Right-Wing Think Tank Praised Ireland's 'Economic Freedom' ... and Then Its Economy Crashed
It hasn't even been a year since the Heritage Foundation placed Ireland among the top ten countries on its Economic Freedom Index. I wasn't intending to write about Ireland at the time, but any time the Heritage Foundation holds up any country as an economic example attention must be paid. It's an invaluable opportunity to learn what not to do, in terms of economic policy.
Even way back then, in April of this year, Ireland's economic crisis was serious enough to make it a real head-scratcher that anyone would place it on top ten list, and hold it as an example of economic success, as the Heritage Foundation's Index is intended to do. Ireland is indeed an example. It's nearly a textbook example of the epic failure of conservative economics to grow an economy and austerity to spark a recovery.
At the time, Heritage glossed over Ireland's economic trouble with a short paragraph.
Despite the crisis, Ireland’s overall levels of economic freedom remain high, sustained by such institutional strengths as strong protection of property rights, a low level of corruption, efficient business regulations, and competitive tax rates. These strengths provide solid foundations on which to build recovery and curb long-term unemployment.
That short paragraph is actually loaded with irony. The very "institutional strengths" that Heritage highlights effectively neutered the "Celtic Tiger" that the Irish economy was suppose to be. Just a year before it was written, Ireland became the first Eurozone country to fall into a recession. A month after Heritage published its index, Ireland's recession evolved into a depression . As in the U.S., Ireland's economic boom was driven by a housing bubble that took the economy down with it when it burst, with shrinking economic output and spiraling unemployment following in its wake. The bursting of that bubble was made even more devastating by the effect of conservative policies on the Irish economy.
On top of the housing bubble, Ireland's economy largely relied on exports, 90% 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% 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.
The "competitive tax rate" for which Heritage rated Ireland so highly turned out t o be catastrophic not just to Ireland but to its neighbors too. Ireland's deficit was caused by a an incredibly low corporate tax rate the benefited the corporations that came to Ireland more than it did the country itself. Ireland's "excellent tax climate for businesses," praised by conservatives came in the form of a 12.5% corporate tax rate that turned Ireland into a tax haven for corporations without profiting the Irish economy much at all.
Ireland’s problems are, sadly, far deeper than the need for simple fiscal austerity. The Celtic tiger’s impressive reported growth over the past decades was in part based on its aggressive attempts to help major corporations in the United States reduce their tax bills. The Irish government set corporate taxes at just 12.5 percent of profits, thus attracting all sorts of businesses — from computer services such as Google and Yahoo, to drug companies such as Forest Labs — that set up corporate bases and washed profits through Ireland to keep them out of the hands of the Internal Revenue Service.
The remarkable success of this tax haven means that roughly 20 percent of Irish gross domestic product (G.D.P.) is actually “profit transfers” that raise little tax for Ireland and are owned by foreign companies. Since most of these profits are subject to the tax code, they are accounted for in Ireland where they are lightly taxed; they should not be counted as part of Ireland’s potential tax base.
Corporate profits were essentially funneled through Ireland, and money funneled through a country's economy doesn't get reinvested in that economy in any meaningful way for the middle and working class who provide labor for those multinationals. It did considerable damage to with what Polly Toynbee called "tax piracy" in The Guardian this week, lowering not only it's own tax base with a corporate tax rate that not only failed to enrich Ireland, but beggared its neighbors by attracting corporations to move their headquarters and thus their profits to Ireland.
The "efficient business regulations," for which Heritage rated Ireland so highly were non-existant. In a review of Fintan Toole's book Ship of Fools: How Stupidity and Corruption Sank the Celtic Tiger, Henry Farrell cites lax regulation and bad business judgement as factors in Irelands economic crisis, and relates that in one instance in which the Irish Central Bank failed to discipline Ansbacher Bank for running a tax evasion scheme for prominent individuals.
Banks suffered no consequences for behavior that ruined the economy and destabilize the public finances. Regulators abdicated their authority to discipline financial institutions, and the result was akin to 50-foot toddlers running amok. Even a major tax evasion scam warranted no consequences. What else went on while the regulatory lights were out, the culprits have largely escaped under the cover of austerity.
