Pot’o’goldbollocks and social partnership

by Henry on November 23, 2010

Tyler Cowen links to my post on Ireland, which is somewhat embarrassing, as I was convinced in comments that my basic argument was wrong (short version: always check taxation statistics you think you have a fair idea of before you post opinions regarding their implications). While property taxes played a crucial role in Ireland’s fiscal disaster, corporate taxes were simply not a large enough part of revenue to be worth talking about (and probably would not have been under any plausible alternative regime).

Nonetheless, I still want to make a (weaker and more indirect) argument about the relationship between Ireland’s efforts to attract inward investment (which included, but were not limited to, its taxation regime) and its current state of disaster. The short version: the desires (a) to attract inward investment, and (b) to maintain peaceful industrial relations helped reinforce an unsustainable fiscal strategy. This has implications for the left as well as for the right.

The problem here is that Ireland in the 1990s and 2000s was trying to square two not-especially-compatible sets of demands. During this period, Ireland, as many commentators have noted, was strongly committed to a neo-liberal program of boosting economic growth through making the country attractive to outside investment, which not only involved low corporate tax rates, but also substantial subsidies for inward investment, and an implicit promise that there would be no very great difficulties from the unions. On the other hand, however, Ireland, perhaps uniquely among liberal market economies, had a substantial system of national level tripartite bargaining between unions, employers and the government (indeed, there were other actors involved too, making the system multipartite, but they did not enjoy the same implicit veto). This had been introduced during the period of low economic growth, as a means of promoting wage moderation.

The problem was that it was difficult to reconcile a strong desire for more inward investment (by companies which liked the low taxes, but emphatically did not want unionization), with a strong national level bargaining role for trade unions. Tripartite bargaining systems have a tendency to end up with government effectively bribing the parties to reach a deal through various concessions, but this tendency was grossly exaggerated in the Irish case. Whenever unions pushed for changes to labor laws which would allow them to organize new industries more effectively (Irish labor law is not as hostile to union organization as US law is, but it is no great shakes either), and were bought off with a combination of increased pay for the public sector, and specific tax breaks aimed at lower paid workers. Because unionization was so spotty, unions were prepared to accept concessions aimed at their members, which were intended to fob off the threat of labor unrest, and of active efforts to organize the new sectors of the Irish economy (which might have made Ireland less attractive to e.g. US firms such as Microsoft, Pfizer, Intel etc).

The long term results of this were twofold. First – a narrowing of the fiscal base as more and more individuals were taken out of the tax net altogether. This had some short term egalitarian benefits at the bottom end – although the very top of the distribution did extremely well too, not least because of the supine approach of the Irish revenue authorities to combating rampant tax evasion in e.g. the property sector (a factor that is obviously not picked up in official statistics series, but that is amply documented in press accounts). This led the government to seek more and more revenue from the frothy property market, and to do everything it could to keep the bubble inflated (since if it did not, its revenue base would shrink dramatically). Second – a large increase in the heavily unionized public sector, and continued increases in public sector pay.

The implications for right wing commentators who brayed repeatedly about the Irish miracle have already been spelled out by several commentators (I’m personally happy to have done my small bit to help ensure that Thomas Friedman’s little exercise in pot’o’goldbollocks remained in the collective memory. But there are some implications for the left too, including people like myself who used to be quite taken with Ireland’s social partnership approach. I mentioned this in passing when I wrote about Fintan O’Toole’s book at the beginning of the year. But it bears mentioning again. Organized bargaining on the sectoral or national can work very well in e.g. a context like Denmark’s, where high unionization rates (combined, contra the usual mythologies, with quite flexible labor markets) mean that trade unions have ‘encompassing interests’ in the Olsonian sense. Hence e.g., the focus of Danish unions on continual vocational training. But institutionalized partnership in an open economy country with low unionization rates may make it in the government’s interests to buy off organized sectors with specific incentives rather than look to the interests of workers across the whole economy. In Ireland’s case, this helped precipitate the country’s fiscal disaster. I don’t know that it was a major cause – I suspect that the Irish government would have ended up relying on revenues from the property bubble in any event, and spent the proceeds in different ways. Furthermore, it is at best an open question as to whether the Fianna Fail/PD government would have been prepared to accept egalitarian policies that implied more state involvement in improving employment relations (such as vocational training, government provided child care etc) and easier unionization, in exchange for lower wage growth. Even so, the social partnership scheme was certainly part of the story – clearly subordinate to the pot’o’goldbollocks but not unimportant either.

