Economy

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The Loneliness of a Low-Tax, Low-Wage Economy

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The new Global Competitiveness Report is out. This is produced by the World Economic Forum (the crowd that occupies Davos once a year). It purports to rank countries by their business competitiveness. Ireland was ranked 25 in 2014. Last year we were ranked 28. Our competitiveness has improved. Yawn.

The rankings are based on a number of indicators – infrastructure, taxation, business efficiency, labour market, ease of doing business, etc. The rankings are compiled based upon a survey of 13,000 ‘business leaders’ throughout the world. So it is subjective – opinions formed by the executives of multi-nationals and large companies. You can only imagine what they might think. They’d probably give gold stars to countries that have hardly any tax, any wage, and require workers to bow every time the owner’s son drives by.

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But actually, no. These captains of industry and finance actually like (or don’t dislike) high-tax, high-spend, high-regulated economies – everything that we have been told is bad for our economic health. Here’s how our peer group – small open economies in the EU-15 – rank in competitiveness.

All the other small open economies are ranked higher than Ireland. Two of the countries are ranked in the top 10 in the world – Finland and Sweden. Let’s go through some of the economic sins as written down in the orthodox bible and see how the different countries fare (taxation data is taken from Eurostat’s Taxation Trends).

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Open Season on Workers (Again)

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The Sunday Business Post ran four stories last weekend- including a front-page banner headline – attacking not only public sector workers’ living standards, but workers in public enterprise as well.

Semi-States Enjoy Pay Increases During the Recession

Sitting Pretty in the Semi-States

Public Sector:  the Insider Story

The Special Protections of the Semi-States

The Sunday Business Post is determined to outdo the Sunday Independent in public sector worker bashing.

And the most interesting thing about these articles is that they are based on a survey and a reading of wage numbers that are not only completely wrong – but make the most basic statistical mistakes.  This is poor analysis, masquerading as informed commentary.  Let’s look at some of the claims and see where they went off the rails (unfortunately the SBP is behind a paywall).

The SBP Survey on Public Enterprise Wages

The SBP did a survey.  It purported to show the average wage in a number of public enterprises for 2009 and 2013.  From this they deduced whether the average wage rose or fell.  Here’s what their survey found.

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From Alpha 2 Omega Podcast #53: What’s Next? Part II

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This week we have part two of our discussion with Professor Peter Hudis, of Oakton Community College, about his book ‘Marx’s Concept of the Alternative to Capitalism’. The first part can be found here.

In this week’s show we talk about the Soviet experiment and the alienation of labour, the role of the state in a post-capitalist society, the Spanish revolution and the anarchist understanding of revolution, and the co-operative model as an alternative.

You can get the Professors book here.

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Dismal Job Numbers Expose Government Spin

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Question: why has employment growth collapsed in the first half of the year after recent claims by the Government that 60,000 jobs per year were being created?

The answer lies in statistical misunderstanding, Government spin and the failure of many commentators to read the numbers correctly. For the fact is that the 60,000 job-creation number was never real and the recovery in the labour market is sluggish at best. This post may get a bit involved but stay with me – for this is as much a story about how the recovery is being contrived as it is about bald numbers.

Last year, employment growth suddenly took off. In 2012 employment actually fell by 11,000 – and this was after a loss of nearly 300,000 since the start of the crisis. However, in 2013 everything changed. Employment grew on a full-year basis by 43,000 (this is consistent with claims by the Government who were using quarter-to-quarter figures).

This was quite a turnaround. The Government claimed their policies were working. For many commentators this was proof that recovery had returned. But there were a couple of problems.

  • First, this employment growth took place while the economy remained in a domestic demand recession. Given that employment is sensitive to domestic demand, this didn’t make sense.
  • Second, the usual pattern of an economy coming out of a recession is that employment growth lags. This is because if there increases in business output, the first beneficiaries are those already in employment; they get an increase in hours which had previously been cut.
  • Third, the actual job numbers were throwing up some strange happenings. Self-employment (own-account workers) grew by over 10 percent and made up over half of the total employment growth. At one stage, self-employment was growing by nearly four times the rate of growth during the boom. This didn’t make sense – not with domestic demand stagnation. Agriculture employment showed a similar pattern.