Meanwhile, the economic painEven more spectacular than the failure of Ireland's "efficient business regulations" and "competitive tax rates" is the failure of its austerity measures in what seems like record time. Not only did Ireland become the first Eurozone country to enter recession, it also became the first to test its status as a petri dish for conservative policy by becoming the first country to respond to the economic critics by enacting severe austerity measures.
The government's 2008 emergency budget was the kind of economic medicine that even now conservatives are clamoring for here in the U.S. — a package of cuts in social programs from education to medical care, combined with a bailout of the country's banks. The idea was that making such severe cuts would increase confidence and produce growth by assuring investors that Ireland was serious about it's economic problems.
Ireland's austerity measures were an "epic fail" on two fronts. The country was rewarded with shrinking economy, and a sharper downturn than if the government had spent more to keep people working. The suffering that austerity measures brought the Irish people sparked a series of public demonstrations in 2008, 2009, and 2010.
But austerity did not inspire confidence nor deliver the growth its proponents promised. Fiscal austerity failed to reassure the markets, and Ireland's credit rating was lowered. Most recently, the country found itself in need of a bailout from the E.U. to make up for the economic grown not delivered by earlier austerity measures. The size of the bailout keeps growing, but recent reports said that it may amount to €85 billion ($145 billion).
The Iris people were left alone and unled, in a way that laid bare the cost of austerity in Ireland, exacted from the working and middle class taxpayers made to finance the bank bailout.
Psychiatrists tell us that grief comes in four distinct stages: denial, anger, bargaining and depression, before finally the goal of acceptance may be reached. In the last year, the country has staggered its way through that grim quartet of emotions. We made ourselves believe that the boom would last for ever, denying the facts when it became clear that it wouldn't. We then told ourselves the fallout wouldn't be as vicious as some predicted, even as the dole queues lengthened and businesses collapsed, and every single one of us had a family member or colleague who lost a job or couldn't pay the mortgage any more. Then followed the grotesque period of passivity and botched action, which the historians of 21st-century Ireland will ultimately remember as the doom of a country's self-image.
When we needed sane leadership, we got evasions and platitudes. The goodwill that people had for the taoiseach, Brian Cowen, a demonstrably decent man, was squandered. His administration came to be widely mistrusted and – I hate to use the word – loathed. We were told that we were all in it together, even as the millionaire speculators were subsidised by the taxpayer, their lavish pensions and remuneration packages guaranteed. About 300 people in Ireland continue to live like rock stars, while 4 million of us foot the bill. We have socialism for bankers, the ferocities of the market for everyone else. We are cheated and lied to, and every family is now paying. The poor pay more than most.
I was young in the 1980s. I know what a recession is. But I cannot remember the boiling anger that now exists here, the sense of betrayal and injustice. A teacher told me recently that he could think of no reason to stay living in Ireland. Many politicians of all parties are despised. The radio phone-in shows have stories that would break a stone's heart. People have been appearing in court pleading for their homes not to be repossessed. Businesses are closing. Thousands are emigrating.
The difference between Ireland and America is that the Irish get it. They understand that austerity holds no promise for them except more pain, and that the benefit will no more "trickle" down to them than prosperity has trickled down to the rest of us from the rich enjoying their tax cuts.
There are depths of economic desperation from which people do not rise, mainly because it is not intended for them to do so. Austerity is a locked gate to upward mobility. The economic message is that most people will have to get used to a far lower standard of living. And permanently, for the recipe of spending cuts and tax cuts for the top 1% has yet to yield anything but increased inequality — prosperity for those at the top, and penury for the rest of us. Given the insistence on destructive policy when all the evidence shows it to be just that, it can only be assumed that more pain, more inequality, and no remedy for either is the desired outcome. The result will probably be greater economic inequality that cements into economic injustice passed from generation to generation.
...Of course it is better to have more money, even if only a little more. But poverty is also about the quality of the local school, access to good health services and the fear of crime. Tackling poverty is clearly about money, but it is also about ensuring access to the services that promote a better quality of life, and wider life chances.
