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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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You wouldn't know it from the Heritage Foundation's 2010 Index of Economic Freedom, but the economic "luck of the Irish" ran out in 2008. Not only did the "Celtic Tiger" —  as the Irish economy had been dubbed — lose its roar, but now it appears to have been neutered, and is likely never to roar quite so loudly again.

Nonetheless, the conservative think tank rated Ireland fifth in its index  — placing it squarely in the middle of the top 10 —  while ranking the U.S. eighth. But a closer reading, along with details of some of the other countries on their index, offers telling hints at the modern conservative values informing the Heritage index.

The entry on Ireland begins with the following description of the country's current economic reality.

Though Ireland's dynamic economy has benefited substantially from its openness and flexibility in recent years, the financial sector was affected by the global financial turmoil, and the economy has suffered sharp economic adjustments since late 2008. The budget deficit has been on the rise, putting greater pressure on balancing the government budget. Despite the government's efforts at stabilization, the banking system's health remains precarious. The government plans to buy up non-performing loans, estimated to be equivalent to about 45 percent of GDP.

"Sharp economic adjustments" must be another way of saying what every estimation of the Irish economy states outright: that after the bubble-burst heard 'round the world happened in 2008 — as housing bubbles popped worldwide — Ireland was among the hardest hit. The "openness and flexibility" that made it one of the high-fliers of the boom period came at a high price, causing it to hit the ground harder than other countries. And the damage from that crash may be permanent.

The Tiger Tamed

The "sharp economic adjustments" started when Ireland became the first Eurozone country to enter a recession in 2008 — the first to hit the country in 25 years.

Ireland on Thursday became the first eurozone member to fall into a recession since the US subprime home loan crisis sparked a global economic slowdown, official data showed.

Ireland's economy, rocked by a domestic property market meltdown, entered recession for the first time in 25 years after shrinking in the second quarter of 2008, the Central Statistics Office (CSO) said in a statement.

...The "Celtic Tiger" economy has not experienced a recession since 1983.

Much like the U.S., the Ireland's economic boom was driven by a surge in housing and consumer spending based on credit. In many ways, it could be seen as a microcosm of the challenges facing the U.S. and many other countries.

Economic output will shrink by 9.2 per cent this year and unemployment will spiral to 17 per cent next year, the Economic and Social Research Unit said in its gloomiest ever quarterly report.

It forecasts that 300,000 jobs will be wiped out by the end of next year, by which time living standards will be 15 per cent lower than in 2007.

It also predicts the return of mass emigration — a traditional Irish ailment which Bertie Ahern, the former Taoiseach, pronounced he had cured — as people go abroad in search of jobs.

On top of the housing bubble, Ireland's economy largely relied on exports, 90 percent of which were made by foreign-owned multinationals, attracted by the corporate tax rate that was among the lowest in Europe. The tax rate was sweetened by more lucrative concessions designed to attract multinationals. Indeed, when tax-cutting advocate Charlie McCreevy became Labour Finance Minister in 1997, he soon implemented what some deemed were unnecessary property-tax incentives, along with a 20 percent cut in capital gains tax for property investment. Banking on permanent prosperity, essentially, led to tax cuts that have deprived the country of much-needed reserves, and left it stuck choosing between severe budget cuts in service of the national debt, or investing in programs to keep people working and stimulate the economy.

As in the U.S., warnings about the signs of a coming crash were ignored or dismissed in favor of unfounded confidence in unending growth.

Why do we allow scaremongers and doomsayers with unfounded pessimism and unbridled negativity dictate our thinking and blunt consumer confidence? The Irish economy is the envy of the world. Job creation is phenomenal with more than 7,000 new jobs being created each month - despite the gloomy attention given to periodic job losses in some sectors.

Unemployment stands at 4.1 percent, the lowest in Europe; there are 750,000 more people in the workplace than a decade ago. We have revitalised cities and towns, a conveyor belt of entrepreneurial business people operating successfully on a world stage, a rich cultural and artistic heritage, a vibrant talented young population, rising by almost 100,000 per year, confident in their own and their country's destiny. We should be celebrating our success on a daily basis. In any event, the Irish love affair with property will continue undaunted despite the knockers.

(Stateside, then Federal Reserve Board chief Alan Greenspan, was warned again, and again, and again, but shrugged off those warnings. The FBI warned of rampant fraud spawned by subprime phenomenon. Loan reviewers sent up flares, but were ignored.)

#1 - Hong Kong

Hong Kong ranks at the very top of the Heritage Foundation's economic freedom index. What does that mean for workers in Hong Kong? Here's what the U.S. State Department's 2009 Human Rights Report says about Hong Kong:

There is no statutory minimum wage except for domestic workers of foreign origin. Aside from a small number of trades where a uniform wage structure exists, wage levels customarily are fixed by individual agreement between employer and employee and are determined by supply and demand. Some employers provided workers with various kinds of allowances, medical treatment, and subsidized transport. Two-income households were the norm.There are no regulations concerning working hours, paid weekly rest, rest breaks, or compulsory overtime. Workweeks of up to 60 hours and more were not uncommon.

While the government provides assistance to many low-wage earners through the Comprehensive Social Security Assistance scheme and housing assistance programs, workers and labor unions contended wages in many low-level positions were insufficient to guarantee workers a decent standard of living.

Also, while there are some ordinances governing workplace safety, getting caught in a safety violation doesn’t set businesses back much. According to the report, “During the first half of [2009], the Labor Department's Occupational Safety and Health Branch conducted 59,475 workplace inspections. There were 842 convicted summonses, resulting in fines totaling HK$6.06 million (approximately $780,000).”

