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No need to worry about economy overheating but we need to look past corporate taxes

about 10 hours ago

Chris Johns

“The flow of corporate taxes that we so enjoy spending will one day dry up. We treat them as permanent revenues when they are so obviously anything but.”




It may come as a surprise but, on one measure at least, the global economy has never been in better shape. Deutsche Bank has counted up the number of economies currently in recession and reckons it is at an all-time low.

And, on International Monetary Fund forecasts, that number will fall further over the next few years. In terms of growth rates it is hard, by contrast, to assert that the world economy is booming but it is certainly looking healthier than at any time since the great financial crisis. Unemployment is falling, even in Europe, and central banks are either raising interest rates or talking about gradually scaling back the money-printing that has sustained, just about, economies over the last few years.

One of the puzzles over the decade since that crisis is just why the recovery has been so sluggish.

Normally, economies bounce back quickly and vigorously after deep recessions. Milton Friedman likened the business cycle to a violin string: the harder it is plucked the more it vibrates.

It’s as convincing an explanation of the trade cycle as can be found in most textbooks – and is at least as well supported by the data. But recoveries after financial crises seem to be different.

Robust growth

It takes a long time for decent growth rates to take hold; often it’s simply that paying down over-indebtedness just takes time. Whatever the reason, enough time now seems to have passed and growth is robust, if not booming, just about everywhere.

Even the UK seems to be staving off recession thanks to healthy growth in Europe and elsewhere.

There is much to be celebrated here, particularly in a domestic context. The small, open economy that is Ireland mostly depends on what is happening in the rest of the world.

The economic policy levers available to the authorities are very limited in number and scope – particularly in a monetary union. But domestic growth, boosted in no small part by external developments, is such that we now hear warnings about “‘overheating”.

This is a bit of puzzle. Until we have full employment and resultant concerns about wage inflation I would have thought that a high growth rate was welcome. Perhaps the worriers are already concerned about the possibility of wages going up. A number of things could be said about that. Mostly, bring it on.

According to OECD data (and other sources) Ireland has the most progressive tax system in the world. Through taxes and welfare payments we do as much or more than virtually any other country to relieve income inequality.

That’s something to be celebrated – but it’s not something we hear too loudly from the poverty lobby and class warriors. They focus on pre-income redistribution measures of inequality: these are indeed very high, particularly in comparison with other countries.

More jobs and higher wages seem to me to be the best solution. We wouldn’t have to do quite so much redistribution if we had a smaller problem to begin with. But Ireland is, today, a shining example of how the fruits of economic growth can be shared more equally via the actions of the State.

Not wholly incidentally, there are several other areas where Ireland looks relatively progressive; whether by accident or design, several aspects of economic life on this island make others look on in envy. While still too high in an absolute sense, our gender pay gap is, on average, less than in most other countries. We tend to score highly on measures of happiness. The next time you hear or read someone moaning about how awful things are, do bear all this in mind.

Small print

No economist can ever be upbeat without referring to the small print. The threats are all too obvious. The flow of corporate taxes that we so enjoy spending will one day dry up. We treat them as permanent revenues when they are so obviously anything but.

The global trading system that is in no small part the driver of both our prosperity and happiness is under threat. Neoliberalism, a term of abuse in most trendy Dublin dining rooms, has served us well. It is endlessly ironic that the people who created much that we now enjoy are so reviled, not least by their own direct descendants.

Ronald Reagan began the modern era with a plea in 1987 to Mikhail Gorbachev to tear down the Berlin Wall. Donald Trump, leader of the party that pretends to revere Reagan, promises: “We will build that wall.” A different barrier but one with very similar connotations.

Margaret Thatcher was the driving force behind Europe’s single market. Today’s British Conservatives betray that legacy with their nativism and determination to quit that same single market. They too are utterly committed to a wall. Actually, at least two walls: one between Britain and the continent, the other between Northern Ireland and the Republic.

We need not worry about an overheating economy. But we do need a plan B.