Crawl Across the Ocean

Wednesday, January 21, 2009

Cheap Shots

Neil Reynolds, August 15, 2007, Globe and Mail:

"What's the best way to expand a welfare state, irrationally assuming for the moment that you want to expand a welfare state? Cut taxes. Especially cut corporate taxes. You will collect less revenue every time you nick a dollar but you will have many more dollars to nick - and you will almost certainly find yourself with more tax revenue than you know what to do with. Iceland is a good example."

Willem Buiter, January 21, 2009, Financial Times (London):

"Iceland’s largest three banks with border-crossing activities collapsed last fall, as did its currency. The three banks are in administration and new state-owned banks with a purely domestic focus have been set up. Strict capital controls make external borrowing all but impossible and discourage foreign investment. The country now has an IMF program.


Iceland’s government had to let the country’s three main banks go into administration because it did not have the fiscal capacity to bail out financial institutions with balance sheets amounting to 600-700 per cent of annual GDP. Any attempt to commit further government resources to the rescue of the banking system would have precipitated a sovereign default.


The excesses in Iceland during the past decade were greater than in the UK, but not qualitatively different. In both countries, the regulation of banks was laughably lax.


Households were permitted, indeed encouraged, to accumulate excessive debt - around 170 per cent of household disposable income in the UK, over 210 percent in Iceland.


Both countries permitted the real exchange rate of their currencies to become materially over-valued, more so in Iceland than in the UK, but still to a worrying extent even in the UK. The same version of the ‘Dutch disease’ - the crowding out of the non-financial internationally exposed sectors (exporting and import-competing) by the excessive growth of the financial sector and the construction industry - occurred in both countries, again to a greater extent in Iceland than in the UK, but to an highly undesirable extent even in the UK. Iceland’s gross and net external indebtedness are much greater than that of the UK, and its current account deficits during the years just prior to the crisis were much larger than those of the UK.

Both countries pay the price for the hubris of policymakers who believed that they had engineered the end of boom and bust and replaced it with perpetual boom. The risks associated with asset market and credit booms and bubbles were dismissed (”how can you be sure it is a bubble? Do you know better than the market etc.”). In neither country have the responsible parties (the prime minister, the minister of finance, the governor of the central bank and the head of banking regulation and supervision) admitted any personal responsibility for the disaster. Instead we are told tales of a once-in-a-lifetime calamity, coming at us from abroad, that ruined a perfectly sensible and sustainable set of domestic policies, regulations, rules and arrangements. As if!"

Neil Reynolds, January 9, 2009: Globe and Mail:

"Why Government Can't Stop Market Crashes"

The man really has no shame. But of course there are always going to be ideological hacks who move on blithely from failed prediction to failed recommendation and back to failed prediction without ever a word of apology, a reconsideration of their premises or a questioning of the ideology that blinds them. The question is why the Globe and Mail thinks one of these people should be one of their columnists.

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  • "Iceland is a good example.""

    I pretty much broke out laughing at that line...

    I may be a free market advocate, but I have no illusions that less tax revenue means LESS money, not more. Seems to me Peter Schiff was right and Laffer was wrong...

    By Blogger Mike, at 7:38 AM  

  • Perhaps he's good at making socialist haters buy papers?

    By Blogger Saskboy, at 9:01 AM  

  • Not much in the quoted article has to do with whether Iceland's tax revenue went up. -except that the government didn't have enough tax revenue to bail out the banks. But them seems to have less to do with the government share of the economy than with the banks having "balance sheets" much bigger tan the Icelandic economy. Perhaps your point is that corporate tax cuts will lead to companies of overwhelming (particularly that overwhelm government revenue) internationa importance setting up shop in your jurisdiction? Anyway what about the original argument is proved wrong (if we take the Times writer's word) needs to be more clearly expressed to convince me.

    Best Wishes,

    By Anonymous Anonymous, at 2:22 PM  

  • Indeed Mike.

    Saskboy - maybe, but isn't that part of the media market awfully crowded already. Maybe they are positioning themselves for the demise of the Nat. Post?

    Alan - true enough. You need to read between the lines a little to see the connection. For example, to know that the government revenue Reynolds mentions was fueled by an unsustainable debt bubble, not economic growth, and that Reynolds is a free market lover who was advocating all the other problems (such as lack of regulation of banks) that got Iceland into trouble.

    By Blogger Declan, at 6:37 PM  

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