Dublin Opinion

I like Paul Krugman. He’s a liberal, somewhat left-leaning, a Keynesian at heart, and, like Milton Friedman, a Nobel laureate. Usually he gets things right. His latest opinion piece on the Irish economy is not really one of those times.

Not that he gets it wrong, mind. His latest opinion piece is not about Ireland per se, but about the American and world economies. Krugman is setting Ireland up as an analogy: in his own words, the worst-case scenario for the world is that ‘America could turn Irish.’

In order to do that, Krugman has to cut Ireland’s financial crisis to suit the American cloth. He says that Ireland got into its current bind ‘by being just like us [America], only more so.’ Ireland last year was the third freest economy in the world, and ‘one part of the Irish economy that became especially free was the banking sector, which used its freedom to finance a monstrous housing bubble.’

He goes on.

Then the bubble burst. the collapse of construction sent the economy into a tailspin, while plunging home prices left many people owing more than their houses were worth. The result, as in the United States, has been a rising tide of defaults and heavy losses for the banks. and the troubles of the banks are largely responsible for putting the Irish government in a policy straitjacket.’

Nice analogy, but a false one.

The crisis in Irish banking wasn’t caused by mortgage defaults and mortgage debt right offs - at least, I don’t remember the litany of mortgage default stories in the newspapers in the months leading up to the August 2008 meltdown. Quite the opposite in fact. The mortgage loans were very much on the books. The problem instead lay within the complex world of property loans for speculative purposes, which amount to tens of billions of euro (anything from 50 to 90 billion euro, take your pick), and which were funded through credit purchases on the international money markets, dodgy share deals, and creative accounting through the temporary transfer of billions of euro from one Irish bank to another.

And that’s just the methods we know about.

Leaving aside the structural problems within the Irish economy - where income is overtaxed and unproductive wealth gets to play with itself - with regard to last summer it was the decision of the Irish government to protect Anglo Irish Bank, its property speculator customers, and its shareholders at any cost which tipped the balance from crisis to meltdown. Anglo Irish doesn’t even sell mortgages, at least, not to ordinary householders. The government could have let Anglo Irish go as a failed bank, and put all its financial weight behind AIB and Bank of Ireland. The policy straitjacket which Krugman says the Irish government finds itself in was not imposed on them from outside forces. Its binds were tied through decades of corrupt financial practices involving Fianna Fail and Ireland’s financial and construction worlds. The speculators and bankers play the tune, and it was time for the Fianna Fail monkeys to dance.

Of course, you look at the financial bailout of Wall Street, and you’re sure to see analogies with Ireland. That’s because the problems are not cultural, but systemic in finance capital. But that’s not the analogy that Krugman made.

The second item raised by Krugman is the 2008 bank guarantee, which he says was forced upon the Irish government when it ‘found itself having to take responsibility for the mistakes of private bankers.’

Last September Ireland moved to shore up confidence in its banks by offering a government guarantee on their liabilities - thereby putting taxpayers on the hook for potential losses of more than twice the country’s G.D.P., equivalent to $30 trillion for the United States.’

But, last September, the Irish government had a number of options it could have taken to protect the banking system. It decided to take the worst one possible, one that has not been undertaken by any other modern country before or since - i.e. give an impossible guarantee on EVERYTHING and then, when questioned on the ability to pay, fluff your lines, repeat that it’s not a real guarantee ‘cos we won’t have to use it, ‘cos there’s no problem, and then listen to David McWilliams praise the idea as a masterstroke all the way up until it’s shown to have been a shite one.

Nothing, and I mean, nothing, this government has done has been about salvaging a workable banking system for the Irish economy. Everything has been about protecting the money men.

As for the harsh new policies which the Irish government has put on the country - there’s nothing case-specific about any of them. They are the Pavlovian responses of finance capital to an economic crisis. The concerns of finance capital are not the same as those of industrial or merchant capital. This is part of a continuing conflict within modern capitalism, albeit one that finance capital in the Anglo-Saxon world had thought it had won. The kind of stimulus packages needed to get the economy working again are the kind of packages which would go against the interests of finance capital - increased public spending, fixed-capital investment, wage maintenance, social service provision. Consumer spending has to be based on wages again, not credit fantasies. And for that you need to create, and maintain, jobs.

