OECD Economic Survey of Ireland

This report was launched today: you can download the chapters here.

In addition, the OECD released the conclusions and recommendations of the Environmental Performance review of Ireland, which make for interesting reading.

13 replies on “OECD Economic Survey of Ireland”

Chapter 3 is on labour market. The chapter has a number of interesting ideas though is perhaps too focused on employment more generally rather than the dramatic surge in unemployment that has just occurred.

Main conclusions below. Clearly, they agree with the idea that Ireland needs to price itself back into the international market. However, it is striking that despite a mostly very conservative report, they come out strongly in favour of extra spending on labour market programmes.

– reduction in minimum wage particularly for younger people

– large increase in numbers targetted by active labour market programmes to avoid perils of long-term unemployment. “The problem is that the overall scale of the programmes is limited compared with the numbers employed”. Box 3.4 outlines the main ideas they have here.

– greater coordination between DFSA and FAS, particularly on information systems.

– wage reductions

– changes in the incentive structure and delivery of unemployment payments.

– various policy changes to encourage participation of older workers, workers with disabilities and lone parents.

Here’s a good piece from City Journal (Published by the Manhattan Institute in New York) which may throw some light on the policy priorities of our leaders. Ireland’s economic problems have been compared to California in the past (political inability to control spending + higher taxes for poor services being the main problems)

William Voegeli

The Big-Spending, High-Taxing, Lousy-Services Paradigm

California taxpayers don’t get much bang for their bucks.

Autumn 2009

In 1956, the economist Charles Tiebout provided the framework that best explains why people vote with their feet. The “consumer-voter,” as Tiebout called him, challenges government officials to “ascertain his wants for public goods and tax him accordingly.” Each jurisdiction offers its own package of public goods, along with a particular tax burden needed to pay for those goods. As a result, “the consumer-voter moves to that community whose local government best satisfies his set of preferences.” In selecting a jurisdiction, the mobile consumer-voter is, in effect, choosing a club to join based on the benefits that it offers and the dues that it charges.

America’s federal system allows, at the state level, for 50 different clubs to join. At first glance, the states seem to differ between those that bundle numerous high-quality public benefits with high taxes and those that offer packages of low benefits and low taxes. These alternatives, of course, define the basic argument between liberals and conservatives over the ideal size and scope of government. Except for Oregon, John McCain carried every one of the 17 states with the lowest tax levels in the 2008 presidential election, while Barack Obama won every one of the 17 at the top of the list except for Wyoming and Alaska.

It’s not surprising, then, that an intense debate rages over which model is more satisfactory and sustainable. What is surprising is the growing evidence that the low-benefit, low-tax alternative succeeds not only on its own terms but also according to the criteria used by defenders of high benefits and high taxes. Whatever theoretical claims are made for imposing high taxes to provide generous government benefits, the practical reality is that these public goods are, increasingly, neither public nor good: their beneficiaries are mostly the service providers themselves, and their quality is poor. For evidence, look to the two largest states in the nation, which are fine representatives of the liberal and conservative alternatives.

One out of every five Americans is either a Californian or a Texan. California became the nation’s most populous state in 1962; Texas climbed into second place in 1994. They are broadly similar: populous Sunbelt states with large metropolitan areas, diverse economies, and borders with Mexico producing comparable demographic mixes. Both are “majority-minority” states, where non-Hispanic whites make up just under half of the population and Latinos just over a third.

According to the most recent data available from the Census Bureau, for the fiscal year ending in 2006, Americans paid an average of $4,001 per person in state and local taxes. But Californians paid $4,517 per person, well above that national average, while Texans paid $3,235. It’s worth noting, by the way, that while state and local governments in both California and Texas get most of their revenue from taxes, the revenue is augmented by subsidies from the federal government and by fees charged for governmental services and facilities, such as trash collection, airports, public university tuition, and mass transit. California had total revenues of $11,160 per capita, more than every state but Alaska, Wyoming, and New York, while Texas placed a distant 44th on this scale, with revenues of all governmental entities totaling $7,558 per person.

What might interest Tiebout is that while California and Texas are comparable in terms of sheer numbers, their demographic paths are diverging. Before 1990, both states grew much faster than the rest of the country. Since then, only Texas has continued to do so. While its share of the nation’s population has steadily increased, from 6.8 percent in 1990 to 7.9 percent in 2007, California’s has barely budged, from 12 percent to 12.1 percent.