...Although worker safety and health continued to improve, serious problems remained, particularly in the construction industry. In the first quarter of the year, the Labor Department reported 8,512 occupational injuries, including 2,842 classified as industrial accidents. In the same period, there were two fatal industrial accidents. Employers are required under the Employee's Compensation Ordinance to report any injuries sustained by their employees in work-related accidents. There is no specific legal provision allowing workers to remove themselves from dangerous work situations without jeopardy to continued employment.

#2 - Singapore

Singapore holds the # 2 spot on the Heritage Foundation's economic freedom index. What does that mean for workers in Hong Kong? Here's what the U.S. State Department's 2009 Human Rights Report says about Hong Kong:

Singapore is a parliamentary republic in which the People's Action Party (PAP), in power since 1959, overwhelmingly dominates politics. The population was approximately five million, with nonresident foreign workers accounting for one quarter of the total. Opposition parties exist, and the 2006 parliamentary elections were generally fair and free of tampering; however, the PAP placed formidable obstacles in the path of political opponents. Civilian authorities generally maintained effective control of the security forces.

The government has broad powers to limit citizens' rights and handicap political opposition, which it used. Caning is an allowable punishment for numerous offenses. The following human rights problems also were reported: preventive detention, infringement of citizens' privacy rights, restriction of speech and press freedom and the practice of self-censorship by journalists, restriction of freedoms of assembly and association, limited restriction of freedom of religion, and some trafficking in persons.

Recession to Depression

That was in 2007. By 2009 Ireland's recession had "technically" evolved into a depression, categorized by some as "the greatest decline in economic growth of any industrialized nation since the Great Depression."

From 1995 to 2007, the country's economy grew at a rate of 7.5 percent per year. By the end of 2009, the cumulative decline in the country's GDP was a "staggering" 12.5 percent. The International Monetary Fund forecasted that the country's GDP would shrink a cumulative 13.5 percent between 2008 and 2010, and that losses at its banks would swell to €30 billion ($40 billion USD), while the Economic Social Research Institute (ESRI) predicted a contraction of 14 percent by the end of 2010. The GNP is expected to contract less than previously forecasted. Roubini Global Economics says Ireland is one a few Eurozone countries whose GNP is expected to contract for three more years. So it's not so much that the economy is expected to get better, but that with a little luck it will be "less worse."

Even the 0.03 percent growth in GDP in late 2009 — that technically signaled the end of Ireland's recession — was based on higher profits at multinational companies that "funnel capital through Ireland due to its low corporate tax rate." Money "funneled through" an economy doesn't get reinvested in that economy in ways that might provide greater stability during an inevitable downturn for those who provided the labor in the first place.

Unemployment "stabilized" at about 13 percent, by the end of 2009, according to finance minister Brian Lenihan. However this was due more to a pickup in outward migration and "reduced labor force participation" — meaning that more of Ireland's unemployed had simply quit looking for work and ceased to be counted even as "labor force wannabes." Indeed, a third of Ireland's unemployed are now categorized as "long-term unemployed," meaning they have been out of work for more than a year. Forecasts of double-digit unemployment came true, and those levels will remain into the so-called "recovery" in 2010, according to the ESRI, which forecasted 16.1percent unemployment for 2010, down from 16.8 percent, but with a faster fall likely due to "a faster fall in participation and also a higher rate of outward migration." A "faster fall in participation" means a number of Irish will simply stop looking for work they've long been unable to find anyway. Migrants, and even some Irish citizens, may "get while the gettin's good" — or less bad.

For those Irish who still have jobs, pay cuts — especially in the public sector — are bitter alternative to layoffs. But it means those who are still employed will have less to spend and put back into the economy, making it unlikely that any increase in demand will speed recovery. It also exacerbates an increase in income inequality, especially among male workers.

Austerity for Ireland

The Irish government has opted for austerity, instituting cuts that have raised the ire of an already burdened public, calling for painful cuts in a number of public services. The reason? Fear that the country's growing debt will put off the foreign investors upon whom the Irish economy is almost completely dependent. Foreign investment in Ireland fell by 5 percent in 2008, accompanied by a 40 percent drop in Irish jobs created by foreign investment, but rallied in 2009. The increased confidence of foreign investors was likely due to the government's emergency budget, introduced in July 2008, which included painful cuts in education funding and health care access (among others) while introducing an income tax on high earners. (Ireland's lowest score from the Heritage Foundation was "Government Spending.")

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.

If the Lithuanian population has yet to engage in the kind of protests seen in Ireland and elsewhere, perhaps that's because the Lithuanian people have finally been broken sufficiently to simply accept what the government and global market deem their fate should be. Hopelessness has yielded to despair for some, fueling the increase in Lithuania's suicide rate, which was already among the highest in the world.

For others despair yields to resignation, summed up by one Lithuanian pensioner:

Mecislovas Zukauskas, 88, a retired electrician, has lived through the devastations of World War II, the Soviet occupation and, most recently, the death of his wife. He is taking his pension cut in stride.

“The government does what it wants to do,” he said. “We can do nothing.”

How the Heritage Foundation measures economic freedom is explained on the website for its index.

Economic freedom is the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please, with that freedom both protected by the state and unconstrained by the state. In economically free societies, governments allow labor, capital and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself.

That the information above adds up to a greater degree of economic freedom in Ireland than in the U.S. is a telling answer to the unasked (and not really answered by the explanation above) questions of the Heritage index: "Economic freedom" for whom? At what cost?

Or perhaps the answer is obvious: According to the index, the U.S. has a way to go yet to reach the point where Ireland finds itself today.

Terrance Heath is the the online producer at Campaign for America's Future.