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How a Responsible Government Responds to Recession

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In reading a recent article about how Ireland is dealing with the recession and budget crisis, it struck me how radically different their response is from what we are seeing here in the US. Despite the fact that their economy was in a bigger bubble and suffered a more significant crash than ours, and even with a government more left-leaning than its predecessors which had brought it great prosperity in the new millennium, their plan to resolve problems with unemployment, recession, and growing government debt shows a good sense and pragmatism which is in stark contrast to the profligacy and irresponsibility of the Obama administration.

In Ireland's recession unemployment has reached 12.5% (high for Ireland, but low for Europe) and their deficit is projected to be $32 billion or a "staggering" 13% of annual GDP, four times the limit which the European Union recommends for member nations. In comparison, the US currently has 10.5% unemployment and an annual deficit projected to be around $2.2 trillion or about 12.3% of our projected $14 trillion GDP. Ireland's national debt is currently around $110 billion or 45% of their GDP, much less inflated than US national debt which is running at around $11 trillion or close to 85% of GDP. This means that Ireland's short-term challenges are similar to the US, though on a smaller scale, while their long-term indebtedness is considerably less. They are overburdened with debt, yet half as much so as the United States. We're both in bad shape, but they have a little more room to borrow money if they wanted to assume that risk.

In the past year the response of the Obama administration and Congressional Democrats to recession, housing foreclosures, business and banking failures, and record unemployment has been to spend money and to spend more money. Not only on bailouts for the banks and the brokerages and the auto companies, but also to benefit their political allies, trade unions and special interest groups. Very little of the money has been directed towards small and medium size businesses that do the most to grow the economy and create new jobs. In addition they have escalated the war in Afghanistan, doubled our commitment to overseas aid, and are preparing to condemn us to trillions more in long-term debt with a poorly conceived and publicly unpopular health care bill which massively expands entitlements and costs for consumers while subsidizing lawyers and insurance companies.

To top it off, earlier this month they passed a budget which expanded spending by a record 10% and included substantial pay raises for federal workers and elected officials. All of this will be paid for with massive revenue-generating measures hidden in the health care bill and from ending Bush-era tax cuts as well as in forthcoming Cap and Trade legislation. These revenue raising measures are the equivalent of unprecedented tax increases that will place huge burdens on small businesses and will amount to thousands more a year in taxes or additional costs even for the working poor. All together these measures add up to the greatest government financial outlay in history and the largest increase in the size of government the US has ever seen, all at the expense of the economy and the working people of America.

Compare this litany of irresponsibility and political opportunism to how the responsible leadership in Ireland has responded to their similar crisis.

In some ways Ireland is well ahead of the US in socialism. Already 20% of their workforce are government employees, a figure which we may match by 2012. But in their case, rather than raising government salaries as the US Congress has done for almost two million federal employees, the Irish government is implementing cuts of between 5% and 15% in the salaries of government workers, and the Prime Minister is taking a 20% pay cut. It's not a huge savings, only about 5% of their deficit, but it's a start.

Ireland already has universal health care, but rather than expanding their system at massive expense as Congress is attempting to do here this year, they are planning $1.1 billion in cuts in social welfare programs plus $588 million in health care cuts.

Ireland is also cutting taxes while the US government is massively raising taxes. They are reversing a 0.5% increase on their national sales tax and cutting taxes on beer and liquor. To raise some revenue they are increasing the tax on various fossil fuels, a nod to the desire to move away from polluting fuels without the dictates of an international treaty.

The main concern of the Irish government is that their economic boom in the 1990s and early 2000s came with substantial inflation, and now they are losing a lot of the business which they attracted with a low corporate tax because of increases in wages and the cost of living. Finance Minister Brian Lenihan observed that they "will not be able to stem the hemorrhage of jobs until our prices and the costs of doing business here move down in line with those of our main trading partners." The goal is to attract business back to Ireland with lower expenses and lower taxes and use that to spur restored growth.

Not surprisingly, Irish unions are up in arms about the austerity measures and are threatening to strike. But unlike the Obama administration, which has pandered to the unions at the expense of businesses and taxpayers, the Irish seem willing to call their bluff and demand that unions behave responsibility and share their part of the burden of rebuilding the economy.

