Wednesday, April 07, 2010

The Celtic Cutter

It was unclear when Ireland would again be deemed a safe topic for the Wall Street Journal opinion page. Not so many years ago, Ireland was the favourite: proof that low taxes and deregulation were the path the economic success. But with the apparent boom years now exposed the product of a bubble and procylical monetary and fiscal policy in a small open economy, it was a case of the less said, the better. Even the Baltics, the new kids on the block, weren't offering much cheer.

But Ireland is back, courtesy of Alex Pollock from the American Enterprise Institute --

But how about when governments spend much more than they take in, running huge and extended deficits? What should happen then? This is something Americans who work in private companies might consider while they file their tax returns over the next week.

Ireland shows the way.

Having had a long run of high growth and success, Ireland has now had a severe bust, the deflation of a housing bubble, and a financial crisis. Plus, its government is running big deficits. Sound familiar?

The specific policy recommendation: Irish style civil service pay cuts in the manner laid out in the December budget i.e. bigger marginal cuts for bigger salaries.

This looks like a very sensible plan for nonmilitary government employees. Ireland has already worked out the plan. All the U.S. has to do is implement it.

There are various odd things about this. First, if the "plan" simply consists of coming up with the idea of cutting civil service pay between 5 and 10 percent, "planning" must be more difficult than we thought. Second, whatever its merits, the Irish plan derives its fiscal punch from the number of people covered by the cuts: not just anonymous paper-pushers in central offices, but also teachers, healthcare workers, and the police. With those services in the US being mostly state, local, or private, a similar pay cut plan is only going to generate big savings with a massive increase in federal power ... which you'd think the American Enterprise Institute would be against.

Which brings us to the next point ... why is Ireland the right benchmark? Why not Lithuania, with its 20-30 percent public sector pay cuts? Maybe Ireland's 7.5 percent contraction versus Lithuania's 18.5 percent contraction in 2009 has something to do with it. But a direct association between pay cuts and recession would be way too awkward a message for the Journal.

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