If this is a recovery why are people getting poorer?

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On the same day that the CSO reported that the economy grow by 3.5% from a year ago, the Irish Times reported deepening gloom among households with survey respondents reporting decreasing disposable incomes. 45% of people said they were spending more on utility bills, and many others reporting increased costs of transport, healthcare and housing.

How is it both possible for the economy to be expanding at a decent clip yet the population is becoming poorer? Leaving aside the possibility that the population is expanding at a faster pace than the economy (which is not the case here), then either the data is false or all of the benefits of recovery and more are going to a minority of society. Or both.

The reality is that the CSO vastly overstate the improvement in the economy, which in reality is doing little more than bumping along the bottom. At the same time, the austerity policy works to redistribute incomes from poor to rich, from labour to capital, especially unproductive capital such as banks and landlords. If energy bills are rising in real terms incomes are being transferred to them from households. If rents are rising, real incomes are being transferred from tenants to landlords, and so on.

Fake exports, real stagnation

The export-led recovery that is so widely touted by supporters of this government and of austerity generally is a statistical fiction. Over time a number of commentators have pointed to the tax regime as a source of huge distortions to the external accounts. This facilitates the booking of costs, output and profits in this jurisdiction in order to avail of extremely low effective tax rates, way below even the headline rate of 12.5%. Constantin Gurdgiev at True Economics has also shown that this is a key factor in the current inflated level of GDP.

One marker of this distortion to the trade data is that the monthly CSO accounts show total goods exports of €23.2bn in the 3 months of Q3.  Yet the data included in the Quarterly National Accounts show exports at €27.3bn. There is a different methodology for the two pieces of data. But there is a truth gap between the real level of goods exports and reality, which has widened over time. In 2008 the export totals were almost aligned, with the GDP data showing exports just €1.8bn higher for the whole year. Now that annualised discrepancy amounts to €16.4bn. This is greater than the entire recorded improvement in real GDP since the trough of the recession at the end of 2009, which is €15.7bn. Without the fakery of an ‘export-led recovery’, statistically there is no recovery at all.

Because the export data is so distorted, it is important to consider the trends in aggregate domestic demand, which is the sum of household consumption, government consumption and investment (Gross Fixed Capital Formation).

Fig.1 Real Final Domestic Demand, €bn

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The actual low-point in terms of real domestic demand was in mid-2013. But the rebound since still leaves it below the level of mid-2010 and remains approximately 18% below its pre-recession peak. Because of the inflated level of exports the variation in GDP data is not so pronounced, but the general trajectory is similar.

Yet the striking fact about the current economic situation is that real living standards continue to decline for the overwhelming majority of the population, even though economic activity is stagnating and supporters of government policy claim there is a recovery.

One key aspect of this highlighted by Tom Healey at NERI is the decline in real wages. This is shown in Fig. 2 below. Real wages actually rose in the first, sharpest phase of the recession. This is customary, as there are often small wage increases agreed prior to recession and the fall in prices boost these in real terms.

Fig.2 Average weekly earnings (Q1 2008 = 100)

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But the fall in living standards is not confined to those in work. The cuts in public services as well as the reductions in social security payments mean that the overwhelming majority of society is experiencing an all-sided real fall in its standard of living. It is austerity policies that have created a broad-based reduction in prosperity.

Solutions to a continuing crisis

If there really were no money left, the solutions to the crisis would be difficult to identify. But that is not the case. Even within economic stagnation, a transfer of incomes implies that while some classes in society are worse off, others are better off. These include the tenant and the landlord, or the worker and owner, or the producer and the rentier. Some of the main components of national income are shown in Fig.3 below in nominal terms (not taking account of inflation).

Fig.3 Main Components of National Income 2008 to 2013, € Nominal

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In the chart above the blue line indicates the trend in wages and salaries while the black line represents domestic profits. The grey line represents the level of employers’ contributions to social insurance. As note previously, wages initially increased in the recession and profits fell. The effect of austerity policy has been to transfer incomes from labour to capital. From 2008 to 2012 profits have increased by €9.6bn while wages and salaries have fallen by €11.7bn (all in nominal terms). There was a slight reversal in 2013, as profits fell in the year by €3bn. This was mainly accounted for by a rise in wages, up €2bn, as well as an increase in employers’ contribution to social insurance rose by €300million.

Given that we have heard nothing about the economy other than the deficit for more than 6 years, it is extraordinary that now the entire focus of debate is on tax cuts. This is surely wrong, and not solely because tax cuts can only benefit those in work and disproportionately benefit higher tax payers. They do nothing about the dilapidation of public investment and the crisis of public services.

Fundamentally, tax cuts represent a transfer of incomes from government to the private sector, especially high earners. What is required is a transfer of incomes from firms, who clearly have the resources to fund it (unlike government). This can be used to boost wages. But increasing prosperity for all depends on a transfer of funds from firms to government to end stagnation, so that these can be used to fund productive investment.

Photo credit: Jamie Davis Empty Office Space, Grand Canal Dock, Dublin, Ireland 2011

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