In a comment on another post, Declan Fallon raises some interesting issues about the distribution of forthcoming pain. I thought it might be interesting to tease this out a bit more.
Most of the debate about the incidence of the fiscal adjustment has focussed on the public/private sector divide and, to a (regrettably) lesser extent on the insider/outsider (i.e. employed vs. unemployed) divide. However, there is certainly a demographic aspect to this. For example, after the medical card debacle, pensioners seem to be guaranteed immunity from the adjustment – one of the reasons for implementing the public sector pay cut as a pension levy rather than a pay cut was to protect the pensions of current pensioners; and, as Philip Lane mentioned at Monday’s conference, this protection is likely to extend to the budget. But it seems certain that child benefits will be further cut. Does this make sense?
As Declan emphasizes, children are not pure consumption goods; if they were, then the only argument against cutting payments in respect of children would be the particular necessity of keeping children out of poverty, in which case cutting child benefit – at least to the middle classes – would make perfect sense. But children are effectively investments too; they have long term economic value. It is in the public interest for citizens to produce children. So if putting the burden of the adjustment on parents has the effect of reducing fertility, the long-run negative effects may cause us to regret it.
The problem with this argument is that the determinants of fertility are not well understood. It seems likely that income increases were responsible, at least in part, for the increase in the fertility rate in Ireland in recent years, but it’s very difficult to pin down the size of the causal effect. If the effect is small, people will grumble about it, but have the kids anyway. But if it’s large, targetting families may prove to be a mistake.
Of course, plenty of investments with positive long run returns are having to be abandoned because of the crisis. Is there any reason that making changes that have potentially significant effects on fertility is any worse than any of the other measures with long-term consequences?
18 replies on “Distribution of Pain”
Very good points. Apparently the Irish government thinks that the Irish are having too many children – women in Ireland are after all among the most fertile in Europe (I mean in the sense of average births per woman) – so they need to be discouraged. And we don’t have enough pensioners so they need to be coddled and protected.
More seriously, we may also look at the property bubble as a wealth transfer from the young to the old as the younger generation took on huge mortgages to buy overpriced houses from the down-sizers among others. Similar to Declan, I have two small children under four but both my wife and I work. Also like him, we are relatively recent immigrants having spent 7.5 years in the US and like him we could see that property prices were crazy so we have rented this past while.
I would also like to add that even when the going was good, Irish children came at or near the bottom in most welfare measures in the EU-15. the standard of childcare and creches here is significantly worse than in continental Europe, schoolchildren are regularly sent out to raise funds for the school either from the community at large or from parents through “voluntary donations”, there isn’t equal access to education as children are discriminated on the basis of religion etc.
I seriously think this has to do with the general attitude of Irish society towards children. You cannot dissociate this from the fate of thousands of children in industrial schools, the general complicity of society at large and the continuing failure to punish those responsible. Take also as an example how the government washed its hands off Louise O’Keeffe. And lastly the generally impervious attitude of the powers that be to successive waves of emigration of the young and talented.
It is what it is.
You are a believer in what government says and not in what government does: emigration solves all ills for those with their snout in the trough.
Insiders are snug. Nepotism will protect their children and those who have no pull will travel. Irish policy for the last 170 years. A land rich country that has a declining population! No forests, no growth just smugness!
“It is in the public interest for citizens to produce children”
Is this necessarily true? For sure, more children increases the size of the Irish economy relative to other economies, but that does not necessarily raise living standards. It’s income per person that counts. The lead article in the Economist magazine last week was about declining fertility rates in the developing world, and how they were correlated with increases in living standards.
I don’t like the argument that we need more children to combat demographic problems such as the increasing proportion of pensioners in the population. That’s like arguing for more investment to keep a pyramid scheme afloat. Eventually it’ll become unsustainable.
It seems that a policy that is in favour of more dynamism in the economy would naturally favour the young. I am certain that the Thatcher revolution was a revolution of the young against the middle-aged. Shaking things up in the economy and opening markets etc… provides new opportunities and these are overwhelmingly opportunities for the young. Ireland does not believe in this. Its political culture is risk-averse, and dominated by insiders. Garo and Pat Donnelly pretty much nail the problem.
The reason why I have always been a fairly radical believer in open markets and small government is because Ireland is a 70-year old experiment in the opposite of these things. The only weapon is competition, more open access to restricted areas of economic and professional life.
If you want a revolution in Ireland then look into the eyes of the establishment to see what it fears most. What it fears most is competition and small government. Therefore competition and small government must be the weapon of choice. Anything else is simply whining to join the smug consensus club.
Thank you for the repost.
Countries with a heavy welfare system, such as ourselves, are dependent on sufficient contributions from taxpayers to cover the debits from it. I would disagree having lots of children contributes to bubbles; cheap money creates bubbles.
Let us not forget Ireland once had a population of 8 million, and given the population densities of many western nations we could probably support many more. The importance of a diverse economic engine is apparent to all given our past vulnerabilities and to do this requires people – lots of people.
