Sunday, March 1, 2009

Luck of the Irish

Every few years or so, as I make my way down the narrow, windy road that leads to my house, I spy a few men in bright yellow vests filling potholes. They work for the county council and approach the job with the insouciance of people who are guaranteed a job for life and who have three times the number of bodies to do the job before them. And I think to myself, oh, elections coming up again.

Call me a cynic, but the potholes and crumbling road surface languish for months, if not years, and it is only when local elections loom that the county council seems to swing into action. To make it even more obvious, around the same time I usually get an official-looking letter in the post from our local county councillor proudly announcing that they are fixing the road, or at least some road that they think I live near.

Now politicians in democracies the world over invariably do their best to bring home the bacon to help their re-election chances, but it wasn't until I came to Ireland that the quid-pro-quo relationship between politicians and voters became so clear to me. Ireland has two major political parties and, in terms of substance, it is hard to tell the difference between the two. Fianna Fáil is invariably described as center-right and Fine Gael is always tagged as center-left. The main material difference between the two is that Fianna Fáil is usually in power, and Fine Gael usually isn't. There are probably many reasons for this, but it probably has something to do with the fact that most people are direct recipients of gifts from the Fianna Fáil government. For example, when we moved here, one of the first things my wife did was to sign up for a monthly cash payment that we were entitled to for having a school-age child. Everyone in the country gets this payment, from the multimillionaires to the unemployed. It is not means tested. During the boom years of the Celtic Tiger, more such goodies were doled out, including fee-free university education and free health care for senior citizens, which likewise are not means tested.

This all sounds great, but now the Irish economy is in serious recession and there is not enough revenue coming in to cover all these outlays the government has committed to. It has no choice but to cut back. But once a group has gotten used to a subsidy, it tends to scream bloody murder at the mere threat of having it taken away. And it doesn't help things for popular opinion when the people you are ticking off are students and senior citizens, who have more time than most people to go marching in the streets.

Unlike the U.S., Ireland has few options to deal with a budget crunch like this, thanks mainly to its membership in the European Union. It can't run up huge deficits because it had to agree by treaty to keep deficits within a certain range, as a condition of using the euro currency. And it can't simply print more money because the money supply is controlled by a European central bank. So, Ireland has little choice but to reduce its budget and/or to raise its taxes. This is simply reality and mirrors the choices most of us have in life when times are hard: either find a way to get more money or reduce our spending.

Because of its sheer size, the United States can choose to radically increase its spending even as revenues fall. It simply writes more IOUs to China and other countries and, if worse comes to worse, it can resort to printing money to cover the spending, thereby diluting the value of the dollar. But despite the massive spending, President Obama aims to halve the U.S. deficit. He bases this on growth projections that look like fantasy, given the economic situation. And he will raise taxes on businesses and the top five percent of earners. This sounds like a painless solution for 95 percent of us, but the fact is that higher business taxes generally result in higher prices and lower employment. And taxes that are not broad-based tend to have diminishing returns as the rate goes up. The calculation seems to be that, even if the economy doesn't improve for many years enough voters will be getting some gift or other, in the best Irish tradition, from the Democratic-controlled government so that they will continue to re-elect it anyway.

Ireland will inevitably have to raise its tax rates and that will not help its recession. The Celtic Tiger made a few individuals super-wealthy, but some of them will not be contributing at all to the treasury, as tax rates go up. Those ones have long since changed their tax residency to places like Monaco.

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