The surge northwards was a PR own goal

The six mile tail back on the road into Newry, splashed in glorious full colour on the front page of today’s Indo, helped yesterdays strike undermine the strongest argument opposing cuts in public sector pay. With various studies putting public sector pay approx. 20% higher than equivalent private sector pay levels (without taking into account superior benefits), the main argument against cuts was that they would reduce the amount of money being spent in the Irish economy, leading to a shrinkage in the total size of the economy and in tax returns to the state.

Union economists such as Michael Taft have produced estimates showing that the size of the deficit reduction of a given cut in spending may turn out to be a fraction of the size of the cut. It is highly unlikely that the models employed took into account the “Newry Effect” – that with significant pricing differentials between north and south, money borrowed by the Irish state to pay state employees is not being spent in this state. In all likelihood spending cuts may well be less deflationary than first thought. Regardless, those who travelled north to shop yesterday fundamentally undermined the argument that the rest of us should borrow more money, and pay more tax to maintain their salary levels because it is beneficial to this (southern) economy.

  • kensei

    Mack

    Or it may force more people to go North in to try and stretch smaller budgets further, and excaberate the “Newry effect”, whih, um, is laready happening.

    The impact of cuts will be deflationary, and will impact aggregate demand. That is as sure as the sun comes up tomorrow. That has to be balanced off against how screwed the eocnomy would be if its not done.

    But with no model, what you have is just ideological idle talk, Mack.

  • hector

    que?

  • Mack

    Kensei –

    But with no model, what you have is just ideological idle talk, Mack.

    This is the second time you’ve made this particular comment, when I’ve actually put forward a logical proposition you’ve attempted to dismiss it out of hand as idealogical. If it is idealogical it is playing on your home turf of Keyenesian economics. It a simple fact that if the stimulus or spending leaks out it doesn’t benefit the economy. The degree to which it is spent on local products and services determines much of the (second round) benefit of the spending.

    What are the estimates of lost revenue something like €800? If that’s right that implies around €5.3bn being spent up north each year. Then factor in the impact of competition in the south (Tesco switching to British farmers is one that has been published, I know of other unpublished switches via friends).

    So, do you disagree, that if larger proportions of government spending is spent either outside or economy or on foreign imports – the impact of spending cuts is less deflationary?

  • Simples

    while moneyin

  • Mack

    Kensei –

    On your actual counter point (if you hadn’t tried to dismiss my entire argument 😉 ).

    Or it may force more people to go North in to try and stretch smaller budgets further, and excaberate the “Newry effect”, whih, um, is laready happening.

    Tax rises could well do the same thing, and would effect rather more people. But the fact that it is already happening and wide spread – means that the deflationary impact of cuts has been reduced somewhat from what it otherwise would have been.

    Btw, Keynes recommended competitive devaluations to restore competitiveness, protect jobs etc. So maybe both sides in the Irish debate are cherry picking Keynesian economics?

  • Mayoman

    Mack, an honest question. Do you know on what basis the 20% higher figure is calculated? Is it a simple mean of private vs public (which would artificially lower private wages due to the very large number of low paid jobs in this sector, I’m thinking waitresses, hotel staff, other lesiure, parts of manufacturing etc), or does it account for job function? That is, compare wages for similar types of job? I have seen in reported that the calcuation is weighted for age, qualifications and age, but not actual job function, or numbers in ‘low’ versus ‘high’ wage functions in each sector. Can qualifications alone properly adjust for this?

  • kensei

    Mack

    This is the second time you’ve made this particular comment, when I’ve actually put forward a logical proposition you’ve attempted to dismiss it out of hand as idealogical. If it is idealogical it is playing on your home turf of Keyenesian economics. It a simple fact that if the stimulus or spending leaks out it doesn’t benefit the economy. The degree to which it is spent on local products and services determines much of the (second round) benefit of the spending.

    Mack, you may have put forward a “logical proposition” but what are your axioms? It is as easy to suggest that things will run the other way, and you are ignoring the fact that this is occuring already. You have no evidence. Without it, you are just beating your favourite whack the public sector drum. Again. And if you are only going to quote from economists thats uit your view, I’m going to point out that you ahve an ideological tilt — multipliers in particular are subject to all sorts of ideological bunfights.

    What are the estimates of lost revenue something like €800? If that’s right that implies around €5.3bn being spent up north each year. Then factor in the impact of competition in the south (Tesco switching to British farmers is one that has been published, I know of other unpublished switches via friends).

    So, do you disagree, that if larger proportions of government spending is spent either outside or economy or on foreign imports – the impact of spending cuts is less deflationary?

