To: Website Fans, Browsers, Clients
From: Polyconomics (Michael T. Darda)
Re: Ireland’s Finance Minister
In all of global politics there was no one person in the year 2000 more committed to the pursuit of pro-growth economic reform than Ireland’s Finance Minister, Charlie McCreevy. By challenging the conventional wisdom in Euroland, the audacious Irishman single-handedly pushed all of Western Europe into the tide of tax cutting now sweeping the continent. No political leader has been more successful in risking political capital to battle the global intellectual establishment for the cause of pro-growth tax policy, which makes him our choice for Man of the Year.
In just three years, McCreevy halved the capital gains tax to 20% from 40%, cut the top tax rate by six-points to 42% from 48% and put in motion a plan to extend Ireland’s special 12% corporate tax rate to all companies by 2003. These growth-propelling policies have given the people of Ireland a taste of non-inflationary, double-digit economic growth for the first time in anyone’s memory -- with the British economic establishment watching agog, troubled at what this might mean for an Emerald Isle that has served as a nearby spot for cheap vacations. Ireland’s rapid growth, defying the Keynesian model of the London School of Economics, has been accompanied by a string of budget surpluses and a Dublin stock market up nearly 15% year-to-date, one of the world’s top performers.
Perhaps the most critical point is that McCreevy’s reforms have been the catalyst behind Western Europe’s gigantic shift toward pro-growth reform. We could not imagine Germany’s huge tax reform getting off the ground without the Irish Miracle pushing political leaders to resist anti-growth forces and go for positive-sum tax policies instead. Ireland’s example is the inspiration behind similar reforms now taking root in Spain, France, Belgium, Greece, and Italy.
Spanish Prime Minister Jose Maria Aznar rocked the political establishment this March by trouncing the center-left opposition on a campaign platform of growth-oriented, supply-side tax policy. Aznar’s center-right Popular Party also won an absolute majority in Spain’s 350-member congress, something the pundits almost universally dismissed. By August, Gerhard Schroder’s center-left government in Germany passed the most historic tax reform in fifty years. Similarly, Silvio Berlusconi, the favorite to win the prime ministership in Italy this spring, has clinched an early lead in the polls by campaigning on a “McCreevy, Reagan, Thatcher, Aznar” platform of supply-side tax cuts. Center-left governments in France, Belgium, and Greece also have cemented plans to reduce self-defeating tax rates beginning next year.
Not surprisingly, the opinion leaders at The Economist and Financial Times do not see the dramatic positive-sum change afoot and have leveled an avalanche of criticism at McCreevy’s supply-side strategy from the outset. The establishment forces at the World Bank, IMF, OECD and ECB, also have excoriated McCreevy’s tax-cutting policies on the grounds that its economy is expanding too quickly, placing upward pressure on prices. Even the monetarists have weighed in, with Milton Friedman & Co. arguing that the Irish punt should be “cut loose” from the euro in order to allow a more flexible adjustment of prices. What a nonsensical idea! It is precisely because the Irish punt is fixed to the euro that there can be no inflation in Ireland if there is no inflation in the euro. The demand-side monetarists are unhappy that the supply-side tax cuts are working as if by magic, liberating the talents and energies of the Irish. McCreevy plows ahead even in the face of withering blasts from Ireland’s own central bank president, who insists the 2001 budget will be overly “expansionary,” that any additional tax cuts would exacerbate “underlying inflationary pressures.” Unfazed, McCreevy continues to explain that raising tax rates during a time when budget surpluses are reaching unprecedented levels is akin to political suicide. The man is a menace to the status quo.
Last year’s Nobel Laureate, the Canadian Robert Mundell, who was the prime mover of modern supply-side economics, has no fears of an Irish inflation. In an online National Post debate with Milton Friedman in mid-December, Mundell argued: “With more rapid growth in Ireland than in the rest of the euro area, wage rates grow more rapidly than elsewhere and prices of non-traded goods may rise relative to goods in the rest of the euro area. Such changes in relative prices are frequently necessary, but they should never be confused with inflation, which is a monetary phenomenon.”
The Irish simply are getting wealthier relative to their European neighbors -- and unless the rest of Europe does not want to be left behind, it has to follow McCreevy’s example. The lower capital gains tax has made labor scarce relative to capital, so real wages rise as productivity climbs with the fresh capital formation. New housing prices rise as the new wealth has invited a construction boom, yet everyone benefits as the housing stock grows faster than the population. Higher after-tax returns to labor have expanded employment and tax revenues. The “inflation” caught up in the Irish price indices simply reflects an increase in relative prices due to rapid expansion, not a permanent rise in the price level due to devaluation. Higher real wages permit Ireland to import more consumer and capital goods with less effort. Living standards are going up!
McCreevy may not understand the dynamics of monetary policy in a supply-side model but he certainly deserves a golden star for resisting the foolish policy prescriptions of the neo-Keynesians at the IMF, World Bank, and OECD -- those who think Ireland’s fiscal expansion should be blunted by fiscal contraction (higher tax rates). McCreevy’s ability to push against the Establishmentarian status quo forces effectively has buried the political support for “tax harmonization” at higher levels. The new pro-growth policies emerging throughout Western Europe, based upon McCreevy’s Irish model, hold the promise of a new European economic awakening. Where Time’s “Person of the Year” was a predictable George W. Bush, whose only achievement in 2000 was to win an election by the narrowest of margins Charlie McCreevy’s Archimedean tax reforms have leveraged the Old World out of its inertia and into motions it has not felt for generations.