How About Capital Levies as an Alternative to Austerity?

Further to Marc’s post on alternatives to extreme fiscal austerity available to hard hit countries like Ireland and Greece,  it is manifestly unfair to attack the living standards of Irish workers to resolve a crisis that was not of their making, especially given that most of the fruits of the the debt financed housing  boom probably went to others. The Irish fiscal crisis is entirely a product of the state assuming bank bad debt as opposed to any previous sins of fiscal profligacy.

There is, of course, a major downside to partial debt defaults and currency devaluations as an alternative to fiscal austerity programs if this makes it impossible to finance deficits, and dropping out of the euro could have brutal consequences.

In thinking a bit about alternatives in extreme cases such as that of  Ireland, I remembered a little known area of the literature on public debt management. It is possible for a country to pay down public debt through a levy on private holdings of wealth. This shift of assets from the private to the public side of the ledger would, of course, elicit great cries of pain from the rich, but it would be much fairer than fiscal austerity and would likely inflict much less damage to growth and jobs moving forward.

Capital levies were proposed by the left, especially the British Labour Party, as a means to reduce staggering debts run up to finance WWI. and they were imposed by General MacArthur under the post WWII occupation of Japan to reduce war debt, finance reconstruction, and to break up the large wealth holdings of a discredited elite. There was a major levy on large concentrations of wealth, effectively enforced via a provision that the state could buy up any assets at their declared value, and Eichengreen judges this episode to have been a success.

(See Barry Eichengreen, “The Capital Levy in Theory and Practice” in Dornbusch and Draghi (EDs) Public Debt Management: Theory and History. Cambridge University Press. 1990)

Ireland is not, of course, post War Japan. But a modest capital levy on the super rich might alleviate some of the pain.


  • From the point of view of the macro economy tapping the savings of the wealthy is a good idea unless they react with capital flight and are allowed to do so.

    It is appalling that the Irish are being saddled with the bad debts of the banks and face years of depression as a result.

    The pressure on the government there to guarantee bank debt is tremendous because allowing the banks to default could bring about the collapse of the entire European banking system if the defaults spread to Greece, Portugal and Spain.

  • Just found the following link from Eurointelligence:

    As noted in my previous comment a critical element of the story in Ireland is the effects of default on European banks that are on the hook for 500 billion euros of loans in that country. The German and UK banking systems would not survive Irish default without massive government intervention. In the absence of national central banks this would be difficult.

    For those interested, the article indicates the exposure of the European banking system to peripheral countries.

  • And there was this GEM in the FT.

    Capital is saying unless the costs of debt restructuring is borne by the citizens they are going to fly. My question is where to?

  • Thanks for this post. I think it’s a welcome intervention into the exchange sparked by Marc Lee’s earlier comments. I don’t think a technical fix like leaving the euro is much of a solution. Aside from the specifically monetary problems this would leave in terms of huge euro-denominated debts and crushing speculation against the new national currency, it would leave the problems (and injustices) at the root of the present crisis untouched — deepening inequality within each society and major imbalances between countries at the centre and the periphery of the EU project. I found Ingo Schmidt’s recent piece on this stuff very helpful:

    This raises the question of political strategy, which Andrew Jackson points to. Rather than a futile exit from the euro, or a questionable defense of the supposedly progressive features of the euro versus the dollar (the Americans have no problem with the euro or the EU, seeing them as playing a vital economic and geo-strategic role), it has to be a matter of finding a way to shift the class relationship of forces within each EU country in defense of in the redistribution of wealth and power Andrew has proposed. Any country violating Maastricht, the Stability Pact and ECB rules in this way would need to have mobilized mass public support not only in their own countries but across EU public opinion. We’re already seeing openings in this direction following the calamity in Greece and Ireland.

  • This is a womderful idea, and I think it is the only reasonable way out in the situation that we have right now. Yes there is a threat that if capital is forced by the governments to pay for what it has done to the global economy it will fly to warmer places like India, Brazil, South Africa, etc., wherever it is needed, which it is doing right now, but this is why the governments need to coordinate some efforts to impose some limits on this.

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