The View from ICTU

Paul Sweeney is today’s contributor to the Irish Times series: you can read his article here.

There is much in his article that would be commonly accepted across the economics profession. However, I discuss below a few points of potential disagreement.

His article seems to suggest that those who advocate cuts in public sector pay are necessarily against the elimination of tax breaks for businesses, farmers, property development etc .   Rather, I would think most of those who have written on public sector pay  would also agree with the elimination of most of these subsidies (see, for example, my own paper.)

He also argues that our low-ish international ranking in earnings means that labour costs are not a major problem. However, it is important to make a distinction between ‘movements along the labour demand curve’  and ‘shifts in the labour demand curve’.    If we can boost productivity, we can raise wages and employment at the same time through an outward shift in labour demand.   Everyone is in favour of this, of course.  However, boosting productivity growth is complex and is really a medium-term process (few instantly effective policies).

However, at the current level of productivity, we can still raise employment by accepting a wage cut (a movement along the labour demand curve).  At a time of sharply rising unemployment, this seems like a sensible approach.

The article suggests that the economic model must “shift rapidly from Boston to Berlin: from the Anglo “shareholder value” system, to the European “stakeholder” model“.  It is certainly true that the crisis should lead to a deep and critical re-assessment of how we should regulate the banking sector and, more generally, the appropriate extent of government regulation across the economy. However, the recession is now getting to be as deep in Europe as in the United States, even if  the origin was American-made. The appropriate analytical framework also needs to be wider than ‘US v Europe’ in view of the rising share of world output that is generated by the emerging markets.

Finally, the article refers to ‘conservative economists’.  I am not sure exactly what he means by that term, but I doubt that the political preferences of academic economists can be easily inferred from their views on topics such as public sector pay.   It is possible to analytically conclude that public sector pay cuts would be a good idea for the overall economy, while holding a very diverse range of views concerning the appropriate level of redistribution in society and other dimensions that differentiate ‘conservatives’ from others.

In similar vein, the article suggests that a neoclassical approach to economics requires a belief in ‘efficient markets’.  This is at odds with the evolution of the profession, with much of the last two decades devoted to using neoclassical economics to analyse market failures (very long list of contributors).

4 thoughts on “The View from ICTU”

  1. The really important and controversial line in Paul’s characteristically entertaining and effective polemic is the one that states “Congress is seeking a major Keynesian-style stimulus package”.

    Now we all should feel squeamish about cutting public spending into a deep recession, but is Paul really comfortable about:

    (i) the sharp fall in labour competitiveness since 2000; and
    (ii) the foreseeable increases in debt to GDP ratio if there are not sizable fiscal adjustments now?

    Of course he is not. So I am hopeful that he will be constructively crafting a package that addresses both of these issues. I guess he’s a high tax man at the end of the day, but its going to be a bit of a stretch to call reducing the budget deficit with a tax increase a “Keynesan stimulus”, so I hope that Congress will not get too wedded to that particular catch-phrase.

    I’m all for Keynesian stimulus, by the way, but preferably we’ll get ours courtesy of trading partners who are not starting with as large a prospective deficit.

  2. I’ve read similar arguments to Paul’s about the Ireland’s low-ish ranking in terms of wage rates etc. They all seem to be something of a straw man argument – as they fail to differentiate between wages in the traded and non-traded sector. Wages in the former sector are already adjusting to international realities via pay cuts, off-shoring or closure (c.f.: Dell, Waterford Crystal).

    The problem is wage adjustment in the non-traded sector: non-state employees in the non-traded sector (hairdressers, architects, car dealers) are facing pay cuts if they are lucky, unemployment if they are not. Which leaves us with the 369,000 people who work for the state at a cost of €20 billion a year (and rising).

    Though I agree with Paul when it comes to ending corporate welfare, I would find his reasoning less dis-ingenuous if he admitted that a consequence of benchmarking was that public sector workers should see their terms and conditions radically retrenched just as they were boosted by the same process in the good times.

    But I’m not holding my breath …

  3. “…its going to be a bit of a stretch to call reducing the budget deficit with a tax increase a “Keynesan stimulus””

    But in terms of short-term effects wouldn’t closing the budgetary gap via tax hikes be a more “stimulatory” (i.e. less deflationary) than spending cuts?

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