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Luck of the Irish vs. economic policy of the Irish

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Liz Alderman has a terrific piece this morning assessing how well -- or, to be more accurate, how poorly -- austerity economics worked for Ireland. As she reports, when the collapse hit, the small, heavily indebted country hiked taxes and raised spending. And in some tellings of the crisis, that should've worked. The European Central Bank is saying that "the idea that austerity measures could trigger stagnation is incorrect,” because "confidence-inspiring policies will foster and not hamper economic recovery." Ireland, however, stagnated.

As Paul Krugman points out, their theory was exactly what the ECB advised: “When our public finance situation blew wide open, the dominant consideration was ensuring that there was international investor confidence in Ireland so we could continue to borrow,” said Alan Barrett, chief economist at the Economic and Social Research Institute of Ireland. But a few years on, unemployment is at 13 percent and the absence of government stimulus contributed to the country's economy shrinking 7.1 percent last year. It's a mess.

For a variety of reasons, Ireland was always going to get hit pretty hard if a financial crisis befell the world in late 2007. But it didn't have to be this bad. It does seem, however, that Ireland made the wrong choice: They focused on lifting uncertainty around their debt rather than lifting uncertainty on the government's commitment to fighting the recession.

As it happens, a paper came across my desk this morning that tests this exact question: Using a lot of firm-level data, Ruediger Bachmann, Steffen Eistner and Eric R. Sims find that "high uncertainty events are a mere epiphenomenon of bad economic times: recessions breed uncertainty." You can read an ungated version here (pdf). The paper, as I understand it, tries to test the premise that economic uncertainty drives firm behavior in downturns and finds it wanting. The authors find that insofar as there's uncertainty, it's mainly a byproduct of recession, which is what's causing the firm to hold back. So without a plausible plan for getting out of the recession, the uncertainty is never going to lift.

Photo credit: Infomatique/Flickr.

By Ezra Klein  |  June 29, 2010; 10:45 AM ET
 
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Comments

"hiked taxes and raised spending"

cut spending?

Posted by: tcjutras | June 29, 2010 11:25 AM | Report abuse

Ezra, the Irish budget went from a surplus of 0.1% of GDP in 2007 to a deficit of 14.3% of GDP in 2009. I'm baffled that Keynesians are even drawing attention to it.

As you note, Ireland was in for trouble in 2007 no matter what. Ireland's real estate/construction bubble dwarfed America's on a per capita basis.

http://www.cso.ie/releasespublications/documents/construction/current/constructhousing.pdf

Ireland completed 88,200 homes in 2006 with a population of 4,500,000. The U.S. completed about 1.9 million with a population of 300,000,000. If the U.S. had built in the same proportion to its population in 2006, it would have completed 5.9 million homes.

In 2006, Ireland employed 282,000 people in construction. The U.S. employed 7.689 million. If the U.S. had employed in the same proportion it would have had 18.8 million people in construction.

Remember, the U.S. itself was in an unsustainable housing boom. Ireland was off the charts - rather on the charts with Spain. Per capita, Irish building was close to what it was in Spain.

Anyway, Spain tried stimulus spending 3 times - $13 billion, $30 billion and $21 billion (potentially more - see comment on the link below). Since Spain's economy is 1/10th of America's, this is equivalent to about $640 billion in stimulus in the U.S. Spain's unemployment is at 20% of GDP, and a budget surplus of 1.9% of GDP is now an 11.2% deficit.

http://crisistalk.worldbank.org/2009/03/spains-stimulus.html

Posted by: justin84 | June 29, 2010 11:26 AM | Report abuse

Correction: Spains unemployment is at 20%* - not of GDP.

Posted by: justin84 | June 29, 2010 11:32 AM | Report abuse

Krugman, Ezra, Matt and many other Keynesians do not get it - how to politically sell the stimulus spending.

