The lessons of Ireland

O'Coonassa

http://www.guardian.co.uk/commentisfree/2009/apr/21/ireland-financial-crisis

This riches-to-rags story is an example for Obama - and the world - of how not to run an economy

• Paul Krugman
• The Guardian, Tuesday 21 April 2009
• Article history

'What," asked my interlocutor, "is the worst-case outlook for the world economy?" It wasn't until the next day that I came up with the right answer: America could turn Irish.

What's so bad about that? Well, the Irish government now predicts that this year GDP will fall more than 10% from its peak, crossing the line that is sometimes used to distinguish between a recession and a depression. But there's more to it: to satisfy nervous lenders, Ireland is being forced to raise taxes and slash government spending in the face of an economic slump, policies that will further deepen the slump.

And it's that closing off of policy options that I'm afraid might happen to the rest of us. The slogan Erin go bragh, usually translated as "Ireland forever", is traditionally used as a declaration of Irish identity. But it could also, I fear, be read as a prediction for the world economy.

How did Ireland get into its current bind? By being just like the US, only more so. Like Iceland, Ireland jumped with both feet into the brave new world of unsupervised global markets. Last year the Heritage Foundation declared Ireland the world's third-freest economy, behind only Hong Kong and Singapore.

One part of the Irish economy that became especially free was the banking sector, which used its freedom to finance a monstrous housing bubble. Ireland became in effect a cool, snake-free version of coastal Florida.
Then the bubble burst. The collapse of construction sent the economy into a tailspin, while plunging home prices left many owing more than their houses were worth. The result has been a rising tide of defaults and heavy losses for the banks. And the troubles of the banks are largely responsible for putting the Irish government in a policy straitjacket.

On the eve of the crisis Ireland seemed to be in good shape, fiscally speaking, with a balanced budget and a low level of public debt. But the government's revenue which had become strongly dependent on the housing boom collapsed along with the bubble.

Even more important, the Irish government found itself having to take responsibility for the mistakes of private bankers. Last September Ireland moved to shore up confidence in its banks by offering a government guarantee on their liabilities thereby putting taxpayers on the hook for potential losses of more than twice the country's GDP.

The combination of deficits and exposure to bank losses raised doubts about Ireland's long-run solvency, reflected in a rising risk premium on Irish debt and warnings about possible downgrades from ratings agencies. Hence the harsh new policies. Earlier this month the Irish government simultaneously announced a plan to purchase many of the banks' bad assets putting taxpayers even further on the hook while raising taxes and cutting spending, to reassure lenders.

As I read the debate among Irish experts, there's widespread criticism of the bank plan, with many leading economists calling for temporary nationalisation instead. (Ireland has already nationalised one major bank.) The arguments of these Irish economists are very similar to those of a number of American economists, myself included, about how to deal with our own banking mess.

But there isn't much disagreement about the need for fiscal austerity. As far as responding to the recession goes, Ireland appears to be really, truly without options, other than to hope for an export-led recovery if and when the rest of the world bounces back.

So what does all this say about those of us who aren't Irish? For now, the US isn't confined by an Irish-type fiscal straitjacket: The financial markets still consider government debt safer than anything else. But we can't assume that this will always be true. Unfortunately, we didn't save for a rainy day: thanks to tax cuts and the war in Iraq, America came out of the "Bush boom" with a higher ratio of government debt to GDP than it had going in. And if we push that ratio another 30 or 40 points higher - not out of the question if economic policy is mishandled over the next few years - we might start facing our own problems with the bond market.

That's one reason I'm so concerned about the Obama administration's bank plan. If, as some of us fear, taxpayer funds end up providing windfalls to financial operators instead of fixing what needs to be fixed, we might not have the money to go back and do it right.

And the lesson of Ireland is that you really, really don't want to put yourself in a position where you have to punish your economy in order to save your banks.


• Paul Krugman, winner of the 2008 Nobel Memorial Prize in Economics, is a columnist for the New York Times, where this article first appeared

Thought this was an interesting article that people might like a look at.

