight nor hearing of any alternative economic policy. Never mind be given a choice to elect a Government that would pursue such policy.

The Better-Off Shall Be First: The Recession Diaries - August 25th

John McHale of NUI Galway has produced an outline for a fiscal plan. It is well worth reading. It’s a serious treatment. It’s also an unnerving treatment. For it has the capacity to wreck the Exchequer’s finances with little ‘stimulating’ effect on the economy.

On the way to presenting his fiscal plan John makes some highly contentious statements. He claims that falling investor confidence last year meant the Government had no choice but to engage in large fiscal adjustment (i.e. cuts). Of course, last year the National Management Treasury Agency launched the biggest bond issue by any borrower in Europe since 2004. Indeed, such was the level of demand for Irish debt that the NTMA was able to build up a war chest of €20 billion in free cash balances. And in the first few weeks of this year, the NTMA raised nearly 40 percent of all the money we needed to fund our debt this year. So much for slipping investor confidence.

John states that current expenditure cuts are less contractionary than tax rises. The ESRI simulation suggests just the opposite - that tax increases are less deflationary and fiscally more beneficial. 

He also states that it would be better for wages to fall than to let unemployment rise. However, beyond the supply/demand curves of textbook models we find that office and factory floor workers are taking pay cuts (in the process subsidising substantial management pay rises) and at the same time find themselves being laid off as well.

On such shaky premises, we are now ready to examine John’s plan.

Step 1: Implement the McCarthy plan over two years. Never mind that it contains horrendously deflationary recommendations with the centre-piece proposal – cutting 17,000 public sector jobs - having been road-tested by the ESRI and found wanting; implement them. John seems to think the Report provides ‘a useful focal point for shared sacrifice’. 40 percent of the ‘savings’ comes from reducing social transfers, impacting most on low income groups. That’s a lot of sharing by one particular income group in society.

Step 2: Cut public sector wages by 5 percent. But of course. It won’t save much, mind you – only about 0.3 percent of the borrowing requirement, while cutting consumption by nearly a full 1 percentage point. John suggests the savings would be €700 million. The ESRI projected savings of €671 million but that was before the April budget and the imposition of additional levies. The net gain would be, as a consequence, somewhat less.

So far, pretty standard deflationary fare.

Step 4 (yes, I’m jumping ahead here – building the drama so to speak): Postpone the 2010 and 2011 cuts in capital expenditure for two years. John rightly points out:

‘Cutting capital expenditure as the economy falls into a deep recession just continues the pattern of pro-cyclical fiscal policy.’

It’s unfortunate he doesn’t see that cutting current expenditure is similarly pro-cyclical and more deflationary than capital expenditure cuts.

But, now, the piece de resistance.of Step 3:

‘. . a significant roll-back of the income and health levies. These levies have brought the marginal tax rates facing many workers to over 50 per cent. The Government was correct to put the burden on the better-off in the first phase of the adjustment. But continued increases in marginal tax rates will damage incentives and hold back growth. The tax-cutting package should also include temporary reductions in employer PRSI to the extent affordable.’

So the real game is revealed:

• Cut public services, wages, health card entitlements, social welfare recipients living standards, and at the same time

• Reduce taxes and levies – in particular, the marginal rate in order to provide relief to the better off John puts some numbers on this proposition.

John wants the Government to reduce taxation by as much as €3 billion nest year (some of this would be directed to cutting employers' PRSI - an ineffectual deadweight proposal). He seems to go further. He wants the Government's planned tax rises next year to be postponed (though I'm not sure if this is in addition to the €3 billion or is inclusive).  

Why? What is the point of this ‘plan’? I can’t believe it’s a crude ‘take from those who don’t have enough and give to those who have more than enough’. John states:

‘This may be as close as Ireland can come to real economic “stimulus” in the current circumstances.’

So we have stimulus for the ‘better off’ and hard times for those at the lower end. This might be worth considering if John had put forward any argument that such an approach would actually stimulate the economy. But he doesn’t. And it won’t.

Recessions are marked by many things – loss of money to the economy, falling living standards, reduced consumer spending, rising unemployment and falling investment. It’s hard to see how giving money back to the ‘better-off’ will address these issues.

Would it result in a rise in investment? I don’t see how. There are few investment opportunities. Enterprises are retrenching from lack of demand while banks are a basket case. The history of investment in this country is that it has either been led by multi-nationals or the State. The investment of choice for the better-off has been property – both here and abroad. With this route of investment cut-off, is it really being suggested that this money will end up in productive investment?

What about boosting consumer spending? Better-off individuals are more likely to save a larger proportion of their income than spend it. If they do spend it, it’s more like to be import-dense. If you want to boost consumer spending, you find ways to put cash in the pockets of those groups with a higher propensity to spend – those same income groups that John wants to hammer with the McCarthy proposals.

This has to be one of the more peculiar ‘stimulus’ proposals I’ve come across. It could end up wrecking the Exchequer finances. John is hopeful that the €3 billion in tax cuts next year would be financed by implementing half of the McCarthy proposals and the public sector wage cuts.  However, the net savings from these deflationary proposals would struggle to reach €2 billion, while undermining economic performance (cutting consumption, increasing unemployment).  This would leave at least a €1 billion hole for next year. 

All in the hope that the better off would do something productive with that money that they've been gifted.

That’s not so much a plan as a leap of faith.

How Not To Read A Report: August 21st - The Recession Diaries

Stop the Presses!

‘Irish workers earn 4th highest wages in the world!’  ‘Irish workers one of the best paid in the world!’ ‘Wages for Dubliners are among the highest in the world!’

So, all that guff from trade unions and progressives and (and as we will see – just about every official data collection agency) is just that – guff. Misinformed guff. Vested interest guff. For the authoritative statistical report has been published and it shows – Irish/Dublin workers are rolling in it.

Or maybe, just maybe – the people making that claim didn’t actually read that report. For the UBS’s Prices and Earnings report for 2009 makes no such claim. So who’s spinning what? And to what effect?

The UBS report is a triennial affair surveying prices and wages throughout a number of cities across the world. They compile price data on a range of product and on wages in very narrowly defined categories covering 73 cities around the world – from all continents, including developed and developing countries. Dublin is Ireland’s lone representative city.

The UBS report lists 14 ‘professional’ categories in the Appendix – ranging from manufacturing, services, public and private and even managerial categories. In most of them they show Irish wages (in US $) as very high – much higher than the global average and even higher than the average from cities in the EU-15. So surely that should be game, set and match point. It would, if we didn’t read the report.

UBS states very clearly that they are not compiling the data for the purposes of finding ‘statistical averages’.

‘ . . our figures do not represent statistical averages and its collection was limited to just a few companies for each profession and city, data from different sources may differ.’

Indeed, we will see why they make this disclaimer below. But, first, let’s see what more is ‘disclaimed’.

• RTE News at One headlined the report as: ‘Irish workers are amongst the highest paid in the world’. Yet, UBS doesn’t compile data on ‘Irish’ or national wages. It doesn’t compile data on any other national wage levels.

• The UBS report doesn’t compile wage data on economic sectors (industry, services, retail, communications, manufacturing, education, etc.)

• The UBS report doesn’t compile wage data on occupational groupings (sales, clerical, managerial, production, etc.).

So what does it do to allow those who haven’t read the report to make such claims as RTE did? Let’s look at just two of the fourteen categories on which the UBS compiles its data.

Skilled Industrial Worker: this would be a relatively easy category from which to obtain data and compare. But that’s not what the UBS does. It takes data based on:

‘Skilled worker with vocational training and about 10 years’ experience with a large company in the metalworking industry; approx. 35 years old, married, two children.’

First off, it is immediate apparent that there is very little likelihood of getting a scientific sampling of this cohort across a range of companies throughout all the cities. That’s why the UBS didn’t even attempt it.

It’s even worth questioning where they got their data from Dublin. The CSO’s Industrial Production Census shows that in the entire Southern and Eastern regions (from Kerry to Cork to Dublin – all counties outside the BMW region), there are only 16 large (100-plus employees) in the base metal and metal fabricating industry. How many of these are in Dublin and of these how many fit the UBS bill of ‘metal working’? Given that there are less than 3,000 workers (some of them women) in these 16 large companies – how many work in Dublin? In fact, there is a good chance, given that Dublin doesn’t have a large metalworking industry, that there are few if any workers that fit the UBS bill (e.g. 35 years old, married, two children, vocational training, 10 years experience).

The same holds true for the UBS category of Female Factory Workers (‘Unskilled or semi-skilled machine operator in a medium-sized company, mainly in the textile industry; about 25 years old, single’). Textile industry? Dublin? There are only 500 women workers in this sector throughout the entire Southern and Eastern region (and this is the latest figure – from 2006; good chance that some of those companies have shut down as this is a sunset industry in high-income economies).

And, how did they collect their data? From data collection agencies whose remit is to accumulate the information to allow us to make such comparisons? No. It was based on a detailed questionnaire (112 questions) used in the following way:

‘We have drawn on the broad network of UBS branch offices, countless universities and our researchers’ personal contacts . . ‘

Let me stress – I have no problem with this. UBS has been open and transparent about their methodology. The problem is the spin that some have put on this report - spinning without reading.

So, can we get some information on this area? Yes, from agencies whose remit is to collect such data for the purposes of comparison. Let’s take Destatis – the German  equivalent of the CSO. Their information is useful because it is more up to date than most. They examined labour costs (wages, employers’ social security contributions, etc.) in the manufacturing sector in the 4th quarter of 2008. They based their results on Eurostat data ((they have access to the raw data from Eurostat whose own published data lags 2-3 years behind). What did they find?  This is for all manufacturing employees (managers included, who took a pay rise at the expense of all other workers in the first three months of this year):

• Average Irish manufacturing wages are 2.3 percent below the EU-15 average and 17 percent below the average in our peer group (top-10 EU economies).

No, it doesn’t focus on skilled male metalworking workers or unskilled female textile workers – but if overall average wages are 17 percent below our peer group, then we can reasonably assume that these workers’ wages are below average as well (isnt' it amazing how official data never gets the headlines?)

How can we reconcile the findings of Destatis and UBS? We can’t. Not because one methodology is superior to another in pursuit of the same goal – constructing a set of data of statistical averages in order to make comparisons. It’s because they have different goals. UBS makes no claim that it is a surrogate OECD, US Bureau of Labor Statistics, Eurostat, Destatis, etc. It doesn’t function on that turf.

If the UBS results were presented in the media with some degree of accuracy, the lead-in probably run like this:

'Recent data compiled by UBS researchers’ personal contacts shows that wages in a few companies where skilled metal workers with vocational training and about 10 years’ experience with a large company in the metalworking industry; approx. 35 years old, married, two children are working in Dublin are higher than UBS researchers’ personal contacts in a few companies employing the exact same type of workers in other cities.'

Okay, not a very sexy lead in. Best just to run with ‘Irish workers’ wages are one of the highest in the world’.

Not terribly accurate but, hey, when did we ever let accuracy get in the way of a good story.

[You can hear this debate between an IBEC representative and myself on the Last Word -  Wednesday, August 19th, immediately after the headlines on the 5:00 pm slot.]

Here We Go Again: The Recession Diaries - August 18th

‘There are people who are working right now, who are looking at the possibility of losing their jobs, they cannot save, they cannot build up the savings to cushion potential loss, or potential risk of their job. And, yet, they are paying increasing rates of taxation in order to sustain what is in effect, as identified by the OECD in their 2007 report, the second most lavish system of social welfare spending in the entire OECD.’

Good grief.  I had thought that, when Sarah Carey publicly retracted her claim that Ireland had one of the most generous social welfare rates in Europe (after being challenged by Irish Left Review), that that would be the end of the matter. If not that, then Sli Eile’s myth-busting piece using OECD data. But no – Constantin Gurdgiev is making the above claim on RTE’s Prime Time. With the McCarthy Report and IBEC calling for social welfare cuts, it’s clear: some people really have it out for the lowest income group in society. It’s getting obsessive.

So once more let’s pick up our analytical cudgels and see what we can make of this latest claim (all figures are for 2007 – the year the OECD report references.

Money, Money Everywhere (But Here)

This was originally written for Progressive-Economy

If you took some commentators seriously, you’d be excused for believing that Ireland Ltd. is on the verge of going into liquidation. Whether it’s defaulting on our debt, a growing inability to borrow more, or just despairing over that ‘€400 million we’re borrowing every week – yes, you’d assume the country is out of dosh.

But that doesn’t tally with the recent US Treasury release of data identifying the major holders of Treasury Securities – that is, US debt. China is the biggest holder of US debt – about a quarter of the foreign total. Japan, the tax havens in the Caribbean and the UK (with its tax havens) are also up there. But guess who else is. Yes, poor ol’ broke Ireland.

Irish ‘residents’ hold $50 billion worth of US Treasury securities. That’s almost as much as Germany (even though German GDP is nearly 14 times larger than our own) and more than twice as much as French holdings. Our holdings are worth over $12,000 for every man, woman and child. Irish holdings have shot up recently. Only last year Irish holdings amounted to $15 billion. In just 12 months, $35 billion fled Ireland for the safety of US debt. Yes, there’s money swilling around – but it’s not swilling here.

This is of a piece. Irish holdings of foreign portfolio securities throughout the world amounted to €1.3 trillion at the end of 2007, with €440 billion held foreign equity and another €575 billion in bonds and notes. The increase since 2000 has been substantial – up from about €500 billion.

To put this in some perspective, Ireland’s €1.3 trillion held abroad compares to the foreign holdings of French residents of €2 trillion – even though the French economy is more than ten times larger than the Irish economy.

Of course, it will be argued that Ireland’s wealth holdings are too big to be maintained in the limited domestic investment opportunities. Foreign Direct Investment may come here by the truckload, wooed by prospects of high returns – but not high enough to satisfy our own residents. They must go abroad to find financial satisfaction; US debt, for instance.

There’s some validity to this argument but there’s another picture. It’s long been a complaint, by politicians and commentators, that money is tight here, but pretty loose everywhere else. Back in the 1950s Flann O’Brien wrote:

‘It is almost a cliché that this country is chronically undercapitalised, that money for productive capital works cannot be got. The administration recently started capital works concerned with land reclamation and drainage and is about to clear all the rocks out of Connemara. With money borrowed from the banks deposited by thrifty farmers? Not on your life. With borrowed American dollars which are twice as costly as pounds.’

Frank Aiken had his own run-ins. When he attempted to finance an expansionary programme shortly after the war, the Irish banks refused to loan, preferring to keep their money safe in the UK. He declared:

‘I regard their turning down of the request (to loan the government money) . . as an act of undeclared war upon our people’.

The banks won and, Aiken surrendered unconditionally, the people paid the price.

Patrick Honohan wrote only a couple of years before the financial crisis:

‘ . . .despite the emergence of the International Financial Services Centre (IFSC) as a leading player in some subsectors of offshore finance; despite the high profitability and unusually high percentage of the banking system not domestically controlled; and despite the absence of any significant bank failures for over a century; there is little evidence to suggest either that recent Irish growth has been finance-rich in the sense understood by the literature, or that the previous low-growth experience was explicable in terms of a weak financial system.’

Irish banking and financial investment played little role in the Celtic Tiger economy. They were too busy playing away and plotting the eventual chain of events which would lead us to the Carroll liquidation and NAMA.

Michael Hennigan of Finfacts points out that between 2001 and 2007, nearly €41 billion left the economy in search of commercial property abroad, while only a fraction of that was invested in indigenous high-tech companies.

Of course, it would be too simplistic to point out that only a small percentage of these resident holdings abroad would be needed to pay off the entire national debt (of course). Or that even a smaller percentage would be needed to recapitalise the banks without taxpayer intervention (of course). To maintain such a position would betray a profound misunderstanding of capital flows in a highly globalised system (of course).

Besides, it’s not as if Brian Lenihan is unaware of the problem of ‘money flowing abroad’. Only recently, in a fit of patriotic fervour, he called on hard-pressed consumers not to go to Newry to shop. Unfortunately, Lenihan’s ‘Irish money for Irish business’ is a pretty limited. I’ve not recalled him calling on Irish investors to stop crossing the oceanic border and buying US debt.

So the next time you hear a commentator or economist calling on the Government to slash social welfare spending, claiming that we have been paying ourselves too much; the next time you hear some politician saying we have to take ‘tough-love measures’ (usually without the love) because otherwise we’ll go broke; just remember all those hundreds of billions of ‘Irish money’ circulating throughout the world Remember those billions that have fled the country in the last few months to buy US debt. Remember all the money that is going everywhere but here – to invest in our industries, enterprises, and infrastructure.

And if you think this is a curious way to run a modern economy, you’d be right.

* * *

[NOTE:  On Progressive-Economy, Pavement Trauma asked whether 'Irish residents' included foreign enterprises operating here.  Yes, it does.  Is there anyway to separate out indigenous and foreign?  Probably not.  There is an agnostic tendency towards the operation of foreign enterprises from many of our state agencies (Forfas, for instance, hardly ever refers to transfer-pricing, despite the fact this has a tendency to distort business statistics).  So, do Tesco and Argos operations here hold foreign securities?  Probably not.  But it's a sure bet that other foreign enterprises do.  To what extent is a matter that could be debated for a long time and we'd still be no wiser.  However, even if foreign enterprises constituted half of all ownership of foreign securities, Ireland would still rank high as a ratio such holdings to GDP].

Try Your Hand at Stimulus - the Fun Way!

