Wednesday, February 10, 2010

Economics 10/02/2010: Can Labour Party lead?

Does a coalition involving any party in partnership with Labour makes sense?

Unfortunately, despite Labour Party having in its ranks some very talented and economically literate senior politicians (Joan Burton and Ruairi Quinn come to mind), there is a legacy of the LP being largely captured by the Trade Unionist movement. In times of economic expansion, this risks the party pre-committing itself to the policy platforms that:
  • expand public sector beyond economically efficient levels;
  • make the above expansions permanent in nature (i.e. irreversible); and
  • commit the state to correcting any potential funding shortfalls out of tax revenue increases.
In this context, it is irrelevant whether or not the Labour Party can or cannot commit to a credible path of public sector productivity reforms. It is simply a party that will find it impossible to impose fiscal discipline on its own constituency.

For example, consider the current situation with public sector wages and non-wage earnings clearly being out of line with private sector and with the reality of economic crisis on the ground. Two past policy dimensions, each one sufficient enough to rule out Labour's ability to impose fiscal discipline on the state, that come to mind:
  1. Labour consistently supported increases in the lower tier wages, thus advocating a compression of wage distribution from the left tail. In current environment, Labour could cut upper tier public sector wages, further compressing the distribution, this time from the right tail. But it cannot commit to shifting the entire distribution left. And this means that any savings achieved will be poultry and will not go far enough to address the existent wages gap between public and private workers to the left of the median wage.
  2. Labour also persistently advocated minimum wage increases. A cut in a minimum wage, therefore, is not an option for Labour. But absent cuts in minimum wages, what policy can promote jobs creation at the bottom of the skills distribution? A cut in the cost of employing workers - aka a cut in employer PRSI - is also out of question for Labour. Training and state subsidised employment simply cannot deliver sustained jobs for this category of unemployed.
The legacy of traditionalist approach to class politics is tainting Labour party platforms today. Their current proposals for dealing with unemployment virtually invariably require the State to find new funding to expand existent programmes, such as investment in education and training, a jobs fund in the Budget and a new National Development Plan. Funny thing is, Labour party seems that propping up the same programmes that failed to deliver jobs in the times of the boom (aka all mentioned above) will somehow, once expanded, deliver jobs in a recession.

There is also a strange belief, on behalf of Labour party that extending a place in a university to everyone who applies (see here), regardless of their merit or ability, is a jobs-supporting policy as well. In following this, Labour commits two cardinal errors:
  • It implicitly beliefs that getting a college degree improves ones ability to gain employment; and
  • It explicitly assumes that providing tertiary education for all is necessarily net-additive economic and social activity.
In other words, Labour party fails to recognise that education can yield diminishing social and economic returns and it fails to recognise that the rate at which social and economic returns diminish is unrelated to the quality of graduates.

So there you have it - despite having some very good people in its ranks, Labour party is simply not a credible contender for economic crisis management.
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