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Heritage Foundation: Why Can't the U.S. Be More Like Ireland?

In the parallel universe imagined by the Heritage Foundation, Ireland's ravaged economy should be the model for us all. It's about shrinking the government, stupid.

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The budget may have made investors happy, but the people of Ireland took to the streets by the thousands to protest cuts in education, pensions and medical benefits. In January, workers at the Waterford Crystal plant in Kilbarry staged a sit-in after being told the company would be shutting down, and over 480 of the companies 607 employees would lose their jobs. In February 2009, over 100,000 protested in Dublin, to vent their anger at the government's handling of the recession. Meanwhile, the budget spawned political defections sufficient to cost the ruling party a significant portion of its majority.

At least some of the anger over painful budget cuts for Irish citizens is due to the cost of Ireland's own bank bailout: €13 billion ($17 billion USD) to bailout Anglo Irish Bank, plus a projected €8.3 billion to €10 billion in years to come, for total bailout cost of €22 billion. The additional €2.6 billion to prop up the Irish National Building Society brings the total to €25 billion.

The bottom line? Lower wages, high unemployment, a huge bank bailout, and a reliance on foreign multinationals who are allowed to take the bulk of their profits out of the country, instead of reinvesting it in the Irish economy, means permanently lowered consumer demand (consumer spending dropped 7.1 percent in 2009, compared with 1 percent in 2008). Wage cuts and budget cuts mean most of the pain will be felt by the public sector in the form of higher taxes to avoid further painful cuts, while keeping the foreign investors happy and the banks afloat. Spending on things like job training and extending unemployment benefits will be difficult if not impossible.

All of which means that the damage done by Ireland's recession is most likely permanent. And that means a permanently lower standard of living for many Irish citizens — even while foreign investors are reassured and bank stability reinforced.

The Price of Austerity

If the Irish government wants to know the potential cost of austerity, it need look no further than Lithuania (#29 on the Heritage index) to see what austerity looks like.

Faced with rising deficits that threatened to bankrupt the country, Lithuania cut public spending by 30 percent — including slashing public sector wages 20 to 30 percent and reducing pensions by as much as 11 percent. Even the prime minister, Andrius Kubilius, took a pay cut of 45 percent.

...But austerity has exacted its own price, in social and personal pain.

Pensioners, their benefits cut, swamped soup kitchens. Unemployment jumped to a high of 14 percent, from single digits — and an already wobbly economy shrank 15 percent last year.

Remarkably, for the most part, the austerity was imposed with the grudging support of Lithuania’s trade unions and opposition parties, and has yet to elicit the kind of protest expressed by the regular, widespread street demonstrations and strikes seen in Greece, Spain and Britain.

...Indeed, outside of Ireland, no country in Europe has come close to replicating Lithuania’s severe spending cuts without the aid of the International Monetary Fund. Ireland passed the most austere budget in the country’s history, and public sector pay cuts were a centerpiece of the government’s reform effort.

...“From a credit rating perspective, Lithuania has put itself on positive trajectory,” said Kenneth Orchard, a senior credit officer in Moody’s sovereign risk group.

As European nations consider what the social and political costs will be when they take steps to cut public sector spending, Lithuania offers a real-time case study of the societal trade-offs.