Stabilizers

Ok..this is going to annoy everyone I suspect…

One of the things that strikes me about the debate in Ireland is the fundamental misunderstanding that exists about the public sector.

There is a large constituency of people who exhibit tendencies in their discourse that suggests that any wage over zero is too high – these are the die-hards whose discourse is a toxic mixture of ideology jealousy and half remembered catchphrases gleaned from too much Fox News. Small government via starving society of essential services or else making the workers therein so impoverished that they are amenable to bribery works so well in so many places…

There is another large, overlapping but discrete, group who suggest that while of course the government should have a role in the economy it should confine itself to capital and not current spending – far be it from me to suggest that many of these are private sector rent seekers who will cheerfully take the government (taxpayer) cash and spend it on whatever madcap idea has come to mind by a an unholy combination of bureaucrats chasing what they think is going to make ireland rich and vested interests seeking warmer vests, regardless of how low the total ROI will be

Then there is a group, again discrete, who urge us to “scrap croke park” (a football stadium cum conference center and also a totemic 2009 agreement between the government and public sector unions to keep nominal wages uncut in exchange for productivity and other gains), regardless of the fact that such cuts a) will, given higher fiscal multipliers in recessions, exacerbate an already bad domestic demand position, b) will in any case be utterly incapable, the downstream effects of a) ignored, of making a massive dent in the deficit and c) will result in a massive industrial relations mess.

Finally, we have the public sector unions, now moderatly cowed but who have over the years taken advantage of the supine and spineless political system to extract massive rent. Most public sector union leaders in Ireland have beards, for some reason.

I spoke recently to a representative of the first/third group, who urged me to brace for a 40% pay cut “like the private sector has had” via the immenent (wished for?) scrapping of the agreement. Hmmmm. Not quite true… Here is a graph of public/private sector average hourly wages and total employment over the last while. One of the things we want, those of us who dont deem all public servants inherent spongers (or is that the people on welfare? cant ever remember) is that government act to stabilize and smooth out the economic cycle. You dont have to be an unreconstructed keynesian (or even Paul Krugman) to think that smoother cycles are perhaps preferable to more jagged ones.

Both Public and Private wages have remained remarkably constant, or it would be remarkable if we didnt recognize that nominal wage rigidity (the empirical fact that people usually dont get/take/accept reductions in nominal wage packets) is the norm even in distressed sectors.   We also see that the government employment total has declined slowly – taken together this is what we would WANT to see, that government act to keep its injection into the economy smooth. Of course this is not, for the more thinking and conscious, a problem (for the reflexive “small government is good and therefore smaller is better so zero must be optimal” merchants this is a heresy) and acts to ensure that the government is doing its job.  The adjustment in ireland has been in the fall in private sector employment. But it has not been in private sector wages.

The problem in Ireland lies in the fact that there is a significant wedge beween public and private wages. Normal economics would suggest that , all other things being equal, having a permanent defined benefit pensionable job would allow people to take lower wages than those in comparable employment who have less security of tenure and less certain pension. But the opposite is the case here, as over decades governments bought industrial peace and election by generous wage increases.

A significant part of the wedge in pay (lets table the pension issue and how much that would cost to fund) can be explained by on average higher qualifications and greater experience in the public sector. While the government have announced new lower pay scales and less generous pensions for new public sector entrants , it is not clear that they can or should or will do anything for those (like me) who are already in the system. Amongst other things while there has been significant forbearance in relation to industrial relations cutting nominal pay would result in this evaporating. There would be legal difficulty and the certainty of challenges in moving existing pensioners or even those with a reasonable expectation of their pension entitlements to a less generous system, and at least in the university and internationally tradable sectors of the public sector we would face an accelerated brain drain.  And yes, there is one of those – right now it is hard to hire lecturers in Ireland, paying at the bottom of the scale which overlaps with the UK pay scales. It might come as a shock to UK academics but their prospects are positively rosy in comparison to here.  And of course removing several billions at one fell swoop from the pay bill will not magic jobs up for the unemployed but will instead add to their numbers (larger negative shock multipliers are so nasty), while also adding to the hole in the (state owned, supported and money absorbing ) banks from foolish mortgage lending.

Its a mess – there are no simple solutions and no lack of simplistic ones.

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6 thoughts on “Stabilizers

  1. kerryman12

    Great article, though I’m in the Public Sector so obviously I’m going to say that. I accept that there is an argument for my wages to be cut even further. And I would endure those cuts, when imposed, if my employer, promised to protect me from my bank (and by ‘my bank’ I mean the banks the government now own or who they are now propping up) when I can no longer pay my mortgage. I want the option of a simple two year bankruptcy or being allowed to sign my house over to the bank and walking away. When my employer offers me these protections, then have at my wages.