{ 13 comments }

1

Kevin Donoghue 11.23.10 at 8:12 pm

I certainly don’t want to discourage union leaders from searching their souls, but I can’t see that they had much to do with the collapse of the banking system, which is surely the main story. The people I would like to see explaining themselves are the highly-paid and supposedly highly numerate risk management specialists, financial analysts, auditors, regulators and Department of Finance officials who allowed this house of cards to grow before their eyes with hardly a peep out of them about its doubtful stability.

Even now nobody seems to be able to quantify the size of the shitpile. Is default simply inevitable? Brian Lenihan has the brass neck to say we can work it out for ourselves. I suppose I should give him credit for implicitly acknowledging that we wouldn’t believe any figures he might give us at this stage.

2

EWI 11.23.10 at 9:10 pm

the highly-paid and supposedly highly numerate risk management specialists, financial analysts, auditors, regulators and Department of Finance officials

Let’s not forget pride of place for collected economists and “economics editors” who cheered this grand free-market experiment over a cliff (especially Marc “The Best Is Yet To Come” Coleman).

But as to Henry’s main points. I dislike saying it (given your usual spot-on-ness), but as wrong in this one as the last, I fear. The tax cuts for the poorer-off were at least counterbalanced at the higher end by the combination of matching upper rate cuts and startlingly-generous tax breaks (41% tax break for ‘pension contributions’, I ask you!). So the McCreevyite/PD liberal gods were appeased while simultaneously not stirring up the unions, but to blame the lower tax takes on the unions is… rich.

And you missed a third long-term effect. The current trades union leadership are generally recognised to have gone soft with ‘partnership’ and are paper tigers these days, much to the frustration of the membership.

3

Bónapart Ó Cúnasa 11.23.10 at 9:20 pm

I really do think that causation is likely to have run the other way here.

It was the long boom in the housing market that allowed the government the scope to cut income tax and award generous public sector pay increases, while at the same time keeping taxes on capital low. Granted, they did nothing to prick it (and arguably a lot to inflate it through various incentives for developers), but neither did they actively try to maximise revenue from it (by raising stamp duty rates, eg – if anything pressure from first-time buyers went the other way). Rather, it was simply a windfall that meant that during the good years we could convince ourselves that the the choice between Boston and Berlin didn’t have to be made…

4

BrendanH 11.23.10 at 9:38 pm

This led the government to seek more and more revenue from the frothy property market

I think there was at least as much accident as intent in that. There was a macho swagger to the tax cutting (“we’re tough, we’ll take the revenue hit”) followed by surprise at the ever-increasing tax revenue. Short on attention span, and long on self-satisfaction.

5

Henry 11.23.10 at 10:26 pm

EWI – I must have been unclear in my writing. The claim I was making wasn’t that tax cuts in general were the fault of the unions – obviously they were not. Rather that there were specific tax cuts aimed at lower income brackets which were aimed at shoring up the social partnership deals, and which contributed to the problem of fiscal reliance on property taxes. When you say

bq. The tax cuts for the poorer-off were at least counterbalanced at the higher end by the combination of matching upper rate cuts and startlingly-generous tax breaks (41% tax break for ‘pension contributions’, I ask you!). So the McCreevyite/PD liberal gods were appeased while simultaneously not stirring up the unions, but to blame the lower tax takes on the unions is… rich.

and I say

bq. This had some short term egalitarian benefits at the bottom end – although the very top of the distribution did extremely well too, not least because of the supine approach of the Irish revenue authorities to combating rampant tax evasion in e.g. the property sector (a factor that is obviously not picked up in official statistics series, but that is amply documented in press accounts).

I don’t think we are disagreeing on much. What I am trying to do here is not to say that the unions were to blame for the fiscal disaster (as Kevin says, the bank regulation disaster is a different story), but that the process helped the disaster on a bit, and that people (like me) who thought that social partnership was a good thing should recognize this.

