Thank you for putting Michael Taft’s ideas forward for consideration and challenge. This is important as they resonate with a significant proportion of the electorate. Others, if they wish, are far more qualified than I am to comment, but I wish to focus on a couple of key aspects.

Despite being fully supportive of the need for a Keynesian style stimulus it must be recognised that the ability of the State to finance anything of this nature is extremely constrained. I describe the contention that, because it is prepared to bail out the banks, the State should be able to finance all manner of job protection and creation schemes as the “Casablanca Folly” - “You played it for her; you can play it for me. Play it.”

That the bank bail-out could be played differently - and less expensively - is neither here nor there. Some budget constraints are just .. hard.

The Eurozone and global stock of surplus savings has been diminished, but it hasn’t gone away. With sensible policies and effective regulation we can tap into this to finance any amount of human and physical capital investment. This, of course, would require the shooting of some sacred cows such as the belief in the ineradicable evils of any form of privatisation.

And the high profits of the semi-states cited by Michael Taft as evidence of the superior performance and efficiency of public sector enterprises (relative, one presumes, to private sector ones) are primarily driven by excessively high prices and revenues set by the energy regulator to allow these businesses to extract a share of up-front investment financing from consumers - so as to avoid direct Exchequer financing. The government is screwing consumers much more rapaciously than any carpet-bagging private equity ghouls ever would.

Welcome to the real world!

Okay, let me begin by conceding some points. In an attempt at brevity and shorthand I managed to come across as unnecessarily aggressive and just plain dumb. In the interview Prof. Galbraith had to correct me a number of times when I tried to express some of the points he had made in articles etc, and I am sure that he would take issue with my simplification of the point he made regarding job creation. Also, he was talking about the US economy at the time, so extrapolation over to Ireland was inaccurate. Also realize too that broad sweeping statement are not helpful, and certainly buck the trend in the detail of comments provided on this and other IE treads.

My point was that while it is good to express caution against panic measures which may seem innovative to the wider public but have been shown not to work, I would have thought that it would be more useful to argue for ways of generating sustainable jobs to ease the social and indeed economic problems associated with a long recession, rather than implying that all state sponsored programs to encourage job promotion should be dismissed out of hand.

Recessions do come and go, but is this one not different? Is not the underlying causes of it connected to deeper structural problems which are the result of how the economic system has worked in the last couple of decades? However, rather than dealing with that point I was thinking, when I made my comment, that there have been a number of problems lying under the hood of the Irish economy for a number of years and which have mitigated against real indigenous growth (and I am relying on Seán O’Riain’s posts here and elsewhere on that). There is seems little real desire to tackle these past shortcomings. It was inaccurate to focus on commodity speculation and the financial sector. Although it has accounted for the huge flood of money passed through the system, it has not contributed to the whole Irish economy in the way that it was imagined (unless I’m reading Patrick Honohan’s 2006 paper for the DEW on the Financial Service Sector incorrectly).

The alternative it seems is to rely on the market on its own to boost job creation without any clear idea of when or how that would happen, leaving those reservists in the army of the unemployed hanging around doing nothing (or relying on them taking leave to another country).

On job creation itself, Michael Taft and others continue to make suggestions.

http://www.irishleftreview.org/2009/05/07/shane/

Perhaps these can be addressed seriously and indeed challenged. So it’s unfortunate if what I said came across as a conspiracy theory – that’s an easy enough brick to lob – but I concede that my argument was wasn’t detailed, well informed or articulate enough for the point I was trying to make.

I’m pasting in the podcast here, so that IE readers don’t have to pollute their browsers with an ILR webpage

Galbraith Interview

What exactly, in concrete terms, is this re-configuring of the entire economy towards job creation that you envisage?

The steep nature of the current recession can make it hard to forget that the most basic fact of macroeconomics is that recessions come and go. Economies create plenty of jobs during expansions and shed them during recessions. While the current recession is bad, we need to be careful not to introduce panic measures that will hamper growth (and probably employment levels) for years to come.

A bit of history is useful on this. We’ve been here before — back in the 1980s people regularly claimed that Ireland could never return to low unemployment without the government directly intervening to “create” lots of jobs. Well-intentioned as they were, these folks were wrong then, and the argument is wrong today as well.

