Special issue on the politics of adjustment

This post was written by Stephen Kinsella

The current issue of Intereconomics has a series of stories about the politics of adjustment in Greece, Ireland, Spain, Italy, and Portugal. Niamh Hardiman and Aidan Regan discuss the Irish case. It’s well worth reading all of the cases for those of us engaged in the current debate, to see similarities and differences in the approaches. It’ll help those of us (read: me) engaged in teaching this stuff as well.

Niamh will also be speaking on this theme at tomorrow’s Irish Economy conference.

23 Responses to “Special issue on the politics of adjustment”

  1. DOCM Says:

    Very useful and insightful commentaries! FYI two of the most relevant extracts from the paper on Ireland which neatly encapsulate the main difficulty confronting the governemnt.

    “In 2013, the government will have to decide whether to renew the Croke Park agreement with the public sector unions or to proceed with further unilateral pay cuts. It appears likely that an agreement will be renegotiated based on another policy package of reducing costs through employment numbers rather than wages. The impact of this strategy of fiscal adjustment is twofold. First, it reinforces a trend toward labour market dualisation: new entrants will be entering the public sector on significantly reduced pay and conditions compared to their older, unionised colleagues. In turn, this feeds into a public backlash against what is perceived to be an insider deal obtained by the higher echelons of the public sector (with a high wage premium and secure employment) in the context of an increasingly precarious private sector labour market. Secondly, if the government is committed not to cut social welfare and public sector pay, then it is inevitable that social services will be hardest hit in the additional austerity measures to be introduced between 2013 and 2015.”

    “Ireland has another urgent problem relating to its bank bailout, though, and this is now at the centre of Irish lobbying activity both with the European Commission and within the ECB. This concerns the “promissory notes” to fund the €28.5bn bailout of Anglo Irish bank, which the rescue vehicle known as Irish Bank Resolution Corporation must repay. The terms of the deal currently in place are “equivalent to the state borrowing money at expensive terms to repay a low-cost interest-only perpetual loan”9, with massive implications for the sustainability of the public debt. The government was able to sell sovereign debt on the open market at acceptable interest rates toward the end of 2012, suggesting that exit from the loan programme may be feasible. But many aspects of expected performance, and indeed of debt manageability, depend on growth projections that have, time after time, been downgraded, making current debt-to-GDP ratios even more burdensome. ECB permission for some form of restructuring of this debt is therefore considered to be a very high priority for the Irish state. Irish governments have not openly challenged or opposed the current European policy framework; rather, they have implemented all the terms of the onerous fiscal adjustment, including the full weight of the bank bailout, and on schedule. The clear expectation from the Irish government side is that some form of payback is now due.”

    The two “problems” are clearly intimately interrelated, the clear hope being that a satisfactory resolution of the second will enable the policy with regard to the first to be actually implemented without too much political damage.

  2. Michael Hennigan - Finfacts Says:

    There is an interesting dichotomy: conservatism when it comes to issues at home and radicalism in dealing with Europe.

    However, the problem about the latter, is that it is rare to have a worst case scenario considered, a necessity in making choices of consequence.

    So the usual escape clause is, that the worst case scenario is impossible as there will be a cave.

    It’s striking that a country that is so globalised is so insular. The potential impact of global trends is rarely if ever given attention unless it has an American context.

    The ESRI says today that the problem about economic reform is that the losers from the process can be easily identified, who the winners would be, apart from the general economic gain, is less certain.

    The ESRI also published a paper where the public pay premium in 2010, excluding the value of the lifetime jobs guarantee and the guaranteed pension payout, was estimated to be 17% for comparable jobs.

    In that year, there was no premium in Finland and Germany. Bitter truths for the cranival barkers!

    http://www.finfacts.ie/irishfinancenews/article_1025517.shtml

  3. Shay Begorrah Says:

    @Michael Hennigan

    In that year, there was no premium in Finland and Germany. Bitter truths for the cranival barkers!

