Notes on the Front

Commentary on Irish Political Economy by Michael Taft, researcher for SIPTU

November 3rd Afternoon: The Recession Diaries

Recession 83 Everybody altogether – let’s help Shane Coleman. In his opinion piece in the Sunday Tribune yesterday Shane took us all to task for being selfish, greedy and indifferent to the economic crisis upon us. So far, not very insightful. But it’s when he attempted to justify his opinion with ‘facts’ that he floundered completely. We could give out about his darkness but a better course for all of us would be to a light a candle for him.

Shane claimed that Minister Lenihan ‘miscalculated’ when he made a "call to patriotic action", urging everybody to "pull together and play our part according to our means". That’s because, according to Shane, we are a small, grasping people who don’t care about society or helping out each other. What’s the proof of this?

‘We expect, sorry we demand, free education, free healthcare, universal childcare payments, subsidised childcare, top rates of pay for public servants, the highest pensions in Europe etc, but don't for a second consider how it might be paid for.’

That is some charge sheet. Let’s go through each of them to see if they hold up in the Court of Facts:

Free education: if only it were so. So many debt-ridden national schools have to levy ‘voluntary’ fees just to pay for essentials. We have one of the worst resourced educational sectors in the industrialised world, according to the OECD. We have fees for higher education – registration fees – and high fees for part-timers. Shane thinks education beyond second level is ‘elite’ (just as in the 1950s secondary education was considered ‘elite’ and, so, levied fees);, but he needn’t worry. There’s nothing free about our system, from the bottom to the top, and this is likely to worsen in the near future

Free healthcare: oh, I wasn’t aware that we had free GP care and free (or nominally priced) prescription medicine. I must have been mistaken thinking that admission to A&E was free, or that all the tests I might need are free. Or that there was even a hospital waiting list based on need rather than insurance or income. Must look into that.

Universal childcare payments and subsidised childcare: Subsidised childcare? C’mon. The OECD measured childcare costs. They found that for a lone parent on average earnings, Irish childcare costs would equal 45 percent of net income. The OECD average is 14 percent. In Belgium it’s 4 percent. If we have any subsidies, it’s pennies, fractions of pennies, compared to other industrialised nations.

Yes, we have a payment called ‘Early Childcare Supplement’. It’s worth about €92 a month. Of course, it has nothing to do with ‘childcare’. It is paid in respect of all children, regardless of whether crèche costs have been incurred. It makes up a small percentage of commercial crèche charges and when it was introduced many crèches increased their fees to exploit the extra cash available. Some subsidy.

Top rates of pay for public servants: No list of the grasping and mean-minded is complete without an entry for public servants. I’ll just take one small statistic here: starting teachers’ salaries in primary schools. Our ‘top-paid public servants’, in this one category anyway, earn below the EU-15 average – some 6 percent below. Does this equate throughout all the public sector? Probably not. But it would be helpful to look up even a few facts.

Pensions: This is where it gets truly interesting. Shane seems to think that our pensioners are ‘rolling in it’ compared to other countries:

‘ . . .not once was it pointed out that compared to all other EU countries, pensioners are very well looked after in this state.’

Again, Shane calls no witnesses to justify this absolutely erroneous claim. However, we can offer some facts into evidence:

Irish pensioners have the lowest ‘replacement ratio’ in the EU-15. The replacement ratio is the income from pensions to income from work just prior to retirement. Ireland has a ratio of about a third (35 percent). The EU-15 average is over 50 percent. We’d have to increase pensions by 42 percent just to reach the EU-15 average (in Austria the ratio is 65 percent – now that’s ‘well looked after’). The reason for this is because we spend so little on old age income supports.

Eurostat's latest report on social protection shows that while all EU countries spend 12 percent of their GDP on old age supports, Ireland spends 5.3 percent of its GNP. Of course, the proportion of elderly is smaller here. But if the proportion were the same how much would we be spending on current trends? 8.5 percent. In other words, we would still have to increase our spending by half just to reach the EU average. So much for being 'well looked after'.

