How Ireland got too much money

0:08Ireland has a serious economic problem. It has too much money. It already had a near 9 billion euro budget surplus. Its economy grew five times faster than expected last year. And just this week, the European Court of Justice has ruled that Apple must pay it 13 billion euros in back taxes that it doesn't want. Today on the show, I have a special guest here to discuss how on earth do you end up with such a pressing first world problem? And what is Ireland going to do about it? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at FT Towers in London.

0:50And my special little friend today is David McWilliams. David, welcome to the show. Katie, how are you? Are you short a few quid? Short a few quid. Do you want a loan there? So if you don't know him, David is that Irish economist guy off of the internet. He's a broadcaster, he's a writer, and he's the founder of what sounds like the worst event on Earth, but is actually one of the best, the Kilconomics Festival, where economics meets stand-up comedy. You're going to have to trust me on this. It does work. I'm going to be out there in a few weeks, and David's special skill is talking about economics in a human way for humans.

1:29David, the floor is yours. The floor is yours. Tell me, in human terms, what on earth is going on over there? In human terms, it's sort of an extreme first world problem to have far too much money, so much so that the government is almost in denial about this escrow account, which has 13 odd billion euros in it. I mean, who's counting? Who's counting? This is back tax owed to Ireland from Apple as a result of a little bit of jiggery-pokery about 20 or 15 years ago. It's a long time ago now where the Apple revenue was rooted through a head office that didn't really exist in Ireland. One of these brass plate jobs.

2:15And everyone was looking the other way until somebody stopped looking the other way and started looking. Right. And that was the European Commission. So basically, Ireland is on a collision course with the European Commission, which is bad for us because we are and pride ourselves in being Europeans. You're good Europeans. Exactly. We're bad in Europe. You're bad, yeah, exactly. So had this been something that would have been unearthed in the UK, the Irish newspapers would have been gloating at this, right? But the fact that it was unearthed in Ireland, there's been a sort of a collective, well, I'll just say, let's just hope this goes away.

2:49But the problem is that Ireland, it's not that it has too much money. The Irish economy has been set up to have a budget surplus. And this sounds very strange. In fact, this is the end result of 20 or 30 years of policy. So if you make your country open to largely American multinationals, and if you attract them in on the basis that your tax rate is lower, and if the purpose of the American multinationals is to sell stuff to the European market of 300 million people when you're only 5 million people, it's highly likely that you will end up with a massive corporate tax surplus. This is something that Irish economists don't explain to the world because we don't want to.

3:33But this is exactly what has happened. So over the last 10 years, the corporate tax take in Ireland has been rising very, very quickly. And it is largely, not exclusively, but largely an American issue. And it is largely four or five very big American companies. The case is about Apple, but it's not just Apple, right? Which are the big US companies we talk about here? The really big ones that are paying a huge chunk of corporation tax are Meta, Google, Apple, Pfizer and Intel. Some big names there. Yeah, some huge names. Some huge names. But again, the risk is that your tax base is very narrow.

4:15Yeah. So at the moment, Ireland's got this problem where it's getting 13 billion euros that it doesn't want. Is it going to get like 13 billion euros from all of these guys at some point and just end up completely swamped with money? Well, I mean, there are many Irish citizens who are thinking, oh, this would be interesting. Be nice. But I think they're trying to draw the line under Apple. Aha. And I think at this stage, the European Commission has only gone after Apple. So if it's only gone after Apple, and this is an eight-year-old case. Yes. I suspect that it's the only one that has this particular sweetheart deal that is unravelling.

4:50Yeah. So the reason the Irish government doesn't really want to make a fuss about this. So everybody in Ireland today is clambering for, first of all, give it to the Football Association. It's really funny. It's like kids with their hands in a candy jar. Every single vessel is interested. Build this, build this, build this, build this. Well, that's what I was going to say, right? So every time I come out to the lovely Ireland for your lovely Kilkenomics Festival, two things happen. First of all, all the Irish people assembled at the festival spend like three or four days laughing at the Brits.

