Economic Shunning: July 6th The Recession Diaries
During the Great Depression, the British King announced he was cancelling the purchase of a royal yacht as a gesture of sympathy towards his beleaguered subjects. John Maynard Keynes claimed this was misguided. Instead of cancelling the order for his yacht, Keynes said the King should have purchased two yachts. His line of reasoning was that these orders would increase employment in the shipbuilding yards, would generate employment in the businesses that serviced the yards and, with the extra wages, would increase demand which would save jobs in local shops and businesses.
In other words, those individuals and businesses that can afford to do so, should circulate money into the economy to generate jobs and enhance incomes which, in turn, ‘enhances’ the initial injection; hence, the multiplier effect.
This is important to remember as the construction industry ends its first day of industrial action. I’m not going to comment on the particulars of the dispute. Those of us not involved hope that a resolution that can be found, that agreements are honoured and that economic justice is done.
However, I am struck by a particular line that is emerging from this dispute which, if universally acted upon, will do considerable harm to the prospects of economic recovery. On Morning Ireland this line emerged three times. First, in an interview with Jack O’Connor, SIPTU President:
Interviewer: ‘Do you anticipate any problems in explaining to your own members why they should support action for more money for one group of workers when so many workers are not getting more money they’re actually getting less if they’re not unemployed?’
And again, with O’Connor.
Interviewer: ‘There’s no question of more money for these people (i.e. other workers). They’re either getting the same if they’re lucky or their pay is being cut and yet you’re advocating more support for a group of workers who are looking for more pay.’
And once more, this time with a striking worker:
Interviewer: Do you think you have the general public’s support? It’s a tough time to be going on a strike and a lot of people losing their jobs and take pay cuts.’
This ‘line’ – striking for increased pay while others are losing pay and even their jobs – could be applied to any dispute anywhere, from electricians to retail and hotel workers, to factory and office workers, anywhere in the economy. It could be applied to any request for higher income – whether it be pay, social transfer or in-kind increases through the reduced costs of public services. The effect is to ‘guilt-trip’ anyone making such requests/demands, never mind anyone acting on this – either industrially or politically. Such people looking for higher pay are selfish, having no sympathy with those who don’t have jobs. They should be shunned:
‘You want more pay?! You should be grateful to have a job. Now get back to work.’
This ‘line’ is exactly what the economy doesn’t need. Higher wages and disposable incomes are a necessary element for economic recovery and, therefore, should be supported; it should be supported by those who want to see us get control of the fiscal deficit and the unemployment crisis; most of all, it should be supported by other businesses who are reliant upon increased domestic demand. Let’s go through the arguments.
On the fiscal level, a pay increase is of more value to the Exchequer than that same money retained by an enterprise. For each extra €100 in pay results in an increase in Exchequer / Social Insurance Fund revenue €40.75 at the standard rate and €61.75 at the top rate (this combines income and PRSI from employees and employers). That’s quite a kick. You would think, therefore, that the Government would be quite anxious to see pay increases in the private sector where affordable. Multiply that €100 and extend it to a few hundred thousand workers, and the money will be flowing in – and all that without unpopular tax increases.
Just as importantly, though, increases in disposable incomes can be translated into higher demand. Quite simply, people with more money in their pockets (either because they got a job, got a pay increase or got a tax cut) are more likely to spend it on goods and services produced by domestic enterprises than people with less money. This is, of course, not a straight equation. People may well take the increased income and save it; or start paying off debts; personally rational, economically inefficient. That is why tax cuts can be hit and miss – with potentially debilitating consequences for the Exchequer.
However, this is not the case with a pay rise. Even without the extra consumer spending, the Exchequer gains. In turn, the Government could use that extra revenue to increase demand (e.g. engage in job-creating investment). Further, there is little doubt that generalised wage increases for average income earners will ‘leak’ into the domestic economy, to a greater or lesser extent depending on circumstances. To the extent that it does, the economy has the potential to get a double benefit.
Where does that leave ‘inability to pay’? It can become a pivotal point in increasing Exchequer revenue and domestic demand. This clause has been used in the past as a defensive weapon for companies to postpone/suspend pay increases agreed at national level. Now it can be turned into a positive weapon for economic recovery.
There is no doubt there are companies that cannot afford to pay wage increases – and therefore, cannot contribute to increased demand. This, in turn, harms other companies – those that sell goods and services into the domestic economy. They receive less sales revenue and experience a decline in turnover, resulting in payroll cuts in wages and/or employment.
Therefore, it is all the more imperative that those companies that can afford to pay, do so. In effect, these companies subsidise those enterprises that cannot afford to pay. This subsidisation increases demand and tax revenue which helps weaker companies in two ways – it increases the prospect of higher sales revenue and increases tax revenue with which the state can promote increased demand.
Of course, this is not how IBEC sees it. They tore up the current wage agreement earlier this year. The only beneficiaries of this act were companies that could afford to pay. It amounted to nothing less than fiscal and economic sabotage. The losers were not just the employees affected; the Exchequer loses out on the extra revenue and businesses reliant on domestic demand lose out – since workers have less money in their pockets. To the extent that this feeds into lower consumer confidence, domestic businesses take a double hit.
When workers engage in industrial action in pursuit of higher pay, there may be many points of legitimate debate. However, the generic allegation that higher wages – and taking either political or industrial action in pursuit of that – is somehow damaging to the economy, and that anyone who engages in it should feel ashamed, only serves to justify deflation.
Hopefully, one day we’ll hear a question on a current affairs programme being put to a company owner:
Interviewer: ‘You have a profitable company. Yet you’re refusing to pay your employees a wage increase. How can you justify such an action that depresses demand, short-changes the Exchequer, and contributes to reduced economic activity?’
I’d sure like to hear the answer to that one.
[And, yes, by the way – I support the electricians.]
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Comment by: Robert Browne
Jul 10th 2009 at 00:07
This dispute is about the exercise of power it has very little to do with money! If we are honest we will admit that the unions have become just as big a problem as the profligate government. The unions sold their soul to the system a long, long time ago under the guise of Social Partnership. Jack O’Connor and friends drive even bigger cars than their government handlers and I’m not joking! Bench marking was a complete tax payer scam and rip off it is one of the most dishonest scams perpetrated against the working people of this country in decades!
These sparks should get real and live in the present that is 2009 and forget about 2006 when even the dogs in the streets thought they were rich! As for all the pot bellied union leaders they should do some real work instead of coming out with crap about “we shut you down and you will not open again until ….” or “this is a war….etc! These middle aged crisis laden leaders should wise up go and see a good psychologist or reality therapist or better still go and visit a dole queue in inner city Dublin! The government are bad but this lot are beginning to make them look good!