By any reliable economic measure, Joe Biden should be strolling in the USA. The US economy posted more than 3 per cent growth in the final quarter of last year, unemployment is as low as it has been for decades, incomes are up and the government is pumping money into the economy.
Yet Biden is languishing, Trump cruising. Polls will tighten and although no one knows what will emerge over the next few months, one thing is certain: the Democrats need inflation to fall and the Federal Reserve must cut interest rates dramatically if the Democrats are to have a supportive platform.
In the past, economics was a critical determinant in US elections, but with culture wars raging, Trump is hoping he can push enough destructive buttons to win in a blizzard of chaos. It has been said before that the US has a choice between pandemonium and calm, between outright turmoil and a semblance of order. Given this framing, it is extraordinary that a character such as Trump is still in the race, let alone surging.
However, the economy could still be the ace in Biden’s pack. If interest rates fall, the US, the debt junkie, will grow yet further, giving Biden a boost. As James Carville announced in Bill Clinton’s 1992 election campaign, it all comes down to “the economy, stupid”. As it was in the past, so the Democrats hope, it will be again in the future.
In Ireland, inflation is a big election issue too. The cost of living is squeezing the middle and the poor. One result of recent rises in inflation is the employment pattern. We report the increase in participation but rarely do we ask why so many people are working longer hours.
Over the past three months, Irish people have collectively worked 1.7 million more hours (a 2.1 per cent increase) compared with the same period last year. You have to assume people are working more hours because inflation is eroding their take-home pay packet. This hours-worked figure leaves out what is happening in the “nixer economy”, omitting cash-in-hand work. [CSO].
We are not just working more hours, but more of us are working. The overall number of people aged 15-89 years in employment increased by 101,600 or 4 per cent to 2,655,900 persons in the 12 months to Q3 2023.
[ Ireland is a rich country that feels poor ]
So what is causing Irish inflation and what can the Government do about it? We’ve heard lots of talk about energy prices after the invasion of Ukraine, and the after-effects of the pandemic on supply chains, but the real culprit driving up Irish prices is closer to home. The perpetrator also has its hand on the tiller.
If we zoom out and look at Irish inflation over the past 20 years a clear pattern emerges. The aggregate CPI index has increased by 48.4 per cent over this period, or about 2.2 per cent per annum, but there have been huge disparities, with some prices falling and other rising dramatically. For example, big-ticket items such as household appliances – TVs, fridges and washing machines – have actually fallen in price by 20 per cent since 2003. Telecoms, phones and internet, a regular part of people’s spending, have seen a 10 per cent absolute drop in cost over the past two decades. Clothes and shoes, again a huge chunk of spending, are down by 37 per cent. So far so good.
Many products manufactured abroad by machines that can benefit from technological advances, are falling in price. The competitive global market is increasing the purchasing power of the average Irish person.
But let’s look at the local economy, at the stuff that isn’t traded. Housing, water, electricity, gas and other fuels are up 159 per cent since December 2001; a rise of about 7.2 per cent per annum. Education bills are out of control, up 121 per cent in the period or 5.5 per cent per year. Alcoholic beverages and tobacco are up 100 per cent; or 4.5 per cent per year. Restaurants and hotels prices have surged 80 per cent; about 3.6 per cent annually. Meanwhile, health prices are up 78 per cent; or 3.5 per cent a year.
What is the commonality here?
It is that three of “out of control” categories – health, housing and energy, and education – are core Government competences, where the State is the major provider or influencer.
All these rises have a knock-on effect on wages. Keeping public pay in line with inflation has evolved into a core issue for unions. Almost 385,000 workers are affected by this week’s deal to ensure a 10.25 per cent increase in wages for the public sector over the next two years.
[ Public sector workers to get pay rise of 10.25% over 2½ years under €3.6 billion deal ]
As inflation spiked in recent years, the public sector unions required more, with the Government apparently over a barrel. But here’s the rub: public sector trade unions have been negotiating with the Government for pay rises to cover rising inflation; but rising inflation is caused by the very Government that is party to the negotiation. Take that in.
The gross cost of the pay for the public service in the Revised Estimates for Public Services 2022 is more than €21.92 billion. The public service headcount for 2022 is reported as 380,492 (including local authority staff) [Oireachtas]. The mean wage is therefore €57,000 annually, way above the national mean for the private sector (€45,557).
Comparing public and private sector pay has been well rehearsed. Public-sector workers are well looked after. Leave it at that because there is something more significant absent in the national conversation: productivity of the public sector.
What are we getting for the money?
Latest figures from the Department of Public Expenditure reveal that the total public sector pay bill in 2024 is running at about €28.1 billion. Ten years ago it was €16.2 billion; in 2016 it was €17.7 billion. That’s a 73.4 per cent increase in public sector pay in a decade and 59.3 per cent since 2016.
However, since December 2016, cumulative inflation has been 21.1 per cent. So public sector pay has risen more than three times faster than inflation. Why? Has the Irish public service become three times better over the period? This should raise some alarm bells but maybe the more worrying question is: what are the taxpayers getting for this?
[ Ireland’s problem is not money, it is management. Let’s fix the management ]
To put it bluntly, if public sector workers constitute about 15 per cent of the workforce, what are the 85 per cent, whose taxes partly pay these wages, getting? Ask yourself whether the quality of the services provided by the public sector has risen commensurately. Have your dealings with the public sector improved over the period, and by how much?
I’m trying to get to something as elusive as the fourth secret of Fatima: the productivity of the public service. If we are paying the public sector more without increases in the quality or provision of services, what is happening? The productivity of the public service is falling, which means the quality of the public service is collapsing relative to pay.
The reason this is important is that countries compete with each other on the quality of their public services, and the quality of life of a country is profoundly affected by the performance of the public sector. In terms of comparison, it makes a large difference to day-to-day life if the quality of public sector delivery is worse here than, let’s say, in France or Belgium.
In addition, in Ireland because the multinational sector throws off so much extra cash, we have forgotten the link between public service pay and public service productivity. Easy money from the multinationals is easily spent.
Is the heath service delivering better outcomes, or the education system? When you deal with the various departments or local authorities, are you getting value for money from a public service that in the past year has garnered pay increases of 73.4 per cent when the cumulative rate of inflation has been 21 per cent?
I realise it is very difficult to assess exactly, but there has to be a measure over and above the rate of inflation that is created largely by the public sector itself.
This presents the questions: who is in control, and among the senior civil servants is there a mandate to make the delivery for the service to the public better in return for higher wages? Minister for Public Expenditure Paschal Donohoe disclosed that the average salary paid to the 18 civil servants who head Government departments is €237,249. This is the highest level since just before the economic crash in 2009, when the salaries averaged €258,502. By the following year, the salaries had fallen to an average of €217,000 and continued to fall to €179,542. They began to rise again in 2017, topped €200,000 in 2019 and have continued to rise steadily since then, to €232,921 in 2022 and over €237,000 this year. [Irish Times].
When looked at in pure economic terms, it seems the answer to the basic question of who is in control remains obscure. So we end up in the bizarre situation where more inflation begets more pay rises, leading to more inflation and lower productivity – and no one seems to be joining the dots.
Ever seen a dog chasing his tail? Well you are looking at it on a national scale right now.
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