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Posted at 9:30 AM ET, 11/23/2010

Two sentences about Ireland that scare me

By Ezra Klein

Philip Stephens:

At first, the vigour with which Dublin wielded the spending axe won plaudits from bond markets. But the deflationary impact of the cuts has since seen the deficit widen.

By Ezra Klein  | November 23, 2010; 9:30 AM ET
 
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Comments

That's crap. Ireland is not in trouble because of "the deflationary impact of the cuts". Ireland is in trouble because of the bursting of a massive housing and credit bubble. The government then socialized the toxic debt that should have been the problem of the owners and bondholders of the Irish banks, and have now turned the Irish people into debt slaves while the bank owners and bondholders on whom the losses should have fallen have been made 100% whole.

It's exactly where Wall Street want Geithner and Bernanke to put us, and we had better beware.

Posted by: bgmma50 | November 23, 2010 9:48 AM | Report abuse

Ireland is in trouble both because of the bursting of the bubble and the inadequate policy response, namely the austerity budget.

Posted by: fuse | November 23, 2010 9:50 AM | Report abuse

"At first, the vigour with which Dublin wielded the spending axe won plaudits from bond markets."

Vigour? Ireland - after these "vigourous" cuts - maintained a worse deficit as a % of GDP than stimulus heavy America. If you would otherwise have a deficit of 17% of GDP and your cuts knock it down to 14% of GDP, I submit your cuts are hardly "vigourous"

If you want to see "vigourous" spending cuts, see Harding circa 1921 or Truman circa 1945-47. Government spending fell by 50% (in Truman's case by more) under each - note also that prices soared under Truman when these cuts were made.

I'm not sure why Ireland is shouldering the burden of its failed banks. It might as well just default.

Posted by: justin84 | November 23, 2010 10:13 AM | Report abuse

Could they soon be saying the exact opposite about America and it's QE2 plan.

"At first, the vigour with which American central bankers wielded the spending axe won ire from bond markets. But the inflationary impact of the spending has since seen the deficit shrink"

Posted by: Mazzi455 | November 23, 2010 10:24 AM | Report abuse

@justin84,
Recall that Harding and Truman made the cuts following the end of the world wars.

Posted by: wiredog | November 23, 2010 10:33 AM | Report abuse

"I'm not sure why Ireland is shouldering the burden of its failed banks."

Because the nod-and-wink way that politicians and executives have long done business in Ireland suckered the pols into believing BS numbers, and when they finally saw the books, they realised that they'd signed their own death warrants. Irish politics is set up to deal with million-dollar fiddles, not billion-dollar ones.

Posted by: pseudonymousinnc | November 23, 2010 11:30 AM | Report abuse

Are the bond markets cheering the deflation?

I think their mainly hoping the deflation isn't a big problem until after the quarterly profits have been logged. They way their bonus checks come and then it doesn't matter how screwed Ireland is.

Posted by: will12 | November 23, 2010 11:32 AM | Report abuse

wiredog,

I would agree.

That said, the evidence shows large cuts in government expenditures and closing large deficits doesn't necessarily result in prolonged depressions and widespread human misery.

Remember that spending in 1921 was cut amidst the worst deflation the U.S. has ever seen in a given year. Unemployment was in the 9%-11% context. Unemployment in 1923 was 2-4% (depending on who's numbers you use).

While output did fall from 1944-1947, output of consumer and investment goods for the private sector soared. Employment surged by 12% from 1945-1947, and unemployment remained below 4%.

ftp://ftp.bls.gov/pub/special.requests/lf/aat1.txt

Government purchases fell from $101 billion in 1944 to $30.3 billion (1937 dollars, multiply by ~15 to get to present dollars), or from 55.5% of GDP to 18.9%.

Private sector spending (C+I) surged from $87.5 billion to $119.3 billion, or a 16.8% annualized growth rate over those two years.

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=7&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1929&LastYear=1947&3Place=N&Update=Update&JavaBox=no

At a minimum, this calls the Keynesian multiplier into question. If the government wants to buy tons of tanks and airplanes and GDP goes up because we are making tons of tanks and airplanes, that makes sense to me. However, if the rest of the economy stagnates during this same period, not only is there no multiplier that is lifting the private economy, but people are arguably worse off (of course, getting rid of the fascist empires needed to be done).

In addition, if you look at the data from 1929-1937 there is clearly no consistent relation between government consumption/investment spending and GDP. You can find years where spending rises and GDP falls, spending rises and GDP rises, spending falls and GDP falls, and spending falls and GDP rises. Nominal GDP data below.

I took the natural log of nominal government expenditures and private sector (C+I) spending, took the first differences and found virtually no correlation between them (R^2 0.0135, annual data 1929-2009). The results are better using real data (R^2 of 0.163, but the coefficient is negative).

Taking out 1940-1947 using the real data, I get 0.007x + 0.0319 (private sector spending grows 3.19% plus 0.07% more for each 1% increase in government spending), with an R^2 of 0.00003.

Of course, we can never know what private sector spending would have done with the government spending as we can't run the counterfactual, but there is no obvious evidence in the data (surges in gov spending lead to surges in C+I spending).

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=5&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1929&LastYear=2010&3Place=N&Update=Update&JavaBox=no

Posted by: justin84 | November 23, 2010 11:36 AM | Report abuse

"If you want to see "vigourous" spending cuts, see Harding circa 1921 or Truman circa 1945-47. Government spending fell by 50% (in Truman's case by more) under each - note also that prices soared under Truman when these cuts were made."

Didn't world wars precede those two periods? Everything is relative.

"I'm not sure why Ireland is shouldering the burden of its failed banks. It might as well just default."

If the situation is that dire, they may as well just exit the EU and nationalise the banking system.

Posted by: tuber | November 23, 2010 2:37 PM | Report abuse

"Didn't world wars precede those two periods? Everything is relative."

Sure, but in Ireland's case, relative to the size of the deficit, the spending cuts were weak.

By the way, quick retraction: the spending cuts were only 17.9% from 1920-1922. Above 50% would include 1919-1920.

"If the situation is that dire, they may as well just exit the EU and nationalise the banking system."

How does that help? Ireland would still be stuck with the losses of its banks.

Posted by: justin84 | November 23, 2010 4:12 PM | Report abuse

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