Irish Economy on Marginal Revolution

Tyler Cowen gives a brief summary of his opinion on where things went wrong

6 replies on “Irish Economy on Marginal Revolution”

Here’s a test. You are invited to comment, but you are not permitted to use any word that begins with G! D words are permitted; debt, depression, (the economic kind), down-turn, declension, delusion, etc. We KNOW why things went ‘wrong’ – admitting that it was our economic model was the problem may not be so easy. Try this: Managed Austerity as your new economic model (not my choice – but its appropriate). The religious canons of MA are: Finite Biosphere, Finite Resources (solar excepted), Exponential Law, and Second Law of Thermodynamics. I am not being factitious – I am in deathly earnest! I did ‘see’ this economic mess as inevitable – though even I have been disagreeably surprised by its velocity and intensity. We are, as our cousins might say, at the end of the Third Inning! Some ways to go yet!

Brian P

If we review what could have been done or decided differently, there is one big mistake. Various decisions should have been made to halt the boom/bubble in house prices at the end of the 1990s and particularly in the wake of EMU entry in January 1999. The necessary precursor to EMU was a halving of interest rates and a mini devaluation, which gave an unnecessary supercompetitiveness to the real economy and an undesirable monetary stimulus to the property/construction boom. The Government had already identified house prices as being too high and rising too fast. In reality, when one “Bacon” recommended measure had an effect (removing interest relief from landlords) it was reversed and the property boom was let rip. All informed observers from outside of Ireland were convinced that Ireland was in the throes of a property bubble/construction boom from the late 1990s. Unfortunately, we were all inside the bubble and very few were able to use their powers of economic analysis to overcome their worm’s eye view.
The trading sector of the economy experienced a sudden slowdown in June 2001, especially industrial production. However, the 2002 Budget was deliberately expansionary. From January 2002, the growth dynamic shifted from the trading sector of the economy to a mix of construction boom, large increases in mortgage borrowing and real increases in public spending. The 2007 and 2008 Budgets were miscalculated and deliberately expansionary.

Brian P: Seriously, you are going to achieve nothing but a bad reputation using that style of writing. There are many serious writers who talk about how we should deal with catastrophic risks, finite energy resources, financial market fragility and some of the things you mention. It would contribute a lot more if you read these guys and posted more sensibly. Wild aphorisms distract the debate.

It was not just FF. The world was facing what itt now faces, but without the housing base being boosted and borrowed into beggary. It was easier to have the depression at that time, before 9/11 and the Fed dropping rates to 1%. But every government except Chile, thought that expansion was required, following international leads especially in the USA.

It should have been obvious, but we’re Irish and we were so happy that things appeared to be going well after 150 years of population decline. Psychology has important effects on consumer behaviour. Politicians have been able to pander to our desires, by inflating and then adjusting tax thresholds when they get too tight. Spending is what they are good at. When the revenues increased so quickly, they should have been more active in setting up funds for public pensions and other known future expenditure, but they did try. Three out of ten, perhaps?

Tyler Cowan says it was complacency and he is correct in that. We could only see the growth and not see the dangers of that despite Kondratieff Winters and the rest. A lack of intelligence on what the US was actually doing is also a fault. Not just economic intelligence. We should have been better clued in there, with our connections, as the Bush approach would have been known by Democrats as well.

The bubble in property construction is deflating. We have to live with that and not try to re-inflate it. Construction jobs can only be maintained, if they are needed and they clearly cannot be supported here or anywhere else in the EU. So we have a massive unemployment problem. And a credit crash.

We will only make matters worse if we attempt to borrow to fund NAMA or extensive deficits. The coming crash in gilts will cause more chaos. This is not over yet. We need to get ahead of the curve somehow. Thankfully, the executive did not try a stimulus package. That shows awareness of just how bad things are. That took courage. Complacency is banished.

The best part of the article were the comments, of very high quality and direct experience apparently.

Cowan was also correct to point out our size and the dependence on FDI. It has yet to unwind in a serious way, but this must be a concern to our planners. I don’t think it has had as much effect as it might have, as these flows were for the long term and are from very successful entities, not tied to finance fantasies.

The major point is thee cheap and abundant capital supplied from the ECB. That was identified as a vulnerability, but not taken seriously by anyone in Ireland, as far as I recall, until things had gone wrong in the USA. Austrian school adherants would have been aware of what was going to happen. The imbalance of economic thought, relying on Keynes to address recessions, means that MSE, main stream economists in Ireland did not understand the nature of a bubble in credit………. Too late now!

Liam, thanks for your considered reply. You are correct – and if times were different I should indeed compose my thoughts in a more careful manner. Trouble is, times is(sic) not good. Our economy, and our social and political structures are coming under immense stress and all I see and hear, albeit well meaning, is too soft. I could sit tight and ‘enjoy’ my retirement – my investments are up 30%!! But I am as mad as hell with the incompetent, ignorant, arrogant, fraudsters who pass themselves off as our ‘leaders’ – political as well as business. Much of the economic mess in not of their making – but some of it is, and they MUST be held to account. I have spent the last 5 years studying this unfolding financial disaster, hence my comments about an alternative Economic Model-in-Use are not something I plucked up off the sidewalk. Permagrowth, (the current Model-in-Use) is failing: transition to an alternative economic model will take years. And if you think the current situation is difficult – just wait until we experience the next ‘energy shock’. I am pleased to get any comments – thanks again.

Brian P

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