A big thanks to Tipster who provided this link to the Keynes Game - a game of political economy from Dreamscape.  It's very easy.  You have the variables to play around with - tax, spend and money supply.  Okay, so we don't have the option of manipulating Irish money supply; still, if you're a fan of quantitative easing, let rip.  Go to File and and press start game.  See if you can lower unemployment while keeping inflation and interest rates in check.  If successful, you get to be re-elected President. 

I played around with a number of variables.  I managed to get re-elected and, in my wilder moments late at night, subjected the country to runaway inflation.

So have fun. 

[And for you unreconstructed command economy socialists - try your hand the Bukharin Game - a game of economic planning.  But be warned, if you fail you won't just get 'de-elected'; you'll be tortured and sent to Siberia]

Share the Pain? Share This! : August 9th - The Recession Diaries

Maybe it’s the Leveller in me, but when times are hard we should all put our shoulder to the wheel, share out the pain and protect the lesser able in our community. Listening to the great debate over wages you’d think that everyone was a Leveller. There is so much ‘share the pain’ going around you’re likely to keel over on your way to the local newsagent. But, as always, in this crazy, mixed-up world, there is ‘pain’, there’s ‘paaaiiinnn’ and then there’s no pain at all. Now, thanks to the CSO’s latest Earnings and Labour Cost Survey, we can measures these gradations of pain or otherwise.

Our first stop is the manufacturing sector. We find that in the first three months this year basic hourly earnings increased by 2.7 percent. However, these gross figures don’t tell the full story. The CSO helpfully breaks down hourly earnings by strata. What do we find then?

Well, management and professional staff, who make up less than 25 percent of all employees in the manufacturing sector, took a substantial increase. All other employees took a hit:  clerical workers who earn only on a little over €37,000 took a 2.3 percent reduction, while production workers, who make up 60 percent of all manufacturing employees and who earn a little over €31,000, suffered a reduction of nearly 1 percent.

Now, we shouldn't begrudge anyone a pay increase. If an enterprise can afford it, they should do it – good for the Exchequer, good for the economy, good for the employees. But what’s good for some should be good for all in something approximating equal measure.

However, what we seem to be witnessing here is not only that some – who just happen to be at upper end of the enterprise food-chain – get increases while most others don’t; the majority of workers will lesser incomes are subsidising the pay increases of those with more.

Truly, those who have, receiveth more. And those who have less get less, indeed – they get more taken away. So let me speculate – admittedly, without any data to justify this, just a gut feeling; that were the Management strata broken down we would find managers earning more than the professionals and associated professionals; and that their increases would be higher still.

If there is pain to be had, it should be shared; and if there is some small benefit to be had in hard times, it should be shared as well. So what would happen if the total wage increases in the manufacturing sector were shared equally among all employees? It would come to an increase of 34 cents per hour which would, as can be seen, would disproportionately benefit those on the lowest wages.

I’m not proposing some kind of ultra-Maoist, everyone-eat-their-dinners-in-communal-barracks wage structure. But surely, especially in a recession, it makes more economic sense to ensure that those on the lowest wages get proportionally more as they are more likely to spend their money. If it goes to the highest groups, they are more likely to save it, or spend it on import-dense products and services.

The Financial sector paints a similar picture. There was a general 0.6 percent increase in wages. The Management / Professional strata – which makes up nearly half of all employees in the Financial Sector and earns an annualised €72,000 a year – was the only beneficiary of wage increases. Clerical staff, who earn less than their counterparts in the manufacturing sector, and Production workers (yes, there a few in the Financial sector) took a hit.

Again, and this is more pertinent in the Financial Sector, we might well find, if we had the data, that staff at the upper end of the Management strata gained an even higher percentage increase over the remainder in this strata.

Were the total wage increase shared out among all employees, the percentage increase for Clerical and Production staff would be 1.5 percent. This would at least help protect their living standards – which the Government was planning at that time to reduce with increased levies.

Ultimately, it’s a bit galling to hear these lectures from the upper economic echelons – especially as they continue to ‘grow’ their incomes at the expense of lower-paid employees in their own establishments.

And how irritating is it when the representatives of the managerial strata give out about employees’ pay, including public sector employees. As we saw above, the managerial strata gained while others fell. And public sector employees?

The marginal increase in public sector pay shouldn’t fool anyone. During this period the pension levy was applied which, because it’s not counted as a wage shift, does not show up. But cut wages it did. Public vs. private sector workers? The real divide is those that have the power to increase their wages and those that don’t – and most public and private sector employees are on the side of don’t.

So the next time you bump into IBEC or ISME or some Dublin Consensus-ist on the street, urging you to ‘share the pain’ – just laugh in their faces and tell them to sort out their own house first.

You Are Not Worthy: 7th August - The Recession Diaries

‘However, given the enormous scale of the problem, it would be fanciful to suppose that it can be solved without at least some reductions in public spending, and anyone who doubts this cannot really be regarded as a serious participant in the public discourse on the matter.’

Well, that put us in our place. Not only are public expenditure cuts so self-evident, beyond the need for any debate; anyone who argues otherwise is, ipso facto, not serious. Therefore, there is no need to debate with them. What a convenient world– yes, we’ll have a debate; but we don’t have to debate with anyone who disagrees with us because, by reason of the fact they disagree with us, they are not worthy to participate in the debate. 

Jim O’Leary, the author of this ‘non-debate debate’, is a serious contributor to the . . . well, debate. His arguments are worthy of being read and discussed in detail. So, I’m going to do just that. Admittedly, I along with many others won’t be allowed to discuss this at the table – we are not worthy. We won’t even be allowed to discuss it through the keyhole. We will have to stand outside the house, in the cold and the rain and the dark. We will struggle to be heard.

Jim presents two ‘necessary’ measures. The first set is intended to:

‘ . . . reduce the yawning gap between Government spending and receipts (cuts in public services, social welfare and public sector pay) . . this is not discretionary, but an imperative, namely the reduction in the huge budget deficit.’

Note the clever sleight-of-hand here. No one disputes the imperative of reducing the fiscal deficit. But Jim takes primarily one means to this end – cuts – and transforms it into an end in itself.  So intertiwned are the two - cuts and fiscal consolidation - that to question the efficacy of the former is to question the need for the later. 

Yet, there is a data to suggest that not only will cutting public spending fail; indeed, it is failing before our eyes. I won’t rely on the generalised (and according to Jim, ‘naïve’) argument that cutting Government consumption and investment during the middle of an out-of-control economic contraction will only make things worse. Let’s go back – one more time – to the ESRI simulations. Take two proposals: cut 17,000 public sector jobs and cut public sector wages by 5%. What is the result?

• GNP: -1.2 percent 
• Consumer Spending: -1.3 percent
• Unemployment: + 1 percent

So, we prolong the recession, reduce domestic demand (that will do wonders for business turnover) and throw another 20,000 people on to the dole. But what will it do it for that yawning gap that Jim refers to? It would bring down the fiscal deficit this year from -12.2 percent (using the ESRI estimate) to -11.6 percent.

Wow! Slashing public sector employment and wages will close the ‘yawning gap’ by 0.6 percentage points. And what do we have left? A ‘yawning gap’. But now we have a weaker economy (reduced GNP, more unemployment, diminished consumer spending), less able to generate the activity needed to take action on the debt down the line.  Cutting public expenditure provides the facade of fiscal consolidation but that's all. 

This same façade is at work in Jim’s second set of measures – an expansionary fiscal contraction that will facilitate a reduction in wages which will, in turn, increase our competitiveness. I’ve covered this subject before – how a wage reduction of 5% in the manufacturing sector would result in a reduction of 0.4 percent in enterprise costs which would in turn mean that an enterprise could, therefore, cut the cost of a €100 product by 30 cents. Would 30 cents really make a difference to our competitiveness? Maybe it would – but it is, at least, debatable, contestable, worthy of further discussion.

But Jim pulls out another figure – how wages and salaries make up 60% of our GDP. He calls this ‘an eloquent statistic’. That may be the case, but I can’t find where this eloquence is expressed. The CSO’s National Income and Expenditure shows that wages and salaries make up nowhere near 60% of GDP, or GNP, not even when you combine wages and employers’ PRSI (a common measurement). At most, the very most, it comes to 51%. And if you think that the increase in the wages’ share in 2008 is evidence that workers’ are taking ‘advantage of the recession’ to increase their income, consider this.

Between in 2002 and 2007 gross wage and salaries increased by over 10 percent per anum (that’s the gross amount of wages in the economy, not individual wage levels). Between 2007 and 2008, wages and salaries increased by less than 2 percent – reflecting the massive job losses. The reason the wages share increased in 2008 can be put down to a shrinking economy.

Still, does Jim have a point – that Irish wages, as a proportion of economic output, have risen too much too fast? On the eve of the Celtic Tiger Boom in 1995 – Irish wages (including Employers PRSI) made up 51 percent of GNP – compared to 48.3 percent in the year before the recession kicked in. If anything, even after all that job creation and wage increases, the wage share decreased.

Jim outlines the areas that are permitted to be debated:

‘There is room for argument about the pace at which this reduction should occur. There is also room for debating the composition of that adjustment as between spending cuts and tax increases.’

Now, since the level of public expenditure is not allowed to be debated, I’m hoping Jim will allow another area to be considered. Why is the Government currently missing its fiscal target? Let’s recap.

In October, Fianna Fail brought in an income levy in order to keep the deficit at -6.5 percent. They brought in public sector wage cuts in February to keep the deficit at -9.5 percent. Then they brought in the April budget – more cuts, more levies - to keep the deficit at -10.7 percent. This was supposed to be the last chance saloon, our last opportunity before the international markets got radical on our fiscal backsides.

So how’s the latest new line holding up? The ESRI says the Government will fail again, that the deficit will rise to 12.2 percent. The IMF, the OECD, and the EU Commission project similar deterioration. And next year? The Government intends to go through another round of spending cuts and tax increases. Well, we certainly know they can’t hold the line at 10.7 percent – that’s already blown out of the water. And along comes the EU Commission, projecting that the deficit will spin out of control at nearly 16 percent.

None of this gets much mention – how pursuing deflationary budgetary strategies during a recession is like running in quicksand; you burn up a lot of energy, weaken the body – but still end up sinking.

And you’re not likely to hear much mention. Because there is a danger that it might lead us to the forbidden zone of economic discourse – that, maybe, maybe, there really is an alternative to the current policies of cutting public expenditure.

But we'll never know.  Because one position - a position consistent with mainstream thinking in other modern economies - is deemed a priori ‘not serious’ and, therefore, unworthy of discussion. To put it another way (as a friend did to me this morning), it’s as if it was said:

‘. . . given the enormous scale of the problem, it would be fanciful to suppose that it can be solved without at least some stimulus measures, and anyone who doubts this cannot really be regarded as a serious participant in the public discourse on the matter.'

Now that would be really mean.

The Nirvana of NAMA: 4th August The Recession Diaries

There is a tendency in political discourse to reach for the apocalyptic. Admittedly, when you read the latest Central Bank report, you can hear the sounds of seals being broken. But take NAMA. Will it be a disaster? Probably not. Will it bring the economy crashing down on us? Doubtful. Will it do irreparable harm to the social fabric? No. Any country that has survived Fianna Fail for so long can pretty much weather anything; even NAMA.

But will it succeed? Within its own limited and partial terms, probably. After all, we’re only trying to take bad assets out of the banks and recapitalise them. There is the concern over haircuts – too little, and NAMA (i.e. you and me) is landed with a portfolio whose worth it will never be recovered. Too much, and the recapitalisation will effectively bring the banks into public ownership. The calculations, though, are part economic, part valuation and part political. Guess which is the biggest part?

Besides, the moment of truth will not be in September – when the legislation is debated - or next June by which time all the assets will have been transferred to NAMA. The moment of truth won’t come for a decade or even longer, when NAMA is wound down. In the meantime, the process has been constructed so that the performing loans can meet the interest on the NAMA debt. If there is a problem, it will be some other Government’s problem, well down the line.

By the time NAMA is wound down, the economy should be up and running, the hit will become relatively smaller, the return on capitalisation may be high, and political pressure will demand that banks, now clean and profitable, face a small levy for the remainder, even if that payback time is extended for yet another decade. There’s a lot of political edge to skirt around here.

The banks could still end up in majority public ownership if the valuators find that no amount of calculation can keep the state from having to reluctantly take a sizeable equity stake. Will that change anything? Probably not. The government is not likely to take an activist role when they are fighting so hard not to be active at all (witness their laissez-faire attitude to mortgage rate increase).

Yes, there are issues of accountability and transparency. Yes, there were better way to deal with this – as Karl Whelan has shown in detail. Yes, we could have bought the banks of systemic importance for a real knock-down price.  And, yes, things could still go wrong (will ACC’s solo run throw things off course?). But we are dealing with the politics of postponement – hard to mobilise a progressive politics over an event that may or may not occur for over a decade, even if the facts are on our side.

That’s why if we get mired in the details – important as they are – we will miss the great sleight-of-hand at work here:

'Clean out the banks (NAMA) = Return to ‘normal lending activity’

Oh? There are two contestable assumptions at work here. First, that NAMA’s success will lead to ‘normal lending activity’. By the time the banks have swapped their NAMA bonds for cash from the ECB, hundreds of businesses will have gone under and thousands of jobs lost.

However, even when they get their cash – will they lend? If they are to operate on commercial criteria (and what else could a private sector concern do without state subsidy) they will not lend to businesses they consider ‘risky’. Doing so might create another set of dubious assets that would impair their loan books. And that’s what NAMA is trying to rectify.

But the real problem is whether this nirvana of ‘normal lending activity’ ever existed. Back in the 1950s Flann O’Brien wrote:

‘It is almost a cliché that this country is chronically undercapitalised, that money for productive capital works cannot be got. The administration recently started capital works concerned with land reclamation and drainage and is about to clear all the rocks out of Connemara. With money borrowed from the banks deposited by thrifty farmers? Not on your life. With borrowed American dollars which are twice as costly as pounds.’

This led Diarmaid Ferriter to rightly interpret O’Brien’s comment as:

‘ . . . an Irish bank, in the sense of a banking concern deducted to furthering the interest of Ireland, did not exist.’

Frank Aiken had his own run-ins. When he attempted to finance an expansionary programme shortly after the war, the Irish banks refused to loan, preferring to keep their money safe in the UK. He declared:

‘I regard their turning down of the request (to loan the government money) . . as an act of undeclared war upon our people’.

The banks won and, Aiken surrendered unconditionally, the people paid the price. But what about recently? Surely, the banks were, if not drivers of the Celtic Tiger, would have been knee-deep in it. Patrick Honohan wrote only a couple of years before the financial crisis:

‘ . . .despite the emergence of the International Financial Services Centre (IFSC) as a leading player in some subsectors of offshore finance; despite the high profitability and unusually high percentage of the banking system not domestically controlled; and despite the absence of any significant bank failures for over a century; there is little evidence to suggest either that recent Irish growth has been finance-rich in the sense understood by the literature, or that the previous low-growth experience was explicable in terms of a weak financial system.’

Not only did the Irish banking and financial system play little role in the Celtic Tiger boom; the prior poor performance could not be blamed on a weak financial system. Indeed, it’s as if Irish banking is in a place apart from the real economy.

In this same vein, Sean O’Riain writes of the activities of the banks in the late 1990s:

‘While capital sloshed around, Irish banks did little to guide it toward the kinds of investments that would have supported medium and long term development. . . . The public sector has been crucial to the provision of funds for investment in high tech and innovation, even as it competed with the rush of money to property and financial speculation induced by the tax decisions of its own government and administered by the banks that contributed relatively little to development.’

So, we may get clean banks; we may recapitalise them to international satisfaction. But there’s little in history to suggest this will make a contribution to national recovery. The progressive agenda remains; indeed, it becomes an economic imperative: credit as a social utility, an instrument of growth, subordinated to the needs of society.

For instance, if the Government had not privatised the Industrial and Agricultural Credit Corporations they would have two instruments to relieve the credit freeze. That’s what these institutions were set up to do in the first place. At the very least, these institutions could have guaranteed the loans from private banks.

And we will need capital for enterprise development, innovation investment, capital projects and infrastructural development. This calls for a state banking system created to meet these needs (or as Sean O’Riain suggests, as part of the solution, to enhance the role of Enterprise Ireland as a venture capital provider).

This even calls for a role for public enterprise in retail banking. As private banks withdraw from local communities, centralise their loan policies, remain indifferent to financial exclusion and tighten up credit to local businesses and households for the foreseeable future (all in the name of restoring capital), the opportunities for public enterprise banking based on the community development model in the US become more significant.

Yes, NAMA may succeed according to it lights. But that light won’t necessarily shine on the economy. If history is anything to go by, it won’t - dim-lit banks in a dark time. For what we need –a strategic and cooperative role for credit in economic recovery – is not something it is concerned with.

But we should be.   Otherwise we will be stuck in Avidyā and, so, in the continuing cycle of death and birth and death.

Risking Ayn Rand's Ire

Spare a thought for Mary and Sean. Both work full-time – not great paying jobs but together they pull in 60K with overtime. They need it. They bought a house three years ago, paying over the odds, but with a one-year old child they had to leave their one-bed flat. Their second child came along last year. Difficult, yes; but they were making a fist of it.

That is, until Fianna Fail got worked up. Since October, the Destiny Soldiers have really got stuck in to Mary and Sean. They took nearly €2,000 off the couple in levies. Then they smashed and grabbed another €2,000 by abolishing the Early Childcare Supplement. Mary and Sean didn’t like this but, sure don’t we all have to share the pain (that’s what RTE and the papers tell them everyday).