Prof. Galbraith is an interesting man but characterising the pre-2007 economy as “relying on commodity speculation rather than job creation” is not helpful. One can be more precise and say that the financial sector of the economy (which means a lot more than commodity speculation) probably became too large in many of the world’s leading economies. But this doesn’t really have anything to do with job creation — these industries created jobs at the time and are now shedding them and during the booms they fueled unemployment rates were very low. When we come out of this recessions, other sectors will emerge to employ these people.

As with the conspiracy theories referred to above, broad sweeping statements like this are very popular but usually just aren’t that helpful.

Yesterday I talked to James K. Galbraith about this, before his Tasc lecture in the Royal Irish Academy, and he emphasised that the system will have to move away from reliance on commodity speculation and towards job creation. You can listen to it here:

http://www.irishleftreview.org/2009/06/05/ilr-podcast-interview-james-galbraith/

I take your points about specific failures of democratic governance in many jurisdictions, but, without deviating too far from the labour market policy debate in this thread, my focus is on effective engagement of the economics profession with the political policy formulation, evaluation and implementation process. It harks back to a post by Colm Harmon in April (http://www.irisheconomy.ie/index.php/2009/04/13/skills-deficits) bemoaning the lack of quality economic input in this process. The extended debate on that thread provoked the following characteristically incisive and pungent observation by Colm McCarthy:

“Consider the market for economic advice, which varies in quality, but not much in price. On which side of the market will quality get determined? If demand is quality-insensitive, what is the pay-off to quality improvements on the supply side?

Why do economists never apply a little economic analysis to the economics industry?”

My simple proposal in response to this is to reform, empower and resource the Oireachtas Committees to enhance the quantity and quality sensitivity of this demand. And that this, in turn, would increase demand on the government side. Our elected representatives would still make the final decisions, but they would do so on the basis of advice presented and contested in a rigorous and structured format. It would facilitate a move towards the separation of the executive and legislative powers, increase scrutiny and transparency and be more effective in holding the government to account. And our dozy Fourth Estate might pay more attention and up their game.

During the long summer recess (assuming there isn’t a general election) our elected representatives could do worse than focus on reforming the current Oireachtas Committee system along these lines.

Thanks for the comprehensive reply.

It is my opinion that some forms of democracy are more democratic than others. Proportional representation is more democratic than first past the post. The best example of this is the share of parlimentary seats the Lib dems get 4-6% usually, even though they have about 12-15% of the UK vote.
It is also my opinion that the party whip sytem first introduced by Parnell was one of the most undemocratic acts allowed to occour in British Parlimentary History. Party whips being abolished via referendum would give parliment more power to disagree with the Government.

Lastly I would argue that corporate lobbying has no place in a properly functioning democracy.
It should also be outlawed through referendum.

I know I may as well be asking for a free holiday in Bermuda for all the good it will do but if there are alternitive answers, regardless their palitablity to the major parties they should be aired.

Guys, can we tone done the ECB stuff a bit? I suppose we should get something going somewhere else on this issue but since you’re discussing it here:

1. The ECB is not buying the banks’ Irish government bonds at all (at favourable rates or any other rates). They are using them as collateral in repo operations.

2. The ECB is willing to lend to the Irish banks using these govenment bonds as collateral because they one of a huge range of assets that the ECB considers eligible collateral for these operations. See here http://www.ecb.int/paym/coll/html/index.en.html

3. Since late last year, the ECB has adopted a policy of providing unlimited amounts of credit in its refinancing operations (previously it had auctioned off a set amount of credit, subject to a minimum acceptable interest rate). So within this framework, the ECB has no choice but to lend to the Irish banks once they come up with eligible collateral.

4. Given the Irish banks relatively modest holdings of Irish government debt (they hold only a tiny fraction of the outstanding sovereign debt) and their now large level of loans from the ECB, they are clearly using plenty of other stuff as collateral also.

5. The “ECB/EU” stuff is just silly. The ECB\Eurosystem is not simply an outgrowth of Brussels. It is an independent central bank (witness the recent Merkel-Trichet spat). It also has representatives from 16 countries going to and fro all the time. Trust me, there is no way they could run some sort of consipiracy theory of the type you’re suggesting.

I know conspiracies are great fun but the truth is usually much less exciting.

@ Paul
I also think that Andrew McDowell deserves credit for debating FG policies on this board. Where are the other advisors???

Fair comment. I accept I was being a bit flippant about what I preceived as an imbalance of coverage. However, you are raising, possibly inadvertently, some fundamantal questions about democratic governance, accountability and scrutiny. This is taking us into the sphere of polictical economy - and probably deserves a separate post - but it is worth while to consider the essential features as concerns have been raised here previously about the quality of economic policy advice available to the Government and suggestions floated about the possibility of elevating this blog as a forum for generating and scrutinising policy ideas in a formal manner.