These concerns were dismissed. Government policies were working and critics were just nit-picking. However, the CSO published warnings throughout all last year – warning people against interpreting growth trends. Why? Because they were re-aligning their sample base with the recent Census (don’t forget, the Quarterly National Household Survey is not a comprehensive head-count, just a sample; like a poll). This happens after every Census.

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Deng Xiaoping – The World’s Greatest Economist

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This article was originally posted on John’s blog, Key Trends in Globalisation on the 23rd of August.
August 22, 2014 is the 110th anniversary of the birth of Deng Xiaoping. Numerous achievements would ensure Deng Xiaoping a major position in China’s history – his role in shaping the People’s Republic of China, his steadfastness during persecution in the Cultural Revolution, his extraordinarily balanced attitude even after return to power towards the development and recent history of China, his all-round role after 1978 in leading the country. But one ensures him a position among a tiny handful of people at the peak not only of Chinese but of world history. This was China’s extraordinary economic achievement after reforms began in 1978, and the decisive role this played not only in the improvement of the living standards of Chinese people but the country’s national rejuvenation. So great was the impact of this that it may objectively be said to have altered the situation not only of China but of the world.

China’s economic performance after the beginning of its 1978 reforms simply exceeded the experience of any other country in human history. To give only a partial list:

  • China achieved the most rapid growth in a major economy in world history.
  • China experienced the fastest growth of living standards of any major economy.
  • China lifted 620 million people out of internationally defined poverty.
  • Measured in internationally comparable prices, adjusted for inflation, the greatest increase in economic output in a single year in any country outside China was the U.S. in 1999, when it added US$567 billion, whereas in 2010 China added US$1,126 billion – twice as much.
  • During the beginning of China’s rapid growth, 22 percent of the world’s population was within its borders – seven times that of United States at the beginning of its own fast economic development.

Wholly implausibly, it is sometimes argued that this success was merely due to “pragmatism” and achieved without overall economic theories, concepts, or a leadership really understanding the subject (particularly with no knowledge of U.S. academic economics!). If true, then the study of economics should immediately be abandoned – if the greatest economic success in world history can be achieved without any understanding of the subject, then it is evidently of no practical value whatever.

In reality this argument is entirely specious. Deng Xiaoping’s approach to economic policy was certainly highly practical regarding application – the famous “it doesn’t matter if a cat is black or white provided it catches mice.” But it was extremely theoretical regarding foundations – as shown clearly in such works as In Everything We Do We Must Proceed from the Realities of the Primary Stage of Socialism, We Are Undertaking An Entirely New Endeavour, and Adhere to the Principle to Each According to his Work. Deng Xiaoping’s outstanding practical success was guided by a clearly defined theoretical underpinning, which can be understood particularly clearly in its historical context and in comparison with Western and other economists.

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Perverse Economics and Water Charges

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If you’re into perverse economics, then you’re going to love the debate in the run-up to the budget. Already we have Minister Simon Harris calling for income tax cuts (didn’t the Taoiseach tell Ministers last year to shut-up during pre-budget discussions?). Of course, there is almost no discussion regarding affordable childcare, reducing education costs or introducing universal pre-primary education, providing affordable pay-related pensions to all workers, reducing health costs, reversing the high levels of deprivation and poverty, etc. Almost no discussion at all about how we can improve our living standards.

But of real interest to fans of the perverse is that while Ministers and interest groups line up to demand tax cuts, the Government will be introducing an extremely regressive ‘tax’ on almost all households – and there is no discussion about how this can be avoided. I am referring to the water charge.

While there has been considerable discussion about the costs to the average household (measuring showers, baths, brushing teeth), there has been little reference to the distributional impact of the charges; that is, the impact on different income groups. Let’s see if we can start to fill this gap.