Unpacking the numbers is even more revealing—and, for California, disturbing. The biggest contrast between the two states shows up in “net internal migration,” the demographer’s term for the difference between the number of Americans who move into a state from another and the number who move out of it to another. Between April 1, 2000, and June 30, 2007, an average of 3,247 more Americans moved out of California than into it every week, according to the Census Bureau. Over the same period, Texas saw a net gain, in an average week, of 1,544 people. Aside from Louisiana and Mississippi, which lost population to other states because of Hurricane Katrina, California is the only Sunbelt state that had negative net internal migration after 2000. All the other states that lost population to internal migration were Rust Belt basket cases, including New York, Illinois, New Jersey, Michigan, and Ohio.

As Tiebout might have guessed, this outmigration has to do with taxes. Besides Mississippi, every one of the 17 states with the lowest state and local tax levels had positive net internal migration from 2000 to 2007. Except for Wyoming, Maine, and Delaware, every one of the 17 highest-tax states had negative net internal migration over the same period. Conservative researchers’ technical explanation for this phenomenon is: “Well, duh.” Or, as Arthur Laffer and Stephen Moore wrote in the Wall Street Journal earlier this year: “People, investment capital and businesses are mobile: They can leave tax-unfriendly states and move to tax-friendly states.”

Summarizing the findings of a report they wrote for the American Legislative Exchange Council, Laffer and Moore pointed out that between 1998 and 2007, the states without an individual income tax “created 89 percent more jobs and had 32 percent faster personal income growth” than the states with the highest individual income-tax rates. California’s tax and regulatory policies, the report predicts, “will continue to sap its economic vitality,” while Texas’s “pro-growth” policies will help it “maintain its superior economic performance well into the future.” The clear implication is that California should become more like Texas.

At this point, defenders of the high-benefit, high-tax paradigm push back. Remember the other half of Tiebout’s equation, they say. There’s no need for a state to be like Texas if its high taxes and extensive regulations are part of a package deal that yields more and better public goods and an attractive quality of life.

But that, it turns out, is a big “if.” It’s true that many people are less sensitive to taxes and more concerned about public goods, and these consumer-voters will congregate in places with extensive services. But it’s also true, all things being equal, that everyone would rather pay lower than higher taxes. The high-benefit, high-tax model can work, but only if the high taxes actually purchase high benefits—that is, public goods that far surpass the quality of those available to people who pay low taxes.

And here, California is decidedly lacking. The biggest factor accounting for California’s loss of population to the other 49 states, bond ratings that would embarrass Chrysler or GM, and state politics contentious and feckless enough to shame a banana republic, has to be its public sector’s diminishing willingness and capacity to fulfill its promises to taxpayers. “Twenty years ago, you could go to Texas, where they had very low taxes, and you would see the difference between there and California,” Joel Kotkin, executive editor of NewGeography.com and a presidential fellow at Chapman University in Southern California, told the Los Angeles Times this past March. “Today, you go to Texas, the roads are no worse, the public schools are not great but are better than or equal to ours, and their universities are good. The bargain between California’s government and the middle class is constantly being renegotiated to the disadvantage of the middle class.”

Similarly, the CEO of a manufacturing company in suburban Los Angeles told a Times reporter that his business suffered less from California’s high taxes than from its ineffectual services. As a result, the company pays “a fortune” to educate its employees, many of whom graduated from California public schools, “on basic things like writing and math skills.” According to a report issued earlier this year by McKinsey & Company, Texas students “are, on average, one to two years of learning ahead of California students of the same age,” though expenditures per public school student are 12 percent higher in California.

State and local government expenditures as a whole were 46.8 percent higher in California than in Texas in 2005–06—$10,070 per person compared with $6,858. And Texas not only spends its citizens’ dollars more effectively; it emphasizes priorities that are more broadly beneficial. In 2005–06, per-capita spending on transportation was 5.9 percent lower in California than in Texas, and highway expenditures in particular were 9.5 percent lower, a discovery both plausible and infuriating to any Los Angeles commuter losing the will to live while sitting in yet another freeway traffic jam. With tax revenues scarce and voters strongly opposed to surrendering more of their income, Texas officials devote a large share of their expenditures to basic services that benefit the most people. In California, by contrast, more and more spending consists of either transfer payments to government dependents (as in welfare, health, housing, and community development programs) or generous payments to government employees and contractors (reflected in administrative costs, pensions, and general expenditures). Both kinds of spending weaken California’s appeal to consumer-voters, the first because redistributive transfer payments are the least publicly beneficial type of public good, and the second because the dues paid to Club California purchase benefits that, increasingly, are enjoyed by the staff instead of the members.