Lenihan seems confident that responsible cost-cutting and sensible economic stimulus will put Ireland back on the right track, commenting that "by taking the difficult but necessary measures now, we will rebuild our nation's self-confidence here at home and our reputation abroad." It certainly seems like a better plan than driving down the economy for political advantage and expanding government and the welfare state at the expense of free enterprise and individual prosperity as seems to be the plan in the United States.

We'll see which approach works better, but I'm betting that Ireland will see an economic turnaround long before we do.

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About Dave Nalle

  • http://ruvysroost.blogspot.com Ruvy

    It should be carefully noted that this approach (of the Irish Republic), adopted by the Brits in 1929, failed – but when they (the Brits) had a social services net under them in the early ’80s, it succeeded.

    It should further be noted that while the “Kenyan” jets around the world humiliating America, the Irish premier shares the pain. What a difference!

  • Mark

    Ireland should be an interesting country to watch over the next few weeks. I’ve read both that some not insignificant civil disorder is anticipated in response to these measures and that the police, who will be needed to suppress unrest are talking strike in response to their cuts.

  • http://www.republicofdave.com Dave Nalle

    In other words, union greed is out of control and they will strike rather than accept cuts necessary for the welfare of the nation.

    Here in the US we just handled it by massive payoffs to the unions. Equally reprehensible.

    Dave

  • Mark

    Greed is a shallow catch-all of an explanation.

    insert disclaimer of choice: imo; ymmv, etc

  • Dyrkness

    The “Kenyan”? Hasn’t THAT lie been put to rest,yet?

  • http://delibernation.com Silas Kain

    Very little of the money has been directed towards small and medium size businesses that do the most to grow the economy and create new jobs.

    This has precisely been my point for the last year. Small and medium businesses are being suffocated out of the marketplace in favor of corporate giants like WalMart and Target. Let’s just get all the consumers into one giant database and we’ll dictate their purchases, their lives and their bank accounts.

    Small business was and continues to be the spine of the American economy. Right now there’s a metamorphosis occurring and we need to be very cautious about allowing the “giants” to kill the last bastion of hope we have. If there is to be an increase in regulation it must begin with removing the exemption of anti-trust regulations from insurance. Then, we must implement a system whereby no corporation is allowed to be “too big to fail”. And, stockholders take note, YOU must be the parties who absorb the costs in the event of failure. There’s got to be a re-education of American consumers. It’s a gargantuan task and failure to facilitate change will result in America being dissolved with a group of third world countries as a replacement within a decade.

  • Glenn Contrarian

    Dave –

    I checked your first source and saw what the Irish government is doing – austerity measures, yes, and buttressed by a tax INCREASE.

    Yes, when the government has enough money to do what it is tasked to do, the country as a whole does better. When the government does NOT have the money and is prevented from being able to raise more money (such as in California), bad things happen – which is why the three lowest tax rates in American history post-1900 preceded (1) the Great Depression, (2) the 82-83 Recession, and (3) the Great Recession.

    Of course, just as before, you’ll call that an error in logic, even though the converse of the above events – the 90%-plus top marginal tax rates of the 50’s – also just so happened to be the time of America’s greatest economic power in the world.

    According to conservative ‘conventional wisdom’, taxes such as we had in the 50’s should have resulted in another Great Depression…but instead, we boomed, despite the hideous WWII debt and the Korean War.

  • http://www.republicofdave.com Dave Nalle

    Glenn, what on earth does the old 90% marginal tax rate for the top earners have to do with anything? It’s the level of tax on the middle class and working people which matters, and that’s exactly who the health care plans and cap and trade are going to hit hardest.

    You also have zero proof that there’s a causal relationship between low taxes and recession and it’s an argument which makes no rational sense at all. Plus the timing doesn’t work the way that you think it does. The tax changes under Bush were minimal and certainly not enough to trigger anything like the current crisis, which also has clear different causes. And Reagan’s tax reforms increased the amount of taxes paid by the top 50% while lowering the taxes paid by the bottom 50% of earners. In each of the eras you mention, including the 1920s when tax rates were cut the amount of tax revenue collected increased substantially, and in particular tax gathered from the top earners increased dramatically.

    And what about the Kennedy tax cuts in the 1960s? Where was the associated recession?

