Is raising taxes the best thing to do in a crisis? What economic theory tells us that, in the face of a meltdown in the economy, the best thing to do is to reduce expenditure and raise taxes? There is none. The lunatics have taken over the asylum.
Making one drastic policy mistake in fuelling the boom with cheap money and tax cuts was bad enough, but making a second one, cutting expenditure and raising taxes in the bust, would be inexcusable.
I am now about to do an unfashionable thing, I am going to make the case for dramatic income tax cuts, offset by property taxes and an expansion of moribund monetary policy through mass debt deferral.
We shouldn’t worry our heads about the implications of this idea, because, if we believe in the logic of monetary union and the irrevocable nature of the euro exchange rate, we should not be too concerned about how big the budget deficit is, or our ability to finance it – because it will be financed.
In addition, if we believe (as I do) in the Irish people, in the long-term economic implication of our demography, in our ability to attract investment based on our workforce and in our ability to create our own companies, these tax cuts will become self-financing.
Granted, these are big ifs. However, we are now following a nihilistic policy which will turn our recession into a depression and will yield us absolutely no economic benefit, either now or in the future.
The consequences of today’s Herbert Hoover approach to the economy will be exactly what happened in the US at the beginning of the 1930s,where a bad situation is made worse by policy mistakes. The Irish depression of 2010 is going to be entirely man-made. Don’t forget this when it comes to apportioning blame.
Here’s the deal. With a few notable and well-known exceptions, the consensus economists who talked about how the housing boom would plateau and achieve a ‘‘soft landing’’ are the same people who are now suggesting that Ireland should deflate its way to growth. They are aided and abetted by mandarins at the Department of Finance who have got all of their forecasts wrong. Why are we still listening to these discredited people? They know nothing!
Let’s call these people ‘the fundamentalists’, because they were -and still are -constantly invoking ‘the fundamentals’. In the boom, they told us the fundamentals were strong. Today, in the bust, they are telling us the fundamentals are weak. Now, that’s enlightening.
The fundamentalists argue that, if we don’t cut now, our budgetary situation will spin out of control and we will end up in default. They are saying this while, at the same time, being faithful supporters of the euro. These are the articles of faith for the fundamentalists -balanced budgets and a strong currency.
But when you think about it, you shouldn’t be supporters of a currency union and agitators for budgetary austerity simultaneously, because at the core of your position is a misunderstanding of how and why the world works as it does.
In defence of their position, they will talk about concepts such as ‘‘market confidence’’ or ‘‘financial credibility’’. But these platitudes mean nothing. This market is finished. It is over. Bank of Ireland is trading at 12 cent (as this column told you it would right after the recapitalisation. In fact, our early February forecast of nationalisation by Easter still looks like a fair bet). We need to understand that nothing we do now in Ireland will turn the taps on.
There is no mythical pent-up flood of money waiting to rush into Ireland once we’ve shown that we can hit some budget target or other. Show me a country that has benefited from this argument in the past 12 months. They don’t exist. In fact, the country that has seen its government paper being sucked up in trillions is the US, which is running the most expansionary budget deficit in decades.
The core of the problem is that the fundamentalists are using the economic logic of a free-floating currency to argue the budgetary policy in a country with no currency risk at all. No mistake could be more straightforward and no misunderstanding more wrong.
Sure, if we had our own currency we would have to keep our budget deficit in check, otherwise there would be a run on our currency. If we chose to defend a certain exchange rate, we’d need to raise interest rates dramatically. This monetary contraction would reinforce the economic crisis, tax revenue would fall and rates would have to go higher.
But none of this will happen in the euro. The euro allows us to analyse without concerning ourselves with the trivialities of the foreign exchange markets. The euro allows us to think clearly (which is one of its modest advantages for us).
We now need to be radical. We need to cut income taxes, raise property taxes, cut all tax incentives to property and use the money saved to give grants to companies that are employing people. We need to accelerate the new euro-wide bond initiative and use it to borrow heavily.
We should stop getting het up about the budget numbers, because whatever we do now, I can guarantee our forecasts will be wrong.
We also need to introduce debt deferral for hundreds of thousands of mortgage owners who are in negative equity, and use this debt relief as traditional monetary policy. Debt deferral gives hope and – most importantly -i t injects liquidity directly into people’s pockets. The recapitalisation needs to be revisited and a huge distressed bank bond of maybe €40 billion needs to be raised to cover the losses in the banking system.
