Friday, November 25, 2011

No Alternative to Budget Cuts?

It is often argued that there is simply "no alternative" to the destruction of social safety nets implicit in proposals to cut government expenditure, e.g. the Irish government's consideration of cuts to child benefit, a reduction in unemployment benefit and the introduction of medical card fees etc., as ways to achieve the required €3.8bn "adjustment" in the forthcoming budget. This line was repeated by Stephen Collins in Saturday's Irish Times. However, the idea that there is "no alternative" to a government decision could never be accurate. The "no alternatives" myth is nothing more than a politically convenient way of saying we don't want to consider the alternatives.

Thankfully, various groups outside of government have put together detailed proposals on alternative ways of saving money in the budget. Michael Taft of TASC has outlined potential "alternative" savings of around €6bn.

It's worth noting that some of the proposals here - e.g. removal of property tax reliefs - present the relatively rare opportunity for government, in imposing taxes, of a win-win on both equity and efficiency grounds. Removal of these reliefs would also represent a reversal of the much criticized policies of the previous government. Rather than subsidizing asset accumulation, taxing wealth (in the form of a property tax or capital gains tax) makes sense as both a progressive tax measure and one which avoids the disincentivization of work entailed in higher income taxes.

On income tax, the proposal to increase the top rate to 48% is still some way below the "optimum" top rate of tax (to be applied only to the top 1% of income earners) of over 70%, as calculated in this new paper in the Journal of Economic Perspectives, and discussed here (Paul Krugman's NYTblog) and here (Kevin Drum of Mother Jones).

The calculation is based on US data. For Ireland we might consider that the "behavioural elasticity", as Krugman calls it - i.e. the reduced work effort in response to higher taxes - is likely to be higher than for the US, given the historically high international mobility of Irish workers and the infamous culture of tax exiles among Ireland's elite. I'm not sure if studies on this elasticity exist for Ireland. But there is another way of looking at this. If we assume that the current top rate of income tax in Ireland is the optimum rate, what degree of "behavioural elasticity" would this imply? Ireland's top marginal rate of income tax is officially 41%. However, if we include the top rate of the Universal Social Charge (USC) at 7% and PRSI at 4% we have a top marginal rate of 52%. This implies a "behavioural elasticity" of about 0.62.* This is still higher than even the most conservative upper bound estimates for the US - around 0.57. Also, as Diamond and Saez note, most of the behavioural response observed in studies to date consists of tax evasion or avoidance behaviour, and not the kind of changes in real economic behaviour that opponents of higher income taxes claim to be concerned about (e.g. labour supply, business creation and savings decisions).

So while increases to the top rate of tax will be dismissed by this government on pragmatic grounds - that such increases would be self-defeating - such claims may not stand up to close scrutiny. Imposing a higher rate of tax on the top 1% of earners in society - and ensuring they actually pay their tax by closing loopholes, removing tax reliefs, and clamping down on tax exiles and tax evasion - could offer a more socially equitable and sustainable means of closing the gap between public revenue and expenditure.

Certainly the notion that we have "no alternative" to the proposed cuts, appears to have no basis in the available facts and figures. Instead it is revealing of an ideologically driven budgetary process.

*The calculation is based on the formula used in the paper by Diamond and Saez cited above: T = 1/(1 + ae), where T is the optimal top rate of tax, a is the Pareto parameter that describes the distribution of incomes at the top, and e is the behavioral elasticity. I assume that the distribution of incomes at the top in Ireland is roughly equivalent to that in the US and so I use the same Pareto parameter as used in the Diamond and Saez paper, i.e. 1.5.

Tuesday, November 22, 2011

Sunday, November 20, 2011

The value of third level education and who should pay for it

Mass student protests took place in Dublin last week (see photos here) over expected increases in fees and cuts to maintenance grants in the forthcoming budget. Students feel betrayed by the apparent unwillingness of the Minister for Education, Ruairi Quinn of the Labour Party, to stand by his pre-election pledge not to raise fees or cut grants for third level students. The protestors also rightly question the wisdom of the proposed measures, given the likelihood that they could end up costing the government money as hard-pressed students are forced out of college and on to dole queues. Roughly one in four young people (17-25 year olds) in Ireland is unemployed, while the figure is more like one in three for young men (see here, here and here). The alternative to the dole queue is, of course, emigration. According to the CSO, 76,000 people left Ireland in the year to April 2011. Almost all of those leaving were aged 15-44 (see here).

