Professor of International Macroeconomics, Philip Lane, in a letter to the Irish Times recently, took issue with ICTU economist Paul Sweeney’s phrase “conservative economists” which he used in his contribution to the Irish Times series “What is to be done?”
“I am not sure exactly what Paul Sweeney means by “conservative” economists, but I doubt whether the political preferences of academic economists can easily be inferred from their views on topics such as public-sector pay.”
The use of the phrase ‘political preference’ here suggests affiliation with one particular party, I suspect, rather than ideological bias with its well established tendency to see things from a class perspective. Anyone, with even a slight smattering of economic history would be aware of how ideological bias can inform economic thinking.
Lane has been generally positive about the Government’s Public Sector pension levy, which because it is tax deductible affects the take home pay of those on lower wages (54% of the civil servants are at the clerical officer level or lower) more than those better paid civil servants. It will also net the government a paltry 900 million euro which considering the growing size of the deficit is not going to save the economy, unless symbolism is a quantifiable economic entity.
However, Lane does display his ideological bias, I think, by consistently suggesting that lower wages will help competitiveness without illustrating how wages levels are actually impacting on the costs of products and services. This is illustrated in a comment about the ESB wage levels in a post today on the Irish Economy blog:
“It is worth remarking that the structure of the national pay deal does not provide the appropriate kind of “incomes policy” that can help this process. In particular, deviation from the national pay deal is only permitted if a firm is in very serious financial distress. Rather, we need cost reductions even in sectors that are still profitable, since prices of all goods and services matter for the level of competitiveness.
A good example is the ESB. It would be very useful to see wage correction in this sector, which will help to reduce input costs for many businesses.”
Of course, the wages in the ESB are in the news at the moment, as the company, which is a member of IBEC has decided to pay the first phase of a 3.5% national wage increase to its staff from November. David Begg said while talks with the Social Partners were still ongoing that private providers of energy will leave the market if prices are not high enough and that this has led to an ongoing increase in the cost of energy. Danny McCoy, IBEC Director of Policy, responding to the move, acknowledged that the payroll element of EBS’s operations did not impact significantly on the overall price of energy, but said the ‘symbolism was the problem’.
So, if Danny McCoy can concede that ESB wages levels do not impact on the overall price of energy what is Philip Lane talking about?
Below is Michael Taft’s article on why wage levels in the ESB don’t impact on current electricity prices and points out what does, which he originally published on his blog Notes on the Front in 2007. As Begg points out, the issues that affect electricity prices are still relevant today – the price is kept high to attract non-existent competitors to a market that is priced by the regulator in order to attract competitors. Philip Lane, by ignoring the facts remains ideologically fixated with the need to cut wages and considering that the wage cuts will have the biggest impact on middle to low income earners – the largest consumers in the economy – we can see that as a class bias.
Keep these two numbers in mind: 37% and 67%. The Amalgamated Transport and General Workers Union published a comprehensive analysis of the electricity market and, in particular, the reasons behind the huge increase in recent years in electricity prices, entitled ‘Through the Looking Glass’ – an apt title given the Alice-in-Wonderland polices the Government has pursued in the energy sector. Finally some light is being shed on an area that is shrouded in obscurity and cant. And the Opposition parties have been given a policy analysis on a platter. Now let’s get back to those numbers.
37% represents the increase in ESB’s total operating costs between 2001 and 2005 (the last year of reporting). 67% represents the increase in prices during that same period. Why the difference? And who is to blame? One would think, from reading media accounts and politicians statements, that the ESB is to blame for these increases and, in particular, the ESB workers. After all, didn’t the Government commission the Deloitte Report that said ESB costs and wages were way out of line with Europe? The ATGWU analysis cuts through all this lazy and misinformed commentary.
In 2000, Ireland had the third cheapest electricity prices in the EU – 20% below the European average. Since then, prices have risen at over four times the rate of other European countries and we are now above the average – coming in 7th out of the EU-25.
The ESB didn’t set these price increases (a common misunderstanding). The Commission for Energy Regulation does that. And one of the purposes of setting a high price is to entice new private companies into the market. In other words, the difference between the price of electricity (+67%) and the cost of producing it (+37%) is a subsidy to prospective new competitors.