Shane does call up the UK pension rate, one of the worst in the EU, and, yes, we do compare favourably (though after accounting for living standards and historical currency exchange, it’s nothing like ‘twice’). But this reminds me of the ‘little world mentality, when politicians and analysts never looked beyond our larger island neighbour, when making comparisons. There’s a larger world out there we can look to.

Shane’s arguments are all of a piece – misinformed and misleading. If he’s claiming that we have all these things (free education and healthcare, top rates of everything) he’s simply wrong. If he’s suggesting these things are costing money, he’s wrong because we don’t have them. If he’s claiming these aspirations are wholly unrealistic, he’s merely setting up a straw man argument – the democratic protests against cuts in living standards, health care and educational investment are not a demand for best European practices (which we are far, far from); it is a protest against making our current poor situation even poorer.  These are modest demands. 

But let’s not pillory Shane for coming up short in the Court of Facts. Let’s help him. If you have any facts regarding these or other aspects of our under-achieving economic and social conditions, forward them on to Shane at scoleman@tribune.ie

A more informed commentary will help all of us.

4 responses to “November 3rd Afternoon: The Recession Diaries”

  1. Liam Avatar
    Liam

    Hi Michael
    I’ve recently come to your blog, and have to say I’m relieved to find a sane and rational voice in the wilderness that is political discourse here in Ireland. I commend you, and will pass on a link to concerned friends. There is a real dearth of left wing discourse of any quality in this country.
    With that said, I believe there is a strong left wing constituency in this country that is currently disenfranchised. No-one, not even Labour is making any cogent arguments as to why higher taxes on wealth would reduce the inefficiencies in resource allocation in this country. Instead it is left to the intuitive understanding of the “man on the street” that he is yet again being screwed to protect the private wealth of an insanely wealthy elite. If I may, I’ll make my arguments purely economic for now.
    First: there is a very real economic argument for raising taxes on higher income groups in this climate. When asset prices fall, wealthy individuals don’t invest. They horde cash. That cash essentially receives miniscule if not negative returns and therefore becomes a deflationary force by virtue of its non use. Only government has the ability to ensure its circulation.
    Second: Redistribution of capital counteracts asset price inflation, i.e. bubbles. When a small number of individuals control most of the cash, they invariably and rationally seek the highest returns. Thus they chase the sector with the greatest inflationary impulse, whether its tech stocks in the nineties or property in recent years, and plough good money after bad. The net effect is to drive the price of those very assets (particularly important in the case of housing) to such levels that deregulation of the credit market and excessive household debts become both an economic and political imperative. Without such debts no-one but the wealthy could afford a home. Obviously this is a catch-22, as those debts then further fuel the bubble, further adding to the wealth of those very wealthy investors.
    Third: When the right speak of competitiveness, what they really mean is reduction in living standards for 95% of the population: wage cuts in other words. However, wage cuts have the net effect of encouraging debt creation or deflation. It’s one or the other. There is a very real argument to be made that the weakening of labour over the past twenty to thirty years has been the primary driver of this mountain of debt. An anecdote I’ve frequently heard from the time of Henry Ford is illuminating. Upon creating the mode of production based on the division of labour, he was able to massively increase the supply of Model T’s he could send to the market. However, he made the enlightened decision to then vastly overpay his staff by the standards of the time. Other industry leaders were aghast. This will be inflationary they say. His response: “But who else will buy my cars?” The point being, that inequality is inherently inefficient. You can increase supply through productivity but without demand, you’re left with destructive deflation or debt creation. And there are only two ways to reduce inequality. Either tax the wealthy, or have strong labour. (Disclaimer: I’m telling that story from memory, so if anyone wishes to argue with it fair enough, but the point is still valid).
    Fourth: Strategic investment is frequently held up by discounting procedures that compare the return on one investment against another. Sounds fair, however, that presupposes that returns are sustainable. Bear with me. I was astounded to find out that over the life time of Merrill Lynch, it actually made a loss. Sure, for many years it made astounding profits, however over the course of its existence its return was negative. Now how many people would have invested in Merrill Lynch if when they were offered the choice they were told that left to term they would actually lose money? What if they were told that there was an alternative investment that would offer them something solid, say a factory, or a windfarm, or an airline, that though in monetary terms may make a loss, will have intrinsic economic value? Now an investor may look at both and say I think I’ll find something else. But a government should be screwing on its thinking cap….
    Essentially, what I’m getting at, is that what we have is a fundamentally unbalanced system, and that doesn’t just apply to Ireland but right across the anglosphere. I disagree with your prescription to borrow by the way, but understand the argument you’re making in any case. I’m willing to bet, that the Nordic countries will be the ones that will come out on top yet again, and I make that bet on the basis that they tax, they tax highly, and they tax progressively.
    I’d like to thank you for your blog and the space it provides. Sorry for the length of my comments. And that those comments didn’t deal with your current post. I can’t honestly think what sort of education many mainstream commentators receive, including Mr Coleman, for they seem to just parrot opinion without actually following the logic of their thoughts. Or maybe that’s it, they just don’t think.
    Liam

