March 4, 2009
‘What happens in Vegas, stays in Vegas.” So says the official advertising slogan for America’s den of iniquity. Knowing this “knowing” slogan, I was expecting something slightly more risquÃ© than the overwhelming smell of waffles and pancakes, which greeted me at Las Vegas Airport.
Granted, there are those stick insects that hang out in the Ice Bar who might regard scoffing down sticky chocolate smeared pancakes as the most lewd and depraved thing known to humanity. But for most of us, something more hardcore might be expected here in America’s centre of sin.
Whatever your weakness, it is clear that self-restraint is not high on the agenda in Vegas. In fact, if one word can describe this place it is gratification, instant gratification.
This town is a microcosm of much that has gone wrong economically with the US (which is why I am here making a documentary). Vegas is loud, brash, overdrawn and in recession. The economy here is crashing.
Nevada has the third-highest rate of unemployment in the Union and house prices are plummeting. Up to 8,000 casino workers have been laid off since January and business is down everywhere.
Like Ireland, Vegas boomed in the past 10 years, construction sucked in workers from all over the US and Mexico and it heralded low taxes and the spirit of the individual. Like Ireland, Vegas engaged in Casino Capitalism based on short-term gains gambling with other people’s money. It bet the house on construction and lost.
Today, the place is full of the same ghost estates that blight our land, built miles away from the city with no transport links. These are houses built for the new service workers of Vegas — workers who are now unemployed. This is now the foreclosure capital of the South West, a state that has gone from boom to bust in a matter of a year. This morning, the third Nevada-based bank this year has gone bust.
Things are grim in the vice capital of the US, but it differs from Ireland in one crucial aspect. This difference will cushion the blow of the recession, allowing Nevada to recover more quickly. If it were an independent country, faced with a recession, Nevada would devalue its currency and trade its way out of this crisis, allowing hotel room prices in Vegas to plummet relative to California and attract in more Californian tourists in process.
But it can’t. It is a state of the United States of America. The downside is that Nevada can’t devalue; the upside is that it gets huge transfers from the federal government to pay for its unemployed in the same way that Wexford gets transfers from the Dublin government to pay for the rise in unemployment in Enniscorthy.
As a result, the impact of the recession in Nevada will be more cushioned than it otherwise would be if Nevada were an independent state within the dollar zone.
Now look at Ireland. Ireland is an independent state within the Eurozone. Because there is no central European budget where we might get federal transfers, we have to suffer this recession with a hard currency, without any offsetting budgetary help. How dumb is that?
Ireland has abandoned macroeconomics and is now being run by mantras, which allow our leaders to avoid honestly assessing our situation.
Ideally, we would devalue our currency and print money to get us out of this mess. We should also increase government investment, not reduce it. This is after all the core of macroeconomic theory as I learnt it.
When you have a liquidity problem where the people are hoarding, not spending, the state takes up the reins and spends. This is what every country did in the 1930s and goes to the heart of the response to the crisis which President Obama unveiled last week. But the Irish government is trapped, we have got ourselves into a stupid situation whereby we can neither devalue nor spend excessively. Therefore, our present European arrangement is the worst of all worlds.
But we are going to vote on Europe again this year with Lisbon II, so what should we do?
Less Europe and an ability to devalue our currency would help enormously but so too would more Europe and fiscal federalism where real political and budgetary integration accompanies monetary union and free trade.
This implies that the best policy for Ireland is either to dilute our commitment to Europe or enhance it greatly! Both outcomes are better than keeping the present status quo of being full members of the euro in a half-constructed political union. This is a disaster. So something has to give.
The financial markets have twigged this Irish dilemma and are betting that Germany will not tolerate more European integration, which the Germans could rightly see as yet another attempt to extort from the German taxpayer money to pay for Ireland’s sins. This is why the market which measures the risk of an Irish default, known as the credit default swap market, is suggesting that a default in Ireland is likely.
However, as against that, the political class in Europe and in Germany in particular, by proposing a European bond, is moving gradually towards more muscular political integration backed up by these monetary measures.
At the moment Germany, while admittedly footing the EU bill, gains tremendously from the EU because it can export its goods freely in the union, without having to worry too much about the budgetary implication of an EU-wide recession. So German trade benefits are amplified in a Euro boom but its fiscal downsides are capped in a recession. So it is win, win for Germany.
Granted it is the largest contributor to the Euro budget but this budget is modest when compared to a national budget and the national responsibility of proper EU governance.
Thus this crisis is not just a challenge to Ireland but it is also a challenge to Europe. We can improve our lot by taking either radical option.
We would be better off being the most ardent pro-Europeans or by being the first to leave the currency union! Equally, we know that if we stay as we are, we will have a much longer recession than is warranted, which is political and social suicide.
In short, we have to make big adult choices. In contrast, here in the land of the Elvis impersonators, Casino Capitalism is a grown-ups Disneyland, which will be paid for by the croupier in the form of Uncle Sam. Unfortunately, in our Irish version of Casino Capitalism, the punter always pays.
We are in a situation where we have to make a move. We can’t stay as we are.
In biblical terms, Ireland needs the Wisdom of Solomon; lamentably all we are faced with is the Life of Brian.