Necessary Changes in Irish Society That Minimizes the Re-Occurrence of Economic Crisis - Case Study Example

Name: xxxxxxxx Tutor: xxxxxxxx Title: Necessary changes in Irish society that minimizes the re-occurrence of economic crisis Institution: xxxxxxxx Date: xxxxxxxx Introduction Over the past decade the economy of Irish society has been growing at a high until the year 2008 when it was hit by global economic crisis. The financial crisis of 2008 slowed down the economic growth of Irish Society, thus causing it to have high level of house hold debt as compared to disposable income. In Europe, Irish Society was the first nation to enter into a recession. It is because of this that various studies have been done to determine how the re-occurrence of economic crisis can be avoided in Irish society. This paper therefore utilizes economic concepts and Solow growth model to explain the changes that are necessary in ensuring that the re-occurrence of economic crises, like the one being experienced in Irish society, is less likely. Necessary changes in Irish society that minimizes the re-occurrence of economic crisis In order to minimize the re-occurrence of the current crisis in Irish Society, several essential changes need to be done in such a way that they tackle the three elements of Irish crisis. The three elements of Irish crisis entail banks’ financial crisis, the crisis of public finances and economic crisis. The main causes of economic crisis in Irish were due to wage cuts within the private and public sectors, businesses running bankrupt and vast and rapid increase in unemployment. This therefore implies that in order to minimize the re-occurrence of economic crisis it is important to initiate changes that will ensure that wage cuts, businesses bankruptcy and high unemployment rate are no longer experienced in Irish society (Deshpande, 2010). Taxation system in Irish society should be changed so as to reduce the problem of wage cuts. The current taxation system in Irish society does not provide a favorable investment climate. The created investment climate scares away potential investors and makes the already existing investments to underperform thus causing wages of workers to be reduced. Many organizations under this situation tend to reduce wages since the prevailing harsh taxation system normally makes them to run bankrupt. It is therefore important to introduce new taxation system in Irish society that attracts and encourage investment development. By doing so, the wages of workers will be improved, thus making it hard for Irish society to experience another economic crisis in future. Irish society needs also to fully implement its progressive system of taxation so as to eliminate the existing wide income and wealth disparities. Majority of individuals taxed in this nation are lower and middle income earners, who are mostly the working class. It is therefore important for Irish government to tax the rich more than it is doing currently so as to reduce the vast income inequality in the economy. In the Solow growth model it is believed that investment per worker is a function of output per worker demanded, that is, i = syd where i is investment per worker, s is constant and yd is output demanded per worker. By equating output demanded per worker to output supplied per worker, that is yd = ys, the investment function can be given as i = sys, but output per worker supplied is a function of capital per worker, that is ys = f (k), the investment per worker function will thus be given as i= sf (k). The investment per worker function therefore depicts that an increase in capital per worker increases investment per worker and since the national income of an economy, Y, incorporates consumption, investment and savings, then an increase in investment will result into an increase in national income. The national income is usually given as, Y = C + I + S, where C is consumption, I is investment and S is savings. The use of good taxation policy therefore increases capital accumulation, which causes investment to increase and thus increases the country’s Gross Domestic product (Felipe, 2008). The wage policy in Irish society should be changed so as to reduce the possibilities of re-occurrence of economic crisis. The suggestion by employers and government to reduce wages as a significant element for recovery should not be adopted. Wage cut is not a way of solving an economic crisis but away of shifting the costs of economic crisis onto the working class. It is not true that wages in Irish Society are high in such away that they cause economic crisis. The fact is, the wages in Irish Society are twenty five per cent below the EU (15) average and that the increase in wages has been around the average. When the cost of living is taken into consideration, Irish wages fall even lower in the table. The policy of reducing wages as a way of fighting economic crisis in Irish society should therefore be changed so as to reduce the re-occurrence of economic crisis. Workers are always motivated by wage increase. Their productivity is always enhanced by wage increase. In economics, it is believed that the supply of labor is always very high if it is being