Pot’o’goldbollocks and social partnership

“Tyler Cowen”:http://www.marginalrevolution.com/marginalrevolution/2010/11/second-thoughts-on-ireland.html 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”:http://yglesias.thinkprogress.org/2010/11/suck-on-this-2/ “collective”:http://www.eschatonblog.com/2010/11/franceandgermanywilldie.html “memory”:http://www.marginalrevolution.com/marginalrevolution/2010/11/second-thoughts-on-ireland.html. 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”:https://crookedtimber.org/2010/01/21/dirty-bertie/ 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”:http://www.eurofound.europa.eu/eiro/studies/tn0804048s/dk0804049q.htm. 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.