Friday, December 31, 2010

Bertie Ahern's Farewell Speech

All accounts of the announcement of Bertie Ahern's retirement from parliamentary politics have noted his positive role in the development of a settlement in Northern Ireland and the clouds that have hung for several years over his personal finances. His own account is here and will be of interest to people with a stake or intellectual interest in Ireland over the period Ahern was in office. For people of my age, Ahern was the major figure in Irish politics for most of our adult life.

It is difficult to see the near to mid-future changing the assessments of either his role in the North or his finances to any great degree. It is unlikely that any major piece of news will suddenly show that he had no problems at all with who was financing him and why; and likewise even if things in the North became hairy again, it could never fully dampen the massive difference between the atmosphere prior to the settlement and the one prevailing for the last several years.

The economic and social legacies of his three administrations will be one of the most contested topics in Irish economic history for the forseeable future. It should be said that the period of prosperity that is often given the label "The Celtic Tiger" is largely agreed to have started in the early 90s before Ahern's first administration so it is another question as to who and what started the Celtic Tiger. The main question for Ahern is how his three administrations managed this historic opportunity.

By 1997 when Ahern first became Taoiseach, the Irish economy had already become one of the most vibrant in the history of the world and it continued apace during the first Ahern administration. The main worry from the 1997 to 2002 period was continued inflation partly fueled by interest rates that were too low, public sector pay agreements and an aggressive finance minister (Charlie McCreevy) who famously summed up his approach to fiscal policy with the phrase "if I have it I'll spend it". While the government did begin to amass a pension reserve fund and kept debt and deficits within Maastricht parameters, the failure to more agressively hedge the economy against potential future shocks surely will go down in history as a missed opportunity. Those who argue that economists only talk after the collapse should look at Philip Lane's output from around this time period. Not only was Philip writing theoretical work on what happens countries that get suddenly rich and the dangers therein, he was also pointing to very practical solutions for a country like Ireland such as building up a strong non-politicised pension fund and also amassing a rainy day fund e.g. this paper from 1998 is about as clear a policy recommendation as it possible for an economist to make.

Having said that, had Ahern resigned in 2002 (which wasn't on the cards) I think he would not have too much to worry about in terms of an economic legacy. Despite the inflationary pressures building up, most analysts believe that the economic growth experienced in Ireland during the first Ahern administration was still "real" in the sense of being driven by improvements in core economic activity. However, the second administration from 2002 to 2007 will be scrutinised for many years for a definitive account of how one of the world's most successful economies was left so completely vulnerable to a financial sector shock and then so completely wiped out by it. Ahern was leader, of course, through this period and he replaced his long-serving finance minister Charlie McCreevy with the current Taoiseach in 2004, meaning that Cowen began as finance minister as glaring financial vulnerabilities were becoming apparent. It is clear that something very dramatic took place in the Irish financial system during this period. The curve showing the amount Irish banks were borrowing from external institutions was practically vertical from 2004 to 2008 with much of this money ploughed into increasingly unviable property developments (see graph below from Honohan 2009), exposing the banking system to a potentially crippling reliance on the performance of domestic property loans. Morgan Kelly's VOX piece summarises what was happening at the time and it really does look shocking. Honohan's 2009 paper Resolving Ireland's banking crisis is more diplomatic in tone but equally hair-raising.

Most official commentators at the time were warning that the Irish economy had become too reliant on property taxes and some commentators were pointing out the reckless nature of some of the lending. In my view (and happy to take contrary views) nobody clearly and emphatically stated that the Irish banking system was so fragile due to the nature of its lending activities that it risked total collapse until Morgan Kelly's prophetic contributions from 2006 onwards. Kelly's original contributions led to one of Ahern's low points where he muttered that he didn't know how people with Kelly's view didn't commit suicide. Ascertaining who was at fault for the very sorry state the banks found themselves in by the time Ahern's third government took power in 2007 will fill many volumes nationally and internationally perhaps for centuries to come. By the time the full extent of the calamity began to be fully publicly acknowledged in late 2008, Ahern was out of the picture with his finance minister now assuming leadership. A sympathetic historian might remark that more prudent banking policies following Ahern's departure (such as immediately nationalising Anglo and offering debt-equity swaps to subordinated bondholders in the other banks) would have contained the damage caused by policies during his reign. Also, they might note that much of the damage could have been contained during Ahern's second and third administrations had a strong regulator noticed that the Irish banks were going crazy. But whatever your view on that, the culture of property, politics, banking and investment that Ahern was the figurehead for will unlikely come to be viewed positively and it is hard to see any assessment of the 2002 to 2008 period as it being anything other than a national financial failure of sizeable proportions. What is less clear is how the overall financial and economic performance during the Ahern years of 1997 to 2008 will be viewed. Critics will point, among other things, to the flaws in social partnerships agreements a failure to reform key public service and the failure to get to grips with educational inequalities that was masked by an artificially inflated public sector. If there is an attempt at rehabilitation, the continued strong performance of FDI into Ireland and exports, and the generally positive business environment maintained throughout the Ahern period might rescue some of his economic legacy.