5:23Yeah, that's not recent. That's not recent, no. But have you at least dialed it down now that we have a new government? No, of course, no. Completely, completely. It was Brexit related and it was Boris related. Yes. I mean, we took our cue from yourselves. That is fair. You did give us the permission. We gave you the material, certainly. But the other thing that happens every time I go out to Ireland is that people bellyache about housing prices. Yeah. And they bellyache about the lack of public transport to get you from A to B. So, I don't know. That's a good thing to do with a spare 13 billion euros.

5:52Ireland is a first world economy with third world infrastructure. Yeah. And this is something you see in a lot of emerging markets that grow very, very quickly. And Ireland needs to spend on homes. In the old days, we used to call them council houses, corporation houses, subsidized houses. It doesn't matter what you call them. We need, the state needs to subsidize housing for not just poorer people, largely the middle class, number one. And number two, we need to build significant infrastructure. We probably need to outsource that to Italians and Spaniards who are by far and away the most efficient engineers in Europe.

6:33We're not. We have a problem that Britain, America, Canada, all common law countries have, which is we don't seem to be able to build on time or on budget. We seem to consistently get legal challenges to all sorts of transport initiatives. So it's very clear that this 13 billion could be spent efficiently. However, the economists in the Department of Planning take the view the economy is already overheating. And what they're saying is the economy is already overheating. if you throw this extra 13 billion on an economy which is basically bursting at the seams, what you will have is inflation. But the counter argument is if you don't do it, you'll have inflation too because you never ever fix a transport or infrastructural or housing bottleneck by building less.

7:25You always fix it by building more. So it's a matter of actually making the choice. My other concern is that economists in general have a sort of a fetish for prudence as a general and for saving. They're a dour bunch. Right, exactly. So we know that nothing ever got built by saving. You have to spend to build. You have to invest to build. And the idea is, oh, well, don't worry about it. If we all save and we're prudent, somebody else will go to the bank and take that money out and they will invest. But that's not the way the world works. So I think that we have to also decontaminate the economics mind away from the fetish towards prudence at a time when an economy requires extreme building at this stage.

8:15That's the dilemma. The other thing is, of course, the government really, really wants to be respectable and it doesn't want to be seen. And does it want more apples? Does it want more big US multinationals? Exactly. Of course it does. Of course it does, because that's the economic model. So unlike the UK, So Ireland was a country that had no capital and loads of people about 30 years ago. So we had ridiculously high interest rates and we had very, very high rates of emigration. Right. Now we are a country with ridiculous amounts of capital and not enough people. So we're absorbing in all these new migrants while at the same time running massive current account surpluses and now budget surpluses.

8:57So it's almost been the country's kind of flipped on its head economically. And it's happened very, very quickly. And it's never really happened in a Western country before. That's the interesting thing. And it's mad as well because it's not so long ago at all since Ireland was suffering a horrible economic housing banking crisis. Absolutely pushed it to the brink. Yeah. Now it's just got euros coming out its ears. Because of this corporation tax idea. And because the corporation tax is so, so buoyant. It's not just corporation tax. VAT is very, very buoyant. Income tax is very, very buoyant. Basically, you have an economy.

9:31What I've always thought is quite interesting about globalization is small countries do extremely well in globalization. And the reason small countries do very well is that in the past, in order to have the benefit of somebody else's market, you know, I'd say in the European case, the 300 million, you kind of had to beat people up to do it. You kind of had to go and conquer them and knock them around the place. And big countries, France and Britain, these big countries were very good at that. And I think that those type of countries have suffered when the playing field was kind of leveled. Smaller countries who have always been terrorized by the tyranny of size have managed for once to escape that.

10:08And so you see that smaller countries have done very well. Ireland did extremely well because who would have thought when the Berlin Wall came down that the country that would have benefited most by the Americanization of the European supply chain was Ireland. Everyone said it's going to be Poland, it's going to be Eastern Germany, it's going to be the Czech Republic. Nobody said this little rock in the Atlantic, right, is going to do well. And of course, the reason they did well is that I think it's important that American managers, so American capital flows to places, and I mean real capital, not just, you know, bish, bosh, in, out, sort of financial capital, but real capital flows to places where American managers feel comfortable.

