11/22/2010

Ireland, the latest country to be bailed out?

Ireland, once deemed the "Economic Superstar of Europe" is the latest country in need of a international bailout. This bailout is surprising since Ireland had recently been considered a world economic leader as late as 2007. Similar to the US, Ireland's economy was spurred on by real estate and development growth. This growth turned out to be unsustainable and now the "loose" lending practices are coming under further scrutiny by the governement.

The other economic factor that led to Ireland's demise is that of "Supply Side Economics". The basic principle of supply side economics is that by removing, decreasing, or controlling barriers such as taxes, regulations, and monetary policy, increases incentives for individuals and businesses. When those individuals and businesses have an incentive for business, benefits will trickle back down to the people and the government. Case in point, some large American corporations went to Ireland due to their relatively lower corporate tax rate of 12.5%.

Ireland's tax cuts and tax rates were very attractive in the short run and benefited the country for many years in many different ways. Now the country is experiencing budget deficits and debt issues that it doesn't look like it will be able to recover from. I believe supply side economics can be a very wise strategy for stagnant or flat growth economies in the short run. If used as a long-term solution, the country will have to deal with debt and deficits that will surely come.

4 comments:

walla walla said...

Ireland’s news concerns me. Are the World’s counties nothing more than dominoes in a single line waiting to fall? I ask this because Ireland now follows Greece as the 2nd country requiring a bailout. However, according to an article by the Associated Press found at http://abcnews.go.com/Business/wireStory?id=12213231, it appears that other countries such as Spain, Portugal and Italy may soon too require assistance. If this occurs, how will Americans be affected? In the short run, I think this news forecasts continued hardship and very slow markets. Slow markets mean less business opportunities and less money flowing into each person’s pocket. It appears that now, more than ever, we need to be cautious with our money and we need to seek long run solutions the global mess. I agree that “supply side economics” has its merit and should be pursued.

DSM said...

I wonder if all these different strategies to economic recovery are any better than the invisible hand? It seems that a bailout here and a stimulus package there, may only be causing future unforeseeable issues. Realizing people demand the world governments do something to ease the current pains, I just can't help to wonder if we are once again sacrificing the future for instant results?

kmuteki said...

That is exactly what is happening. This bailout nonsense has got to stop. I heard on the news today that if the EU bails Portugal and Spain, they will essentially have no more money left to do anything with.

Supply side economics: Yes, by removing regulation and taxes economies will boom. The demise to Ireland's economic struggles is not supply side economics, but rather, irresponsibility with easy lending and debt! Is it not possible to have minimal government regulation, but maintain a level of moral and financial responsibility? It is destiny for any country to face a period of reckoning for irresponsible behavior. Is bailing them out going to help them learn this elementary lesson of financial responsibility?

Dave said...

The European situation is not well understood on this side of the Atlantic.

What does it mean for one country to bail out another? It means a transfer or money. Where does that go? It has to be spent on something. And what is so pressing that they need the money right now to spend?

The answer is generally that these countries need to make interest payments on bonds. Bonds held inside a country are no problem - since there is a circular flow from tax payments through interest payments back into the domestic economy.

No, the big problem is when the bonds are held by foreigners, so those interest payments go out of the country.

In the case of Europe currently, a lot of what we see is that the government of country A owes interest payments to the citizens of country B. If country A can't pay its bills, it is easy for them to threaten default against foreigners. And who's got their back? the government of country B.

So, a lot of what we are seeing is taxation in one country being transferred to another country, so that it can be sent back where it came from as bond payments.

There is a huge incentive for the government of a country whose citizens have bought these sort of bonds to make this work.