Californians have the best possible reason to believe that the state’s public sector is not holding up its end of the bargain: clear evidence that it used to do a better job. Bill Watkins, executive director of the Economic Forecast Project at the University of California at Santa Barbara, has calculated that once you adjust for population growth and inflation, the state government spent 26 percent more in 2007–08 than in 1997–98. Back then, “California had teachers. Prisoners were in jail. Health care was provided for those with the least resources.” Today, Watkins asks, “Are the roads 26 percent better? Are schools 26 percent better? What is 26 percent better?”

The steady deterioration of California’s public services hasn’t gone unnoticed. Shortly after his stunning ascension to the governor’s office in 2003, Arnold Schwarzenegger established an advisory commission, the California Performance Review (CPR), to recommend ways to make governance in California smarter, cheaper, and better. The commission labored through 2004 before delivering a doorstop report with more than 1,200 recommendations for streamlining this and consolidating that, along with an assessment that implementing the full list of changes could save California $32 billion over the first five years.

And then . . . nothing, really. The 2,500-page report was “dead on arrival,” according to Bill Whalen of the Hoover Institution, “because it was too complicated for voters to rally behind and legislators didn’t want to see it enacted.” Citizen Schwarzenegger may have assumed that his personal star power and the CPR recommendations’ plodding good sense would make a politically irresistible combination. Such reckoning failed to account for the formidable ability of even the most obscure and otiose governmental body to hunker down, defend its turf, and outlast mere politicians.

The CPR, for example, recommended abolishing dozens of California’s commissions and advisory boards, either outright or by folding their activities into a simpler and more rational organizational structure. Five years later, few of these vestigial organs have been removed. The many that remain include the Commission on Aging, whose lead accomplishment for 2009 is getting the legislature to declare a Fall Prevention Week (which began on the first day of autumn, naturally); the Apprenticeship Council, “which has been in place since the 1930s,” according to the CPR, and “is no longer needed to perform regulatory and advisory responsibilities”; the Board of Barbering and Cosmetology; the Court Reporters Board; and the Hearing Aid Dispensers Bureau.

The point is not that turning a flamethrower on every item in the Museum of Governmental Anachronisms would have saved California a great deal of money. It is, rather, that abolishing these boards and commissions, whose names are talk-radio punch lines, would have been the easy calls, the obvious first steps toward giving California’s taxpayers a decent return on their surrendered dollars. Yet even the low-hanging fruit proved out of reach. The path of least resistance was to do the same old thing, not the sensible thing.

The resistance comes from the blob of interest groups, inside and outside government, that like California’s public sector just fine the way it is and see reform as a threat to their comfortable, lucrative arrangements. It turns out, for example, that all the pointless boards and commissions are bulletproof because they provide golden parachutes to politicians turned out of the state legislature by California’s strict term limits. In the middle of the state’s most recent budget crisis, State Senator Tony Strickland proposed a bill to eliminate salaries paid to members of boards and commissions who, despite holding fewer than two formal hearings or official meetings per month, had received annual compensation in excess of $100,000. The bill died in committee.

James Madison would have to revise—or possibly burn—Federalist No. 10 if he were forced to account for the new phenomenon of the government itself becoming the faction decisively shaping its own policy and conduct. (See “Madison’s Nightmare” in City Journal’s 2009 special issue, “New York’s Tomorrow.”) This faction dominates because it’s playing a much longer game than the politicians who come and go, not to mention the citizens who rarely read the enormous owner’s manual for the Rube Goldberg machine they feed with their dollars. They rarely stay outraged long enough to make a difference.

Take entitlements and public-employee pensions, which are, Watkins says, “the real source of the state’s fiscal distress.” A 2005 study by the Legislative Analyst’s Office (California’s version of the Congressional Budget Office) found that pensions for California’s government employees “surpassed the other states—often significantly—at all retirement ages.” California government workers retiring at age 55 received larger pensions than their counterparts in any other state (leaving aside the many states where retirement as early as 55 isn’t even possible). The California Foundation for Fiscal Responsibility periodically posts a list of retired city managers, state administrators, public university deans, and police chiefs who receive pensions of at least $100,000 per year. The latest report shows 5,115 lucky members in this six-figure club. The state’s annual bill for polishing their gold watches is $610 million.

Again, the most vivid part of the problem is not the most important. California would move only slightly closer to regaining fiscal health if it scraped the gilding off the pensions and health benefits of its most lucratively retired employees. But when even a flagrant example of a government’s serving its workforce better than its citizens is politically unassailable, it’s hard to be hopeful about the mundane reforms needed to change the rest of the economically debilitating public-employee retirement system. The California Performance Review suggested the sensible thing: gradually substituting defined-contribution for defined-benefit pension plans. (According to a report by the Pew Center on the States, just 20 percent of the nation’s private-sector employees are enrolled in a defined-benefit pension plan, compared with 90 percent of public-sector employees.) To no one’s shock, the state legislature has rejected all proposals to curb the state’s financial obligations to its retired and retiring employees.

