Some people, perhaps those not so well versed in macroeconomics, perceive giveaway budgets and political auctions as signs of strength, reflective of underlying economic vitality; in reality, giveaways are one of the most accurate indicators of trouble ahead. Why is this? It is because, as I tell students every year, macroeconomics is counterintuitive: this complexity is based on a phenomenon called the economic cycle, which plays tricks on us. Just when you think you are strong, you are weak and vice-versa, substantiating the observation that the worst decisions are often taken in what appear to be the best of times.
For many people, we are in the best of times. Government coffers are full, the economy is growing strongly, unemployment is as low as it has ever been, there are more people at work in this country than ever, wealth and incomes are growing. Of course, you wouldn’t think this listening to the stream of woe emanating from the electoral debates depicting Ireland as some sort of hellhole when in fact on almost every metric it has been one of the most successful economies in the world. But relative economic success does not mean it can side-step the relentless logic of the economic cycle.
The cycle works as follows: when things are going well, taxes rise far above the long run average. If these taxes are spent on day-to-day expenditure, they will add further to the tax revenue surge, giving a sense of permanence, begetting more giveaways, encouraging more spending, while all the while the tax base becomes more fragile. Then something unforeseen happens and bang the tax revenue falls. However, recent “commitments” to the electorate remain in place, and the budget deficit expands. In time, this leads to austerity – a technocratic term for broken promises.
Had the original money been spent on infrastructure – trains, homes, tunnels, inter-city lines, metros – that enhances future productivity, we’d have something to show for it. But when a government spends on sweeties for the electorate, when the unforeseen event happens and things change, all you are left with is national anger.
We’ve seen this movie before. In 2004, the place was awash with cash from a massively unsustainable housing and credit boom. I was on TV and radio at the time and remember distinctly the budget jamborees of 2004/5/6. Within three years it was all over. Once the cycle turned, the game was up and we all know what happened.
Back then, the reversal was immediate: credit disappeared, the housing market collapsed and paper wealth evaporated. Those of us who warned about the cyclical certainty of a collapse were dismissed as unpatriotic.
Credit collapses are unforgivingly swift and brutal. This time around we can be thankful that the downturn won’t be quite so sudden. What is now in prospect for Ireland is not a credit collapse; today’s promises will be broken more slowly, but the sense of betrayal will be similar, and could be amplified by a culture war over immigrants as people look for someone to blame. Immigrants didn’t feature during the Celtic Tiger crash.
The potential threats to Ireland now come in four guises.
1. Foreign direct investment
Ireland is by far and away the most successful economy in the world when it comes to attracting FDI. The stock of FDI assets in the country stands at €1.15 trillion. That’s real stuff – factories, research labs, corporate headquarters with highly paid and trained staff. In return, Ireland is a profit gold mine, with the annual rate of return on FDI investment coming in at 15.3 per cent. You don’t get those returns in Kansas. And this is precisely the dilemma for the Trump administration. Although they want to bring the money home, the realities of business suggest that the biggest impediment to bringing corporate America home will be corporate America itself. Ireland will watch this battle between the corporate boardroom and the populist war room with special interest.
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Despite comprising just 3.4 per cent of total enterprises here, multinationals generated 72 per cent of total turnover (€798.8 billion) and 72 per cent of total gross value added (€266.7 billion). They also employed 28.2 per cent of the total workforce and 72 per cent of inward FDI is American. A month ago this column focused on the words of Howard Lutnick – and that was before he was picked to be US commerce secretary. He wants to bring Yankee money home. Let’s see how this pans out, but it is clear the world has changed. Unfortunately, given our exposure to America, Ireland is now the Mexico of Europe, intertwined with an America that might not want us anymore.
Another aspect we must accept is that the cost-of-living crisis that many Irish people are experiencing is a function of supply in the economy not being free to respond to demand. To set supply free, barriers to development must be immediately rescinded. Ireland is still the least populated country in western Europe so house and land prices should be low but they are high. This is because supply is meddled with by policy that protects the interests of home and landowners over new home buyers and renters. At its core, it really is that simple.
2. Housing
We are miles away from equilibrium. Housing supply lags demand everywhere. We need 35,000 to 53,000 new homes annually based on projected population growth scenarios. This requires political and bureaucratic determination to tackle dereliction and vacancies as well as Nimbyism in urban areas and fast-tracking a transport system that allows greenfield developments. Can the Irish State do this? Why not? It can’t continue like this. For example, an IMF report estimates that the average Irish household would need to save for more than 15 years to buy a 100sq m property – the highest of all EU countries.
But it is not all about freeing supply. Markets can help up to a point, although there is such a thing as systemically significant prices like there were systemically significant banks (remember them?). A systemically significant price is the price of development land. An unforgiving free market society, such as Singapore, tightly controls the price of development land. The state buys the land and releases it at a price, putting a cap on land prices. We should do the same – it is the key to the cost of living. A new government must know when to intervene and when not to. Let’s call this approach to systemically significant prices “paternalistic intervention”. Some things are not best left to the market.
3. Ageing population
In the last crisis, we could take heart that we had loads of young people who could work to lift the economy out of depression. We still do but it is beginning to change. On January 1st, 2023, Ireland had the highest share of children and young adolescents (aged 0 to 14) in the EU – 19.3 per cent. However, like many developed nations, we are not having so many children and we are getting old, quickly. Projections indicate that by 2051, the number of individuals aged 65 and over in Ireland will nearly double, reaching 1.6 million. We have to plan for this demographic change.
4. Youth emigration and immigration quality
More than 64,000 people emigrated last year; today more than 70 per cent of 18- to 24-year-olds are contemplating emigration to achieve a better standard of living. Professions particularly affected include healthcare, with many young doctors relocating to countries such as Australia. In some areas, like nursing, immigrants are replacing the emigrating Irish, and the ESRI notes that many immigrants possess higher education levels than the native-born population. At the same time there are lots of immigrants who are not finding jobs in their specialist area, leading to a waste of talent.
Ireland is at a crossroads. We’ve had three decades of growth. To future-proof the next three decades, we must respect the cycle, prepare for downturn, use State power – paternalist intervention – judiciously and hope that corporate America kicks back against isolationist America. The US president Calvin Coolidge noted that “the chief business of the American people is business. They are profoundly concerned with producing, buying, selling, investing and prospering in the world.” When the political dust settles, I still believe this will be the case.