Observing Ireland from England, as I do, I am a little bemused that the current intense debate here about the business of parliament and democratic governance is having almost no resonance in Ireland. From the comfort of retirement, Andrew Turnbull, former UK cabinet secretary and head of the civil service, has recently made some serious points:

http://www.ft.com/cms/s/0/73f524ca-4faa-11de-a692-00144feabdc0.html

For all sorts of historical and cultural reasons the Irish system of democratic governance is broadly similar to that in Britain - and similar to to the system of parliamentary democracy in all other EU member-states, with the important exception of France. Indeed, in global terms, in established and well-functioning democracies, with the important expection of the US, this model of parliamentary democracy holds sway.

Its essential feature, as Andrew Turbull points out, is that the power of government in parliament, once it can sustain its parliamentary majority, is virtually absolute. Switch back to Ireland. The Taoiseach has asserted that “he will govern as he sees fit”. While the Dail arithmetic holds up, this is simply a statement of fact. Irrespective of the quality of the critiques posted here by Karl Whelan and other well-qualified and internationally recognised economists, the Government will take no notice. And an atavistic and tribal strain of anti-intellectualism erects another barrier.

(In passing it is to Andrew McDowell’s great credit that he is prepared to engage on this blog with critiques and scrutiny of FG’s policy proposals as they are being developed. In fact, this is probably one of the most beneficial aspects of this blog. There is an extremely high probablity that FG will be the dominant player in the next government - irrespective of when a general election is called. It is only now that their economic policy proposals may be influenced before they are set in stone in a programme of government. And it is why I have frequently called for more scrutiny here of what FG and other parties are proposing.)

Back to democratic governance. The simplest and most effective reform comprises the selection, empowering and resourcing of parliamentary committees (similar to those in the US) to hold the government to account and to initiate legislation. This could involve shrinking government within parliament (and, possibly, taking some outside), but increasing scrutiny and accountability. These committees would have the resources to retain the calibre of economic expertise to scrutinise and modify government economic policy proposals. And the government, in turn, would be required to increase the quality and quantity of economic analysis supporting its proposals.

And it is possible that this could be achieved wthout a constitutional amendment.

- (i) Yes, we should train more teachers and instructors at all levels of education initially in temporary and low paid apprentice jobs for the duration of this part of the cycle. This is one specific example but in general, teaching-type jobs are good candidates for holding positions for people with college education that will allow them to keep their skills while not really costing the taxpayer much (I will be more precise on a later thread). In general these type of “graduate intern” jobs could be introduced at the stroke of a pen and would absorb potentially a large number of graduates who are either going to be unemployed or competing for jobs in areas that they are overtrained for, thus potentially displacing the lower skilled people that many here have argued are the ones really in trouble. Universities, hospitals, services companies, tech companies and so on could all absorb intern positions and we should try this out. I am aware that DETE are piloting something (see link) and maybe this might be the catalyst but my sense is that the number of places is far too small and the framing too dull http://www.entemp.ie/press/2009/20090527.htm (ii) Yes - we should fill certain types of public sector vacancies with contract employees on 2-3 year contracts subject to a far greater emphasis on what employees do in the public sector. (iii) There is a case for lowering a certain number of taxes while increasing others. John makes some of this case. (iv) We are already engaging in a big stimulus effort by running double digit deficits but we have no real idea of the employment effects and whether it makes sense to alter composition to directly target employment. The IMF Conference linked to by Philip talks about among other things about employment effects of fiscal stimulus but less on composition effects as far as I can see. For Ireland, the issue has obviously to be one of composition rather than level as we cant do much more on the level and may have to do a lot less. (v) Depends what you mean by ALMP’s. Aedin’s point about younger workers is interesting in this score. The ESRI conference reviewed some ones that might work. What FAS is doing deserves more scrutiny - it might be great but its not being subject to any proper debate. (vi) We should not view the items mentioned as net additions to current levels of spending. Reallocation of existing social welfare payments toward more active initiatives is one way of paying for some of this. A complete rethink of the capital plan in the short-run is another.

