Friday, January 31, 2020

Confederacy of dunces: Worst Irish governments since 1922

Michael McDowell, a founder of the Progressive Democrats (PD) in 1985, affixes a poster to a pole in Ranelagh, South Dublin, during the 2002 general election campaign. The message on the poster was that the PDs were needed to ensure good governance. However, the PDs had already made a Faustian bargain with Fianna Fáil and they had gone along with the delusion that tax cuts would create a permanent prosperity while ignoring the risks of the property bubble. They also had to turn a blind eye to Bertie Ahern's dodgy personal finances and the bizarre explanations for funds in his personal bank accounts. In the 2007 general election, the PDs lost 7 of its 8 Dáil Éireann seats including McDowell's.

With just two years to the 100th anniversary of the founding of the Irish Free State which became the Republic of Ireland in 1949, by next week Ireland will have held 31 general elections beginning on June 16, 1922 — 12 days after the first general election, the shameful Civil War would begin.

I have selected 4 governments that deserve to be termed the worst, because of ignorance  including politicians, civil servants, central bankers, commercial bank executives, journalists,  and voters, coalescing as a confederacy of dunces  greed, expediency, recklessness or cowardice.

The worst may have achieved some positive results but overall deserve the judgement.

Jonathan Swift (1667–1745), the Anglo-Irish satirist, essayist, political pamphleteer, poet and cleric who was dean of the Protestant St Patrick's Cathedral, in Dublin, from 1713 until his death, is most famous for his book 'Gulliver’s Travels,' which had an original title 'Travels into Several Remote Nations of the World,' when published anonymously in 1726.

'Thoughts on Various Subjects, Moral and Diverting' is the title of a satirical essay by Swift from 1706 and it comprises a series of short epigrams or apothegms (short clever sayings that are intended to express a general truth, according to the Cambridge dictionary) with no particular connections between them (see here).

The 1706 essay includes, "When a true genius appears in the world you may know him by this sign; that the dunces are all in confederacy against him."

Swift inspired John Kennedy Toole (1937-1969) who was an American novelist from New Orleans, Louisiana and whose posthumously published novel 'A Confederacy of Dunces' won the Pulitzer Prize for Fiction in 1981. Toole had committed suicide more than a decade before.

1. 1997-2007 

Fianna Fáil in coalition with the Progressive Democrats were in government for the decade with Bertie Ahern as taoiseach/ prime minister.

The legacy was 389,000 net job losses between Q32007 and Q12012; thousands of business collapses; public debt of more than €100bn with a ratio of above 100% of modified gross national income (GNI); family-home mortgages in arrears of 90 days or more which peaked at 12.9% in September 2013; the collapse of the domestic banking system and an international bailout of the Irish economy in 2010.

In 1999 the euro was launched and Ireland as a member of the system lost its ability to change interest rates. However, that didn't deter Charlie McCreevy, finance minister, in the same year from slashing taxes and extending property incentives to every village in the country, that had been introduced in the 1980s to regenerate centres of big cities.

In April 1999, Maurice O'Connell, the Central Bank governor, issued a letter to financial institutions stating that an analysis of practices had shown that some lenders had no evidence as to how borrowers came by the balance of their money. The governor criticised what he called, the particularly disturbing practice of allowing large amounts of the borrowers after-tax income to go towards paying off a mortgage.

The 1999 annual report noted, "Institutions were...advised that it remains vitally important for them to take a medium-term perspective and to reckon with the potential consequences of rising interest rates and a return to lower rates of growth in the economy. All institutions gave assurances that there would be no slackening in prudential lending standards." 

In April 2006, Bertie Ahern said that he had listened for seven years to warnings and arguments about difficulties in the construction sector:

"I think you have to look at the asset. This is the question: if you are borrowing 'x' if you sell the asset, if there's a bit of a downturn, will you get 'x' back in return? That's the issue. At the moment, there doesn't seem to be an indication [of difficulties].

"I mean quite frankly if you had taken the advice a year ago you would have lost a lot of money. Everybody said we're going to see a huge downturn in 2005 linking into 2006  they were entirely wrong.

"Really we should have an examination into why so many people got it so wrong. My view is there's not a great problem. Really, the bad advice of last year given by so many has maybe made some people make mistakes, that they should have bought last year."

In 2005 Euro Area private sector credit growth was 7% and almost 30% in Ireland with property accounting for 80%. Trinity College economist Patrick Honohan said in 2006 that Irish banks' borrowing from abroad to onlend to Irish residents soared from 10 to 41% of GDP between 2003 and 2005.

Rossa White of the National Treasury Management Agency and Lisa Sheenan of Queen's University Belfast in a 2019 paper commented:

"In effect, the property market became a Ponzi scheme, fuelled by inflows of foreign capital. It became increasingly susceptible to a liquidity freeze. Cracks showed long before the collapse of Lehman Brothers when the European Central Bank (ECB) hiked interest rates eight times from 2% to 4% in the eighteen months to mid-2007. Inward capital flows plateaued around that time before dramatically reversing in September 2008. Ireland’s domestic banks were insolvent. House prices collapsed by 55%, while commercial property lost two-thirds of its value. Gross national income per capita declined by 21% between 2007 and 2011. The financial cycle had accompanied the genuine boom in the late 1990s but discovered a life of its own to drive the extension of the cycle in the 2000s; with ruinous cost."

