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Economics

Birth and Death of the Celtic Tiger

In 2008 Eurostat reported that Ireland was the second richest country in the EU.

Less than three years later, Max Keiser presents us with a very different picture, of an Ireland few could have imagined.

There is blame aplenty and no shortage of wonderful writers in this country to expound their various theses on who or what was to blame, but not many focus on the central bank and its money.

When savings collapse and the total debt per taxpayer climbs to nearly 500,000 euros, one doesn’t need to wade through 900-odd pages of Ludwig von Mises’ Human Action to suspect interest rates might have been to blame.  Higher interest rates would have discouraged this level of borrowing, and increased savings — real savings.

One also realises that an average wage of around 35,000 euros (and falling) will never repay a total debt (still climbing) of 500,000 euros per taxpayer. Everyone knows this, but to face it would require the politicians to make themselves most unpopular in Brussels, and prompt some very uncomfortable conversations with bankers and property developers, with whom they had a very cosy relationship. Much easier to shift the obligation to service the debt onto the taxpayer and even raid his pension.

It seems childish to break it down to this level but the creditor’s relationship was to the bank or property developer. At what point did the contract stipulate that in the event the creditor could not be paid, the taxpayer would step in and shoulder the burden?

As a foreigner in Ireland, I have been moved by the stoicism of the people, but the degree to which it is being called upon is unjust. The shifting of debt obligations onto the taxpayer is simply not acceptable and one wonders how long it will be before the people decide to follow the more boisterous attitude of other small nations who are starting to make a stand (Finland, Iceland and Norway).

Let us hope it will be peaceful.

15 comments to Birth and Death of the Celtic Tiger

  • Bob Wilson

    Believe it our not, we still have political parties standing in the elections in Northern Ireland suggesting we here vote to leave our £100,000 per capita debt (gross external debt) in the UK and join the Republic at £350,000 per head gross external debt!

    In truth, other than defaulting, joining the UK (or at very least sterling!) is the Republic’s only hope.

  • chef

    If the money as debt meme is correct then it’s impossible to increase savings while simultaneously reducing debt, the two go hand in hand. if you want more or one then you need more of the other, and vice versa.

    The Irish economy fell because they allowed unfettered property speculation, Irish politicians may want to shift the blame onto the ECB but if they had the balls to tax land speculation the bubble would never have blown.

    • Tim Lucas

      Hi Chef. If property had been taxed as you suggest, what makes you think that a bubble would not have blown up in a different part of the economy?

      Equally, would you be able to decide what is the right level of property tax to prevent “speculators”?

      If a bubble were to occur in a different part of the economy (oil, farmland, equities, government debt!!!??), should the government tax that too?

      And finally, do you think that it is fair that government should restrict individuals from exchanging their own property?

      I doubt anyone on this site would disagree that an increase of debt is a corollary of increasing savings. However, a property bubble is usually a symptom of credit growth that is not backed by real savings. I suggest to you that if you try to put your finger in one part of the dam as the water is rising, you’ll find it will just squirt out somewhere else instead.

      • chef

        Hi Tim, you’re asking a lot of very big questions so I won’t be able to answer them all.

        When economists and politicians talk about the “business cycle” they’re really referring to the property cycle which runs for about 18 years, (Austrians, having erased land from their lexicon coined the term ‘credit cycle’).

        Taxing land (not property) would dampen speculation and reduce the intensity of this cycle, thus stabilising the economy. This could be achieved without monetary reform.

        The reason land taxation works whereas oil (or energy) taxation doesn’t is because land is inelestic in supply, i.e it doesn’t away when it’s subject to tax. This isn’t true with produced goods so whenever we tax them to raise revenue the result is our gradual impoverishment.

        I think that’s enough to get us started, I’m sure with disagree with everything I say.

        • Tim Lucas

          Hi Chef,

          I don’t think I’m likely to be able to agree with what I see as unecessary restrictions of personal freedoms for the purposes of stabilising the economy when I see that the source of instability is unsuitable government monetary policy and property laws regarding the banks.

          However, I’m interested in what you say. Please could you suggest to me a source to read supporting the various assertions that you make regarding property cycles and land taxation?

          • chef

            Tim, the return to land – rent- is an economic surplus, and as Adam Smith himself noted it’s collection would free up the productive side of the economy, only the rent seekers would lose out.

            If the monetary reform you speak of added an extra dimension to the nation’s productivity this value would quickly end up as house price inflation. Broadly speaking this is why housing is more expensive in the south, the area is more productive so owners are able to get away with charging higher prices for ‘access’ rights.

            You can try Fred Harrison’s blog;

            http://www.fredharrison.com/?p=247

            or Mark Wadworth’s blog for more detail:

            http://markwadsworth.blogspot.com/2011/04/propaganda-fail_27.html

          • Tim, if you’re looking for quality argument in favour of land taxation, you’ll find some excellent material in the speeches of Richard Cobden, who was a vocal supporter.

        • mrg

          Current has given examples in the past of how usable land isn’t necessarily inelastic in supply. Marshland can be reclaimed, trees can be planted in deserts, etc.

          In general, the value of land can be increased significantly by investment. Most people in the UK could afford to buy a property in the North East, but most wouldn’t want to live there. Investment could change that.

