Saturday, 25 July 2015

The Social Democrats' Scandinavian Delusion

First we had Renua Ireland. Then it was the Ross/Fitzmaurice publicity vehicle. Now it's the Social Democrats. No, you are not Bill Murray in Groundhog Day. I assure you that these are all different political parties. However, the sense of deja vu is unmistakeable. Stephen Donnelly, Catherine Murphy and Roisin Shortall have added their product onto an already crowded shelf and much like a shopper in the now famously defunct Clery's, I find myself simultaneously bewildered with choice and yet not seeing anything on offer that I remotely want. Such is life and politics, I suppose. In fairness to Donnelly et al, social democracy is not this author's cup of tea and those wishing to advance it will understandably be aiming their ideas at a different target audience. However, I will proffer them one piece of advice, which is genuinely meant to help not hinder - not like the Daily Telegraph's current campaign to get Jeremy Corbyn elected as the leader of the British Labour Party: Lose the Scandinavian obsession. It will doom your enterprise.

In last week's Sunday Times, Murphy presented her new party's prospectus to Middle Ireland and in fairness to her, some of her observations were surprisingly sensible for someone whose political career began in a Communist offshoot of the Republican movement. I was particularly impressed with her admission - a surprising one for a lefty - that Ireland's headline rates belie how heavily taxed Ireland is, as well as her refreshing proposition - again, surprising for a lefty - that the answer to Ireland's problems was to ensure that the money the government taxes is spent on providing high quality services and entitlements and not wasted. Having been treated over the last decade to a left led by Pat Rabbitte (who believed that incompetent public servants should not be sacked), Eamon Gilmore (who specialised in recycled Keynesian talking points) and Gerry Adams (whose understanding of economics is every bit as impressive as his system for handling sex abuse complaints), it is refreshing to think that there might be a left force that is prepared to do something other than shilling for the public sector. However, having identified a fair question, Murphy then proceeded to trot out a hackneyed and derivative answer: Make Ireland more like Scandinavia.

Scandinavian social democracy has become the middle class left's intellectually lazy single transferable answer to every major point of public policy. I suspect that to the educated left wing mind, Scandinavia represents a sober grown-upness that the chaotic "Bolivarian" revolutionaries of Latin America patently lack and a patrician openness to entrepreneurship and innovation that the more self-consciously working class left wing cultures of countries like Britain and France cannot emulate. Scandinavian social democracy is leftism shorn of the violence of revolution and the gaucheness of proletarianism -  because deep down, we all know that a Volvo is more attractive than a Trabant, smoked salmon is more palatable than coddle and Borgen is a whole lot more highbrow than Eastenders. This, I believe, accounts for the number of times I've met people who advocate Scandinavian social policies and seem not to know even the most anodyne details of what they so passionately advocate. Scandinavia, it would seem, speaks to the emotions in more or less the same way as prestige luxury goods brands like Louis Vuitton and Rolex.

Nowhere is the folly of the Scandinavian fixation better exemplified than in the valorisation of the countries' subsidised childcare systems - which appeal both to the politically correct egalitarianism of the public sector and the unions and the constant quest on the part of Ireland's rent-seeking business lobby to socialise yet more costs to the burdened taxpayer. To understand the concept of subsidised childcare, imagine two couples, each of whom has one main breadwinner and suppose that the non-breadwinner in each couple paid the other €2,000 a month to look after his/her children. The net effect would be that (a) the two parents would sacrifice time with their own children in order to spend it with somebody else's; (b) each parent would earn €2,000 a month, the entirety of which would have to be spent on paying the other; and (c) each parent would have to pay tax on their respective earnings, meaning that each would be financially worse off for no opposable benefit. To each parent, this would make no sense, so why would they do it? To unscrupulous governments, however, the arrangement would generate (a) tax revenue; (b) an extra €48,000 in GDP to make the economy look better than it really is; and (c) create two paying jobs which swell the labour force participation rate and make unemployment rates look lower than they truly are.    

The above example is no fantasy. It is the actual camouflaged effect of subsidised childcare. Instead of inducing two parents to pay eachother, the government taxes the main breadwinner in each couple, finds two people working as, say, retail cashiers, uses the money taken in higher taxes to hire those individuals to work in government run creches and then tells the two couples that they can get their taxes back if the two non-bread winning parents go to work as... retail cashiers. These arrangements allow Scandinavian governments to boast about their inflated GDP, impressive labour force participation and their supposed gender equality whilst having an excuse to drag more money into the public sector. The arrangement does nothing for ordinary citizens, but it sure makes the societies in which they live look good, which, to many people, is what really matters. In the real world, however, most of us just don't have the luxury of living in a Potemkin village in which public policy is driven by aesthetic considerations, which is why creating artificially subsidised double-income households will do no good and some harm.

Of course, a much better question that a social democratic party could be asking is: Why is it that in the bad old days of the 1970s and 80s, households with only one breadwinning spouse could afford to own their own suburban single family homes without needing both spouses to have paying jobs? The problem with that question is, of course, that it raises all sorts of uncomfortable follow-up questions about monetary policy, planning and land use law, building regulations, environmental laws and tax policies? And who wants to do that when you can just mouth off asinine bromides about "social justice"?

