November 13, 2014

To stay a wealthy nation we need to stop the drift in politics and economic affairs

Posted in Irish Independent · 18 comments ·
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What will Ireland produce in the future? This is a serious question. The world is moving on and no one is waiting for Ireland.

Countries and companies are constantly in competition with each other for everything, everywhere, all the time. That’s the landscape of the future.

The wealth of any nation depends on producing goods and services that other people want to buy. We have to be better, cheaper and create brands that others are convinced are valuable.

In the political arena, the government appears to be stumbling from one crisis to the next without anyone seeming to be in charge. Similarly, there is a significant element of drift in the economic affairs of the nation.

If we are to remain a wealthy nation – and we are a wealthy nation – it might be wise to go back to the drawing board and think about what we are going to do over the next two or three decades.

Over the past 20 years, the “Irish model” has been based on a number of critical policies – all of which are under threat. It is time to take stock.

The first policy that will change in the next few years is the 12pc corporate tax-rate strategy. This has been phenomenally beneficial to the companies that were big enough to avail of it. It was also very successful in creating a capital-intensive industrial base.

However, these companies got greedy and we got dumb, allowing their greed to undermine a perfectly reasonable tax strategy. The ‘Double Irish’ has undermined the reputation of the country and the ‘tax haven’ stench is contaminating the national brand.

Tax competition – although it will remain important – is something that will be tightened, mainly by governments which are losing out on corporate tax dollars to Ireland.

The unfortunate thing is that Ireland didn’t benefit commensurately from these tax dollars. The shareholders of the companies benefited as we allowed them to do unnatural fiscal acts by virtue of transnational accounting tricks.

The tax strategy was a form of protectionism that – rather than protecting infant Irish industry – protected big foreign industry that didn’t need protecting. It protected the strongest players, not the weakest.

This game is coming to an end.

In an effort to circumvent the authorities in other countries getting their hands on tax, we facilitated a second policy that is another tax-driven sleight of hand. This policy was called “inversion” whereby American companies could “pretend” they were domiciled here, but most of the activity still went on in America. This was aimed at reducing the corporate tax bill again.

It was the corporate equivalent of a second-hand car spray-job, where a US company got a cheap Irish legal makeover and hey presto, it was Irish. This policy is also being closed off.

Both these policies boosted national income dramatically.

The third policy has been our willingness to allow house prices to rise faster than wages. For house owners, this boosted income, generated a false sense of wealth and led to a boost in activity. These episodes are always characterized by massive private borrowing.

Today the Central Bank vows to make these periods things of the past. If it is successful (and it’s a big if), we will have no more house price/asset price booms, but what will replace them?

By this I mean, what if the only way of getting unemployment down to low single digits in Ireland is the effervescence associated with housing booms?

Ever thought of it this way? Ever thought that it is only during episodes of housing booms that we have enough economic activity to generate enough jobs for everyone? Without this giddiness, what happens to the long-term rate of unemployment?

The fourth major policy was the Common Agricultural Policy (CAP), which stabilized farm incomes in Ireland. Rural incomes were pushed up rapidly in the 1980s and 1990s and were more or less maintained.

However, the CAP is being reduced throughout the EU and this will continue. In 1984, the CAP budget alone accounted for 71pc of the EU’s total budget – today it is half this and will continue to contract. In short, all four policies are changing at a time when our debts have never been higher. To keep debt-to-income ratios sustainable, we have to figure out where are we going to get the income in this new world.

All successful States have national policies which draw on the reserves of the country to direct the national economic effort in one direction or another. It is now fashionable to claim the free market will do this, but it never has. Throughout history, national industries were always incubated initially by some State-given advantage. Even in Silicon Valley – which claims to be heaven for free markets – the basic technologies were developed by the state-sponsored and tax-funded US military.

Similarly, Germany built its industries by protecting them initially and then creating a cooperative structure called “Rhineland Capitalism”.

Every country needs a vision as to where best to deploy its resources. Once this is figured out, then it should allow the markets to work. But in the same way as a child needs stabilisers to learn how to cycle, infant industries need some protection to get off the ground.

Ireland is a rich country that has lost its way. To maintain our wealth in a changing world we have to find a new economic GPS and a new set of industrial coordinates to guide us through, not just for the next few years, but the next few decades.

In the coming weeks this column will explore some of the economic possibilities open to Ireland.


  1. McGoo

    Excellent Article!
    You accurately list huge economic problems that are definitely coming down the track and are not being talked about (ok, corporate tax gets some press).
    I would really like to know if the government is deliberately keeping quiet about these problems, or is just unaware of them?

