Friday 30 September 2016

Why rules which favour the wealthy are unlikely to change

Published 01/07/2014 | 02:30

Arrears and non-repayment rates for investment properties are still very high by international standards.
Arrears and non-repayment rates for investment properties are still very high by international standards.

Economists tell their students there are four main factors of production in advanced economies which are used as inputs to create the outputs we use to make our lives better. These four factors are land, labour, physical capital and technology. I always add a fifth: rules. Rules create winners and losers, and the best place to be is to be the maker of the rules. It's why democracy is so very important. Those who make the rules have to be accountable to those who might suffer under them.

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Any rule is a resource to those who want to impose them. Take a simple rule like the property tax – you own some property, you pay a specific amount in a band related to the value of that property. Who wins? The State's coffers. Who loses? Your coffers, and whoever you planned to spend that money on.

Take another deeper, older rule like debt repayment. We insist in our society that if I enter into a contract with a lender I should pay the principal plus any agreed interest back in full. This rule is perfectly sensible until vast swathes of the population face levels of debt which can't be repaid. Ireland's household debt to disposable income ratio is 196pc, one of the highest in the world. This ratio has fallen by 17pc from its peak in 2008 even as tax rises and wage cuts have hammered disposable incomes.

Arrears and non-repayment rates for investment properties are still very high by international standards. The new insolvency rules, which replaced a truly awful, and ancient, bankruptcy regime, have done little so far to ameliorate the situation for those experiencing stress levels comparable to those felt during wars. Another important rule: Ireland's banks must deleverage, that is, lower the ratio of their loans to deposits, to meet a specified amount. Result? A credit contraction for small firms. Unlike many European countries, Irish small and medium enterprises (SMEs) borrow for working capital, that is, to stay alive. Credit for SMEs essentially equates to survival for many of them.

The Central Bank recently released an important collage of data on how and why SMEs access credit. The Central Bank researchers found the stock of total credit for the SME market has fallen continually since mid-2011. Given the structure of Ireland's SME sector, there won't be any recovery until credit conditions improve, and this report gives us a lot more clarity on what is happening in that sector.

Ireland's recovery, such as it is, will be credit-less. It is a rule that the rich shall get richer. Inequality damages societies and reduces the growth of living standards for the vast majority of people. We know this now conclusively following the work of Thomas Piketty and his co-authors. In the US, Amir Sufi and Atif Mian have shown the top 20pc of the wealth distribution had 15 times the wealth of the middle 20pc of the distribution in 1992. In 2010, the richest 20pc has more than 25 times the wealth of the middle 20pc. The rich are getting richer, for sure.

The rules we have clearly favour the wealthy in Irish society, and any move to change those rules will be ignored, then fiercely fought, then someone will write a report and waste a few years, and then maybe something approaching nothing might be done. Meanwhile, fortunes will continue to amass. Piketty's rule of capitalism, that the rate of return on owning capital is normally greater than the rate of economic growth certainly holds for Ireland in 2014.

Austerity, of course, is a rule. The Columbia sociologist Saskia Saasen has written about austerity's ability to exclude. The government body National Economic and Social Council (NESC) has shown Ireland's jobless household rate increased from 13pc in 2004 to 22pc in 2010. Even during the years of the Celtic Tiger, Ireland's jobless rate was high compared to other European countries. In 2010, there were 9,000 people in our society over 25 who had never, ever worked. That is 9,000 too high.

The Bank for International Settlements, easily the most conservative international institution, warns that the debt crisis risks becoming permanent, as debt levels across the developed world explode and interest rates trend toward zero.

The banking system, which clearly believes there is one rule for them, and one for us, may well be entrenching instability in the system, according to the BIS.

Rules are resources, and factors in the reproduction of the global economic order. The rules, when they insist on austerity, instability, and inequality, are wrong.

Stephen Kinsella is Senior Lecturer in Economics, University of Limerick.

Irish Independent

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