Every infrastructural investment that would make us more productive in the future should be fast-tracked, not abandoned. We should also raise the money internally, as well as externally. Ireland has close to €300 billion in deposits. We have loads of money. Let’s just raise a national recovery bond and invite our pension funds to participate. We could make it much more tax efficient to invest in the recovery bond than foreign equity.
There are always ways and means. This is all so simple. If our debt/GDP ratio rises to 100 per cent, so what? Most of it will be our cash anyway, and what is the sanction under a monetary union? In the euro, this is only a figure and, as the economy recovers -which it will – this figure will plummet. Implicit in this approach is a cull of many of the senior civil servants who are now acting as inhibitors, rather than facilitators of, change.
Such radicalism is the only way that jobs will be saved and our country can be stabilised. If we follow the current policy of the fundamentalists, we will end up where fundamentalism of every sort always leads -up a blind ally where the world is seen, not as it is, but as they would like it to be.
The world has changed, maybe irrevocably, and we have to change with it. This crisis presents us with the greatest opportunity in decades to shake up this country. Let’s hope we seize it.
Taliban comes to mind here and tuesday is Osama’s birthday and that day is a Full Moon.Expect a surprise.
David,
I’m afraid Irish people have as much appetite for forking out on property tax on their houses as Osama bin Laden has for eating an Irish breakfast roll.
It’ll take a long long time for the mentality to change.
Hi David,
Sounds right on the ‘money’ again, I mean the ‘money we used to have’. But how do we get the government to make these ideas a reality?
One of the biggest mistake the US made in 1929 was that they raised interest rates and after awhile the Dow lost 89% of its value. Now before the US raised interest rates it was obvious that a depression was coming because the commodity markets lost more than 60% of there value. Fast forward to today. Its obvious that the World is going into a depression because all commodities with the exception of Gold has lost over 60% of its value. Industrial metals like copper, aluminium etc are still dropping this is signalling that on a World scale there is… Read more »
The possibilities for acting that can be determined under the traditional range of economic theory amounts to no more than a hill of beans. (Fee Fie Fo Fum!!) It is refreshing to hear from such an expert that the forecasts will definitely be wrong! This with an effort to persuade that the emphasis should instead be on doing the right thing. Because of unusual conscious challenges in the world including climate change effects, growing inequality, unpredicted wild market oscillations, possessing excellent knowledge of the intricacies of standard economic responses may actually pose as much of a blinding miasma as do… Read more »
Alleluia – David’s Strong Initiative for CHANGE has arrived – pick up yere pikes and charge to the top of Vinegar Hill and sing Boolevogue
Borrow and spend, borrow and spend. Yep, let’s do that.
It worked great in the 80s, didn’t it??
Emmm…
Ah yes but we’re in the Euro now. Those lovely Germans will help us out, won’t they?? They’ll help us and let us keep their 12.5% corporation tax rate too coz we’re lovable paddies who know how to have the craic and we have leprechauns.
But we said we wanted to leave the euro a couple of weeks ago, didn’t we??
Humm…
Keep floggin those papers boyz
David: I think your suggestions might work, if we could be sure of a continuing supply of crisp folding notes. I may be mistaken, but I am not aware of a Mint located in Ireland. If we don’t play ball with the ECB they can just slow down cash delivery. Existing cash in Ireland will trickle out into UK and Europe and there will be a cash crisis at the ATMs. No matter how much electronic money is borrowed, it won’t get around the cash shortage. Eventually we will be obliged to trim our coat to fit the cloth.
You’re right the ‘worst thing’ we could do if we want to create and maintain employment now is to increase taxes on employing people and generating economic activity. Unfortunately, we can’t be competitive internationally with a strong euro operating from Ireland compared to the main trading currencies for indigenous exports — dollar and sterling In 2007, Enterprise Ireland clients had total export sales of €13.2 billion (c.10% of total exports ‘booked’ in Ireland). Enterprise Ireland estimates that export gains of up to €1 billion were achieved by its client companies in 2008 despite the global economic climate ? Assume indigenous… Read more »
David,
You mention €300 billion in deposits but my question is…
Could we actually get our hands on this money or has it been spent by the banks? Could the government guarantee these deposits in the event of a meltdown in the banking system …….or am I missing something. Why do I feel broke !
its a great article ..first one to make me laugh, only a pity that such forward thinking is cramped by a self serving monolith that continues to refuse sound and {in these troubled times} free advice !
