Thursday, October 11, 2012

Irish experience shows Japanese Model makes most vulnerable pay for financial crisis

The Irish Times ran an article that contrasted Ireland, which adopted the Japanese Model and bailed outs its banks, with Iceland, which adopted the Swedish Model and made its banks absorb the losses in the financial system.

What the contrast showed is in Ireland, the vulnerable are paying a disproportionate share for the financial crisis.  In Iceland, the burden fell on the rich.

What is true in Ireland is also likely to be true where ever the Japanese Model was adopted and the banks were bailed out.  This includes most countries in the EU, the UK and the US.

Regular readers know that your humble blogger has said from the beginning that the Japanese Model for handling a bank solvency led financial crisis is good for banks and banker bonuses.  It is bad for society and the real economy.

I have also said that the Swedish Model is good for society and the real economy.  It is bad for banker bonuses.

This article not only supports my observations about the Japanese and Swedish Models, but it extends them.

It documents how under the Japanese Model the rich benefit and the vulnerable suffer.  The article also documents how under the Swedish Model, the rich pay and the vulnerable are protected.
AT A conference in Dublin on Monday, an academic from Iceland, Thora Kristin Thorsdottir, showed a chart contrasting the impact of the crisis measures adopted by governments in Iceland and Ireland on real disposable earnings of couples by income deciles (that is the poorest tenth of earners, the next poorest tenth, through to the richest tenth). 
It showed that the poorest tenth of earners in Iceland suffered a drop of 9 per cent, whereas in Ireland the drop was 26 per cent (the data for Ireland was for the period 2008-2009 and for Iceland 2008-2010). 
For the second-poorest 10 per cent of earners, the drop in Ireland was 14 per cent, in Iceland, 9 per cent. 
For the second-richest tenth in Iceland the drop was 17 per cent, in Ireland it was just 2 per cent. 
But, the most revealing figure of all, for the richest 10 per cent in both countries, in Iceland the richest had a drop in earnings of 38 per cent, in Ireland the top 10 per cent showed an increase of 8 per cent. 
Quite simply, the left-leaning Icelandic government chose to focus the impact of the adjustments necessitated by the crisis on the richest sectors of Icelandic society. In Ireland, the right-leaning government did the opposite (it was a Fianna Fáil-Green government during the relevant period but its prescriptions have been followed by the right-leaning Fine Gael-Labour Government). 
Please re-read the highlighted text again and remember that Iceland adopted the Swedish Model and Ireland adopted the Japanese Model.
As in Iceland, there were and are clear choices for an Irish government in dealing with the crisis: whether to focus the impact on the adjustments on those best able to bear the pain, ie the richest sectors of society, or to focus the impact on those least able to bear the pain, ie the poorest. 
This is a very important point.  The choices are ongoing.  The fact that a government chose the Japanese Model initially does not mean it cannot now adopt the Swedish Model.
Perhaps the cruellest measure introduced here has been the universal social charge. 
Initially, everyone being paid €4,004 and above had to pay the charge. Amid a flurry of self-congratulation, the current Government increased the threshold to €10,036, but with a vicious sting retained in the tail. 
Anyone getting even a single euro over €10,036 has to pay the charge on their entire income. But not just that, whereas a levy of 2 per cent applied on earnings up to €10,036, those between €10,036 and €16,016 were levied at 4 per cent and everything above that attracted a levy of 7 per cent. 
In other words, people living on slightly over the minimum wage (€8.65 per hour) were catapulted into the highest levy bracket (€8.65 multiplied by 38 hours a week, multiplied by 48 weeks, equals €15,777.60). 
Since the crisis broke in 2008, there have been reductions in child benefit; carer’s allowance; disability payment and blind pension; jobseeker’s benefit; jobseeker’s allowance for those aged 18-21 years; supplementary allowance for those aged 22-24; one-parent family payment; and earnings disregard (by €16.50 to a weekly amount of €130). 
There have also been reductions in heating fuel subsidies and in supports to Travellers’ education, plus an increase of €2 per week contribution from those with a rent subsidy.
Low-paid workers in the public service, ie those earning €30,000 and less, have had a 5 per cent reduction in salary, and the minimum public service pension age has been raised from 65 to 66. 
It has been a relentless assault on the disadvantaged, accompanied by protestations by the last government and this Government that everything possible is being done to protect the vulnerable.
Forgive me, but isn't this what is also happening in several EU countries (Portugal, Spain and Greece), and at a minimum being talked about in the UK and the US?
Meanwhile, the agencies that campaigned for rights and entitlements of vulnerable people have been undermined or abolished: The Equality Authority suffered a huge budget cut and now may disappear; the Women’s Health Council is closed; the Crisis Pregnancy Agency is closed; the Human Rights Commission has had huge budget cuts and is now being merged with the Equality Authority; the Combat Poverty Agency has been abolished; the National Consultative Committee on Racism and Interculturalism is closed down; the National Women’s Council of Ireland has had massive budget cuts; the Rape Crisis Network Ireland has seen its core funding ended; and Safe Ireland, which has been providing frontline domestic violence services for women including refuges, has had its core funding ended.
Clearly adopting the Japanese Model changes the social contract for the benefit of the rich and the detriment of the vulnerable.
Meanwhile, in the vivid phrase of Tom Healy of the Nevin Institute: no senior bondholder left behind. Billions have been poured out to non-guaranteed bondholders in the banks, including the defunct Anglo Irish Bank.... 
Remember, banks in a modern financial system like Ireland has do not need to be bailed out.  They can operate with low or even negative book capital levels because of deposit guarantees and access to central bank funding.
(odd that powerful vested interest sectors can avoid the reach of the troika, while low-paid workers are faced with restructuring – ie the weakening of employment entitlements), and millionaires pay only 40 per cent of their gross income in tax, PRSI and the universal social charge.
And now we learn that the relentless assault on vulnerable people is to persist with the coming budget. 
The news (as reported in yesterday’s Irish Times) that payments to young people aged 16 to 18 with disability may be cut by about €110 per week is indicative of the prevailing mindset that “there is no alternative” to immiserating the already miserable while “incentivising” the “wealth creators” to return us asap to the joys of the Celtic Tiger yesteryears.
The chart:

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