Low-tax regime becoming an impediment to growth

The old debate about whether Ireland should embrace US-style liberal capitalism or the more regulated European variety resurfaced in the wake of the recent European and local elections.

Suggestions by the Minister for Communications, Mr Ahern, that the Government paid a price for not delivering on health, education and other spending promises provoked a strong response from his colleague, the Minister for Finance, Mr McCreevy.

There was little point talking about more spending if you don't have tax revenues, according to Mr McCreevy. And you can forget about revenues if you don't have jobs. And they are only going to come to Ireland if we have low tax rates, he pointed out with his normal subtlety in a pithy speech last week.

It's a debate that greatly interests Prof Joseph Stiglitz, who was the chairman of the Council of Economic Advisers and in effect the number one economic adviser to President Bill Clinton.

The bespectacled academic and Nobel laureate - who was in Dublin last week - is on Mr Ahern's side.

"Many people think that one of the factors that gave rise to the Irish miracle was the strong investment in education over a period of time. Therefore to cut back on those areas is to cut back on what is the source of economic growth," he explained.

There is a clear parallel with what he sees as the gross mismanagement of the US economy by the Bush administration.

"What gave rise to the US boom was the internet and biotech, all of which was government funded research.

"What we are facing now as a result of Bush is a huge deficit going on for as far as the eye can see which is already putting pressure on education and research in every area except the military.

"The result of this is that we won't be renewing the foundations of what brought us the prosperity in the nineties," he explains.

Mr McCreevy is also taking a risk by putting his faith in low tax rates as the driver of economic growth. "All the evidence is that the low tax, low service strategy for attracting investment is short-sighted. Far more important in terms of attracting good businesses is the quality of education, infrastructure, services," he says.

Ireland can continue to engage in tax competition to attract investment and it may work, provided services are not starved to the point that it leads to a significant deterioration, but it is short-sighted, says Prof Stiglitz.

"It's a game that other countries can play. If you are going to play that game you are going to be outbid," he says.

"You have to have another strategy. You have to out-compete by high quality. You have to have services, education and so forth.

"Low tax was not the critical factor [in the Republic's economic development] and it is now becoming an impediment," according to Prof Stiglitz.

His views are not those that would be expected of an adviser to a US president, even a left-leaning Democrat such as Clinton. But they stem from his analysis of the boom and bust cycle of the 1990s, which is the subject of his latest book, The Roaring Nineties.

He contends that the recent recession was the worst since the great depression because of a number of factors, the common thread being greed.

"The boom was bigger than the typical boom and the greed was an order of magnitude bigger than the typical greed. You see it in terms of statistics about the payments that went to the top CEOs. The ratio of executive pay to the pay of ordinary workers went out of bounds," he said.

The scale of abuses apparent during the 1990s boom have not been seen since the 1920s, he believes.

"Every major investment bank has been involved, every major accounting firm," argues Prof Stiglitz.

The aftermath has also been worse, with the US economy still facing a deficit of $5.3 million between the number of jobs created and the entrants to the labour force. "This is the first time since the Great Depression that we have had a net job loss over a four-year period," he claims.

Prof Stiglitz is damming of the Bush administration's handling of the downturn. "They say they inherited a bad economy and given the war on terrorism, they did as well as anybody could and that's just wrong," he explains.

"What did they do wrong? It's very easy. You had a tax cut for the rich that did not stimulate the economy when you could have had a tax cut for the low and middle income groups that would have stimulated the economy," he says. So bad has been the job done by Bush's team that the recovery now under way may not last into 2005, he believes.

"Because we had these tax cuts that did not stimulate there was a further burden put on monetary policy, which meant low interest rates. What kept the economy going was that people refinanced their mortgages.

"As interest rates rise, households will have more difficulty meeting their debt burden and there is at least a significant risk the housing bubble, fed by low interest rates, that if it doesn't break it will be damaged," he explains.

President Bush's economic policy suffers from the same flaw as his foreign policy, says Prof Stiglitz. "Foreign policy proceeds with an arrogance and without looking at the evidence.

"They wanted to believe that Iraq was a problem. The evidence was not there for the weapons of mass destruction and yet they [the administration] came to believe it in almost a religious way," he says.

The administration also wanted to believe that a tax cut for the rich would help the economy despite a substantial body of evidence to the contrary, he claims.

People who challenge the orthodoxy are quickly removed, he believes. The role of the Council of Economic Advisers which Prof Stiglitz chaired has been downgraded by Bush.

"Larry Lindsay was economic adviser inside the White House. He raised questions about whether the tax cuts were stimulating the economy.

"He was fired. He didn't say what was wanted so he left," Prof Stiglitz explains.

"Clinton never asked us [the Council of Economic Advisers] to compromise as economists, whereas these guys are asked to compromise all the time".

It's the sort of thing that upsets most ordinary Americans, according to Prof Stiglitz, who unsurprisingly, predicts defeat for Bush in the November elections.