Now their bank has jacked up their mortgage interest. The Destiny Soldiers won’t interfere even though they practically own the bank.  Then, they read that Colm McCarthy’s committee wants to take another €720 off their Child Benefit. And they’re bracing themselves for the promised tax hikes in the December budget. Mary’s job is more insecure by the day and Sean’s employer has just unilaterally slashed the occupational pension scheme. They’re hanging on by their finger tips.

But now – they read that a property tax will be knocking on the front door.

In their collective nightmare they glimpse their future: Mary, unkempt, sits at the window all day muttering, the kids run around in unchanged soiled clothes, while Sean takes up drink, beating the cat whenever he’s not too drunk to catch it.

This is a family on the edge.

Opinion = Fact = The Whole Truth?: 24th July The Recession Diaries

On the One News at One, RTE’s business editor David Murphy concluded his piece on the National Treasury Management Agency’s Annual Report:

‘The other problem is that the credit rating agencies have downgraded Ireland’s debt. International markets will want to see serious spending cuts so the country can stop bleeding money day after day.’

There are three things wrong in just this last sentence. First, did David actually interview the ‘international markets’ to assess their views on the Government’s budgetary strategy? Indeed, how does one actually interview a ‘market’? Maybe, David meant those institutions that purchase bonds – insurance and pension funds, investment funds, banks (including Central banks) spread throughout the world. Did he interview them? Maybe, David meant the syndicates through which debt is bought and sold? Did he interview any of them?

I suspect not. If he had, he might have got a number of different opinions. Maybe they want to see ‘serious spending cuts’; or, maybe tax increases. Maybe they want to see stimulus programmes to restore growth and employment to the economy (for instance, this whacky employers’ group wants increases in wages, tax increases on the rich, increases in social benefits, and stimulus programmes out the ying-yang). 

Or, maybe, the 'markets' don’t really care about budgetary strategies in wee little Ireland. After all, if you just want to make some money on the six-month paper market, you know you'll get your money back plus interest regardless of what shape the country is in unless the capital is about to fall to economic Khmer Rouge brigades. But we’ll never know any of this because David in all probability didn’t investigate. He just repeated a line that comes straight from The Report.

Second – ‘ . . so the country can stop bleeding money day after day.’ Nice image. But there’s as programmed assumption that ‘serious spending cuts’ will somehow stop the bleeding. Maybe. Maybe not. It’s a contestable position. But David presents this as a ‘fact’ – an automatic cause and effect.

Now, I’ve gone over this ground a number of times but it’s worth doing it again. Because all we get in the media is ‘we’re borrowing €400 million a week’ (horrified tones, shaking of the head) – repeating a phrase used by The Chair of The Committee that wrote The Report. Now if the ESRI’s simulations are correct – that cutting €3 billion off public spending will only reduce our borrowing requirement by 0.9 percent – this would mean reducing that €400 million a week figure to €371 million a week – at best, at absolutely best.

That would stop the bleeding? To be honest, I wouldn’t want the Committee to apply triage to me.

Third is the way that opinion morphs into fact. The debate is no longer about different ways to bring the fiscal deficit under control. We just have the facts: markets want = serious spending cuts = stop the fiscal bleeding. The debate is circumscribed, limited, short-changed.

Let’s look at one fact. David referred to the credit agencies downgrading our debt. This did happen (first, Standard & Poor, then Fitch, then Moody’s). Sounds terrible. Must really be affecting both our ability to sell our debt and driving up the cost of selling our debt. Is either of these true? Let’s test these assumptions.

From an economic perspective, the higher the Bond Index the better. A high index indicates reduced cost of borrowing. A low index indicates increased borrowing costs. For instance, in the last 12 months:

• The lowest point in the Index was on January 26th when tit fell to 91.81 – with a gross redemption yield of 5.74 percent (yes, that was the time when Anglo-Irish was nationalised)

• The highest point was on December 3rd when the Index topped out at 101.43 with a gross redemption yield of 3.97 percent

We want to head back towards the December 3rd point. But surely with all those credit agency downgrades we must be going in the wrong direction. Are we?

No. The graph charts the Bond Index from March 23rd – a week before the first downgrade by Standard & Poor. We find that the credit downgrades didn’t have much if any affect at all. The Index continued to rise after two downgrades (Fitch downgraded the week after Standard & Poor). It dipped starting in May but returned to growth quickly and continued rising after the Moody downgrade.

Where are we now? In the four month period, containing three downgrades, we are edging closer to our previous 12 month high. We are closer much closer to this high than our previous 12 month low. We are moving slowly in the right direction. In the last few months we have closed the spread with German bond yields by a third.

Are we having trouble selling our bonds? Doesn’t look like it. In the last three days, the NTMA auctioned two bonds and Treasury Bills.They took in €2 billion and were over-subscribed by three to four times. In effect, they were turning away investors. The NTMA has pretty much borrowed all we need for this year and, in addition, have a cash cushion of €20 billion. Maybe we should get on to the credit agencies and ask them to downgrade us again (okay, a bit cheeky, but you get my point).

This is not an argument for treating the bond ‘markets’ as a cash cow. We have to take into account issues of debt, interest payments, yields, borrowing sustainability, etc. But a starting point is to, first, identify the real facts on the ground – and not just repeat something we heard and treat it as fact. Second, it is imperative that we separate out fact from opinion. This is not to dismiss opinion – informed opinion is always helpful, even (and especially) when it doesn’t coincide with our own.

When that happens, the quality of the debate improves, different voices are heard and new options may appear.

Unfortunately, that’s not happening now.

Public Sector Workers of Ireland Unite (you have nothing to lose but a shed-load of grief) July 22nd: The Recession Diaries

Boy, have public sectors workers been kicked around the block for drill. They wear the mark of Cain. They are one of the main reasons why the economy is in such rank order. There are too many of them. They are paid too much. They don’t work hard enough. Aren’t you glad you’re not a public sector worker? You can go out at night without fear of being accosted by roving bands of columnists from the Sunday Business Post and Independent House.

This is not much of an exaggeration – if at all. In particular, any chance of having a rational debate on the issue of public-private wage differentials is almost nil. No wonder so many public sector workers just keep their head down. But that’s not good enough anymore. There is a debate going on – and it's about more than just wages in the public sector:  it's about all wages (witness the latest attacks on the minimum wage) and about the public realm.  Therefore, it’s time public sector workers stop being defensive. Indeed, it’s time to go on the attack.

I want to suggest three starting arguments that can be used. These are ‘cut to the chase’ arguments: simple to use, simple to understand. In our attempts to ‘explain’, we can sometimes disappear down an Alice-in-Wonderland hole of occupational and educational variables, regressions, differentiations from the mean, etc. Any time a spokesperson for public sector workers is interviewed after the latest statistical outrage – harassed, harried and defensive – trying to explain, you can hear the interviewer drumming his/her fingers until:

‘Yeah, yeah, yeah – but the point is you people are paid squillions and you’re bleeding the rest of us dry. What do you have to say to that?’

Stop explaining. Stop defending. Present the argument in a way that is immediately comprehensible. Use each argument as a building block to the next. Tell a new story. And most of all, be confident.

Shock! Horror! McCarthy Vindicates Public Sector Efficiency! 20th July: The Recession Diaries

Noel Whelan wants you to read The Report. He wants you to read it now. Call in sick, dump the kids on grandma, kick the cat out – and read it. Mark Hennessy also wants you to read it – to know why you must take that bitter medicine. Ed Walsh wants you to read it because it will open your eyes to the vast range of waste and fat in the public sector. I want you to read it, too. But with a difference.

Don’t read it with it pre-conceived notions, based on previous leaks, spin and the current commentary. Read it carefully. Read what it says –not what others say. For if you do, you might find there is relatively little waste and fat in the operation of the public sector. Though there are improvements to be made – they are in the vast scheme of things, relatively small. You may find that The Report supports the findings published by the OECD and the National Competitiveness Council – that the Irish public sector is small and highly productive. And that in terms of tackling our fiscal crisis, never mind the broader economic crisis, proposed savings in the 'structural and operational reforms’ in the public sector, always desirable, will nonetheless produce little in the way of ‘savings’.

Fear and Loathing Reading The Report (or, it really is the economy, stupid): July 16 The Recession Diaries

No one should be too surprised about the broad thrust of the report of the Special Group on Public Service Numbers and Expenditure Programmes (here on referred to as The Report, best said aloud in deep, sombre terms). We knew there would be cuts of €5 billion, cuts in social welfare, health and education, cuts in public employment, cuts in programmes in every Department – an orgy of cuts to satisfy even the most insatiable deflationist gourmand. Okay, now we know the details. Now comes the concern, even outrage.

With over 300 pages to pore and sweat over, how do we get an initial handle on The Report without getting lost in the considerable detail contained therein? Can we take a step back and view it – much as we might examine the dark cloud from afar, to get a more comprehensive sense of the oncoming storm.

First, let’s deal with a political issue – and this is not down to The Report and its Authors. There is nothing in this – and I emphasis nothing – that could not have been drawn up by Ministers, their appointed advisors and civil service staff. Indeed, as the section under Methodology points out, many (most?) of these proposals came from the Departments themselves. No doubt, many of these proposals have been hanging around for a while – if only in shorthand.

Fianna Fail is cynically using The Report as a kind of good-cop, bad-cop pantomime. The Report recommends cuts of €5.3 billion. But the Government is only looking for €2.5 billion in current expenditure cuts next year. So when people get all wound up by this or that proposal in The Report, the Government will step forward with a reassuring tone: ‘Yes, citizen, that is awful. We won’t go there.’ See how it works? And, then we’re supposed to be grateful that Fianna Fail is only cutting off one finger rather than our whole hand.

But back to The Report proper. We are, in effect, being sold tainted goods. And the Authors are completely aware of this. The Terms of Reference state

‘Review the scope for reducing or discontinuing Expenditure Programmes with a view to eliminating the current budget deficit by 2011.’

This was written in November 2008. Events have overtaken this term – the Government’s strategy, revised in April, doesn’t envisage the current deficit being eliminated until 2014 or later. Nonetheless, the work of the committee was instrumental – to provide a sustainable basis for eliminating the current deficit.

Here, The Report employs an obvious sleight-of-hand. It talks about ‘savings’ of €5.3 billion but the Authors know full well that this ‘headline’ figure is disingenuous. It is not the same as reducing the current deficit or reducing the borrowing requirement by that amount. Indeed, they know that the fiscal effect of these cuts will fall short of €5.3 billion. The Report calls these cuts ‘savings’, all the while knowing that we will not save the amount they claim. It is misleading – knowingly misleading. Let’s take a look at two areas.

First, the Report suggests reducing public sector employment by over 17,000. Interestingly, the ESRI ran a simulation of reducing public sector employment by this same amount (they culled these numbers from the educational and health sectors; in The Report these sectors accounted for over 75 percent of overall employment cuts). What did the ESRI conclude?

• A drop in the GNP of nearly 1 percent (boy, we need that)
• A drop in consumption of half a percent (more, domestic businesses going to the wall
• Unemployment rising by nearly 1 percent (or an extra 20,000 on the dole queues)

And the fiscal effect? The reduction of 17,000 in public sector employment would reduce government expenditure by €1 billion (headline figure) but would only ‘save’ the government €492 million – less than half the headline figure.

Why is that? Because when you calculate the effect of the reduction on the economy (it is, after all, the economy, stupid) – the drop in output and consumption, the rise in unemployment – you don’t maximise the ‘benefit’ of the cut. In fact, you don’t even get half the ‘benefit’.

The second issue is the attack on the living standards of those on the lowest incomes. This is largely but not confined to the income of social welfare recipients; however, they take the brunt. A cut of 5 percent in social welfae rates is only the start but let’s stay with that. The Report claims a ‘saving’ of €850 million. But would it actually ‘save’ the Exchequer this amount? Hardly – and the Authors know this. Unfortunately, the ERSI did not calculate the effect of reducing social transfers. But we can make logical deductions. Given that those on low incomes have the highest propensity to spend, any reduction in that expenditure will

• Reduce spending tax revenue
• Lower consumption (purchasing goods and services from domestic businesses) which will,
• Decrease business profits tax revenue, and lead to
• Either wage freezes in the business or even job losses

The €850 million is therefore a misleading ‘saving’ figure. However, the Report is full of deflationary attacks on people’s living standards – beyond just reducing social welfare rates:

• Reducing the numbers on the medical card schemes and requiring those with one to make payments for prescription medicine
• Increasing thresholds for the Drug Repayment Scheme (which will impact most on low/average income groups)
• Reducing childcare subsidies to low-income families
• Means-testing the elderly’ Homecare Packages
• Increasing school transport charges

All these will have a deflationary impact. Could the Committee have made an economic impact assessment of all their recommendations? You bet. The ESRI has the computers, the software and the trained personnel to do so. Would it have been conclusive? Not necessarily. But they would have been indicative and given us some parameters to asses the impact.

So why didn’t the Committee do this? Quite simply, because it would have undermined their whole approach and opened it to general public ridicule. Here’s why.

If, say, that the entire cuts package actually only produced savings of 60 percent of their headline figures, then the €5.3 billion ‘savings’ would have melted away. We would be talking about €3 billion. And the simulations would have clearly shown what we intuitively know.

That The Report’s proposals, if implemented, will lengthen and deepen the recession, will cause further job losses, will further reduce consumption and spending.

And after all the pain what would be the fiscal effect of implementing every one of The Report’s proposals?

It will reduce this year’s Exchequer borrowing requirement from nearly €26 billion to €23 billion – maybe, if we’re lucky, if the combined effects of the cuts are not greater than their individual parts.

Can anyone claim that this is anything more than rearranging the deck chairs on the good ship Ireland?

That is why The Report should, after the few obvious common-sense measures have been cut out, be metaphorically placed in a large manila envelope, sealed and stamped with ‘Return to Sender’.

Softening Us Up: July 16th The Recession Diaries

In case you had any inclination, no matter how vague, of expressing concerns that the whole thrust of Colm McCarthy’s cuts committee is somehow mistaken – stop it. Get real. Grow up. Wrap yourself in the flag and sing scripted patriotic anthems to national deflation. Feel the pain – deeply and willingly:

'As Mr McCarthy’s proposals become clearer over the next while it is likely that many of us will need another kind of courage. The kind of courage needed to face unpleasant, uncomfortable realities. If the report (is) to have the kind of impact required then every sector will feel pain. . . It’s time to bite the bullet, make the recovery plan and stick to it no matter what.'

And:

'Let first snip be the deepest: The country is spending almost €50bn a year to struggle along, with just €30bn coming in from taxes, so radical measures are inevitable. The social welfare budget of €21.5bn is the elephant in the phone booth that can no longer be ignored.'

Yes, this is going to be an orgy with esteemed economists and commentators feasting on our economic innards. Cut employment, cut pay, cut programmes and living standards: you know it has to be done so shut up and let us get back to our food. Is there any release?

Fortunately, over at Progressive-economy, they will be commenting on the proposals today – so I strongly suggest you drop in on them later today, if only for much needed tonic. I will be posting later today on the subject as well – and over the next few days.

If progressives let the deflationists and real devaluationists run this agenda, it’s going to be ugly. It’s well past time that we draw the proverbial line in the ground. It’s well past time we took the fight (and fright) to them. Such as SIPTU’s Jack O’Connor, commenting on the ESRI’s broken record proposals to cut pay, welfare and spending:

‘. . . the ESRI has unanimously become nothing more than an intellectual mouth piece for the policies of the establishment. This is the institution which either failed to foresee the collapse of the credit led property boom or saw it and stayed mute about it, like all the other instruments of the establishment, such as the financial regulatory bodies. One would imagine that a good place to start addressing the economic catastrophe, which has been caused by pandering to speculators and bankers, would be to abandon that policy; but no, while virtually every other country in the developed world has embarked with evidently increasing success on such a path, we are condemned to the same old economics, pandering to the wealthy and imposing the burden of adjustment on working people.’

Now that’s what I’m talking about.  See you later today.

Penthouses, Basements and Nervous Sitting Rooms: July 14th The Recession Diaries

Over at Dublin Opinion, Conor McCabe is continuing his excellent analysis of contemporary class relations, this time using the CSO’s new National Employment Survey for 2007. He challenges the sloppy thinking that suggests we have a ‘middle-class’ majority, concluding that nearly two-thirds work in what can be properly called ‘working class’ occupations:

‘From the viewpoint of wages, or occupation, or employment status, or education, we’re constantly coming up with the majority of the population in working class jobs, with working class levels of pay. The middle class majority is a middle class myth.’

Prior to the last general election we were weighed down with simplistic analysis: ‘we’re all middle class’, ‘the aspiring middle class’, and such. We don’t hear these terms being bandied about much anymore. But, then, recessions have a tendency to cut through froth just as they cut through livelihoods.

I want to take a different a different route that nonetheless leads to a similar conclusion. Conor rightly warns us

‘Income is not a determinator of class, and to think of class in such terms is to miss the point that class is a social relation, not a category . . . there are enough commentators . . . who are all too willing to see class purely in terms of income, who maintain that Ireland has a majority middle class, with a working class rump and a lucky few at the top. And they cite Ireland’s wage levels as perfect proof of the middle class majority.’

Bearing this in mind, let’s play a little game. Let’s assume that ‘middle income’ can describe that large grouping between the lowest and highest income groups. Let’s adopt the mistake that many make – to assume that this middle stratum is the amorphous ‘middle class’. For I want to show how little this ‘middle grouping’ makes; and, further, that without the welfare state this middle grouping would be even more impoverished. This will hopefully complement Conor’s work as we head into discussion of pay freezes and social welfare cuts.

The EU’s Survey of Income and Living Conditionsprovides useful decile breakdowns of income from a variety of sources. Our first stop is the household deciles, but we should treat this with caution. Households in the higher deciles have more people working than those in the lower income deciles. Still, what does it tell us?