1. Show some spine in holding off 'unjust entitlements' and 'high public labor costs'.
2. That should free at least some tax dollars and use those for your employment creation / stimulus spending.
3. Beyond that the state will at least have credibility so as public will believe in any borrowed money subsequently for stimulus funding.

Today Public is rightly apprehensive about borrowings to spend on stimulus (when all of them do want stimulus) as long as their is no spending discipline and proven willingness in cutting of spending where tax dollars are wasted.

Let the war begin - 'borrowed money for union teacher salary' versus 'money for improving roads'; 'pulling plug of Grandma' to 'spending Trillions on Smart Grip and Alternative Energy'. Unless people are told how 'entitlements for some' and 'plum public union jobs for few' are essentially holding all of us at ransom by forbidding any employment creation stimulus; there is no chance that we will avoid slower growth.

Posted by: umesh409 | June 29, 2010 11:53 AM | Report abuse

Ireland is rich becasue it's capitol is Dublin and has been for years.

Posted by: WrongfulDeath | June 29, 2010 12:01 PM | Report abuse

The whole austerity thing is short-term ridiculous from the U.S. point of view. In the current global economic climate, investors are going to keep their money where the most innovation and productivity will be found, with the most political freedom, in the most land area. That is their best bet. Where else are they going to go? So the U.S. has a little more breathing-space to do a short-term stimulus. And if the new CBO long-term budget outlook (which is due this week) shows some improvement, then there will be a little more breathing-space. And we should use it, to pull global demand back up and help everybody else too. If we don’t do a stimulus and the U.S. economy continues to tank, why would interest rates go back up?

Posted by: Lee_A_Arnold | June 29, 2010 12:08 PM | Report abuse

"hiked taxes and raised spending"

Same with Japan in the '90s. After the Japanese real estate bubble burst in the early '90s, the government ran massive deficits for new public works/infrastructure projects. This was great for Japanese linked into the supply chain of contractors winning those government projects.

However, the Japanese government also raised the consumption tax, siphoning money from all citizens - lower, middle, and upper incomes - as a partial offset to the deficit.

So did that kind of 'stimulus' plan work? Half-solutions rarely do.

Posted by: tuber | June 29, 2010 12:15 PM | Report abuse

Ireland was screwed no matter what, we've spent most of the last decade balancing on the edge and responding to 'you can't support an economy purely on construction' with our fingers shoved resolutely into our ears.

And now the leader of the opposition switched his shadow finance minister from one of the smartest and most popular people in the party to someone who most people haven't heard about.

Although, it doesn't matter if what they do works or not, we're not going to stop complaining; it's not in our nature.

Posted by: NeonBlueStocking | June 29, 2010 2:25 PM | Report abuse

Only in the world of an Ezra Klein does austerity mean raising taxes and spending...

Posted by: robert_c_gladstone | June 29, 2010 4:06 PM | Report abuse

the current decline of ireland is largely predicated on their success of going with the lowest corporate tax rates in europe.

as bad as things are in ireland, it is only magnified by their previous revenue increase from drawing corporations to their nation.

examining their 'realative' decline, while ignoring the expansive growth in gdp over the past 10+ years is history by gestalt. Something libs do very well at...

Posted by: owenmagoo | June 29, 2010 4:10 PM | Report abuse

Mr. Klein exhibits the left's biggest blind spot - he thinks that government can change reality and that there is no price to pay for decades of bad, not to mention stupid, policy. Ireland has recognized reality and Ireland is paying that price. When its paid, the Irish citizens will reap the reward. The US, or at least the 20% or so of the public that is "progressive" is trying to hide from reality. If they succeed, we will face decades of stagnation and poverty will increase. While I believe the "progressives" think that they mean well, in reality they are willing for all of us to pay whatever price is necessary to hide the reality that they have been wrong for 50 years. They just cant take reality.

Posted by: SeekingRationalThought | June 29, 2010 4:13 PM | Report abuse

In economics, austerity is when a government reduces its spending and/or increases user fees and taxes to pay back creditors. But Ireland raised taxes and spending. That's not economic austerity! Most economists associated economic austerity with cuts in government spending.

