The serious side to Paul Krugman’s leprechaun economics

Is it possible to be a Nobel Prize winning economist and a bit of an idiot at the same time? Step forward Paul Krugman and take a bow.

The distinguished New York Times columnist and City University of New York professor's tweet last week calling the official 26 percent figure for economic growth in Ireland in 2015 "leprechaun economics" went viral. It provided a cheap headline for lazy financial journalists around the world and may have caused some damage to our credibility at a time of great uncertainty, something we really don't need.

We get that Professor Krugman does not really think that anyone here believes our economy grew last year by 26 percent. You don't have to be a Nobel Prize winning economist to understand that such a performance would be virtually impossible in a developed economy like Ireland, and the Irish are aware of that.

Even us leprechauns over here know that the 2015 data for indicators like jobs, tangible output and consumption show that the real growth in the Irish economy last year was around five percent. That's still a very impressive performance (compared with the U.S., for example) but it's a long way from the 26 percent figure for GDP growth in 2015 produced by our Central Statistics Office (CSO) in its report published last week which was ridiculed by Krugman.

We get that he was having a little joke at our expense and at the CSO's expense. As an economist with expertise on international trade he knows that the CSO in Ireland compiles its figures strictly in line with the rules set down by Eurostat, the EU body that oversees the way all member states add up the figures for their economies.

What we don't get is that he did not realize how damaging his tweet could be, since it plays into the usual stereotypes about the Irish at a sensitive time. Shure we're a hilarious bunch, even if we're not very good at figures and we actually think that our economy grew last year by 26 percent.

Next thing we'll be believing in little men in green suits sitting on pots of gold at the end of rainbows. Or leprechaun economics.

Krugman is not only a leading economist, he is also a high profile media commentator, so he should be media savvy enough by now to have realized that his tweet was potentially harmful. He should have been alive to the possibility that some people in the global financial community might take his tweet a lot more seriously than he may have meant it and they might apply it in general to economic statistics produced in Ireland.

For those international money men with only a superficial knowledge of Ireland, the more serious implication in Krugman's tweet was that although most of us here in Ireland know the 26 percent figure is nonsense, we're trying to convince the rest of the world that it's real. A bit of Irish economic blarney, if you like.

Given the cloud of uncertainty that hangs over the future of the Irish economy in the wake of Brexit -- which will cause more problems for us than any other EU country -- that is dangerous territory. We are servicing a huge national debt burden after the crash and will be for decades to come.

Any suggestion that our economic figures might be less than reliable (never mind complete blarney) could affect the interest rates we pay. Krugman may have an itchy tweeting finger, but someone of his stature and influence should have been more careful.

Having said all that, of course, the unavoidable question is why our Central Statistics Office not only produced such an absurd figure for economic growth here in 2015 in the first place, but then published it without sufficiently strong health warnings.

It's not like they were unaware of the problem. A number of economists here have been warning about our skewed GDP figures for several years and warned that there was potential for a laughable outcome some year. Which is exactly what has now happened. It's not that the CSO figure of 26 percent growth in 2015 is inaccurate. In fact, knowing the caliber of the work done by the CSO, it's likely to be accurate to a fault. And therein lies the problem.

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It's not the accuracy that is in question. It's a matter of what is being measured.

The CSO, as we said, diligently follows the framework of rules set down by Eurostat, the European Union statistics agency. This common set of rules is used by national statistics offices in all EU member states, thereby providing Eurostat and the member states with comparable data on how the economy in each country is doing.

The problem is that this one size fits all approach does not suit Ireland with its very high number of foreign companies (75 percent of our exports are by multinationals). Many of these act in ways that artificially inflate GDP here without actually growing economic activity on the same scale on the ground here. The Eurostat set of rules means that the CSO in Ireland has to include all this activity, and there was a lot of such activity here in 2015. Hence the crazy 26 percent figure.

You already know about some of this stuff, like the "inversions" of U.S. companies here to benefit from our low 12.5 percent corporate tax rate. Many foreign companies which headquarter themselves here for tax reasons have only a small part of their global operations in Ireland, yet much of their profits may be booked here and have to be counted, even if the money is only here fleetingly. Some have very valuable intangible assets here (patents, licenses, leases, etc.) which also have to be counted as part of our GDP.

Even when there are tangible manufactured products that are counted as part of our GDP, a lot of the output may not be made here at all. These products may be made in factories on one side of the world and exported to markets on the other side without ever coming here.

Last year there was a particular problem with aircraft leasing which added billions to our supposed GDP, even though the planes involved will never be landing here.

All this is a highly complex area, financially and legally, and there is growing questioning here about how much all this activity really benefits Ireland on the ground.

There are significant revenue benefits, as the Irish government will tell you, but there is no doubt that the national figures for GDP can be badly out of synch with what is happening in everyday life here, as the 26 percent figure for last year has shown.

There are also some unwelcome side effects. Our annual contribution to the EU budget is based on how our economy is performing, and based on last week's CSO figure for growth in 2015 that would mean us paying an extra €300 million into EU coffers.

Here at home, the growing pressure for unaffordable pay "restoration" will increase as people look at the 26 percent headline. And since last year's figure also reduces our debt-GDP ratio to somewhere in the 80 percent range (like Germany!) there could be a temptation for our politicians to start borrowing wildly again, even though they should know none of this is real.

In light of all this one might consider forgiving Krugman for his leprechaun economics cheap shot. It's not that he was wrong to be concerned, just that he was simplistic in his approach to our problem and careless about the exact target he was aiming at.

That and his timing, because for us there could hardly have been a worse time for a joke about leprechaun economics to be doing the rounds in Europe and the U.S.

The reason is that a critically important EU investigation into the tax affairs of Apple in Ireland is due in the next few weeks. This was prompted by the investigation by a U.S. Senate committee three years ago which at one point claimed that the effective tax rate Apple was paying in Ireland was around two percent and not the headline 12.5 percent. The suggestion was that the Irish government had done a secret deal with Apple and that the arrangement was saving Apple billions in tax on its global business.

Apart from not being in line with the new international efforts to force such global giants to pay their fair share in tax, the EU is also angry at this because it is seen as Ireland unfairly subsidizing Apple to get it to base itself here rather than in another EU country, which is against competition rules.

And of course it's not just Apple. The findings of this EU investigation which are due within the next few weeks will have consequences for a number of global giants based in Ireland and many other multinationals here as well.

At the very time the report is probably being written, the last thing we needed was a lame joke about leprechaun economics. But the truth is we have only ourselves to blame.