St. Paddy’s Day Lesson for Arizona
March 16, 2007
Ireland was one of the world’s most dynamic economies during the 1990s. Other regions, including Arizona, want to emulate Ireland’s success. Unfortunately, two of Arizona’s most vocal advocates of the Irish model, Governor Janet Napolitano and Arizona State University President Michael Crow, have learned the wrong lessons from Ireland’s success. If Arizona follows their recommendations the state will not achieve the economic ‘luck of the Irish.’
Ireland catapulted itself from a standard of living only about two-thirds the level of the EU average in 1985, to one of Europe’s richest countries by 2000. Ireland’s performance in the late 1990s was particularly impressive—its economy grew nearly 10 percent annually. Governor Napolitano and ASU President Crow attribute this success to governmental industrial planning and subsidization of scientific research. Unfortunately for Arizona, they are mistaken.
Last March, to emulate Ireland’s success, the Arizona Science Foundation hired William Harris, who previously directed the Science Foundation Ireland. However Science Foundation Ireland was only created in 2000. By then most of Ireland’s dramatic growth had already occurred. In fact, since its creation Ireland’s economic growth has averaged roughly half of what it did in the late 1990s. Science Foundation Ireland clearly did not play a role in Ireland’s transformation.
Arizonans also mistakenly credit the Industrial Development Authority for Ireland’s economic boom. The Authority is supposed to attract companies to Ireland. The Industrial Development Authority did exist during Ireland’s boom. However, it has existed since 1949. In the 1960s it was given an expanded role in the industrialization of the Irish economy. If this agency was the main driver of growth in the Irish economy the growth should have come long before the 1990s. The Authority’s budget was actually cut just prior to Ireland’s growth.
The importance of economic freedom is Ireland’s real lesson. For years the Irish government interfered with the market by taxing, spending, regulating, and inflating. The result of the government’s spendthrift policies was a fiscal crisis in the mid 1980s. Politicians were forced to cut spending or the government was going to have to default on its debt or face an IMF intervention. The Irish dealt with the crisis by making massive spending cuts in 1987 and 1988.
The 1987 spending cuts eliminated the budget deficit and by 1990 Ireland’s outstanding debt had shrunk from a high of 116 percent of GDP to back under 100 percent. Although the Irish motives were not ideological, the result of the spending cuts and growth was that government spending as a percent of the economy shrank from 55 percent in 1985 to 41 percent by 1990.
Ireland embarked on a series of tax cuts once the size of government shrank and the debt problem was resolved. Income taxes were cut multiple times. The top personal income tax rate fell from 65 percent in 1985 to 44 percent by 2001. The standard income tax rate went from more than 35 percent to 22 percent. Corporate income taxes were slashed from 40 percent in 1996 to 20 percent by 2000. A special 10 percent tax rate was offered in some locations and to particular industries but this has since been phased out and now the standard corporate tax has been lowered to 12.5 percent.
Slashing government spending and taxes were the last missing pieces of economic freedom in Ireland. Like Arizona, Ireland already had a strong rule of law, fairly free international trade, and a stable monetary environment. These last missing pieces of economic freedom combined with the existing freedoms to provide the catalyst that launched the Celtic Tiger. In 1995 during Ireland’s growth, and just prior to the truly rapid tiger growth, Ireland ranked 5th in the Economic Freedom of the World index. Since 2000 its score and rank have slid back slightly and so has Ireland’s growth.
Ireland’s lesson is that Arizona should dramatically increase economic freedoms if it wants to grow. Arizona already ranks fairly well in freedom compared to many U.S. states but it still trails some neighbors. Taxation and government spending in particular lag behind Arizona’s overall score. If Arizona’s leadership wants to emulate Ireland’s success they should be slashing taxation and spending—not subsidizing science and planning industrial policy. Improving Arizona’s economic freedom, in the words of a Guinness commercial, would be ‘Brilliant!’