    I think you need to clarify your agrument because I don’t understand it. I know nothing about economics, so this may make no sense at all and wind up making your argument for you but if we have:

    X = Government Wage Bill
    Y = Expenditure going North
    Z = Net money recycled to the Irish economy

    Z = X – Y

    We cut the wage bill by 10% to get X’. What happens?

    Z’ = X’ – Y’

    Y’, because Y is not fixed. If Y’ also reduces by 10%, then we have a 10% impact in overall demand. If Y remains the same, the impact on Z is actually more than 10%. If it goes up, then any impact is even further magnified. It could go down, but that seems unlikely.

    You have the same or greater resources going North, but it’s out of a smaller overal economy so its impact is relatively greater. How is this not more deflationary?

  • Dave

    True, Mack, and if you look at figures for the British Government £2,000 car scrapping scheme that was used as part its Keynesian fiscal stimulus muppetry, you’ll see that the main benefiter was not the British economy but the German and French economies. Globalisation has made Keyensian economics even more irrelevant and destructive to national economies. Keynesianism belongs to a protectionist era, and is now only used as propaganda by governments to provide a token justification to expand the role of the state and as similar propaganda by the likes to Taft to justify excessive wages.

    Marvel at the amount that these public sector union official are paying themselves:

    General Service Grades – Pay 2008
    (01 Sep 2008)

    Revised pay with effect from 1 September 2008 for General Service Grades

    SECRETARY GENERAL

    €221,929

    DEPUTY SECRETARY

    €177,547

    ASSISTANT SECRETARY

    €131,748 €137,737 €144,225 €150,712

    PRINCIPAL (HIGHER)

    €92,730 €96,555 €100,392 €104,217 €107,485 €110,9281 €114,3662

    PRINCIPAL

    €86,168 €89,819 €93,449 €97,109 €100,191 €103,3891 €106,5822

    ASSISTANT PRINCIPAL (HIGHER)

    €72,681 €75,448 €78,226 €80,989 €83,760 €85,375 €88,1351 €90,8842

    ASSISTANT PRINCIPAL

    €66,179 €68,656 €71,132 €73,609 €76,087 €77,520 €80,0161 €82,5202

    1 After 3 years satisfactory service at the maximum.
    2 After 6 years satisfactory service at the maximum.

    Revised pay with effect from 1 September 2008 for established officers appointed on or after 6 April 1995 paying the Class A rate of PRSI contribution and making an employee contribution in respect of personal superannuation benefits.

    SECRETARY GENERAL

    €233,610

    DEPUTY SECRETARY

    €186,891

    ASSISTANT SECRETARY

    €138,683 €144,986 €151,816 €158,644

    PRINCIPAL (HIGHER)

    €97,617 €101,636 €105,675 €109,705 €113,141 €116,7601 €120,3822

    PRINCIPAL

    €90,702 €94,550 €98,370 €102,218 €105,463 €108,8291 €112,1912

    ASSISTANT PRINCIPAL (HIGHER)

    €76,510 €79,421 €82,338 €85,253 €88,169 €89,872 €92,7651 €95,6652

    ASSISTANT PRINCIPAL

    €69,659 €72,268 €74,871 €77,483 €80,090 €81,593 €84,2251 €86,8652

    1 After 3 years satisfactory service at the maximum.
    2 After 6 years satisfactory service at the maximum.

    http://www.ahcps.ie/General_Service_Grades__Pay_2008/Default.358.html

  • otto

    I’ve a small business. I pay employer’s national insurance of 12.8%.

    If you wanted to create a 7% deflationary reduction in wage costs in the North you could just cut employer’s national insurance to 4.9% (112.8% down to 104.9%). If this was funded by an increase in personal income tax or even corporation tax I for one would not complain (better a bird in the hand with reduced wage costs that a bigger slice of retained profit in the bush).

    Does the same hold for the South?

  • Mack

    Kensei –

    That’s a good point. You’d also have to include savings (SV) and other external expenditure (EE).

    I would imagine that a certain proportion of Z is fixed also – either because the purchases have to be provided locally or it’s cheaper to purchase them in the south, e.g. Cable tv, broadband, electricity, gas, oil, coal, petrol, rent, public transport, taxis, entertainment, financial services, local services (mechanics, plumbers, hair dressers etc) and perishables such as milk and other foods that it’s more convenient to purchase in the south. I’d have thought at least some portion of Y would include luxury goods (plasma tvs and the like), that if necessary would be sacrificed next to local neccesities covered in Z.

    The argument has always been though that lower paid workers spend proportionally more of their income on Irish (southern) goods and services than higher paid workers. On that basis would it be reasonable to assume that Z would hold up better than, certainly SV and EE? Perhaps also even Y?

