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The Wall Street Journal Europe

February 15, 2001

The Trouble Is With Europe, Not Ireland

By Arthur Laffer, an economist in San Diego.

     Ireland's politicians probably thought they had left the days of peer pressure behind in their teens. Unfortunately they didn't. The European Commission has been trying to pressure the Celtic tiger nonstop to reverse its pro-growth policies and conform to mainland Europe's backward socialist economics. The latest reprimand against Ireland's tax cutting carries with it the threat of force. Ireland is rightly saying "No." European countries should follow Ireland's example, not fight it. What the commission is attempting to do is unseemly bullying. If anything should be done by force, it should be to demand that the high-tax-rate clique of Euroland lower taxes.

     Any concession to the socialists who want Ireland to slow its economy to reduce inflation would be a mortal sin. For too long Ireland has suffered in poverty's grasp. Too many beautiful people have sacrificed their dreams, their hopes, their lives and the lives of their children at the altar of pseudo-intellectuals' blarney. Tax cuts work, and Ireland proves it.

     In truth, the recent surge in Irish prices -- almost 6% versus a euro-zone target of 2%--is a direct consequence of the Irish punt being locked to a euro also used by governments that follow sparkle-headed antigrowth policies. To eliminate Irish inflation without harming Ireland's miraculous economy Ireland must either allow the punt to appreciate against the euro or convince the rest of the countries of Europe to adopt Ireland's pro-growth tax cutting policies. It's as simple as that.

     Ireland has been impoverished for hundreds and hundreds of years without relief. In a reversal of fortunes, several years ago Ireland became the epicenter of the European tax revolt. To businesses, entrepreneurs and the lovers of freedom everywhere Ireland's government was comprised of nothing but heroes. But to Europe's statist bureaucrats Ireland was a problem. How could the repressive bureaucrats of Europe keep a lid on its citizenry if Ireland kept fanning the fires of tax revolt? Ireland cut taxes and became the low-tax, high-performance country of Europe.

     The highest marginal tax rate on personal income went from about 65% in 1984 to 42% today. The highest corporate rate went from 50% to 20%. It's amazing what Ireland was able to do in a sea of European hostility. Saint Patrick, bless his soul, helped the teeming masses of Irish poor far more by cutting taxes than by driving out the snakes. An economic juggernaut, unimaginable in the emerald isle for at least the past three centuries, had been created out of thin air. And who says there aren't leprechauns?

     In the U.S. it took an Irish-American president with supply-side tax cuts, John F. Kennedy, to end years of stagnation under President Dwight Eisenhower. What followed President Kennedy's untimely death was 16 years of bone-crushing antigrowth, antibusiness polices. Once again it took an Irish-American president, Ronald Reagan, to provide us with tax cuts, economic prosperity and hope. Even yet another Irish-American, President Bill Clinton, pushed the frontiers of pro-growth policies, extending the miraculous American prosperity.

     Well, fortunately for those who live north of the Liffey, the tax cuts in Ireland worked just as well as they had worked in the U.S. Employment soared, government spending fell, government revenues rose, the budget moved into surplus, and the public debt declined. It doesn't get any better.

     Folklore has it that the tragedy of being Irish is that, just when you think your ship is coming in, POW! something goes wrong. And so it would seem today for the Irish economy. From the city of Dublin to the county of Cork, Ireland's miraculous economy is now generating inflation far above the rest of Europe. And the European Commission has bared its teeth, ready to use inflation as an excuse to bite at the Celtic tiger's economic prowess.

     Today inflation in Ireland results from the Irish pound's linkage to the euro and from a change in the relative prices of Irish located goods versus foreign goods. This change in Ireland's "terms-of-trade" is a direct consequence of Ireland's fantastic tax cuts and pro-growth economic policies. Foreigners want to invest in Ireland because their capital is doubling. Ireland's capital surplus is her trade deficit, and to induce a trade deficit Irish goods had to become noncompetitive in the global marketplace. In order to have Irish goods become less competitive when the exchange rate is not free to move, all of the adjustment has to take place with increases in the prices of Irish goods. This is Ireland's problem.

     It would be unconscionable if Ireland crushed its prosperity in the name of controlling inflation. Ireland does not have an irresponsible monetary authority, nor is their inflation held in check by having fixed exchange rates. In fact, it is the fixed exchange rates that are the root cause of Ireland's current inflation.

     Ireland is integrated into the European Union and the Irish pound is fixed to the euro. Ireland, however, has implemented radical pro-growth policies, which are totally at odds with their European colleagues. People would rather invest in a country that's cutting taxes than in countries that raise taxes.

     Irish politicians now must do one of two things. Either they must convince the rest of Europe to abandon socialism and adopt free enterprise democratic capitalism, or the Irish pound must break with the euro and appreciate. Given the fact that Ireland has virtually no say in the politics of Europe, they would be left with no choice but to allow the Irish pound to appreciate against the euro. Any other policy is unthinkable.

     -- From The Wall Street Journal Europe



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