The consumer price index rose 5% in 2006.

There were both dunces and cowards among central bankers and senior civil servants. Business, banks and commercial economists and voters cheered while politicians knew there were risks but they hoped for a mythical "soft landing."

2. 1977-1981

Following a then record rise in consumer inflation in Ireland in 1975 to over 20% following the quadrupling of oil prices, the Fianna Fáil party returned to power, winning a 20-seat majority in the 1977 general election.

Martin O'Donoghue (1933-2018), a professor of economics at Trinity College, wrote the 1977 general election manifesto and was appointed minister for economic planning and development, on his first day in the Dáil. In December 1977 O'Donoghue promised "an everlasting boom." He guaranteed full-employment by 1983 and inflation down to an annual rate of 7%.

Between 1977 and 1981, the combination of tax cuts with huge spending increases (in the single year 1979, the public service pay bill was increased by 34%), resulted in doubling the National Debt/GNP (gross national debt) ratio while inflation rocketed to over 20% in 1981. The all-time record high for annual inflation was 23.15% in October of 1981.

Residential rates were abolished and car tax was replaced with a registration fee of £5.

The number of days lost through industrial action in 1979 reached almost 1,500,000 — an all-time record.

The Irish unemployment rate rose from 10% in 1977 to 17% in 1985.

However, following the 1970s — the first decade of net inward migration since the Potato Famine in the 1840s — there was gross emigration of 450,000 in the 1980s according to the Department of Foreign Affairs.

There had been a second Arab oil embargo in 1979 and severe recessions in the UK and US in the early 1980s. 

However, the reckless spending splurge that resulted in a record budget deficit in 1978 for developed countries in the period 1970-2008, meant successive Irish governments were struggling to get the public finances and employment situation under control.

1948-1951

In 1950, a year after Ireland had been declared a republic, Dr Noel Browne, the minister of health, proposed a new health scheme that would allow mothers and their children free health care up the age of 16. In that year over 26,000 infants died in the country.

Catholic bishops and the medical profession objected to the scheme 1) as it conflicted with Catholic social teaching and morality 2) the Irish Medical Association feared that the new British National Service would be replicated in Ireland and they would be at a financial loss. 

Browne was forced to resign in 1951.

1932-1938

The Great Depression of 1929-1939 was the worst economic downturn in the industrialised world since the dawn of the Industrial Revolution in the late 1700s.

In 1932 the Cumann na nGaedheal party peacefully handed over power to Fianna Fáil, that had evolved from remnants of the defeated insurgents who had rejected democracy in the 1922/1923 Civil War.

Éamon de Valera became president of the Executive of the Irish Free State.

There would be general elections also in 1933, 1937 and 1938.

The greatest economic achievement of the outgoing government was the Shannon Hydroelectric Scheme that was agreed by the Government in 1925.  Thomas McLaughlin – a young Irishman who had been an employee of Siemens-Schuckertwerke (SSW) in Berlin since the end of 1922, had persuaded the Government to agree to the project that would cost more than £5m — equivalent to 20% of annual state revenues.

The Electricity Supply Board (ESB) was established in 1927 with McLaughlin as its head.

At the time just over 40,000 Irish homes had electricity, supplied by local authorities and private companies. The country had the second-lowest consumption of electricity in Europe.

One of de Valera's early significant populist moves was to halt the payment of land annuities to the UK, that arose from British government loans to Irish land tenants to buy their holdings from landlords in the late 19th and early 20th century. The annual value in 1932 was less than £5m.

About 90% of the exports of the Irish Free State went to Britain and they were mainly agricultural produce.

The British government initially imposed a tariff on Irish imports, which was later escalated.

Cattle exports dipped from £12.7m in 1931 to £4.3m in 1934 while industrial exports dropped to a mere £600,000 by 1935.

Unemployment was at 29,000 in 1931 and by 1938 it had risen to 139,000

The consumer price index based on the 1914 level of 100 was at over 160 in the mid-1930s.

The Anglo-Irish Trade Agreement of 1938 provided for the Irish government to pay a lump sum of £10m to settle land annuities and the British agreed to surrender 3 ports that it had access to under the 1921 Treaty. In contrast with 1921 de Valera had gone to London to negotiate with the British government.

The timing was good for the Irish as the British did not wish to have a hostile neighbour during a possible future war with Germany.

The return of the ports had enabled Ireland to remain neutral during the Second World War.

So there were benefits from the so-called Economic War but the misery that it caused to many people does not appear in statistics.

Also, the positive side of protectionist policies resulted in a rise in employment of about 20,000 while new housebuilding schemes helped the economy and beneficiaries.