Permabear

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ceret

donegalfella wrote: »

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Not only that, a large amount of government income (about 13%) was from taxes on buying/selling houses (compared with 4% in the UK). If people stop buying as much houses, the government isn't going to get as much tax income,.

graduate

State tax revenues have plunged precipitously, but the government is held in thrall to special-interest groups, so spending can't be brought down to responsible levels.

Tax revenues have fallen precipitously because of the dysfunctional structure of taxation which taxed the froth of the boom. It would not be responsible to bring down spending to this degree, a different structure of taxation is needed. The Irish government has reduced public sector salaries on a par with the average decline in private sector salaries, so has not quite been inactive.

Permabear

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bokspring71

donegalfella wrote: »

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Bertie Ahern's legacy is to have almost bankrupted the country with the most incredible expansion of the public sector wage bill under his watch. Since then, the government has shown no appetite for doing what everyone knows in necessary to help stop the countries slide into depression.

What has to be done is simple; we need to drastically reduce government spending, increase taxes,but not in such a way as they act as a disincentive to employment, and pray quite a lot more than we have been doing.

The only real way we can avoid disaster is to encourage jobs creation in the private sector, and by increasing taxes on employment in the private sector, both for employer and employee, doesn't bode well for the future.

Permabear

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ardmacha

Except that umpteen thousands of public-sector workers have not lost their jobs (and thus their salaries). The relative size of the public and private sectors has shifted dramatically;

There is not much use in stating the obvious, this is an inevitable consequence of a recession. A large proportion of public sector workers are in sectors such as health and education whose demand continues (or may even increase) while many private sector workers were beauticians and car dealers whose services people dispense with when times get tough.

The point is well made about Bertie throwing money at public sector problems, but the flipside of this is that non problematic public services did not receive vast amounts of money. Throwing money around without reference to the all of efficiency of the service makes no sense, but the blanket implication that all of the public sector is equally inefficient means that your analytical skills are on a par with Bertie.

Sand

There is not much use in stating the obvious, this is an inevitable consequence of a recession. A large proportion of public sector workers are in sectors such as health and education whose demand continues (or may even increase) while many private sector workers were beauticians and car dealers whose services people dispense with when times get tough.

It appears there might be.

The money to pay for the public service does not grow on trees. It is taxed from the private sector (public sector workers get taxed too, but thats just a circulation of money within the public domain...not actual funding for the public sector). If the private sector collapses - like it has in Ireland, then cutbacks must be made in the public sector in line with that collapse.

The point is well made about Bertie throwing money at public sector problems, but the flipside of this is that non problematic public services did not receive vast amounts of money. Throwing money around without reference to the all of efficiency of the service makes no sense, but the blanket implication that all of the public sector is equally inefficient means that your analytical skills are on a par with Bertie.

The only people calling for scattergun public service cuts are the unions and the government who at best will impose a hiring freeze and hope the useless quit more often than the useful do. A proper process would be to actually manage the cuts in the public service by identifying whats vital, whats not and making the appropriate level of cuts in the non-vital areas.

A mixture of unions and politics will ensure this wont happen - not until the IMF arrives anyhow.

Woger

donegalfella wrote: »

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How will it correct and what jobs will replace those that were previously in property?

ceret

ardmacha wrote: »

There is not much use in stating the obvious, this is an inevitable consequence of a recession. A large proportion of public sector workers are in sectors such as health and education whose demand continues (or may even increase) while many private sector workers were beauticians and car dealers whose services people dispense with when times get tough.

And we need the thousands of middle managers in the HSE? Whereas all the private sector companies who actually created this boom can just whither away, since they're nothing more than frivilous beauticians?

Queen-Mise

is ireland in a depression now rather than a recession.

Permabear

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ardmacha

And we need the thousands of middle managers in the HSE?

We probably don't need the middle managers in the HSE. But this doesn't negate my point about the public sector providing services whose demand varies less. It is not unreasonable to aim to provide these services, but as Sand says there must be directed cuts. I have a real fear that the cuts will be where unions are weakest rather than in the overmanned areas where unions are strongest.