The top one-in-five households ‘earn’ (income from employment, self-employment and from capital) a lot more than the average middle strata, never mind the lower strata where there would be a disproportionate number of elderly and unemployed living alone. On average, the upper strata earn 3.5 times what the middle strata earn. The range of middle incomes stretches from €114 per week in the third decile to €1,236 in the eighth decile. Yes, the top twenty percent of households contain 37 percent of all those at work.  However, households in the middle 60 percent strata contain 60 percent of all those at work.

The CSO attempts to even out the demographic factors by use of net equivalised incomes. While this is an artificial measurement, it helps us plot the comparative earnings per strata. As we can see, the top 20 percent income earners make nearly three times the average of the middle strata.

It must be stressed that both these measurements are abstractions but what is noteworthy in both of them is how much more those in the top deciles earn than those in the great middle.  And how little those in the great middle earn over those in the lowly lowers.

So how are the majority of household’s incomes sustained if earnings from work are so low? Quite simply, through the welfare state. On average, social transfers (Child Benefit, pensions, social welfare payments, etc.) make up a quarter of households’ incomes. At the lowest income levels, social transfers make up 93 percent of total net income.  But even in the upper middle strata, the reliance on social transfers is not inconsiderable. These are the same transfers that commentators are demanding be cut - cuts that will have a severe, almost devastating, effect on those on the lowest incomes.

Where does all this lead us in practical political terms? That even at higher levels of the middle strata, households are closer to lower income groups than they are to the highest decile group. Households in the 7th highest decile – with more people at work – are twice as close in money terms to the 2nd decile as they are to the top earners. Whatever about the penthouse being not that far from the basement, clearly the case the basement and the middling sitting room are located on the same street.

Conor states that the ‘middle class majority is middle class myth’. Absolutely. And when we look at income deciles, we discover where this myth melts away. For the great middle strata are a long ways from mythical middle class bank accounts, reliant on social transfers, closer to the basement than to the penthouse and balancing on ever more precarious income streams.

Surely, there is a progressive politics in here somewhere.

Economic Shunning: July 6th The Recession Diaries

During the Great Depression, the British King announced he was cancelling the purchase of a royal yacht as a gesture of sympathy towards his beleaguered subjects. John Maynard Keynes claimed this was misguided. Instead of cancelling the order for his yacht, Keynes said the King should have purchased two yachts. His line of reasoning was that these orders would increase employment in the shipbuilding yards, would generate employment in the businesses that serviced the yards and, with the extra wages, would increase demand which would save jobs in local shops and businesses.

In other words, those individuals and businesses that can afford to do so, should circulate money into the economy to generate jobs and enhance incomes which, in turn, ‘enhances’ the initial injection; hence, the multiplier effect.

This is important to remember as the construction industry ends its first day of industrial action. I’m not going to comment on the particulars of the dispute. Those of us not involved hope that a resolution that can be found, that agreements are honoured and that economic justice is done.

However, I am struck by a particular line that is emerging from this dispute which, if universally acted upon, will do considerable harm to the prospects of economic recovery. On Morning Ireland this line emerged three times. First, in an interview with Jack O’Connor, SIPTU President:

Interviewer: ‘Do you anticipate any problems in explaining to your own members why they should support action for more money for one group of workers when so many workers are not getting more money they’re actually getting less if they’re not unemployed?’

And again, with O’Connor.

Interviewer:  ‘There’s no question of more money for these people (i.e. other workers). They’re either getting the same if they’re lucky or their pay is being cut and yet you’re advocating more support for a group of workers who are looking for more pay.’

And once more, this time with a striking worker:

Interviewer: Do you think you have the general public’s support? It’s a tough time to be going on a strike and a lot of people losing their jobs and take pay cuts.'

This ‘line’ – striking for increased pay while others are losing pay and even their jobs – could be applied to any dispute anywhere, from electricians to retail and hotel workers, to factory and office workers, anywhere in the economy. It could be applied to any request for higher income – whether it be pay, social transfer or in-kind increases through the reduced costs of public services. The effect is to ‘guilt-trip’ anyone making such requests/demands, never mind anyone acting on this – either industrially or politically. Such people looking for higher pay are selfish, having no sympathy with those who don’t have jobs. They should be shunned:

'You want more pay?! You should be grateful to have a job. Now get back to work.’

This ‘line’ is exactly what the economy doesn’t need. Higher wages and disposable incomes are a necessary element for economic recovery and, therefore, should be supported; it should be supported by those who want to see us get control of the fiscal deficit and the unemployment crisis; most of all, it should be supported by other businesses who are reliant upon increased domestic demand. Let’s go through the arguments.

On the fiscal level, a pay increase is of more value to the Exchequer than that same money retained by an enterprise. For each extra €100 in pay results in an increase in Exchequer / Social Insurance Fund revenue €40.75 at the standard rate and €61.75 at the top rate (this combines income and PRSI from employees and employers). That’s quite a kick. You would think, therefore, that the Government would be quite anxious to see pay increases in the private sector where affordable. Multiply that €100 and extend it to a few hundred thousand workers, and the money will be flowing in – and all that without unpopular tax increases.

Just as importantly, though, increases in disposable incomes can be translated into higher demand. Quite simply, people with more money in their pockets (either because they got a job, got a pay increase or got a tax cut) are more likely to spend it on goods and services produced by domestic enterprises than people with less money. This is, of course, not a straight equation. People may well take the increased income and save it; or start paying off debts; personally rational, economically inefficient. That is why tax cuts can be hit and miss – with potentially debilitating consequences for the Exchequer.

However, this is not the case with a pay rise. Even without the extra consumer spending, the Exchequer gains. In turn, the Government could use that extra revenue to increase demand (e.g. engage in job-creating investment). Further, there is little doubt that generalised wage increases for average income earners will ‘leak’ into the domestic economy, to a greater or lesser extent depending on circumstances. To the extent that it does, the economy has the potential to get a double benefit.

Where does that leave ‘inability to pay’? It can become a pivotal point in increasing Exchequer revenue and domestic demand. This clause has been used in the past as a defensive weapon for companies to postpone/suspend pay increases agreed at national level. Now it can be turned into a positive weapon for economic recovery.

There is no doubt there are companies that cannot afford to pay wage increases – and therefore, cannot contribute to increased demand. This, in turn, harms other companies – those that sell goods and services into the domestic economy. They receive less sales revenue and experience a decline in turnover, resulting in payroll cuts in wages and/or employment.

Therefore, it is all the more imperative that those companies that can afford to pay, do so. In effect, these companies subsidise those enterprises that cannot afford to pay. This subsidisation increases demand and tax revenue which helps weaker companies in two ways – it increases the prospect of higher sales revenue and increases tax revenue with which the state can promote increased demand.

Of course, this is not how IBEC sees it. They tore up the current wage agreement earlier this year. The only beneficiaries of this act were companies that could afford to pay. It amounted to nothing less than fiscal and economic sabotage. The losers were not just the employees affected; the Exchequer loses out on the extra revenue and businesses reliant on domestic demand lose out – since workers have less money in their pockets. To the extent that this feeds into lower consumer confidence, domestic businesses take a double hit.

When workers engage in industrial action in pursuit of higher pay, there may be many points of legitimate debate. However, the generic allegation that higher wages – and taking either political or industrial action in pursuit of that – is somehow damaging to the economy, and that anyone who engages in it should feel ashamed, only serves to justify deflation.

Hopefully, one day we’ll hear a question on a current affairs programme being put to a company owner:

Interviewer: 'You have a profitable company. Yet you’re refusing to pay your employees a wage increase. How can you justify such an action that depresses demand, short-changes the Exchequer, and contributes to reduced economic activity?'

I’d sure like to hear the answer to that one.

[And, yes, by the way – I support the electricians.]

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.

Histories At Dawn: June 30th The Recesion Diaries

History is such a malleable thing. It can be twisted this way and that to support or oppose any contemporary position. Take An Bord Snip Nua – this is a grand thing altogether. How do we know this? Because, sure, its predecessor was such an outstanding success. Yes, it brought pain but it set the groundwork for the Celtic Tiger economy. So goes the history; if we gird our loins, cut and hack away, we too can replicate this outstanding success. Suffer a couple of years of fiscal pain, and economic paradise awaits.

But history is not so straight-forward and certainly not so reductionist. Was it really the case that the ‘cutbacks’ endured under Mac the Knife (Finance Minister Ray McSharry) were (a) successful and (b) set the preconditions for the growth explosion in the mid-1990s? Let’s take a look at some provocative facts for clearly there is a lot of myth making about that period – a period that ran from 1987 to 1989, encompassing three budgets.

First, how much was cut? In nominal terms, public expenditure wasn’t cut – it increased. During the three budgets, total expenditure increased. Current expenditure increased. Even excluding interest payments, current expenditure increased by over 5 percent. The main target of the knife was that ol’ standby – capital expenditure. Cutting investment is the easiest option. It doesn’t take away from what people already have – it only defers something we don’t have. This started a period of long-term chronic under-investment in our economic base.

But that’s only Irish public expenditure. Don’t forget – this was ‘begging bowl’ days, when Ireland was one of the poorer performing economies in the EU. So what about public expenditure in Ireland? Between 1987 and 1989 we received over £1 billion under the EU Social and Regional Development Funds - a substantial 38 percent increase in the previous three years under the hapless Fine Gael/Labour government. Now, £1 billion might not sound much but were we to receive the same proportional amount it would come to nearly €6 billion over the next three years. That would subsidise a lot of cuts, but it’s doubtful if the EU today would play ball.

Second, there is much talk about how the minority Fianna Fail government brought down the public spending/GNP ratio. In 1986 public expenditure amounted to 54.7 percent of GNP (if you think that’s because we had some kind of super-Nordic government, remember – it was largely due to interest payments and social welfare). By 1989, spending was brought down to 45.1 percent. But this was only the continuation of a trend that was already in place since 1983 when expenditure was over 62 percent of GNP.

But there was one thing that saved Fianna Fail’s bacon. The numbers on the Live Register started to fall. Was that because all this fiscal contraction started producing jobs? Hardly. Between 1986 and 1992, the economy was generating an average of only 14,000 new net jobs, and while unemployment didn’t rise it didn’t fall either. Between 1988 (the first year of the ILO calculation) and 1993, unemployment fell by less than 1% leaving nearly 16 percent still unemployed. So what happened here?

Yes, you guessed it: emigration. Between 1987 and 1989 over 100,000 emigrated. While not all of these would have been of working age, it’s a fair bet most were – the overwhelming majority. The numbers emigrating amounted to 8 percent of the entire labour force in 1989. To put this in perspective, we’d need over 180,000 to leave over the next three years to reach this level.

Emigrants are great. You don’t have to pay them any dole. They reduce demand on social services. They don’t end up clogging our jails. It’s a great solution, and it certainly gave the Government at the time a real dig out. Expansionary fiscal contraction? Try expansionary demographic contraction.

There is no question about the impact of some of the cuts during that period. But, as always, there were choices. Fianna Fail did choose – they chose to abolish the Land Tax – just as they abolished the Wealth Tax a decade earlier. When it came to patients being moved out of closed hospital wards or the IFA, Fianna Fail certainly knew whose side it was on.

Whatever about our ‘historians’ today, what did contemporaries think of this policy? They couldn’t ditch it fast enough. First to go was Mac the Knife himself – kicked upstairs to the EU Commission. During the 1989 election campaign – resulting from a lost vote on a non-economic private member’s bill – Charles Haughey apologised on an RTE phone-in show for not realising the damage being done to cutbacks in the health services (what’s new?). The election result put the seal on Fianna Fail’s historical anti-coalitionism, and for the first time they entered cabinet with another party – the right-wing PDs. What happened then? More of th same?  Don't you believe it.

The Fianna Fail/PD government went on a spending spree. In the very first budget spending cuts were reversed – and how; public spending rose by 7 percent. In the three budgets under this government, spending increased by over a quarter while capital spending increased by a third.

And then there was that EU dosh. It really started flooding in – over £2.2 billion in the three year period. This was more than double the amount received in the previous three year period. Public expenditure in Ireland leaped and bounded ever upwards. 

And this was done against a pretty bleak fiscal situation. While spending was being increased, the debt/GDP ratio was over 85%, though falling; interest payments on the debt soaked up a quarter of tax revenue and over 7% of GDP (compare that to payments in 2008 which made up only 1 percent of GDP). Still, they kept spending.

And then the 1993 devaluation – which made our exports cheaper.

And then the fruits of years of work by the IDA – the multinationals swept in, bringing mega-growth.

And the direct state investment into the high-tech domestic sector.

We never hear that narrative – one that poses spending, investment and public policy as the driving force in the emerging economic boom. Rather, all we get is a selective and reductionist recitation of history, skewered to fit a set of pre-conceived policies.

And just remember, when you read reports of today’s Bord Snip proposing cuts in social welfare, that throughout the late 1980s and early 1990s, social welfare increased every year.  And public sector workers received pay increases.

History has much to teach us.

Dates with the Devil: The Recession Diaries June 28th

What would be your reaction if it could be shown that a set of policies would result in deepening the recession, increasing unemployment, reducing domestic demand (meaning more business closures) while having only a minimal effect on the fiscal deficit? What would you say to the political party or the Minister who offered you such a programme? You’d probably say:

'Get thee away from me, fiscal Satan!'

And you’d be right. But hey, this is Fianna Fail country, where economic demons rule and the orthodoxy hail them as angels, even saviours.

The ESRI has done us a considerable service by showing what the impact of certain budgetary policies will have on economic activity. This is all the more urgent with the IMF report calling for a gigantic smashing ball to be hurled at society - repeatedly. And today’s Sunday Tribune suggesting that An Bord Snip will come out with a swinging programme of cuts, cuts, and more cuts.

The ESRI takes a number of policy proposals and shows how they will affect a range of economic categories – GNP growth, unemployment, private consumption, the borrowing requirement, etc. Here’s one example. The Minister comes into the Dail and in solemn tones announces the Government will have to fire 10 percent of all health and education staff (okay, provocative; he will reduce the payroll through redundancies, wastage and vacancies left unfilled). Oh, he will be sorry, he will wish he didn’t have to do it, but times are hard and we have to reduce that ol’ fiscal deficit, so there’s no alternative; yes, he’s possessed by the demons. So, what will be the effect of reducing the health/education payroll on the economy? The ESRI provides hard numbers for the first year:

• GNP will decline by 0.9 percent 
• Unemployment will rise by 0.9 percent 
• Consumption will fall by ½ percent in the first year, falling by over 1 percent in the third year
• While the public sector wage bill will fall – by €1 billion, the effect on the borrowing requirement (and, so, the deficit) will be negligible. This will fall by less €500 million, or 0.2 percent of GDP.

Wow. Getting rid of all those lazy, unproductive workers – which we are told is an absolute virtue – sends all the indicators in the wrong way. And we only end up cutting the borrowing requirement by a 0.2 percent (remember, the IMF and their deflationary cheerleaders here want the borrowing requirement cut by nearly 10 percent in four-five years).

Let’s say the Government (a) cut public sector wages by 5%, (b) cut health and education employment by 10%, and (c) cut capital investment by €1 billion. What would be the reaction? It would be called a victory, proof to the ‘international markets’ (those grand bazaars lodged in the boardrooms of hedge funds and pension funds and banks) that we are ready to take ‘courageous action’. After all, this would cut €3 billion off Government expenditure – nearly two-thirds of the amount An Bord Snip is looking for.

Now, in the real world, what would be the economic effect of this ‘victory’? According to the ESRI, in the first year (2009) the economy declines by 1.5 percent, consumption falls by slightly less, while unemployment increases by 1.3%. Just what we need – more recession, more unemployment and falling domestic demand (why isn’t the Small Firms Association jumping up and down in protest against these policies, rather than supporting them). And with the deficit expected to be between -12 and -13 percent, how much do these measure reduce that figure? By 0.9 percent. More pain, more misery and minimal effect on the budget.

We would still have an unacceptably high deficit but, now, by reducing growth and domestic demand, while increasing unemployment, we would find it an even greater burden to generate the growth needed to overcome our mounting debt problems.

A second finding of note from the ESRI calculations is that tax increases have a less deflationary effect on the economy. This is important since we are constantly being lectured that public spending cuts are more ‘beneficial’ than tax increases. Let’s take the following three taxes:

• A rise in income of tax approximately equivalent to a 1% rise in the standard and higher tax rate) 
• A carbon tax of €34 per tonne, and 
• A lump-sum house property tax, averaging roughly €600 per house

The combined effect would be to lower GNP but only by 0.3 percent (five times less than public spending cuts), increase unemployment by only 0.3 percent (four times less) and reduce the fiscal deficit by 1.4 percent - ½ percent more than spending cuts. But, unsurprisingly, these tax increases would reduce consumption – by 2%, substantially more than spending cuts in the first year.

Now, I wouldn’t push this distinction too far. These tax increases are still deflationary and their impact on the fiscal deficit is still insignificant. And, like, spending cuts, we may end up years hence struggling with a stubbornly high deficit and a reduced capacity to bring it down. But it shows that more carefully crafted taxes – focusing on high income and wealth sectors – can have even less deflationary effect. True, they wouldn’t immediately raise the same level of revenue. But now we know.

That continuing with the Government’s policies, the policies of the Right, the policies advocated by orthodox commentators will only sink the economy further with marginal effect on the deficit. The ESRI’s conclusions confirm a truism, which somehow gets lost in translation here: that you can’t cut or tax your way out of a recession. You can only grow.

Anyway up for an exorcism?

