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
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We are the dog, the others are the tail.
That makes me wonder what the dog food is.
Energy?
But I thought that increased globalization was good for everyone? And that more and more trade was indisputably good and should always and every time be pursued as much as possible? So to maximize their own and everyone's economic well-being, every country should be striving to be more and more dependent on the rest of the globe?
How can it be that an economic contraction would hit hardest those who have best followed the precepts of free trade?
Is there actually some value in self-sufficiency or is this just the exception that proves the free-trade rule?
Blighter: I think you are ignoring the original gains that were made possible by trade. Developing countries benefit greatly by trade, they grow, but they tend to rely on exports, so they are the hardest hit in a recession. Still the hit is less than the original gain. Had they stayed closed in and "self sufficient", they would never been able to climb high enough to fall from.
In other words, if a rich uncle was to give you $1,000 last week, and nothing to your brother, and then this week take $800 from you but not take any money from you brother, you are the hardest hit, but you are still ahead.
Ken, I think you've addressed Blighter's concerns well. Going three steps forward and one or two steps back is still moving forward. Whereas staying where you are is just staying where you are.
I have to laugh at all the foreign comentators that try to pin this recession on the United States when not a single one of them gave the U.S. any credit for the long period of prosperity that preceded it.
Ken is right. Think about China versus India. China is likely to take a bigger hit than India is, but China is three times as wealthy as a result of being open to trade for much longer. 50 years ago, the developing world was all largely in the same bucket. Today, the difference between a Ghana and a Taiwan is the degree their economies were open to trade over the past several decades.
There's the trade that really works, and the trade that's just trendy. There are businesses that really work, and there are businesses that ride bubbles and then fall apart. There's real estate that holds value because of its qualities and location, and there's cheap construction in the middle of the desert.
A regular recession is how you tell the difference. This banking crisis seems to be more than that, but it's still having that effect.
Hey, is that an allusion to Auden in the headline (from his poem "In Memory of W.B. Yeats"*)? If so, nice: the sign of a tasteful and expensive education (to borrow Neal Stephenson's phrase).
Re your last paragraph,
"Which just points up how little this crisis seems to be associated with [...] even housing lending--Austria is about to topple because of its massive exposure to Eastern Europe."
Wasn't Austria's exposure to housing lending in Eastern Europe? Also, regarding this sentence,
"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."
This statement could use a little fine-tuning, I think. Australia is weathering this crisis much better than we are, so far, despite its relatively small population. Like Canada, it has benefited from the commodity boom of recent years, but it has two big advantages over Canada. First, it's much less levered to the U.S. economy, and much more levered to East Asian economies. Second, Australia came into this recession in a much stronger fiscal position, having no net federal debt. It is taking on some debt now, to stimulate its economy, but it ought to have plenty of room to do so.
*I'm thinking of the great line "Mad Ireland hurt you into poetry", which I think of whenever I flip the channels and see Celtic Woman on a local PBS station. I wonder if "Mad Ireland" hurt them into doing their 50-piece Enya covers.
No one else found that footnote funny? That cracks me up every time I read it.
But Canada has some protection from its energy sector - being a net exporter of energy is always a good thing, in boom and in recession. If the US could grow the domestic energy sector - nuclear, gas, oil, cleanER coal, solar AND wind (but no biofuels please) while cutting consumption, it would massively improve the US' balance of trade and would make Americans' love of cheap imported consumer goods much more sustainable.
Another note - a lot of folks have been asking why Canada's banks are in such good shape - one reason has always been that they charge retail customers a lot of service charges - checking and ATM fees for instance - and pay much lower interest on deposits. Essentially, the cartel-like system allows them to gouge the customer to make up for any I-Banking losses. Well, from what I read on the consumerist and elsewhere these days, US banks have learned the lesson. The US retain banking world is becoming a lot more like Canada - fewer but bigger banks and a lot more and higher service charges. Maybe it is safer, but safe has a price.
"If the US could grow the domestic energy sector - nuclear, gas, oil, cleanER coal, solar AND wind (but no biofuels please) while cutting consumption, it would massively improve the US' balance of trade and would make Americans' love of cheap imported consumer goods much more sustainable."
From yesterday's IBD:
That's not quite accurate about Canada's banks. US banks also charge lots and lots of hefty fees. The real explanation for the strength of Canada's banks is the isolation of Canada's banking system. Canada has only 5 major banks, which have long operated under something of an oligopolistic structure. They don't face much foreign competition, are not big players abroad, don't compete with each other to the same degree as you see banks compete in the US or Europe, and they've got complicated capital requirements imposed by several Canadian regulators that forced them to keep far more capital than European commercial banks or US investment banks (and even better than US commercial banks, which have also weathered the storm relatively well). Since they weren't facing as much competition, keeping this amount of capital didn't hurt them all that much (though it did keep them from becoming major world players when they really really wanted to be.)