David, I totally agree with you but I am wondering why you don’t point out the simple reason why the government and its advisors have not touched property and have put insane policies leading to a fundamentally sick property market – quite simply, they themselves have a huge stake in it personally and don’t want to do anything that will hit them personally. Its the same reason why the PRTB registration is practically a voluntary system and various departments involved in the rented sector are coy about handing over information on potentially tax-dodger landlords to Revenue Commissioners. They are protecting… Read more »
The best suggestion I heard recently was from a young entrepreneur Patrick Collison who suggested that we spend 50m euro enticing 50 start-up companies and give them 1m each as an incentive to move their operations to Ireland to form a cluster of high potential start-ups. As you build a cluster of technology you also encourage the investment to increase the wealth created on the back of such operations. VC money drives growth and we need more than the existing minnow VC’s that operate in Ireland. HPSU’s create wealth and employment and our high skill tech expertise can further stimulate… Read more »
David, thank you! Finally, a plan I like! Folks, in tandem (though I have reservations about HOW the property tax would be applied – should not be on family home, for instance), what do you think of this, from Taft?: No better place than with Sean O’Riain’s piece on TASC’s progressive-economy blog. His message is simple, his analysis irresistible: ‘The crux of the matter is that this gap is too huge to close with cuts and tax increases, even though those will play a part. We have scope for borrowing, given our low debt ratio but this will give a… Read more »
Of course, there is still that matter of the 7billion we gave to AIB and BoI, and for WHAT? For them to sit on it and continue to starve SMEs of liquidity, of wages, of credit for the raw materials they need to keep people in jobs? It’s not working, this way. We must convince government to take back that 7billion; issue government cheques to companies and homeowners who are defaulting, let THEM repay these cheques to the banks to pay-off their debts and they save their businesses and its jobs; the homeowners save their homes. No-one goes on the… Read more »
Tax wealth and not incomes? David, you are truly insane :-)
Thank you David McWilliams. Thank you for the clarity with which you’ve expressed a plan that we can consider. You gain all my attention because your suggestions seem grounded in straight talking about reprehensible behaviour. “No” to income tax increases – because every euro taken from this household’s income is one euro less for me to spend paying a carpenter to do useful work on my house. I’m an ordinary, fairly well off person. I have money to spend in shops, and income to spend with small businesses which are horrendously strapped for cash-flow. I’m looking for a place to… Read more »
“We also need to introduce debt deferral for hundreds of thousands of mortgage owners who are in negative equity, and use this debt relief as traditional monetary policy. Debt deferral gives hope and – most importantly -i t injects liquidity directly into people’s pockets. The recapitalisation needs to be revisited and a huge distressed bank bond of maybe €40 billion needs to be raised to cover the losses in the banking system.” Money & Markets most recent assessment of the O’Bama administration’s attempts to soften the blows for homeowners is that they are wasting valuable funding on the wrong end… Read more »
It is definetely an interesting article, and the basic theories are just as I remember from a social/macro-economic class I attended several years ago. So what David writes makes sense. but as all the now disgraced economists claimed during the boom. Ireland is a special case, thats why normal rules do not apply, we have a very specific demographics etc… Maybe they were right in one thing. Maybe Ireland is a special case or at least some sort of case. Ireland is planning to spend 55 billion this year and are forecasting 34 billion or so in revenue. To me… Read more »
Right lets get this over with!!!! The Green Party are wrong,they have compromised the welfare of this State by propping up FF so long as they can follow a dream..Their long held ambition of controlling the Dept. of Enviornment is now redundant given that the bursting of the property bubble has left nothing for them to influence for the forseable future,and certainly until after the next election.Somebody needs to tell them that there will be nothing built here for years end of. None of their core policies will be funded and what’s left will be watered down by the spin… Read more »
Pera, I like your “stimulous is the deficit” idea – I had not considered it in that way. Let me think about a suitable response. I agree with you on Dail Committees – gravy train has to end for these people. 7billion has been wasted in recapitalisation of two banks that will not lend money and credit/overdrafts to companies that could be saved if they did. Take the money back and, if we MUST re-capitalise the banks, give the struggling companies/homeowners who are defaulting government cheques (made payable to the banks in question), so these companies and people can pay-off… Read more »
David is really getting to the heart of the problem that some macroeconomic experts have in not looking beyond the most publically available statistics. Some are constantly in reactive mode. They are either reacting to some projection or past related statistic. David is proactive because he is thinking in terms of the real nature of economic exchanges. I could be accused of fundamentalism in referring to von mises but what he wrote in human action p701 and p702 is as true now. There he acknowledges the role of the mathematical economist in quantifying the static situation. He explains that the… Read more »
Shane Dempsey,
http://www.davidmcwilliams.ie/2009/02/15/turn-crisis-into-opportunity
This is the link to the “5s”.