Of course, we don’t have a history of water charges to measure so let’s look at waste collection charges. User charges, like sales taxes (VAT, excise) are generally regressive – they impact more on low/average groups. This is in the nature of the tax as lower income groups consume, whether goods or water or waste, more of their income than high income groups. The CSO Household Budget Survey provides information on waste collection charges from 2009/10.

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There are two things worth noting about the above chart.

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Obstruct Reality, Consciously Manipulate, and Deny the Denial: Propaganda, Irish Style

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The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country.”

Ask the vast majority of people who said that and it is a fair bet they will probably reply something like: Josef Goebbels, or maybe Stalin perhaps, Saddam Hussein might even come up, maybe even Henry Kissinger, or maybe even, in a lucid moment, they might reply Rupert Murdoch, or for that matter Denis O Brien.  The truth is they would be wrong on all accounts. Although they would at least be relatively close with the last two or three.

But no, none of them said it, but it is a sure bet that all of the above names would understand the sentiment.

The quote is the first sentence from a 1928 book called Propaganda. The writer was Edward Bernays who many regard as the founder of modern public relations.  As a bold and declarative sentence it leaves you in no doubt what so ever as to the logic underlying the words.

That is, the masses can be first organised and manipulated and secondly, even more important, they must be if “democracy” as it is largely understood today is to fulfil its function in maintaining market-driven politics. The logic therefore is that “the people”, the great mainstay of democratic theory and thought or so we are told, cannot and should not be trusted.

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From Alpha to Omega Podcast #052: What’s Next?

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This week I am delighted to welcome Professor Peter Hudis, of Oakton Community College, who has recently published his new book: ‘Marx’s Concept of the Alternative to Capitalism‘.

We discuss what Marx had to say about post-capitalist societies, and the reluctance of those on the left to talk about what it might actually look like.

We also talk of the theoretical reasons for the failure of the Soviet and Maoist projects, how abstract labour dominates our lives, and how not even the capitalists are in control of the current system.

You can find the Professors book here:http://www.haymarketbooks.org/pb/Marxs-Concept-of-the-Alternative-to-Capitalism

Enjoy!

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The most important book on economic growth to have appeared for many years

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This article was originally posted on John’s blog Key Trends in Globalisation on the 28th of July.

Vu Minh Khuong’s The Dynamics of Economic Growth is the most importantbook on world economic growth to have appeared for many years. It is for that reason (full disclosure) that I did a small amount of work assisting on editing it.

The crucial importance of the book is rightly summed up by Professor Dale Jorgenson, of Harvard University, in his forward: “The emergence of Asia… is the great economic achievement of our time. This has created a new model for economic growth built on globalization and the patient accumulation of human and non-human capital.’ However the book’s economic importance goes far beyond Asia – although it is by far the most important comparative study published anywhere of how East Asian countries became prosperous. The aim of this review is therefore to explain why the book is so important from the point of view both of general economic theory and policy making.

There are two different strategies for economic growth, related to two different theoretical analyses of its causes, which have been pursued in the world in the last six decades.

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Debating Directions for a New Republic

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This article provides a critique of social partnership & ‘soft’ NGO advocacy and reflections on pathways forward.

Political & Economic Context: Neoliberalism & Ireland
Many people ask about the cause of poverty, oppression, rising inequality, environmental destruction and climate change. Neo-Marxist thinkers like David Harvey, Erik Olin Wright and Hardt & Negri, make the case that it is International capitalist globalization that is underlying these social catastrophes. It is the neoliberalism of the Washington Consensus – which was a political project of the wealthy and capital elite, theorized by the free marketeers of Friedman and Hayak. It started in Pinochet’s Chile and then Reagan and Thatcher implemented it in the US and the UK. In the face of declining profitability and the crisis of capitalism in the 1970s the aim of the wealthy and elite was to reduce the share of income (wealth) that went to workers and to increase that returning to capital and the elite. They also sought to reduce the power and influence of trade unions and the working class socialist organisations in society, politics and the economy.

