Mad Ireland

I have to say I'm kind of surprised by Paul Krugman's column today, where he diagnoses Ireland's current troubles as a mad rush into unregulated financial markets, and warns that we may suffer the same fate.

Ireland's problems are, to be sure, large--and to some extent, a rebuke to conservatives who liked to wave it as an example of supply side economics.  Ireland's low corporate income tax rate did spur massive growth in the country, but this was at least as much because it made it an attractive place for eurozone countries to locate as from any impact on capital formation.  The mad rush to Irish backoffice played havoc with national accounts--Ireland's Gross Domestic Product was significantly larger than its Gross National Product, which is not usual for developed countries.  And it turned the whole economy into a volatile mirror of the world economy.  When world GDP grew, Ireland's grew faster.  When world GDP shrank, Ireland raced towards the bottom.

The problem of the banking system are large, but they are the problems of a small country that is tightly integrated with big neighbors.  We are not going to have that problem--we're the neighbors.  Moreover, the particular problem that Krugman describes, of their treasury having to massively tighten its belt in order to preserve the banking system and its credit ratings, is related not just to the size of the country (and its economy) but the ratio of bank assets to GDP.  This table is a little dated, but it illustrates the problem well enough.  By the time of the crisis, bank assets in America just about equalled GDP.  In much of Europe, including Ireland and Iceland, they were 3-5 times national output.

Which just points up how little this crisis seems to be associated with any particular regulatory change, or "free market ideologues" in the government, or even housing lending--Austria is about to topple because of its massive exposure to Eastern Europe.  And though you'd never know it from listening to most of the commentary, we're weathering this crisis better than many, even most, more statist countries--even Canada may suffer worse than we do, because their economy is so exposed to our importing appetite.  When you look at how countries are performing in this crisis, what seems more relevant than a free market government is how big your country is, and how dependent it is on the global economy.  On both metrics, we're actually in pretty good shape