Why don't they give free market capitalism a try?

Posted by: mfrazer2002 | June 29, 2010 4:26 PM | Report abuse

Ezra, can you make sure George Will sees this paper, too?.

Posted by: mitbruin | June 29, 2010 4:48 PM | Report abuse

From a different perspective, the WSJ is reporting today on economists who say that Ireland's economy is set to return to growth in the next quarter, as the drop in the euro makes tourism and other industries more competitive.

Posted by: tomtildrum | June 29, 2010 5:24 PM | Report abuse

Ezra and Krugman are MORONS! Austerity? Blame the Euro and the raising of taxes. Since Ireland does NOT have the reserve currency of the world, they can't PRINT their way out of trouble. Only we can keep printing money. However, that will catch up to us pretty soon and all HELL will break loose. Brought to you by Obama, Ezra, Krugman and the FED.

Posted by: beecheery | June 29, 2010 5:33 PM | Report abuse

Its pretty obvious to me no matter what happens, Europe and the US is in for some serious pain. You can either subscribe to the Keynesian philosophies and prolong the pain and kick the can down the road by providng temporary relief through stimulus measures or you can begin the austerity measures that will heighten the pain in the short term, but will lead us to a more sustained recovery 4 to 5 years out.

Japan is slightly different but similar, the main difference is that the bubbles in the stock and housing market were much much much bigger than what we are facing today, so the downturn was much more pronounced.

The US right now has a STRUCTURAL problem in its labor force. Construction and manufacturing jobs will not be coming back any time soon. Which of course has a negative residual effect on the rest of the labor force. I believe that in most recessionary cases, a keynesian stimulus plan works more often than not, but in this recession/depression it wont work.

Think about it like a bridge. The stimulus is the bridge, and on one side is pre recession and the other side is the RECOVERY. The idea of the stimulus was that it would help guide us from the pre recession to the recovery. Sounds good, but two main problems, one, the distance between pre recession to recovery was much much farther than most economists anticipated and two, there was structural damage to construction and manufacturing. The stimulus bills that were enacted, dont address these areas. It mainly helped unemployed people with checks, subsidies for health insurance, state aid that helped avoid layoffs and some minimal infrastructure projects, that were temporary jobs as it is.

Not only were the stimulus bills rather ineffective in regards to helping our economy recover on a sustained basis, but the policies of the president has created a lot of uncertainty. The national debt and binge spending from our president is also hampering hiring in the private sector. Small business owners are fearful of all the taxes and mandates from the health insurance bill. Any one with at least half a brain or that isnt a partisan puppet knows that this tremendous spending will have to be largely made up of tax increases. Who knows what cap and trade will do, and that adds to the uncertainty. Corporations are being demonized and that doesnt help foster job growth.

What we need to do is go through some serious pain through austerity measures. Lower the corporate tax rate for businesses and help create a positive environment for them to succeed. Crush unions and lower pensions to help states have a more sustained and certain future. AND STOP DEMONIZING THE CHINESE, THEY ARE OUR BEST HOPE IN CREATING JOBS. They have such a wonderful growing domestic market, and we should tap in to that. More free trade, exports are our best hopes for creating manufacturing jobs, and this will have a positive residual effect on the rest of the labor force. More free trade

Posted by: Magox | June 29, 2010 5:52 PM | Report abuse

http://www.irishtimes.com/newspaper/opinion/2010/0602/1224271666129.html

"Meanwhile, both the OECD and the EU’s statistics agency predict that Irish growth – still seen slightly down for this year – will pick up to 3 per cent in 2011, well above their average forecasts for the overall euro zone. What a difference credibility makes"

Looks like Ezra is getting some bad information.

Posted by: Magox | June 29, 2010 6:00 PM | Report abuse

Ezra is both foolish (about economics) and a poor proofreader - I am reasonably confident by the links he provides that he intended to say "cut spending" early in his piece (which is what the Irish apparently did).