At the heart of the neoliberal ideology was a belief that private unregulated markets are the best mechanisms to organize society and state-led planning is inefficient. Neoliberal policies included the de-regulation of the Keynesian welfare state protections and the financial sector, the privatization of public services, neocolonial conquest through corporations, imperial wars for resources such as Iraq, the commodification of nature like water, land, and seeds. Indeed at the heart of this project of neoliberal capitalism is the commodification of everything. Everything is to be turned into something that can be bought and sold, traded on markets, profited from, commercialized. Neoliberalism is about the utopia of individualized responsibility. Your existence is commodified through competition. You must compete with everyone for everything. Values of solidarity, public good, and co-operation are replaced with competition, individualism, commercialism and materialism.

But neoliberalism is also based on a myth of freedom. Where is the freedom for migrants who die in attempts to enter the EU or the US? Where is the freedom for low paid workers forced to work three jobs to survive? Neoliberalism has been dramatically successful in increasing the wealth of the minority, in increasing inequality, and in promoting its values and ideology amongst populations. However, it is also riven with contradictions as any variant of capitalism is inherently so because of the anarchy of free, unregulated, markets that continually engages in boom and bust cycles and because of uneven development where one area expands at the expense of retrenchment in another area. For example, the declining rate of investment for capital in general commodities led to capital in the 2000s flooding new financial products and the financialisation and commodification of ever greater aspects of our lives that capital could invest, gamble and accumulate profit from. But as the logic of the market was expanded into ever greater areas the potential for crisis and crashes increases and thus we see greater numbers and intensity of economic crises. Naoimi Klein has used an interesting term ‘disaster capitalism’ to describe the way in which the elites use various crises to further intensify exploitation and the commodification of everything by private corporations.

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Why China Won’t Suffer a Western Type Financial Crisis

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This article originally appeared on John’s blog Key Trends in Globalisation on the 22nd of July.

Inaccurate articles sometimes appear claiming China faces a “severe debt crisis.” Factually these are easily refuted. Changyong Rhee, the IMF’s Asia and Pacific Department director, pointed out that China’s national and local government debt is only 53% of its GDP, compared to U.S. government debt which is roughly as big as GDP, or in Japan where government debt is 240% GDP. Foreign debt is 9% of China’s GDP – insignificant set against the world’s largest foreign exchange reserves.

Factually, it is therefore unsurprising that China’s predicted “Lehman” or “Minsky” moment, a financial collapse, invariably fails to occur. But there is another, even more fundamental, reason why China’s economy does not suffer severe financial crises of the type that struck the Western economies in 2008 or wracked the Eurozone. As this illustrates a way that China’s economic structure is superior to the West’s, it is worth analyzing.

Starting with fundamentals, the way the argument is constructed that China faces a “serious debt crisis” violates the most elementary accounting rule – more precisely that of double entry book keeping, which was invented in Italy “merely” eight centuries ago! This is that for every debit entry there has to be a credit one, and vice versa. Discussion of only of one side of a balance sheet without the other is financial nonsense. Claims, such as in the Financial Times, that the big story of 2014 is “the black cloud of debt hanging over China” are financially meaningless given they do not discuss assets to be set against debt.

To illustrate this elementary accounting principle, take a simple example. A company borrows $100 million at 5% interest, uses it to build houses, and sells them at 15% profit. To declare “there is a crisis – the company has a $100 million debt” is evidently nonsense. The company has debts of $100 million but assets of $115 million. It can repay $105 million and make $10 million profit – there is no “debt crisis” whatever. That its assets are greater than its debt illustrates why it is financially illiterate to discuss only debt without assets. A “balance sheet” is called that because it has two sides, not one.

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Hoarding Cash While Refusing to Invest

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This article originally appeared on Socialist Economic Bulletin on the 8th of July.

The world’s largest companies are hoarding cash and cutting productive investment at the same time. The Financial Times reportsa survey from one leading ratings’ agency, Standard & Poor’s, which shows that the 2,000 largest private firms globally are sitting on a cash mountain of $4.5 trillion, which is approximately double the size of Britain’s annual GDP.