    You’re also wrong about the 1950s, which was a period of recession, lasting from 1953 to 1957. The false perception of good economic conditions in the 1950s is mostly nostalgia.

    Dave

  • http://thingsalongtheway.blogspot.com/ Cindy

    now they are losing a lot of the business which they attracted with a low corporate tax because of increases in wages and the cost of living

    Makes me wonder about your ideas Dave. Seems to me you would support the scheme to lower corporate taxes to attract business. Yet, from your comment that doesn’t seem to work in the end. Unless, of course the workers’ lifestyle suffers. Corporations were apparently attracted by their desire to maximize their profits but the problem, as it always is, is that they don’t want to pay wages for workers. Especially if they can go somewhere else where the workers can be exploited more efficiently.

    What I see in your comment is that essentially you are admitting that your whole Libertarian system does not work to benefit all. If corporations cannot maximize profits, at the expense of everyone else, then they will leave and go somewhere else where they can exploit people better.

    When does this system of blatant exploitation and competition for profits work to even everything out and make it better? Apparently it can’t work until every last worker on earth has been properly exploited and there is no one left who is forced by circumstance to sell herself for a pittance. Think that will ever happen, Dave?

    It also occurs to me that you don’t think it is unfair at all–in your attempt to support a fair system–that the power doesn’t lie with the workers instead of the capitalists. The immobile workers never gain power, the mobile capitalists can mover about to exploit whom they will.

    That fact, right there, discredits your theory that this can ever work fairly. The workers will always have less power. Yet somehow they will be saddled with being the cause of the problem.

    In your pov the capitalist can never want too much, they’re supposed to want that. It’s always boiling down to the workers who want more being the problem.

  • http://www.republicofdave.com Dave Nalle

    Makes me wonder about your ideas Dave. Seems to me you would support the scheme to lower corporate taxes to attract business. Yet, from your comment that doesn’t seem to work in the end. Unless, of course the workers’ lifestyle suffers. Corporations were apparently attracted by their desire to maximize their profits but the problem, as it always is, is that they don’t want to pay wages for workers. Especially if they can go somewhere else where the workers can be exploited more efficiently.

    It’s not that they don’t want to pay wages. They don’t want to pay a wage higher than the prevailing market wage or at least not one high enough to offset the tax benefits of locating in Ireland. In this case they can get workers of equal skill for slightly less in other European countries which have also cut taxes to compete with Ireland.

    This is not a matter of taking these high-tech jobs to some third world hell hole and paying a dollar a day. It’s a matter of looking for the best return on their investment in a country which will be a good partner for their business.

    Most corportions are not looking for someone to exploit, they’re looking for the best workers they can get at a fair price.

    What I see in your comment is that essentially you are admitting that your whole Libertarian system does not work to benefit all. If corporations cannot maximize profits, at the expense of everyone else, then they will leave and go somewhere else where they can exploit people better.

    You really don’t get it. Your black and white view of the world isn’t suited to understanding how businesses really operate. Wages are just one of many considerations. For example, one of the main reasons why businesses are leaving Ireland is the much incresed cost of living there. They are leaving because it isn’t as good a place for their workers to live. They want their workers to be able to buy food and housing at a reasonable price, and Ireland has one of the higher costs of living in Europe. So many companies are moving for the good of their workers. How does that factor into your “corporations are evil” mentality?

    When does this system of blatant exploitation and competition for profits work to even everything out and make it better? Apparently it can’t work until every last worker on earth has been properly exploited and there is no one left who is forced by circumstance to sell herself for a pittance. Think that will ever happen, Dave?

    What a free market in labor eventually does is lift up those who are disadvantaged and give them the opportunity to earn more and live better lives, though it can take quite a long time.

    It also occurs to me that you don’t think it is unfair at all–in your attempt to support a fair system–that the power doesn’t lie with the workers instead of the capitalists. The immobile workers never gain power, the mobile capitalists can mover about to exploit whom they will.

    I don’t see this at all. Workers have a great deal of power. The fact that a worker in Malaysia can live decently on half what a worker in Bulgaria earns gives him the ability to draw the best jobs to Malaysia which are within his scope of technical competence. The Bulgarian worker, who is more educated and skilled, attracts different jobs which require greater skills and command a higher wage, which is a good thing because his cost of living is higher.