10:52And Americans feel comfortable in Ireland because it's culturally, it's linguistically. Half of them are Irish. You know, you see Joe Biden doing the lap of honour in Ireland about two years ago. We couldn't get him out of the place, right? He was like the Apple money. He was like, okay, go at some stage. So Americans feel, you know, and as I say, no fair, like all of us, my generation, we've worked as waiters, as dishwashers in the States when we were kids. So we're very proximate to America. So when the Americans decided that they had, as a result of the Berlin Wall coming down, the permission to export capital out of the United States, they came to Ireland in big numbers.

11:33It helps that the Irish said, and you won't pay very much tax. And the reason Ireland could do that is we had no capital base before. So if you had no capital base, it didn't really matter what your corporation tax rate was because you had no capital. And that allowed us to sort of, in the UK I've always remembered, and in France and Germany, debates about corporation tax were ideological. So the left said, tax the hell out of the corporations. The right said, don't touch them. We never had that because we didn't have any corporations. Right. So we could reduce tax to a minimal level because we didn't have any tax yield to do so.

12:11And then, of course, the Americans came in and they said, this suits us down to the ground. And then in the last five or six years, and this probably maybe brings it back a wee bit to the United Kingdom, Brexit has been a boon for us because multinationals aren't going to touch a place that hasn't figured out who it's trading with. Yeah. So they go to the next place. We're figuring it out, David. You are now with the new government. But the last five years, you know, the idea is if you're in corporate America, for example, and you're making a 50-50 decision between two locations. Yeah. Both English speaking.

12:44Both English-speaking, both culturally similar, etc. The one that looks more stable or is in the right gang is the one you're going to go for. So maybe what we've seen in the last five years is some of the increase in the corporation tax has been a sort of a Brexit dividend. Yeah. Now, one thing you can do with all of that, you already had a budget surplus. You now got this 13 billion euros that you don't want from Apple. We kind of want it, but we're trying to pretend. What you could do is put a little ribbon on it and park it away for a rainy day and do a Norway, right? Just like shove all of your national wealth in a fund somewhere that will be worth 11 billion zillion euros somewhere down the line.

13:24I think we could definitely do that. There's some of that going on already, right? Some of that's going on already. And I think that unlike Norway, Norway didn't have the urgent requirement for capital investment when it discovered oil. But I do think that you can look at multinationals, the flows, unless, of course, you believe the world is going to end and Pax Americana is going to be usurped by something else. And the idea that Europe and America will trade freely with each other is going to be a thing of the past. If you think that, well, then the game's over. Yeah. But I don't think many sensible people believe that that's what's going to happen.

14:03So you can therefore look at this excess revenue as a type of oil field type dividend. And then you could absolutely put it away. And that already is happening. But my sense is that one of the dilemmas for Ireland is that the state is using that money, are going to use that money for a pension fund in the long term. But my sense is we need a startup fund. We don't need a pension fund. The dilemma for Ireland is that it has this income. I've always described it. Ireland is a bit like Connecticut with shitty weather, right? So if you imagine Connecticut, right? Right. Okay. We're, you know, and London is our New York.

14:44We're a little, a little small state. The weather is terrible. It is awful. Yeah. And it's getting worse. We are like, we're getting the global warming. We're getting... Global wetting. Yes. Yeah. Global dampness. Exactly. But a country like Ireland, and to a degree the UK or any country, needs to have a vibrant small business sector. And what is happening is the multinationals are elbowing out the talent that would otherwise have gone to small businesses. And you cannot in the long term have an economy that is just a public sector and a multinational sector with a very tiny retail and services sector.

