Growth, Ireland, and Short Memories

Former economist Paul Krugman writes today about the disaster facing Ireland in the wake of the global recession. And he may be right about some things: Ireland´s own leaders certainly believe they´re in for it, and a painful contraction has already begun. But is that too high a price to pay for the free-marketeering that led to the boom of the past 15 years in Ireland? As a former economist, Krugman should know about tradeoffs, but if he does know he doesn´t let on here.

The average Irish resident was earning $16,600 (inflation and PPP-adjusted) in 1993. A quick accounting using basic OECD data shows that from 1993 to 2008, Ireland´s economy grew 120% per capita, or up to $36,700. The EU and USA grew about 32%, and the UK did better at 44%.

Suppose that instead of becoming a low-tax, low-regulation corporate favorite, Ireland had followed Krugman´s stolid advice and stayed with the pack. We´ll generously grant them the U.K.´s robust 44% growth over the period. That would mean current income per Irishman of $24,000. If Krugman´s ¨depression¨ materializes, and Ireland´s economy shrinks by 10% (a drastic figure) from its current high, the 2009 level would be $33,000. In order to fall to the hypothetical peak that Ireland would have reached under UK growth rates would take four consecutive years of 10% contraction, a decline far worse than the Great Depression. And even then, the sum of lifetime earnings of the average Irishman would be far higher under the boom-and-bust regime than under the slow-and-steady one.

If a country is willing to stomach the ride, the rollercoaster of high growth and harsh recessions delivers much higher standards of living much faster than the alternative. Some wisdom should be applied: the booms can fund national savings, and the government can ease the crashes with the resulting savings. As Krugman does note, public debt in Ireland is low. But he doesn´t tell you why: Dublin used the growth to lower its debt-GDP ratio from above 90% in the 1980´s to below 40% today. If the country had grown more slowly, this would have been much more difficult to achieve.

Ireland is in good shape today: despite drastic contraction, living standards are among the highest in Europe, and Ireland´s government has room to take on debt if it must.