Europe's periphery

Ireland's low corporate tax rates make it not just a "low cost place to do business", but also a low cost place for multinationals to funnel foreign-sourced income through accounting shenanigans, in order to pay tax at a lower rate.

R.A.,

Slow as I am, it took me a few readings of this post to, *I think*, follow you.

Your statement about Ireland's recession struck me as odd (e.g. all Western economies have suffered brutal recessions and unemployment), but I take you to mean that if we hew to a classical line, that should not have happened.

Where I am still confused is your use of 'deflation' - typically we hear it in the context of central bank action to stave off a deflationary spiral (expectations of future lower prices which influence consumers to hold off spending now). However here the term denotes a general fall in prices which, if we follow the classical line, would have cleared the market and helped the Irish economy (including domestic demand) to pick up again.

Hence I don't understand your contention that a similar Irish-style deflation elsewhere would cause a) domestic demand to crater (since in Ireland it hasn't) and b) no one would gain external competitiveness (since the point is that the domestic market has cleared).

This is not to suggest Ireland is insulated from a eurozone crisis.

@Danny2000,

What you describe about rents and wages does jibe with R.A.'s claim that they are down at the margin. By definition marginal cost refers to the cost of an incremental addition of new worker, etc.

R. A.

I always find cultural explanations of economic development patronizing towards those it praises and dismal for those who don’t fall in the blessed category (well educated English speakers, etc). Better to focus on good institutions, which are constructible and culture neutral.

Your doomsday competitive deflation scenario gets things the wrong way around. The problem in the world now is that investors cannot find many places where they feel confident to put their money. The more countries undergo a serious Schumpeterian reorganisation and adaptation and make themselves competitive in terms of the costs of production and corporation tax and the quality of institutions and the sustainability of the government transfer payments, the more real choices investors will have, and the more interested private investors will become in opportunities to create demand and future innovation on transnational playing fields. Ireland appears to have begun in a determined manner along that road. So could Greece if it made the existential choice. If many other countries did so, problem solved.

Michael G. Heller

http://tandf.net/books/details/9780415694452/

I would have to challenge Mr Cowen's statement that rents are low. This is simply not true, for any business which entered into a rental contract before the current bust arrived. Most, if not all, rental agreements in Ireland have clauses which allow rent reviews only upwards, not down.

The present government is trying to bring in legislation to change this, but it is unlikely to be retroactive.

Anyone who can classify Ireland as "..the low-cost place to do business" is either uninformed or deluded. Private sector wages/salaries are down substantially, true, but the bloated public sector retains a differential of some 40% over the private sector average. This has consequences, such as probably the most expensive electricity in Western Europe. Public transport is poor, and being cut back, while house prices are still far too high. Meanwhile, there are some 40,000 households in negative equity.

"emulate Ireland and seak rapid deflation"

Spellcheck?

Another factor is the exodus of people from other countries, particularly workers from E. Europe. I forget the numbers but the percentage relative to population size was significant. The exodus had immediate effects, some bad, some good - as in reducing payments taken overseas but also reflecting much, much lower spending and investment. But overall, the dumping off of a chunk of population has stabilized demand and, as the Irish papers note, kept social spending manageable. One decent effect of the EU is freer movement of people, both in and out of a country.

Of course, if you look at the numbers for homeowners and the like, it looks bleak at best. House price falls have put huge numbers underwater. Add to this that they've held together a bailout with gum and string, that they're still facing the cost of guaranteeing all bank debt.

Funny how arguments go. The effects of austerity have been bad but more austerity is the prescription. The counter argument is that one-time partial stimulus package in the US "failed" according to a standard that it didn't reverse the entire course of the economy. Not exactly objective argument.

Don't forget that things are so up in the air in the Eurozone that Ireland's recent experience may not be generalizable to Ireland's future, much less anyone else's.