Ireland against the grain

Anonymous1987

An article in this weeks economist (http://www.economist.com/world/europe/displaystory.cfm?story_id=13331143) gives a very interesting perspective on the economy.

The general theme of the article suggests wages and general prices in Ireland are falling rapidly and may possibly restore Ireland to competitiveness. The risk to this is that people may not be able to repay large mortgages on their homes with lower wages.

The article highlighted a key point, the major economies in the world are opting for a different strategy, take for example the Bank of England's "quantitative easing" and just recently the Fed's injection of $1 trillion into the US economy. There are serious worries about the consequences of these actions, particularly the danger of rocketing inflation levels in the future. Keynes never bothered with the long-run and he may have been right but the sheer scale of these injections in addition to the stimulus packages may tip the scales too far and overheat economies.

So what does this mean for Ireland? With inflation possibly plaguing the US and the UK in the future, Ireland will hopefully seem like an attractive investment location with lower competitive wages once again. The cost to this will be a large burden of debt on the government and a period of wage cutbacks however this certainly has potential to improve our competitive standing from a cost perspective.

Do you think this move to tighten our belts will resolve our economic difficulties or will it just deepen our recession with homeowners defaulting on mortgages as a result of decreased wages?

blast05

I reckon it all depends on the ECB rate. If it goes up to 6 or 7% (plus banks margin on top of that) anytime in the next 6 or 7 years combined with higher personal taxes and lower wages, then i'd say we are screwed as there would be massive mortgage defaults crippling the banking system. Of course others in the EU would also be screwed if that were to happen so perhaps the future of the EU would be in even more serious trouble than now ?!

Sam the Sham

Interesting article. It isn't pointed out often enough in the Irish media that Ireland's government, by focussing entirely on foreign investors and their assumed attitude toward only one element of the crisis (government finances), is doing something that few if any other countries are doing: cutting spending and raising taxes in the teeth of the mother of all recessions.

The assumption seems to be that if we can only assuage foreign investors by showing them that our fiscal house is in order, we can continue to borrow. But, if we don't, then they'll refuse to buy our debt or will only do so at exorbitant interest rates. What seems to be lost on all of them is that foreign investors also pay attention to such things as deflationary spirals and the 20% drop in retail sales and the fact that Ireland is doing exactly the wrong thing, in Keynesian terms, in the current conjuncture. So we may end up cutting spending and raising taxes and still have to go begging to sell our debt.

The whole country, fuelled by the Independent newspapers, seems to be of the opinion that only the fiscal position of the government matters. This is wrongheaded. There are no good options now, but it does not go without saying that cutting the deficit now must be the top priority.

Even within this cozy consensus that the deficit must be top priority there is similar one-sided thinking going on with regard to the question of whether the gap should be bridged via spending cuts or tax increases. The media, again driven by the Independent, want to maintain that spending cuts and, especially, pay cuts in the public sector are the obvious way to go. When they address the question of tax increases, they write incoherent things like this:

The [20% decrease in retail sales] figures should also have made Cowen realise that taking yet more money out of consumers' pockets carries enormous risk. He must see that his priority is to cut government spending, and only turn his attention to tax increases once he has exhausted all other possibilities -- including privatisation and tax reform.

The author seems to think that raising a billion euro in tax increases is a terrible thing to do because it will cut consumer spending by that much, with terrible consequences for the Irish economy. But take that same billion euro out of public-sector wages and, apparently, it becomes a brilliant idea, despite the fact that a billion euro taken out of the pockets of public-sector workers has similar effects on consumer spending. In other words, there is no free lunch: bridging the deficit by a billion euro takes a billion out of the economy no matter how you slice it, which is why it might not be the best option at present. But you'll never hear that in the Independent.

silverharp

Sam the Sham wrote: »

The author seems to think that raising a billion euro in tax increases is a terrible thing to do because it will cut consumer spending by that much, with terrible consequences for the Irish economy. But take that same billion euro out of public-sector wages and, apparently, it becomes a brilliant idea, despite the fact that a billion euro taken out of the pockets of public-sector workers has similar effects on consumer spending. In other words, there is no free lunch: bridging the deficit by a billion euro takes a billion out of the economy no matter how you slice it, which is why it might not be the best option at present. But you'll never hear that in the Independent.

As you have said there is no free lunch , you cannot manage spending or growth in a situation like this, borrowing or raising taxes to pay for the marginal state funded activity is equivalent to borrowing money to dig ditches , any other interpretation is just vested interests trying to hold on to their piece of pork.

ardmacha

This is a small open economy, most things made here are exported and most things consumed here are imported. Keynesian expansion wouldn't work in such an open economy. If wages fall even a bit here then we a much better positioned to take advantage of an increase in demand internationally, including one caused by other people's injections of money.

Sam the Sham

ardmacha wrote: »

This is a small open economy, most things made here are exported and most things consumed here are imported. Keynesian expansion wouldn't work in such an open economy. If wages fall even a bit here then we a much better positioned to take advantage of an increase in demand internationally, including one caused by other people's injections of money.

What percentage of Irish GNP is made up of exports?

Mizu_Ger

Mortgages seem to be a huge stumbling block in all of this.