Forcing young people out of education and on to dole queues - or on to planes - represents a personal tragedy for the young people and their families who are directly affected. It is also clearly not in the long-term social or economic interests of the country. However, the question inevitably arises as to how we should fund the third level sector in this country. Should free third level education - funded by the state - be offered to all those who wish to attend (and meet some basic minimum academic requirements)? Or should students themselves be asked to pay for their education through some kind of fee system? There appears to be an ideological (or at least political) aversion amongst the current government to the idea of fees based on the full economic cost of a third level education. However, the current approach of creeping fees (or "student contributions" to use the euphemism favoured by politicians) and cuts to maintenance grants, represent highly regressive mechanisms for plugging the funding shortfall. They also guarantee that only those who can afford the fees (and other associated costs of attending college - cost of living, books, foregone income etc.) will pursue third level education. Not only is this morally wrong, it is also economically inefficient - the most talented and those who are determined to make the most of their education are not afforded the opportunity to do so in such a system.

This matter of public funding for third level education is particularly pressing, given the government's current financial difficulties. A simple short-term solution would be not to repay these bonds, thus alleviating the need for such severe austerity in the forthcoming budget. However, even such a dramatic u-turn in government policy would not address the wider issue of the long-term sustainability of a third level sector that, because of Ireland's youthful demographics, will have to cope with large increases in the demands on its services over the coming years - that is, if we expect to continue offering third level courses to a large proportion of the population. Out of a population of almost 4.5 million in 2011, 1.25 million are aged 19 and under, with a particularly large cohort born in the last 5 years. Over the coming years, the college-age population cohort will increase considerably (see CSO figures here).

The protestors and their student leaders were understandably coy during the week about proposing any alternative to raising fees as a means of funding third level education. The USI president was right, however, in pointing out the limitations - particularly in the Irish context - of an Australian style system of student loans repaid through income tax (which appeared to be the preferred approach of the Fine Gael party - now in government - during its time in opposition). For one thing, such a system would only exacerbate the short-term funding crisis, as it would (presumably) involve removal of the existing "non-tuition" fees and would not see any returns to the exchequer until graduates began earning sufficiently high incomes to pay the implied graduate tax. Given youth unemployment rates, this could be quite a wait. There is also the issue of the international mobility of Irish young people and Ireland's history of emigration. Returns (societal or economic) to any investment in education, are dependent - at the very least - on people remaining in the country.

Any debate on the appropriate way to fund education must also consider the value of education, both to the individual and to society. A number of recent analyses have begun to question the value - from the student's perspective - of the enormous investment involved in attempting to acquire a third level qualification (e.g. this New York Review of Books article). In the US, where students pay extremely high fees, young people graduating from university are leaving with worse job prospects and higher debts than ever before (see this Mother Jones article). Worse again, many leave before graduating - with a heavy debt burden and no qualification to show for it.

Over the medium to long-term we must consider what role the third level sector should play in our society, and what sort of graduates (and in what numbers) will be needed or desired in future. Will churning out large numbers of undergraduate degrees, masters and PhDs deliver the hallowed 'Knowledge Economy' of so many political speeches and government documents? As Paul Krugman argued back in 1996 - in what already seems like a highly prescient piece of futurology - "when something becomes abundant, it also becomes cheap. A world awash in information will be a world in which information per se has very little market value."

Much has been made recently of rising income inequality in rich countries - the US in particular - in part thanks to the issues raised by the Occupy movement. Many economists have - mistakenly it seems - linked rising income inequality to the proliferation of technology, leading to higher returns to education. In fact, most of the rise in inequality appears to have been driven by the runaway increase in incomes for the top 1% (see here). For everyone else - including the majority of college graduates - real incomes have not risen over the last 20 or 30 years. The Occupy slogan "we are the 99%" appears to have captured the reality of modern income inequality.

So perhaps the debate ultimately comes back to a question about what kind of society we wish to live in. Certainly, if we wanted to we could decide that a third level education represents a basic right of all citizens and as such should be funded by the state. This would have to be paid for - through taxation of one kind or another, or reduced spending elsewhere - but is certainly not beyond the realms of possibility, as politicians might conveniently argue.

Education is undoubtedly a fundamental right. But should that extend to third level education? Education is also a public good - an investment (as opposed to a cost) to which the returns from a societal point of view far outweigh the benefits to the individual. As such, there is plenty of justification for public investment in education. However, the scientific evidence indicates that the greatest returns to investing in education accrue to investment in early childhood (see here). This is also likely to be the most progressive form of educational investment - given that a child's prospects for educational attainment appear to be determined from a very early age. It is worth noting that the free fees for third level system in Ireland does not appear to have had much of an impact on the participation rates for different socio-economic groups.