If California doesn’t want to be Texas, it must find a way to be a better California. The easy thing about being Texas is that the government has a great deal of control over the part of its package deal that attracts consumer-voters—it must merely keep taxes low. California, on the other hand, must deliver on the high benefits promised in its sales pitch. It won’t be enough for its state and local governments to spend a lot of money; they have to spend it efficiently and effectively.

The optimistic assessment is that things are going to get worse in California before they get better. The pessimistic assessment is that they’re going to get worse before they get much worse. As is often the case, hanging around with the pessimists is less fun but more instructive. The current recession has driven California’s state government into what amounts to a five-month budget cycle, according to Dan Walters of the Sacramento Bee. He estimates that the budget deal tortuously wrought in July should start falling apart in October, because it was predicated on pie-in-the-sky revenue estimates and because so many of its spending cuts are being challenged, often successfully, in the courts.

The recession will eventually end and California’s finances will improve, say the optimists. Given the state’s pervasive political bias against efficient and effective public services, however, the question is whether its finances will ever get truly well. States that have grown accustomed to thinking of the engine that drives their economies as an inexhaustible resource—whether it’s Michigan and the auto industry, New York and Wall Street, or California and the vision of the sunlit good life that used to attract new residents—find it tough to compete again for what they thought would be theirs forever, and to plan budgets for lean years that turn into lean decades. Instead, they invest their hopes in a deus ex machina that will rescue them from the hard choices they dread.

For California’s governmental-industrial complex, a new liberal administration and Congress in Washington offer plausible hope for a happy Hollywood ending. Federal aid will replace the dollars that California’s taxpayers, fed up with the state’s lousy benefits and high taxes, refuse to provide. Americans will continue to vote with their feet, either by leaving California or disdaining relocation there, but their votes won’t matter, at least in the short term. Under the coming bailout, the new 49ers—Americans in the other 49 states, that is—will be extended the privilege of paying California’s taxes. At least they won’t have to put up with its public services.

William Voegeli is a contributing editor of The Claremont Review of Books and a visiting scholar at Claremont McKenna College’s Salvatori Center. His book on the American welfare state will be published by Encounter in 2010.

If you see Ireland as a state within the EU and the Fed as the ECB lending this analysis has something to tell us about our own situation. Many of the economists writing on this forum appear to treat Ireland as a closed model where initiatives can be taken and levers pulled with regard to all sorts of effects but little regard the fact that people may simply leave – even people with good jobs. I think this article provides a compelling case about the assumption nearly everyone writing on this forum makes – which is that more government spending is necessary as a ‘stimulus’ or ‘rescue’ – where as lower taxes would do the same but more productively.

As a related point the lack of policy diversity in terms of choice was evident form this morning’s ‘Morning Ireland’ RTE ! Show. Which presented our crisis as an opportunity for Blitz spirit – including with Pres. McAleese doing her bit by turning off lights at the Aras. But the entire discourse / ‘debate’ was how ‘We’ are going to pull through the way we did at the end of the 1980s. I suppose the fact that everyone in the studio / including interviewees was working for the Gov’t should tell you more than anything they actually said.

Strange, no mention of proposition 58. Nor the Gramm-Rudman-Hollings Federal Balanced Budget Act which inspired it.

Guess what? Enforced efforts requiring budget balances end up being pro-cyclical and you are obliged to cut spending in recessions (as well as encouraged to spend the farm during booms). And the lesson of both the Federal and California experience (aside from the economic dislocation the policy causes) is that you fail even to meet yours stated target- the downturn is exacerbated by cuts during a recession and keeps pushing the deficits higher.

I believe California is unique among the 50 states in this requirement and is uniquely distressed as a result.

Welcome to California, without the oranges!

I think the most interesting aspect of this analysis is the idea that the Government sector has every incentive not to do anything that threatens itself. It is more than happy to be poorer if it retains its relative (aristocratic) status relative to the rest of society. This seems true both in California and Ireland. Hence the blitz spirt being promoted by the establishment suggesting that some entity called ‘We’ are all in this together whilst clearly a large section of ‘We’ – especially the younger section – are preparing to leave. Nothing condemns the Irish policy and its leaders more convincingly than the fact that no one in this country (who isn’t already a state-sanctioned vested interest) is prepared to start even a mild argument about public policy.

