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Ireland moves from financial constraints to real constraints

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Ireland has a checkered history when it comes to achieving economic policy goals.

This ranges from near-failure in the post-independence decades to more recent, albeit temporary, success.

There are four main objectives of macroeconomic policy. It is a step towards raising living standards, providing more and better employment opportunities, promoting a stable economic environment, and making distribution more fair.

Measuring living standards is not easy, but whether using income, consumption or life expectancy, the standard of living in Ireland in the 1950s was little improved compared to the 20s.

After World War II, while other developed countries were booming, Ireland’s economy stagnated. Huge numbers of people migrated due to limited employment opportunities.

This failure has been reversed and Ireland’s standard of living is now on par with peer countries, and improved employment opportunities mean Ireland is now a country that attracts workers from overseas.

However, this recovery has not been achieved consistently.

Domestic policy mistakes have led to exaggerated cycles of booms and painful recessions. There were also periods of high inflation and high interest rates that crippled economic activity.

The recession of the 1980s was prolonged by the need to restore fiscal order following unsustainable increases in public spending in the late 1970s.

The post-2008 crash was even steeper because the earlier explosion in private sector confidence had allowed it to expand almost unchecked.

income inequality

There are several aspects to achieving a more equitable distribution, but one that has received much attention is income inequality.

Over the past 40 years, income inequality has declined in Ireland.

This decline has moved Ireland into the middle of the income inequality rankings among peer groups such as EU and OECD countries.

Macroeconomic policy can have a number of secondary objectives as well as a primary objective.

These include environmental sustainability, balanced regional development, increased competitiveness and improved access to public services.

The real constraints on economic policy are the supply of labor and the stock of capital assets.

Capital assets include productive assets such as roads and buildings, and non-productive assets such as land and natural resources.

Ireland has been a labor surplus economy for most of its history, reflected in high unemployment and large numbers of immigrants.

After initial attempts to provide adequate funding from domestic sources, including a number of parastatals, we focused on foreign investment as a source of capital investment. This was probably the most effective policy in achieving economic policy goals.

Ireland is currently in an unusual situation where it has practical constraints that act as major constraints on its ability to achieve its economic policy objectives.

Indeed, it is perhaps true that one such constraint, the housing shortage, should be viewed as a policy objective. Our ability to do this is limited by the fact that we are at full employment.

Achieving economic policy goals involves trade-offs. We can say we want more housing built, but unless we make space in the economy to provide it, it’s not clear where the extra workers needed to do that will come from.

Hopefully, you’ll be able to recognize these trade-offs better than before.

  • Seamus Coffey is an economist and lecturer at UCC.

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