So while there is no denying the desirability of significant public investment in education, to the extent that this is constrained by available resources, it should be concentrated on early childhood interventions. The question, then, is whether a free fees third level system is a luxury we can no longer afford, or a social programme we would be poorer without.

NYRB on the Occupy movement two months in

On the NYRblog, Michael Greenberg gives a detailed account of a dramatic week for the Occupy Wall Street movement in New York, while Jeff Madrick looks at the evidence on runaway incomes for the top 1% - America's new robber barons.

The meaning of crisis

Crisis is a term rooted in Greek tragedy, meaning “a decisive moment or turning point in a dramatic action”. It is a moment of suffering and confusion, a time when everything that seemed to be fixed becomes suddenly unstable. The events of November 2010, with things spinning wildly out of control, certainly meet this definition. But the point of crisis in Greek tragedy is that it leads to catharsis, a sense of things being purged.

Václav Havel, then president of the Czech Republic and himself a distinguished dramatist, used precisely this metaphor while addressing his nation in 1997, when it had been hit by the twin scandals of political corruption and a banking bubble. “However unpleasant and stressful and even dangerous what we are going through may be, it can also be instructive and a force for good because it can call forth a catharsis, the intended outcome of ancient Greek tragedy. That means a feeling of profound purification and redemption. A feeling of newborn hope. A feeling of liberation.”

From that perspective, a cynic might be tempted to remark that the Irish are not even capable of having a proper crisis. We’ve had the unpleasant, painful and dangerous bit – and we’re going to go on having it for the foreseeable future. But we don’t do catharsis.

- Fintan O'Toole, Irish Times, 19 November 2011.

Deciphering the jargon of economic crisis

Frank McNally provides a guide to the crisis jargon in Saturday's Irish Times (19 November 2011). Two definitions that stand out:

Quantitive Easing: The process whereby the number of economists appearing on Irish TV shows is increased indefinitely, in the hope that the country can talk its way out of the crisis, even at the risk of rampant ego-inflation.

Standard & Poor: Adjectives describing the two main types of judgment exercised by ratings agencies when assessing the sub-prime mortgage packages that started the whole mess in the first place.

Thursday, November 17, 2011

More children living in poverty, while the 1% keep getting richer

The Irish children's charity Barnardos yesterday estimated that 130,000 Irish children are now living in consistent poverty (up from 90,000 in 2009). On the same day, in his Irish Times column, Vincent Browne discussed two new reports showing that both the number of millionaires worldwide and the value of their combined assets, have continued to grow since the financial crisis began.

Wednesday, November 16, 2011

Selection of posters and placards from today's student protests in Dublin, Ireland

Thousands of students marched in Dublin today in protest against increases in fees and expected cuts to student maintenance grants in the forthcoming budget. Here is a selection of posters and placards from the march.

"What ever happened to free education"

"we write the future"

"If you're gonna take my education, at least book my ticket to Australia"

"Make the 1% pay"

"No cash, no jobs, no hope"

"Sentenced to debt"

"Pay my fees or pay my dole"

"Feck off fees"

"Emma was here! (But probably won't be next year ... )

"Dumbledore wouldn't stand for this sh!t"

"Beans on toast + fees = toast"

Sunday, November 13, 2011

Blaming the poor for their condition...

Faced with inexplicable inequalities and injustices in society, and feeling disempowered to challenge the status quo, we have a natural tendency to try and rationalize the situation by assigning blame; the unemployed must be lazy, rape victims were "asking for it" etc. In this way we try to evade the unpleasant prospect that such circumstances could befall any one of us.

Oliver Burkeman describes this phenomenon in his latest Guardian column. However, he mistakenly sees this "just world hypothesis" as a difficulty the Occupy protestors will have to overcome. If the majority of us view the travails of those less well off than ourselves as their just desserts, why bother trying to alter "the system"? In fact, the Occupy movement presents an alternative to the vicious cycle of inequality being reinforced by negative stereotyping of the less fortunate members of society. The Occupy protestors force us all to face up to the injustices, to which we have become - subconsciously or otherwise - desensitized. Perhaps even more significantly, the movement also offers a voice of empowerment and the prospect that such inequalities are not inevitable.