Chris Edwards on Ireland’s Economic Growth: I Resent His Insults

In the middle of the usual supply-side spin, Chris Edwards writes:

It’s become fashionable to argue that increased government spending on education is the key to success for countries like Ireland. I’m skeptical.

Has Mr. Edwards ever been to Dublin? When he decides to actually visit the country that he chooses to use as evidence for his supply-side spin, might I suggest he visit Trinity College and the University of Dublin? Edwards also refers to the Ireland of twenty years ago as a “backwater”. How insulting!

But let’s take a look at his argument:

Ireland has boomed in recent years, and it now boasts the fourth-highest gross domestic product per capita in the world. In the mid-1980s, Ireland was a backwater with an average income level 30 percent below that of the European Union. Today, Irish incomes are 40 percent above the EU average. Was this dramatic change the luck of the Irish? Not at all. It resulted from a series of hard-headed decisions that shifted Ireland from big government stagnation to free market growth. After years of high inflation, double-digit unemployment rates, and soaring government debt that topped 100 percent of GDP, Irish policymakers began to cut spending in the late 1980s in a desperate bid to recover financial stability.

I’ll give him that the Republic of Ireland did move to fiscal restraint – which of course is the opposite of the Bush fiscal train wreck that the National Review cheerleads for. Edwards, however, would have you believe that Ireland has low tax rates:

Low business tax rates have helped Ireland attract huge inflows of foreign investment. Given the country’s modest size, it boosts a high-tech industry second to none. Intel, Dell, and Microsoft are among the island’s biggest exporters. Ireland also hosts booming insurance, banking, money management, and pharmaceutical industries.

Where to begin? Even though Kash has started his own blog, he left this gem back in late 2005:

So Ireland enjoys a decided benefit from its low corporate income tax rates. But note that this benefit is a very different one from the typical supply-side argument in favor of low taxes, which is that low taxes promote growth by promoting capital investment and thus generating economic growth. There certainly was a lot of capital investment in Ireland during the 1990s. But much of the gains to Ireland from its low tax rates were simply due to profit transference from the US to Ireland by US multinational corporations. As I’ve argued before, the link between economic growth and tax rates has yet to be established.

Earlier, Kash had provided this evidence:

Ireland has indeed been the fastest growing economy in the OECD (that’s the club of the world’s richest countries). But it has HIGH taxes on capital, not low ones. At the other end of the spectrum is Italy, with the lowest economic growth in the OECD. Yet Italy has extremely LOW tax rates on capital income.

I also have had several posts on Ireland’s economic growth with a good summary with links to some very good papers (often by economists at Trinity College and the University of Dublin) provided here:

The Irish economic miracle was in part an employment boom as it had laid the foundation for a productivity boom many years earlier. This employment boom piggybacked the U.S. technology boom with U.S. multinationals realizing that Ireland not only was a gateway into the European Union that could avoid customs duties but also a means for reducing its effective tax rate by using transfer pricing manipulation to shift U.S. income into tax-advantaged Ireland. The really odd thing about the tax cut jihadists in the U.S. is that they are now complaining that the IRS might actually enforce section 482 of the U.S. tax code. Their hypocrisy is apparent when they claim – as many have been recently doing – that enforcing section 482 will lead to an outsourcing of jobs to low-tax jurisdictions. The Irish know that the lack of enforcement of section 482 has been part of their success in attracting jobs from U.S. multinationals.

Edwards says he’ll spend St. Patrick’s Day in a pub. Might I suggest he spend the day in a library catching up on the real economics literature on Ireland’s economic growth?