Ideas that visitors to this site have about how to fix Ireland’s problem.
You have great knowledge and ideas, Shane.
Will you consider adding to the “5s”, please?
Just hone your thinking and suggest 5 points for rescue.
I hope that you will consider. Thanks, Tim.
some ideas into the mix. they might sound a bit offbeat but they are based on my observations on living in the UK and the differences with Ireland. i sense opportunity for any Irish company willing to step up and do these in the uk market: 1. nash’s red lemonade only sold in a small little “world food” section in Asda. you cant get it anywhere else. why isnt it sold in Tesco in the main lemonade areas? theres a big opportunity there. 2. Big thick rashers. i dont care who does these in ireland – but did you ever… Read more »
recession biz ideas on sky news now… from the uk
chinese restaurant in reading :
food is free. but you must spend £5 on drinks.
folks from as far as London are queueing to get into the place.
another one is a pub
has a nightclub where you can bring your own drink. £5 entry free.
both methods are a gamble. but it gets the punters in the door.
low cost idea for irish government – push google to do a complete streetview of all of ireland. the benefits in tourism would be immense. if you arent familiar with streetview, go to maps.google.com – see the orange man? drag him onto the map of the united states. streetview is currently also available in some cities in spain, italy , france, and a large part of japan, australia and new zealand. have a look around – now imagine what that would do for our tourism industry. somebody in government needs to push google on this – offer tax breaks, internships… Read more »
Folks, MK1, Lorcan, Furrylugs, Phillip and Deco may “weigh-in” on this tomorrow, but this is good, I think. Thanks for all contributions. Oiche mhaith.
Good morning all. I’ve read nothing yet but have some fresh ideas to share. (1) What % of contributors here are anonymous? (2) What % of the anonymous contributors are only expressing their ideas on here. (3) How many of those, with whom you shared your ideas off here, are sharing your ideas with others? (4) If I met you by accident in the English Market (Cork), or the back end of Dublin, would I realise it was you I was talking to? (5) The rate at which money is circulating in the national economy needs to be calculated, and… Read more »
What a superb “New Ideas” idea in action. Thank you very much webmaster and David.
Thank you especially for the line you have taken in relation to other places where people are doing their best at public thinking.
Idea: Let’s construct a list of all the commentators who are helping to make clear what’s happened in Ireland, economically and politically. Let’s add names to this list, so that we gradually compile a register which people will want to be included on (no pseudonyms)
This is the start of the list:
David McWilliams
Shane Ross
Nick Webb
Damien Kiberd
Mark Paul
It’s great to be inventive and dynamic! Let’s say we do as David says: We cut taxes and go on a borrowing frenzy in the hope that therest of the EU will bail us out. 6 months later there are still no jobs and the world is still in recession. Our national debt is double what it was in 2007. The EU says stop your borrowing or we will expel you from the EU. We give them the two fingers and say you can’t expel us, we’re the Irish, we can do whatever we like. 3 months later we’re expelled.… Read more »
@mcsean2163 – I would not be that harsh. DMcW’s approach would be phased. I saw 2 messages… 1) Be confident in the Irish grassroots (private enterprise) to get wealth generation going. Over tax it and it’s killed off. 2) Cull the dampening down effect of the current mardarins. For me, I would dump all the quangos, committees and junior ministries left right and centre and show no fear in outsoucing what can be done abroad more cost effectively. You know, I recently had my GP recommend I go to Poland to get laser treatment for my eyes. @pera, you are… Read more »
You are on planet GAGA david, clearly, too much VEGAS, SEDONA and Pacific Heights. The calamitous equinoctical gales are pounding this benighted isle with the hard rain. The path of hyper-inflation, or worthless money, of no incentive to save, of interest free loans, has led us to the pandemomium in which we find ourselves. And you propose more of the same, but mulitplied. Is this the position that trained economists, with whom you disagree substantially and regularly, consider the most beneficial long-term solution to the crisis in global financial markets? Stop comparing Ireland with any large country, and stop considering… Read more »
Economic crises happen because of the withdrawal of money from circulation. Industry collapses because of a systemic liquidity crises. Increasing taxation further excacerbates this.