    I understand including Finland in the comparisons but as Germany has a population approximately 16 times that of Ireland it enjoys totally different economies of scale - perhaps restricting comparisons of the public sector to countries of a roughly similar scale might be more useful?

    Also, do you really believe that Ireland’s approach has been conservative at home and radical in Europe? Outside of the neoliberal right’s fellow travellers in Ireland and Ireland’s political and economic opponents in the German bloc our toadying behaviour in the EU is seen as craven, deluded and self destructive.

    Could it be that your hatred for the Irish establishment, however it came to be, is causing you to ally yourself with foreign economic imperialism?

  4. grumpy Says:

    Kudos to Niamh Hardiman and Aidan Regan for writing this down and not being just some anonymous contributors:

    ““In 2013, the government will have to decide whether to renew the Croke Park agreement with the public sector unions or to proceed with further unilateral pay cuts. It appears likely that an agreement will be renegotiated based on another policy package of reducing costs through employment numbers rather than wages. The impact of this strategy of fiscal adjustment is twofold. First, it reinforces a trend toward labour market dualisation: new entrants will be entering the public sector on significantly reduced pay and conditions compared to their older, unionised colleagues. In turn, this feeds into a public backlash against what is perceived to be an insider deal obtained by the higher echelons of the public sector (with a high wage premium and secure employment) in the context of an increasingly precarious private sector labour market. Secondly, if the government is committed not to cut social welfare and public sector pay, then it is inevitable that social services will be hardest hit in the additional austerity measures to be introduced between 2013 and 2015.”

    Isn’t it amazing that there is so little public discussion over the last 2 years by economists of the economic implications of these fundamental policy questions:

    a) Trade-off, pay rates per employee vs number of employees providing services

    b) The introduction of a 2-tier employee system in the public services.

    These have been clearly on display since 2010 to perceptive, and since 2011 to all other Irish economists - and can hardly have been thought trivial and not worthy of discussion or debate.

    Why has there been so little discussion?

    A cynical, straignt talking Australian might jump to the wrong conclusion, one of these:

    http://www.quotesdaddy.com/author/Gough+Whitlam

  5. Brian Woods Snr Says:

    @ grumpy: “Isn’t it amazing that there is so little public discussion over the last 2 years by economists of the economic implications of these fundamental policy questions:”

    Its not ‘amazing’ to some who frequent this site. There is no kudos in public speaking of the truth. Also, I might opine to the belief that they are not well versed in what is happening. I do not recall reading, hearing or seeing any sustained level of meaningful intellectual engagement - such as may be found in the political economy literature - that might inform the lay folk.

    Its hard to involve yourself in ‘hard thinking’. And who wants to listen to you anyways? The decision makers? Since they are axiomatically ‘right’, why listen to any guff which asserts they may be ‘wrong’. “P*ssing down you’re own leg sure feels warm to you, but not to me!”

    Its not economic growth that is required outcome: that’s the propaganda spin. What is being demanded is the continued ability to repay domestic and foreign creditors - regardless of how this is achieved. That is, the proportion of government income going to debt repayment is maintained, whereas the proportion going back to the community is reduced. And if the government is short some, why just borrow some more.

    Its goddam Voodoo stuff!

  6. seafóid Says:

    They aren’t going to get very far with that policy with the health mess. If they can’t cut salaries they’ll have to cut everything else drastically and there are votes in those hospitals.

  7. Michael Hennigan - Finfacts Says:

    @ Shay Begorrah

    You’ve got hold of the wrong end of the stick.

    I was referring to a much wider population than the policy elite.

    It would be foolish to suggest that the lack of interest in for example reform/tackling vested interests at home, is just a problem at political level.

    Years into the crash, Prof Paul Gorecki of the ESRI said in a report overnight on the slow-motion effort to have a greater usage of generic drugs: “without knowing more about the reference price setting mechanism it is not possible to say whether prices will fall more than they otherwise would under recently negotiated agreements with industry.”