    *I’ve edited this, as the previous acronyms managed to spell out a word (sex as it happens) should have checked first, d’oh!*

    Mayoman –

    The raw means put public sector pay around 48% ahead. The ESRI and CSO have tried to take different factors into account, but it’s far from perfect. It’s a difficult concept to measure, and it’s unfortunate we went down this route with benchmarking in the first place. Had we not, we probably wouldn’t be in this mess.

  • Mack

    Otto – Fine Gael are calling for something along those lines.

  • kensei

    Mack

    Sorry, maybe that was a bit confused. I didn’t mean to suggest X was the entire economy, just looking at the impact of reduction – if Z is the proportion that goes back into the economy, does a 10% decrease in X imply the a bigger or lessor affect on Z? Obviously things are more complicated, people could save more or less of their wages for example but I just wanted to keep things simple case. It still looks likely it would put more pressure on Southern retailers to drop prices than less to me.

  • Mayoman

    Ok Mack, thanks for the answer, although it does make me think the public service unions have a point in saying the studies are flawed.

    To add another point, just seen that the dfferential in 3rd level qualified people is quite large: 1/3rd versus 2/3rds. So even if you balance on qualifications (i.e. control so you are matching pay for the same level of qualifications), the mean is going to be higher. 33% higher with 3rd level quals and only 20% higher wages may, in a certain light, look quite good value?

  • otto

    Did you mean this thing in Fine Gael’s NewERA policy Mack?

    “Offer employers who increase overall employment levels a PRSI exemption for new staff recruited over the next two years, or an alternative of a €6,000 wage subsidy per employee over the same period”

    Sounds like a dog’s dinner to me. It’s a reduction for new staff which is supposed to help save existing staff? When do people get their €6,000? Up front or in arrears?

  • Makabob

    See not only shoppers moving north, I have been what looks like an internal document which is saying that FF are going to launch a Fermanagh branch in Enniskillen, it says

    “Fianna Fail plans to launch its new Fermanagh Forum this Sunday, 29 November 2009, thus continuing the party’s campaign to establish bases in every county across the North where its membership is steadily growing.”

  • Mack

    Mayoman –

    When you control for experience, qualifications etc. the gap is around 20%.

    While the Unions may have a point that the studies are flawed (and they certainly aren’t perfect) they were happy enough to push for the equally flawed benchmarking process that caused the problem in the first place.

  • Mack

    Mayoman –

    To make the above statistics clear.

    If you calculate the mean salaries in public and private sectors for workers with 3rd level qualifications and similar levels of experience, public sector salaries come out significantly ahead.

    Here is some details on the ESRI study (26% premium)

    http://www.rte.ie/news/2009/1009/economy.html

    And the CSO multi-variate analysis (19% premium)

    http://www.cso.ie/newsevents/pr_nationalemploymentsurvey2007supp.htm

    Note – these studies do not take into account public sector pensions estimated to be worth an additional 30-40% of salary

    Neither do they take account of the value of a secure job.

  • Big Bopper

    If there is a freeze on public sector recruitment, and the private sector contracts further, this will lead to an even larger gap.
    Public sector “workers” will become increasingly resented. This already happens in NI where civil servants are seen as highly paid dole recipients.
    They are easily spotted in their designer gear enjoying a long lunch in trendy pubs and expensive restaurants.

  • Itwas SammyMcNally whatdoneit

    Mack,

    Surely someone should offer home delivery to stop all this traffic congestion – if Tesco etc dont offer to cross the border.

    Nice little earner there for someone – perhaps a bit of light double jobbing for a teacher?

    http://www.irishcrossbordershopper.com doesnt seem to be taken.

  • Mayoman

    Thanks Mack, need to peruse those figures. A quartile analysis would be nice. Comparison of wage levels for each ascending quartile of earnings (mean of top 25% of private earners vs mean of top 25% of public earners etc). Then match that to the mean tax payed by those in each quartile. That would show up nicely who was costing the country.

    On the Newry effect, its market forces in action. The stores/govt did nothing about overpricing when times were good and ‘rip off Ireland’ was in full flow. Doesn’t help now, but can’t be helped anyway. Its the way the right wanted it. How to avoid the right’s mistakes in the future is the big question.

  • Mack

    Mayoman –

    Its the way the right wanted it

    Perhaps Fianna Fail were comfortable with it, they did feck all about it. Support for price gouging certainly shouldn’t be right wing, there’s a difference between being pro-business and pro-market, that unfortunately many politicians (right and left) fail to understand.

    http://sluggerotoole.com/index.php/weblog/comments/excellent-series-of-articles-on-market-economies

  • Mayoman

    I’ll have a read of those links Mack. I think you hit the nail on the head with FF’s attitude.

