Dr Tom McDonnell, Senior Economist at the NERI presented at week 1 of the "Economics made Simple" series of Lectures in the Teacher's Club on Monday 21st October. The Lectures are run in conjunction with The People's College. Tom presented on "Concepts and Irish Economic Development".

1. Economics made Simple
Week 1
Dr. Tom McDonnell
NERI (Nevin Economic Research Institute)
Dublin
Tom.mcdonnell@nerinstitute.net
21 October 2019

2. Part One
Some Economic Concepts

3. What do economists study?
Economics is about the study of choice under
conditions of scarcity
Some Definitions
• Scarcity: is the excess of human wants over what can be
produced- gives rise to choice
• Demand is related to WANTS- which are limitless
• Supply is related to RESOURCES- which are limited

4. What do economists study?
• Economic problems
– production and consumption
• Scarcity: the central economic problem
– defining scarcity
– use of resources (factors of production)
• labour
• land and raw materials
• capital (machinery and equipment, buildings, financial assets)
• technology
– demand and supply
• importance of reconciling demand and supply; coordination
– Choices

5. Choices…..individuals, firms,
governments

6. What do economists study?
• Macroeconomic issues
1. economic growth and development
2. employment and unemployment
3. price inflation
4. trade (including imbalances)
5. cyclical fluctuations (booms and recessions)
6. distribution (inequality and poverty)

7. Economic development over the
centuries…

8. Technological change and economic
development

9. Trade…….

10. Goods and services
€
Consumer
expenditure
Wages, rent
dividends, etc.
€
Services of factors of production (labour, etc)
The circular flow of goods and incomes
GOODS MARKETS
FACTOR MARKETS

11. Output (GDP) per capita

12. Booms and Busts…

13. Unemployment...

14. Social security...

15. 15
Policy debates
• economic and political right argue for a laissez-faire approach to the
economy on the part of government - governments job is to ensure
free and competitive markets
– The right argue that free markets are the most efficient (least
wasteful) way to achieve economic prosperity
• centre/left argue that disequilibria can persist for long periods of
time (markets don't work!) and that therefore (e.g.) government
intervention to boost aggregate demand is necessary to bring the
economy towards full employment
– The centre and the left also argue that government intervention
is needed in order to achieve certain social goals such as:
• Attain full employment
• Reduce poverty,
• Reduce inequality,
• Protect the environment

16. IRISH ECONOMIC DEVELOPMENT
Part Two

17. Prior to Independence
• Part of the British Empire (colonial relationship)
• Nascent-Industrialisation had been thwarted in the 19th century
• Predominantly rural
• Land ownership
• Subsistence
• Falling Population

18. Economic failure leads to over a
century of population decline

19. 1922-1932
Free State Government
International context was mixed: Roaring twenties and Wall
Street crash in the US, hyperinflation and instability in Germany
Conservative Policies in Ireland:
• Non-interventionist (laissez-faire) policy
• Government expenditure and taxation contracted during the
period
– Mainly balanced budgets
• Taxation favouring traditional industry
• Little welfare state expenditure

20. 1932-1952
Policies of Self Sufficiency
International context of Great Depression followed
by World War II and a post-war boom
• (self-sufficiency, trade war with Britain, WWII)
• Poor economic performance
• Widening of fiscal policy
– Significant increases in social expenditure (housing,
unemployment benefits, pensions all increased)
– Financed by increased taxation
– Small current budget deficits
– Introduction of capital expenditure financed by borrowing.

21. 1950s – 1960s
Change of Direction
International context of rapid growth in Western European
economies
• Poor economic performance in the 1950s
– High unemployment and mass emigration
• From 1952 on fiscal policy was contractionary
– There was concern about balance of payments deficit)
• Expenditure cut backs, and increased and additional taxation.
– Expansionary fiscal policy may have been more appropriate.
• 1958 First Programme for Economic Expansion
• (T.K. Whitaker)
– FDI (Foreign Direct Investment)
– Trade liberalisation
– Little borrowings
• Moderate economic growth in the 1960s

22. 1970s
High inflation
International context of global stagnation
• Oil crises ‘73 & ‘79 – very high inflation, but moderate
growth
• 1972 - expansionary fiscal policy and the first planned
current deficit
– Moderate increases in taxation (inflationary fears)
– Sustained deficits, but tightening of fiscal policy in 1976 and ’77
• New government in 1978,
– strong pro-cyclical expansionary fiscal policy in 1978 and 1979
– financed current expenditure by borrowing

23. 1980s
Economic Crisis
International context of turn towards neo-liberalism
• Irish economy in crisis
• Rising interest rates, debt service
– Sustained fiscal imbalance
– Some cuts in capital expenditure, not current.
– Fiscal paralysis (economic recession - 17% unemployment).
– National debt: 1980 = €10bn, 1987 = €30bn
• 1987:
– Budget deficit 8.3% of GDP;
– Debt /GDP 129%;
– Debt service = 94% of PAYE (employee income tax) receipts.

24. 1987 to 1994
Turnaround – Birth of the Celtic Tiger
International context of rapid globalisation
Why did the economy recovery? – Was it just catch-up?
1. Investment in the form of EU Structural Funds
– Effectively a mini stimulus (without a fiscal cost)
2. Currency devaluation
– Increasing the competitiveness of exports
3. Fiscal stimulus in the UK, Ireland’s main trading partner
– Increasing demand for imports from Ireland
Most importantly,
Ireland was able to exploit its new found position within the Single Market in the early
1990s and attracted a disproportionate amount of inward FDI (and jobs) from the US

25. The Celtic Tiger
GDP Growth Rates – Fastest in the World

26. The Celtic Tiger
Transformative Impact on per capita GDP
0
5000
10000
15000
20000
25000
30000
35000
40000
euros
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

27. The Celtic Tiger
Transformative Impact on Unemployment

28. The 2008 crash –
A Story of Policy Failure
• Fiscal Policy - Pro-cyclical and unsustainable
– Group think - Lack of capacity/competence at Departmental level? – ‘the Irish model’
• ‘This time is different’ – ‘Ireland is special’
– No independent oversight of government policy decisions
– Increasingly narrow tax base skewed towards transaction taxes and characterised by an
array of property related tax breaks
• Monetary policy transferred to Frankfurt
– But monetary union left incomplete...and policy levers not replaced
– Fiscal and competitive imbalances allowed to mushroom
• Banking policy characterised by an absence of proper supervision and
regulation
– Failures by the Financial Regulator/Central Bank
– A symptom of other policy decisions

29. Unemployment: Boom to Bust

30. Conclusion
• Economy was predominantly agricultural in the 1800s
• Ireland was catching up for most of the 20th century
– Colonial overhang
– Weak manufacturing base
– Closed economy
• Recessions in the 1950s, 1980s and again post-2008
• Celtic Tiger starts around 1990
– FDI based boost in employment and output (fastest growing economy
in the world)
• Economy overheats prior to 2008 and badly hit by global crash
• Economy in recovery since 2012 but labour market performance is
mediocre by EU standards
• Ongoing challenges in housing, just transition and adjusting to a
post-Brexit reality