Stephen Kinsella

This is why I love teaching at UL. Occasionally, you get emails like this one. A student in Economics for Business wrote me the following email after a rant in class asking why shouldn’t we double the ‘dole’ to increase consumption. Here’s her email to me, and my reply is below the fold.

Everytime we talk about the economic situation in Ireland we always focus on consumer spending.

On today’s lecture u asked what ‘What will be if the government double the dole?’. In my opinion, by doubleing the dole,at the beginning the consumer spending will increase but not for a long while. Employed people would prefer to give up their jobs and go on  social welfare benefits as they would benefit from it more. As a result, costs of production and all the other costs will increase which will lead the consumer spending to decrease. People would not operate with the same amount of money in their hands and accordingly decrease their spending and the final result will be the same as at the beginning = Recession.

In my opinion, the first thing we should concentrate on is the effect of the tax on consumer spending. Firstly, employer has to pay at the moment very high tax on his employees, eg even if employee doesnt earn that much the employer still have to pay the tax. As a matter of fact, the employers would not be able to hire that many people and the unemployment will increase. If the government decrease the taxes, employers would be able to offer more work positions and the unemployment would decrease.
Secondly, decrease in the taxes would lead to the increase in investments…Foreign countries would invest more in Ireland and open their businesses here . We have to remember that soon every country would finally beat the recession and Ireland has to be prepared for the potencial investors giving them the best conditions for the opening up their businesses such as decrease in the tax.

↓Tax => ↑Investment => ↑Work positions => ↓Unemployment => ↓Costs => ↑SPENDING

Thirdly, decrease in taxes is followed by the decrease in costs like ESB, GAS, rent,etc. So people will have more money and start saving more in case of another recession. There will be more savinig accounts opened so that their interest rates would increase the amount of money lodged and the banks would have more money to operate with so the overall bank investments in the country would increase and makes the economy moving up.
After all the unsuccessful bank operations people will lost the trust to the banks so the banks would have to increase the interest rate to attract the clients.

I know that in the case of decreasing the tax government would have to borrow the money however the same thing would happen if the government double the dole. However, decreasing the tax would make the recovery process of the economy a lot quicker.Finally  it would bring the profit to the economy and we would be able to start paying the debts. It is a big risk but we can always tryes different ways of solving the problems.

Click below for my reply, and feel free to use the comments to give your opinions on the subject.

Thanks again for your very smart email.

The low taxes route you suggest is both valid and workable, but not
when the government has a really low level of tax to begin with.
Ireland is a fairly low tax economy, especially of corporations. In
the 2002-2006 period, Ireland’s tax take was also the lowest of any
Euro Area economy, at 34.9% of GDP compared to Euro Area average of
44.9% of GDP. When certain areas of tax revenue are much reduced, such
as VAT and Stamp Duty, there isn’t much scope to cut taxes. Perhaps
cutting VAT by a percent makes sense to stem some of the flow of trade
up to Northern Ireland. There is a good policy proposal out there to
remove employer PRSI for new employees for two years, making it
cheaper to hire new people, and this would operate via the channel you
describe:

The state of the public finances is another argument. There is
actually a lot of scope to borrow for infrastructural projects, in my
opinion, but the ‘received wisdom’ from several sources is that the
budget deficit must be plugged over three or four years by decreases
in government spending and increases in taxation.

I completely agree with you that the price of utilities like gas,
electricity, and telecom services should come down, and also,
continued investment in broadband-esque initiatives would really help
us get out from under the recession via new business creation.

And the student’s reply:

just to continue our debate, I personally think that we can not forget about the direct subventions.  From my point of view government should focuse on the one particular target which in my opinion should be the big enterprises to bring the foreign capital in to Ireland. This direct subvention should concentrate on the regions that are mostly impacted by the crisis as an example in Limerick. To achieved that government should turn the Limerick into The Special Economic Zone. This zone allows government directly donate the enterprises to set up the work departments. This donation would offer the tax exemption to the enterprises for example 2 yrs period. Instead of paying the tax the enterprises undertake the condition that states money would not be lodged as a profit directly to companies bank accounts but the money would be used for a creation of a certain amount of work positions in the before consulted period of time.

What do you think about these issues raised in class?