  • Dave

    Except, Sammy, that should be http://www.irish-british-crossbordershopper.com since the border refers to two separate sovereign states. You cannot cross a border into the same state that you left.

    Keynesian muppetry relies on the ability of the state to recoup circa 40% of the amount of the spending that it engages in. In other words, it assumes that the state is protectionist and that it can contain the spending within its borders, thereby deriving benefits in the form of employment, investment, taxation, etc. That doesn’t apply when the spending (in this example, its spending on public sector wages) is spent outside of its borders, i.e. in the United Kingdom.

    This is what Obama found to his cost when he realised that using Keynesian as cover for socialism would only be effective if he could introduce protectionism – the cost being that the protectionist policies he proposed to introduce to contain the government spending within his border caused outrage from other states and from free market fraternity, causing him to delete the offending protectionist measures and allow the state spending to be wasted. The same applies within the EU where state spending cannot be contained within the state, benefiting other states and not the state that is spending.

    That is why Keynesian has been rendered obsolete by globalisation. The only reason it is still used is because governments use it to expand the state; socialists use it as cover for their policies, etc – and in the Taft example, vested interests use it to justify their excessive wages. Indeed, they should follow that logic a bit further and argue that they should be paid a minimum of one million each, thereby ushering in another Celtic Tiger period.

  • Observer

    The amount of money being lost to the exchequer through shopping in Newry and further North is fairly piddling when put in the context of its overall borrowing costs — approx 500 million euro set against a deficit approaching 30 billion.

    As for the hype regarding the tail-backs on the M1 being caused solely by public sector workers — the schools were off — I wouldn’t be surprised if their ranks were swelled by plenty from the private sector.

    Had to laugh at ISME’s reaction to the Newry story. Mark Fielding remarked sarcastically ‘that’ll help save the economy.’

    Excuse me a minute Mark — its your members who have contributed to the price-gouging in the 26 counties. If you want to stop people legitimately taking advantage of a strong Euro and cheaper prices then tell your folks to stop taking the p**s.

  • Mack

    As for the hype regarding the tail-backs on the M1 being caused solely by public sector workers—the schools were off—I wouldn’t be surprised if their ranks were swelled by plenty from the private sector.

    Eh? Private sector workers were at work.

  • Alanbrooke

    Why shouldn’t Southerners spend their money where they want?

    Wasn’t that part of what they voted for in the Treaty referendum with full cross-party support ?

  • Mack

    Alan of course they should be free to spend their money whereever they want. The issue here is whether the state should continue to borrow huge amounts to fund higher salaries which will then be used to purchase good and services in another state?

    Is it sensible for the (southern) Irish state to run up a huge debt, that will have to be paid by (southern) Irish taxpayers, to fund the Northern economy? I would have thought not…

  • Observer

    Whether they cut public sector salaries or not, people will continue to shop in Newry. Shopping in the North also doesn’t mean diddely squat in the overall context of the public finances.

    For years, people from the North have been heading to the Ballymac filling station and have been heading to pubs, clubs and restaurants in Dundalk. It works both ways. Anything else is protectionism.

    The people who should be vilified are those who stood by and allowed retailers to turn the Republic into one of the most expensive places in the world.

    As for private sector workers shopping on Tuesday — I’m pretty sure part-time workers and the self-employed are not adverse to taking some off to do their Christmas shopping when they get a chance.

  • Mack

    Observer –

    As for private sector workers shopping on Tuesday—I’m pretty sure part-time workers and the self-employed are not adverse to taking some off to do their Christmas shopping when they get a chance.

    That’s certainly true. I think the extra weekday traffic, and hence the vast bulk of the shoppers was due to strikers heading up. Part-time workers and self-employed workers can head up any day they like and so would not be especially concentrated on Tuesday. Wrt to parents of school age children – I’d imagine stay-at-home-mammies would be less likely to travel up alone with the children in tow, and most double income families would probably be paying the child minder extra than wasting a valuable holiday (20-22 per year) on a day off for this. Certainly I don’t know anyone who took a day off…

  • self employed (ex)

    Observer
    All public sector ‘workers’ are part-time (same in the North), they just get paid -very handsomely- a full time wage.

  • Mack

    Whether they cut public sector salaries or not, people will continue to shop in Newry. Shopping in the North also doesn’t mean diddely squat in the overall context of the public finances.

    That’s also true (sort of). The lost tax revenue is significant but is hardly the cause of the fiscal crises, the lost jobs at Irish retailers and suppliers is a big issue (the company adjacent to where I work, are seriously struggling atm).

