Notes on the Front

3 responses to “February 19th Morning: The Recession Diaries”

1. 

   Honest Cathal

   February 19, 2009

   Independent.ie
   ‘White lies’ are informing the partnership discussions
   By Cathal O’Loghlin
   Thursday February 19 2009
   Ireland is faced with severe economic and budgetary problems arising out of the ongoing global financial sector and economic “meltdowns”.
   Major policy changes are needed to position Ireland to return to substantial employment growth on the back of global economic recovery — whenever that may occur. The ongoing social partnership discussions must address two issues in particular.
   We need to “grow” employment by 20,000 annually just to accommodate today’s school-goers as they finish their education over the years ahead.
   We will need to generate as many more again, each year, if those now losing their jobs are to have decent prospect of re-employment before the middle of the next decade.
   Costs out of line
   But Irish costs have got far out of line. The partnership discussions, therefore, must lead to outcomes which will seriously improve Irish competitiveness — critical to enable strong employment growth in the years ahead.
   The public finances, also, are seriously out of line. The discussions must lead to outcomes which, over the next five years, will reduce a prospectively horrendous 2013 budget deficit of €22bn to a just-about-acceptable level of the order of €5.5bn. Measures must be agreed which will add up to deficit reduction of the order €16.5bn by 2013, in some combination of higher taxation and reduced public expenditure.
   The enormity of the challenges demands that all face up to realities honestly. But some at the social partnership talks are dishing out seriously-misleading “facts” to bolster sectional interests.
   What “big lies”? Three stand out.
   First, the ICTU claims that Irish labour costs are low relative to those elsewhere – when, in fact, they are among the highest in the EU.
   Their published submission to the discussions claims that “wages in Ireland … are still relatively low compared to many other countries”; that “total labour costs in Ireland are a long 22nd place down the 30-member OECD club”; and that, according to the OECD, “the total cost of employing the average Irish worker in 2007 was just under $34,379 (€25,100 at that time), compared to $59,526 (€43,400) in Germany and $56,612 (€41,300) in the UK”.
   Each of these claims is very seriously inaccurate.
   The CSO reports that average labour costs (gross wages plus employers’ PRSI — the concept used in OECD data) in Irish industry were €47,100 in 2007 – and €66,700 in our financial sector.
   Gross wages (excluding employers’ PRSI) were €42,200 in the building sector, €36,900 in non-financial private sector services, and €48,000 in the public sector (excluding health).
   These CSO data, covering three-quarters of all Irish employees, give a weighted average 2007 labour cost slightly above €44,000.
   Eurostat’s databank allows estimation of average labour costs, economy-wide, in the various member-states.
   It reports (i) Total Employee Compensation for each country in millions of euro, (ii) total persons at work (actual, not full-time-equivalents) and (iii) the proportion of those at work who are self-employed or employees. The misleading ICTU presentation purports to show that Irish labour costs in 2007 were 2nd lowest among the EU15 members.
   Eurostat data gives the lie to this — placing Irish labour costs 4th highest (and 30pc above the EU15 average).
   It seems highly implausible that ICTU’s top brass genuinely believe Irish wage costs (including employers’ PRSI) averaged €25,100 in 2007. One is left with the conclusion that the ICTU submission intended to mislead – to protect their sectional interests.
   Second, CORI claims that €14.5bn of the foreseen 2013 budget gap of €16.5bn would be resolved by the simple expedient of raising the Irish tax burden to the EU-member average. Is it really this simple to solve the public deficit problem?
   The government projects GDP in 2013 of €209bn, with a public revenue ratio of 34.4pc of GDP on the basis of today’s taxes, public fees and charges. Legislating €14.5bn of extra taxes by 2013 would raise this ratio to 41.4pc of GDP. How would that compare with the revenue ratios across the EU?
   Before making comparisons, one little detail must be addressed.
   Unlike other countries, a very large slice of Irish GDP is owned by overseas investors.
   This “slice” – from which we can’t collect VAT, excises, income tax or the like – is estimated to reach 18pc in 2013.
   Our public revenues can only come from the remaining 82pc of Irish GDP. Calls for an Irish revenue ratio of 41.4pc of Irish GDP are calls for public fees, charges and taxes of €41.40 out of every €82 (over 50pc) of GDP which we Irish actually own.
   How much do other EU members pay in public taxes/charges out of their GDP? At present, they average 45pc. Only three have a tax burden of 50pc or more – Denmark, Sweden and Finland.
   The CORI proposition, if acted upon, would push Ireland’s tax burden to 4th highest among all the EU member-states.
   Imposing enough additional taxation to place the same revenue burden on us as is borne by the average EU15 state would close the projected 2013 budget gap by a little over €5bn – not €14.5bn.
   Third, ICTU claims that “our public expenditure is amongst the lowest of the OECD countries” They back this up with a graphic showing public expenditure as a percentage of GDP.
   This misleads about our true levels of spending (relative to Ireland’s income) in the same way as GDP-based tax ratios mislead about our true tax burden.
   There’s a very simple measure available to compare public spending across countries. How many €uros does each country’s public sector spend per head of population?
   The Commission’s figures indicate that public expenditure per capita here last year was 5th highest among the pre-enlargement EU15 – and (at €16,800 per head) was a full 25pc higher than the public spend-per-head of the average €uro-area member (€13,400 last year).
   Public expenditure here would have been about €12bn lower, last year, if our €uro-per-capita spend were at the EU15 average.
   The ICTU submission included an admonishment that “commentators demanding a (pay) cut should base their assertions on analysis and get their facts right”.
   It’s a pity that this admirable principle was ignored in their presentation to the social partners. Indeed, that admonition might well be taken on board by certain others, also!
   *Cathal O’Loghlin is former Assistant Secretary with the Department of Finance and Director of the IMF

