Against the Grain –Constantin Gurdgiev
Every crisis is an opportunity to introduce reforms that do not seem seem feasible in the times of the ordinary. By this standard, Irish policies over the first nine quarters of the current crisis qualify as an abject failure. And it is political ideology, not economic rationality that has maintained this nation on the brink of total insolvency. Two of the most potent myths that shaped the emergence of the current economic crisis are still driving our policy today. These are the myths of social and economic benevolence of Government spending. Both have inhabited the pages of the official media and the halls of our political, judiciary and executive power, since Independence. The brief period of the Celtic Tiger – marked by vast increases in public spending and employment – was no exception. These myths shaped our pre-Budget 2010 debate and the Budget itself, and now underlie the analysis of the Budget’s measures. The debate on whether to raise public spending is now contrasted with the debate on whether to raise the tax burden, in Ireland. It is along these mythological lines that our élites divide the world into black (entrepreneurs, consumers, investors and ordinary workers) and white (public workers, State organisations, quangos and NGOs). In the Left corner an army of Mary Robinsons and Jack O’Connors are warming up to battle the imaginary Mr ‘Top Hat’ Capitalism on the right.
The argument that social fairness requires that the so-called rich should pay a greater percentage of their income in tax, hinges on the argument that taxes provide direct benefits to society at large. According to the latest Budgetary definition the rich in Ireland includes everyone on an income in excess of €75,037 or just €2,950 above the average earnings of professionals and managers in financial services and €24,200 less than the average employee earnings in the electricity, water-supply and waste-management sectors. Actually, according to Terry McDonagh from NUI Galway whose research was supported by the Irish Congress of Trade Unions (ICTU) and the unions’ intellectual outfit, Tasc, it’s anyone from a household with €134,000 in annual income, or for a two-earner family anyone with an annual income of €67,000.
These and other ‘rich’ employees, as Tasc and the ICTU will never tell you, consume a smaller share of public services than lower-earning residents, yet already pay close to 50% of the entire tax-take. They further subsidise the public sector by purchasing supplementary or substitutable services. In fact, of Ireland’s top 0.5% of income earners some 11,714 residents with income in excess of €275,000 pay almost 18% of the entire income tax revenue – around €2bn in total. They also heavily subsidise state services they never receive and, incidentally, through gratuitous tax breaks and state subsidies, they subsidise ICTU and the ludicrous studies the union commissions on how to tax the ‘rich’.
The best example of subsidies from the upper-middle-classes to the state is found in the private health insurance held by over 40% of Irish people. This is used to co-finance public health-care provision. Double standards apply to redistributive social ‘justice’ in Ireland, meaning that one person can be required to pay three times over for the same services. In some cases, private insurance patients are actually made to wait longer for services than those who do not contribute at all either through tax or insurance. So the very idea that steeply progressive and higher taxation achieve some sort of ethical objective is bonkers. Instead, progressive income taxes are guilt charges on those with higher productivity.
The only remaining argument that can in theory support the idea of the Left’s battle cry for ‘higher tax, not lower spending’ is that higher taxes lead to higher spending that in turn supports a more productive economy. But is state spending, financed out of either current or future tax revenue, the source of economic growth? The answer to this lies with the size of the so-called Keynesian Multiplier – a term that for many will conjure up the imagery of the “Improbability Drive” from The Hitchhiker’s Guide to the Galaxy. The Keynesian Multiplier is supposed to work by using public spending to stimulate private demand. No one really buys this idea in normal economic times. But at times of crises, as the last 18 months have shown, the Keynesian stimulus reigns supreme amongst all economic policies.
The trouble is that evidence from around the world shows that, in practice, Keynesian Multipliers have been yielding less than one-for-one increases in GDP per unit of increased public expenditure. This year the Centre of Economic and Policy Research (CEPR) published a large study using data for 45 countries for the period from 1960 through 2007. For developed countries the cumulative long-term impact of a €1 increase in public expenditure was an average increase of €1.04 in GDP over a period of 6 years. After that, the entire effect dissipated to zero. Sound like a good deal? Not really – private consumption multipliers over the same period of time suggest that leaving cash with households would provide more than €1.28 per €1 spent. But the above study found even more disturbing (from a Keynesian propagandist point of view) facts.
In highly open economies with flexible exchange rates – in other words countries like Ireland with a large share of traded goods and services, and foreign investment from trading partners outside the Eurozone – deficit-financed fiscal spending actually has a negative cumulative impact. That’s right – negative as in ‘you’ll never see this money in the economy again’. An average open economy trading in a flexible exchange rate environment at the moment of fiscal stimulus will lose between five and seven cents on the euro spent and this can rise up to 13 cents depending on other factors. Over six years, this negative effect will add up to permanent annual losses of 38 cents.
So economic evidence strongly asserts that The Left’s argument against budgetary cuts on the grounds of Keynesian-Multiplier theory, simply hold no water. Social ethics and democracy suggest that the same arguments are fallacious. And yet, the Irish Left continues to beat the drum of ‘tax and spend’ politics as a sacred ritual for its ideologically-driven and (in the case of Social Partnership-bonded segments of the Left) self-interested agenda. The legacy of decades of state-sponsored socialism lives on. The crisis, caused by this very socialist system’s support for over-proliferation of skewed incentives and clandestine backroom deals across the economy has been wasted since we have failed to learn the lesson. Or as Salman Rushdie summed it up: “The idea of the sacred is quite simply one of the most conservative notions in any culture, because it seeks to turn other ideas – uncertainty, progress, change – into crimes”. In truth, the sacred Multiplier is largely a figment of economic imagination that provides an intellectual veneer of plausibility to the Left’s efforts to expropriate an ever-growing chunk of economic value from those who have earned it.