Kevin O’Rourke – one of our leading academics and a frequent contributor to this blog – is to leave Ireland to take up a Chair at Oxford. I use ‘leading academic’ to mean one whose works will still be known a hundred years from now; this applies at the very least to his superb 2007 book with Ron Findlay – Power and Plenty: Trade, War and the World Economy in the Second Millennium. How many people could even dream of writing, never mind complete so successfully, a history of 1,000 years of world trade? Also ar an mbád bán – go Meiriceá – is another leading Irish academic, Declan Kiberd, Professor of Anglo-Irish Literature at UCD. Best of luck to them both.
Author: Frank Barry
Shamefully, it has taken me several weeks to realise the full import of the attached Irish Times piece by Garret FitzGerald. He has for many years sought to draw the attention of the Irish public to the role of the European Commission as defender of smaller states’ interests. Here he warns, in much more modest language than that with which I have entitled this entry, that the current German-French proposal for euro zone reform “represents a new attempt to bypass the union’s tried and tested decision-making system… There is a new danger that the decision-making system that for over half a century has sustained and kept in balance an inherently cumbersome union… may lose its hitherto carefully preserved cohesion, and for the first time become dominated by some larger states.”
The twin problems of unemployment and the public deficit make it imperative to search for low-cost schemes that can help to stimulate employment creation. “Marginal employment subsidies” were much discussed in the international literature in the early 1980s and might have a role to play today.
A specific and fairly modest proposal to start with would be to abolish employers’ PRSI contributions for new jobs; i.e. for any increase in a firm’s employment over and above the level recorded at a specific date in the past, e.g. X/X/2010. (The importance of choosing a date in the past is that it would prevent firms gaming the policy by shedding jobs in advance of its introduction). This avoids the extensive deadweight losses associated with e.g. a cut in employers’ payroll costs. There would still be some deadweight loss in tax revenues resulting from jobs that would have been created anyway, but it seems unlikely that there is much new employment creation at present. The proposal would amount to a wage subsidy of over 10% for new jobs. (If it looked like it was starting to have an effect, it could be extended by taking into account some of the resultant savings in social welfare).
Care would need to be taken to prevent firms closing down and establishing under a new name to exploit the scheme, but I assume this could be surmounted.
Many of the existing schemes in place today (details here) might be thought similar to the present proposal. Most are targeted however at particular groups of disadvantaged workers, which make them less likely to succeed, and, as far as I recall, some displacement effects were found. The present proposal avoids these.
The proposed scheme might be gradually wound down as follows: the implicit subsidy to be reduced by Y% for each 50,000 jobs recorded in the economy over and above the level prevailing at X/X/2010.
If the economy were solely cost-constrained, the proposal would raise employment through both the output and substitution effects. The substitution effect will still apply if the economy is purely demand-constrained, and by getting people back to work will have beneficial demand effects.
Examples of the literature from the 1980s include:
Chiarella, C., and A. Steinherr (1982), “Marginal employment subsidies: an effective policy to generate employment”, Commission of the European Communities, Paris, Commission of the European Communities Economic Papers No. 9, November.
Layard, R., and S. Nickell (1980) “The case for subsidizing extra jobs”, Economic Journal, Vol. 90 pp.51-73.
Oswald, A. J. (1984) “Three Theorems on Inflation Taxes and Marginal Employment Subsidies”, Economic Journal, 94, 375.
Whitley, J. D. and R. A. Wilson (1983) “The Macroeconomic Merits of a Marginal Employment Subsidy”, Economic Journal, 93, 1983.
See also:
Snower, D. (1994), “Converting unemployment benefits into employment subsidies”, American Economic Review, Vol. 84 pp.65-70.
Readers might be interested in this analysis of the (bureaucratic and electoral) politics of the introduction of export profits tax relief in 1956, available here. The abstract is as follows:
T. K. Whitaker and Seán Lemass are generally credited with effecting the policy shift from protectionism to outward orientation. Ireland’s low corporation tax regime, however, has its origins in the export profits tax relief (EPTR) measures introduced by the second inter-party government in 1956. EPTR was introduced at the behest of the Department of Industry and Commerce in the face of long-standing opposition from Revenue and the Department of Finance. Industry and Commerce at the same time successfully thwarted the desires of the Taoiseach, the Department of Finance and other state agencies to have restrictions on foreign ownership of industry repealed. These apparently contradictory positions were rooted in the historical legacy of protectionism. The inter-party Taoiseach, John A. Costello, downplayed the connection between EPTR and foreign investment in an apparent attempt to deprive Fianna Fáil of an opportunity for controversy. Its introduction hastened the end of Fianna Fáil prevarication on the issue of foreign ownership.
The importance of the intense electoral competition of the period is also frequently ignored in accounts of the policy shift towards outward orientation. Following sixteen years of unbroken Fianna Fáil rule, the next four general elections brought four changes of government. Along with the depth of the 1950s recession, this forced Fianna Fáil into a comprehensive reexamination of its industrial strategy. The economic thinking of the major political parties co-evolved, and many of the institutional innovations of the period, including the Capital Investment Advisory Committee, the Industrial Development Authority, the early Córas Tráchtála, and, of course, EPTR, were the result of inter-party government initiatives.
The defeat inflicted on Finance by the Department of Industry and Commerce partly motivated Finance’s work on Economic Development, the 1958 publication of which was important in providing political cover for Fianna Fáil’s U-turn on overall economic strategy.
“Iceland proves Ireland did ‘wrong things’ sacrificing taxpayers”, just carried on Bloomberg.