The IMF Rules OK: The Recession Diaries June 25th

Great. Coming home from a few days break and there’s the IMF, holding open the cell door. The projections are worrying enough, though hardly new.  Still, to be reminded one more time that the economy is crashing through the double-digit barrier - it doesn’t really perk up your day. The real worry is the prescription, the ‘medicine’ they propose. This will be a real fillip for the government, the orthodoxy, the Right. For the IMF is proposing nothing less than a massive hollowing out of the economy and public realm. With international blessing, Fianna Fail will up the ‘cut’ stakes while the Left and the trade union movement is in danger of marking time.

Ah, the IMF; its track record of interventions doesn’t fill one with warm, fuzzy feelings. Just ask Argentina or Kenya or most other countries that have had to slash n’ burn their economies to get a ‘bailout’ (never mind the dictators that the IMF supported – dictators that ran parallel slash n’ burn policies against their own populations). And, so, the IMF and Ireland:

‘. . . the execution of their ambitious consolidation plan (i.e. the Government’s expenditure cuts) will require a continuing commitment to address sensitive expenditures, including the public wage bill and the scope of social welfare programs. . . To bear fruit these efforts will require determined execution over several years.’

What a future. First, they propose that ‘social welfare expenditures must better target the vulnerable’. This is code for wide-scale means testing. Indeed, the IMF welcomed the Government’s commitment to move away from universalism. This is a bit of a hoot.

Ireland has the least amount of universal payments in the EU – by a wide margin. Whereas, only 11% of all social benefits are means-tested in the EU, Ireland leads the means testing league at nearly 25% (compare this to Denmark and Sweden where only 3% of benefits are subjected to means testing). Moving away from universalism? We’re already there.

While Child Benefit is usually held up as the main ‘universal’ payment – one to be targeted through means testing or taxation – there is another target: social insurance. We can expect the Government to dilute the insurance principle and move towards means-testing Jobseekers’ Benefit, Disability Benefit, etc.

Secondly, the IMF calls for further public sector wage cuts and/or cuts in employment. Surprise, surprise. The IMF is deeply, deeply concerned that public sector employment grew from just under 14% of total employment, to just under 16% in 2008. Now, you might not think this sounds like much. That’s because it isn’t. But it’s enough to get the IMF worked up – never mind that Irish public sector pay costs lag behind most other countries as a proportion of GDP; never mind that Irish employment of civil servants is the fourth lowest out of 26 OECD countries (civil servants as a percentage of total employment).  New report - same ol' scapegoats.

The IMF doesn’t even bother assessing the negative impact (i.e. multipliers) of large-scale cuts in wages, Government consumption/investment, social welfare, etc. on the economy. Instead, they offer us a faith-based approach to fiscal correction; that somehow hollowing out the economy will lead to growth and consumption and investment. How? They never quite say. They focus on one thing and one thing only: the deficit. And what an accountancy-inspired focus it is.

They are proposing the Government – if it is to reach fiscal nirvana – will have to cut current public expenditure by over 23% by 2014. To give you a snapshot idea of what this means, it calls for the Government to cut expenditure by over €12 billion in 2009 terms. You could abolish the Department of Education and still fall well short of the intended target.

In one respect, this is all nothing new. We’ve been feeding off a steady diet of cuts and contraction since this recession gig got hopping. So what’s one more ‘expert’ commentary? Little in itself. It’s the impact on an alternative dialogue, though, that makes one depressed.

ICTU is otherwise engaged, trying to find some traction in talks with the Government to reach an agreement that will, regardless of minimalist measures to protect jobs and pensions, reflect the broad thrust of the IMF.

Labour’s reaction to the IMF report was to use its analysis to bash the Government over past mistakes. This is a fine as far as it goes but the fact is that even the dogs in the street are familiar with the arguments over the property bubble. What the Left has failed to do to date is mount a fundamental challenge to the very premises of the IMF report and the orthodoxy’s prescriptions; namely, the cuts agenda. The Dail debate can give the Left an opportunity to correct this. Let's hope the jump in with both feet. 

For without that fundamental critique, we allow the IMF to rule us by default, by setting the mood music, by establishing the most rigid of parameters. We are trapped, prisoners. We get to choose our warders but we don’t get to leave. We get to decorate our cells but we must pay respect to the walls. We get the semblance of choice but really, there is only one choice.

The IMF’s choice. A logical end to a desultory debate.

May 28th Lunchtime: The Recession Diaries

Over at Cedar Lounge Revolution, WBS is doing a good job tracking the ongoing campaign against Ireland’s borrowing capacity and, in particular, the performance of the National Treasury Management Agency. On a recent post, I agreed but received this challenge from barratree

Michael, - I’ve yet to see you addressing the point that most people are concerned about. Its the medium to long run ability to finance the country not right now in the present. If we undertook a massive stimulus plan in would completely undermine any trend towards a sustainable budget. After 2 years we would be looking at laying off all those people taken on by the state to build railway lines etc and there still being no jobs for them. And the deficit would be sky high. B

I accept that, in arguing for an expansionary investment approach, I might not have comprehensively addressed the issue of fiscal sustainability. However, I question whether ‘most people’are concerned about long-term budgetary issues. People I come across are more worried about losing their jobs, or getting a job, or losing their business or their pension, etc. Nonetheless, barratree has asked legitimate questions. So here goes.

May 25th Afternoon: The Recession Diaries

Boy, was Senator Fergal Quinn taken in. Or was he? In his recent column, ‘Getting people work a priority’ he attempts to make two real-life comparisons – one based on a letter he received and one from what he read in the paper. Senator Quinn forgot the first universal rule of life: don’t believe everything you read in the paper. And certainly don’t be drawing policy lessons from what could be mere fiction. It leads you down all the wrong roads.

Senator Quinn had received a letter from a recently qualified solicitor who had been let go from work. She found part-time work in a dairy business but offered to work free in a small legal firm. She was so successful that the firm hired her. Sen. Quinn rightly praises the persistence and success of the young solicitor (though his contention that ‘supply creates its own demand’ doesn’t’ quite translate to the larger economy which is suffering from a lack of demand regardless of the growing supply of unemployed).

The problem, however, starts when he compares this with another ‘real-life’ situation:

‘Compare this . . . to that displayed in a recent letter to the Irish Independent, in which the letter writer spoke of a friend who had recently been made redundant. Far from being spurred to seeking a new job, the friend said he was better off on the dole: by drawing on various welfare payments available to him as a father of four with a mortgage, he said he now received the equivalent of €39,000, a sum well in excess of the €35,000 he had been earning before losing his job. This allowed the newly unemployed man to spend most of his greatly expanded free time on the golf course, all at the expense of the taxpayer.’

This story has been doing the rounds. The letter writer claims his unemployed friend is better off by

‘ . . €10,034 per year for working on his golf handicap . . (this) could even drive our small economy to collapse as the welfare bill gets bigger and bigger as more people, including myself, ask: why should I bother to go out to work when it is basically costing me money to work? Unless something radically changes, I will be joining my mate on the golf course very soon.’

I wouldn’t start polishing those golf clubs just yet, though; at least not until we examine this story a little further. For the story is riddled with mistakes and misconceptions. First, the golfer’s work income.

He had a net income of €28,854 according to the letter. Not a whole lot, certainly not with four children and a dependent spouse. But here’s the first problem: if this were real life, the golfer would be in receipt of Family Income Supplement(it seems clear he was a PAYE worker – working overtime, losing his salary, etc.). In general, the golfer would have been entitled to €147 per week, or over €7,600 per year. He would also have been entitled to €8,856 in Child Benefit, if his children were under 18. In other words, his net income could have exceeded €45,300 per year – not the €28,854 as the letter writer assets.

[As well, the letter-writer didn’t think this situation was a little curious – that with less than €29,000 net income, the golfer was apparently paying a mortgage of €18,000 per year. This can happen in extremis – such as when a partner loses their job. But there’s nothing to suggest our golfer was hit with this double-whammy.  Rather, he still managed to get his 18 holes in, despite the fact that, after housing costs, this family of five would have been living on €211 per week before paying for utilities, telephone, medical bills, etc. How did this golfer afford the green fees?]

Now the golfer is unemployed and working on his putting. What’s his income now? The letter claims he's on Supplementary Welfare Allowance (though an insured PAYE worker would probably be on Jobseekers’ Benefit or, at least, Allowance). But let’s go with it. SWA is a tough means-tested gig. And you have to register for work with FAS. But if you satisfy the conditions, you will get, as the letter claims, €23,083.

In addition, as the writer correctly calculates, the golfer would be eligible for other schemes (Back-to-School allowance, medical card, etc.). However, another problem – and this is a big one – is the claim that

‘As he also has a mortgage, he is entitled to mortgage interest supplement which pays all the interest on your mortgage. In his case, this was €1,200 per month of his €1,500 mortgage, or €14,400 per annum.’

Is our golfer being paid over €14,000 a year in Mortgage Interest Supplement (MIS)? This is another means-test, tough and complicated. If you don’t believe me, get your head around this. However, the guiding rule is:

‘Generally the Community Welfare Officer will ensure that your income after paying the interest on your mortgage does not fall below than a minimum level. This level is the Supplementary Welfare Allowance minus €18 (€24 from 1 June 2009).’

Even at a minimum, with the weekly write-off, MIS doesn’t pay all the interest, despite the letter’s claim. It is difficult to calculate what the supplement might be (even the Social Affairs Department claims ‘calculating your Mortgage Interest Supplement can be difficult’). Assessed means (savings, investments, etc.) will reduce payments further.

But the Annual Statistical Reportreveals that the average MIS payment was €60.22 per week. No doubt, average payments are rising, as more mortgage holders are being made unemployed. It’s a big jump, however, from an average payment of €60 per week to the letter’s claim of €277 per week, which is incorrect anyway. Look at this discussion where someone with far less income was entitled to nothing. Though the situations aren’t completely comparable, it shows how difficult it is to get MIS – even with people on low incomes.

Where does all this lead us? First, the letter is incorrect, to the point of fiction. I’m not suggesting the letter-writer is making it up. He may well have a friend in the situation he has described – but between the mistakes relating to social welfare entitlements, in both work and in unemployment, and the very real likelihood that his friend is not being completely forthcoming on all aspects of his situation, you have the makings of an urban myth.

It’s not unlike those myths from the 1980s, when people ‘knew for certain’ that single mothers were getting free colour TVs from the health board. Or the myths from the 1990s when ‘non-nationals’ were given cars from that same generous health board.

But it suits Senator’s Quinn agenda just fine:

‘The welfare state that this golf lover is relying on has been one of the greatest achievements of developed countries in the 20th century. It has mitigated some of the worst side-effects of capitalism, by assisting the unemployed and ensuring that access to health and education are not based solely on inheritance or family income.’

Doesn’t that just make you feel fuzzy all over? But now the sting:

‘But it is also right and proper that the State makes it attractive and financially worthwhile for people to take a job rather than live off the State, whatever their personal situation. This means that the State must modify our benefits system to ensure that it is always more worthwhile to work than to stay inactive.’

Of course, Senator Quinn could be referring to how the state could intervene to help raise low wages (introduce right to collective bargaining, pressure IBEC in social partnership talks, raise minimum wage and JLC rates,etc.) but I doubt it. Rather, it’s the ‘modify our benefits system’that Senator Quinn is getting at; making it tougher to get basic payments, reducing welfare rates, confiscating golf clubs, tennis rackets and football boots from those made unemployed. This argument works, after a fashion, if you first buy into the notion that people are somehow living high on the hog on welfare.

But that isn’t the case. With high rates of low-pay and, compared to other EU countries, low social welfare rates; combined with a woeful level of social protection measures and universal services (free health, low-price public transport, etc.) – it’s tough and getting tougher for a lot of people whether in work or on the dole.

Senator Quinn may be easily misled. But maybe he wants to be. It serves a simplistic and wrong-headed politics. This is one more contribution to the ‘most generous social welfare rates in the EU’ argument, sizing up those on low incomes for cuts in their living standards, preparing to rain a deluge of golf balls upon them.

Fore!

May 22nd Morning: The Recession Diaries

Jim Stewart has come up with a provocative idea to stimulate one small part of the economy:

‘Some possible measures to stimulate spending could be vouchers which must be spent within a limited time period, or vouchers which can only be spent in hotels / guesthouses (accredited by Bord Failte). This latter policy has the advantage of minimising leakage, and most likely stimulating spending of a multiple of the value of the voucher.’

Interesting. There is a tendency to conceive of economic solutions as silver bullets, big ideas. The orthodoxy wields a big axe. Even stimulus arguments have a ‘big-cheque’ sense about them. However, Jim’s proposal raises the prospect of economic recovery as a series of small, targeted endeavours - in this case, a series of forensic stimulus initiatives.

It raises, however, another question – what role can consumer spending play in recovery? This is, unfortunately, complicated by another concern – the role of materialism and ‘consumerism’. This can lead us into a bottom-less pit of debate over general statements like – ‘We’ve become too materialistic’. Does this refer to the quality of our consumption? The wastefulness? The longing for some ideal of a slower, richer quality of life that existed (or not) in the past? A critique of the ‘keeping-up-with-the-Jones’? Such phrases can mean anything you want.

In any event, it is an old debate. Karl Marx, the comeback kid of the 21st century, put it first and probably still best:

‘The extent of the power of money is the extent of my power. Thus, what I am and am capable of is by no means determined by my individuality. I am ugly, but I can buy for myself the most beautiful of women. Therefore I am not ugly, for the effect of ugliness is nullified by money. I am lame, but money furnishes me with twenty-four feet (a horse and carriage). Therefore I am not lame. I am bad, dishonest, unscrupulous, stupid; but money is honoured, and hence its possessor. Money is the supreme good, therefore its possessor is good. Money, besides, saves me the trouble of being dishonest: I am therefore presumed honest. I am brainless, but money is the real brain of all things and how then should its possessor be brainless? Besides, he can buy clever people for himself, and is he who has a power over the clever not more clever than the clever? Do not I, who thanks to money am capable of all that the human heart longs for, possess all human capacities? Does not my money, therefore, transform all my incapacities into their contrary?’

I spend (if I have the dosh), therefore I am. So to what extent have the Irish bought into rampant consumerism? And should we incentivise people to spend more? On the first question, international comparisons don’t really put us in the big spender league.

Private consumption makes up less of our GNP than the EU average (and even below the frugal Germans). Private consumption makes up less than 49 percent of our GNP compared to an Eurozone average of 57 percent. It’s not much different from other countries with small home markets (e.g. Luxembourg, Netherlands, etc.).

When it comes to spending per capita we’re again well down the league. The Irish spend, per capita, 13,500 (PPP) compared to the average in other EU-15 countries (14,560 PPP). Every man, woman and child could spend 8 percent more and they’d still be only average spenders.

Maybe the Irish, though, are irresponsible spenders – blowing our money on shoes and lotto tickets while our children starve in rags. It’s a theory but, again, the statistics are more interesting.

Since 1995 overall Irish personal spending more than trebled as you would expect – rising to over €91 billion before taxes. For every €100 of that increased consumer spend, a third - €34 – went on housing, food (excluding eating out) and utilities. This is fairly necessary expenditure. But there are other little nuggets.

We spent nearly as much on public transportation as we did on clothing and footwear. Of course, the volume of clothes purchased increased substantially – but we can thank exploitative world trade for that; all those sweatshops in Asia driving down prices.

Okay, we probably spent more on booze and fags than what was good for us – but in monetary terms, we didn’t go crazy. And all those cars and petrol, it still doesn’t make up a significantly high proportion – especially give land-use policies that forced people further into the hinterlands with few public transport options.

We can have a lot of fun dissecting these numbers (and getting a breakdown by household income would be fascinating) but the one thing that is noticeable that a substantial proportion of our increased spend is on services – personal, professional (medical, education, etc.) and others. This is noteworthy because one of the arguments against stimulus is that people would spend it on imports. However, services have a high labour-content and in many areas – education for example – a low import-content. If one excludes necessary items (food, housing, utilities), more than 35 percent of our extra spend went on services.

That’s not to dismiss the ‘import’ argument in our spending patterns. The cars, petrol, clothes, washing machines – they all have to be imported. But there are a couple of points to remember:

• First, most imports are purchased by the business sector to produce their goods and services. Clearly, no one would argue that we should dampen enterprise in order to avoid leakage.

• Second, even those items imported for private spending have a high domestic content. Take clothes – the primary product is imported. But how much of the primary product is reflected in the final price and how much the domestic output? After all, it has to be brought on shore, transported, warehoused and shelved, sold and bagged, etc. This all is home-grown activity. And what about the services the retail enterprise purchases – legal, financial, advertising, cleaning; again, largely domestic activity. Of course, the picture looks different when examining car sales – where the primary product comprises most of the final price.

A more thorough examination would show us to what extent spending is ‘leaked’ and what stays here – but on the CSO numbers a large part of it stays put. All that said, we have to do something about consumer spending. It wasn’t very large to start with – in comparison with EU averages. And, if the Retail Sales Index is anything to go by, it is collapsing – with all the downside that has for employment and enterprises reliant upon domestic demand.

Excluding motor sales, retail spending is falling – in value terms – by 11 percent annually. And it’s accelerating. The collapse is more severe here than in almost any other EU-15 country (only Spain is suffering more). That’s where Jim’s proposal comes into play. A voucher for hotels has a number of advantages:

• First, it increases ‘sales’ in a sector heavily reliant upon labour – probably the most labour-intensive sector we have.

• Second, other services benefit in the locale where the hotel voucher. I stay at a hotel/B&B in Westport. I’ll be spending money in restaurants, shops pubs in the area. It becomes a stimulus for the local area beyond just accommodation.

