Would You Really Want To Be Like Iceland?

TW: The Republicans have one answer for everything- tax cuts. It is a simple strategy and it is unswerving and dogmatic regardless of our fiscal status, our place in the economic cycle, our spending on wars etc.

When hearing these ideologues I frequently find it relevant to refer back to their comments prior to the start of the Great Recession. Why should we listen to these folks?

Iceland as you may have read has basically imploded, their currency is untradeable and the economy in depression.

From the Cato Institute (leading libertarian, Republican leaning think tank):
"Iceland Comes in From the Cold With Flat Tax Revolution:
Iceland has joined a growing list of nations that have sharply cut their corporate tax rates and adopted flat-rate individual income taxes, with hugely positive consequences on economic performance...The corporate income tax rate is 18%, among the lowest in the industrial world...It reduced its estate tax rate to 5%, implemented a flat tax of just 10% on capital income, repealed a turnover tax on business, and abolished a wealth tax...

From a political perspective, however, the Iceland reform is remarkable. It is the first time a western nation chooses no longer to impose discriminatory tax rates on successful taxpayers.
Tax reform and economic liberalisation have helped Iceland prosper. Let's hope that other industrial nations – and especially [the UK] – will learn from Iceland's success. "
http://www.cato.org/pub_display.php?pub_id=8155

First the Economies Then the Governments

TW: This is the stuff that gets me concerned about exactly where we are headed. Obviously Iceland is very small, tiny in fact (300K people) but political unrest is fermenting in many places in particular throughout Europe. Interestingly it is the more affluent nations that have had the greatest rumblings.

These are the times that test the assumptions which underlay societies economic and political structures. Globalization (a positive force from my perspective) will be under stress. Where the political unrest goes no one knows, but rest assured if the economic malaise continues for much longer it will grow quickly.

From Der Spiegel:
"Icelandic Prime Minister Geir Haarde, rattled by the financial crisis and widespread anti-government protests, called early national elections for May 9 on Friday and announced he was stepping down.

...Iceland, the epicenter of the banking crisis, saw huge debts toppling its banks last autumn. Its fragile economy is expected to contract by 10 percent this year. Faced with rocketing unemployment and rising inflation, Icelanders have increasingly taken to the streets to voice their anger. Tensions in Reykjavik peaked on Thursday night when police used tear gas to control rioters for the first time since 1949...Polls suggest a new election would likely spell a swing to the left with the Left-green party profiting from the tide of anti-capitalist sentiment.

Icelanders haven't been the only ones in Europe taking to the streets to voice their disgust at worsening economic conditions. People in Bulgaria, Latvia, Lithuania, Hungary and Greece have likewise been voicing their frustration.

...Last week, Lithuanian police fired tear gas at demonstrators who threw stones at the parliament in protest at government social spending cuts. Meanwhile in Bulgaria, hundreds protesters smashed windows, fought police and damaged cars when an anti corruption protest escalated into a riot."
http://tinyurl.com/advmjp

Iceland: A Parable On Free Markets Run Amok

TW: As you may have read, Iceland is more or less screwed. Naturally the question becomes why? The answers are not complex. This country of roughly 300,000 had no freaking idea what they were doing economically and then shockingly it all blew apart. The sobering thought is many of their policies sound familiar to another country with roughly 300 million folks- minimal regulation, nearly blind faith in free markets, debt out the wazoo (their ratios to be fair are far worse than ours) etc. But since their country is not too big to fail unlike say ours, they have been largely left to hang.

From Fortune:
"...Iceland had one of the richest economies in Europe, but it had a problem. Its three main private sector banks had become so large that their assets amounted to more than ten times the gross domestic product of the country...Today the economy is in unbelievably horrible shape: The three banks - Kaupthing, Landsbanki, and Glitnir - are in receivership. The stock market has lost 90% of its value. The central bank is technically insolvent, its modest pile of assets dwarfed by a mountain of liabilities...The currency, the krona, has lost more than half its value. GDP is expected to drop by a stomach-churning 10% in 2009, and unemployment will probably hit a 40-year high...Above all, the nation's future is heavily mortgaged. Claims from Britain alone amount to half of what's left of its GDP. 'It's like a neutron bomb that has wiped out all monetary assets but left the people intact'...

Iceland used to be one of Europe's poorest countries, a bleak place that survived mostly on fishing revenue and the occasional adventurous tourist who came to bathe in the natural hot springs or explore the moonlike lava fields. Davíd Oddsson almost single-handedly changed that. A onetime actor and producer of radio comedy shows, Oddsson, 60, was elected mayor of Reykjavík while in his early 30s and went on to become Iceland's longest-serving Prime Minister, in office from 1991 to 2004. With thick, wavy hair, he's moody, witty, and an outspoken free-marketer who likes to quote Milton Friedman and has modeled himself on Britain's Margaret Thatcher...Oddsson then put in place a comprehensive economic-transformation program that included tax cuts, large-scale privatization, and a big leap into international finance. He deregulated the state-dominated banking sector in the mid-1990s, and in 2001 he changed currency policy to allow the krona to float freely rather than have it fixed against a basket of currencies including the dollar. In 2002 he privatized the banks..."
http://money.cnn.com/2008/12/01/magazines/fortune/iceland_gumbel.fortune/index.htm