    Slow motion it is and on the left, David Begg, 15 years a Central Bank director but no apologies needed, is due to lead public demonstrations on Ireland’s debt burden while on the right, in the High Court action today in respect of Anglo promissory notes, Shane Ross, who castigated AIB and BoI for being slow to emulate FitzPatrick and Fingleton, was an amicus curiae in the case.

    So these defenders of the status quo are the purveyors of outrage to an eager market - - both doing well from the system they have been both for and against .

    So that is the point about conservatism at home and radicalism when it comes to Europe. Ross is an advocate of debt default.

    I guess you use the various political labels to avoid addressing specific points made. As for ‘hatred,’ that is reserved for dictators, the likes of Rush Limbaugh etc. Besides, I’m nobody’s running dog.

  8. David Madden Says:

    There is one respect in which the Hardiman/Regan paper is quite misleading. They state:

    “The net distributive consequences of budget measures can be hard to assess, and all sectors have grounds to feel aggrieved. But the Irish Central Statistics Office suggests that the cumulative outcome of Irish fiscal adjustment, particularly the 2012 budget, has been regressive. According to the Survey on Income and Living Conditions, the bottom decile has seen net disposable income reduced by 25 per cent, whilst top decile income increased by five per cent. Consistent deprivation levels have increased. So too has the percentage of those at risk of poverty, which has risen to 15.8 per cent - or 700,000 people, 220,000 of whom are children. The modest gains in reducing household poverty that were achieved throughout the Celtic Tiger period have effectively been reversed.”

    The SILC figures which they quote above regarding the top decile gaining by 5 % and the bottom losing by 25% refer to 2010 alone - it does not refer to the cumulative experience over the years from 2008 to 2010 and nor does it refer to the cumulative experience over the 2008-2012 period (since SILC for 2011 and 2012 have not been released yet). SILC reports poverty in 2010 as 15.8%. However in 2006 and 2007, the two years before the crash, it was 17% and 16.5% respectively. So how can they say that reductions in household poverty during the Tiger Period have been reversed?

    Readers wishing for an accurate account of the distributive impact of austerity measures in Ireland over the 2008-2012 period should consult the work by Tim Callan and his co-authors in the ESRI https://www.esri.ie/UserFiles/publications/QEC2011Win_SA_Callan.pdf .

    They show that overall from 2008-2012 such measures have been progressive (though note that 2012 was not). They conclude that: “The overall distributional pattern of Irish austerity measures is among the most progressive in 6 EU countries examined in a recent study”.

    It may prove to be the case that by the time the complete austerity package is finished that the distributive impact will be neutral or perhaps regressive. But the evidence so far is that has been progressive (in the context of overall living standards falling).

  9. Tullmcadoo Says:

    Prof. Madden,
    You will be excoriated in certain quarters for adding facts and a note of objectivity to this debate. Shame!

  10. David O'Donnell Says:

    … excluding emigration of course.

  11. DOCM Says:

    @ Dave Madden

    Your point is well taken. But the problem lies in the skewed distribution of income between the public and private sectors in the first place. This has not been corrected. Indeed, the payment of increments has resulted in may public servants recuperating cuts in salary.

    There is clear evidence from the contribution under discussion and others that cracks are emerging in the wall of silence associated with the voluntary myopia on the part of the beneficiaries of this situation which, of course, include politicians. This is happening not just because of the obvious inequities but because the approach is simply untenable in terms of the public sector itself, given the distorsions it introduces.

    There is nothing really unique to Ireland relative to the other countries with the same antiquated approach, all, not entirely coincidentally, Latin (with the exception, of course, of Greece). French civil servants - there are only five million of them - have just staged a general strike. A similar approach by Irish public servants would, in my opinion, receive a very dusty response from the public they serve.

    The “politics of adjustment” have a particular resonance in Spain at this juncture cf.

    http://politica.elpais.com/politica/2013/01/30/actualidad/1359583204_085918.html

    One wonders what the Spanish is for “brown envelopes”.

