Author: Karl Whelan

Public Pay and the Sindo

Former Bertie Ahern Seanad appointee, Eoghan Harris, writes in the Sunday Independent today that he is confused that I can believe public sector pay should be cut and yet also believe that his newspaper has demonised this issue. His silly comments about academics and the Irish Times aren’t worth responding to but I’m happy to clarify what my position is.

In relation to public sector pay, one can argue until the cows come home about whether public sector workers in Ireland are paid more than private sector comparators or comparable public sector workers in other countries, and about how these premia have been altered by the pay cuts of the past few years. However, that debate doesn’t change the fact that Ireland has a very large budget deficit and every major component of expenditure will need to be cut to put the public finances back on an even keel. And that must include public pay.

I’m sceptical about whether an approach that doesn’t see pay rates cut can deliver substantial savings and would also prefer pay cuts to reductions in numbers of front-line workers that will affect the delivery of key public services. So my position is that public sector pay rates need to be cut.

If that’s my position, then what’s my problem with the Sunday Independent? My problem is its focus on high rates of public sector pay as the single cause of the budget deficit. Its coverage repeatedly gives the impression that “we are borrowing to pay for the public sector”. Other areas of spending such as welfare rates receive comparatively little coverage and topics such as our narrow tax base and generous income tax exemptions receive no coverage at all.

An examination of the figures reveals that a focus on public sector pay as the source of the deficit is misplaced. This year, the government will spend €18.1 billion on pay and pensions for the public sector. The general government deficit is projected to be €15.6 billion.

You might think this means we can eliminate the deficit via an 86 percent cut (0.86=15.6/18.1) in public sector pay. But, even if you did manage to get anyone in the public sector to work for 14 percent of their current salary, this strategy still would not work because public servants pay PAYE, PRSI and a pension levy and most of these payments would have disappeared. (They also pay VAT when they spend their salaries.)

I don’t believe the government releases figures on the net cost of the public sector pay and pensions, subtracting taxes and levies, but I would be surprised if it was more than €11 billion. So you could fire every public servant in the country and still not close the deficit.

Back in the realms of reality, even substantial cuts in pay rates will still leave a yawning deficit. For example, consider a cut of 25 percent in pay rate, reducing gross pay by €4.5 billion. The marginal tax rate on public pay rates above €36,000 is 62 percent. (See tax calculator here) so the deficit would only be reduced about one-third of the amounts cut for people on salaries above this level. I suspect the net reduction in the deficit, before accounting for reduced VAT revenues, would be less than half of the gross amount, i.e. somewhere below €2.25 billion.

So, sadly, if the enormous deficit is to be closed, then other categories have to be looked at. These include spending on social payments (which will cost €26.8 billion this year and are largely exempt from income tax), on capital programmes (which will cost €6.1 billion this year) and on the narrowness of our tax base.

The idea that public sector pay is the source of the deficit has a satisfying ring for many. It means that an identifiable group of “other people” is responsible for all our problems. And it allows people to think that the pain of all the spending cuts and tax increases they are being hit with is unnecessary and is only occurring because public servants are being protected: Nothing sells newspapers quite as effectively as rage. I suspect the commenters on this blog have well above the average level of economic literacy and I can tell from repeated comments that many of them believe the deficit is solely due to high rates of public sector pay. Unfortunately, the arithmetic doesn’t support this position.

So that’s why I dislike the Sindo’s coverage of public sector pay. It leads its readers to believe that there is a simple single bullet solution to the deficit and, via that logic, to a demonisation of a particular group as the cause of our problems. Ultimately, this kind of coverage is unhelpful because it undermines public support for the additional measures that need to be taken, over and above public sector pay cuts, if the public finances are to be stabilised.

No doubt Eoghan would still diagnose my position as being down to status anxiety twitch or some other mysterious condition but I’m happy to take a few shots from the Sindo if the result is a more informed debate about the options for closing the deficit.

Oireachtas Committee Transcripts: September 1 and 2

The transcripts from last week’s meetings of the Joint Committee on Finance, Public Expenditure and Reform are now online. The transcript for Michael Noonan’s appearance is here. The Honohan-Elderfield transcript is here. I’m happy to say the website has improved since the last Dail and you can now read the transcript for a full meeting without having to hit lots of arrow buttons.

Mortgage Arrears: June 2011

The latest quarterly report on mortgage arrears from the Central Bank is available here. The report shows the fastest increase yet in the fraction of mortgages that are more than 90 days in arrears. This fraction rose from 6.3 percent in March to 7.2 percent in June, compared with increases of about six tenths of a percentage point in the previous quarters.