The most important thing to do is to get the economy moving again, reverse the explosion in unemployment and start creating jobs.
The solution is to follow (copy) the British Governements approach and by-pass the normal means by which money is created and start putting money into the economy to reverse this crisis.
Banks, because of their toxic debt, are no longer able to, or willing to, create money which could solve this crisis.
What caused the problem ? Human stupidity. Humans seem to become intellectually lazy, and contragulate themselves as they ease into intellectual subprime behaviour. This is what we have seen in Ireland since 2002. The ideas emininating from both the public and private sector became increasingly stupid and delusional. Same as the Great World Depression – which is now in danger of being renamed the First World Depression. There are parallels with The Great War becoming the First World War. It took a generation of incompetence. In fact the roots of the failure stem from the success that followed the post-War… Read more »
Abudget defecit of 30 billion next year is a given-so expect the economy to crash within 18 months.At that stage it will be man the lifeboats.A rerun of the fifties is the most probable scenario-the economy cannot recover @ the present euro/Sterling exchange rate.Nice 2 see Seanie enjoying a round of Golf in 2days herald.
There is a picture of the current Minister for Education, and a known gambler and tax avoidance expert who is providing a scholarship scheme for students in Third Level. Now, I think scholarship schemes are great. There was a time when the top rank of the Civil Service of this country were all scholarship recipients at some stage. This eventually was eliminated – when the state decided to take an increased role. Scholarships are fundamentally meritocratic. And meritocracy in Ireland that exists in the CAO, and on getting on the Kilkenny hurling team. After that, grafting seems to be commonplace.… Read more »
Courtesy of Tony Benn – Few if any senior people in the political and banking sector have ‘lost’ their jobs – jobs are never lost, they are taken away from you, this has happened to plenty of ‘working’ people. who didn’t get golden handshakes. “There was a boat race between a Japanese crew and a crew from the National Health Service (UK). Both sides practised long and hard and the Japanese one won by a mile. So the NHS faced with this problem setup a working party which reported that the Japanese had eight people rowing and one steering and… Read more »
gadfly55 – I always admire a radical independent mind in a room – what are you proposing and what are your honest views of ireland now?
gadfly – reconable income of irish citizens worldwide is taxable as it is .can you be more specific what you mean?
Hello all. I wrote a post here the other day looking at Income Tax reform (and increases), while also calling for a suspension of the NDP. Looks like David doesn’t agree. :) Anyway, onto the article. David > What economic theory tells us that, in the face of a meltdown in the economy, the best thing to do is to reduce expenditure and raise taxes? There is none. The lunatics have taken over the asylum. Could I offer that the lunatics have been running this asylum for a long time? Economic theory was roundly ignored during the good years, with… Read more »
Volcanic Eruptions – Our Time on Fire – to morrow the MOON PULL maximises and right now the DRAG is Hurting – watch gadfly and lorcan releasing their radical minds and revealing the underlying flames of passion and Lorcan adds more ‘Lunatics ‘ to his last submission .Big CHANGES ……..Listen to the Music .
sirganja – your last contribution on Fromm was interesting can you do it again and perhaps submit more ideas .
gadfly – are you proposing karl marx socialism or something else ?
The Belfast Telegraph reports that Branson is considering morphing Virgin Financial Services into a retail bank. http://www.belfasttelegraph.co.uk/business/business-news/richard-branson-ponders-virgin-bank-14218985.html
I know it can take 2 years to get in place but please please Sean Quinn or dermot Desmond, do likewise? God forbid that An Post would help a genuine Irish Beowulf instead of a foreign bank like Fortis.
Let the merchant bank wings burn. Just keep those ATMs ticketyboo Leno.
@Deco, you are spot on. I see no element of the polemic in anything you say. That said what can you do? When I started looking at this blog some time ago, I was dealing with a group with a diverse view of what was about to happen in 12, 18 or 24 months time. My outlook was negative. Now, I find that reality was indeed far more negative than I could have imagined. My naive expectation was for a rational response to try evade the worst aspects of this recession and bring people to their senses. I have found… Read more »
gadfly55 – if you have a good proposal you would not submit to a question ( & moon drag ) and refuse to clarify .what are you afraid of?
Webmaster, when I click on John Allen, I get None.co.uk, a credit card website. What is this about?
Philip – I agree with your statement
gadfly – i am asking you questions and you are evasive and you still criticise dmcw article ….you are not very clear .
…easing the multiplicity of moons to ensure the fertility of our Irish Currency