Irish Example Doesn't Support the Case Against Fiscal Austerity

Alex Massie offers a powerful rebuttal to those who would use Ireland's woes to argue that this somehow "proves" that austerity is bad: they didn't really have much choice.

As always, I'm not sure what Krugman's alternative is. He's a brilliant economist and I'm not but, in the end, Ireland's problem has been that it ran out of money. This year Ireland is borrowing nearly €20bn to cover the gap between revenues and expenditure. That's unsustainable and a reminder that Ireland's woes are gravely exacerbated by but not confined to the fiasco at Allied Irish Bank. (And the other, smaller fiascos elsewhere in the financial sector.) No wonder the governor of the Central Bank is calling for further spendings reductions of €3bn this year.

And, again, Krugman ignores the fact that the Irish have been here before. The 1987 crisis was in some ways as bleak as Dubin's present predicament. Perhaps an updated Tallaght Strategy won't be enough this time, but the memory of Haughey's reforming 1987 government remains powerful: austerity then helped create some of the conditions for future growth.

Perhaps Krugman is right that austerity is often a bad idea but it's not been a bad idea for Ireland in the past and, anyway, given the peculiarities of Ireland's current parlous situation it's not clear that, for once, there was any compelling let alone palatable alternative.

This hardly means one need place any confidence in the men at the Ministry for Finance and their ability to dig the country out of the hole its in. But using Ireland as a pawn in some greater "Austerity Doesn't Work" game doesn't work either. Ireland might well be screwed regardless of what branch of painful thereapy it chose.

I made this point a few months ago, though less elegantly. Their budget deficit sounds modest by American standards, but in fact they're running around 13% of Irish GDP this year. Their debt is now trading at 400 basis points over Germany's.

Now, maybe if they'd embraced a really swell stimulus package and driven their deficit to 25% of GDP, they'd be back on the road to recovery. On the other hand, maybe they'd be in the hands of the IMF because capital markets had refused to lend them money at any price.

Looking at the US experience, one could argue there doesn't seem to be much evidence of a long-term boost from stimulus; we seem to have increased GDP by about the amount of stimulus spending, and as soon as the money began ebbing out again, we returned to a depressing trend. The problem is, we can't keep running 10% annual deficits indefinitely. And Ireland certainly can't, because the country is already running an enormous deficit, and paying an enormous premium to borrow.

Whatever the case for stimulus in the US, Ireland is just a terrible example to use in its favor. In fact, I am hard-pressed to understand why stimulus proponents insist on returning to it. Constantly talking about a country which has substantial borrowing constraints seems to reinforce the conservative complaint that stimulus proponents think we live in a fairy tale simple economic model where adequate capital to fund stimulus borrowing can simply be assumed. Ireland's example could serve at least as well as a warning about the dangers of acquiring an unsustainable debt load, rather than an encouragement to hog-wild deficit spending.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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