Friday, December 23, 2011

The (Krugman's) Rumors of Irish Austerity Are Greatly Exaggerated

Personally I believe Ireland was gang-raped by the banks, in cahoots with Irish politicians.

Speaking frankly I'm a bit surprised that the IRA hasn't yet pointed up the negative externalities that can arise from an economy having a banking sector larger than the productive sector.

From Consulting by RPM's Free Advice blog:
A certain Nobel laureate has been pounding the drums lately (e.g. here), pointing out that the awful euro economies prove just how bad fiscal austerity is. In particular, the case of Ireland shows that–as our Keynesian friends like to put it–”contractionary policy is contractionary.”

Now in fairness, for all I know maybe lots of people have been pointing to Ireland as a shining success story. I don’t know of any Austrians who have done so, but maybe George Will or somebody has. (I come back to this in the Appendix below.)

If so, then said austerians were being sloppy, because Ireland at best is only relatively engaging in austerity. Here are the figures for its government budget surplus/deficit as a share of GDP:


So let’s review, to make sure you know how to understand how a Keynesian uses these types of labels. Herbert Hoover engaged in liquidationism, with his last budget deficit of 4.5% of GDP plunging the economy into the worst single-year performance in US history. In the following years, thank goodness FDR (though far too cautious at the time) allowed deficits that averaged 5.1% of GDP, which propelled the economy to its fastest expansion in history, an expansion that was unfortunately aborted when FDR chickened out in 1937 and tried to trim the deficit. When the Obama Administration ran a deficit of 10% of GDP in 2009, Krugman declared that “Big Government” (his words, not mine) had spared the US from another Depression. And now, when the Irish government runs deficits of 12% and 10.8%, this is a period demonstrating the utter failure of fiscal austerity. Everyone got that?

Incidentally, one might argue that it’s unfair for me to look at deficits. After all, the Keynesian argument is that cutting spending will hurt the economy, in turn making tax revenues fall–thus aggravating the original problem.

Sure, then let’s just look at government spending in absolute terms for the Irish government (billions of euros):


So when we are talking about the massive textbook fiscal austerity plans of the Irish government, note that they haven’t even cut spending back to 2007 levels, at the peak of the global boom. It’s true, the Irish government has actually cut the absolute amount of its spending the last two years, and admittedly that’s pretty amazing as far as governments go. But all it really means is that they are (just about) unwinding the huge increases in spending that no Austrian endorsed....MORE