There’s nothing wrong with subsidising private companies. The IDA and Enterprise-Ireland (to name but two) do it all the time. The problem lies in the method of delivering the subsidy. The electricity market throws up special problems. The capital investment and length of time to recoup that investment is considerable. A new company needs to have a guarantee that sizeable long-term investment will eventually turn a profit.
The Government has not used the traditional subsidy regime – tax breaks, direct grant, in-kind aid, etc. It has decided to guarantee a sufficiently high price through a state office, namely the Regulator. If prices and, therefore profits, are low – as they were in 2000, no new companies would enter the market. The Government would have failed to create ‘competition’.
So what has been the result? To create competition the State has raised electricity prices to uncompetitive levels. We have the prices but the Government is still flailing around, pumping out policies, all in the name of creating competition.
This analysis, of course, is not sexy. Far better to have a go at ESB employees – too many, over-paid, inefficient – pick your favourite adjective. Except that the ATGWU revealed another number worth remembering: 16%.
16% is the proportion the ESB spends on payroll costs out of its entire budget. It’s ludicrous that rising prices can be attributed to an input that is so relatively small. But it gets even more ludicrous. Between 2001 and 2005, the proportion of payroll costs fell from 22% to 16%. This is, ironically, the same period that Deloitte examined and which they very carefully avoided commenting on.
Now, there is no known (and legal) accountancy that can attribute rising prices to an input that is falling as a proportion of total costs. That Deloitte did so is a tribute to their determination to exonerate Government policy (one thing missed by media commentators at the time – if Government policy as pursued by the Regulator was working, why the need for a consultants’ study to find out what was going wrong). The irony in all this is that Deloitte never even stated that ‘labour costs were high’ – even though the media continue to repeat this.
On the way they created the fictional ‘€150,000′ earning ESB worker. This wholly fabricated figure could only be constructed by conflating a number of things: management and workers salaries, payroll taxes, employer/employee pension contributions, expenses, etc. That many ESB employees earn over-time pay is never explained by Deloitte because it would have embarrassed the Government by showing that the Government itself has prevented the ESB from investing in new, more efficient plant which would reduce payroll and maintenance costs. Therefore, in the name of competition, the ESB is forced to operate some of the oldest plants in Europe which breakdown more frequently.
The document is worth reading in detail. Its section on VIPPs is an example of how surreal Government policy can get (VIPPs are ‘Virtual Independent Power Producers’: they, of course, don’t produce one kilowatt of power. They’re virtual and the ESB is required to sell electricity to them at below the market rate which the VIPP can sell on to industries at a profit. Who pays for this subsidy? Yes, the consumer.).
What makes the ATGWU paper even more surprising are its recommendations. In a nutshell they propose that the market, not a State regulator, should dictate the price; that all companies should be allowed to compete equally; that new companies should receive a range of subsidies – but not a guaranteed price which is paid for by consumers. This is not a position one would normally attribute to a trade union but its one that would work for everyone.
Further, they expose the problems in the renewable sector (for instance, many customers of wind-farms would be surprised to know that most of their energy doesn’t come from wind – it comes from fossil-fuels and even nuclear power). They establish a road-map of how to we can move to an economy which is more reliant on renewable energy.
The opposition parties have been given a policy gift-wrapped. For Labour, this analysis appeals to their traditional support for public enterprise. Fine Gael would certainly have no problem with a ‘let the market dictate the price’ policy. For the Greens, it goes beyond aspiration and shows how public and private enterprise can work together to create progress on renewables.
If the opposition parties wanted to have a go at Government policy in the energy sector, there is no better platform from which to launch such a campaign. In the weeks ahead it will be interesting to see if they are really serious about electricity prices.
Clearly, the Government isn’t.
Latest posts by Donagh (see all)
- The policy of transferring incomes to capital and the rich - September 6, 2012
- ILR Will Not Blink While Facing Down the Jaws of Excessive CPU Usage - September 6, 2012
- Dan Froomkin | The Jobs Crisis Obama, Romney and the Low-Wage Future of America - August 29, 2012
- Money as a Social Construct – Talk Given by Mary Mellor - August 27, 2012
- - August 23, 2012