March 11, 2001

Sliding into irrelevance

Posted in Politics ·
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‘There is no art that one government sooner learns from another than that of draining money from the pockets of the people.’

(Adam Smith, The Wealthof Nations, 1776)

In late 18th century Edinburgh, Adam Smith was the type of person whom decent respectable people crossed the street to avoid. He had a weakness for rambling about in a trance, half-dressed, twitching and muttering to himself. Worse still, his gait was described as “worm-like”. The man was totally unmarriageable and lived with his mother all his chaotic life.

It’s charming to think that today, this shambolic Scottish eccentric is revered by all those “efficiocrates” who aim to put defined, explicable order into the convoluted workings of the economy.

Smith’s main contention was that the individual, acting alone, is the key to economic wealth. He contended that politicians (who traditionally try to take credit for booms) have nothing to do with the wealth of an economy. Indeed, he went further and suggested that any political club tends to act in its own interests and he wrote that “people of the same trade seldom meet together even for merriment and diversion but the conversation always ends in a conspiracy against the public”.

You don’t have to be a disciple of Smith or a conspiracy theorist to see that he was on the money to a great extent. Nowhere is this example of the irrelevance of politicians more evident than in Ireland. This observation, if true, renders their confident assertions about the future course of the economy — as penned in publications such as the Financial Times or delivered at Ard Fheiseanna — almost risible.

In a modern economy, there are two specific ways politicians affect proceedings. The first is active interference and the second is through passive messaging which results, down the line, in economic growth.

In peacetime, political power stems from being able to spend other people’s money. The more money they have to spend, the more power they have. This is why politicians in Soviet Russia (who had all the money) were extraordinarily powerful, while politicians in federal Switzerland (who need to hold a referendum before they can raise any taxes), have no power at all.

In fact, can you name even one of the last ten prime ministers of Switzerland? So you see, no money, no power, no glory and, ultimately, no job.

In Ireland, over the past ten years, politicians have been forced by the electorate to cut taxes and spending, relative to total income. In the early 1990s, 44 pence of every pound spent went through the government’s hands in some shape or form. By next year, that figure is forecast to fall to 28 pence. When politicians actively cut taxes, they are like turkeys voting for Christmas and every percentage point of GDP that passes public to private control is another redundancy cheque for Irish politicians.

Realising this inconsistency, politicians now talk about “giving money back to the people” and are endlessly spinning to make a virtue of income tax cutting as if in some way it were a brave, even ideological move. The facts show that this is nonsense.

A cursory glance at the history of Irish tax cutting measures reveals that tax cuts came after, not before the revenue was already in the bag.

It is essential to understand this fact as it shows that reductions in tax were facilitated by an injection of cash into the economy from elsewhere and therefore were, a risk-free political option. The extra credit injected into the economy has come largely from private sector borrowing and rampant export revenue. Credit increases the amount of money in the economy and tax revenue from indirect and direct tax, thus allowing politicians to cut taxes. As EMU allows us to borrow from our European neighbours’ savings pool (arguably Bavarian savers who been putting aside cash for the past 40 years), they should get more credit for our tax cuts than Irish politicians.

Despite this, our politicians continue to talk about the big vision thing. But wait, the vision thing can only be delivered if one has the means and in all areas the politicians are losing the wherewithal to influence the economy.

In the area of corporation tax, the reduction to 12.5 per cent has already been announced, framed in the main by corporate boardrooms in New York. Income tax rates are falling due to revenue buoyancy owing to German savers’ largesse and voters’ demand. Monetary union means that Ireland can no longer lean on the Central Bank.

Unlike in the 1980s, when the government issued debts and the Central Bank, despite all its indignant public rhetoric, simply printed money in exchange for government paper. The exchange rate can’t be devalued — as it was on six occasions from 1779 to 1992. Since 1992, all government subsidies are now being policed by the EU Commission under the anti-State Aid legislation associated with the single market, thus taking away a further weapon.

All this begs the question: what, if anything, can politicians do to affect the economy? The answer appears to be pretty little. There are those who argue that the Irish productivity (output per worker) miracle of the 1990s must owe something to political planning. But this is a spurious contention.

Our productivity miracle stems from using more capital and using it in a smarter fashion. As in the US, much of the miracle results from the explosion of high-tech investment and the reduced costs of communication. So, it is fair to say that Bill Gates, Larry Ellison and Co, more than the members of Dail Eireann, deserve our thanks.

The final spice in Ireland’s high-growth mix is that of population growth and even the most brazen TD cannot take credit for the nation’s fertility.

Despite the evidence on absolute growth, politicians will argue that relative performance difference between Ireland and other countries must indicate that we are doing something right. We are, but it has nothing to do with the Dail.

Economic history is full of examples where being in the right place at the right time and producing the right products, propels economies forward for a limited period of time. Venice in the Middle Ages, Yorkshire and Lancashire in the 19th century, Hong Kong in the early 1990s and Silicon Valley up until last November are all places that spring to mind.

Economic history and recent observations about the limits of political power, suggest that the present political top brass are simply lucky that the pinnacle of their careers coincided with the present boom. To fully understand this point, ask yourself whether Michael Noonan taking over from Bertie Ahern next year would make a jot of difference to the economy.