  2. Adelaide

    Excellent article.
    An article on what the true unemployment figure is in Ireland before offering solutions would be great.

  3. I’m sure you’ll talk about the economic possibility of being European leaders in Renewable Energy- both in provision and in developing new technologies. Your previous article hints we could be better at education and competing more on an international level. Certainly our location in the world, our climate, education levels and English speaking will be some of our greatest resources to develop an industry we could become the experts in.
    I think the economist Mark Coleman in his book ‘The Best is Yet to Come’ says that our economy was never really efficient in the first place but had growth only because of our increase in population. I’m sure most Economists here would say we were never really an efficient nation.

    • Deco

      Efficient ? Look at Irish Water. A country that is soaking in water, and they wish to charge twice what everybody else is paying for it.

      And then when the government gets found out – the official scripted explanation “it was a communications problem”.

  4. Bit late coming out this one, will read it in the morning.

  5. michaelcoughlan

    Hi,

    Your article created the WRONG context. Let me simplify.

    Q. “What will Ireland produce in the future?”

    A. Plenty of well educated young and not so young emigrants.

    From the link below to the CSO stats you will see that in the last 2 years 170900 people left Ireland (Poluba). Thats every single leaving cert group for the last 2.5 to 3 YEARS. Since overseas countries only take the cream you are witnessing the crem dela crem of several generations of leaving cert classes voting with their feet and simultaneously the implosion of Poluba (Ireland; a country surviving on disgracefully exploited polish immigrant labour and like Cuba on massive cash transfers from a larger neighbour to suit a political agenda.)

    http://www.cso.ie/en/releasesandpublications/er/pme/populationandmigrationestimatesapril2014/#.VGX9Dd-K8oM

    “The wealth of any nation depends on producing goods and services that other people want to buy. We have to be better, cheaper and create brands that others are convinced are valuable”

    I am going to take a leaf out of your book and state the obvious. NO IT DOSENT. The wealth of Poluba depends on the dynamic outlined above. So does Cuba and many other nations.

    “If we are to remain a wealthy nation – and we are a wealthy nation”

    Are we? I thought Poluba is operating a deficit and up to our goolies in hock in excess of GDP?

    Once again;

    “What will Ireland produce in the future?”

    A.
    Well educated graduates young and not so young told to fuck off to a country where they will be paid a living wage for their skill instead of being exploited for taxes and stuck in zero hour contract Min wage “Jobs”.

    B.
    Bloodstock.

    C.
    Livestock.

    4.
    Highttech

    5.
    Chemicals.

    6.
    Pharma.

    7
    Food.

    And how much of that listed above will benefit the PEOPLE who live in Poluba rather than Poluba itself?

    Remember David Ireland exported food during the famine when 1 million starved and 1 million emigrated when the peasant farmers were reduced to boiling the grass to feed to their kids and when the churches whether catholic or protestant closed their gates in the face of the starving masses.

    Nobody in FAIL EIREANN gives a fuck about the future or the present or the people or the graduates or anybody else Dathi. We are on our own like we were during the famine and when we acknowledge that we ourselves can put in place the strategies to allow our own families prosper in spite of the unmitigated scum incumbent in Fail Eireann.

    Michael.

  6. DB4545

    That’s telling it like it is michael. We have entrenched corruption in most spheres of government and their access into the public and private sectors semi-states, Quangos and ngo’s. What can we do that is within our power with immediate effect that will pull the plug and send a clear message? Pull the plug on charitable donations. This might seem cruel but if the public realised how its generosity is being scammed by insiders getting fixed up in charities and ngo’s it would be astonished. They money isn’t reaching the people you want to help.If you want to be charitable hand it over directly to person you want to help. Contributions to most organised charities are syphoned off into ‘admin’ and used to pay salaries to cronies. Taxpayers are forced to spend over 600million annually on foreign aid

  7. DB4545

    Money which we have to borrow! It’s an area which we can shut down quickly with a little targetted effort.

  8. coldblow

    How fairly was CAP distributed? Did it just make the richer farmers wealthier?

    Does anybody remember that Late Late from Gay Byrne’s time where an English farmer argued that this is what CAP was doing, that he was glad to get the extra thousands but he didn’t need or deserve them? Ivan Yates and farmers lobbyists were in the audience to take him on.

  9. Deco

    I would also add four factors that accentuate matters both on the upward and downward. {they make the boom boomier}. Matters that ensure that there is less financial conservatism, and more (often badly thought and reckless out adventurism). This make the disasters even worse.

