Reply to Erin Go Broke - US-Ireland Council

How Krugman got it wrong on Irish economy
US-Ireland Council responds to New York Times column
By
DAVID O'SULLIVAN
,
Executive Director, The Ireland-U.S. Council, New York, NY

David O’Sullivan, Executive Director, The Ireland-U.S. Council, New York, NY




Economics, they say, is the dismal science. And, it becomes dismally gloomy in the hands of someone like Paul Krugman whose opinion piece on Ireland’s economic challenges (Erin Go Broke - April 20, 2009) contained egregious errors which clearly compromise the conclusions he allows himself to reach.

He reports that “Ireland moved to shore up confidence in its banks by offering a government guarantee on their liabilities”. This is not true. And, it is incorrect by a magnitude that cannot simply be glossed over. The Dublin Government only guaranteed bank deposits - something the Federal Government here did back in 1933 with the establishment of the FDIC ..

Thus, his assessment that Ireland’ taxpayers have been put on the hook for potential losses of more than twice the country’s G.D.P. is plainly and simply wrong. Ireland has the most open economy on earth. When international trade tanks, you can be sure that Ireland feels the pain. And, it has. But, this is not news. A long time ago, Ireland chose the strategic option to be a free-trading nation with low corporate taxes to encourage enterprise and faster economic growth.

The Irish economy has weathered all the recessions ever since the policy was adopted over 60 years ago. But, it has also been the fastest-growing economy in the world for most of the past 25 years.
Professor Krugman also paints a big picture that is disappointingly negative and inaccurate.

He says that Ireland has raised taxes and cut spending. Well, a closer look at what Ireland’s response has been is more instructive. The very low corporate tax rate, obviously, was not touched. Personal income tax rates were not increased. Sales taxes (or Value Added Taxes) did not get hiked. So, there were some (but I would have to say minor) tax increases.

But, the real story is that the Government in Ireland has taken a scalpel to Government spending – but in areas that make sense – especially the cost of Government. For example, if private companies have to cut labor costs to survive, the Irish Government thinking is that public employees, who cannot be fired, must also shoulder some burden. Thus, every Government employee will see their wages cut by 20%. Not very nice if you are a Government worker – but I suppose it’s better than losing your job

Finally, Mr. Krugman does not take the great opportunity he had to contrast the Irish Government’s interesting and imaginative policy response to the banking crisis with the U.S. policies that have been announced. The problem real estate loans of Ireland’s banks will be ring-fenced in a sort of asset lockbox and will be managed back to health in time. Thus, these problem legacy assets will no longer taint the balance sheets of the banks. More importantly, Ireland’s taxpayers will reap the rewards of the upside when asset values recover – something never mentioned in his piece.

The recapitalization of Ireland’s banks has been undertaken in a timely and prudent manner. The Government’s liquidity injection to the banking system came in the form of preference share capital in the two largest banks. Importantly, ownership of the vast majority of Ireland’s banking system remains in the hands of private shareholders.

Even after these capital injections have been made with Government funds, Ireland's total national debt (even allowing for the increase in debt levels recently) is today less than the total corporate debt of AT&T, Inc. - the slimmed-down regional Bell!

The great thing about a democracy is that opinion journalists are free to be depres singly negative if they choose to be. The current international financial and economic crisis provides a grand platform for the pessimists to strut their stuff. A little look on the bright side now and again might do a power of good for Dr. Krugman’s dismal outlook.