December 6, 2007
So what did Cowen do as the storms grew and we looked to him for courage? He bottled itPosted in Irish Economy · 17 comments ·
IN 989 AD, Ethelred the Unready, the Anglo-Saxon King of England, introduced a deeply unpopular tax called Dangeld (Danish gold). These were coins that Ethelred minted from the tax.
Then, he waded into the Wash off the Norfolk coast and proceeded to throw the money into the sea.
This bizarre ritual was an effort to persuade the tides not to come in. If he could somehow bribe the sea, the impending Norse invasion might not happen. He would then live in peace and prosperity, safe from the ferocious Danish longships.
Ultimately, of course, the tides came in, the Vikings raped and pillaged, and the Anglo-Saxons were routed
Seeing the half-hearted stamp-duty efforts to stem the tide of falling house prices in yesterday’s Budget, I couldn’t get the image of bearded Brian Cowen, flowing mane dressed in only an Visigoth tunic held together by a few ornate broaches, pegging coins into the sea, out of my mind.
The stamp duty efforts will do nothing to prop up house prices; in fact, they might even precipitate further falls. The reason is that half-baked tinkering with tax rates risks what economists call the law of “unintended consequences”.
Think about the tax amnesty a few years back. There was a first amnesty, then a second, then another, then another and then another. So people held off coughing up initially, waiting for a more generous deal in the years ahead. And they were right to wait.
The same thing will happen with stamp duty. This column argued for the complete abolition of stamp duty as far back as May 2006. (Irish Independent May 10, 2006). This was almost a year before Mr McDowell hopped on that particular bandwagon. But the problem is you have to do things properly and with bravura conviction. Once you start doing things piece-meal, people realise that if they hold off, the tax might disappear altogether.
Buyers will therefore wait, prices will fall further and those who were about to take the plunge will step back. This might ironically accelerate the very house-price falls it was supposed to arrest!
This lack of conviction was evident throughout Mr Cowen’s Budget, which was unusual given that Brian Cowen was yesterday doing a leadership interview. This was his chance to show all of us that he had the mettle, the bottle and the long-term vision to lead the country.
He is, after all, the “anointed one”. We are moving out of the Bertie Ahern era of prevarication, “dig-outs” and endless tax revenue from a rising housing market. We are moving away from the era of spin, half-hearted initiatives and conciliation. Now, as things get difficult, it is time for the leaders to step forth. We want mettle, muscle and, above all, courage.
Yesterday, Mr Cowen went some of the way there, strode out manfully at first, then got cold feet, wobbled and ended up sounding like a poor man’s Eamon Ryan.
Far from committing too much money to public projects, (as much of the typically predictable commentary suggested this morning), he didn’t commit enough. He told us he was going to be ambitious, but he bottled it (against his political instincts).
Yesterday was the day to tell the cautious mandarins of the Department of Finance where to go. It was time to borrow heavily. This is particularly logical given his view that the housing recession will not spill over into the real economy in any worrying way. If that is the case, than now is the best time to borrow to fund desperately needed new infrastructure.
But either he believes that this view is wrong or hasn’t the courage of his own convictions. Yesterday was a priceless opportunity, but he wasn’t brave enough.
If we take a bit of altitude from the present cackle, the age-old law has always been that when the private sector begins to falter, the Government has to take up the slack. This is the lesson from economic history. Every time there is a downturn, the people look to the State for economic leadership. This was the time for Mr Cowen to unveil his New Deal, to take the reins and signal to everyone around him that he is in charge.
He needs to, because there is panic all around him. This week alone we have seen the former poster boys of the property boom, one after another, squeal that they needed government protection. These were the same people who this time last year, were titans of the inflated property market, astride their bubble, arguing that there was too much government influence in the economy. Now they are looking for protection, why? Because they are planking! The “land cabal” has been rumbled and their golden age of flogging second rate apartments at premium rate prices is over.
The State should not be beholden to them (they have done enough damage) but should seize the opportunity now to fix the infrastructural deficit. As the construction industry stalls, taxpayers will get a better deal in road building, railways and the like. For the first time in 10 years, there is an opportunity.
The chance presents itself precisely at a time when the need is most pressing. The World Economic Forum has just cited our embarrassingly hopeless public infrastructure as our biggest competitive hindrance. Mr Cowen should have announced far more ambitious plans for the next few years.
Why didn’t he? The only answer is that he believed the whispers of the mandarins. These senior civil servants –many of whom were badly scarred by the 1980s — have no vision. But worse than no vision, they are working off the wrong economic model.
In the bad old days, the Department of Finance was petrified of an ambitious politician who saw the need to borrow. Events followed a well trodden path where we borrowed too much — more than our domestic savings could finance — forcing us to borrow abroad. This borrowing put pressure on our (punt) exchange rate. Interest rates went up. As interest rates rose, personal borrowing fell.
This impacted negatively on government revenue, raising the prospect of yet more borrowing, putting the currency under more pressure. In the old model, borrowing begot more borrowing which begot successive crises. Now this financial chain has been broken. We have no currency and no domestic interest rate.
In EMU we can get away with it. In the same way as Irish consumers borrowed to spend like drunken sailors, the State now can borrow like a proper government to provide public infrastructure.
Instead of big bold moves, we get a Budget for everyone with no overall vision, no plan and no lasting impact.