    5. ECB interest rate policy, which is fully monetarist in the Milton Friedman school.
    6. The effects of an oversized, overextended institutional state that gobbles up all it can, and that produces a lot of failure, and adjustments across the board. Often creating a lot of distortion.
    7. Booze/high levels of substance abuse. Nothing comes close when it comes to ensuring that things get out of control, like professionals on Cocaine, where the professionals hold a lot of power in the system, and questionable moral decency. We seen this in the legal, auditing and banking professions.
    8. A mentality of selfishness, and having a “right” to behave like an idiot. This causes all sorts of problems, and results in a pecular strain of arrogance that really is capable of any disaster. [ witness the politicians in the Dail - practically all of the ones in political parties].

  10. Deco

    Constantin Gurdgiev’s website has some very interesting comments concerning the nature of wealth accumulation and who Ireland can have a very high GDP, and yet the economy is, essentially stagnant. The experience of those who participate in the economy, is very different from that of those who are in authority giving pronouncements of how wonderful it is.

    And you see this most starkly once you get move more than five miles from the DART line. Suddenly the lavishness, starts to thin out, and live becomes a bit skinnier.

    Of course we have no plan. What should we expect.

    We have no leadership. We simply have a bunch of people aligned to the largest party in the EP, who are in agreement with everything that is pronounced good by the paymasters of the EU, because it must be so.

    In other words, if they were not already intellectually barren, before getting into power, their code of obedience would be sufficient to make them intellectually empty, upon acquiring “power”.

    Michael O’Leary grasped the essence of it, when he said that we lost our sovereignty because we did not look after our money. The problem was that there was not money there at all in the first place, and yet the media and the state decide to call enormous borrowings, unprecedented riches.

    And why did they make such a stupid mistake ? How could they be so intellectually dishonest ? Well, intellectual dishonesty is one of the core elements of this entire “modern Ireland” experience that we have been congratulating ourselves about. We got hooked onto what James Howard Kunstler called “the pursuit of ‘something for nothing’ “. And our media, and our politicians loved it. The Americans based it all on cheap oil. But our “knowitall” class really did create something for nothing. When it became apparent that it was really nothing for nothing, and was all an illusion, they changed the script. It was somebody else’s fault.

    At the heart of Ireland’s biggest problems in the current age, is an enormous amount of intellectual dishonesty.

    Or what most people will term as “bull5h1t”.

  11. Deco

    If Ireland is to get serious about economics, Ireland is going to have to address the

    I) the inefficiency that is rampant across the entire state system. Time to shrink the state, and get into subcontracting the private sector to get tasks done.
    II) the inefficiency that is rampant in the transport area (building the underground link under Dublin city is a good place to start)
    III) the inability to build upwards in Dublin
    IV) Various stealth taxes, and charges.
    v) The stupidity that prevails in the banking system
    vi) the demographics problem which will start in five years time (and this is not helped by the scale of the mortgages that exist in the Eastern region in gernal, and Dublin in particular).
    vii) the demographics cliff on the Western seaboard.

  12. Deco

    The IW has revealed that Ireland’s political leadership is a collection of economic chancers. No clue about cost control, productivity, scalability, or efficiency.

    And fully convinced that it will all be resolved once the people get beaten into submission, and made obedient to an expensive, inefficient racket.

  13. StephenKenny

    The difficulty with the idea of actually creating wealth, is that it is actually very hard to do, at least to the level we’d need, to sustain the current general standard of living:

    You have to decide on product or service to provide; look for an angle to enable market entry; find high risk finance which will all disappear if the company fails; find initial customers; probably re define the market presence as a result; deal with existing clients while looking for new ones; find invoice finance that doesn’t eat all your profits; supplier problems and uncertainties; find skilled staff; keep skilled staff; deal with more cash flow problems; deal with too many sales; deal with too few sales; changes in laws; currency fluctuations; ………

    Asset speculation is so very much easier:

    Buy an asset; repaint it; wait; sell it. And you may not even have to repaint it.

    I don’t think anyone outside the highly ordered economies of mainland Europe or Asia would consider the former, when the siren song of the latter is always there.

  14. [...] “We need to stop the drift in politics and economics,” says Irish economist David McWilliams. [...]

  15. SMOKEY

    When viewing the Joan Burton water balloon clip in slow motion, one cant help but see the parallels to the Abraham Zapruder film. Forward and back,…… forward and back,……… forward and…………………..

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