          If you tax according to the value of land, you discourage the improvement of it.

          There may be reasons to favour land taxes over other kinds that are more invasive and which impose greater compliance, avoidance, enforcement, and deadweight costs. However, your underlying assumptions about a “property-owning elite” dominating the economy just don’t seem to square with reality.

          You can tax land to your heart’s content, but if interest rates continue to be manipulated by a central bank, malinvestment will still occur: uneconomic ventures will be pursued because of the illusion that they are economic.

          • chef

            If tax reform was introduced people wouldn’t need to take refuge in marshland and deserts, they only do this because the most productive land have been monopolised and (often) idled in pursuit of ‘capital’ gains.

            Land tax is a reality anyway, it’s just that landlords and homeowners pocket all the freebies whilst those renting have to pay twice, once when they’e taxed and another when they pay rent.

            That doesn’t seem very fair to me.

          • magrathea

            The supply of land, (once the frontier of discover / ownership has closed) is absolutely fixed. The term you use ‘useable land’ is meaningless. If land can be turned into useable land then clearly the land is useable; because it was used. Another way of saying the same thing is to note that any opportunity to drain a marsh or reclaim a lake is also land and is also fixed in supply.

    • mrg

      Cheers Mark. I agree that there are specific circumstances where it will make sense to develop land despite tax on its value. My point was that at the margins, it may make the difference between land being developed or not.

      Suppose I have a couple of acres of wasteland in my back garden, which currently costs very little in tax (say £500/year) because the government surveyors reckon it has low value. The land still has some value to me, because it means that my neighbours are further away.

      I might prefer to invest in converting the wasteland to beautiful gardens, which would have greater value to me, as well as presenting a positive externality for my neighbours. Suppose I subjectively value the aesthetic improvement at £50,000. If it costs less than that to achieve, I will pursue the project; if it costs more, I won’t. Say the cost is £49,000. I’d go ahead, except that I fear the next time the government surveyor comes round, he’ll notice the improvement, and increase my Land Value Tax from £500/year to £2000/year. Thanks to government intervention, the benefits no longer exceed the costs, and I’ll decide to keep the wasteland as it is.

      I don’t think I’m saying anything controversial here. The same thing occurs with income (there are jobs I might take untaxed, but which I can’t be bothered with after tax) and with purchases (I might be prepared to spend £1000 on a laptop, but not £1200).

      I’m not suggesting that land tax is necessarily a bad idea (compared to other taxes), just that it’s not a panacea. More generally, I’m not convinced that land is special.

      • Current

        Mrg,

        You are right. The argument Mark has made here is an old one. He is saying that if income from asset class X is taxed then in equilibrium that will affect the price of the asset class. This isn’t true because of substitution.

        To make the issue more clear, suppose that I own a factory that is worth £1million. I also own land worth £1million. There is a land-value-tax which has been paid for many years, by myself and previous owners of the land. The discounted cost of the land-value-tax is already accounted for in the £1million price.

        Now, suppose that I have income of £50K which I can spend on improvements to the land or to the factory. Which would I choose? Well, it depends to a large degree on the difference in tax rates between the two investments. It may be that improving the land would produce a greater gross return, but I may decide to improve the factory because taxation means it will produce a greater net return.

        Some may be tempted to say that the improvement to whole economy offsets this issue. This also isn’t necessarily true, or even likely to be true. Suppose that my £50K could buy a new machine for my factory which would reduce production cost by £5K per year. Suppose that with the £50K I could install better air-conditioning in the properties I own and because of that improved service charge I could charge an extra £6K per year in rent. Both cases are positive for the long-run economy. The issue that land-value depends on location which is a positive externality doesn’t apply to land improvements.

        • Chef

          Current, I don’t think you’ve fully grocked the concept of land tax.

          I don’t know what you mean by “improving the land” with £50K, surely that’s a building isn’t it? In which case the improvement would be tax free.

          But lets say you meant cleaning up the place or adding flower beds etc, these improvements wouldn’t impact your gross return because they wouldn’t trigger the land tax. If there were twon identical plots one with flower beds (or whatever) and one that was plain soil there tax liability would be exactly the same.

          A land tax isn’t a land improvement tax, however you want to improve it.

      • magrathea

        Mrg, you are presenting the one and only scenario in which LVT has any weakness. With LVT, although it is pretty unlikely, it is not entirely impossible that a person end up being charged for land value they themselves have added with improvements they have made – that is, if I understand your scenario correctly. However, a normal garden would not suffice to achieve this. In reality the increase of tax in your scenario would be due to far more than any normal garden and would be indicative of development in the area now pushing for a better use of the garden. Bear in mind, that if no-one wants to do anything with that piece of wasteland, the price will be low; it would only get higher because of the wish to do something with it. By claiming the taxes would prevent use, you end up somewhat in a contradiction; unless people wanted to use it for something there would be no high tax and so no disincentive. The second point I would like to make is that although LVT can possibly result in a situation in which some people are taxed somewhat on their improvements, all other forms of taxation start by specifically targeting improvement. So, although LVT sets itself the high standard of perfection that it only just fails to meet, it beats all other taxes into the long grass by being anywhere near the target at all or even aiming for it.