Permabear

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ardmacha

The private sector in modern Ireland has not exactly covered itself in glory, the banks, the builders, the estate agents. These have done more to create the present mess than anyone else and these people's influence on the government did as much harm as the public sector unions.

gnxx

I'm very worried now that the recesssion is entering the closing stages in US/UK and that Ireland may see some artificial signs of recovery. This would be completely devastating for the country in the long term.

I'm sure that some folks noted the speaker on Questions and Answers last night suggesting that we build more houses. This is the type of lunacy that will completely kill this country for decades. Sadly, I suspect that members of our government are so tied to the construction industry, they may start to listen to nutjobs like this.

At this point, consumer prices should have started to drop sigificantly. Realistically this hasn't happened; particularly after the serious drop in the price of oil.

Public sector spending needs to be slashed and services improved at the same time.

Property in Ireland hasn't even started to crash. It is simply adjusting to world wide markets and the lack of credit. Surely if Bank of Ireland were to offer 100% mortgages tomorrow, we would have a queue of people paying €400,000 for a two-bed apartment in Dublin 33.

Some figures indicate that the UK is showing a larger drop than Ireland. My own view is that we have yet to receive our punishment on property. I suspect that we could see a "€10,000 property for sale" headline before 2015.

The whole idea of NAMA is frightening. Chasing developers who have since moved their assets into other companies will prove impossible. Legal challenges will hold this up until 2020. If the debt can be secured on assets, why not allow the banks to deal with this directly.

It will cost the Irish taxpayer much more in the longer term to "Nama-ise" the banks.

I'm actually begining to think that the IMF might be the best thing for Ireland in the longer term. Having an rough and independent "audit" is what Ireland really needs at this point.

Sorry ... rant over.

Permabear

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Lemming

ardmacha wrote: »

The private sector in modern Ireland has not exactly covered itself in glory, the banks, the builders, the estate agents. These have done more to create the present mess than anyone else and these people's influence on the government did as much harm as the public sector unions.

You know that the private sector doesn't just consist of the banks, builders and estate agents right? Not by a long shot.

Greed has left us where we are. Greedy and inept politicians, greedy bankers and corrupt builders, public sector workers demanding their cake only wanting it super sized, private sector workers who bought into the lies being peddled by the politicians, banks, etc.

There is not one sector of this economy who is not in some way responsible. Every single person who voted the incumbent government into power again and again need only look in the mirror and watch it crack to know who shares the blame.

bokspring71

donegalfella wrote: »

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We don't always get it, but 99 time out of 100 it feels like it.

To your list I'd add "paucity of arguement" as one of the things which is lost in the public sector.

For example, the whole education debate seems to centre around class sizes, while there is no evidence that class size is a factor to outcome.

There is virtually no debate about bad teachers, and what to do about them. No debate about their effect on children. No debate about the rise in cost and numbers of "classroom assistants" etc, and no debate about why the education budget has expanded much faster than inflation.

We have a lack of honesty, which starts with a Taoiseach who is over paid and over pampered with ridiculous benefits, and right throughout society we have vested interests who seem more interested in shoring up their own positions rather than considering the national good, and this includes our political class.

The title of this thread is "the lessons of Ireland" and I wonder will we ever learn any lessons. Perhaps we should all welcome with open arms the IMF and hope next time around that the voters of this country will hold our politicians to account, rather than reelecting Michael O Leary, Beverly etc etc and rewarding dishonesty and corruption.

What do we do?

Permabear

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turgon

The problem is at this stage its so ingrained in Irish culture that Government has to provide these services.

For example for about 3 weeks ago I had a job that meant moving all over the country via public transport. Now I was out of pocket a lot over this, with each one way ticket costing €20, train to Dublin €56 return etc etc.

I was then giving out about the fact that I'm not just paying for myself - I'm also paying for the OAP's who get free transport, the dyslexic folks who get free transport for them and a friend who aids them reading signs (wtf?). But the response I got was "well didn't they pay tax for so many years."

