Five Lessons from Ireland

January 7, 2011

The continuing deterioration of the Emerald Isle deserves further analysis so that American policymakers hopefully grasp the right lessons.  Here are five things we should learn from the mess in Ireland, says Daniel J. Mitchell, senior fellow at the Cato Institute.

Bailouts don't work:

  • When Ireland's government rescued depositors by bailing out the nation's three big banks, they made a big mistake by also bailing out creditors such as bondholders.
  • This dramatically increased the cost of the bank bailout and exacerbated moral hazard since investors are more willing to make inefficient and risky choices if they think governments will cover their losses.

Excessive government spending is a path to fiscal ruin. 

Low corporate tax rates are good, but they do not guarantee economic success if other policies are bad.  The lesson for American policymakers, of course, is that low corporate tax rates are a very good idea, but do not assume they protect the economy from other policy mistakes.

Artificially low interest rates encourage bubbles:

  • Being part of Europe's monetary union meant that Ireland did not have flexible interest rates.
  • The resulting artificially low interest rates in Ireland helped cause a bubble, much as artificially low interest rates in America last decade led to a bubble.
  • But if America already had a bubble, what lesson can we learn from Ireland?
  • The simple answer is that we should learn to avoid making the same mistake over and over again -- easy money is a recipe for inflation and/or bubbles.

 Housing subsidies reduce prosperity:

  • Ireland's bubble was worsened in part because politicians created an extensive system of preferences that tilted the playing field in the direction of real estate.
  • The combination of these subsidies and the artificially low interest rates caused widespread malinvestment and Ireland is paying the price today.

Source: Daniel J. Mitchell , "Five Lessons from Ireland," Cato-at-Liberty.org, January 5, 2011.

For text:

http://www.cato-at-liberty.org/five-lessons-from-ireland/

 

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