55,763 mortgage accounts have been in arrears for more than 90 days, of which 40,040 are in arrears over 180 days. In addition, 69,837 mortgages have been restructured with 39,395 mortgages that have been restructured but which are classified as performing and not in arrears and 30,442 again in arrears. These figures raise questions about whether the type of light restructurings that the Irish banks have been applying to distressed mortgages are sufficient to deal with the problem.

Economists and the Media

Richard Tol has raised some interesting issues about the interaction between economists and the media. One point he makes is how much of the supposed expert commentary in the media is from people who have limited expertise. That’s not too controversial and I think is true of media throughout the world.

As I read it, however, Richard is also making another point related specifically to academics. This point is that only those who are experts in a particular area, as signified by their contributions to academic publications, should discuss this area with the media.

On balance, I don’t see much merit in this argument.

I’d make the following points:

First, while it is true that an economist with more frontier research contributions is (other things being equal) more likely to be smart and on top of their subject area, it is also true that the majority of economic policy issues that are discussed in the media do not relate these frontier debates.

For example, based on my publications in leading journals, I could bore for Ireland on the merits of the New Keynesian Phillips curve or the link between consumption spending and asset prices. However, the media aren’t too interested. Instead, they often ask me to discuss issues that a very good command of undergraduate or master’s level economics would allow a person to explain. In most cases, it does not take a frontier-economics level of expertise to answer the questions about bank balance sheets or fiscal policy that the media are often interested in.

This point probably holds particularly well for my specialised research area of macroeconomics but I think it holds pretty broadly across various subfields. For example, I think it’s now pretty well known that Richard Tol has published a large number of academic papers in the area of environmental economics. However, when economists, including Richard, appear in the Irish media to discuss environmental policy issues, in the vast majority of cases they are making points about taxes to curb externalities or pricing to match costs of services with costs of provision – points that I recall from second year undergraduate microeconomics.

To summarise, a smart economist without any frontier research publications in a particular area is perfectly capable of making useful points about a whole range of issues.

Second, when arguing that an academic should decline invitations to discuss anything other than issues they have published papers on, it’s worth keeping in mind the alternative the public will get to hear if the academic says no. Whatever Richard thinks about Irish academics, there is a large number of financial journalists and stockbrocker economists whose job is to say yes when asked to appear on these shows (in the case of the latter, they often appear to promote a particular interest group’s point of view).

In many cases, an academic that agrees to discuss an issue on which they have not published a paper is doing so because they have an opinion on the issue based on their expertise and because they are fairly sure that the alternative is that the public get to hear something from a journalist with very little background at all in economics or someone promoting a vested interest.

Third, Richard reckons that “The typical listener to the radio or watcher of the TV assumes that because someone is a professor and speaking on the topic, (s)he must be an expert.” Well, maybe that’s true in Holland but it sure isn’t true here. If you think everyone in Ireland thinks I’m an expert on issues I prognosticate on, I recommend reading the comments on this blog. Appearing with the title “Professor” is nice but if you can’t make cogent logical arguments, then the public won’t necessarily buy what you are saying.

Finally, I’d note that there is very little financial compensation for appearing on Irish TV and radio shows (fees are somewhere between very low, e.g. €50, and zero) and, from conversations with colleagues, I believe the majority of reasonably well known economists say no most of the time when asked to appear on these shows. I believe that those Irish academics who appear on TV and radio to discuss economic policy issues are largely doing so because they believe they have a useful contribution to make and that their state-paid salary places an obligation on them to make a useful contribution to debates about public policy.

Morgan Kelly on the Size Distribution of Irish Mortgages

Morgan has a new working paper titled “A Note on the Size Distribution of Irish Mortgages”.  From the conclusions

Our analysis here has shown that instead of 10,000 million plus mortgages, there were probably fewer than 2,000 and these were mostly for investment rather than own home mortgages. However, looking at the 11,000 largest mortgages from the bubble peak of 2006-08, we find that the total is €9 billion. We do not know how many people held more than one mortgage, but it does not seem implausible that the total indebtedness of the 10,000 people with the largest mortgage debt is in the region of €10 billion.

Morgan uses statistical methods to estimate the number of mortgages valued at over €1 million because the Department of the Environment do not make these data available.

While the question of how many mortgages there are over €1 million is not particularly important, it might be worthwhile for the Central Bank or CSO to make available more detailed figures on the size distribution of mortgages. As there are quite a few banks in the Irish mortgage market, the usual argument about confidentiality hardly applies as an issue when releasing aggregate figures.