While Karl raises critical challenges to wage subsidy policies, I feel the overall perspective is too micro oriented. It would be right to focus on industry-level labour demand elasticities if we were dealing with an economy at full employment, where the position of the labour demand curve itself can be taken as given. The situation is different if we are facing an economy in a recession. In this context, it is interesting to consider general temporary payroll tax cuts as a form of macroeconomic stimulus. Now I realise payroll tax cuts are not usually thought of as a stimulus instrument. However, I feel that the nature of the Irish case is such to make them worth considering. First, the recession is at least in part related to dysfunction in the banking system. Financing constraints (most worryingly for working capital) appear to be a significant contributor to the contraction. The large literature on investment and finanancing constraints suggests policies that improve the cash flow position of businesses could have a significant return in the present situation. Second, it has been rightly pointed out that multiplier effects from standard demand stimulus measures are likely to be relatively weak in an economy as open as Ireland’s. Policies directed at payroll costs at least have the advantage that they benefit exporting firms as well as those depending on domestic demand.

Of course, any costly stimulus policy must be judged in terms of the overall fiscal constraint. (One rough way to think about this constraint is as a Laffer-curve style relationship between the deficit and real GDP. If we are to the right of the peak, any increase in the deficit makes things worse through interest rate/expectation effects.) But as stimulus policies go, temporary payroll tax reductions are worth consideration.

Indeed, you’re right that I should have used 1.6 million rather than 2 million (that calculation was bit more back of the postage stamp rather than back of the envelope!) Also, as I noted, the FG plan would only apply to hiring unemployed people, so this would also reduce the cost relative to my estimates, though I’m not sure by how much.

On the data used in the Lawless-Murphy study, “job gains” are only counted if total employment has increased, so replacing exisiting workers does not show up in their dataset (they discuss this on the fifth page of the paper). So their figures correspond precisely to the measure of job gains that your policy would apply to.

I agree with you on education vs. training. Getting those that dropped out of school over recent years back into education would also buy some time to find out what training might have a return after the recession. In the BB paper proposals 3, 4, and 5 relate to this.

My praise for Karl’s post was not related to the comment on broadening the tax base, which I took to be marginal to his central message. It was that I am sceptical of job creation policy responses, for reasons identical to those he so eloquently evokes.

On this one, I’m sure you will agree that I have been consistent throughout.

In fairness to Labour Economists, I think there is a sense that unemployment in this recession is a different beast to that in previous recessions, and we’re watching the data emerge to assess whether we actually know anything useful about how to remedy things this time around…..

Infrastructure is just one of the 10 proposals in BB. In my paper I make the point that we need to get value for money and that we are spending a lot so we do not need to spend more (as argued by some). I do not argue against infrastructure investment, but against blindly raising the public capital programme without having done the background work.

I raised some questions about a further 5 proposals in BB. Do you think we should train more teachers? Do you think we should fill public sector vacancies? Do you think we should reduce taxes? Do you think we should have a major stimulation programme? Do you think we should do more ALMPs? How are we going to pay for it all?

I know some people will argue that we are able find the money for the banks so why not for ‘employment supports’ - fair question, but can we do both?

I am reluctant to wade in, but this thread, in a forward-looking manner, highlights many of the key components what will be required for a sustainable economic recovery. (I think we may have had enough of the banks and rectal fiscitude - as Barry Desmond once put it.) It began with Karl’s perceptive critique of FG’s (and other) costly, blunderbuss approach to subsidise an increase in employment.

Three plausible contentions seem to be emerging.

1. Fiscal constraints should prevent blanket employment subsidies where deadweight costs are high and significant additional capital expenditure where the cost per job is much higher than it is for alternative investments;
2. The human and social costs of unemployment (and sustained unemployment) are very high for some categories of the unemployed - particularly the younger cohorts - and these must be addressed.
3. There is a pressing requirement to enhance skill sets for those about to enter the labour force (in the light of declining take-up of maths and science-based courses) and to modify and enhance the skill sets of those recently unemployed.

In response the following may be worth considering:

1. Reducing the costs of doing business: more effective application of existing competition, regulation and consumer protection policy is probably the best way of ensuring that the marginal revenue product generated by a new employee exceeds the marginal expense of employment. This may take longer to incentivise new employment, but it will squeeze rents and deadweight costs rather than adding to them as a blanket employment subsidy would.
2. Mobilise private sector finance of investment in key telecoms, energy, transportation and water services infrastructure under a reformed regulatory revenue model; this will generate the quadruple whammy of reducing charges for these services, freeing up scarce government revenue, boosting economic activity and productivity and providing employment for suitably skilled workers.
3. It should be possible to justify expenditure to encourage young people to remain in, or to re-enter, education and training on its own merits as an investment in human capital. However, expenditure on useful social and community-based schemes for those in longer term unemployment and who have difficulty participating in education and training could be easily justified in terms of avoided future health, social and criminal justice expenditure.