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  2. Tomaltach Avatar
    Tomaltach

    Michael, your figures provide a sound basis for showing how poorly our services are in comparison with other countries. Yet there is a grain of truth in what Coleman says. While we don’t get free healthcare or education, there is an air of expectation that we should have it – or something near to it. Yet time and again we have chosen governments for their track record in cutting taxes. The McCreevy giveaways were relished the lenght and breadth of the country. Why was it that Labour felt it simply had to enter the bidding war on Taxes at the recent election? Surely there is an element of truth in the line that we want the services of Sweden but the taxes of Texas. I think perhaps now, in the crisis, we may have a more honest and robust debate with ourselves about the link between taxes and service and indeed fairness. Perhaps this is a time to break the fantasy and spread some intellectual consistency.

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  3. Liam Avatar
    Liam

    Hi Tomaltach,
    If my memory serves me correctly, tax cuts were negotiated with the unions through the partnership process as a means of keeping gross labour costs down. I’m not entirely sure that tax reductions per se were what people were celebrating rather than the net increase in income they received as a result of the process. (My opinion admittedly)
    Might it have been better to allow wages to rise higher and maintain a higher tax base? I’m not sure people would have minded, since in theory at least, they would have received the same net income but also a better funded public service.
    Also I don’t think people are necessarily opposed to taxes. In fact I think that’s a myth.
    As for Labour, they forgot what their party stood for. Much like the Greens at the moment. Desire for power can be a dangerously corrupting influence.

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  4. Michael Taft Avatar
    Michael Taft

    Liam, thanks for your comments and let me say that your points are both cogent and aboslutely correct (something that is lacking in most economic commentary). As to the issue of borrowing, I would not hold it up as a principle, just a tool and one that we are more reliant on than stronger economies such as the Nordic countries, which can indulge in targeted tax cuts to reflate the economy or ramp up spending without recourse to substantial borrowing. Unfortunately, we don’t have those luxuries and, as you say, one of the reasons is that the trade union movement has in the last two decades, bought into tax cuts to increase net take-home pay. This short-sighted support is now boomeraning on us. We have falling growth, rising unemployment and a small tax base that is rapidly getting smaller.
    Tomaltach, I take your point. If Shane were posing the issues in the manner you have, it would be an instructive argument. However, his article was so tainted by factual inacuracies and a lack of knowledge of other economies, it was difficult to make sense of it. And blaming people is always the easy way out. I agree, though, absolutely with your point, though: there has been no party with the political courage to engage in an open and honest dialogue with the Irish people over the trade-off between taxes/social insurance and enhanced services. And that lack of courage continues to this day. That’s what makes the naitonal debate so poverty-striken.

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Commentary on Irish Political Economy by Michael Taft, researcher for SIPTU