Today, my wife and I are traveling to Ireland to visit the
town where my grandfather grew up (and maybe have a beer or two–if we
survive my driving!). The economy there presents a sad case study for
the austerity programs being forced on economies around the world. Just
days ago, it was reported that Ireland appears to be in recession once
again (Ireland falls back into recession).
How can this be given the rapid growth of the Celtic Tiger just a few
years ago? Actually, this comes as no surprise to many economists
because the so-called solutions being implemented are a function of the
very same principles that caused the collapse in the first place. Unless
a significant about-turn is executed, stagnation, emigration, and
unemployment will continue for years to come.
That culprit is the philosophy of neoliberalism. It argues, among other things, that unregulated financial markets efficiently price assets, higher profits are good for everyone as they lead to increased employment and wages (the so-called trickle down effect), and governments represent a net drag on economic activity. Neoliberalism has been a powerful force driving world economic policy since the 1980s and as such laid the groundwork for many of the problems we are experiencing today. Ireland was not immune to these influences and, as a consequence, policy makers lowered corporate tax rates, made transfer pricing rules business-friendly, and adopted a largely hands-off approach to financial regulation (even when improprieties emerged). Dropping the punt in favor of the euro was also seen as a sign of economic responsibility because it linked Irish policy to that of the fiscally-prudent Germans.
What resulted was the emergence of Ireland-as-tax-haven. Yes, foreign firms were attracted and the impact was not entirely negative, but they tended to repatriate a substantial portion of their profits so that this money was available neither as a component of domestic income nor as part of the tax base. This, along with low euro interest rates that were more appropriate to the German than Irish economy, created an environment in which borrowing was easy and it appeared that no investment could fail. An asset bubble–something that neoliberalism says cannot happen in a free market since assets are priced efficiently–naturally followed. As is well known, that bubble burst in 2008.
But then, rather than decide that the earlier policies had failed, bets were doubled. In keeping with the neoliberal assumption that businesses were the key to prosperity, it was they, not the citizens, that the Irish government protected. In addition, Ireland continued to cede control of monetary policy by remaining on the euro. But most egregious of all was following the neoliberal advice of reining in “wasteful” government spending via austerity.
There is little more difficult to understand than the widespread fetish for balanced government budgets. Anyone who believes that lowering public spending will help an economy expand is woefully ignorant of both elementary accounting principles and basic economic theory. With respect to the former, by definition, a public sector deficit must equate to a private sector surplus. If you reduce one, you reduce the other. That cutting government spending means cutting private sector income is an inescapable fact (see for example Why you should love government deficits).
Furthermore, the key problem in modern economies is the inability of the private sector to consistently generate sufficient demand to hire all those willing to work. Consider this. Why did the Great Depression strike America? Was there a mass wave of laziness in the United States? Did Americans forget how to produce all the goods and services people had been consuming during the Roaring 20s? Of course not. The problem was insufficiency of demand, which is why once US government deficits grew, standards of living were able to not only recover, but reach new heights. Nor was the period thereafter one of economic collapse as the weight of government debt suffocated American firms and consumers. The fact is, the private sector needs government spending to supplement demand. The latter creates jobs and income when the former cannot.
And so it comes as little surprise that Ireland’s austerity policies have generated nothing more than…austerity. Unemployment stands at nearly 14%, an obscene level given that it was closer to 4% a mere six years ago. It’s not as if the goods and services that Irish men and women purchased back in 2007 are no longer producible. There is zero reason that the same standard of living could not be enjoyed today. The austerity policies are a monumental injustice and a crime against every Irish man, woman, and child affected by the contraction that has followed.
Recovery will only come when the Irish government rejects the neoliberal worldview and takes steps to directly employ the unemployed. This will require, at least at the outset, larger government deficits. This also means that Ireland MUST leave the euro so that fiscal policy is no longer tied to the wishes of the European Central Bank and hedge fund managers. Nations with their own currencies are never forced to borrow abroad to finance their own government’s spending (for more on how deficits actually work see The big danger in cutting the deficit). But so long as Ireland uses the euro, it will be dependent on the acquiescence of foreigners for both monetary and fiscal policy. And for far too long Ireland has been run for someone other than the Irish.