For what it’s worth…

And I do think its time that labour economists made some contribution to the public debate. I accept that ESRI ran a conference and that they talk about unemployment in the QEC. But we have had two crisis conferences that barely mentioned the word job. This is disproportionate and points to a lack of people knowledgeable about labour markets and willing to speak about them in public debate. One cannot pick up a newspaper without reading often very cogent analyses of the banking system. I have not read a decent piece yet analysing properly the unemployment situation and as usual please enlighten me if I am incorrect.

Edgar - your paper suggests that much of the current capital programme is poorly costed and also has an enormous cost per job. Is this not a place to start? Also - you cannot compare the type of projects that the BB paper is suggesting with the huge pork investments you critique in your paper.

Some observations on your estimate of the deadweight cost for the proposed FG wage subsidy scheme.

The scheme is restricted to companies expanding overall employment levels. There is a subtle, but potentially important, distinction between expanding overall employment levels and creating new jobs. As you point out, there will, even in a recession, be significant (albeit declining) replacement of staff due to natural turnover, even in companies that are declining in size (this, I suspect, is what is measured in Martina’s data).

But I suspect that only a fraction of such firms will, in the current environment, be expanding their overall employment levels and therefore qualify for the proposed wage subsidy. This would seem to be backed up by the latest NCB PMIs, which estimated that only 5% and 4% of manufacturing and services companies respectively were planning to expand employment.

A smaller observation - the subsidy would, of course, only apply to private sector employers, which probably employ no more than 1.6m people (not the two million overall level of employment that you cite).

Andrew

@ Liam
I have looked briefly at the Bell and Blanchflower paper (we are bound to cross swords on this again). It seems rather partial equlibrium to me. What about the budget constraints, inefficiencies, disincentive effects, slowing down of the needed re-adjustment….

I would only endorese proposals 3,4,5 (on encouraging young people to stay or re-enter the education system) and 10 (short time working as an alternative to lay-offs).

There are lots of proposals in there that call for more spending (particularly proposals 1,7,8,9) and less taxes (proposal 2) - how could we square that with the obvious budget constraint?

I have outlined my views on “shovel ready infrastructure projects” (proposal 7) elsewhere. I wonder about proposal (6) to encourage more people to be trained as teachers (what are the needs from a demographic perspective in Ireland?). Bell and Blanchflower also propose that more money be made available to fill public sector vacancies (proposal and they also argue for some “temporary, limited and targetted expansion of ALMPs (proposal 9)

“we are not making the case for significant expansion of existing ALMP measures on a broad scale …As already mentioned, the evidential basis for such a course of action is not strong at least in terms of their effects on participants. Other effects are not well researched. Further, such evidence as is available suggests that any positive impacts on participants may be diluted when unemployment is high, e.g. Podivinsky and Mcvicar (2007). This adds to our caution in proposing substantive expansion of existing ALMPs in the UK.”

This is, I think, one of the reasons why labour economists have not been rushing to propose loads of them, especially with the state of the public finances.

B&B do, however, go on to say that whatever measures are put in place should be focussed on the young, for the reasons that Margaret Hurley emphasizes; Brian Nolan also made this point in his DEW conference paper - that we should not be indifferent about who is unemployed, since long-term scarring effects are much worse for young and inexperienced workers. This is an important message and not addressed by any of the existing proposals that I’m aware of.

The loss can be minimized by being realistic and pretending that the state can do everything for voters is a lie. It has been perpetrated by those who gain and retain power by pretending that the state can make the sea recede by command.
Just what tax rates are you prepared to accept? Ireland rejected the Scandinavian model years ago. The Denmark solution will create training jobs but we see what has happened in Ireland with the various training agencies. We have a very poorly trained building industry, that turned out substandard housing.
It seems to suit many to have permanent emigration from Ireland.

You make a good point! This behaviour is taught and then learned and exists in co-dependancy that we now call democracy. There is nom limit to what a politician or his oozing familiar, the senior civil serpent, will sell to get and retain power. Lord Acton anyone?
Why people laugh at North Korea for its hereditary communism when we have more extensive nepotism in Ireland, as existed in Iceland, escapes me, but with your insight, you may already know.

Keep it up!