A tale of two economies

Investors Business Daily had a really good article that I wanted to share. It uses the empirical model of reverse engineering different results to try to figure out causes. It looks at Ireland versus the rest of Europe’s, because there’s been such a radically different effect since 1985, and tries to figure out the difference.

In 1985 Ireland was it deep shamrock. 17% unemployment, violence, social unrest, weak growth. Ireland had the same Keynesian spending policies as Belgium, Denmark, Sweden, France, Finland, Norway, Germany, etc. — but was in much worse shape. For example, Ireland had about 65% the wealth, nearly twice the unemployment, and less opportunities (convenient trade, etc.) that Belgium had. Today the story is completely reversed. Ireland is rolling in the clover. What happened and why?

If you compare Ireland to other European countries, there were some startling results. They are the outlier, with far better growth, opportunity, lower unemployment, more jobs, and so on. Today the growth rate in Ireland is double that of Belgium, In 20 years, the Irish economy has grown 59%, Denmark 17%, Belgium 10%, Finland and Sweden have lost jobs. Total wealth grew in the last 20 years by 30 – 50% in most European countries. In Ireland it grew by 167% in the same time period (over triple). Even violence and crime is changing radically for the better in Ireland, and for the worse in most other European countries. So what happened? What is the causal event that we can create a correlation with?

The biggest difference is that Ireland is the outlier not only in their results, but in their tax/economic/social policy. In 1985 much of Europe had a 46%+ tax burden on their economy, and the social programs to go with it. Since then, many European countries have raised it slightly. (Belgium’s is at 47.9%). Ireland on the other hand was at the same level in 1985 when they decided to go the other way. They decided to foster growth and opportunity, so they cut their tax rate way down. And kept lowering it, and the social programs it funded. They are now at 19.3%. (Belgium’s is 2.5 times larger tax burden). Ironically, the EU refers to the “Irish Miracle” of their economy, but has not made the leap to understand that their economic policy differences had any effect or might actually be the cause. They still think the Irish are backwards with their evil tax cuts for the rich, while ignoring what the effects of taking the shackles off their economy has been. And the European solution is more social programs to try to cure the unrest and problems their economies are having.

The EU’s lost sense of direction is a major problem. They now want to try to force Ireland to raise their tax burden to the rest of the EU’s level so they can be included in their trade, instead of realizing that the much better solution is for them to all try to lower their tax burden to follow the Irish model. Instead of liberating their economies, they want to put the same shackles on Ireland that drag the rest of their economies down. A philosophy repeated by many in the U.S. as well.

There is no doubt that when you cut social programs (and taxes that are tied to them) that there is some short term hardships for a few. But there is also little doubt that fosters opportunity for the entire economy and far more people. Which makes sense as more of the economy is dependent on small business or individuals that can’t afford the burdens of higher taxes; thus when you take the shackles off, they thrive. American is called a Capitalist Country, China a Communist one, yet Americans have 3 times the tax burden as the Chinese people do. African Countries often model their tax policy after the Europeans, and you only need to visit each of those countries to realize how well their policies are working out for them. China is thriving in growth, Africa is drowning in their own tax burden. Africa is not an emerging market but a submerging one, because it follows the hue and cry of the socialists; tax more and use that money for good.

Next time you hear someone ranting about tax cuts for the rich, you should think about Ireland versus Europe. Or Africa versus China. We’re all in the same boat (economy), and trying to sink the rich side of the boat, sinks us all. Helping the “rich”, helps us all. Fiscal conservatives or libertarians aren’t evil or about empowering the rich, they are trying to empower the economy and everyone — it is just the rich have the means to take advantage of that first. Also since the top 5% pay half the entire tax burden, while the bottom third pay nothing, through a fluke of numbers all fair/across-the-board tax cuts look like they help the rich more than the poor. Until you start paying attention to where the poor are employed, or how many of the poor start climbing from burdens on society into economic contributors (and becoming the rich).

So the real difference between the taxers and the tax cutters isn’t a republican vs. democrat thing as much as it is about people who are looking at long or short term benefits. Some want to empower the economy by taking the shackles off of it, others want to help more in the now by burdening it more, while ignoring the effects next year, next decade, or to our kids. Personally, I want to give our kids more opportunities than I had, not less — and the way to do that is by reducing the burdens and debts that they will have. (Including taxes, regulations, trade restrictions, and many laws). I also want to devote my retirement to philanthropy and social work (seriously), but to do that I need to make enough to be able to do that — and while I can survive each tax increase or vilification of the rich, it works against my goals and against the very people I would like to help (long term).