    The argument against cutting salaries is that the money is being spent in the south. While that is true for the largest portion, it appears significant amounts are being spent across the border. So if we cut back on salaries and workers cut back on plasma tvs bought in Newry and foreign holidays – there is no deflationary effect.

  • Brian MacAodh

    I have no experience working in or with the public sector in ROI-someone could speak to their experience hopefully. I’m guessing the environment there is similar to the one where I work now (I am a contractor for the federal government in DC and am embedded with mostly government workers). The benefits for these workers are great, working beyond 40 hours is rare, it is much less stressful than private sector (for the vast majority of positions)and in any team of 10 workers there are 4 more than necessary.

    At least in the State’s the government workers (particulary at mid-manager levels and up) are make substantially less in gross salarey than the private sector. It’s a payoff some decide to make for (unheard of) job security, flexibile hours, and good benefits.

    I doubt the beauracracy of one nation is much better than any other, but even if it is in NO state should public sector workers make more than private sector workers. By the nature of their work there jobs are more secure and their employers won’t go under (let’s hope not).

    How did it ever get that way??? Has it always been that way???

  • Mack

    Actually to correct the above – it doesn’t really matter whether the plasma is bought in Newry -as an expensive imported good it’s purchase in the south would only be of minimal benefit.

    Kensei

    If the spend in the north is fixed – it’s gone anyway – there is no multiple to be gained from it. If the workers cut back on other purchases (luxury imported goods favoured by higher earners) regardless of whether that is in the north or south – then that is not deflationary..

  • Brian MacAodh

    excuse my spelling/grammar errors above…

  • Mack

    Brian –

    Two rounds of ‘benchmarking’ in the last decade gave huge pay rises to public sector workers.

    It’s also important to note that pay rise means something different in the public sector than in the private sector. They have an additional concept of an ‘increment’. So you get your increments every year, which are set out in a salary scale. Pay rises in the public sector relate to increases in the amounts paid at each point in the scale. So when they speak of a 5% payrise, they mean 5% + 2% increment, etc.

    According to the Unions the public sector are on a pay freeze – which means no payrises, but increment have been paid. (In fairness public sector workers have in the last year started to pay on average 7% towards their gold plated pensions)

  • Observer

    Mack. Your line of argument strikes me as slightly mad — i.e. making salary levels contingent on where you think the money might be spent.

    The southern economy — like the public sector — needs to go through a sharp and painful correction.

    The fact that Newry is still significantly cheaper than anywhere in the 26 counties is outrageous.

    The British retailers who operate across the island should be forced to explain how they make such massive profits in the Republic and the financial regulator needs to grow a pair of balls.

    If smaller retailers are struggling then they need to look at themselves. It might sound cruel, but that’s how capitalism works.

    Hopefully, Newry and other towns like it will eventually help drive down prices on the rest of the island.

    The jumping up and down by Lenihan, Coughlan etc, is sickening. They don’t have to go to Newry to do their shopping.

  • Mack

    Observer –

    That’s not quite my line of argument, but I’m sure Dave would agree with you on Keyesian economics. Where the money is spent is crucial for Keynesian stimulus to work.

    The Unions are arguing cutting public sector salaries are deflationary, i.e. workers spend that cash in the Irish (southern) economy, supporting Irish retailers and suppliers. Cut public sector salaries, they say, and Irish private sector workers will be unemployed.

    That now appears not quite to be the case. Some of that money is being spent outside the state, and within the state increasingly on imported goods (re – Tesco’s decision to switch to British importers). This means government borrowing (a Keynesian stimulus equivalent) – is supporting other economies not ours. This is madness…

  • Brian MacAodh

    “Two rounds of ‘benchmarking’ in the last decade gave huge pay rises to public sector workers.”

    That tends to be a problem-raises are made in times of excess and rapid growth…but when the bubble breaks cuts are very hard to make.

    As I’m sure has been pointed out, one can’t forget the that every euro cut from the budget saves the government more than 1 euro. ROI is borrowing a hell of a lot of money and is competing in the capital markets with other, bigger countries to raise this money. A defualt down the line is not out of the question.

  • Observer

    Mack,

    I can’t help feeling you’re focusing on a side argument.

    The impetus behind cutting public sector pay is two-fold.

    i) it reduces the state’s out-goings

    ii) it helps deflate the economy — a hugely over-inflated economy. By bringing down wages in the public sector this generally brings down wages and prices across the board.

    Considerations about the North are simply not on the agenda.

    If you look at the basket of goods used by the CSO to gauge inflation — punters in the south are paying more than they were in the summer of 2006 for a whole range of items. This is a comparison with boom-time ‘Rip-off republic’ prices.

