Luck of the Irish

May 24, 2017

Note: The following essay relies on research I did during my final semester as a M.B.A. student at M.I.T.’s Sloan School of Management. If you’d like to review the formal presentation I created (if, for example, you have small children and you need something to make them–and you–fall asleep), you may find it here.

As other issues rightfully dominate our headlines, some media outlets question the three percent growth target President Trump has attached to his proposed budget. In fact, within his 100-Day Plan, Trump promised his administration’s eventual tax cuts would deliver four percent economic improvement. Trump addressed those predictions while speaking with CBS News in April:

“Here’s what we do. We’re going to grow. The numbers just came out for Obama’s last year. 1.6 [Gross Domestic Product, (“GDP”)]. That means nothing. That’s, like, one percent GDP. So I have gotten to know as you know, I really get along with a lot of other countries. So I talk to the heads of countries. ‘How are you doing?’ ‘Not well, not well.’ ‘Why?’ ‘GDP is eight percent. GDP is nine percent. We are doing poorly.’ GDP — Our GDP is, like, one percent.”

Perhaps Trump had one such conversation with Irish Prime Minister Enda Kenny during the latter’s 2017 St. Patrick’s Day visit to the White House. This ambitious rhetoric notwithstanding, it will be difficult for the U.S. to emulate the steeply rising fortunes of countries like Ireland by increasing annual GDP growth from two percent to four (or even three) percent. To understand why, we must explore what The Economist referred to as the Emerald Isle’s “Gross Domestic Blarney.”

Leprechaun Economics

In 2015, when then-candidate Trump was detailing his aspirations for the American economy, Ireland’s was beginning to stabilize. Its national debt, budget deficit, and unemployment were decreasing, though not to pre-crisis, Celtic Tiger levels. In March 2016, the Irish Central Statistics Office (“CSO”) even speculated that real GDP rose by 7.8 percent in 2015.

That proved to be an underestimate. By the summer of 2016, the CSO announced that Ireland’s 2015 real GDP had, in fact, grown by 26.3 percent. While the news release was ridiculed–Nobel laureate Paul Krugman infamously referred to the numbers as ‘leprechaun economics’–the veracity of the information was later confirmed by Eurostat, the EU’s statistical agency.

The CSO suppressed many details to comply with corporate privacy laws, which only fueled conjecture regarding the figures. What was clear was that in 2015, €300 billion worth of capital assets were recognized in Ireland. To put the magnitude of this transfer in context, the country’s gross capital stock subsequently increased by 40 percent. Furthermore, a working group convened by the Irish government noted that the assets were “dominated by intellectual property.”

Many incorrectly held airline leasing firms and corporate inversions culpable for the 2015 GDP surge. In reality, it seems the activities of a few multinational companies were responsible. For example, the European Commission’s August 2016 tax ruling noted the tech firm, Apple, had restructured its operations in January 2015 to comply with changes in Irish law. Within this new structure, Apple likely moved significant intellectual patent property to Ireland, while revenue associated with those intangibles accrued as Irish exports and imports. This ‘on-shoring,’ combined with the Activis-Allergan transaction completed later that year, may have led to nearly all of Ireland’s reported GDP growth.

The economic math seems to support this assessment. Ireland calculates its GDP by taking the average of two methodologies. First, within the income approach, 2015 nominal corporate profits grew by over 40 percent, while depreciation of assets–the ‘gross’ accounted for in GDP–nearly doubled. Second, rising investment and a €50 billion trade surplus, elements of the expenditure approach, caused Ireland’s 2015 GDP to skyrocket.

Fools’ Gold

Did Ireland’s GDP really grow by 26.3 percent in 2015? Regardless of the ‘correct’ answer, the Irish economy cannot serve as a suitable model for that of the United States. Ireland’s relatively small size enhances its vulnerability to exogenous corporate maneuvering, like a row boat paddling from Dublin’s Silicon Docks to the Statue of Liberty through a tsunami of capital transfers.

By comparison, the U.S. is not so easily steered on its own course to prosperity. Some experts champion Trump’s emphasis on lessening supply side burdens through tax cuts and regulatory simplification. Other observers contend that such changes alone are insufficient to stimulate investment.

Furthermore, policies that are part-free market and part-isolationism may indeed cancel each other out. In simple terms, a nation’s economic growth is a function of its expanding work force and improving productivity. Trump faces headwinds in each area. Birth rates are slowing and Americans are growing older (making bans on immigrant labor injurious). Higher domestic consumption, which may foster greater efficiency, could be offset by the rising interest rates that accompany a ballooning deficit.

If Trump is unable to make good on his pledged GDP expansion, his mistake was asserting control over macroeconomic velocity in the first place. Here he has behaved like a traditional politician, and elections are not won on messages of hopelessness.

Trump’s interactions with foreign counterparts can indeed provide crucial insights. Specifically, that the scale and complexity of the U.S. economy means it cannot be manipulated by the shuffling ledgers of conglomerates.

Or even, for better or worse, by the agenda of the nation’s Commander-in-Chief.