• There are other down-stream benefits. Instead of consuming ‘transport’ abroad (private or public), I consume it here, via my car or CIE. Yes, there is leakage here but the money goes to an Irish transport company, an Irish petrol station.

Of course, there might be issues regarding state-aid rules. But I suspect this is going to be less severely applied than in normal times. After all, nationalisation is all the rage while payroll subsidies paid out by some countries like Germany and the Netherlands could be distortive of competition – but they’re going ahead anyway. Making vouchers available to all EU citizens to spend in Ireland might get over that problem - and be a welcome boost to export earnings.

From Jim’s simple proposal we could – if we had the data (e.g. import content, labour content, domestic output and activity – survey the whole range of domestic activities (even down to hairdressers) that could be boosted with forensically targeted stimulus measures.

This is what the Obama administration has done – broken down its stimulus package into a series of targeted measures; businesses from all sectors are lining up to get a piece of the action. For ultimately, stimulus is the most pro-business activity you can have in a downturn.

None of this implies that there aren’t issues regarding our spending. Socially-conscious spending, ethical spending, sustainable spending, consumer conscious spending; we need to assess how we spend and what impact it has – on the environment, on society, on community bonds. A stimulus package could become the first in a series of lessons on responsible spending (we could even extend Jim’s vouchers only to those establishments that recognise their employees right to collectively bargain, pay ‘living wages’ and are tax-compliant).

So let’s spend wisely, spend well and, with the help of state resources, help spend our way out of the recession.

May 19th Lunchtime: The Recession Diaries

Be under no illusion – the economic debate is now morphing from an obsession with debts and deficits into a full-blown assault on the public realm that has more in common with Thatcherism than it does with mere fiscal prudence. For some time, the more extreme fringes of the Irish Right have been steadily moving centre-stage. Meanwhile, the Left and the trade union movement find themselves slowly being pulled into this maelstrom, at best shoring up defensive arguments that will easily be breached.

The latest assault has been on social welfare rates and the minimum wage. Dan O’Brien of the Economist Intelligence Unit is reported in the Irish Times speaking before ISME:

‘Welfare, he argued, is “the elephant in the room” in the Irish public finances . . “We’ve got to bring expenditure closer to revenue,” said Mr O’Brien. He also said a reduction in the minimum wage from €8.65 was “an open and shut case” because the current rate “hinders” job creation rather than protecting employees.’

 Stephen Collins also has the public realm in his sights:

‘Tackling the public service pay bill and the social welfare bill can hardly be avoided and neither can new revenue raising measures like property tax, third level fees or a tax on child benefit.’

Whatever about a property tax (a large part of which will fall upon average income groups who are already getting hit by levy increases, falling wages and job losses), public services and social protection are clearly the target.

Is this a new twist in the debate? No. It was signalled very early on in the influential series of articles in the Irish Times back in January. The ESRI’s John Fitzgerald called for cutting public and private sector wages, along with social welfare rates.

If this wasn’t part of the mainstream yet, then certainly Richard Tol’s contribution was absolutely off the pitch – calling for the slashing of business supports, wages, social welfare, along with privatising ESB, CIE, An Post and anything else that smack of the public realm. He did say that ‘Protecting the vulnerable would be nice . . . ‘ but, hey, what can you do; in the war against the public realm, there is unfortunately collateral damage.

They are not off the pitch anymore. What was once the fringe is now mainstream. Fine Gael has enthusiastically joined in. They want to privatise Bord Gais (great, handing over a natural monopoly to the private sector); cut rent supplements, freeze the minimum wage for two years, slash the public sector payrolls and open up health and training to ‘competition’.

So the attack on the living standards of those on the lowest incomes and the low-paid should come as no surprise. On This Week in Politics, this attack featured in questions put to the candidates in the Dublin South by-election:

‘RTE: As part of improving competitiveness, would you cut the minimum wage?

George Lee: No, I wouldn’t cut it straight off.

Shay Brennan: Wages across the board have to be reduced in order to allow for competitiveness. (Cutting the minimum wage) should be open to debate.

Alex White: I would not be in favour of cutting the minimum wage. Absolutely not.’

The responses are interesting. Fianna Fail’s Brennan fully buys into the real devaluationist argument. Fine Gael’s Lee is more cagey – ‘not straight off’ (oh, how that will warm the low-paid on those cold economic nights). Only Labour’s White was categorically opposed.

What’s more intriguing, though, is the premise of the question – improve competitiveness = cut wages. And that’s exactly what it is: a premise that requires no elaboration. It just is – like the orbiting of the earth. The hypocrisy is rank.

Finfacts’ Michael Hennigan provides a tour de farce of those that supported the economically criminal policies of Charlie McGreevy in the early part of the decade – when he effectively created the property boom and crippled the state’s tax base. Guess who supported ol’ Charlie:

‘Economists such as Jim O’Leary, Dan McLaughlin, Eoin Fahy, and Alan McQuaid all called for cuts in both the top rate of tax and the standard rate, with Dan McLaughlin (calling for) new medium term targets of 30% and 10% respectively (for top and standard tax rates).’

A few economists and commentators pointed out that this was all come to a bad end. But Goodbody’s Colin Hunt, who later joined Brian Cowen as a special adviser said:"Minister, don’t let the doomsayers get you down. Bertie Ahern put it more quaintly, suggesting that those doomsayers go off and commit suicide.

Many of the same people leading the attack on the public realm were some of the cheerleaders for those very policies that created the burst bubble and hamstrung the State’s fiscal powers to address it. And they are still invited on to current affairs programmes, still write newspaper columns, are still sought out for their wisdom on today’s events.

The hypocrisy is not just past tense. Even when their arguments are caught out, many are unrepentant and indifferent. Emblematic of this is Sarah Carey of the Irish Times; she claimed we had the most generous social welfare payments in the EU. When challenged on this, when asked to substantiate her claim, when presented with the facts – not only on Irish Left Review but also from John Downes of the Sunday Tribune – she couldn’t pull up one piece of evidence in support of her position. All she could say was:

‘Let’s say I acknowledge that perhaps we are not the MOST generous.’

But she didn’t say. She didn’t acknowledge in a subsequent column that she was wrong or misled. Instead, Carey goes on her merry ideological way, indifferent to evidence or facts or substantiations. Within a few weeks she complained that bank nationalisation would spread the contagion of the public sector.

‘I accept that there are talented people in the public sector, but the inertia of government is more than they can usually bear. Worse, it’s contagious. Turn bank employees into public servants and I guarantee the malaise will seep in.’

Inertia? Malaise? What would Carey say when confronted with the study highlighted by the National Competitiveness Council – that the Irish public sector is the fourth most productive public sector in the EU, a ranking supported by the EU KLEMS database? She wouldn’t. She doesn’t have to. She has her platform. And informed debate isn’t part of it.

Carey isn’t an exception. Peter Connell exposed Ed Walsh’s limp arguments. Cathal O’Loghlin, likewise, was challenged and found wanting. But don’t expect these people to drop off the radar. They will be with us. Their premises will go unchallenged, their conclusions taken as read.

This is not some vast conspiracy.  It's merely a logical working out of basic right-wing premises.  It started with calls for public expenditure controls, then moved on to the 'bloated' public sector and 'overpaid' public sector workers, proceeding to private sector wage cuts - and so on until it cascaded into a full blown attack on the public realm, making those on the lowest incomes scapegoats for the failed policies of past right-wing governments.

What has been the progressive response to this evolving debate? With a few exceptions, timid at best. After an initial burst of expansionary arguments, progressives have to a large extent been drawn into the premises of this desultory debate. ICTU, in agreeing the Framework Document back in January, signed up to the following:

‘The Government and Social Partners are agreed on the necessity to reduce . . . Exchequer borrowing over the next five years in order to reduce the General Government Deficit to below 3% by 2013 . . . The Government and Social Partners agree that a credible response to the fiscal situation requires a further adjustment at this stage of the order of €2 billion in 2009.’

ICTU didn’t get an agreement, being forced out of the talks by the Government. But they got the €2 billion ‘adjustment’ - in the form of the public sector pension levy. And the leading party of the next government has called for more of the same – more public sector payroll cuts, more public sector job losses. The debate has moved a long ways away from where ICTU wanted it.

Similarly, with the Labour Party. Calling for a major stimulus late last year, they reversed this position and accepted the need for fiscal contraction in their pre-April budget submission. And now, while rejecting any engagement with other Left parties and individuals who might help bolster the case for stimulus, Labour has stated its intention of agreeing a programme for government with Fine Gael– the party of privatisation, public sector cuts and wage freezes for the low-paid.

One could get despondent but what’s the point of that? We must continue putting forward the progressive case on the economy and highlighting the limited policy differences between the two major parties of the Right. We have to give both policy and strategic substance to the argument that Senator Alex White made on that same This Week in Politics programme:

‘There’s no question the Labour party propping up . . into what is essentially now a corpse (Fianna Fail). Nor does it follow that we are in the business of propping up either the two parties . . . . there is a high measure of agreement between Fianna Fail and Fine Gael . . frankly, I do not believe that either Brian Cowen of Fianna Fail or Enda Kenny, leader of Fine Gael, is providing that vision.’

We must start, from a ruthless acknowledgment that progressives are not only losing the economic debate – in many senses, we are not even at the debate. We must acknowledge our lack of political and industrial strategy.  If we pretend that ‘we are making a difference’, whether it be in social partnership talks or, in the future tense of coalition negotiations with Fine Gael, we will only be fooling ourselves and find ourselves co-opted into policies which fly in the face of our values and principles.

But just as importantly, we must become passionate. Clear-headed and incisive, but passionate all the same. For the battle is not just about graphs or projected growth percentages or debt levels. The Right is drawing the battle line and their target is nothing less than the public realm – that vast social space through which people participate in determining their own future, participate in the economy and the society.

Are we up for it? Or are we too busy washing the white flags?

May 18th Morning: The Recession Diaries

The ESRI’s recent ‘Recovery Scenarios for Ireland’ offers us a glimpse of the ‘nirvana of the return to normal’ – a set of projections that could see the economy, if not flying high, then at least gliding well above ground level within a couple of years. It assumes that ‘if-only-we-can-get-through-this-spot-of-bother’ we can resume high levels of growth and relatively low (relative to today) levels of unemployment. Is it plausible? Maybe, except that the ESRI, chasing the chimera of ‘real devaluation’ and budget fundamentalism, doesn’t tell us where all this growth is going to come from.

In short, the ESRI predicts that, if we can only bring the public finances under control and cut wages, the Irish economy, on average, will grow by 5.5 percent annually between 2010-2015 if the world economy recovers next year (short recession). If the world economy suffers a prolonged recession (recovers in 2011), our economy will still grow by nearly 5 percent. In addition, in both scenarios, unemployment will fall from a high of over 17 percent to an average 6 to 7 percent between 2010-2015 – more than halving.

This seems too good to be true. In 2010, they are projecting the economy will still be losing ground (-1 percent). But in the succeeding five years, it will suddenly turn around and average something like 5 percent. This compares favourably with recent periods of growth.

While not reaching the dizzying heights of the mid-90s – when foreign investment fuelled the economic boom – the ESRI is projecting the economy will clearly match the run-in to first Celtic Tiger boom and the years of the property boom.

Their projections regarding unemployment also compare favourably. Between 1995 and 2000, unemployment fell from 12.2 percent to 4.3 percent – a decline of 7.9 percent. The ESRI projects that unemployment will fall by an even higher rate – over 10 percent in a five-year period.

No doubt Fianna Fail Ministers will be taking great comfort from all this. If only they can survive the upcoming democratic exercise (i.e. the elections) and the Greens tetchiness over the Programme for Government; if they can just get to 2012, the economy will not only have turned the corner but will starting to grow rapidly. They can go to the electorate and say - yes, it was tough, but it was worth it. It’s all coming right.

Yet, there is this nagging question – where is the growth, where are the jobs going to come from?

In the mid-90s, one out of every eight jobs created were due to multi-nationals – as foreign direct investment flooded into the country. Is the ESRI suggesting that we will experience a similar FDI renaissance? This is not likely. Not just because we are facing into more competition from other low-tax countries, not just because we should expect FDI expansion to be more risk-averse in the years ahead; but also because the character of FDI is changing – to more capital-intensive, high value-added employment. While this is a good and inevitable development, it will not be as labour-intensive as the mid-90s; better paying but fewer new jobs.

We cannot – and wouldn’t want to – return to the property-based job creation starting in the early 2000s, when nearly one-in-six people were employed in construction/property-related sectors.

The ESRI takes some solace in the reduction of the savings ratio and, so, an increase in consumer spending, we should be more cautious. However, in the years ahead, with disposable incomes being reduced by increased taxation – people will be trying to get out under a mountain of debt. The ESRI doesn’t address this problem of household deleveraging.

In addition, public sector job creation contributed to employment growth. If anything, this is going to be reversed under current policy (a policy that the ESRI enthusiastically supports).

There is a serious question  over where our growth - economic and employment - will come from.  If we can't return to the halycon days of FDI, don't want to return to a property bubble, if there is little likelohood of future credit-fuelled consumer spending, and with public sector employment likely to contract - that leaves us relying primarily on the indigenous sector.  Yet, only 10 percent of the jobs growth in our traded services sectors came from this sector.  Our indigenous sector has always been reliant on the downstream of FDI, property and retail, and the public sector (either direct or through public procurement). 

The ESRI has taken into account none of these developments. They have relied on textbook models. But we don’t have a textbook economy (no country does, by the way). They claim, again without any substantiation, that wage cuts will give our export base a boost - even though we are a relatively low-wage economy.  They call for drastic adjustments (read: cuts) in public expenditure - even though this is the only sector capable of undertaking the economic investment to give our indigenous sector a boost.

In short, I don' get it.

This doesn’t make the ESRI’s report and worthless exercise. We may still learn from it. And one of the main lessons is to be sceptical, very sceptical of models that project a return to normal.

For the sad reality is that, when examining the real economy sector by sector, there is no normal to return to.

May 14th Morning: The Recession Diaries

Here is my challenge to the real devaluationists. Will any of them take it up? Real devaluationists claim that, since we can’t devalue our currency, we must devalue other inputs into the economy. Wages feature prominently as in cutting wages will increase our competitiveness. Many of these ‘real devaluationists’ are grouped around Irisheconomy.ie (Alan Ahearne was a leading figure until he went off to advise Brian Lenihan). Garrett Fitzgerald, one of the few commentators who have distinguished themselves in the debate over the recession, has unfortunately fallen into this thinking, too.

So here’s my challenge: please explain the devaluationist argument in the context of facts, rather than assertion. I will offer space on this blog to any or all of them to write a guest post on this subject. For much of the arguments regarding wage cuts rests on the assumption that wages are uncompetitively high. Is this the case?

Let’s start with two databases. First, AMECO – the database of the European Commission's Directorate General for Economic and Financial Affairs – compares annual industrial employee compensation, a key figure in that it incorporates major sections of our export base.

As can be seen, Ireland ranks well down the league tables when it comes to average industrial pay – 10th out of the 13 countries reporting for 2007. Irish industrial wages are 4 percent below the other EU-15 average and over 9 percent below the average of top-ten EU economies (of which Ireland is one). In addition, we rank well behind other advanced industrial nations – Norway and the US.

The following, courtesy of a link from a friend, comes from Destatis, the German Statistical Board. This examines labour costs per hour in the 4th quarter, 2008 and covers private sector earnings.

Again, we see Ireland coming in slightly below the EU-15 average, but significantly behind the top-ten EU average – 12 percent below.

Of course, we have to be careful regarding some the national figures. The UK, for instance, experienced a fall of 10 percent in labour costs in 2008. However, this is due to statistics being enumerated in Euros. The UK fall is a result of currency exchange rather than cuts in labour costs (there own devaluation experience). But there is another little insight in these figures.

While German labour costs come in below the top-ten EU average, the national distribution varies considerably. For instance, the former German Federal Republic (i.e. West Germany), manufacturing wages average over €46,000 while in the New Lander (i.e. formerly East Germany) the average wage comes in at €29,600. In the powerhouse region of the German economy, therefore, labour costs are higher than is stated in the above table.

'Real devaluationists’ (along with IBEC, ISME, Forfas, etc.) may point out that Irish wages have been increasing at a faster rate than other EU countries. In one respect, they are correct.

Between 2000 and 2007, Irish industrial wages increased by 38.9 percent while the other EU-15 average increased by 24.4 percent. So do they have a point? Not as much as this stat might initially suggest. There are three things to look at:

First, individual workers’ wages did not necessarily rise by that amount. A contributing factor is the changing character of the industrial base is changing. A number of indigenous enterprises and low/mid-skill multi-nationals have closed down or left. These would have been relatively lower-paid. They have been replaced by enterprises with higher-skilled, higher-value added jobs.

Second, there is a catch-up or ‘convergence’ factor at work. A crucial part of the argument to enter the EEC back in the 1970s – and to continue approving subsequent EU-based referenda – is the benefit of the Irish economy converging with the rest of the EU; in particular, with the top economies. Though we have some ways to go, this process is in train. So if convergence was a laudable goal in the past, why is it considered an obstacle now? It’s only an obstacle if we believe that Ireland will prosper only if we remain a relatively low-waged economy.

Third, there is considerable statistical manipulation going on here. For instance, in 2008 overseas ‘tourist trips to Africa increased by 39 percent while trips to Europe only increased by 5 percent. So are the Irish abandoning the romance of Paris for the challenging terrain of the Niger hinterlands? Hardly. Actual trips to Africa rose to 56,000, while trips to Europe increased to over 1.3 million. That’s the fun and games you can have when playing with statistics. So let us get up to our own fun.