Yet capital expenditure, or ‘capex’ by those firms fell by 1% in 2013 and is projected to fall by 0.5% this year. But this does not presage an upturn. Steeper declines in productive investment are projected by those firms in both 2015 and 2016. Taken together, if these projections materialise the actual and projected falls in capex over the 4 years from 2013 to 2016 will approach the calamitous fall in productive investment seen at the depth of the recession in 2009. This is shown in the FT’s chart below.

Chart 1. Real Capital Expenditure by 2000 leading firms

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SEB has previously argued that companies are not prevented from investing by lack of access to capital or similar factors. They are sitting on a cash mountain. The same is true of British firms. There is plenty of money left, but firms refuse to invest it.

This is because private firms are not concerned with growth, either GDP growth or the growth of their own productive capacity. They are primarily driven by the growth of their own profits, or preserving them. Where that is not possible, where new capex will not meet an expected level of return, no new investments will be made.

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The Dangers of Exaggerating RMB Internationalisation

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RMB ‘internationalization’ is one of the most discussed issues in China’s economic policy. But many claims regarding the extent of RMB internationalization are greatly exaggerated and the practical proposal to attempt to achieve it, capital account convertibility of the RMB, is extremely dangerous for China’s economic and social stability. To eliminate false estimates and policies, it is, therefore, necessary first to accurately establish the facts regarding the real international role of the RMB and then analyze what consequences flow from these.

Those wishing to present a highly exaggerated picture of the degree of RMB internationalization frequently do this by presenting percentage growth figures. This gives a misleading impression because it fails to mention that such growth rates look impressive merely because they are calculated starting from extraordinarily low levels. To take a typical example, the proportion of RMB payments carried out in the US in April 2014 had risen by 100% compared to a year earlier. This sounds spectacular – until it is noted that the rise was only to 0.04% of all worldwide currency transactions!

A sense of reality is immediately injected if its noted that in April 2014 the RMB accounted for only 1.4% of international payments – globally, RMB payments are entirely marginal. Furthermore even this very low figure exaggerates the RMB’s internationalization because a large percentage of the payments are merely between mainland China and Hong Kong.

To illustrate the real situation, start with China’s strongest area internationally – trade. By the end of 2013, 8.7% of world trade was denominated in RMB – but the dollar’s share was almost 10 times as high at 81%. Furthermore, the RMB figure was artificially flattering as around 80% of RMB payments were for Hong Kong. Excluding Hong Kong RMB payments were marginal. For example, by April 2014 only 2.4% of China and Hong Kong’s trade with the US, China’s largest single country export market, was in RMB.

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Stag-covery

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Stag-covery (n): a situation where statistical recovery occurs within a persistent economic stagnation  

The CSO’s new release shows a statistical recovery and a stagnant economy – a state of affairs that can be described as stag-covery.

The headline rates show a GDP quarterly increase of 2.7 percent.  This might seem solid enough but all this is driven by net exports.  The domestic economy remains mired in stagnation.

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The worst of the economic crash ended in 2010.  Since then it’s just a matter of bouncing along the bottom.  In 2013 consumer spending fell, spending on public services bumped up marginally while investment fell marginally.  We can debate the swings and roundabouts (impact of the pharma cliff, aircraft leasing, etc.).  But the narrative remains the same – the ship sunk to the bottom and is struggling to get back to the surface.

The first quarter of 2014 didn’t get off to a hectic start.  On a quarterly basis:

  • Consumer spending fell, though this shouldn’t be too surprising given that it was coming off a quarter that contained Christmas spending.
  • Spending on public service resumed its long-term fall – by over 2 percent.
  • Investment fell by a substantial 8 percent.

It is this inability of the latter to generate any momentum upwards that is particularly worrying.

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This represents is a potential problem for the Government.  In the last quarter investment fell by 8 percent.  Yet the Government has pencilled in investment growth of over 15 percent this year.  Of course, the game isn’t even half over but this is an especially poor start.

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