There’s part of a joke I’ve heard which summarizes the Russian Military Handbook for Generals as containing simply one line: ‘retreat to your capital and wait for the winter snow to arrive.’ In many ways, this is the response of a banker to an economic crisis. Sit on the money and wait until it all blows over, then start lending again but on your terms. In contrast, merchants and industrialists need not only money to make things, they need consumers with money to buy the stuff they make and have. They can’t afford the banker’s waiting game.

A lot of Irish businesses are going to go under over the next few months and years, businesses that with the right policies could have kept at least ticking over. What is truly amazing at this time is that even though this crisis is the result of finance capital, it’s finance capital that’s getting to dictate the terms of the economy. That’s not a political straitjacket. That’s a political choice. The Irish government could side with the industrial and retail world, but instead it’s going with finance and land speculators.

The final point in Krugman’s article which relates to Ireland starts off by saying that although there’s widespread criticism of the government’s bank plan, ‘there isn’t much disagreement [among Irish economists] about the need for fiscal austerity.’ Again, not quite true, but quite telling as to the type of Irish economists Krugman listens to and reads.

He goes on to say that

as far as responding to the recession goes, Ireland appears to be really, truly, without options, other than to hope for an export-led recovery if and when the rest of the world bounces back.’

The worrying thing about that game-plan is the type of exports Ireland has at the moment.

In 1997 Krugman wrote a chapter for the book International Perspectives on the Irish Economy, edited by Alan W. Gray. In it he outlined a number of key items which he felt led to Ireland experiencing ten years of five per cent growth. first of all, he wrote that Ireland’s economy showed signs of regional and national economics.

It would be going too far to think of Ireland as if it were purely a regional economy, its growth driven by its export base. The kinds of macroeconomic issues that matter for bigger regional economies also matter for Ireland, and must be discussed. But by moving back and forth between thinking of Ireland as a productivity-driven national economy and as an export-driven regional productivity we may be able to get a fuller picture. (p.42)

So. Ireland was a national economy with the workforce flexibilities of a regional city economy such as that of Boston or Los Angeles. In terms of productivity, Ireland was able to show such gains in the late 1980s and 1990s because it combined ‘a fairly low-productivity, traditional sector with an advanced modern sector that is primarily foreign-owned.’ Ireland’s ability to attract foreign investment centered around the growth in technology which improved transportation and speed of communication, among other factors. Again, Krugman,

A decade ago Ireland, despite its debt and unemployment problems, had some strong points: a well-educated population, enough social cohesion to introduce an effective incomes policy that kept wages low compared with continental Europe, and the fact that its work force speaks English. an opportunity was then presented as a result of changes in the underlying geography of the world economy: as trade became less influenced by transportation costs but more critically dependent on communication, a location within Europe became necessary but one in the centre of Europe less important. Thanks in part to luck, in part to policies (including investment in telecommunications), Ireland got a head start over other European locations in attracting what became a surge of inward foreign direct investment; the early investments both generated a cascade through informational effects and, eventually, created external economies that further reinforced Ireland’s advantages.”

All well and good, but the foreign investment Krugman is talking about is mainly related to goods producers. There has been a decisive and dramatic shift in Ireland’s export base in the past seven years, with around forty per cent now consisting of service exports (2007) amounting to an estimated €62 billion. This is an increase of nearly €34 billion since 2002, when service exports stood at twenty four per cent and around €28 billion.*

Contrast this with our goods exports, which stood at €93 billion in 2002, and €89 billion in 2007. Estimates for 2008 put it at €86 billion. At best, it’s been static for the past seven years, while export services has exploded. And it’s here, in services, especially financial services and the fact that “there is no approval process for foreign investment or capital inflows unless the company is applying for incentives. There are no restrictions or barriers with respect to current transfers, repatriation of profits, or access to foreign exchange”, that you get the praise for Ireland as the fourth freest economy in the world. The Heritage Foundation isn’t just calling Ireland “free” because of housing. By the way, the Heritage Foundation also states that “Financial freedom and freedom from corruption are high” in Ireland. Just so you know.

If Ireland is going to retreat to its capital and wait for the winter snows, it better do something about its export base, as a dramatic shift to services while putting goods in limbo is not a working strategy.

But, export goods are not the bankers’ concern. And neither are they the concern of Fianna Fail and its landowning chums.

Ireland’s heading for freeze-frame. you can thank Fianna Fail for the sepia tones.

*Figures are ball-park only, and arrived at by comparing the CSO’s National Income and Expenditure for 2007, table 5, no.83, with the CSO table of Annual External Trade (goods only).