In a similar vein to the gist of this OECD report, Martin Wolf, in a recent article (http://www.ft.com/cms/s/0/a7977fc6-c8c2-11de-8f9d-00144feabdc0.html) – already cited in another thread – in which he examines the composition of private, government and foreign balances (by definition summing to zero) for the major G7 economies as well as Ireland and Spain, is blunt in his prescription:

“So what are the ways back to fiscal health, particularly in the countries with the biggest deficits?….there must be some combination of a recovery in domestic private sector spending with a surge in net exports (and so a fall in the net capital inflow).”

In an effort to merely stabilise the fiscal deficit the Government is fixated on cuts in public expenditure and pay which, unambiguously, will reduce domestic private sector spending (opening up a deflationary trap) and will provide negligible support for a surge in exports.

The OECD, in its Policy Brief, keeps banging the drum to which the Government is deaf:
“Policies to boost competition in the sheltered services sector would make the economy more efficient in the long run, but would also contribute more immediately to reducing costs and improving international competitiveness. The effectiveness of competition law should be enhanced. Restrictions and barriers to competition should be removed in the electricity market, the retail sector, doctors, pharmacies, the licensed trade, the legal professions and bus transport. To increase retail competition, planning laws should be changed to remove barriers to entry and facilitate new types of store.” p10.

The OECD, similarly to many international agencies and bodies, falls for the “competition” panacea, but, given the direct control and influence which it exercises over these sectors in Ireland, the Government is in a position to strip out the cost and price-increasing rent capture and inefficiencies in these sectors very rapidly.

This would, at least, partially counteract the downward pressure on domestic private sector spending of the necessary fiscal adjustment and improve international competitiveness. And stripping out these costs might encourage existing MNCs to extend and renew mandates in Ireland.

Unfortunately those who benefit from these inefficiencies and rent capture seem to have the same “protected status” as domestic bankers and developers.

I am not sure I follow the California analogy in respect of the Tiebout effect. To the extent that Ireland has exploited the potential for competition amongst rules within the EU it has been through policies of low taxation both on companies (many of which have a relatively high degree of mobility) and on persons (for whom the tendency towards mobility is frequently less. In any case immigrants are likely to come for the higher wages rather than lower taxes. Potential emigrants are not moving to lower tax regimes, they are seeking work). There are also areas where arguably there has been competition over regulatory rules, particularly in financial services.

What may be at least as big a driver of outward migration in California is that residential property prices are extremely high, while prices in Texas are relatively low. Whatever about personal taxation, I think the property price issue has some relevance for Ireland.

What seems to be lacking in the general discussion of the Public Sector in Ireland is a qualitative evaluation of our Public Services. All the focus is on the size of the budget and nothing on how well the budget is spent.

I would suggest for serious improvement in the quality of Public Services would be an external audit of the entire Irish Public Service. As far as I can recall I have never heard a rep from the Public Sector ever mention that one cent was wasted.

A separate department outside of the Public Service needs to be created ( either Irish or from Overseas ) to do this evaluation. They would have to have the powers to hire/fire and reform.

Self Regulation as with the Banks, Builders, Beef Industry, Barristers Politician etc doesn’t work.

@ mad dog
There is already an organisation charged with evaluating the effectiveness of public spending – the Comptroller & Auditor General. The extension of the office’s remit to conducting special reports on value for money addresses the issue you raise with arms-length oversight. Not all activities can be reviewed within current resourcing and views may differ on how much reviewing should be undertaken. There is currently no linkage between the duty and power to carry out audits and the rigth to engage in management. When an external oversight body becomes the manager (with powers to hire & fire for example) the independence of the oversight would be lost and the reviewer would become implicated in the success or failure of the activities.

Colin Scott,

The issue with the CAG is one of resources. Whilst it may have extensive powers or review of money that has been spent, the size of the office makes root & branch reform unlikely.

@ Colin Scott

The constitution states;

“There shall be a Comptroller and Auditor general to control on behalf of the State all disbursements and to audit all accounts of moneys administered by or under the authority of the Oireachtas”

I think there are few people that could argue that the C&G has performed his job at all adequately. We have had scandal after scandal, waste heaped upon waste and it is still going on.

If I were the C&G and my position was defined by the constitution and I was unable to perform my duties as defined therin. I would have to resign! If one is not able to perform one’s job because of lack of resources then surely any person in this position would be honorably bound to resign. But nobody resigns in Ireland and everybody looks around and thinks “why should I be the fall guy?”

By him not doing so, the impression is given that things are being properly audited. Surely, you do not half do your job as specified by the constitution and not do the other half for want of resources.

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