A
Tiger Slumbers in Maine's Woods 2001-08-14
Picture two rocky, northern outcrops on the far edges of
prosperous regions. Despite great natural beauty, neither of
these remote places seemed able to overcome poverty. Their
history was rich, their people were resourceful, their
potatoes were famous. But, economically, both of them lagged
behind and were regarded by others as permanent problem
territories. Their names were Ireland and Maine.
Things have changed. For Ireland, as is now known even
in the moose lodges of Maine's Great North Woods, has
transformed itself over the past 20 years into a global growth
model. The US state remains a backwater. These differing
outcomes illuminate the limits of some government policies and
the value of others. Two decades ago, Ireland and Maine faced
similar challenges. Both states were learning that tourism
alone, however enthusiastically promoted, cannot sustain a
northern economy. And both were haemorrhaging young people,
who routinely emigrated.
There were other ways in
which the two places resembled one another. Ireland was a
high-tax area and so was Maine. Maintaining rural
infrastructure, after all, requires a lot of cash for
road-building, power supplies and so on. A needy populace
generated high healthcare costs and consumed a lot of pricey
social services.
In both places people were at home
with the idea of extensive services for another reason: they
had come to believe in what might be called "the northern way"
or, to be less charitable, "the northern syndrome". This is
the idea that the best move for poorer northern regions is to
retreat to the comfort of the Scandinavian model.
For
a time, politicians in both places pursued similar economic
policies. Both sought and won heavy subsidies from distant
wealthy capitals - Ireland from the European Union in
Brussels, Maine from Washington. Modern highways replaced poor
roads; business incubators were duly established. Enormous
subsidies went to youth training.
But Irish leaders,
both politicians and labour unions, took an additional,
courageous step. They gambled that a nation that shed the
burden of an over-large government would have a better shot at
competing globally. They cut state spending and taxation
dramatically. In the 1980s, Charles Haughey, the taoiseach,
slashed the size of the Irish government from half of gross
domestic product to 40 per cent within two years. Corporate
taxes came down and the spending restraint continued
throughout the 1990s. Today, government spending equals about
30 per cent of GDP.
This is a dramatic cut - how
dramatic becomes clear when you consider that neither of the
west's two great free-market radicals, Ronald Reagan and
Margaret Thatcher, came near to matching it. The change
transformed Ireland in two ways. Local workers and
entrepreneurs now had an incentive to stay home and work. And
Ireland became a European tax haven, instead of a tax pariah.
The result was the double-digit growth that created
the Celtic tiger. Crucial to the tiger's birth was the
recognition of the importance of relative competitiveness -
that, to succeed, Ireland had to provide an environment that
was more than "all right" or "like the UK". It had to offer
more, both to its own businesses and to outsiders.
The
Ireland of today may suffer setbacks. This month, for example,
brought the hard news that Gateway is cutting Irish computer
operations. But Ireland is not likely to retreat to the sort
of undeveloped poverty it once knew.
In contrast,
Maine shunned the smaller government model, following an
exclusive "spend to grow" plan. Budgets increased each year;
Washington funnelled more cash into the state. Taxes stayed
high. And Maine has stayed - in the words of its governor -
"ambivalent" about courting investors from outside.
The result has been an environment hostile to the
entrepreneurial Everyman. A study by Fred McMahon of the
Fraser Institute, Canada's free-market think-tank, rates Maine
as one of the worst places to do business in North America.
Measured by an index of three components - labour market
flexibility, size of government and tax burden - Maine ranks
49th among the 50 states. Only Alaska is worse. Maine's tax
disadvantage is particularly remarkable: the US Census Bureau
reports that Mainers shoulder a higher tax burden than
citizens of other states.
Precisely why Maine so
consistently rejected the smaller state model is hard to say.
But one answer is that it never grasped the point about
relative competitiveness. Maine lawmakers tended - and tend
still - to insist that Maine is simply not comparable with
lower-tax states to its south.
Matters are not helped
by the fact that the Pine Cone State shares a border with a
place that maintains an even larger government than it does:
Canada. Politicians often excuse their inaction with a line
something like the following: "Our government is large but it
is not so large as Canada's."
The results of Maine's
do-nothing policy have, in any case, been devastating. With
its timber industry disappearing and no Dell or General Motors
arriving to build new factories, northern Maine is seeing its
population drop. Manufacturing jobs are disappearing. Most
troubling of all - and counter to the global trend -
high-technology jobs are disappearing in favour of unskilled
jobs.
Yet there is still the conviction in Maine that
colder weather, longer distances, poorer people - in short,
the northern syndrome - excuse Maine from competition and
explain all. It would be naive - and rather un-Maine - to
assume that tax changes could turn Maine around, one economist
assured me recently. This argument might be believable - if
Ireland hadn't happened.
Article Source: Financial
Times
|