MDF - I don't believe that anything you wrote refutes my assertion. When I first moved south in 2000, I could not believe what a bargain banking seemed to be, and what good interest rates I was getting. Now there are a lot more charges and ATMs have gone from $1 to $3. Interest is trickier, since with rates so low, it's hard to see much of a spread.
The oligopolistic / cartel element is one that I think we both agree on - it gives the Big 5 a number of advantages, including the opportunity to gouge customers with impunity, as well the freedom not to be super-aggressive in searching out profits out of a need to succeed against equally aggressive rivals.
Why is it that people think that things (economies, relationships, markets) will work in their favor ALL of the time?
What should be so surprising to most of us (if we had any perspective at all) is that we have cruised along so well for so many years without having a major fallback as we are now.
The big lie that Obama and the other statists are trying to push is that they can somehow suspend the laws of cause and effect. That we can have it both ways all of the time, without any fluctuations or downside. Reminds me more of a TV series than of real life - but, then again, that's what they are selling.
Can somebody help me with that one?
gdp is the total value of all final goods and services produced in a particular economy;
The Gross National Product (GNP) is the total dollar value of all final goods and services produced for consumption in society during a particular time period
In other words they produced a great deal of stuff that they do not intend, and never intended to use themselves. Its another way of saying that their exports exceed their consumption. making them vulnerable to the whims of whoever they happen to export to.
He also nowhere mentions that Ireland's govt debts are in Euros, with which Ireland's relationship with are like that of an American state with the dollar, not the Federal govt with the dollar. This is an elephant in the room fact, and not mentioning it in a comparison pretty much means one's comparison isn't going to be too illuminative.
I'd think too that bank asset table is bit misleading for the following reason, in that in the US there are reserve requirements, as distinct from capital requirements which are a wholly different animal, while in Europe there aren't, since in the US the Fed wants to control the size of M1 and in Europe, M1 is set by the market, though both control, in fact create, high powered money.
That's the reason why we have such a big and deep CP market and Europe doesn't, CP is a substitute for vanilla,working capital liquidity to big business so their checks all clear, bank loans. It seems to me that the US CP market is a response to the sand in the gears put in by reserve requirement (as distinct from capital requirements).
Also, it might seem rather fitting that 'checking accounts backed by CP' came about as the result of the 'shortage' of bank provided liquidity, and that MM Funds were 'banking' institutions in all but name, they were unregulated and uninsured, and that's where the current nastiness started.
Krugman notes that Ireland was rated by the Heritage Foundation as having the third freeest economy in the world, after Hong Kong and Singapore.
Question: How are Hong Kong and Singapore doing in the current ecomomic crisis? (Admittedly, such city-polities are highly atypical, but if they are weathering the crisis better than Ireland that at least would be *some* evidence that free-market economics can't be *all* Ireland's problem...)
According to the 2009 version of the Heritage Foundation's Index of Economic Freedom, Ireland is #4 after Hong Kong, Singapore, and Australia. Since, as you note, the first two countries are city-states, consider Australia. Australia is in a recession now, but it's a much shallower recession than ours. GDP declined at less than a 1% annual rate in Q4, if memory serves, and current projections are for GDP to about flat or suffer a 1% annual decline in 2009. Australia's key interest rate is at 3% now, so its central bank still has some dry powder if things get worse.
A lot of Ireland's problems have to do with the fact that they can't do what most countries do during this kind of economic crisis--devalue their currency.
It also inhibits a run on the currency which helps with predictability.
look for another wave of irish emigration - as tough as that will be on them, it'll be a damn sight easier on them (white, english-speaking, relatively well-educated) than on their ancestors circa 1840 or on their current competition emigrating from other zones
Murphy is a Jewish guy, and he already emigrated. Things will go OK for Ireland.
Heard on the radio a few weeks ago, station/program not remembered: Ireland is facing a wave of immigration; during the Celtic Tiger, they imported workers from Poland. Now, the Irish are moving to Poland because there's jobs and growth there.
I don't know if any of this is actually true
Ireland certainly imported workers from Poland - back in the summer of 2007 I read (in a Dublin newspaper) that 10% of the city's population was Polish. However robust that statistic is, there were plenty of ads in Dublin (on buses, etc.) in Polish. Somehow discombobulating.
No idea about any reverse affects.
"Ireland's problems are, to be sure, large...": to be sure, to be sure.
Ireland's problem is that it was the cheap-wage manufacturing outpost for US firms in Europe, and then they discovered Poland.
My take on Krugman's column and Megan's post on it: "Mad Ireland"