    Reply
  2. kerryman12

    Great article, though I\’m in the Public Sector so obviously I\’m going to say that. I accept that there is an argument for my wages to be cut even further. And I would endure those cuts, when imposed, if my employer, promised to protect me from my bank (and by \’my bank\’ I mean the banks the government now own or who they are now propping up) when I can no longer pay my mortgage. I want the option of a simple two year bankruptcy or being allowed to sign my house over to the bank and walking away. When my employer offers me these protections, then have at my wages.Great article, though I\’m in the Public Sector so obviously I\’m going to say that. I accept that there is an argument for my wages to be cut even further. And I would endure those cuts, when imposed, if my employer, promised to protect me from my bank (and by \’my bank\’ I mean the banks the government now own or who they are now propping up) when I can no longer pay my mortgage. I want the option of a simple two year bankruptcy or being allowed to sign my house over to the bank and walking away. When my employer offers me these protections, then have at my wages.

    Reply
  3. Stephen F

    Great piece. As someone running a company in the private sector I find the treatment of the public sector puzzling. Market forces should be allowed to drive change, if demand falls supply should fall too. Public service should be managed on a Total Cost of Employment, inclusive of generous pension schemes. It might be naive but I think if the government ever had a chance to tackle to the powerful public service unions the time is now. We need a massive contraction in public expenditure so taxation burden can fall below the 50% mark. As a private sector owner manager I take on enormous risks, have huge in salary outlays and at the end of the day I have little or no benefits – why take the risk, if no rewards maybe I should just sell up and move the business elsewhere.

    Red Tape costs have increased, it is more difficult to build a business now then before. The government haven’t a clue how to build enterprise – loys of rhetoric – the pension levy was a serious act of theft.

    The key is Less short term tax is more medium spending, less tax will empower consumers who can then reward enterprise which will then create growth. The Croc Park agreement was the biggest cop out ever, it screwed the private sector and gave a nice cushion to the public servants. We should make plans on the basis of potential gains not just on the basis of fear (industrial peace!!!).

    Cut the costs of operating business, reduce regulatory oversight, make it easier to hire and fire people, create flexibility so business can start easily, fail safely and drive growth. I also think SME’s need active assistance in training, credit insurance and tax breaks. Enterprise Ireland is a great start, but it is run by public servants who are not incentivised enough. This country needs to seriously consider strategies to manage the 300K plus debt burden per person we hold as a nation – much of it bank debt. Sorry for the rant Bryan!

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  4. Stephen F

    One more thing… Croc park part 2 should have a cut in wages of…. say 25% and a incentive scheme for performance with… 15% bonuses based on department targets being met.

    Reply
  5. otto

    “Market forces should be allowed to drive change, if demand falls supply should fall too.”
    That’s correct — and in many of the public services there is no fall in demand at all. In the universities, for example, demand for services has increased of course. We need to stop thinking of “public services” overall, and more about different labour markets, because some are indeed overpaid (mostly at the lower-skilled end of the public service, in fact) while others operate in high-skill orientated international markets for medical workers and researchers, where salaries may already be too low.

    “We need a massive contraction in public expenditure so taxation burden can fall below the 50% mark.”
    Of course you know that Ireland is very lightly taxed, particularly re. taxes on incomes for middle and lower income earners. And no property tax, no water charges etc. Above all we need to reincorporate the middle income earner on 25-35k a year into the income tax system. See here for example:
    http://www.kearon.ie/?p=415 – and net contributions are even lower after much-higher-than-UK benefits taken into account.

    “the pension levy was a serious act of theft”
    It was a tax, just like all the others. Welcome to democracy.

    “Reduce regulatory oversight”
    No — we need much more, including for example re ensuring timely payment of VAT and pension contributions by firms, and checking building construction standards. Standards of honesty and reliability are low in Irish business, and need to be raised a lot.

    “Make it easier to hire and fire people”
    Yes. Already pretty easy by international standards, but there’s probably more to be done here.

    Reply
  6. otto

    “There would be legal difficulty and the certainty of challenges in moving existing pensioners or even those with a reasonable expectation of their pension entitlements to a less generous system, and at least in the university and internationally tradable sectors of the public sector we would face an accelerated brain drain”

    On this however, I think perhaps there is room for e.g. a 15% cut to all public sector pensions, on the basis of the current financial emergency, by whatever legal mechanism is necessary. It makes much more sense for pensioners’ income to be cut than the income of those currently in work. The pensioners are out of the labour market, are not contributing to today’s provision of services, there is no brain drain risk, and younger lecturers / nurses will rightly expect that their pension entitlements will go up and down several times between now and their age of retirement.

    Reply

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