Now supposing we stopped government control of buses and trains for a start. Taxes would lower slightly, giving more people cash in hand. This crazy system would stop whereby people who don't get buses pay for those who do. For all I know my €20 fare didn't even cover the cost, and my next door neighbors partly paid for my bus! How ludicrous is that?

Also, why would Bus Eireann by motivated to cut costs? Its not like it in their interests. But if it was a private company there would be adequate motivation. And with the introduction of competition (2 or more bus companies operating the same route) things can only get better.

Take the Cork to Dublin bus route. Bus Eirean €14 return, Aircoach €20 return. Airbus is a better service because its faster and a lot more comfortable. But imagine Bus Eireann was private. The Bus fair would have to be rationalized: it would probably go up because the Cork to Dublin route is heavily subsidized asfaik. I would imagine more people would opt for Airbus (the difference of €6 being lessened), so Aircoach's their fare goes down. And also I'm not paying for OAP's, and me next door neighbor isn't paying for me.

I don't know if that makes sense. Tl;dr, I suppose!

Woger

donegalfella wrote: »

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To me invoking the market as an answer is the equivelant of the "god works in mysterious ways" arguement.

jmayo

Every thread about Irish economy these days seem to get hijacked by donegalfella rattling the free market, privatisation, libertian something or other economic model.
To me donegalfella you are just the polar opposite of the communists who stridently believe that public ownership model will lead to some happy utopia.

Your privatisation and market driven model may work in theory but in reality it doesn't and it's because people are people. This is particularly true in this country where the system would get hijacked by some cute hoors and before you know it you have created a monopoly owned by a few individuals.
Ala our primary phone landline network which is now owned by group of people who have no money to invest in the infrastructure.
UK rail network would be another towering example of this.

You may argue that government interference caused the glut in credit availability worldwide, but on the other hand the lack of any meaningful regulation allowed greed to go unchecked and we are now where we are.
This last point does highlight why you do need big brother watching the private sector particularly in financial markets.
Either way governments do have a lot to answer for.

I think the solution is a happy medium, certain things should remain in state ownership such as water, electricity distribution networks, phone landline network, roads, railway lines becuase such systemic infrastructure items should not be owned by any private entity.
Other services, such as health and education, should be provided by the state so that all citizens can avail of them and not just those rich enough.

Far from being a public sector champion I do agree the entire public sector
needs to be overhauled and it needs to operate on semi profitable structure.
The way HSE budgets is luaghable. If you get budget x this year you must ask for x+10% next year and so on.

Also having some things done by public sector does not mean that those working for the state operating this infrastructure or providing these service are just there for their own benefit and not the benefit of their customers, i.e. the people of the state.

Perhaps i hope for an utopia of sorts in the public sector and expect too much

Permabear

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weiss

jmayo wrote:

Every thread about Irish economy these days seem to get hijacked by donegalfella rattling the free market, privatisation, libertian something or other economic model

While I wouldn't agree with everything donegalfella says, he does make very good points about the problems in this country.

In fact, If he were to stand in an election, I'd probably vote for him.

The Raven.

gnxx wrote: »

I'm very worried now that the recesssion is entering the closing stages in US/UK and that Ireland may see some artificial signs of recovery. This would be completely devastating for the country in the long term.

I'm sure that some folks noted the speaker on Questions and Answers last night suggesting that we build more houses. This is the type of lunacy that will completely kill this country for decades. Sadly, I suspect that members of our government are so tied to the construction industry, they may start to listen to nutjobs like this.

I couldn't believe that this fellow had the gall to come out with such lunacy on Q & A. But then again, we have these sort of developer responses to objections on planning applications on a regular basis. They will swear that black is white, in order to get their destructive planning applications granted. This is still happening in some cases, in spite of the downturn in the economy! It's hard to believe. My worry is that it will return to the the situation we had before the recession.

At this point, consumer prices should have started to drop sigificantly. Realistically this hasn't happened; particularly after the serious drop in the price of oil.

There is talk of consumer prices dropping, but I have yet to see it.