However, I am also confident that tax increases are not part of an austerity program - in what way is increasing the amount taken from private citizens an act of self-discipline by a government? The real lesson of this article is that increasing taxes is foolhardy in times like these.

Speaking of Ezra's links, does anyone else see the irony of Krugman's comment "Of course, I know what will happen next: we’ll hear that the Irish just aren’t doing enough, and must do more. If we’ve been bleeding the patient, and he has nonetheless gotten sicker, well, we clearly need to bleed him some more" Hmmm, perhaps he's getting a message from his subconcious about deficit spending?

Posted by: RRD1 | June 29, 2010 7:04 PM | Report abuse

Ezra,
You continue to mislead your readers!

You conveniently ignore the first part of the story, where liberals bankrupted the country by offering unaffordable promises to those foolish enough to trade their vote for government handouts. This led the country to the verge of bankrupty.

This "austerity" you speak of is the natural result of giving away the treasury of a nation in return for votes. When the bill comes due the people pay!

Liberals in the US must stop “investing” in fat public sector union contracts and unaffordable post-retirement health care and pensions. Instead let the industrious people and business in this country keep our money so we can innovate, grow private sector employment, grow the tax base, save for our own education and retirement, and increase our standard of living.

To save this country we must outlaw all defined benefit plans immediately and convert all plans to affordable defined contribution plans. To ignore this issue is the ignore the fundamental challenge facing this country!

Posted by: ELFopportunity | June 29, 2010 9:54 PM | Report abuse

I constantly hear the choice framed between deficit spending (stimulus) to prop up the economy or austerity measures in the form of cutting public programs. Neither seems very convincing to me.

Back up a bit - why do we even have the deficits to begin with? It's definitely not because of Obama or the stimulus. The stimulus, spread over several years, is a miniscule portion of the overall deficit - and not a huge amount more than Bush spent on his prescription drug benefit alone, which no one even remembers.

In fact, the deficit exists largely because of a much simpler cause - the gap between spending and revenues. The last President who left office with a deficit approximately the same as when he arrived (in other words, when spending and revenues matched) was...Jimmy Carter. It was when Reagan came into office and slashed taxes for the wealthy (from the 70% range to the 30% range!) without corresponding spending cuts that our debt began to surge - and we haven't looked back since. This was truly a case of America deciding we could have our cake and eat it too. Well, clearly not.

And although Republicans would now like to renounce George W. Bush as "not a real conservative" simply because of his unpopularity, he was actually a Reagan Republican in the truest sense - pursuing ANOTHER massive tax cut, while actually increasing spending at the same time.

Now given that the causes of the debt are fairly obvious (or should be, unless you want to engage in self-serving mental gymnastics), why on Earth can't we just solve the crisis by eliminating the thing that caused the problem - low taxes on the rich? Bring taxes in line with spending by returning the top rate a reasonable level, and we could be FREE of our debt problems and move on as a nation. Of course, conservatives will probably say the wealthy will rebel, or leave, Atlas Shrugged style, but where exactly would they go - Europe? We're already the most free market Western democracy. Is it worth seeing the country go under so that someone can have 100 million instead of 90 million?

Posted by: WA_Independent | June 30, 2010 7:15 AM | Report abuse

Today's Irish Times reports that the Irish economy grew in the first quarter -- at a 2.7% rate -- for the first quarterly growth since the final quarter of 2007. I suppose that supports the position that "austerity economics" worked poorly for Ireland??

Posted by: Facts5 | June 30, 2010 8:56 AM | Report abuse

While reading responses about Ireland's sad situation and example of what will go wrong with fiscal austerity, don't miss Marshall Auerback's. (He was quoted by the head Keynesian himself, Paul Krugman, when everyone was first starting to talk about this topic): http://www.newdeal20.org/2010/06/30/ireland-in-decline-or-what-austerity-looks-like-13658/

Posted by: BryceCovert | June 30, 2010 12:47 PM | Report abuse

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