August 18, 2013
It’s always fun to have conversations with people who will proclaim themselves great experts on a country about which they may know very little because they have been there. I have encountered people who tell me poor countries are rich because they saw opulent homes and expensive restaurants on a visit, or that there is no unemployment in the middle of a downturn because every business owner they talked to couldn’t find enough workers.
Steven Pearlstein gives us a wonderful example of such arguments in his piece on Ireland’s economy in the Post. Pearlstein tells readers:
“In the world beyond its emerald shores, meanwhile, another simple narrative about Ireland’s economy has found a receptive audience, this one about the Draconian spending cuts and tax increases that have been forced on Ireland by its creditors in order to reduce an annual government budget deficit that had reached 32 percent of the country’s annual economic output. The Irish themselves have long since accepted the urgent necessity of belt-tightening. But to Keynesian critics who believe in the healing power of fiscal stimulus, the country’s recent slide back into recession is offered as proof of the futility of austerity.
“Neither of these fables — the one about the bank bailout, the other about austerity — is adequate to explain the rise and fall of the Celtic Tiger. You don’t have to spend much time here before discovering that the real story turns out to be both more complicated and more interesting.
“In fact, you might say that what’s holding back Ireland’s economy is the same thing that is now holding back the once-fast growing economies of Brazil, Russia, India and China. It is the same thing that afflicts Greece, Italy, France and the other struggling economies of Europe. And, to a somewhat lesser degree, it is the same problem bedeviling the U.S. economy.
“In each, it is the inability to make fundamental reforms to political and economic institutions that now prevents them from rebalancing their economy, from taking next leap in terms of their productivity and efficiency, from creating a new, more sustainable model for economic growth.”
Wow, Ireland and all these other countries need to make adjustments to adapt to a changing world! Who could have guessed?
Guess what boys and girls, countries always need to make adjustments to adapt to a changing world. The question is why would these adjustments pose such great problems now that they are causing mass unemployment in Ireland, the United States, and elsewhere?
Pearlstein has a laundry list, but nothing comes close a serious answer to this question. For example, he tells us of the unfortunate habits of Irish business start-ups:
“What strikes an American visitor, however, is how few of those successful Irish start-ups have grown into large Irish corporations. The normal pattern is that once the firms reach sales of $10?million, the founders sell out to a bigger firm, usually foreign, that is willing to pay a premium for the product or the customer base. The riskier course — taking the company public, making a big push into foreign markets, creating a billion-dollar company that spins off other firms and creates a cadre of Irish millionaires who invest in other Irish startups — rarely happens.
“As John O’Shaughnessy puts it, it’s not the lack of financing or ambition that explains this urge to sell out so much as the fact that Ireland is simply at a relatively early stage of its economic development.”
It’s not clear why it is a big for Ireland if business owners sell out their business early. Does Pearlstein have a problem with foreign ownership of domestic businesses? if so, he should enlighten readers to the dangers.
Pearlstein lists other problems in Ireland’s economy, which no doubt exist, but don’t come close to explaining why the country would not be growing more rapidly and have far lower unemployment if there were a big boost to demand from the government.
In fact, Pealstein unwittingly implies as much himself when he approvingly cites a comment from Danny McCoy, the president of the Irish Business and Employers’ Federation:
“If only, he laments, Irish consumers would get past the fear and anger stirred up by their underwater mortgages and start spending again.”
If Pearlstein’s source Mr. McCoy is correct, and the Irish economy just needs consumers to start spending again, then there is no reason other than superstition as to why the government can’t provide the needed boost. McCoy is making a Keynesian argument, Ireland’s economy needs demand. The government can generate demand (i.e. spend money) just as well as private households. In fact, it can get private households to spend more money by giving it them.
The long and short is that it’s really nice that Pearlstein was able to have a vacation in Ireland, but he did not find any evidence that contradicts the simple Keynesian argument that the primary problem afflicting its economy is a lack of demand.
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