As well as being too narrow, this approach is too static. Social mobility is what characterises a fair society, rather than a particular level of income equality. Inequalities become injustices when they are fixed; passed on, generation to generation. That's when societies become closed, stratified and divided.
Austerity is another word for abandonment in the context of economic crisis. It means that the most vulnerable and the most in need will be abandoned to their fates by politicians and political parties as public money is used to bail out the very entities whose activities caused the crisis in the first place. No one wants to join or celebrates joining the ranks of the undeserving poor, but in the context of the "new normal" that's what we are, or what we are a paycheck or two away form becoming. Those of us who feel comfortable in our middle class status know somewhere in our hearts and are often wakened in the middle of the night by anxious thoughts of how close we are to tumbling permanently down that ladder — permanently, because the ladder is being pulled away, or sawed off at the bottom.
Ireland's government may yet just douse that ladder with gasoline and set it aflame. The price of the bailout set by the IMF and Ireland's partners in the E.U. has turned out to be more austerity — a four year plan that heap more economic pain on the Irish people, but leaves the most destructive elements of the Irish economy untouched.
The budget calls for cuts of nearly 15 percent in Ireland’s social welfare budget, one of Europe’s most generous, saving 3 billion euros a year. Some 24,750 public jobs — a huge number in a country of about 4 million people — would be eliminated, cutting state payrolls down to about what they were in 2006 and saving about 1.2 billion euros a year. Child benefits other social welfare payments would be reduced, and the nation’s minimum wage, now 8.65 euros ($11.59) an hour, would be cut by 1 euro in the hope of promoting job creation.
The country’s tax net would be widened to take in some low-income workers who currently pay no tax, and a series of new taxes would be imposed on certain residential properties, as well as on 120,000 people who receive public sector pensions.
But the budget plan does not touch Ireland’s very low corporate tax rate of 12.5 percent, which has helped to lured companies like Microsoft, Intel and Pfizer to set up operations in the country. Though the country’s political parties are bitterly divided over many aspects of economic policy, they all agree that the low corporate tax rate is one of the few pillars that can allow Ireland to return to economic health. Multinational companies employ about 1 out of 7 working people in Ireland, and their businesses are stoking export growth, even as the latest austerity program is expected to depress consumer demand and touch off a wave of retrenchment and job losses.
For Ireland, the potential cost of austerity may be a hollowed out society; in which a discredited political elite holds power, while an angry, abandoned and increasingly poor population chase a shrinking number of jobs. In other words, a somewhat new twist on an old socio-economic model.
According to Friedrich von Hayek, the development of welfare socialism after World War II undermined freedom and would lead western democracies inexorably to some form of state-run serfdom.
Hayek had the sign and the destination right but was entirely wrong about the mechanism. Unregulated finance, the ideology of unfettered free markets, and state capture by corporate interests are what ended up undermining democracy both in North America and in Europe. All industrialized countries are at risk, but it’s the eurozone – with its vulnerable structures – that points most clearly to our potentially unpleasant collective futures.
As a result of the continuing euro crisis, European Central Bank (ECB) now finds itself buying up the debt of all the weaker eurozone governments, making it the – perhaps unwittingly – feudal boss of Europe. In the coming years, it will be the ECB and the European Union who dictate policy. The policy elite who run these structures – along with their allies in the private sector – are the new overlords.
We can argue about who exactly are the peasants, the vassals, and the lords under this model – and what services exactly will end up being exchanged. But there is no question we are seeing a sea change in the post-war system of property, power, and prosperity across Western Europe, just as Hayek feared. An overwhelming debt burden will bring down even the proudest people.
Ireland's plight illustrates the lie of the austerity cheerleaders. Austerity does not lead to growth and recovery anymore than the cronyism, deregulation and free-market fundamentalism typical of conservative failure in the realm of economic policy. Austerity means that the "tough" decisions politicos and pundits tell us must be made are invariably toughest on the people already having the toughest time.
Austerity's epic fail has turned the Irish Tiger into a Tiger skin rug for banks and bondholders to trod upon. A similar fate will be the likely reward of any country threat that looks to austerity for growth.