Many people have large mortgages that will always be there and is an impediment to reducing wages without affecting spending in the broader economy. People can shop around for basic necessities and forgo luxuries to make ends meet, but the mortgage will always be there. Maybe the bank bailout money should have been used to bailout consumer's mortgages, which would relieve some pressure on mortgage repayments and have a knock on affect to banks by reducing their bad debts?

Not sure if this makes economic sense overall, but it seems like it would kill (or seriously injure ) 2 birds with one stone. I suppose this depends on whether bad debts in the banks are mostly due to comsumer mortgage lending or not.

sparklepants

The thrust of this article appears to be that Ireland's primary response to the current crisis is to cut wages, and that this will make Ireland a more attractive location for FDI. But the government has chosen to increase taxes and reduce public sector expenditure. There has been no general agreement to cut wages across the board as far as I'm aware. While some private sector companies have had to force wage cuts upon their employees, there is nothing to suggest that "Ireland" has already chosen this route.

vinylbomb

sparklepants wrote: »

there is nothing to suggest that "Ireland" has already chosen this route.

I'd be of the same opinion. There's been a fair amount of bit-part moves by the government, but there doesn't appear to be any over-arching policy decision to even remotely assume this is what they are aiming for.

As previously stated, most wage reductions have been forced by employers in the private sector.

thebman

vinylbomb wrote: »

I'd be of the same opinion. There's been a fair amount of bit-part moves by the government, but there doesn't appear to be any over-arching policy decision to even remotely assume this is what they are aiming for.

As previously stated, most wage reductions have been forced by employers in the private sector.

That's basically the point though IMO.

Private sector companies that have to cut wages will do so. The others are sustainable businesses at current wage levels. They could cut costs but aren't. One has to ask why given this would increase profits.

The main reason IMO is they see reducing wages while still making large profits as a disincentive for their workforce. In this case they can survive at their current wage levels and if it is sustainable then what is the point in cutting it?

Most of the people I have seen not take decreases that I know are in high skilled areas or retail areas that are still making the sales. Why would you cut their wages so? Sales people have taken a natural decrease in wages if the business goes down as they get less commission.

Then you have the people that are out of work in industries where wages have not come down. These people will be willing to work for less since they are currently out of work and will bring down the averages in this sector so that when people currently on high wages move jobs, the amount they will be offered by the employer will naturally come down IMO.

The public sector is the only area that doesn't compete so its wages have to be forced down which is why the focus is on this area but that has been done. The other thing we need to cut is other areas of spending in the public sector such as projects that are no longer possible given the current financial position. This should be things like privatise Bus Eireann, I don't see the need for a public bus carrier nationwide at this point. There are some unsustainable routes that may need a community initiative that could apply for public funding by a private operator to do unpopular routes that need to exist and it could be evaluated on a case by case basis, year on year to see if it is still unsustainable and worth doing.

Galway to Dublin routes are being covered by private operators and usually better serviced from my experience and this has/will led to a decline in business for Bus Eireann so why keep them going?

Same for Dublin Bus, for god sake they have been using public funding to kill private routes IMO (I got buses on this route and could see it first hand, odd number of 25A services and other bus routes that covered the same route as a private operator while other services starved of buses had people standing and squashed on to try to get home).

As we have no private train service, we can't wind down Irish Rail but we can investigate best practice in areas where private services exist and then allow privitisation and then privatise Irish Rail or sell its assets and let the staff go and be rehired by the private company less union problems which is why I'd imagine nobody would want to buy it at present.

Step one of course would be an integrated ticket system which would have to be forced through, screw any union opposition or other opposition. No good reason not to have this IMO.

ardmacha

The public sector is the only area that doesn't compete so its wages have to be forced down which is why the focus is on this area but that has been done.

It is an oversimplification to say that the public sector is the only area that doesn't compete, there are private owned non-tradable sectors of the economy that do not compete and the high prices that continue to be charged in these sectors are an important part of the problem.

Godge

ardmacha wrote: »

It is an oversimplification to say that the public sector is the only area that doesn't compete, there are private owned non-tradable sectors of the economy that do not compete and the high prices that continue to be charged in these sectors are an important part of the problem.

Very true. Lawyers, pharmacists, doctors and dentists will be the last to realise that they must cut prices and their own salaries.

One other sector overlooked is the commercial state sector. The rest of the public sector has a wage freeze and the pension levy but apart from Dublin Bus, the other state commercials (DAA, IAA, ESB, Bord Gais etc.) are still paying increases and not reducing charges as much as they should.

thebman

Godge wrote: »

Very true. Lawyers, pharmacists, doctors and dentists will be the last to realise that they must cut prices and their own salaries.

One other sector overlooked is the commercial state sector. The rest of the public sector has a wage freeze and the pension levy but apart from Dublin Bus, the other state commercials (DAA, IAA, ESB, Bord Gais etc.) are still paying increases and not reducing charges as much as they should.

The government has influence on those groups that it can put on them even if they aren't state owned.

ESB are cutting prices anyway but they can't cut wages while they are still making massive profits. Any new hires can come in on a lower pay scale however and overtime the average wage will reduce.

Basically while the price of electricity is artificially high they can't cut wages so the regulator needs to wake up.