The whole idea of NAMA is frightening. Chasing developers who have since moved their assets into other companies will prove impossible. Legal challenges will hold this up until 2020. If the debt can be secured on assets, why not allow the banks to deal with this directly.

It will cost the Irish taxpayer much more in the longer term to "Nama-ise" the banks.

I'm actually begining to think that the IMF might be the best thing for Ireland in the longer term. Having an rough and independent "audit" is what Ireland really needs at this point.

The NAMA idea is all wrong, and indeed very scary. I wonder if they will see sense before it is too late. I don't know about the IMF, but they need to get Peter Bacon out of there and hire an independent expert to take over.

r0nanf

The lesson? My wifes P21 from last year - she's a middle income earner and when you net out her tax on gross income, you get 14.5%. That is the lesson - you cannot run a welfare state on sales taxes.

AlekSmart

turgon wrote: »

The problem is at this stage its so ingrained in Irish culture that Government has to provide these services.

For example for about 3 weeks ago I had a job that meant moving all over the country via public transport. Now I was out of pocket a lot over this, with each one way ticket costing €20, train to Dublin €56 return etc etc.

I was then giving out about the fact that I'm not just paying for myself - I'm also paying for the OAP's who get free transport, the dyslexic folks who get free transport for them and a friend who aids them reading signs (wtf?). But the response I got was "well didn't they pay tax for so many years."

Now supposing we stopped government control of buses and trains for a start. Taxes would lower slightly, giving more people cash in hand. This crazy system would stop whereby people who don't get buses pay for those who do. For all I know my €20 fare didn't even cover the cost, and my next door neighbors partly paid for my bus! How ludicrous is that?

Also, why would Bus Eireann by motivated to cut costs? Its not like it in their interests. But if it was a private company there would be adequate motivation. And with the introduction of competition (2 or more bus companies operating the same route) things can only get better.

Take the Cork to Dublin bus route. Bus Eirean €14 return, Aircoach €20 return. Airbus is a better service because its faster and a lot more comfortable. But imagine Bus Eireann was private. The Bus fair would have to be rationalized: it would probably go up because the Cork to Dublin route is heavily subsidized asfaik. I would imagine more people would opt for Airbus (the difference of €6 being lessened), so Aircoach's their fare goes down. And also I'm not paying for OAP's, and me next door neighbor isn't paying for me.

I don't know if that makes sense. Tl;dr, I suppose!

Indeed a valid set of observations turgon and one`s which may be further expanded upon by a quick browse of This .......

http://www.equalitytribunal.ie/index.asp?locID=165&docID=2004


Particularly paragraph 3.2.....and THIS little nugget of a statistic.....

The respondent submitted that there is a very high number of these Free Travel Passes in circulation (circa. 600,000) and it has experienced considerable difficulties with the fraudulent use of these passes in the past.

That term "CIRCA" is the important issue here as it confirms that the DFSA have no idea how many of it`s Free Travel passes are out there.

It is also why the Northern Ireland Public Transport Authirities refused to buy into Seamus Brennan`s brave new Free Travel Island but instead insisted upon a far more stringent and accountancy driven system based upon knowing EXACTLY how much Free Travel exposure it was taking on.

Turgon is to be congratulated on wondering about the dyslexic persons reading companion,but there are far more such "companions" out there,many of whom are simply picked up at the Bus Stop..."ah sure just say you`re with me".

CIRCA 600,000 Free Travel Passes extant does NOT refer to the amount of PERSONS entitled to the benefit.
This could be alomst a Million if one includes Spouses and Companions.

The reference by Irish Rail to the issue of "Problems" is understatement at its best and explains why it was the only one of the CIE companies which moved to protect it`s interests by insisting on a Ticket Issue in exchange for the Pass.

The situation on the Countrys Road Passenger services is now out-of-control and that applies to Private Operators which accept the Free Pass as much as to CIE companies.

For example,a DFSA Photo ID card is the preferred method of "Proving" one`s entitlement to Free Travel in many Cities.
However in the Urban areas the Free Pass is actually a two-part item which combines the Photo ID with the actual cardboard document,both of which MUST be together.