    So long as governments don’t screw with the basic balances of an international free market in labor, each type of employment will go where the most appropriate workers are located and everyone will be paid decently within the context of their economic environment.

    That fact, right there, discredits your theory that this can ever work fairly. The workers will always have less power. Yet somehow they will be saddled with being the cause of the problem.

    I don’t see it. The workers have a great deal of power. They just need to learn how to exercise it effetively.

    In your pov the capitalist can never want too much, they’re supposed to want that. It’s always boiling down to the workers who want more being the problem.

    Not at all. Workers should want more. But they should be willing to work to earn more, not just demand it because they want it. If low skill workers want to earn more they need to educate themselves and learn skills. This is the force which provides the impetus for poorer nations to develop and modernize their economies, so that their workers can earn more and their nation can prosper.

    Dave

  • Cannonshop

    #7, Glenn, the point is that with the Tax Increase, the government also Cut SPENDING. While the combo might violate Keynes to a degree, it does allow the government to gather the resources necessary (and hold them) to continue functioning without devaluing the currency through debt-expansion, and the stable currency is the sort of thing that draws in investment, which Should help Ireland’s weak economy.

    The problem a LOT of fiscal conservatives have with how OUR government does it, is that they never actually cut spending back, regardless of tax policy, they always (and I mean ALWAYS) spend MORE-‘cuts’ in Americanese means “Reducing the rate of increase below the rate desired by the agency in question”, not actual austerities-though on the recieving end where they ‘service’ the taxpayers, they DO cut services-they just don’t cut administrative costs, personnel costs, or other non-essential costs on the block. (For example, King County lays off workers on the ‘sharp end’-where they actually serve the public, but still find enough surplus to buy complete office redeco bi-yearly complete with new furniture, paint, wallpaper and whole filing systems. State of Washington cuts fire-services, but still has millions to redecorate the Capital in Olympia… Hmm… fight forest fires, or a new Mural in the Capitol Building? they chose the Mural.)

    Now, it seems that the Irish aren’t doing what WE do-they’re actually cutting admin and overhead FIRST, then getting down to the sharp-end. and if that’s what they ARE doing, then even a minor tax increase isn’t a bad idea. It’s a bad idea here, because our Civil Masters will blow the money on murals and office-supplies at the end of the year (zero-balance budgeting) and we STILL won’t get good service.

  • Glenn Contrarian

    C-shop –

    Soooo…the half-trillion-dollars’-worth of Medicare cuts that the Obama Administration wants (and that the Republicans are so adamantly against) aren’t cuts at all?

    Better let your Republican congressmen know – because THEY sure think these are cuts!

    And you know what? The Republicans have been talking about ‘getting government under control’ since Reagan…and did they make government ‘smaller’? No.

    The Republicans have been talking about deficit control for FAR longer than that…but the last decent Republican (economically speaking) was Eisenhower. When LBJ handed Nixon a surplus, what happened? When Clinton handed Bush a surplus, what happened?

    Republicans talk a great game…but when it comes to actually DOING it, the Republicans’ efforts far FAR short of those of the Democrats.

  • Cannonshop

    #12 Glenn, I know you love the Democrats, but y’know what?

    1992 to the present, Nothing Changed.

    Bush 1, Clinton, Bush 2, Obama, four different presidents, and the basic problems remain the exact same. When it comes to actually Operating the “Civil Service” (which is the purview of hte Executive), the exact same screwed up budgeting processes, with the exact same waste, the exact same ineptitude, the exact same inefficiency, ineffectiveness, impotence, corruption, nepotism, etc. Only the names on the letterhead changed.

    The GOP Talks a good game, they just don’t do it when they have the opportunity-instead, they act like Democrats, but it’s worse with them, because Dems at least don’t lie about wanting more centralized power over people’s lives (well, much), and they’re openly aggressive about their desire to create omnipotent, omnipresent nanny-state government, and they’re always ‘up to’ defending the Bureaucracy against Citizens when it comes to cases.