    (Google Translate seems to copes with Latin languages particularly well).

  12. DOCM Says:

    @ Dave Madden

    The last item should have been addressed to All.

  13. DOCM Says:

    @ All

    Le Figaro provides contrasting data for a number of European countries on the approach to public service reform. It will come as no surprise that Germany is well ahead of the game among the larger economies with major reductions in public service numbers through privatisation and other measures.

    http://www.lefigaro.fr/conjoncture/2013/01/31/20002-20130131ARTFIG00471-en-europe-les-fonctionnaires-font-les-frais-de-la-rigueur.php

  14. Shay Begorrah Says:

    @DOCM

    It will come as no surprise that Germany is well ahead of the game among the larger economies with major reductions in public service numbers through privatisation and other measures.

    You really have rather let them mangy neoliberal cat out of the concern troll bag there.

    Major reductions in public service numbers through privatization is not reform, it is a long standing political project of the upper reaches of the capital owning classes and their lackeys.

    Real socially and economically beneficial change in Ireland would be making mortgages non-recourse, or invalidating upwards only rent reviews, or creating a free at point of provision national health service.

  15. DOCM Says:

    @ All

    With regard to the paper dealing with Spain, and how the country is coping with the process of adjustment, the FT has now caught up with what is happening there. No doubt, the Irish media will follow. How this will impact on Spain’s recovery process remains to be seen.

    http://www.ft.com/intl/cms/s/0/547573ae-6b9c-11e2-8c62-00144feab49a.html#axzz2JIfNYsOP

  16. DOCM Says:

    @ All

    FYI

    http://www.ft.com/intl/cms/s/0/7892f3ae-663a-11e2-bb67-00144feab49a.html#axzz2JIfNYsOP

    The fact that the Single Market does not fully exist in Spain, not to mind in the Euro Area, may come as a bit of a shock to some.

    Its genuine creation is the sine qua non for the future of the euro.

  17. David O'Donnell Says:

    @A. Regan & N. Hardiman

    Good empirical piece and welcome use of GNP rather than GDP.

    Note the ‘liveral orthodoxy on tax one third and cuts two thirds;
    …….

    What we now need is a ‘critical analysis’ to follow this empirical piece; the how and why of this ‘form’ of adjustment rather than others, in whose interests, and the social psychology of a supine nation that has half its GDP stolen by the Financial Sector and which remiains ’supine’. Any ‘critters’ in Irish academia?

    e.g.
    Prominent figures at forum say State should ‘hold firm’ for deal

    At last year’s [Davos forum Prof Joseph Stiglitz, the Nobel economist laureate, described as “unconscionable” Ireland’s repayment of unsecured bondholders.

    This year he criticised the Government for harbouring false illusions and approaching its partners as “beggars”.

    “Ireland is still [operating] under the belief that, if it is good enough and doesn’t say nasty things, that virtue has a reward,” he said.

    “But virtue in this case is, I think, doing the wrong thing. Doing what the ECB wants is bad for the Irish economy and bad for the Irish people . . . eventually it will become transparent that this austerity package isn’t working.”

    http://www.irishtimes.com/newspaper/finance/2013/0126/1224329298459.html

  18. Michael Hennigan - Finfacts Says:

    It is interesting what gets attention or not in the national debate and it can depend on what impacts policy makers and academics on a personal basis.

    The paper refers to the low employer security costs and that has been official policy while policy makers themselves have feathered their own nests - - work less than 3 years as attorney general, get a pension from 40 years old that 26 years later is almost €50,000 pa . In 2006, the minister for finance’s representative on the Pensions’ Board effectively issued a veto on consideration of a mandatory pension scheme in the private sector. When the corporation tax on domestic firms was cut by over 20%, of course there was nothing asked in return!

    Well meaning staff of the Pensions’ Board, on guaranteed pensions, were sent to places such as racecourses to promote PRSAs to low income workers.

