ESRI commentary

Paul Sweeney14/04/2010

Paul Sweeney: In his latest book, “Freefall: America, Free Markets, and the Sinking of the World Economy,” Joseph Stiglitz slams the Irish government’s attitude to international cooperation on dealing with the financial crisis. He quotes disgraced former Minister Willie O’Dea, who boasted that Ireland can be a free-rider on the back of other economies’ stimulus packages.

The book, as its title indicates, is a fierce attack on how the adherents of free market economics brought the global economy to its knees. Stiglitz is scathingly critical of the conservative (free market) view and argues that it is far better to raise taxes on those who can afford them than cutting expenditure and welfare in a depression.

It is again deeply disappointing that an august body like the ESRI continues to devalue its otherwise excellent analysis and research by equating wage movements with “competitiveness.” A cursory glance at the reports issued by the National Competitiveness Council would demonstrate that the issue of competitiveness is far more complex than wage movements. (See for example, the NCC’s Benchmarking Ireland’s Performance, posted below, where wage costs, unit labour costs, etc. are compared and not found to be as vital as some would have us believe, p59-63).

A clear understating of the complex issue of competitiveness is vital if we are to get ourselves out of this deep hole.

It is also deeply disappointing - and perhaps disingenuous - that the ESRI and many other conservative economic commentators, who are “wage movement obsessives,” neglect to look at comparative international labour costs. Could this be because Ireland, in spite of rises in recent years, is still down the list on total labour costs? And what about Irish productivity? Not booming in recent years, but still high.

The ESRI has been quite obsessive about falling wages in the private sector. In its latest report, it admits that “there was no conclusive evidence of falls in hourly earnings in the private sector.” Yet it desperately wants such cuts in wages – to fit in with its crude wages=competitiveness model. In spite of the evidence to date, it then predicts “our expectation is now that wages across the economy will have fallen by 2 per cent in 2009 and that they will fall by 3 per cent in 2010 and by a further 1 per cent in 2011.” However, this will be due largely to the imposed cuts in public sector earnings and reduced working hours all over the private sector. They got it wrong so far on wages in the private sector, and maybe they will be wrong again on this projection.

In fairness to John Fitzgerald of the ESRI, some time ago he said that the justification for the cuts in public sector wages then being mooted in Government was weakened by the fact that private sector earnings (per hour - the way to evaluate such movements) had not fallen. This is still the case.

The ESRI says that “our forecasts suggest that labour’s share of GNP will fall from 54.6 per cent in 2009 to 50½ per cent in 2011. This demonstrates that we are optimistic with respect to the competitiveness challenge which built up in the years leading up to the economic collapse.”

This fall in labour’s share of national income, of course, means a greater share for capital, including the banks. What is interesting is the simplistic tie-in of falling workers’ incomes with improved “competitiveness”. Why would one be so “optimistic” when the fall in wages will further reduce plummeting domestic demand and, thus, employment?

The ESRI report itself shows how consumption fell by 7.2% in 2009, and while they hope it will fall by only 1 per cent this year, they seem to be doing their best to cheer on a greater reduction engendered by pro-cyclical, deflationary polices.

Today’s retail figures are not good when one strips out the state subsidies to car buyers. The fall is a substantial -6.8% in the year, up from under -3% in 2008.

Investment, they also tell us, collapsed by a staggering 30% last year, and they take comfort in that it will only fall by a massive (is that smaller than staggering?) 20% in volume terms this year. Imports have fallen so much - due to reduced earnings and increasing joblessness - that the balance of payments is improving substantially. This is also aided by the very strong performance of Irish exports (why have exports done so well, if Irish wages are so high?). With no jobs policies, a quarter of a million more people (244,000 per ESRI) will be out of work at the end of this year than just two years ago. Thus, demand will fall further. Why is the deflationary impact of government policies not seriously considered by the ESRI?

Yet if one reads the report, one can see that the collapse in the banks, (the ESRI’s own figure is a gross cost of €73bn in taxpayer bailout) and and the fact banks are still not lending to small businesses etc., are the real issues hitting competitiveness.

Perhaps the ESRI should be more precise in its use of English and talk of “wage competiveness”. It should perhaps really be “wage movements”, if one is not including productivity and the impact of exchange rate movements. This is a much more precise definition - more accurate and informative. But perhaps less ideological?

The ESRI commentary admits it got it seriously wrong on the cost of the public bailout of the banks. “The revelations in respect of the scale of losses in Anglo Irish Bank and the consequent needs for recapitalisation were well beyond anything that we, like many others, (but not all) had anticipated.”

It predicts that the net cost of the bank bailout will cost Irish workers and other taxpayers a staggering €25bn. This is 80% of this year’s total tax receipts of €32bn. And it could be much more. This is what is really hitting our competitiveness in my opinion! Why is this issue dominating media? Because it is the key economic issue. Not wage movements.

The optimism regarding a hoped-for recovery of 2 or 3 per cent growth next year pales significantly when one realises that the Irish economy will be a huge one-fifth (20 per cent) smaller (GNP) this year than at its peak in 2007.

Posted in: EconomicsFiscal policyLabour market

Tagged with: esriWagesCompetitiveness

Paul Sweeney     @paulsweeneyman

paul-sweeney

Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions.  He is a member of the Economic Committee of the ETUC and chair of TASC’s Economists’ Network. He was a President of the Statistical and Social Enquiry Society of Ireland, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.


Share:



Comments

Categories

Contributors

Rory Hearne

Rory Hearne is a postdoctoral researcher in the Maynooth University Social Sciences …

Vic Duggan

Vic Duggan is an independent consultant, economist and public policy specialist catering …

Paul Sweeney

Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions.  He is a …