Thursday, December 09, 2010

Can Ireland be Saved from Econeurosis?

Ireland is one of the countries whose governments have fallen into deep deficits. The Irish deficit, including bank bailouts, is 32 percent of its gross domestic product. The bonds of Ireland are now regarded as highly risky. Ten-year bonds from Ireland, Greece, and other indebted members of euro-land are paying over 7.5 percent.
To avoid a default on its debt, the European Union and International Monetary Fund will provide a loan of 85 billion euros (US$ 113 billion). The chiefs of the European Union fear contagion, as a default by one country will induce others such as Spain to also default, and the loan losses would cause another financial crash.
As in the U.S.A. and other countries, the fiscal crisis in Ireland was caused by its unsustainable real estate boom, when its capital was doubling. Irish house prices have fallen by 50 percent. The Irish economy suffers an unemployment rate of 14 percent. The Irish government had previously resisted an aid program from the EU and IMF for fear of having to abide by the harsh terms of a loan agreement.
As with Greece, and aid package only postpones the fiscal program. The government of Ireland plans to increase tax rates and reduce its spending by 20 percent. Future generations of Irish will have to pay for the failed policy of subsidizing the Irish landed interests and their banking allies.
The economist Paul Krugman wrote a column in the New York Times entitled “Eating the Irish.” He invokes Jonathan Swift’s satiric “Modest Proposal” for Ireland to sell its children as food. The Irish were poor and starving in the 1700s and 1800s as the nation’s wealth went to the landlords. The Irish learned neither from economics nor from history, as they repeated the error of letting the gains from their great economic expansion go to ever higher land values, until real estate prices inevitably collapsed, which also crashed their banks.
But Krugman, like most other economists, has misdiagnosed the problem. He writes that these days, the problem is not the landlords, it’s the bankers. Wrong, it’s still the landlords, as the bank losses come from fueling the real estate bubble. But the real problem is not the landowners, but with the government subsidies to real estate in the form of public goods paid for by taxes on wages instead of land, thus generating higher rent and escalating land values.
The reaction of the government of Ireland, as in Greece and other indebted countries, is austerity. Of course excessive government spending should be cut, but vital services should be transferred to the private sector rather than eliminated. There have been huge demonstrations in Ireland in opposition to the cut in welfare spending.
The justification for government welfare spending is that it is compensation for denying economic opportunity to labor, by imposing burdens on enterprise and taking away much of the earnings of labor. By taxing wages, government prevents labor from buying the goods it produces. Government then provides the goods with welfare spending, but the taxes also create a resource waste, a deadweight loss that has to be made up by borrowing, and thus we get to the fiscal crisis. Higher taxes on labor and enterprise will make the problem that much worse.
There is an alternative to austerity and a new Irish economic famine. The Irish need to confront their centuries-old land problem. Ireland needs to stop subsidizing the landowners. The Irish need to keep their value-added tax at the minimum required by the European Union, and replace all their other taxes with user fees, pollution charges, and a tax on all their land value.
Ireland also needs to quit the euro and restore its own currency. They can call it the eireo (pronounced eye-row). The new central bank of Ireland can then pay off the bank loans with eireos. Usually, such money creation is bad, but just as sticking a knife into somebody is normally evil, when a dying patient is undergoing an operation, one needs to perform surgery. The monetary inflation of eireos would reduce the real value of the loans to the Irish banks, but the lenders should have realized that they were fueling a risky speculative land boom. Why should the Irish people suffer and not the financial fat cats who hold the Irish debt?
Land value taxation plus paying off the debts with new currency will save Ireland. Why are they not doing this? Why are economists not screaming this remedy to the world? Perhaps there is a mental disease one can call “econeurosis,” analogous to psychoneurosis. Econeurosis is a disorder of economic thought, the mental confusion of refusing to confront economic logic and reality, rooted in ego defense mechanisms and anchoring to learned doctrines.
At any rate, the Irish will suffer an economic famine for no good reason other than their refusal to understand economic logic.


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