15:21So what I would think is that some of this money could be used as a sort of a startup fund. So imagine, for example, as you said, like every Norwegian citizen has, let's say, 5, 10, 20 million, right? Accruing to them. One of the dilemmas with starting a business is you need to de-risk them at the beginning to get finance. And if you could pledge some of this startup fund to a bank as collateral, what you would do is you would de-risk the business sector here. So I think in Ireland we can be creative because the money is essentially free. right it's coming to us because of tax arbitrage yeah i mean it you know on on your point about the uk it's funny that the uk has got london but it's also got some of the poorest bits of of europe scattered around yeah speaking of money oh look at that look at that book about money called money and one of the interesting things about this book available in all good bookstores possibly some bad ones as well.

16:26We won't even judge. We will not judge. We will not judge. One of the things that comes out of it is that money is almost, I'm going to sound like an idiot when I say this, but it's almost like love, right? It's kind of almost a natural thing. So one of the things your book does is it digs way back in history. It doesn't matter how far back you go or where you go in the world, there's a system of money somewhere that starts off like an incredibly long time ago, much longer ago than we might currently imagine. And so we feel like it's a sort of, it's a natural thing that just comes out of the earth and you either have too much of it, like Ireland, or too little of it, like me.

17:06We're trying hard. We're working on it, McWilliams. We're working on it, yeah, yeah, yeah. But yeah, like it feels like a sort of natural system of government and it affects everything around it. This is the point. I mean, I started my career as a central bank economist. So the place where it's magicked up, the sort of tabernacle, if you will. And then I went to the city around the corner here to big investment banks who were basically doling it out. And then I came back home and I documented what was happening in the country and society. And all the time I realized that my career was intertwined with this one particular relationship, which is the relationship between humanity and money.

17:43And at every iteration, this was the driving force. And this is what was happening. So I decided, well, let's go back and look at where it came from. And what is really interesting is once humans started money, using money, we never stopped. No, there's no way back. There's no way back. And every society and tribe that embraced money passed it on to somebody else. So why was that? What competitive advantage was money bequeathing on humanity? And it struck me that when you look at, for example, you go back to 5 ,000 years, there's this co-evolution of money and other things like writing, counting, legal systems.

18:28Look at the relationship between innovations in money and innovations in everything else. And what you see is a co-evolution of ideas and money manifest themselves in ideas and science and literature. it's impossible to disentangle the story of humanity in the past and today with the story of this bizarre invented technology that is, at the end of the day, a leap of abstraction. It completely is. Yeah, no, totally. Well, look, it's a fascinating book. I'm very glad that your tour of London has brought you here to talk about it and Ireland's first world problem. We are going to have to wrap it up there, but we're going to be back in a sec with Long Short.

19:16Alrighty, now it's time for Long Short, that part of the show where we go long, a thing we love, short, a thing we hate. David, you should be prepared. What have you got? I have just been watching on Netflix. Yes. Perfect couple. Oh. And we're long. Are you? This is back to American suburban life, which is stuff of extraordinary. extraordinary. I'm fascinated by it. And I'm fascinated by the way Americans tell the story about parts of America. I'm a couple of episodes in, but I'm, yeah. Are you quite hooked? Yeah. I have already been short Trump Media and Technology Group, but I'm going to double down.

19:56This is not investment advice, I should remind our listeners, but I cannot help but observe that Donald Trump's truth social thing, his listed thing on the stock market, not doing too well after his debate performance. It really is. And it's been tanking since the start, wasn't it? It was a lot of, was euphoria about last April or March? Yeah, when it first listed. And the thing is that his lock-up ends soon in terms of he's going to be able to start selling. And he left no brass. So it's not looking super for Trump media and technology groups. So that's my short thing. So we're a long perfect couple and short Trump.

20:33You're a long perfect couple. I'm equal weight. Why don't we come back? By the time you get to Kilkenomics, which is two days after the American election, Kilkenomics.com, by the way, for tickets. Shameless. Which you should be so long on. We can have watched Perfect Couple the whole lot. Yeah, all right. Okay, fine. We'll come to a firm conclusion. Until then, we will be back in your ears on Tuesday. So listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio.

21:16Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening. We'll be right back.