WHAT HAS OCCURRED in Ireland since then is without precedent in economic history. By the start of the new millennium the Irish poverty rate was under 6 percent, and Ireland was the second richest country in the world, according to the Bank of Ireland. How did that happen? A bright young Irishman who got himself hired by Bear Stearns in the late 1990s and went off to New York or London for five years returned feeling poor. For the better part of the past decade there’s been quicker money to be made in Irish real estate than in American investment banking. How did that happen? For the first time in history people and money longed to get into Ireland rather than out of it. The most dramatic case in point are the Poles. The Polish government keeps no official statistics on the movement of its workforce, but its Foreign Ministry guesstimates that, since their admission to the European Union, a million Poles have left Poland to work elsewhere—and that, at the peak, in 2006, a quarter of a million of them were in Ireland. For the United States to achieve a proportionally distortive demographic effect it would need to hand green cards to 17.5 million Mexicans.
HOW DID ANY of this happen? There are many theories: the elimination of trade barriers, the decision to grant free public higher education, a low corporate tax rate introduced in the 1980s, which turned Ireland into a tax haven for foreign corporations. Maybe the most intriguing was offered by a pair of demographers at Harvard, David E. Bloom and David Canning, in a 2003 paper called “Contraception and the Celtic Tiger.” Bloom and Canning argued that a major cause of the Irish boom was a dramatic increase in the ratio of working-age to non–working-age Irishmen, brought about by a crash in the Irish birthrate. This in turn had been mainly driven by Ireland’s decision, in 1979, to legalize birth control. That is, there was an inverse correlation between a nation’s fidelity to the Vatican’s edicts and its ability to climb out of poverty: out of the slow death of the Irish Catholic Church arose an economic miracle.
The Harvard demographers admitted their theory explained only part of what had happened in Ireland. And at the bottom of the success of the Irish there remains, even now, some mystery. “It appeared like a miraculous beast materializing in a forest clearing,” writes the preeminent Irish historian R. F. Foster, “and economists are still not entirely sure why.” Not knowing why they were so suddenly so successful, the Irish can perhaps be forgiven for not knowing exactly how successful they were meant to be. They’d gone from being abnormally poor to being abnormally rich without pausing to experience normality. When, in the early 2000s, the financial markets began to offer virtually unlimited credit to all comers—when nations were let into the dark room with the pile of money, and asked what they would like to do with it—the Irish were already in a peculiarly vulnerable state of mind. They’d spent the better part of a decade under something very like a magic spell.
A few months after the spell was broken, the short-term parking lot attendants at Dublin Airport noticed that their daily take had fallen. The lot appeared full; they couldn’t understand it; then they noticed the cars never changed. They phoned the Dublin police, who in turn traced the cars to Polish construction workers, who had bought them with money borrowed from the big Irish banks. The migrant workers had ditched the cars and gone home. A few months later the Bank of Ireland sent three collectors to Poland to see what they could get back, but they had no luck. The Poles were untraceable. But for their cars in the short-term parking lot, they might never have existed.
MORGAN KELLY IS a professor of economics at University College Dublin, but he did not, until recently, view it as his business to think much about the economy under his nose. He had written a handful of highly regarded academic papers on topics regarded as abstruse even by academic economists (“The Economic Impact of the Little Ice Age”). “I only stumbled on this catastrophe by accident,” he says. “I had never been interested in the Irish economy. The Irish economy is tiny and boring.” Kelly saw house prices rising madly, and heard young men in Irish finance to whom he had recently taught economics try to explain why the boom didn’t trouble them. And the sight and sound of them troubled him. “Around the middle of 2006 all these former students of ours working for the banks started to appear on TV!” he says. “They were now all bank economists and they were nice guys and all that. And they were all saying the same thing: ‘We’re going to have a soft landing.’”
The statement struck him as absurd on the face of it: real estate bubbles never end with soft landings. A bubble is inflated by nothing firmer than people’s expectations. The moment people cease to believe that house prices will rise forever, they will notice what a terrible long-term investment real estate has become, and flee the market, and the market will crash. It was in the nature of real estate booms to end with crashes—just as it was perhaps in Morgan Kelly’s nature to assume that if his former students were cast on Irish TV playing the financial experts, something was amiss. “I just started Googling things,” he said.
Googling things, Kelly learned that more than a fifth of the Irish workforce was now employed building houses. The Irish construction industry had swollen to become nearly a quarter of Irish GDP—compared to less than 10 percent or so in a normal economy—and Ireland was building half as many new houses a year as the United Kingdom, which had fifteen times as many people to house. He learned that since 1994 the average price for a Dublin home had risen more than 500 percent. In parts of Dublin rents had fallen to less than 1 percent of the purchase price; that is, you could rent a million-dollar home for less than $833 a month. The investment returns on Irish land were ridiculously low: it made no sense for capital to flow into Ireland to develop more of it. Irish home prices implied an economic growth rate that would leave Ireland, in twenty-five years, three times as rich as the United States. (“A price/earnings ratio above Google’s,” as Kelly put it.) Where would this growth come from? Since 2000, Irish exports had stalled and the economy had become consumed with building houses and offices and hotels. “Competitiveness didn’t matter,” says Kelly. “From now on we were going to get rich building houses for each other.”
The endless flow of cheap foreign money had teased a new trait out of a nation. “We are sort of a hard, pessimistic people,” says Kelly. “We don’t look on the bright side.” Yet since the year 2000 a lot of people had behaved as if each day would be sunnier than the last. The Irish had discovered optimism.
Their real estate boom had the flavor of a family lie: it was sustainable so long as it went unquestioned and it went unquestioned so long as it appeared sustainable. After all, once the value of Irish real estate came untethered from rents, there was no value for it that couldn’t be justified. The 35 million euros Irish entrepreneur Denis O’Brien paid for the impressive manor house on Dublin’s Shrewsbury Road sounded like a lot until the real estate developer Sean Dunne’s wife paid 58 million euros for the four-thousand-square-foot fixer-upper just down the street. But the minute you compared the rise in prices to real estate booms elsewhere and at other times, you reanchored the conversation; you biffed the narrative. The comparisons that sprung first to Morgan Kelly’s mind were with the housing bubbles in the Netherlands in the 1970s (after natural gas was discovered in Holland) and Finland in the 1980s (after oil was found off its coast), but it almost didn’t matter which examples he picked: the mere idea that Ireland was not sui generis was the panic-making thought. “There is an iron law of house prices,” he wrote. “The more house prices rise relative to income and rents, the more they will subsequently fall.”