I like Michael Lewis. I’m envious of his writing and reporting skills–and I really learned a lot from The Big Short.
But I have to say that I was disappointed in his latest Vanity Fair piece “When Irish Eyes Are Crying” on Ireland’s financial collapse. A well-written and engrossing piece, for sure, but he managed not to fully address one of the greatest puzzles about Ireland’s economy–how did it ever get such a high per capita income *before* the construction boom started? Here’s what Lewis wrote:
At the bottom of the success of the Irish there remains, even now, some mystery. “It appeared like a miraculous beast materializing in a forest clearing,” writes the pre-eminent Irish historian R. F. Foster, “and economists are still not entirely sure why.” Not knowing why they were so suddenly so successful, the Irish can perhaps be forgiven for not knowing exactly how successful they were meant to be. They had gone from being abnormally poor to being abnormally rich, without pausing to experience normality.
Lewis accepts that Ireland went from poor to rich, and then proceeded to fumble it away. But what if Ireland was never really as rich as it seemed? What if the statistics that said “rich” were wrong? Maybe the real problem came earlier.
Let’s start by looking at the numbers. Remember that Ireland was called the “Celtic Tiger’ because it grew so fast in the 1990s. The chart below has three lines– per capita real GDP in Ireland, per capita real GNP in Ireland, and per capita real GDP in Germany (a certifiably real economy that makes things). Per capita real GNP subtracts out the net income flow of profits out of Ireland–that makes a big difference because of Ireland’s role as a pharma and electronics production hub by multinationals.
Click charts to enlarge
The salient fact is that according to the official stats, Ireland’s real per capita income appeared to reach Germany’s level around 2000, before the construction boom started. (Construction was important to the economy in 2000, but not dominant like it was later in the decade. Home completions in Ireland totaled around 50,000 in 2000, compared to 93,000 in 2006). That’s really an astonishing run-up. In 1995, Ireland’s per capita income was 25% less than Germany’s. By 2000 Ireland had made up the gap. Truly a Celtic Tiger not to be trifled with.
Now, let’s stop here. As regular readers of this blog know, I’m very concerned that the conventional economic statistics are systematically mis-measuring national output, because of problems handling trade. Ireland happens to be one of the most open economies in the developed world. In fact, exports in magnitude are almost as large as GDP, with imports not far behind. (I don’t know who has a more open economy…but it isn’t China).
With exports and imports so large, it only makes sense that changes in exports and imports actually drive growth in Ireland. In fact, everything else–including capital investment in things like homes–is really a secondary source of growth.
So I used the data from the Central Statistics Office in Ireland to calculate the contribution of exports and imports to growth. First I started with the supposed period of strong growth, 1995-2000. You can see that the positive contribution of exports and the negative contribution of imports is enormous.
The implication–and you knew I’d get to the implication someday–is that in Ireland, in particular, relative small mismeasurement errors in real exports and/or imports can have outsized effects.
So this Celtic Tiger may have been a Celtic Kitten instead. And the shift from real boom to fake boom may not have been as abrupt as it seemed.