Tyler Cowen ponders what went wrong. As someone who wrote a bit about the Euro, and the Celtic Tiger, before this mess started, my thoughts:
- The corporate tax rate played a huge role in Ireland's growth, and produced real improvements in standards of living--the back office work that was being done there really mattered. The productivity improvements in Irish output were real. However, it also produced some massive capital flows that in retrospect look unhealthy.
- Likewise, the euro enabled this corporate-tax rate driven boom. Over the long term, however, it was a disaster for the Irish economy. Interest rates were too low for the booming Irish economy for a long time. The Irish government recognized this, and ran an offsetting contractionary fiscal policy, but it was not able to contract enough (politically, practically) to counter the monetary stimulus from ECB policy and capital flows. When the crash came, the country was unable to take the most obvious and least painful route out of its troubles: devaluation and (maybe) default.
- I now think that there should probably be some limit on the size of the banking sector, at least in smaller economies. The decision to guarantee the bank losses was disastrous, and also necessary, given Ireland's capital account. I am willing to countenance the notion that maybe the banking sector isn't the limit to the problem, and some form of capital controls may be necessary in a small, open economy, though I am far from being convinced of this point. Capital controls have their own, often quite large, problems that make me leery of embracing them.
- Housing bubbles are politically very hard, maybe impossible, to pop once they are clearly housing bubbles and not merely a natural response to a very fast growth rate. China is now trying to deflate what looks like an incipient bubble here; we'll see if a tightly controlled economy can do it. But democracies have a pretty poor record.
- It certainly didn't help that many Irish politicians have historically been pretty cosy with the real estate development sector.
- Ireland remains better off than it was twenty years ago. The current pain is real, and perhaps unnecessary. But it is no small thing that a generation of Irish workers didn't have to migrate abroad.
- It's easy to forget how bad some of the old Ireland's policies were. I remember talking to someone in 1996 or early 1997 who had just gotten a promotion teaching at UCD. Her pay was doubling, and she'd gone to see her parents accountant, who pored over her paperwork and said, in a jovial tone that implied that Christmas had come early, "I think it's very possible that you're actually going to see some more money in your pocket!"