As the government of Ireland undergoes scrutiny and criticism for its poorly mismanaged fiscal house, the media risks missing the primary lesson. Poor public sector incentives drive politicians to enact policies that defy the laws of economics. There is no such thing as a free lunch—not even a Keynesian lunch of government issued corn beef and newly minted cabbage. The political process centers around the delusion that government spending amounts to something other than a zero sum—and more often negative sum—game. Markets, private property, and economic liberty are the engines of growth. No government can achieve what a spontaneous order of freely trading people can produce.
The reality is clearly visible in Ireland’s own history. Unleashing markets via economic freedom enhancing policies led to remarkable growth rates of 5-9% in Ireland’s economy in the 1990s. During that period, working class Irish improved their lot dramatically. In 1986, Ireland’s GDP per capita was only 63% of the U.K.’s. By 1999 it exceeded per capita GDP in both the U.K. and Germany.
The rapid growth experienced by the Irish in the 1990s came with low taxes. As low taxes encouraged investment and growth, revenue came rolling into the coffers. The incentives facing politicians encouraged excessive public spending. Government continued to expand—growing out of proportion to the private market. Public sending took to new levels and the Leviathan was unconstrained despite the insufficient tax revenue to feed the insatiable appetite of the state. The public sector at best transfers—never creates—wealth and usually wastes resources and destroys new opportunities for innovation and growth. It doesn’t matter who you put in the political line-up. Bad incentives cause bad government policies.
While the media bashing of the current politicians responsible brings important attention to the issues, the bigger picture should not get lost in the debt reshuffling schemes. The bailouts will amount to the state only partially facing up to the realities that public spending cannot produce what the market accomplishes—no matter how hard we wish it so. The poor incentives facing politicians need to be addressed to check the proclivity to spend other people’s money less prudently than one spends her own. Eventually, the U.S. federal government (and some of the states like California) will have to face the same economic reality Ireland now confronts.