Between 2000 and 2007 Belgian industrial wages increased by 25 percent while Irish wages increased by 39 percent. Obviously, our wage competitiveness has deteriorated substantially vis-à-vis Denmark. Or has it? Actually, Danish wages increased by €11,300 while Irish wages increased by €12,000. The actual cost difference to Irish employers is €100 annually. No one can seriously argue that €100 a year constitutes a ground for ‘real devaluation’.

At the end of the day, when wages make up approximately 6 to 8 percent of the manufacturing base, it’s hard to imagine how the real devaluationists think that lower wages will make any difference to Irish competitiveness – especially as Irish industrial wages are below average to start with.

Not only do the real devaluationists avoid this they avoid another consequence of wage slashing: the fiscal damage. With the Government flailing about over the collapse in tax revenues, real devaluationists want to cut revenue even further.

Let’s say we cut wages by 7.5 percent. Using Colm Keena’s table of income and tax revenue for 2008, this could, on average, reduce tax revenue by €1.2 billion. And this doesn’t count reduced PRSI contributions and spending tax revenue. And this doesn’t count the negative multipliers – reduced economic activity, driving enterprises dependent on domestic demand even further to the wall, or through it. And this doesn’t count the proportional rise in debt.

The real devaluationists count none of these things in their pursuit of the wild goose of competitiveness. And that’s the real problem – for if we go down their road, not only will we find ourselves in a cul de sac very soon, we will be amassing even more problems for ourselves.

So this is my challenge. Please explain how cutting wages will improve competitiveness when – on a cost basis – we have are a relatively low-waged economy. Please quantify the direct cost to the Exchequer and how exacerbating the fiscal deficit will help. Please examine the cost to the economy, through the negative multipliers and their impact on those parts of the economy dependent on domestic demand.

And please explain how slashing our living standards in pursuit of a highly contestable proposition will do anything else but impoverish people more.

So, to all the real devaluationists, you have been invited.

May 11th Morning: The Recession Diaries

Like many people, when I heard that George Lee had been recruited by Fine Gael to stand in the Dublin South by-election I thought that was it – game, set, match. After all, he’s George Lee, tutor of the nation. So, when I saw that George Lee had penned an article in the Evening Herald entitled ‘How I would fix the economy’. I bought a copy, rushed home, popped up a bowl of popcorn, kicked the cat off the sofa, and hunkered down to what I expected to be an original and thoughtful contribution to the debate. As I started reading, I wasn’t disappointed:

‘I believe we will never fix the deficit in public finances unless we reverse the hemorrhage of jobs in our economy and get people back to work. Every job lost adds another €20,000 to Government borrowing.’

Bouya, George! This can only get better. So on to his ten points.

1.     I would finance a massive job-intensive investment programme in green energy, broadband and clean water, financed in part by selling off state companies like Bord Gais and parts of ESB that the State no longer needs to own.

Interestingly, in proposing this Fine Gael policy on investment, he omits that (a) it was originally an ICTU policy and (b) it constitutes setting up new public enterprises and expanding existing ones. Mentioning this might have confused people – selling off the very enterprises that are created in the first place to generate growth and recovery, selling them off to the private sector that is not capable of creating companies to generate growth and recovery. Sound coherent?

Of course, George the economist will be aware of Ireland’s poor privatisation experience. One word: Ericom. Two more words: ICC and ACC. If we still owned the latter two, we could be extending credit now, this morning, to hard-pressed businesses. But we can’t. Because we privatised them. Now George wants to sell-off a natural monopoly (gas) and the highly successful ESB International, thus undermining a successful Irish multi-national. Why? For purely ideological reasons. It has no economic rationale.

2.     I would fight for a fairer sharing of the burden of rising taxes. Middle income families on an average wage should not be paying 51pc in tax on every extra euro earned . . . This is hardly the strategy needed to encourage people to put in the effort and initiative needed to create new jobs and economic opportunities.

I think I know where this is going, sort of. I, too, believe the levy increases are harmful. But George is apparently of the school that believes ‘high taxes’ reduce incentives to set up businesses and create new jobs. If that were the case, then all other European countries would have been broke a long time ago. The reason why the levy increases are wrong is that it will reduce spending and squeeze enterprises reliant on domestic demand. George is essentially taking a low-tax argument and giving it a make-over for the current crisis.

3.     I would reverse the increase in the VAT to 21.5pc . . . which has combined with the weakness of sterling to see a deluge of hard-pressed Irish shoppers crossing the border, at the expense of thousands of Irish jobs and hundreds of millions in lost tax revenues.

It’s the currency exchange which is driving cross-border shopping.  VAT is just a passenger (there’s no VAT on food here in any event). Yes, in the long-term, we should reduce regressive indirect taxes. But does George really think that reducing a €100 basket of non-food items to €99.50 is going to make a whiff of difference? C’mon, now.

4.    I would cut the reduced 13.5pc rate of VAT to just 10pc between now and the end of 2010. This would stimulate labour-intensive services like construction, help the tourism industry through the downturn, and give a huge incentive for first time buyers to bring forward purchases of new houses, helping to resolve crises in banking and the public finances.

Again, George confuses cause and effect. Reducing VAT will probably not lower prices (they’re in deflation anyway) but it will ease business cash flow – which is fair enough since many businesses can’t get credit. It’s a crude instrument, though, since this ‘credit easing’ helps out businesses that don’t need it just as much as those that do. It doesn’t target enterprises in need which are, in any event, suffering more from reduced demand.

But the real kicker is that reducing VAT on some construction inputs will get the punters to buy houses again. Fact: people who fear for their economic future (or are unemployed or short-timed) don’t buy houses. Fact: the fearless few are waiting, quite rationally, for house prices to fall further. Fact: many who want to buy now can’t get mortgages because of the credit squeeze. Reducing VAT will have no effect on any of this. We are in the middle of a vast stock-clearing exercise - and much of the stock will never be bought as know one will want to live in half-built estates miles from anywhere.  As an economist, George knows this. As a candidate, he’s promoting gesture politics.

5.    I would freeze local authority rates for at least five years.

Fair enough – but where is the alternative source of revenue? Below the national media radar, local authorities are cutting back at a ferocious pace – capital programmes, services, etc. Cutting off more revenue oxygen will only asphyxiate local government everywhere with further deflationary effects.

6.     I would legislate to make upward only rent reviews for small businesses illegal.

Of course. But this won’t address the real problems behind high commercial rents, which are high because many landlords are so heavily leveraged. They can’t afford to reduce rents but if they don’t their tenants will walk or close down. It’s a vicious trap. Amending rent reviews won’t resolve this.

7.     I would exempt employers who take on additional staff from additional employer PRSI obligations until the end of 2010.

Let me get this straight. A profitable company with expanding output (and therefore requiring extra labour) will now get a state subsidy for doing something they were going to do anyway. Talk about deadweight. The issue is about subsidising hard-pressed enterprises that are on the verge of letting people go. Talk about getting it arse-backwards.

8.     I would make sure that taxpayer support for banks is used only to support new lending to small businesses and families, not to nurse along dodgy property related debts to Fianna Fail's developer friends. The banks, the professional investors who funded them and developers should between themselves take care of the mess they have created. They made the big profits in the good years. They should now eat the losses.

First, George wants taxpayer support for banks conditional on opening up credit. But he wants banks, investors and developers to sort out their own problems. If banks eat the losses, they will end up throwing up all over us. There won’t be new credit, just hoarded credit to make up the losses. In any event, can someone explain to me how banks, operating on commercial criteria (even the best criteria), are going to increase lending in a recession? It’s populist but its nonsense.

9.     I would fight to make performance, accountability and thrift core values of our public service once again, starting with the political system itself, and cut top-end public sector salaries, including those of TDs, by at least 5pc.

Yeah, sure, why not. Cut them by 10 percent. Won’t do anything for public finances. Won’t create one single job. Might have a demonstration effect. Yawn. Move on.

10.     I would overhaul the massive public sector quangos like the HSE, CIE and FAS and expose them to more competition in order to deliver vital health, transport and training services more effectively and at less cost to the taxpayer.

Oh, just great. We’re going to either privatise whole areas of public services – or allow private interests to cherry-pick the most profitable parts of the public market. Isn’t that what’s happening in the health sector anyway? And if anyone thinks this has anything to do with competition – just look at the electricity market, where the one company that can compete internationally, invest in new generation plant, and lead a national strategy for new green technologies is actively prevented from doing so. Rather than engage in hard thinking and core solutions, we get knee-jerk responses.

* * *

I tossed the paper to the floor, finished my popcorn and kicked the cat some more. This is the prescription by a leading voice on the Irish economy? It is a collection of populist clap-trap that relies on the failed strategy of privatisation, incoherent VAT cuts, wasteful subsidies, and public market liberalisation.

I had thought that when George Lee entered the race that was it. But progressives like Senator Alex White shouldn’t fear this nonsense – if they have the courage to call it for what it is, go on the offensive and expose Fine Gael as just another deflationist privatising party of the Right with little to say about economic recovery or social equity.

Progressives can turn this by-election battle into what it always was – before the celebrity diversion: a contest between the Left and the Right, a contest between two qualitatively different economic alternatives.

For there is no question that Fine Gael’s new recruit, George Lee, will have no problems getting along with that other new recruit, Michel McDowell.

Like peas in a pod.

May 8th Afternoon: The Recession Diaries

Higher taxation is now on the agenda. The Left has long argued the virtues of higher taxation: more resources for health, education, infrastructural modernisation, childcare, social protection, elder-care, etc. We had little success – so enthralled has the nation been to the low-tax, low-spend model. Even social partnership was premised on cutting taxation (maintaining low wage increases in return for tax cuts to increase take-home pay).

Now everyone accepts taxes will have to rise – if, only, to help close the fiscal gap and, afterward, to pay for all this borrowing. This is not quite how the Left envisaged the debate. We wanted European-level of taxation to pay for European-level of services and living standards. Now, we’re going to get the high taxes but even worse living standards. So, perversely, the principle has been won – but not on the Left’s terms. So how do we get back into the debate?

There are two stages. During a recession I have argued that the last thing you do is increase general taxes on low and average income groups – those cohorts with a propensity to spend. Rather, you find less-deflationary sources of revenue, even as temporary measures.

However, on the other side of the recession what kind of tax system do we want? Falling back on ‘tax the rich’ and ‘close the loopholes’ demands, will only get us so far. We have to present a clearer picture – one that distinguishes us from the Orthodoxy and can win popular support.

As an initial contribution to this debate, I have examined the tax structures of other EU countries with the help of Eurostat's comprehensive Taxation Trends in the European Union. After all, we want to move in their direction. But what do their structures look like and what can we learn. There might be some surprising lessons here – and ones that the Left can exploit to its advantage.

Ireland’s Perverse Low-Tax, High-Tax Model

Ireland is a low-tax economy. In comparison with the top-ten EU economies (I’m using the top-ten because there is little sense in comparing ourselves with poorer countries es like Greece and Portugal where the average industrial wages are less than half of our own). Ireland is almost rock bottom. Only the UK is lower. We would have to raise nearly €8 billion more in taxes just to reach the average – and this doesn’t take into account the necessity of having to fund disproportionately higher capital investment to catch up with European levels of infrastructure.

But while total Irish taxation is low Irish central taxation is high. According to the Eurostat report:

'Ireland is one of the most centralised countries in Europe . . . '

Central taxation covers those taxes that go directly to a country’s Exchequer and includes personal, corporate, indirect and capital taxation. Only the UK has a higher level of central taxation. Let’s turn to some of the main categories of Irish central taxation and see where the disparity lies.

Indirect Taxes: In this category, including VAT, Excise duties and other taxes on products, we are nearly the top of the table. We have a disproportionately high level of indirect taxes – one of the more regressive taxes that states impose. We could reduce these taxes by 15 percent (reduce the standard VAT rate by 18 percent) and we’d still be at the EU average.

Corporate Taxes: Despite Ireland’s low tax rate, we have one of the highest levels of corporate tax receipts. There’s no contradiction here. A massive amount of ‘profits’ taxed here are earned somewhere else, courtesy of transfer pricing. As Michael Hennigan constantly, and correctly, points out:

'Two of Ireland's biggest companies by revenue are owned by Microsoft. They have no direct staff and are operate from the offices of a Dublin law firm.'

There may be a number of reasons to raise corporate tax rates and end our tax-laundering system. But not because we don’t get enough corporate tax revenue.

Personal Taxation: Here we fall behind the EU average but not by much. The Eurostat figure understates the level of personal taxation because it assumes that the Health Contribution Levy is part of social insurance when in actual fact it is paid into the Exchequer. So, abolishing those regressive tax expenditure and shelters would probably bring us close to the average. There are still questions of balance within personal taxation – for instance, average income earners enter the top tax rate far too early.

When we examine central taxation and, for Ireland, its sub-categories, we find that we’re not low-tax; we’re relatively high-tax – in some cases the highest taxed. So how do we end up being a low-tax economy? There are two main categories.

Social Insurance

We are at rock bottom when it comes to social insurance. Actually, rock bottom doesn’t quite capture it. In fact, Ireland’s social insurance take is over-stated since it includes the Health Contribution Levy, as mentioned above.

PRSI rates – employees, employers and self-employed – would have to be increased by more than 2 ½ times just to reach the top-ten EU average. That would mean increasing the PRSI rate for employees from 4 percent to nearly 10 percent, the employers’ PRSI rate from 10.75 percent to over 20 percent and the self-employed by a similar proportion.

[A little note: it’s interesting that, given our anaemic social insurance system that both Fianna Fail and the Greens campaigned in the last election on a platform of cutting social insurance levies even further.]

Local / Regional Taxation

There is no sense in putting up a graph on this one. Ireland hardly features. For the EU top-ten, local and regional taxation makes up over 8 percent of the GDP. In Ireland, it makes up a minuscule 0.8 percent. We’d have to increase this taxation base by over eight times and we’d still fall short of the average. But in other EU countries it is local and regional government that delivers many of the services and programmes that, in Ireland, is delivered by central government.

A New Basis for the Left’s Taxation Programme

So what can we make of all this? First, it is noteworthy how close we are to the UK’s centralised model. Like Ireland, the UK takes little in local/regional taxation and social insurance and is quite high in centralised taxation. The Left should argue for a profound break from this model – and centre it’s ‘tax’ demands on two areas – social insurance and local taxation.

Social Insurance: In most EU countries, a significant proportion of social protection and public services is delivered through the social insurance system. For the Left to adopt this model would have considerable advantages. People consider increased taxes as going into some kind of black hole. However, social insurance implies a specific contract: for x amount you pay, you will receive y amount of benefit. Here are two examples:

• If PRSI was increased to include a specific ‘Health Insurance Levy’ (say, 2.5 percent) that might be more acceptable if people knew that they would receive free (or extremely low-cost) GP and prescription medicine. That’s a specific contract.

• Further, if PRSI was increased to include a specific ‘Earnings-related Pension Levy’, again, this might be more acceptable if people know, as part that contract, they would receive 50% of their pre-retirement income in a pension.

We could go further – a small insurance levy for elder-care, including nursing homes, highly-subsidised childcare in best practice crèches and early education centres, pay-related unemployment and disability benefits. In addition, redirecting expenditure through an enhanced Social Insurance Fund would relieve pressure on the Exchequer finances, allow for increased investment in other areas such as social housing, etc., while providing a quicker route to fiscal stability.

Local Taxation: this would require even more radical surgery as our local government system is feeble, unaccountable and largely powerless. On every level, it is not fit for purpose. Before we could even begin contemplating higher local taxes, we would have to reconfigure a system of local governance that was devised in the 19th century. I will elaborate on this in a later post.

But, like social insurance, people might be more amenable to increased taxation if it went to greatly enhanced local/regional government. For they would see the benefit of their taxes in improved local services, enterprise supports, social programmes, amenities, etc.

* * *

A new Left programme begins to emerge:

• Radically reform social insurance to deliver the benefits of free health, earnings-related pensions, income protection and other services such as childcare, etc. This will mean increasing PRSI rates but only as part of an identifiable contract that delivers the benefits.

• Radically reform the local government system into a rational network of governance capable of employing greatly increased, and democratically accountable, powers. This is a pre-requisite to substantially increasing local/ regional taxation.

• Reduce indirect taxes over the long-term (and put in the institutions that can ensure that the benefits of reduced VAT get to the consumer). This would reduce a regressive tax on low-average income groups.

• Re balance personal taxation to ensure that average income earners do not enter the top tax rate. This would also mean tackling the difficult issue of when people enter the tax rate. This is a highly emotive issue – taxation on the low-paid; but it’s coming down the line. The Left has to argue for a progressive approach, otherwise the Orthodoxy, who just want to slap high tax levels on low incomes, will dominate the debate.

That’s the vision in broad outline. That we are in a recession doesn’t mean postponing the debate - it means we have to integrate transitional strategies into that long-term version.

So let’s get to work. And let’s, finally, lead the debate.

Just To Let You Know, Shane

This article was originally written for Irish Left Review

Shane Coleman writes:

‘ . . . the reality is that if there was a general election tomorrow and Fine Gael and Labour became the new government, there is probably no decision of the past nine months that they would reverse.’

I fear he might be correct. Of course, there would be changes at the edges. We should expect the educational special needs allocation to be restored, we would probably get some extra spending in job-intensive infrastructural projects, there would be fresh faces with their fresh-looking expressions, even competence. Broadly speaking, however, there wouldn’t be much of a change – certainly not with Fine ‘George Lee’ Gael in the ascendant.

