We may yet pay a high price for ignoring lesson of past mistakes

ECONOMISTS are still optimistic about the Celtic Tiger, but they frequently get things spectacularly wrong. People should therefore beware.

The change in outlook that occurred in this country in the 1960s was phenomenal. While much of the world was enjoying an economic boom in the 1950s, Ireland was depressed. Some 40,000 people had to emigrate in 1956, but the gloom was lifted during the following decade. People believed we would never again see a poor day.

The unbridled optimism was not dented initially by the troubles in the North, but problems there leaked over the border, especially after the Arms Crisis.

Many people were responsible for the boom of the 1960s, but if one were to pick out the single person most responsible, it would be TK Whitaker.

His programme for economic expansion was largely credited for the economic changes.

In the recent Haughey series on RTÉ, Whitaker explained that he took issue with Haughey providing free travel for the elderly in April 1967.

He was afraid of the impact this kind of giveaway would have on the psyche of Irish people.

“I was opposed to it,” Whitaker explained. “I warned him if you start that sort of thing there is no knowing where you can stop because there are so many other free gifts that you can make available that people begin to expect them.”

The free secondary education, announced by Donogh O’Malley in 1966, set the ball rolling. Then Haughey announced free travel, free telephone rental and free television licences for the elderly, as well as tax-free status for horse-breeders, writers and artists.

The economic setbacks of the 1970s are usually blamed on the so-called oil shock, resulting from the rise in oil prices following the Arab oil embargo, which began in October 1973. Oil prices soared to $12 a barrel.

In recent days we have been witnessing an even greater rise in the price of oil. This time two years ago it was $30 a barrel but this week it reached $64 a barrel.

There is obviously a danger of another oil shock. We should be looking at what happened the last time to see if we could learn something to avoid past mistakes.

What undermined the economy? Was it all due to the 1973 oil shock? Ken Whitaker was particularly critical of the government’s irresponsible behaviour in living beyond our means before the oil crisis. He singled out the introduction of deficit spending by George Colley in his 1972 budget. Then, many of the same people compounded this mistake five years later.

Instead of tightening our belts after the oil shock, Fianna Fáil - with many future PDs at the helm - virtually beggared the country with giveaway promises in the election manifesto of 1977.

It was not until the late 1980s that the country began to recover. Much of the credit for that recovery should go to Garret FitzGerald, who recognised that the economy was going to get worse if Fine Gael played politics as usual. He announced that if the new Haughey government introduced the necessary unpalatable economic reforms, Fine Gael would support them.

Alan Dukes then implemented what become known as the Tallaght Strategy by backing spending cuts.

But the current Government has been like the old dog that can’t learn new tricks.

Ministers have been throwing away money on their own constituencies, and they have given medical cards to all people over 70, without regard to their wealth.

It’s all a confidence trick, as we should have learned long ago. There is no such thing as a free lunch. Somebody always has to pay, and we’re paying for it.

A COLUMNIST in the New York Times attracted a great deal of attention last week by contending that the housing bubble in the United States has burst.

For years we have been warned of the danger of the runaway cost of new housing in this country.

The Government commissioned the economist Peter Bacon to recommend ways of bringing down house prices without precipitating a collapse. He suggested a number of initiatives, but they did little to stem the prices rises.

At the end of 2000 he predicted that prices would fall by as much as 10% to 15% in the following months. But house prices have continued to soar. They went up by 13.2% in 2002 and by 13.3% in 2003. The increase was 8.6% in 2004, and they are already up by a further 2.5% in the first half of this year. We have been witnessing a house price bubble. Normally rising prices slow demand, but in a bubble they generate buyer enthusiasm and lead to increased demand, thereby forcing prices to rise even higher.

We should beware of what happened in Japan in the 1990s. At the beginning of 1990, property in Japan was worth four times more than all the property in the United States.

The grounds of the Imperial Palace in Tokyo were worth more than all of Canada. To purchase a house, people had to take out multi-generational mortgages. The typical cost of a house had increased by a multiple of 50 in the previous 30 years.

On paper, all of the houses in the area where I live have gone up by an even greater multiple than that Japanese bubble. Many parents now have to provide their children with help to allow them to purchase a house. We seem to be blindly following the example of the Japanese.

In the last week of 1989, the Japanese finance minister announced a rise in interest rates. Within four days the stock market began to fall. By the following March, Japanese stocks had lost a quarter of their value. The slide continued. By September 1992 stocks were down by 65%.

House prices held up at first, but by 1992 they had fallen by 60%. In the next eight years they dropped another 20% with consequences for the whole nation. A great many corporations went bankrupt and pension funds evaporated because their money was invested in overvalued property.

There has been an unprecedented demand for houses in this country because for generations our young people emigrated - but in the midst of the Celtic Tiger economy, they are staying at home and getting into the property market.

Others have been returning, and for the first time in our history we have had a massive influx of immigrants. More than 100,000 people came here from other EU countries.

But production of houses and flats would seem to be exceeding demand. The second-hand housing market has gone stagnant. Many are vacant because they are no longer commanding the prices that people expect. Owners are content to wait for the right price, as the value of houses seems to be appreciating faster on paper than the kind of money owners would get from interest if they sold the property and put the money in the bank. Such property is being held for its capital appreciation, not its productivity.

This is helping to drive prices up further. To pay back the exorbitant mortgages for new houses, people will have to earn more, which means that prices will inevitably go up, and our competitiveness will deteriorate. The current dream could be a nightmare.