Ireland is well known for its educational standards and should retain those standards through the crisis, but even then, some could put the argument forward successful entrepeneurship requires less formal education and more risk-taking and free-will, but that’s another story. Ireland does at least have the basis to drive economic diversity and rebuild wealth. So where do the people we need come from:
[1] Children
[2] Immigration
Politically, [1] will always trump [2], but [2] cannot be ignored. Again – another day’s argument. But to have [1] requires a pro-family stance from the powers-that-be.
With the December budget looming and the focus on reducing public sector costs it would appear the real issues at hand are getting brushed under the carpet. Nitpicking the tax base – public or private – for in effect pennies, while brushing-off the thousands lost on a mis-priced NAMA will stall any recovery. But NAMA is old news and unless the EU steps in we will all be stuck in a quagmire of overpriced expectation.
Recoveries require consumer spending and spending requires consumers to have money to begin with; as Eoin (I think) previously mentioned, families are in effect held hostage to current economic conditions – unable to leave. So because of their ties to the economy, families are an essential drivery for a recovery, creating demand for physical goods and services. Families are also important in the property market because families provide the demand in a capacity for which property is intended – i.e. to reside in.
But here is the rub. Families aren’t cheap to run – families are always spending because that’s the nature of having children. Whereas individuals can emigrate, move home, or simply hold tight until better times; families always have to spend – be it for food, education, clothing, and property (rent or mortgage). Crimping family spending power either pushes families into debt (bad) or worse still – forces them away. A family in debt lacks spending power. A family which leaves takes the economy’s future asset – their children, with them. A family which leaves is also a direct loss because of the expense to the taxpayer in nuturing their development up to that point.
If there is a solution to offer it should be to simplify the tax code and drop the single-income/dual-income differential at the standard band.
Dual-income married couples should not take home more money than single-income married couples where combined income is equal. This is anti-competitive (+ discriminatory) and places a single-income couple at a disadvantage with respect to a number of issues, chief of which is in the property market. But it also disadvantages dual-income earners who lose one source of their income.
The dual income tax system offers a false sense of security; the extra tax break creates artifical wealth. Wealth which was used to fuel the property boom the consequences of which are now all too apparent. Many former dual-income earners now find themselves in situations where the second income has disappeared due to redundancy and lack of job availability. Former dual-income earners are left tied to higher financial commitments but have less money to cover them.
Solving this by raising the standard-rate band for single-income earners to match dual-income earners (effectively neutralising the difference) gives extra spending power to those most tied to economy – as most dual and single income married couples will have families – and will alleviate some of the stress to the former group who now find themselves in the latter situation.
Flattening the standard rate band for married couples also offers opportunities for whom dual-income earning was the only way to bring enough money in. Perhaps a flattening of the rate bands for married couples may be enough for only one spouse to work, freeing a job for someone unemployed to work (simplistic, but you never know).
I don’t expect a whole lot of support for an idea which is in effect the system used in the U.S. It will many families will be paying (even!!) less tax, but it will help families, and non-family couples who have lost a job, increase their spending power. It must be remembered, these are the individuals with the greatest ties and commitments to the existing economy and its future success.
Standardising the married couple income tax bracket will cost all of us far less than the NAMA fiasco foisted upon us.
Declan
@ Declan
“Families aren’t cheap to run – families are always spending because that’s the nature of having children.”
Bear with me here. Per your argument, we have a system where people with kids pay little or no tax, for the reason that they are creating future tax payers. However, given that we are apparently trying to encourage people to have kids for demographic reasons, we will then have the kids of people who paid little or no tax having kids, and therefore paying little or no tax.
What’s the end game here – either the demographic non-taxed pyramid scheme eventually craps out and implodes, or we end up with single and old people paying all the taxes on behalf of the people with kids? huh? What if all the single and old people (both the most mobile – i could leave pretty easily and my folks could head off to Spain) left the country?
Wouldn’t it be better to have everyone somehow more involved with the tax system, and so create a broader and more sustainable tax base?
By the by, as a single person paying almost 37% of my income in tax, i spend an awful lot of money and dont have some crazy amount of savings. I’m no doubt one of the mega consumers of our economy. The fact that i spend my money on discretionary goods and services rather than necessaties doesn’t make my impact on the economy any less real, meaningful or important.
@ John Cowan
I don’t suggest that it would be desireable to incentivize fertility back up to developing country levels, but our fertility rate is now about replacement rate, which seems to me a lot better for long run living standards than the 1.2 or 1.3 or so in Eastern Europe.
@ Declan
I’m afraid I entirely disagree with your prescription for helping families – penalizing dual-income families to favour single-income ones. The question I was trying to raise was whether it’s reasonable to expect those without dependent children to partially subsidize the costs faced by those with children (through child benefit), given that there is/may be a valid public interest in maintaining fertility levels. In my view, the taxpayer should not be getting involved in deciding whether parents spend any such subsidy on allowing one parent to give up work or pay others to provide childcare while they work.
Any time I hear a recommendation that government should be “pro-family”, I get very very nervous indeed.
@ Pat: Yep, but, where travel? US is an e-coli hamburger, UK is anhydrous jellied eel, AUS is running dry! NZ – yep, if you want to farm should be fine.