RTE: In terms of squaring up to the difficulties in the public finances, is there any avoiding tax increases and major cutbacks in public spending?

Richard Bruton: No there isn’t. I think the issue is the balance you strike between those.’

Thus spake Fine Gael’s Finance spokesperson on This Week. Even Labour, against its better instincts (and against what it was prescribing for the economy only a few months ago) has accepted the need for fiscal contraction – at the same time as the economy is contracting even further. Of course, it will probably be a ‘fairer’ set of deflationary policies but deflationary nonetheless.

So, given what is on offer today, Shane is probably, unfortunately, spot on. But its one thing to prognosticate a wrong set of policies, it’s quite another to cheerlead on those same policies. That’s what Shane does:

‘Any responsible new government would have to take the same course of action (as Fianna Fail) . . . Regardless of who is in government, the tax net has to be broadened and public expenditure has to come down so that at some point over the next five to seven years, the exchequer returns to a balanced budget . . . let's not kid ourselves that there is any alternative to the kind of policies currently being implemented.’

Apparently, Shane is not keeping up with the news. The ESRI has predicted that under current policy – tax increases and spending cuts – we won’t get a balanced budget; not anytime soon. The EU Commission reinforced this with a vengeance – stating that under current policies the fiscal deficit will rocket out of control. John McManus quotes Jaakko Kiander of the Labour Institute for Economic Research speaking about the Finnish strategies when their economy collapsed in the early 1990s (which, Mark helpfully pointed out):

‘ “In response to the crisis, fiscal policy (in Finland) was tightened in 1992-95: public-sector expenditure and employment were cut, social benefits were frozen or reduced, and taxes on employment were increased. But in spite of these measures there were large government deficits in 1992-1994, and the cutbacks and increased taxes further reduced demand and employment,” says Kiander.’

McManus summed it up nicely:

‘ . . what jumps out from Kiander’s paper is that the Finnish government initially adopted the same policy response as we have and it didn’t work.’

Shane is flogging that ol’ dead horse and dressing it up in some kind of Dr. Rambo economics (‘The only cure for the disease currently crippling the Irish economy is some particularly tough medicine.’). Fair enough – there’s a lot of it going around. But then he says

‘ . . . no one – political commentators, economists, dissident government TDs, opposition TDs – has come up with a credible course of action that is markedly different from what the government has been doing since October.’

Okay, so Shane doesn’t drop into Notes on the Front. Again, fair enough – there’s a lot of that going around, too. But a number of commentators over at Progressive-Economy have been arguing for a different course of action for some time. So have some trade unions. So have some individual politicians.

Maybe it’s that Shane only reads those who affirm his world-view. Or maybe he feels that those of us who think differently from him – and Fianna Fail – are so marginal to the debate that we deserve no mention, no acknowledgement. Maybe he was partying all week and had to pull an all-nighter to write this particular column, which didn’t give him enough time to study alternative perspectives.

Whichever, I will come to Shane’s assistance and provide him with an alternative – one that he’s free to rubbish. But at least he can’t say there are ‘no’ alternative courses of action. Here’s a set– abridged and limited – but Shane can contact me anytime and I can fill him on the details.

May 5th Morning: The Recession Diaries

I’ve been trying to get away from this topic – the whole deflation thing and its impact on the economy and the budget. There are, after all, a hundred and one other issues in the Fianna Fail playbook to consider, deconstruct and reconstruct in a progressive fashion. But it seems that everyday we are drawn back to the Government’s fundamental failure by new reports, projections and analysis. Now the EU Commission’s Spring Economic Forecast is pulling us back with a ferocious wrench. Let’s recap.

Back in October, the Government introduced the Income Levy, along with spending cuts (e.g. medical cards for the elderly, etc.) to bring the deficit under control.

In January they had to rewrite the budget numbers because the October projections were overtaken by a rapidly contracting economy (in October, the Government actually believed GDP would fall by less than 1 percent). Shortly afterwards, they imposed the public sector pension levy to cut expenditure further.

Still, as the economy contracted, the deficit grew. At the time, the Government projected that if they did nothing, the deficit would grow to 12.75 percent. So the April budget was introduced to try to hold the -9.5 percent line (which had apparently been agreed with the EU Commission) but this proved impossible. They set a new target of -10.75 percent and, to this end, introduced further levy and other tax increases, combined with more spending cuts.

The ESRI’s Spring Quarterly Report is now predicting that the -10.75 percent deficit target is history. They project it will be 12 percent (just shy of the do-nothing line the Government was so afraid of weeks earlier). The EU Commission makes the same projection.

But, the EU Commission, based on current policies, is now projecting the deficit to balloon (swell? distend? bloat?) to an incredible 15.6 percent by next year, This is on the basis of the economy contracting by nearly 12 percent over the next two years with unemployment rising to 16 percent.

Hello! Hello! Is anybody taking this on board?  Are the great economic gods trying to tell us something? (P O'Neill over at Irishelection.com has twigged it.) The problem with the EU Commission’s projection for next year’s deficit is that we can’t be exactly sure if they are including the Government’s intended ‘adjustments’. They announced in the April budget that they would take another €4 billion out of the economy: €1.75 billion in tax increases, €1.5 in current spending cuts and €750 million in capital spending cuts. There’s an argument that the EU Commission has factored this in (their projections include the new April budget targets).

If this can’t convince anyone that the deflationary policies are failing, not only to reverse the economic slide, but the fiscal slide as well (which they were intended to arrest) I don’t know what will. This does not, ipso facto, mean that the only recourse is stimulus policies – but, in truth, there are not a lot of options.

But what it does mean that we should give it up. It’s one thing to flog a dead horse. It’s quite another to dress up the poor beast, prop it up at the Cabinet table, and pretend that it has something constructive to contribute.

Deflationary budgetary strategies are dead. Let’s get over it. Now can we please have a debate on the strategies that get to the heart of our crisis – economic contraction, rising unemployment, falling consumer spending and collapsing investment. We may still disagree but there is a better chance of something productive coming out of such a debate.

In the meantime, let’s give the deflationary horse a decent burial.

April 29th Afternoon: The Recession Diaries

Do you remember why the Government introduced the emergency April budget? Rising unemployment? Collapse in economic growth? Mass depression over the weather? Let’s refresh our memories:

‘Without this supplementary Budget the general government deficit would have been 12¾% of GDP reflecting the large gap needed to fund the difference between spending and revenue. In the prevailing economic circumstances the natural preference should be to leave expenditure and taxation as they stand. This is not an option . . . because of the scale of the deterioration of the public finances. It is the considered view of the Government that a borrowing target of 10¾% strikes the correct balance.’

At the same time, the Minister also announced a number of future measures to reduce borrowing targets going forward. For instance, next year more ‘adjustments’ will be made: tax increases and reductions in current and capital spending - an additional ‘adjustment’ of €4 billion. This was to ensure that borrowing that borrowing would be held at 10¾ next year.

So – the entire machinery of Government is working towards one goal and one goal only: 10¾.

Along comes the ESRI’s Spring Quarterly Report:

• GNP collapsing by over 11% at current market prices 
• Unemployment to average nearly 17 percent next year 
• Consumer spending down nearly 8 percent this year 
• Investment plummeting by over 30 percent

There is considerable rancid meat here to get sick over but initial commentary has focused (belatedly, thankfully) on the spectre of mass unemployment and the prospect of a lost generation due to joblessness and emigration. Even today’s Live Register figures – showing a slight falling off in the rise in unemployment – will not bring much comfort (as I have pointed out before – wait until the signing-ons in May/June and the lack of signing-offs in the autumn; that’s where the real bloodbath will happen).

But let’s return to the Government’s magic 10¾ percent – the raison d’être of April budget. What does the ESRI have to say about that? The Government balance will be 12 percent. Hmmm. The Government increased taxes and cut spending to reduce the balance from an unsustainable 12¾ and now it ends up pretty much back at their starting point.

All that work, all those late nights in Government buildings, all that red penciling and Excel tables – and the Government further away from their goal than ever (let’s not forget that the Government had originally agreed a target of 9.5 percent with the EU Commission – not much chance of that happening anytime soon).

Why is the Government standing still – even though it is running like hell? Well, there are all those people on the dole; and no one is spending any money – fearful of future job losses, pension losses, wage cuts; and the only investment businesses are making are in redundancies. But there’s something more – which the ESRI quantified by didn’t elaborate on in its discussion of the impact of the April budget:

'Overall, and including the February measures (public sector pension levy, etc.), the full year effect is to raise taxation (3.6 per cent) and cut expenditure (3.8 per cent) by similar amounts. These cuts are equivalent to 4.4 per cent of GDP.'

So, the Government takes 4.4 percent out of the economy at the very moment the economy is contracting. Does anyone wonder why everything is going pear-shaped? I’ll offer each of the readers of this post a bet. I’ll give good odds. I’m betting that this causal relationship will not be mentioned in any serious, analytical way whatsoever (except the few lonely outposts of progressive thinking that exist, mostly on-line).

Going forward (and remembering the Government’s magical 10¾), what does the ESRI predict the balance will be in 2010? 11.5 percent. In other words, we still won’t reach the target next year that the April budget was intended to achieve this year. The Government is running, but we’re in quicksand. We’re not just standing still. We’re sinking.

But there’s a little catch in all this. The ESRI is bullish about our prospects next year. While the government claims the economy will decline by nearly 3 percent in 2010, the ESRI thinks it won’t be so bad – only a contraction of 1 percent. This must be a first – Government projections being more pessimistic than independent commentators.

I wouldn’t put much stock, though, in the ESRI’s, or anyone else’s, projections for next year. This is not a reflection on their abilities but with the Irish and world economies in such flux– even short-term projections have a limited shelf-life (don’t forget, the ESRI predicted a decline of 4.5 percent for this year; and that was only 13 weeks ago). We’re on a roller-coaster – and the fun-park operator is out to lunch.

You’d think this would be grist to the Left’s mill. You’d think. Yet, both Labour and Sinn Fein – against their better instincts – played the adjustment game. Both argued in their pre-budget submissions for measures to reduce the budget deficit without including the cost of their proposed measures to boost economic activity. This should stop – and the Left should take solace in the lessons that that the ESRI current projections are teaching us, lessons which the dunce-Government has failed to grasp.

For the Government is trying to convince us that there must be order in the public finances before any recovery can begin. But what we are seeing is that public finances cannot be put in order until the recovery begins.

If we learn that simple fact, then we can start putting our better instincts to work.

And, thus, the economy.

April 27th Morning: The Recession Diaries

Ronan Lyon has written an instructive post on the ‘Thorny Issue of Teachers’ Pay’. So useful, in fact, that it was highlighted on Irish.economy and in the Sunday Business Post. And boy has it stirred comments on both websites. Cutting to the quick, Ronan concludes that Irish primary school teachers are paid too much – at least, when compared with teachers in other EU countries. Therefore, in these cash-strapped times, if we want to increase investment in education then we must address the issue of those over-paid teachers. This might be valid if Ronan’s conclusion on pay is correct.

There are three basic statistics derived from the OECD’s Education at a Glance upon which Ronan bases his conclusion.

First, he highlights the fact that Irish school teachers – after 15 years of service – earn considerably more than their peers in Eurozone countries. He doesn’t put exact numbers on this, but his graph tells his story.

Second – and here he does put numbers on it – Ronan shows that Irish teachers earn more per day than teachers in Eurozone countries. Even after the pension levy, Irish teachers are the highest paid. Ronan says:

‘ . . . the amount paid for every day spent teaching in Ireland looking pretty unsustainable. Factoring in the pension levy only scratches at the surface of the problem.’

Third, he calculates teachers’ net pay – after tax and PRSI. This, if anything, shows that Irish teachers’ pay is higher still.

Do his arguments stand up?  Let’s investigate - using primary school teachers' pay scales.

April 20th Evening: The Recession Diaries

Pat Leahy examines the impact a Left-led government might make on the economy and concludes . . . well, I’m not quite sure what the conclusion is. Indeed, I’m not any wiser about what the impact might be. He does ask the relevant question:

‘But what does the advocacy of a left-wing government actually mean? Does it mean simply that people don’t like the current government, or is there a characteristic left-wing alternative in gestation? And what would such a government do about the principal - in some ways, the only - question of the day: the economic crisis?’

Good question. To my mind, one of the most important questions. The problem is that Leahy treats us to a discussion on taxation and, while this is an important sub-component of economic strategy, it is only a part, not the whole. In short, if I thought the whole debate over the policies of a Left-led government boiled down to where we shift the incidence of taxation, I’d say it’s not worth the effort.

I don’t blame the various individuals quoted in the article – representing the broad spectrum of the Left. When the questions are framed within a set of restrictive parameters, it’s hard to break out and address the core issues of the crisis. Leahy (and I don’t think this is being unfair to him) is one of many, the majority in fact, who believes the crux of the debate is about what combination of tax increases and spending cuts need to be implemented to reduce the fiscal deficit. As it happens, I don’t. The debate should be about generating economic growth – saving and creating jobs while stimulating spending and investment. And when you look out at the world around us there is only one agency that can do that at the moment – the state.

So, while Leahy treats us to a sometimes surreal discussion - how much tax must be imposed, definitions of ‘well-off’, protecting public serivces that were starved of resources even before this recession kicked-in (concluding with that totally discredited McDowellist-line of juxtaposing efficiency and equality) - there are different, outside-the-orthodox-box responses to be made:

‘Mr. Leahy, the first thing a Left-led government will do is massively roll-back the levies on all incomes save for the highest – slash both the income and Health levies. That’s what a Left-led government will do.’

Now Pat’s teeth may fall out if he hears this from a high-tax, high-spend leftie - but then there’s that report from his same newspaper about falling retail spending.

Emperian, a global information services provider, has calculated that while in January the number of people visiting shops fell by 0.8 percent compared with the previous January; falling by 3.8 percent in February – the number fell by 8 percent in March.

'Mark Mullally, property services manager at Experian, said that the increased income and health levies in the budget earlier this month would exacerbate the situation for retailers, as people would have less disposable income.'

 Exacerbate might be an understatement.

Moving on, Leahy, after he picks up his teeth, will then ask – If you’re going to reduce levies, you’re going to have to cut spending; what would you cut?

‘Actually, Mr. Leahy, a Left-led government would do just the opposite. It will increase public expenditure – considerably. It will generate jobs in the public sector and, through public procurement, in the private sector. It will invest in infrastructure and public services. It will subsidise jobs to prevent redundancies. It will pursue wage and income maintenance strategies to stimulate demand. It will dare to spend, borrow, invest and lend.’

I can see Pat’s hand reaching for his mobile to ring the emergency psychological hot-line service for his interviewee. But he won't resist one more question – How can this be done? We can’t afford to borrow anymore. In that name of all that is holy, what are you talking about?

(sigh) 'The Government tell us we can’t afford a stimulus programme because it would mean higher borrowing, which we allegedly can’t afford. But they’re increasing borrowing because of rising unemployment. And they’re proposing a massive borrowing splurge to bail out the banks. So, we can borrow to maintain people on the dole and buy worthless assets. But we can’t borrow to put people back to work and invest in productive assets.' (shrug)

Once we step outside the narrow, deflationary parameters imposed by the orthodoxy, we can conceptualise an alternative programme for the economy. We must first, however, take that step. The Left has good instincts, the better instincts, but for some reason it hesitates to act on them.

Late last year, Labour called for a major stimulus programme and has consistently made the point that the fiscal deficit is the result of economic contraction and rising unemployment, not the other way around. Sinn Fein launched a comprehensive job-creation and training policy document. Such investment programmes would cost billions. This is what almost every other industrialised country, large and small, is doing in one form or another – growing, not deflating economies.

However, in the run-up to the budget, everything got terribly foggy. Labour stated, in its pre-budget submission:

'This deficit is unsustainable, and a major fiscal correction is required.'

From this, Labour argued for a deflationary approach, albeit far less than what the Government had been rumoured to be considering. Nonetheless, the bottom line figures – in terms of borrowing – ended up being rather similar. Sinn Fein produced a range of ‘fiscal’ measures to reduce the budget deficit but still ended up pretty close to where the Government ended up.

The proposals that each party made were far, far better than what the April budget produced: the tax increases focused on higher income groups and wealth, rather than reducing the disposable incomes of low and average income groups. In this respect, it was progressive. However, both parties failed to integrate their stimulus expenditure costs, which would in the short to medium term substantially increase Government spending, into their proposals for the April budget.

No question that progressives must argue for fiscal consolidation measures as part of a total package of economic investment. Those measures must limit the deflationary effect. But at the end of the day, any stimulus programme will cost. For example, a minimal programme would cost 2 percent of GDP – or €3.5 billion. There is no getting around or hiding the fact that calls to increase investment to save and create jobs will mean a higher deficit in the initial stages – more borrowing, more borrowing costs. Neither party factored this in.

The Left’s arguments for stimulus investment and fiscal measures are disconnected. They hang separately, not together. I would suggest this is not because Labour or Sinn Fein, the trade union movement or progressives in general, accept the deflationary programme proposed by Fianna Fail and supported by Fine Gael. They don’t. In fact, they know it won’t work.

Unfortunately we have, so far, failed to integrate the fiscal and the expansionary into a self-support stimulus strategy, failed to start the difficult, challenging work of creating a macro-economic alternative. Because of that, we are trapped, unable, unwilling to step outside the parameters laid down by the deflationary orthodoxy.

Realising this, knowing that our instincts are correct, is a start. It’s not a substitute for work but it is a motivator. Unless we begin this work, however, and step outside the trap, we can talk all night about realignment, political cooperation, a new progressive front that challenges the conservative political consensus for the first time in history.

But come morning time we still won’t have anything to say.