    Many retailers, suppliers and service providers still aren’t getting the message. Government is doing little to encourage them.

    Either they do that or build a big fence.

  • Mack

    Observer –

    That’d put you in the mainstream camp. I was addressing the arguments made by the Union’s, on the terms in which they are made. While the north isn’t specifically on the agenda – the ‘open’ nature of the Irish economy (and the tendancy of fiscal stimulus to leak out overseas) certainly is..

  • the future’s bright, the future’s orange

    not only are southerners spending more money in NI, but I imagine less northerners are heading south of the boarder? Would that be fair comment. For example, I’m heading down to dublin for the rugger. In the past, I would have got down early, had a few jars, lunch, watched the match, jars, hotel and back on sunday. This weekend, just driving down and back on the one day.

  • Mack

    the future’s bright, the future’s orange –

    Not sure. Prices have come down a lot now, very cheap hotel rooms if you’re willing to go a bit further out. Pints cheaper too..

    http://www.boards.ie/vbulletin/showthread.php?t=2055500568

  • otto

    Factors which might increase southern prices include

    1. relatively higher labour costs
    2. historical exchange rate abuse by GB based suppliers

    I buy quite a lot of stuff from Euro-zone based suppliers. In January many of my suppliers raised prices 20% as the Euro/Pound exchange rate dropped from 1.20 to parity. I’ve yet to see decreases as the rate stabilises at 1.10. Have Irish retailers suffered the same naughtiness from sterling area based wholesalers and transfer-pricing parent companies using past currency fluctuations as a one way ratchet on pricing?

  • Mack

    Otto –

    Prices have been falling here quite consistently (and significantly), I haven’t seen any rises in well over a year (except perhaps in services like electricity). I noticed a massive rise (20-25% since the summer) in a particular electronics product in the UK yesterday the Irish price held steady (difference wiped out).

  • kensei

    Mack

    If the spend in the north is fixed – it’s gone anyway – there is no multiple to be gained from it. If the workers cut back on other purchases (luxury imported goods favoured by higher earners) regardless of whether that is in the north or south – then that is not deflationary..

    You can’t just say that people will stop buying buy ticket items in the North. They are buying nappies too. It’s all about aggregate demand.

    What my little thought experiment implies is that a 10% reduction in the wage bill does not correspond to a 10% to that component of demand to the economy. It is potentially bigger, because the amount of money in circulation is actually smaller due to the bit getting leeched off Northwards.

    Now it is probably unreasonable to suggest that people will not also reduce purchases that will impact the Northern bit. But you risk also driving more demand up there to save money so what happens is unpredictable. Unless it somehow has a big impact on spending in the North, it’s probably more deflationary than you think whatever way you cut it.

  • Itwas SammyMcNally whatdoneit

    Observer,

    I agree it cuts both way.

    Mack,

    is there a simple but rigosous study that explains EXACTLY why there are such price differntials (say on the top 10 psend items). Evrytime I have heard it debated on RTE it always seems as if no one actually understands and can explain the differentials.

    As mentioned previoulsy to have an informed debate we need to see the a comparison of the respective figures ie what Northerner spend in the South and vice versa.

  • Mack

    Kensei –

    It is potentially bigger, because the amount of money in circulation is actually smaller due to the bit getting leeched off Northwards.

    I don’t think so, as shoppers are purchasing nappies anyway, and if they’re spending that money in the north now then it’s already lost to this economy.

    In order for your though experiment to hold, the shoppers would have to sacrifice Irish products and services (not northern, or imported products, or cut back on savings or any other alternative). Given that these make up a larger proportion of lower income groups earnings – it’s reasonable to assume that they disproportionately contain essentials provided locally.

    Most of our luxury goods are imported – whether it’s cars, household appliances, furniture or foreign holidays (hidden imports). It doesn’t make a huge difference whether these are purchased in the north or south (although it does make some).

  • Mack

    It Was Sammy –

    Tesco claim there is a 12% differential (although a consumer organisation claims 18%). VAT differences alone would account for 1/2 or 1/3 of the differential depending on who you believe.

    Tesco have dropped their prices significantly recently – they’ve done this in part by switching to British suppliers (even switching from an Irish subsidiary to a British subsidiary of the same companies).

    Irish suppliers claim they can’t compete because of costs – commercial rents (which often have clauses only allowing upward rent reviews, and at the minute banks and commercial property management agencies are keeping properties empty rather than rent them out as mark-to-market accounting regulations would force write downs and require capital payments to the banks which the property management firms can’t afford), commercial rates, the highest electricity prices in Europe, wage costs at the lower end of the scale (second highest gross minimum wage in Europe, despite being mid-table on gross wages generally) & professional fees (which are high as they are often state protected from competition).