Monday, 13 July 2015

The Living Wage and the IKEA Economy

Ironically, the week that saw George Osborne implement his first budget since the May general election in the UK whose signature move was to reduce tax credits whilst imposing on the UK labour market a "living wage" of £9 an hour on all workers over the age of twenty five, coincided with my first trip to IKEA's giant flat-pack furniture facility in Ballymun. My first impression of the place was rather similar to the reaction of the Tory benches to Osborne's big new announcement. There truly is something magical and space-agey about it - laden as it is with touchscreen computers into which customers can input their personal data, massive racks of shelving containing efficiently packed furniture kits stacked several stories above human height and only accessible using forklifts and cleverly designed trolleys that allow customers to push vast weights of furniture around with the ease with which one sees shoppers in supermarkets transport their groceries. Compared to a conventional furniture store, the difference is about as stark as the comparison between a traditional grocery shop and a Tesco. IKEA feels like the future, much like the notion that the Tories have finally realised Harold Macmillan's dream of usurping Labour as the true workers' party has the seductive feel of historic inevitability.

The sad truth about magical feelings is that the reality behind them is invariably more squalid than the fairy dust sprinkled on the object of the besotted observer's fixation leads one to believe. Look beyond the alluring twinkle and behold the prosaic nuts and bolts beneath. And yes, this is IKEA, there are lots of nuts and bolts and Allen keys and screws. Everything that makes IKEA so attractive advertises the dysfunctionality of the society that created it. Take a closer look at IKEA and you will see that what every innovative aspect of the chain's business model has in common is the objective of eliminating the use of human labour from the furniture shopping experience. Dispensing with the need for human labour is, of course, a sine qua non of free market innovation. Schumpeter called the process "creative destruction" and the desire to resist it is one of the most damaging aspects of the political system. However, good old fashioned resource misallocation often masquerades as creative destruction, with labour saving processes responding not to endogenous technology-driven economic change but exogenous incentives created by government. So is IKEA a Schumpeterian machine using technology to re-allocate labour to more productive uses or is it part of the free enterprise system's response to damaging political interference in the labour market? Sadly, the country in which the flat-pack giant was born provides a clue as to the answer.

Everything about IKEA advertises the fact that it originates in Sweden. The trolleys allow customers to ship their goods from the warehouses to the car-parks without the need to pay workers to do so. The flat-pack model allows furniture to be easily fitted into cars instead of customers having to pay for delivery men to transport them in vans and the easy-to-read plans allow the customer to assemble the furniture without paying somebody to do it for them. Delivery and assembly can be provided but they cost extra. The theme even pervades IKEA's restaurants. Drinks and ice cream are self-service. Confectionery and cans are dispensed out of machines. Does this mean that Sweden has become a futuristic technological dynamo which has moved so far up the value chain that its labour force has moved en masse into the creative economy and left its non-professional jobs to the machines? Er, no. Most of the labour re-allocation being effected by the IKEA model is moving the burden of labour, not from workers to machines (which is creative destruction avant la lettre) but from workers to consumers (which is making the world economy more primitive, not less). Small wonder that when the number of annual hours of paid work done by the average Swede is one of the lowest in the western world, the number of hours s/he works inclusive of unpaid work (cooking, DIY etc.) is amongst the developed world's highest. Why is this? Quite simply, Sweden's labyrinthine structure of labour laws, collective bargaining agreements, payroll taxes, social insurance contributions and health and safety regulations makes it extremely expensive and litigiously risky to hire workers - and the lower skilled the workers, the more unprofitable these government impositions make it to hire them.

This is the IKEA economy and it's coming to a labour market near you. The "living wage" law is becoming a cause celebre on both sides of the political spectrum. In the fiscally abundant 20th century, the socialisation of costs seemed to represent the wave of the future, with family income supplements, tax credits, child benefits and subsidised housing being dispensed by politicians. Today, in an era in which the money has run out, politicians like Joan Burton on the left and George Osborne on the right have become infatuated with the notion that the burden of subsidy can be moved from the taxpayer to the employer. They could not be more wrong. If bank bailouts represent an attempt to privatise profits and socialise costs, the living wage represents their equally distortive converse - the socialisation of gains in return for the privatisation of costs. It won't work. Consumers and employers will (as IKEA demonstrates) refuse to pay for the artificial bending of the cost curve. Employers will respond by eliminating labour costs and passing the labour onto the consumer - whose labour remains untaxed and unregulated. Osborne thinks he has trimmed the welfare state. Burton thinks that she can use regulation to get Swedish levels of provision at British tax rates. What they will both get is an IKEA economy - where consumers will pay higher taxes to fund expanded welfare rolls and spend their free time doing DIY. Paying higher taxes for the privilege of working harder - welcome to your Swedish future. 