Bonapart and Brendan’s suggestion that this was as much unexpected windfall as anything else seems plausible – ingenuousness and political opportunism were mixed in equal measure.

6

Daragh McDowell 11.24.10 at 2:19 am

Speaking of Marc ‘The Best is Yet to Come’ Coleman @Henry did you get my e-mail about his new venture?

7

P O'Neill 11.24.10 at 2:31 am

I certainly don’t want to discourage union leaders from searching their souls, but I can’t see that they had much to do with the collapse of the banking system, which is surely the main story.

David Begg, General Secretary of the ICTU since 2001, and Central Bank of Ireland board member 1995-2010.

Do I think David Begg caused the crisis? No.

Do I think it would be nice if David Begg, ideally before his march on Saturday, explained what objections he had in real time to the Central Bank approach to financial stability, how he pursued those objections using his board position, and what the outcome was? Yes.

8

John Quiggin 11.24.10 at 7:58 am

While you’re all here, how did the Greens end in up in coalition with FF? I don’t know anything about the Irish Greens, or much about FF, but they don’t sound like very compatible partners to me.

9

Bónapart Ó Cúnasa 11.24.10 at 9:21 am

The Green Party wrestled with its conscience and ultimately won…

10

Tim Worstall 11.24.10 at 10:53 am

“corporate taxes were simply not a large enough part of revenue to be worth talking about”

Quite. Vaguely remembered numbers are that EU average corporation tax take is circa 3% of GP. Ireland’s around and about that (2.9% I think for the most recent year). Germany is 1.1%. So if it were corporation tax revenues then there’s something about to happen in Germany: which I really don’t think there is.

The only place I know of where the corporation tax take is really significant is Norway. (12% or something). But I think that’s a function of how they account for either oil royalties or Statoil profits.

11

Chris E 11.24.10 at 11:20 am

“corporate taxes were simply not a large enough part of revenue to be worth talking about (and probably would not have been under any plausible alternative regime).”

Right. But a major factor in the latest round of the crisis was the capital flight from AIB and BOI – the majority of which was corporations withdrawing their money – a lot of this money presumably wouldn’t have been there if not for the lower rate of corporation tax which made it advantageous for corporations re-patriate their profits to Ireland.

What effect did this additional money have during the boom years?

12

EWI 11.24.10 at 11:11 pm

I don’t think we are disagreeing on much. What I am trying to do here is not to say that the unions were to blame for the fiscal disaster (as Kevin says, the bank regulation disaster is a different story), but that the process helped the disaster on a bit, and that people (like me) who thought that social partnership was a good thing should recognize this.

Well, social partnership in and of itself I would agree to be a Good Thing ™, but the Irish experience surely (as P.O’Neill points out) establishes how a union leadership (not especially left-wing to begin with) can be bribed along a path of least resistance, which Green Jersey mentality they’re still not free of.

The lengths gone to in trying to get rid of Mick O’Reilly from the ITGWU during the height of the Ahern/Blair era (as so comprehensively documented in the Phoenix) shows what was going to happen to any union leader who wasn’t prepared to travel this road.

Bonapart and Brendan’s suggestion that this was as much unexpected windfall as anything else seems plausible – ingenuousness and political opportunism were mixed in equal measure.

Well, yes. Like the majority of their fellow Dáil Éireann colleagues, the kindest description of the abilities of nearly all the FF TDs is that they’re not much more than glorified county councillors (even their corruption is of a particularly petty nature).

(Still, at least we have Baron Osborne of Ballentaylor and Ballylemon making some Plantation reparations.)

13

EWI 11.24.10 at 11:17 pm

@ John Quiggin

I don’t know anything about the Irish Greens, or much about FF, but they don’t sound like very compatible partners to me.

You’re telling me! FF is the party of small farmers, ambitious “entrepeneurs” and avaricious property developers. They’ve been steadily bleeding backbenchers over stuff like (mild) reform of planning and other bones tossed to the Greens – who gave up opposition to the US use of Shannon (for troops and renditions), building a new motorway in close proximity to Tara and Shell’s taking over of part of Mayo in order to shore up The Party of Bertie. The only one of them worth a damn – Patricia McKenna – has long since been forced out.

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