    Apart from the risk of investing in funds weighted towards bank shares, there was also the official support for the hidden fee racket of the pensions industry.

    Don’t take my word for it.  A government report issued last year said pension fund charges are taking as much as 17.4% of retirement savings in occupational schemes.

    It provided an example: “If an individual age 35 saves €250 per month for a pension for 30 years, a fund of approximately €200,000 is created which results in a pension of about €10,000 per annum. Apply the average charge of 2.18% per annum to this fund and the final fund is reduced by 31% i.e. the fund is reduced by €62,000, resulting in a lower pension of €6,900 per annum. This impact would be significantly higher where the maximum charges apply.”

    So who would speak for the victims of this carry on? Not people on public pensions; not trade unions who’s main activity is in the public sector and of course not employer bodies.

    Then there’s the official green light to private firms that it’s OK to have different rights for individuals doing the same work - - 40 years after the campaign for equal pay for equal work for women.

    Duel labour markets are OK - - doesn’t the temp system work well in Japan? - - but it’s OK for a permanent job to be created for the deputy prime minister’s wife on existing terms irrespective of the work. Why? Well Sir Stafford North and Sir Charles Trevelyan recommended it in 1853 — the same Sir Charles who is immortalised in that Galway song, ‘The fields of Athenry’!

    Simply, a long time later, there are still different rights on who is entitled to the biggest shares of the corn.

  19. Fiatluxjnr Says:

    Interesting article on the quagmire of banking compliance and the facilitators..
    http://dealbook.nytimes.com/2013/01/31/doubt-is-cast-on-firms-hired-to-help-banks/?hpw

  20. David O'Donnell Says:

    “Critter” of the month award:

    Michael Hennigan

  21. Joseph Ryan Says:

    @Michael Hennigan
    re Post on Pensions

    I endorse every word you said in that post. The vast majority of SME companies have no pension scheme, other than the obligatory offer to pay over employee PRSA deductions. Indeed most SMEs cannot afford it, yet it is SME that are required to become more ‘competitive.

    You point on the failure to link lower CT rates in 2000, with mandatory pensions is very well made.

  22. Joseph Ryan Says:

    @Stephen Kinsella / UL staff

    Well done on conference. Excellent presentations.

    Also well done on an excellent and courageous article in Irish independent this week.

  23. Joseph Ryan Says:

    @Michael Hennigan

    Again re pensions;

    I should add that PRSA (private sector pensions in the main) are treated more harshly that all other pension scheme.

    The employee in a PRSA pension must pay USC (7%) on any employer contributions to PRSA. An employee of any other employer scheme does not pay USC 7% on Employer contributions! Strange or just plain discrimination. Probably the latter.

    It is almost as if if the DOF and Pensions Board deliberately kick private sector holders of PRSA pensions in the teeth. These PRSAs, remember, were marketed and sold by government as the ‘Poor man’s pensions’. Somebody in the DOF or Pensions Board clearly does not like ‘Poor’ people.
    From Revenue (Jan 10th 2013)

    http://www.revenue.ie/en/tax/usc/universal-social-charge-faqs.pdf

    1.16 Is my employer’s contribution to an approved retirement benefit scheme liable to Universal Social Charge?
    No, section 778 of the Taxes Consolidation Act 1997 provides that an employer’s contribution to an approved retirement benefit scheme or a statutory scheme is not treated as a benefit-in-kind for income tax purposes. As the Universal Social Charge treatment follows the income tax treatment, any employer contribution to such schemes will not be subject to Universal Social Charge. Irrespective of this, employee contributions are not relieved for Universal Social Charge purposes.

    An employer’s contribution to an employee’s PRSA is, however, treated as a benefit-in-kind and chargeable to both income tax and Universal Social Charge. It should be noted that while employer contributions to a PRSA are a taxable benefit in the employee’s hands, these same contributions qualify for full tax relief subject to certain age-related limits. They are not subject to PAYE and they are not chargeable to PRSI (both employer and employee share). They are subject to USC.

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