9 November 2006 Edition

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Lessons from twenties for the tiger

BY 
CAOILFHIONN
 Ní DHONNABHÁIN

There are more than a few similarities between the Celtic tiger and the United States of the 'Roaring Twenties'. And I'm not talking about the Charleston, the Flapper or prohibition. The US experienced an exceptional economic boom during the 1920's with many features that bear a striking similarity to the economic boom of Celtic Tiger Ireland.

Governments elected on manifestos of 'prosperity and order' pursued laissez faire economic policies, tax cuts and deregulation. A booming economy was accompanied by an explosion in consumerism. It was a decade of affluence and persistent poverty. Seventy million people lived below the accepted poverty line. President Herbert Hoover's 1928 statement that the US at that point was nearer to the final triumph over poverty than ever before was a laudable assertion never to be realised. Trade union membership had fallen drastically across the country. Lifestyles changed. Aspirations soared for those benefitting from the boom. People thought that the boom would last forever.

Optimism and abundant credit led to a huge wave of investment in the stock market resulting in artificially high stock prices. When the economy showed signs of slowing and share prices plummeted, it caused an extensive domino effect. As the record levels of consumer spending were funded by credit, people deeply in debt when a price deflation occurred were in serious trouble. As investments lost their face value and the loans on them went bad, financial institutions collapsed, creating a monetary crisis. This caused massive withdrawals of bank deposits leading some banks to collapse, confirming investors' fears and resulting in more withdrawals.

The majority of economic commentators and media pundits speak as if the present Irish economic boom will never end. They seem to forget that capitalism is characterised by cycles of boom and recession. Abundant credit and government incentives have led to unprecedented investment in property - overpriced property. The danger is - and the lesson from the economic boom of the 1920's which set the stage for the great depression that dominated the 1930's - that a decline in the property market could result in a domino effect that would precipitate a recession.

We have record levels of household indebtedness, over-valued property, an economy over-dependent on construction and a government over-dependent on revenue from construction and consumerism. We have optimism, heightened aspirations and rampant consumerism. But be warned it can all change very quickly. Our economic prosperity has not been used to the benefit of the people as a whole nor is it built on solid foundations. The difference between a slight downturn and a more significant recession rests on the ability of our economy to absorb economic pressures. As it stands we are peculiarly exposed to the factors which could precipitate a dramatic economic slowdown - changes in the US property market, a global economic recessions, and rising interest rates.

What could be done to curb our exposure to such an eventuality? Implement strategies to reduce dependence on foreign direct investment and to curb the reliance of the economy on construction. Introduce tax changes to reduce investor-led demand in the housing market. Implement polices which ensure a sustainable tax base so that the Exchequer is not at the mercy of fluctuations in consumer spending. So the lesson is - it doesn't have to end in a crash - but it could.


An Phoblacht
44 Parnell Sq.
Dublin 1
Ireland
 

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