    The conduct of the Congress with Bush in office WAS inexcuseable-they passed the PATRIOT act, created another agency to do what previously existing agencies were supposed to do, couldn’t balance a checkbook, much less a budget, and acted all in all like…

    Democrats. Except at least on a congressional level, Dems don’t make-believe they want to rein in ANY spending, hold government accountable, or make believe they aren’t cheating on their taxes and taking bribes from big donors.

    Above a certain level, there’s simply no difference-they’re all scumbags.

  • http://www.republicofdave.com Dave Nalle

    I hardly want to defend Bush, but if nothing else he didn’t expand the federal bureaucracy 30% in a single year as Obama has done.

    Dave

  • Glenn Contrarian

    C-shop –

    Um, who was it that last balanced the budget? And what about the time before that?

    And when it comes to ‘more centralized power over people’s lives’…please show me where we Dems have specifically made this a goal?

  • Glenn Contrarian

    Dave –

    I hardly want to defend Bush, but if nothing else he didn’t expand the federal bureaucracy 30% in a single year as Obama has done.

    Yes, Dave, like Obama’s to blame for the 9% average annual increase in military spending from 2000-2009…and the Bush-approved military budget for 2009 was 741B, which, when added to the 52B for Homeland Security, takes up thirty-two percent of ALL federal tax receipts.

    One can only wonder how much more was spent since the Bush administration didn’t include the Iraq war.

    How about looking at the OTHER side of the story, for once, Dave?

    “OMB Director Peter Orszag stated in a November 2009 that of the $9 trillion in deficits forecast for the 2010-2019 period, $5 trillion are due to programs from the prior administration, including tax cuts from 2001 and 2003 and the unfunded Medicare Part D. Another $3.5 trillion are due to the financial crisis, including reductions in future tax revenues and additional spending for the social safety net such as unemployment benefits. The remainder are stimulus and bailout programs related to the crisis.”

    In other words, just like with 9/11 (“It was Clinton’s fault!”), the Republicans screwed things up and are doing their worst to blame it on the Democrats.

    All of the above data (minus the last paragraph) are from the Wikipedia page on the Federal Budget.

  • http://drdreadful.blogspot.com Dr Dreadful

    Most corportions are not looking for someone to exploit, they’re looking for the best workers they can get at a fair price.

    No, at the lowest possible price. If you have two equally-qualified job applicants but one is willing to work for $1 an hour less than the other, who are you going to hire?

    Corporations may not specifically be looking to exploit workers, but it does all come down to the bottom line.

    They are leaving because it isn’t as good a place for their workers to live. They want their workers to be able to buy food and housing at a reasonable price, and Ireland has one of the higher costs of living in Europe. So many companies are moving for the good of their workers.

    This is really twisted logic. So exactly how many of XYZ Corporation’s Irish employees is the company bringing with it to its new factory in Kuala Lumpur, where they will be able to purchase reasonably-priced food and housing?

    What a free market in labor eventually does is lift up those who are disadvantaged and give them the opportunity to earn more and live better lives, though it can take quite a long time.

    Then perhaps it’s not the best way of addressing poverty.

    This is the force which provides the impetus for poorer nations to develop and modernize their economies, so that their workers can earn more and their nation can prosper.

    And yet those countries still always seem to end up with an impoverished underclass…

  • Mark

    The workers have a great deal of power. They just need to learn how to exercise it effetively.

    qft

  • Cannonshop

    #15: Herbert Hoover, his didn’t rely on hiding spending in ‘off-budget’ accounting practices.

  • Shane

    For your information, here in Ireland we are in serious trouble.

    There has been a deliberate attempt to deflate the economy to lower costs to ready us for the next bubble.

    And we’re doing a ‘little’ thing called NAMA. Buying the worthless assets from our banks to the tune of 50billion with the hope of selling them at a profit. House prices have fallen 50percent since these loans were made and are still falling. It’s ledger trickery that’s legally allowing us to keep it separate from the full National Debt figures.

    We also need to recapitalize the banks still standing (again) which will cost another 15billion this quarter.

    To put that in context, employment and gdp is still falling and our Treasury has about 30billion to use per year.

    The USA has the benefit of being, ye know, a superpower, the owner of the world currency and continent sized! You lads just need to invade a country(or sell Alaska) and youre sorted! Or just inflate your way out! Who is actually going to put the squeeze on if youre a month late repaying loans??