   LikeLike

   Reply
2. 

   CMK

   February 19, 2009

   And, your point is? Oh, yes, ICTU are lying and “Honest Cathal” has got the facts to prove it, too? So, what do you suggest, slash public spending, slash wages, slash, slash, slash!!! The most darkly amusing aspect of this current degree is the degree to which economists seem to zero grasp of the socio-political implications of their policy prescriptions. Pig ignorant, stone age levels of comprehension of that basic element. Do Honest Cathal and his fellow travellers seriously believe we’re going to have any sort of economy worth investing in with widespread social order on par with Northern Ireland at it’s worst? At least the unions are engaging in a decent effort to bring union members with them in efforts to get through the current crisis. SIPTU are experts at moderating expectation and generating consensus. They’re proposing fair and equitable solutions. On the other, we have Cathal the gang seemingly intent on stoking up class warfare and provoking social disorder. But the, as a Director of the IMF, that’s to be expected. Why bother trying to resolve the crisis when you have a golden opportunity for structural adjustment to benefit investors and the rich. His three “Big Lies” are laughable given the degree to which our economic miracle was built upon a succession of much bigger lies. Foremost of which is the lie that sustainable economic development can result from utter dependence on foreign investment – yes, that’s why 18 per cent of “our” GDP is foreign controlled. And, as is clear to everyone, the biggest liars (the banks and property developers) have been and will continue to be bailed out by workers. If Cathal is interested in honesty maybe he can apply himself an analysis of the behaviour of those bankers and then perhaps his musings on ICTU, SIPTU and CORI will have some credibility.

   LikeLike

   Reply
3. 

   liam

   February 19, 2009

   Honestly, Honest Cathal, this is pretty sad stuff. Look, diagnose the reality before digesting the numbers.
   After reading the article you´ve posted I felt I should dig up something just to ad a bit of rigour. Its entitled Are We Heading for Another Great Depression? and is posted by Robert Reich on his blog back in 02 March 2008. Generally it refers to the US, but its relevance to our island should be obvious. Specifically, he quotes from Marriner S. Eccles who he introduces as having served as Franklin D. Roosevelt’s Chairman of the Federal Reserve from November, 1934 to February, 1948.
   My apologies upfront to Michael for posting a lengthy reproduction.
   I´ll leave it up to the good chairman – from his memoirs “Beckoning Frontiers” (New York, Alfred A. Knopf, 1951):
   “As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth — not of existing wealth, but of wealth as it is currently produced — to provide men with buying power equal to the amount of goods and services offered by the nation s economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.
   That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers’ loans, and foreign debt. The stimulation to spending by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product — in other words, had there been less savings by business and the higher-income groups and more income in the lower groups — we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.
   The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.
   Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.
   This then, was my reading of what brought on the depression.”
   see: http://robertreich.blogspot.com/2008/03/are-we-heading-for-another-great.html

   LikeLike

   Reply