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,Â 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 housingÂ 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 ofÂ 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.