paid well. By considering Solow growth model, labor is usually assumed to be one of the major factor input in production. According to Setterfield (2010) Solow growth model normally assumes that an economy has a single aggregate output and two inputs, which are capital stock and labor. Therefore, the production function in Solow growth model is given by: Ys = F (K, L), where Ys is aggregate output supply, K is capital stock and L is labor. According to the model, an increase in any input increases aggregate output until a stable state is attained. This therefore implies that wage increase will encourage more individuals to be willing to provide their services, thus increasing the total output or product of a nation (Sengupta, 2011). Unemployment, brought about by wage cuts, normally threatens workers in an economy. In order to sustain wage levels and employment, it is very important to share out the prevailing work minus reduction of wages. The working hours should be reduced without loss of pay and the age of retirement should be reduced to a round fifty five years of age. The minimum wage needs to be replaced by the living wage such that it can support an adult and a dependent. Deferred wages in form of pensions should be defended. Irish society needs also to develop a pension guarantee scheme for workers within the private sector. This normally makes workers to be more active in their own defense (Kolb, 2010). In order to minimize the re-occurrence of economic crisis in Irish society, it is very essential to change the existing housing policy (Salisbury, 2010). The current housing policy in Irish society is usually considered as a social welfare for the rich. It incorporates three hundred and ninety one million pounds of rent supplement, one hundred and sixty nine million pounds of tax incentives, four hundred and fifty million pounds of stamp duty loopholes and four hundred million pounds unspent in local authority accommodation. The current housing policy in Irish has caused fifty six thousand individuals and families to be on housing waiting lists, sixty thousand individuals to depend on rent supplements, five thousand individuals to be homeless and fourteen thousand to live on mortgage arrears. Housing in Irish society is bound up with financial system. Since it is very hard to separate the financial crisis from housing, it is important to apply solutions to banking crisis to eliminate housing problem. Salisbury (2010) highlights that the best way to eliminate housing problem and thus the re-occurrence of economic crisis is through nationalization of banks. Nationalization of banks normally assumes the ownership of vacant and mortgaged houses. The policy of nationalizing banks incorporates several surplus housing units within the country. Through nationalization of banks, the vacant houses can be transferred to the management of councils as public ownership rental. The policy can eliminate housing waiting lists and families placed into a decent accommodation. By doing all these, hundreds of millions that are being paid as rent allowance to private landlords can be saved and utilized to develop other essential public services. Nationalization of banks makes it possible to guarantee a halt to repossessions. Individual who are not able to pay mortgages can decide whether to convert assets to public rental or have their homes re-valued and their repayments adjusted to levels that are more manageable. The collected revenues from rents and repayments can be used to finance program for redeveloping local community infrastructure that was avoided during the unmanaged house building boom. Conclusion From the discussion it is clear that there are a number of changes that need to be done in Irish society so as to ensure that the re-occurrence of economic crisis like the one being experienced is less likely. The taxation system in Irish society should be changed so as to eliminate the problems of businesses bankruptcy, wage cuts and wide income disparities. The wage policy in Irish society should be changed so as to reduce the possibilities of re-occurrence of economic crisis. The rapid increase in unemployment should also be avoided. The prevailing housing policy in Irish Society should be changed so as to ensure economic stability. The current housing policy in Irish society is usually considered as a social welfare for the rich. The best way to eliminate housing problem and thus the re-occurrence of economic crisis is through nationalization of banks. Bibliography Deshpande A. 2010, Capital without Borders: Challenges to Development, New York: Anthem Press. Felipe J. 2008, Why Are Some Countries Richer Than Others?: A Reassessment of Mankiw-Romer-Weilżs Test of the Neoclassical Growth Model, New York: DIANE Publishing Kolb R. 2010, Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future, New York: John Wiley and Sons. Salisbury P. 2010, The Current Economic Crisis and the Great Depression, New York: Xlibris Corporation. Sengupta J. 2011, Understanding Economic Growth: Modern Theory and Experience, New York: Springer. Setterfield M. 2010, Handbook of alternative theories of economic growth, London: Edward Elgar Publishing. Read More