  • Itwas SammyMcNally whatdoneit

    Mack,

    but thats precisely the point – one fecker claims this the other claims that.

    Surely it is not that complicated. There are factory prices, (there are wholesale prices? )and their are retail prices. Surely someone can look at the top ten items and see where the differential lies with allowance made for currency at each stage.

    No?

  • greagoir o frainclin

    I saw on RTE’s Primetime during that week folk working in the public sector are earning up to €55,000 and €60,000+ a year!

  • Mack

    Itwas SammyMcNally whatdoneit –

    You’d think – stores tend to change prices even store to store depending on the demographics they get, so maybe it is a little complicated. There’s a good chapter in the Undercover Economist on that.

    In terms of groceries, you’d barely notice the difference, in fact I think some of the time it’s cheaper down here.

    Alcohol is still a lot cheaper up north, and big ticket items for the wean are cheaper up there too (car seats etc).

    At this stage I’m worried about jobs down here. We have a relatively hard currency, people with jobs are doing well, while more and more people are being thrown to the wolves – and per Pete’s thread perhaps an entire generation…

  • Mack

    greagoir o frainclin –

    They were heralded as ‘low paid’ too. The median salary was €25,000 in 2006, it’s likely lower today (now in fairness, that would be dragged down significantly by part-timers) – but €50k is a good wage. It’s around about the top 30% of earners.

  • Itwas SammyMcNally whatdoneit

    Mack,

    there should be clarity. end of.

  • kensei

    Mack

    I don’t think so, as shoppers are purchasing nappies anyway, and if they’re spending that money in the north now then it’s already lost to this economy.

    You are getting away from your original point. It is a relatively bigger drag on a smaller economy, and therefore increases price pressure.

    In order for your though experiment to hold, the shoppers would have to sacrifice Irish products and services (not northern, or imported products, or cut back on savings or any other alternative). Given that these make up a larger proportion of lower income groups earnings – it’s reasonable to assume that they disproportionately contain essentials provided locally.

    Most of our luxury goods are imported – whether it’s cars, household appliances, furniture or foreign holidays (hidden imports). It doesn’t make a huge difference whether these are purchased in the north or south (although it does make some).

    In which case you are contradicting yourself. If Northern shopping is mostly large, imported, goods, then apparently this has no impact and the North shopping can be discounted when considering deflationary impact. I don’t thik you can take your assumption – people are driving fairly largely distances to do their weekly shop, not just buy TVs.

    Given this will happen, it’ll be interesting to see what happens to Southern Euros flowing North.

  • Mack

    In which case you are contradicting yourself.

    No. That spending (northern) is gone – where it lies on the scale of luxuries to essential doesn’t matter in itself. Undoubtedly some of it will be neccesities some of it luxuries.

    What does matter though is what the marginal purchases are (which will always be further up the scale). We know though that the bulk of the money recirculated in the Irish economy is spent on essentials (i.e. it’s a fixed spend). The marginal Euro is spent on Imports, or saved.

    Before NI –
    TotalIncome = Imports + Savings + Recirc

    After NI

    TotalIncome = (Imports+NE) + Savings + (Recirc-NE)

    NE=Newry Effect

    Shopping in NI has reduced consumer spending in the republic and increased imports.

    GDP = C + I + E + G

    (C = consumer spending, I = capital investment, E = net exports (gross exports – gross imports), G = government spending)

    The Newry Effect reduces E (net exports) by increasing imports and also reduces C (consumer spending).

    We can’t affect the NE effect on C by cutting government spending – that component is lost to us.

    We can reduce imports (marginal spending on non-essentials) and thus increase E and reduce G (by cuttting current spending). The question is, will the increase in E offset the decrease in G ? What will be the impact on C? I imagine as C has already fallen, there will be some impact, but a reduced one of cuts in G.

    * I’ve updated the above section to make the reasoning a little clearer.

    If reducing G has less impact on decreasing C, than presumed in the original models, and more impact on increasing E, then the effect of reducing G is less deflationary than the first thought.

  • kensei

    Mack

    GDP = C + I + E + G

    Those terms are related. C is clearly dependent on the slice of G that represents public sector wages. So cut G, cut C, and you mulitply your impact on GDP – more deflation. But G is also going impact on I too.

    So if we have

    G = (PSW + OE) (public sector wages / other expenditure)

    C = (PSS + OS) (public sector spending + other spending)

    Then on a very simple model (no savings, other income etc) for clarity:

    PSW = PSS

    Cut PSW 10%, 10% reduction in PSS

    but the reality is:

    PSW = PSS + PSNE (public sector newry effect)

    Let’s rephrase that:

    xG = yC + zI, with x, y and z various fractions. Those terms are all related to some degree. Cut G = reduce C, reduce I, multiply GDP effect.

