Monday, November 22, 2010

Mac(ro) Daddies

Macro economics is a historical science like geology, paleontology, or astronomy, but without their solid underpinnings in the deep theory and rich experimental history of physics, chemistry and biology. So it behooves the economic Mac Daddy to try to extract whatever historical lessons there may be from the ongoing experience of the world. Ireland ought to be a nice object lesson in something or another. A few short years ago it was the latest poster child for free market radicalism: no business taxes, minimal capital regulations, and a booming economy. Now that it's the latest Euro basket case, what lessons can be drawn therefrom? Tyler Cowen (no social democrat he) has some candidates:

1. The Irish had some excellent economic policies, but they needed to regulate their banks more. They were simply too optimistic and too sloppy.

2. Irish troubles could have been contained, at some point over the last two years, had Ireland not been on the euro. They would have devalued, defaulted, and had a rapid bounce back up, within the next three years.

3. Ireland never should have guaranteed the liabilities of its banking sector. Indeed, Ireland (as New Zealand did long ago) should have encouraged larger, more diversified foreign banks to dominate its financial sector.

4. Irish troubles are intimately connected with low corporate tax rates. Revenue starvation induced the Irish government to court and tolerate a real estate bubble. One claim is that Ireland relied too much on property taxes.

5. The good and bad policies are a bundle of sorts, and Ireland needed the mix to rise from squalor and the dominance of anti-commercial interest groups, no matter how painful the present day may seem. I recall vividly, growing up, that Ireland was thought of as not much more than a Third World country.

6. We are overreacting to the Irish failure. It is one of the first European dominoes to fall, but over time many different policy models will look like mistakes.

The rest and the comments are well worth a look.