‘Fraid we leprechauns is stuk! When the liquid fossil fuel gets lowish we will need all hands to plant ‘taters!!
I’m guessing you read Joe Lee.
B Peter
Dear Aedin
Remember me from the EUI ? Long time no see. I followed a link from Mark Thoma (economistsview).
@Aedin
I don’t believe that Declan is suggesting penalising dual income couples, rather he is suggesting unpenalising single income couples – removing the penalty that individualisation wrought.
However, given the fiscal situation, that might be just the ticket. In the days of labour shortage, work was incentivised. Now that we no longer have a labour shortage, incentivising expansion of the labour force is not necessary. I’m not going to suggest for a moment that it won’t be women who would largely leave the workforce in this forced arrangement, however, times have changed and it would not automatically be so. Given excess male unemployment and high self-employment rates, it is likelier now than it was that female employment levels would remain high.
@Eoin
I’m the money earner in a single income household with two children. Despite the effects of child benefit, I pay plenty in tax. When you add in the extra charges the state imposes, I could probably even argue that I pay a disproportionate amount of tax. Mortgage interest relief is a total red herring. I have no mortgage, therefore I am also subsidising those with a mortgage. If you want to argue that the state should not subsidise the purchase of property, fine, I’m with you on that one, but it has little or no relevance to tax rates.
@YM
earners in dual income households buy childcare in the market; the only reason they should also subsidize the childcare expenses – foregone wages – of single-income households is if the state is taking the position that non-parental childcare is bad for kids.
I’m in favour of individualization for many reasons of both equity and efficiency. The disincentivization of female participation in the labour force under the alternative is the main argument against reversing individualization rather than an argument for it, in my view.
@Declan Fallon
To quote from your email advocating a population increase in Ireland:
“Let us not forget that Ireland once had a population of 8 million.”
This is a very poor historical argument. The correctly-remembered history is:
Let us not forget that Ireland once had a population of 8 million, and then 55% of the population starved to death or fled in misery due to per capita food and resource scarcity.
That is the distant past, but let us remember it correctly! Going forward, Ireland will be a happier, healthier, and more environmentally-friendly country with a population of 3+ million. The goal should be a gradual (not excessively sharp) decline in population.
Using short-term pension-based and health-care based arguments for population increase is short-sighted and logically inconsistent, since it pushes the same problem, made worse, on to the next generation.
@Robert Waldmann
Welcome, you have come from Angry Bear?
@All
I am childless, and happy with that as I have never got on well with children, not even as a child myself. I am also concerned about world population and think it is getting too high. I don’t agree with policies that encourage people to have more and more children, but I do believe in policies that allow people to give the children they do have the proper quality of life, and the amount of personal attention they require and deserve.
To that end, as a childless taxpayer, I would consider my contributions well-spent. Call me idealistic but I certainly do believe in the common good. It takes a village and all that.
But I am not a policy wonk, so how would one reward having, say, 2 children, but not three or more, using the tax system?
@Gregory Connor
“Let us not forget that Ireland once had a population of 8 million, and then 55% of the population starved to death or fled in misery due to per capita food and resource scarcity.”
If I recall, there was plenty of food, but there was also a neo-liberal, laissez-faire government and an open market.
The more things change . . .
@yoganmayhew
I am even for using my tax dollars to allow working- and middle-class families afford a home. But not for the profit of speculators. I would like to see reform in how housing is priced and sold. For one thing, I am wondering if the auction process is detrimental to equality in purchase.
An argument for another thread I’m sure.
@Aedin
I take your points, but I do have some issue with them.
Parents not seeing their children for most of the working week may be efficient, but is it humane? Perhaps the state shouldn’t take issue that parental childcare is a choice for parents that they would rather make themselves without being incentivised/penalised for it.
Given the higher educational achievements of women, higher numbers in further education, and a higher proportion in permanent employment, I think a reversal would not diminish other than marginal employment.
BPW
Aus gets the same rainfall as the USA! Most is in the monsoonal north. We still have enormous rivers many of which flow all year. Our exploitable borders are at least 300ks beyond the coast and we have many islands too each with a similar EEZ. The DIMA, migration department, can cost the benefit to Australia of each migrant and the most valuable are 18 year olds, and third level grads, hence the temp visas to show off Australia. (Worth nearly $300,000 per head over their lifetime!) We are a young country if you neglect the aborigine and everyone does, sadly. European only some 200 years after America. Would you have gone to USA 200 years ago? We use massive machines to resculpt the earth we live on. We plan for the future and we do not have the same web of vested interests that Ireland has and we do not tolerate it in any form.
Why does Ireland refuse to carry out the same exercise of assessing the value of these young people? Politically sensitive? Might it knock some off their perch?
Women have been drawn into the workforce, as pay for single earners was reckoned to be inadequate or in wartime. If we stop the socialism of the family then perhaps we can afford to keep whichever parent or none, that wishes to stay with the children? Much of the economic activity has now been shown to be of little worth to individuals.
@ Robert
as if I (or any of us in EUI) could ever forget you!