    If PSNE, stays the same, then a 10% cut in PSW implies a more than 10% cut in PSS. Trivial example

    10 = 8 + 2

    9 = 7 + 2

    1/8 = 12.5%

    In order to for things to be less deflationary than you thought, PSNE would need to be cut more than the amount you cut PSW. Which is *possible* if it really is all TVs and holidays, but you could well drive more people and money North. Perhaps the big weekly shop tries to cut out the need for smaller things during the week. Perhaps it is suddenly worth the hassle to get the Christmas presents North. And so on.

  • Mack

    Kensei –

    Which is *possible* if it really is all TVs and holidays,

    Yep, it is critical which spending is cut. More imports to force E to rise (net exports) faster than C falls. If it forces more people north then that may increase imports balancing out that effect somewhat.

    I am assuming that there is a core of essentials represented in C, that won’t change and that cutting G will primarily affect imported goods (the fall in C, being compensated by a rise in E).

  • kensei

    Mack

    I am assuming that there is a core of essentials represented in C, that won’t change and that cutting G will primarily affect imported goods (the fall in C, being compensated by a rise in E).

    Which looks to me an unsafe assumption, given that people are goign North to buy their weekly shop and maybe alcohol and Christmas mwans bigger purchases of soem description. If you were asking me to take a stab, I’d say money flowing to Newry would drop, but less than the overall fall.

    No doubt there’ll actually be data to back it up. In any case, there is clearly a multiplier off the back of reducing G.

  • Mack

    Just thought of this – if take your example, assume a 20% saving on items actually purchased (I’d wager it’s higher as shoppers are deliberately choosing the savings & stocking up)

    (Without NE)
    10 = 10

    (With NE)
    10 = 7.6 + 2 + 0.4 (savings)

    10% reduction, taking an extreme view – it all comes of the southern spend

    9 = 7 + 2

    =7.89% fall in spending from 10% fall in wages

  • Mack

    By the way – the multiplier from I is much higher than from G (according to Michael Burke of progressive-economy – in comment to me here :-http://www.irisheconomy.ie/index.php/2009/11/24/pre-emptive-strikes-and-public-sector-pay/#comment-25671).

    Cutting G and boosting I makes real sense at the minute, especially seeing as I has fallen by 35% or so this year!

    http://www.finfacts.ie/irishfinancenews/article_1017047.shtml

  • kensei

    Mack

    Damn I’s should E’s above. But yes, you’d rather be sticking limited resources into investment than current expenditure. Not only will it give a bigger bang for buck, but it will have positive affects going forward.

    In any case, you are cheating, because you just nuked savings.

    Without NE would be

    10 = 9.6 + 0.4

    9 = 9

    0.6/9*100 = 6.25%

    You ain’t getting off that deflationary hook so easily 🙂

  • Mack

    Kensei –

    The 0.4% savings comes from shopping in Newry instead of Dublin. It doesn’t exist unless they shop up there.

    In effect the state can confiscate the savings made in the north by public sector workers by cutting their salaries. The bigger the saving, the less deflationary the cut..

    Machiavellian or what?

  • kensei

    Mack

    Still cheating. You are assuming the 0.4 in savings is going to be spent entirely in the Southern economy. In which case

    10 + 7.6 + 2 + 0.4 is:

    10 = 8 + 2

    The terms above meant something!

  • Mack

    Kensei –

    Well, no I wasn’t. I was assuming it was saved, and yes, that it would be nuked entirely.

    Obviously, if savings rates are maintained and spending on Irish goods and services is cut instead then that would be deflationary. Just based on my own habits, I’m sceptical about that

    Wages = Fixed local costs (bulk of expenditure on – rent, running costs of car, heating, electricity, vhi), variable local costs (pub, entertainment, petrol), groceries (generally purchased in north – sometimes south 60/40 split), big ticket items (generally purchased where cheapest – mostly north – _always_ imports), holidays (abroad cheaper), savings.

    When my salary drops, or when our household income drops (it maybe almost halved last year *updated forgot tax credits, benefit payments etc) – savings were cut first, then big ticket items.

  • kensei

    Mack

    When my salary drops, or when our household income drops (it more than halved last year) – savings were cut first, then big ticket items.

    Which makes it highly unlikely that people are going to actually save the savings! And that 0.4 is still lost to the Southern economy. Bigger spend North and it all going into savings does not help the Southern economy anyway you spin it, despite how less deflationary it may be.

    Be happy. We will be able to answer this question with actual data in about a year! Don’t you love natural experiments?

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