I’m just back from Iceland, which is (as always) an interesting place. It had more difficulties than most after the 2008 financial crash, largely as a result of Gordon Brown’s outrageous use of anti-terrorist legislation to freeze the assets of Icelandic banks—no way to treat a country that was our best friend in Europe, and something that still rankles. As it turns out, Icelanders grudgingly admit, Brown did them a favour. Iceland’s banks had grown beyond financial reason, thanks to policies of cheap credit and easy money—much like the UK’s (the Royal Bank of Scotland, for instance) but even more so. Brown’s shock therapy forced the sector to restructure, and today it is much healthier. Iceland has paid off its debts, and is now doing many of the right things. A pity, really, that Brown did not dose out the same medicine at home: instead of a quick and painful restructuring, the UK has had a lingering and painful non-restructuring and is still living beyond its means.
Iceland was never bankrupt, thanks to its fishing and free geothermal energy, not to mention the resilience, stamina and enterprise of its people. But the shock of the crash and the Brown collapse led to years of political turmoil. Confidence in politics and business was shaken (despite the fact that it was bad policy, rather than bad businesses, that caused the crash—the usual inflation-fuelled fake boom that ended in the usual destructive real bust). So Iceland’s business lobby has been on the back foot, while the current prime minister is a Socialist Green who spouts the familiar nonsense about inequality and Gini coefficients (a proxy critique of capitalism and an attempt to legitimise larger statist control).
And despite having restructured the finance sector, paid its debts, and got inflation under some control (it’s currently about 2.5%), other things are going wrong too. Iceland’s taxes are among the highest in the OECD: the average Icelander works 170 days a year for the state, from the 1st January to the 19th June. And as we know from the Rahn Curve, high taxes mean low growth. That’s because high taxes kill enterprise (why take risks when the government takes half your profit) and make your goods more expensive. So it’s time for a really serious zero-based review of all government activities. Does Iceland’s government do things it doesn’t need to? Yes. Could other people deliver some services better? Yes. Can the essential government functions be done better? Yes.
But in small countries, the cronyism between business and politics is hard to break. Too often, Iceland’s businesses see big government as an easy source of cash, when they should be proclaiming free markets. But given Iceland’s crazy post-crash politics, even those who believe in free markets have been reluctant to be seen advocating them.
It has indeed been a difficult decade, but with things now going reasonably on the economic front, it is time for Icelanders to put that decade behind them and look to the future. To liberate enterprise with open institutions—low taxes, sound money, free markets—that motivate people to go out and create wealth for everyone. Not a bad lesson for any country, really.