Now is the time to abandon austerity, increase spending, and leave the euro. The other path has already been tried.
That culprit is the philosophy of neoliberalism. It argues, among other things, that unregulated financial markets efficiently price assets, higher profits are good for everyone as they lead to increased employment and wages (the so-called trickle down effect), and governments represent a net drag on economic activity. Neoliberalism has been a powerful force driving world economic policy since the 1980s and as such laid the groundwork for many of the problems we are experiencing today. Ireland was not immune to these influences and, as a consequence, policy makers lowered corporate tax rates, made transfer pricing rules business-friendly, and adopted a largely hands-off approach to financial regulation (even when improprieties emerged). Dropping the punt in favor of the euro was also seen as a sign of economic responsibility because it linked Irish policy to that of the fiscally-prudent Germans.
What resulted was the emergence of Ireland-as-tax-haven. Yes, foreign firms were attracted and the impact was not entirely negative, but they tended to repatriate a substantial portion of their profits so that this money was available neither as a component of domestic income nor as part of the tax base. This, along with low euro interest rates that were more appropriate to the German than Irish economy, created an environment in which borrowing was easy and it appeared that no investment could fail. An asset bubble–something that neoliberalism says cannot happen in a free market since assets are priced efficiently–naturally followed. As is well known, that bubble burst in 2008.
But then, rather than decide that the earlier policies had failed, bets were doubled. In keeping with the neoliberal assumption that businesses were the key to prosperity, it was they, not the citizens, that the Irish government protected. In addition, Ireland continued to cede control of monetary policy by remaining on the euro. But most egregious of all was following the neoliberal advice of reining in “wasteful” government spending via austerity.
There is little more difficult to understand than the widespread fetish for balanced government budgets. Anyone who believes that lowering public spending will help an economy expand is woefully ignorant of both elementary accounting principles and basic economic theory. With respect to the former, by definition, a public sector deficit must equate to a private sector surplus. If you reduce one, you reduce the other. That cutting government spending means cutting private sector income is an inescapable fact (see for example Why you should love government deficits).
Furthermore, the key problem in modern economies is the inability of the private sector to consistently generate sufficient demand to hire all those willing to work. Consider this. Why did the Great Depression strike America? Was there a mass wave of laziness in the United States? Did Americans forget how to produce all the goods and services people had been consuming during the Roaring 20s? Of course not. The problem was insufficiency of demand, which is why once US government deficits grew, standards of living were able to not only recover, but reach new heights. Nor was the period thereafter one of economic collapse as the weight of government debt suffocated American firms and consumers. The fact is, the private sector needs government spending to supplement demand. The latter creates jobs and income when the former cannot.
And so it comes as little surprise that Ireland’s austerity policies have generated nothing more than…austerity. Unemployment stands at nearly 14%, an obscene level given that it was closer to 4% a mere six years ago. It’s not as if the goods and services that Irish men and women purchased back in 2007 are no longer producible. There is zero reason that the same standard of living could not be enjoyed today. The austerity policies are a monumental injustice and a crime against every Irish man, woman, and child affected by the contraction that has followed.
Recovery will only come when the Irish government rejects the neoliberal worldview and takes steps to directly employ the unemployed. This will require, at least at the outset, larger government deficits. This also means that Ireland MUST leave the euro so that fiscal policy is no longer tied to the wishes of the European Central Bank and hedge fund managers. Nations with their own currencies are never forced to borrow abroad to finance their own government’s spending (for more on how deficits actually work see The big danger in cutting the deficit). But so long as Ireland uses the euro, it will be dependent on the acquiescence of foreigners for both monetary and fiscal policy. And for far too long Ireland has been run for someone other than the Irish.
Now is the time to abandon austerity, increase spending, and leave the euro. The other path has already been tried.
