Sunday, November 28, 2010

Irish financial crisis has lessons for Americans

Published in The Tennessean, Sunday, November 28, 2010

Irish financial crisis has lessons for Americans

by Richard J. Grant

The current Irish financial crisis offers lessons to Americans. First, we can learn a lot about fiscal prudence and economic growth from the preceding Irish history. Through the mid-20th century the Irish, like their British neighbors, abandoned common sense in favor of the pseudo-intellectual promises of socialism (what we call “progressivism”). The role of state involvement in their lives grew and their economies stagnated.

Just as the Thatcher revolution pulled Britain back from the precipice and restored, at least temporarily, the people's dignity, the Irish went one better. They cut government spending and tax rates aggressively. They removed trade restrictions and brought down their inflation rate.

As a small country, with a population just under 4.5 million, they needed to offer clear advantages to business in order to stand out from the crowd. They learned well from Thatcher, but perhaps Ireland's most important inheritance from Britain was rule-of-law principles and a common-law legal system that served to protect private property.

In 2007, Ireland's net public debt was only 12 percent of annual economic production (GDP). Compare that to the United States, where net public debt (which excludes the portion of debt held by US government agencies, such as the Social Security Trust Fund) is currently around 62 percent of GDP. (Total U.S. public debt outstanding is 93 percent of GDP.) By world fiscal standards, Ireland was in great shape.

Ireland was so attractive to investors that its banking system grew disproportionately to the size of the country. And bankers who had grown up in a world of government-run deposit insurance schemes and the expectation of government and IMF bailouts succeeded in business without fully developing their sense of prudent restraint. Further, Ireland had delegated control of its money supply and, therefore, interest rates to the European Central Bank (ECB).

During the middle of the last decade, the ECB, like our own Federal Reserve, pushed down interest rates to stimulate recovery from the tech downturn. That set us up for the most recent recession and real-estate downturn.

Government officials rarely foresee or react correctly to the systemic risks created by government-granted monopolies in the supply of money and the power to manipulate interest rates. The Irish blunder, which was the granting of a government guarantee for most of the loans in the banking system, could have been avoided. The Irish government was too small relative to its banking system to make good on such guarantees and, unlike the US government, it no longer had the power to print money to cover its guarantees.

When Ireland joined the European Union, it put its national sovereignty at risk in order to reap the benefits of living in a large free trade zone. Now, however, it has put its national sovereignty at further risk by blundering into the sphere that should have been reserved strictly for private action. Instead of letting the banks and their creditors learn to bear the burden of their own actions, the Irish government made promises that will overburden its taxpayers.

To get a bailout from the EU, Ireland faces demands from EU members that it raise its corporate tax rate. This won't help Ireland, but the intention is to make it less competitive so that other EU states don't have to make the effort. This is how American states have sold their own sovereignty to their federal government.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail:

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