It is common for the two items to be used seperately with the entitled person using the ID and a "Friend,Spouse,or Companion" using the card minus the ID...thereby doubling the useage of the Pass.

The figures above reveal that approx 33% of our Adult population could have access to Free Public Transport...Is this sustainable ?
Is ANY Public Transport Operator able to avail of FREE Diesel,FREE Road Tax,FREE Insurance or Free Labour...I await confirmation of those freedoms....

However Turgon should step back a wee bit from addressing this as a Public vs Private issue as is evident in Dublin where Aircoach accepts the Free Travel Pass on its Airport Service whereas Bus Atha Cliath does NOT accept it on it`s (Commercial) Airlink service.....theres a lesson in there....!!

It`s a funny old world...and going to get absolutely hysterical very soon !! :P

jmayo

donegalfella wrote: »

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Maybe you just just seem to bring in the free market alternative on the threads I read ?

donegalfella wrote: »

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Sorry I think I forgot that to state that even though you are polar opposites you are a lot a like in believe that your system is the total solution.
I believe in a medium.

donegalfella wrote: »

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Big business is also a vested interest
e.g US energy and oil companies.

In your posts you have often stated that almost everything should be privatised: education, health, infrastructure, power, water ?

Do you think that one of necessities of life, water, should be owned by private individual or group ?
Call me naieve but I see major problem with that.

How would you measure sucess for a school ?
Would you measure it in how many pupils achieve Grade A in Honours maths ?
Thus the richest schools attract all the richest intelligent students and then we would have poor dunce schools perhaps where the poor not so bright kids can go and screw them if they have no facilities ?

Our healthcare system is an absolute joke, but would you seriously say the US system is success ?
Perhaps it is if you are rich, but look at the less well off who have poor medicare and health insurance companies looking for out clauses, so that they don't have to provide expensive treatments or remedies ?

donegalfella wrote: »

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Do you know where must of the money goes ?
Do you know how many administrative, non front line staff were hired since bertie took over in 1997 ?
That is why the budgets went up but there was no appreciable increase in end user care.

donegalfella wrote: »

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I readily admit the model doesn't woprk but that doesn't mean I want to sell my country to the highest bidder for a short term gain which is what you want.
Just because your car doesn't work so well today, do you sell it to your neighbour for a few quid and then pay him to drive you around for the rest of the year ?
I do believe the public sector unions need to be smashed and then we can reform. Will that happen ? Well I live in hope

donegalfella wrote: »

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Somewhere in my posts on some thread, I believe I did allude to the holy cows of teachers, nurses and guards. Of course they are not alturisistic, but they are a few of the public servants who actually have a fair quotient of members who really do give their all and work hard in what can very often be a difficult enough profession, whose members do jobs most of us wouldn't really want.

Yes maybe I want a utopin public service but you want a utopian market where if I can't buy it here, then whey hey I can buy next door at the next guy.
That can work for lots of things, but for somethings it doesn't work so well.
From what I can remember I have only got one physical phone line coming down the road, one physical electricity line, one physical water pipe into and one sewage pipe out of my house.
I can't see much scope for getting any more pipes or wires put in :rolleyes:

weiss wrote: »

While I wouldn't agree with everything donegalfella says, he does make very good points about the problems in this country.

In fact, If he were to stand in an election, I'd probably vote for him.

He does make some good points but that doesn't mean I want ot go back to year zero (ala Pol Pot) and hope some capitalist investor cares that my family gets educated and has healthcare, particularly if I fall on harsher times.

Couldn't vote for someone that very probably voted for Harney & McDowell and worse still probably hopes for his return :eek:
Worse still from recollection I think donegallfella intimated he voted FF because they were with PDs and no PDs in Donegal.
Apologies if I am wroong on this assumption and if I am right ahhhhhhhhh.

Must get local SF councillor to go round and convert him to communisism, socilaism or what ever airy fairy brand of economics they now preach

Permabear

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