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Saturday, July 02, 2005

Why, oh why, can't we have a more reality-based class of lovers of big government? Or: the Joy of Ireland goes unappreciated.

One of the world's greatest (and underpublicized) economic turnaround success stories of the past 20 years has been Ireland.

In the mid-1980s Ireland had 17% unemployment, GDP per capita only about 65% of the EU average, a past generation of average economic growth under 2%, and national debt at 113% of GDP and rising in spite of a national tax burden of 45% of GDP, as government spending was almost 55% of GDP. And the population was fleeing the country.

The nation was going up against the wall of insolvency when all the major players in the economy (businesses, labor, government) got together to implement a dramatic turnaround program. This immediately slashed government spending, taxes, and regulations on business -- and kept slashing for years to come.

Since then, government spending as a share of GDP has been cut virtually in half, to 27%. Taxes have been cut by a third, to 30% of GDP, the lowest in the EU (with the corporate rate cut from 40% to 12.5%, the capital gain rate cut from 40% to 20%, the top personal rate from 80% to 44% and standard personal rate from 35% to 22%). The fiscal surpluses produced from reducing government spending by more (about half) than taxes (about a third) have reduced the national debt to 30% of GDP.

The result has been the creation of the Celtic Tiger. Average GDP growth has tripled since 1987 -- with an average 7% for the last 10 years -- reducing unemployment to as low as 4% and making Ireland one of the five richest countries in the world -- and #1 in the EU (disregarding Luxembourg) with per capita GDP 39% above the EU average. And the population flow has reversed, the expatriots are returning home.

All since 1986!

Thomas Friedman in his New York Times opinion column on Friday noted this success, compared it to endless economic slumps in France (10% unemployment) and Germany (12% unemployment) and dared to opine...
There is a huge debate roiling in Europe today over which economic model to follow: the Franco-German shorter-workweek-six-weeks'-vacation-never-fire-anyone-but-high-unemployment social model or the less protected but more innovative, high-employment Anglo-Saxon model preferred by Britain, Ireland and Eastern Europe.

It is obvious to me that the Irish-British model is the way of the future, and the only question is when Germany and France will face reality: either they become Ireland or they become museums...
.... which apparently was just too much for many of the big government types out there!

Over at Crooked Timber we see Friedman damned for...
"dodgy generalizations constructed around trite metaphors ... employed by someone who clearly doesn’t know what he’s talking about."
... as they go on to inform us...
Ireland is an especially poor fit with the Anglo-Saxon model in the area of labour market policy .... it is exactly the non-Anglo-Saxon features of the Irish economy -- and in particular the systematized concertation between trade unions, management, government and other social actors -- that was at the heart of Ireland's economic success in the 1990's. This system, unbeloved of free market economists, set the broad parameters for wage and income tax policy...
... which we find quoted and lauded by Brad DeLong -- who adds that in his own mind the Irish example reminds him of ... Sweden?
I confess I too had a "Huh?" moment here. Ireland in the past decade and a half looks, I think, more like a Scandinavian economy...
Hey, I'll see that "Huh?" and raise it with a "What??"

Sure, Ireland reminds us of any of those Scandinavian economies that over the last 20 years have cut their size of government by half, and their tax burden by a third (to 20 points of GDP, or a good 40%, below that of the Scandinavian economies), to fuel accelerated economic growth that has taken them from per capita GDP of only about 50% of the Scandinavian economies a generation ago to 20% more than the Scandinavian economies today.

The name of one of those Scandinavian economies will come to me in a moment... hmmm...

As for Crooked Timber's...
" ...the systematized concertation between trade unions, management, government and other social actors ... was at the heart of Ireland's economic success in the 1990's. This system, unbeloved of free market economists, set the broad parameters for wage and income tax policy ..."
...well, let's just ask them to name a few "free market economists" who are "unbeloved" of broad policy parameters such as cutting government spending from 53% of GDP to 27%, taxes from 45% of GDP to 30%, deregulating the nation's major industries, and so on.

Of course, what is unique about the Irish example is that it was the labor unions who embraced old-fashioned, Anglo Saxon-style capitalist economic policy in strong form by embracing these parameters, as a part of the "systematized concertation" of reform.

By just referring to a "systematized concertation" of reform that labor took a partnership role in -- without mentioning what the reforms actually were -- the folks at Crooked Timber seem to be trying to fool somebody (themselves?) into thinking that, to the contrary, it was business and government that swung around to the traditional labor point of view. Like in Scandinavia, no doubt.

Well ... so much for criticizing "dodgy generalizations constructed around trite metaphors... by someone who clearly doesn't know what he's talking about".

By the way, the good folks at Cato hold Ireland up as a favorite model for the type of reform governments should undertake. Imagine ... Cato, Crooked Timber and Brad DeLong all on the same page, apparently without the latter two knowing it. Somebody's sure gotta be wrong there!

You know, it's one thing to be a fan of big government, root for it, and even do your own best to try and make it work.

But it's something else to look at success somewhere in the world, fantasize that it must have resulted from your favorite policy prescriptions, of course -- and thus eagerly conclude that anyone who reports differently, in say a newspaper, must be some sort of foolish incompetent at his job.

It's enough to make one wonder...

Why, oh why can't we have a more reality-based class of lovers of big government?