In terms of the social record, while I have written a couple of papers showing that improvements in Irish subjective well-being and life satisfaction had largely stalled in the mid-1990s, I am with Ronan Lyons on the view that there are too many people exaggerating the failure to make social and health gains through the Celtic Tiger era. Life Expectancy gains among older people began to increase in 1986 and accelerated through the Celtic Tiger period with proportionate gains occurring during the Ahern years and Ronan lists a long record of other improvements in living standards that occurred during the period. Again, the extent to which any of this was due to Ahern's leadership is debatable and I doubt any econometrician would ever find an "Ahern effect" if they had enough time to mine health data-sets. But it is worth being cautious about a general public reaction against Ahern turning into a wider sense of despair about the real developments in human welfare attained in Ireland over the last 20 years. When we balance those against the ruined financial position that a lot of people have been left in as a consequence of the collapse of the property bubble and the fiscal and employment position in Ireland that threatens to leave behind a decade of stagnation, we will get someway toward evaluating the social legacy of the Ireland that Ahern was at the helm of.

1 comment:

Martin Ryan said...

Looking back on the last decade (and earlier), I am keen to offer a distinction between the Celtic Tiger (1994-2001), the "Celtic Bubble" (2002-2007), and the "Celtic Crisis" (2008-10). I think it could be potentially helpful for popular discourse if folk don't refer to the "Tiger" for any time-period from 2002 onwards.

I also agree that there is not much merit (in relation to economic management) in the Administration that steered us through the Celtic Bubble. In the interest of fairness, I hasten to add that the architects of that Administration were not the only contributors to the bubble. Also compromised are the Irish banks, some European banks, the Irish Regulator, the European Regulator, Irish trade unions, and even the Opposition parties who may have played the "I see your tax cut and raise you" card.

All the same, debit where debit's due. Irish political leadership - especially in relation to economic management- was shocking from 2001-2007. And Ahern was the figurehead of all of that. Perhaps tellingly, the majority of the people who bothered to vote over the last 10 years gave their thumbs-up to Ahern, and "McCreevy-ism". This McCreevy-ism was not just a case of "spend it while we have it" -- but went as far as the toxic mix of cutting tax and ramping up spending at the same time. Very popular stuff altogether (bench-marking, tax reliefs, SSIA's - a lot of us know all about it), but not at all sustainable - as the ESRI tried to warn before this country's national obsession with property speculation. I think this video of John Fitzgerald speaking out in the year 2000 (before economic management became even more dubious) will go down in the annals:

Ireland's Taoiseach Bertie Ahern rejects ESRI Economic Advice, March 2000

Our spending before the Celtic Crisis was arguably out of touch with reality -- it ballooned due to the (temporary and bubble-driven) taxation revenue that we thought we had at our disposal. The taxation revenue was unrealistic, and so - one can argue - were the spending levels. Nothing to do with the banks bar the important exception of them pursuing a tunnel-vision short-term agenda and them not being regulated properly.

Looking to next year, because of all the fiscal malarkey, we just can't avoid the austerity that we need now to balance the Exchequer.

I take some comfort in reading Philip Lane's landmark report to the Oireachtas Committee on Finance. The fact that this only received 10 comments on the Irish Economy Blog is not too inspiring though. We're seeing now - how tough the cure is at the moment, so what they say about prevention seems more true than ever:

Prevention Better than Cure

As bad as the next ten years may be, I think it's easier to get through it if one knows there's a decent chance things won't be let get that bad again.

Finally, a good popular slogan could be "Make the cutbacks fair" rather than "No cutbacks". With such a precise demand, then the new Govt. would have to accept that:

(a) protesters are realistic, and
(b) protesters require specific information about the distributional impact of cutbacks (rather than it just being a Yes/No issue)

What are the odds of that happening though?