Monday, 6 July 2015

The Welfare State's Greek Future

In Homer's Iliad, the Trojan prince Paris is challenged to render judgment in a grim beauty contest between the Olympian goddesses Athena, Hera and Aphrodite, each offering him blandishments in return for the sought after affirmation and their undying enmity in its absence. Yesterday, the people of the Hellenic Republic voted in a referendum whose respective options seemed as hopeless as those of the hapless Paris, whose choice of Aphrodite brought him death and the complete destruction of his Kingdom in return for the temporary favours of Helen, Queen of Laconia. Ironically, even this choice would not have been possible without the various sacrifices made to date which Greece's far-left government has opposed tooth and nail. To wit, Greece has forced its finances into a primary surplus, with her entire deficit now financing the country's Herculean debt servicing burden. This has robbed the Troika of an arrow in its quiver. With its fiscal largesse no longer funding the upkeep of Greece's ramshackle government, but simply taking a round trip back to the bank accounts of the very institutions providing financing, the associated leverage has been lost - the late Ted Heath might have called this a "problem of success", since the funders' success in imposing grinding tax hikes and spending cuts in return for continued bailout funds has had the effect of forcing Greece's bloated public sector off the drug of subsidised credit. With the nearly 2:1 margin of victory for the No side, the Greek government now has an overwhelming political mandate to start banking its years of fiscal consolidation into a unilateral default on its debt.

However, if it were that simple, Messrs Tsipras and Varoufakis would have already burned their government's worthless bonds or bought them back from their current owners at a ruinous discount to their face value. They haven't because the Troika has one more weapon in the armoury. A full Greek debt default will result in the ECB withdrawing support for Greece's tottering banks, thereby shutting down Greece's financial system and forcing her government to abandon the euro and re-float the Drachma, a currency whose ensuing meltdown on the FX markets would require the Bank of Greece to maintain penalty rates of interest for an indefinite period of time to stem hyperinflation. This leaves the Greeks with an unenviable choice: keep paying off a massive public debt which will not finance a single new government entitlement or service or leave the euro and face a grim combination of massive devaluation and amplified fiscal (and now also monetary) austerity. The Greeks (people and elites alike) have spent decades setting themselves up for this dark denouement with the laws of financial gravity. However, it's hard not to pity them their choice. At the same time though, it's hard to feel too much pity, especially in circumstances in which a government willing to press the nuclear button of default has made startlingly few of the type of contingency plans which ought to have been considered prerequisites for even the contemplation of such hardball diplomacy - Leo Varadkar's pithy analogy to a government run by a student's union wasn't far off the mark.

Regardless of the wisdom of either choice and regardless of whether the Greek economy continues on its course of slow financial decay under the shadow of a debt mountain every bit as imposing as Olympus or whether it throws itself into the vortex of a new crisis with an uncertain ending, we know enough to know two things already. First off, Alexis Tsipras, irrespective of his triumphalistic preening before the cameras yesterday evening, hasn't solved the fundamental problem of how he can continue to ask Europe to prop up his country's insolvent banks whilst simultaneously refusing to pay off his government's debts to this self-same benefactor. He can choose to default on his government's debt or he can avoid throwing his banking system under the bus and leaving the euro. He can't do both. However, the second fact is less dramatic but, in the long term, much more fundamental. When the dust settles on the current crisis (as it will) and when the Greeks make their eventual accommodation with economic reality (which they will have to), their economy will be a hollowed out shell with North African productivity and Northern European demographics. With its electorate's vacillation between the "same old, same old" of New Democracy, PASOK and POTAMI on the one hand and the dangerous fantasies of Syriza, the Communist Party and Golden Dawn on the other, it is now clear that Greece has no prospect of developing an organised constituency for serious economic reform any time soon.

Greece will remain a social democracy, with its punitive taxes, suffocating regulations and somnolent and subsidised public sector forging a sclerotic economy in which the providers of health, education, security, transport and infrastructural services will continue to extract monopoly rents from the economy, where the government will continue to use redistribution to interfere with the rational incentive systems that get people out of bed in the morning and where an adolescent left and a gerontocratic right will continue to fight over the carcass of late twentieth century prosperity. Without constant deficits to give the populace governmental luxuries for which their taxpayers won't pay, consumer credit to generate the consumption that the country's soggy productivity will not or financial bubbles to generate the temporary elixir of illusory wealth, what this adds up to is an economy in which double digit unemployment is permanent, in which standards of living are low and stagnant, in which those who don't work will have little prospect of ever doing so and in which those who do will have little prospect of the western lifestyle to which they felt entitled. This is social democracy in the 21st century and this is why Greece is causing the world so much stress. Greece's economic problems have not been caused by "austerity" - rather, the latter was made inevitable by the former. On the contrary, Greece is simply what an honest social democracy looks like, with its population forsaking creativity, entrepreneurship and dynamism for the illusion of security and equality. Greece has simply been a country which was both foolish and unlucky enough to allow all of its unviable economic indices to converge into the first postwar sovereign default to occur in a western country. Their die is cast. The question is whether the rest of Europe will react with smug complacency or whether we will learn the true lesson of this Greek Tragedy.