Alex Massie

The Irish Economic Problem

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Responding to this New York Times piece on Ireland's ecoomic woes Matt Yglesias, Ezra Klein, Kevin Drum and Steve Benen echo Paul Krugman and say: See, this just shows how stupid austerity measures are. And it's true, Ireland really is in a terrible hole and won't be getting out of it any time soon. As the article puts it:

Nearly two years ago, an economic collapse forced Ireland to cut public spending and raise taxes, the type of austerity measures that financial markets are now pressing on most advanced industrial nations.

“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. “A lot of the argument was, ‘Let’s get this over with quickly.’ ”

Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.

Joblessness in this country of 4.5 million is above 13 percent, and the ranks of the long-term unemployed — those out of work for a year or more — have more than doubled, to 5.3 percent.

Now, the Irish are being warned of more pain to come.

“The facts are that there is no easy way to cut deficits,” Prime Minister Brian Cowen said in an interview. “Those who claim there’s an easier way or a soft option — that’s not the real world.”

Despite its strenuous efforts, Ireland has been thrust into the same ignominious category as Portugal, Italy, Greece and Spain. It now pays a hefty three percentage points more than Germany on its benchmark bonds, in part because investors fear that the austerity program, by retarding growth and so far failing to reduce borrowing, will make it harder for Dublin to pay its bills rather than easier.

All true. But the austerity-sceptics, while keen to use Ireland's misery for their own domestic political reasons (and never mind that there's precisely zero evidence that the Republican party is seriously interested in deficit-hawkery), make some of the same mistakes anti-stimulus campaigners in America insist upon committing themselves. That is, what if there hadn't been a stimulus package? Maybe things would be even worse?

Now this is, of course, a tricky position. But one reason the Democratic Congress is unpopular is the sense, fair or not, that massive amounts of public money have been squandered on expensive stimulus packages that have little to show for themselves. The stimulus's defenders say: ah, but think how bad things might be without it? And they may well have a point, even though it might be optimistic to expect voters to give Congress credit for staving off something that might have happened but hasn't or to give Congress brownie points for matters not being as bad as they might otherwise be.

Sauce for the stimulus goose is sauce for the austerity gander however. It's entirely possible that Ireland might be in an even worse position if it hadn't opted for austerity. Apart from anything else it's much too soon to say for sure. This is a point Megan McArdle makes and I commend her post to you.

But let us suppose the Irish had pretended they had not in fact run out of money. If Ireland "pays a hefty three percentage points more  than Germany on its benchmark bonds" despite its austerity measures then surely it might be paying a heck of a lot more than that without them? I don't pretend to be any kind of economics whizz but this seems reasonably - perhaps dangerously! - elementary.

I don't believe the Irish example necessarily holds many lessons for the United States (or even the United Kingdom) so I'm not quite sure why people are claiming it does (one way or the other). Ireland was well-placed to take advantage of the 1990s boom; rather unfortunately and for a number of complicated reasons, few of them having much to do with economics, it mismanaged that success. But, dependent as it was and is on financial services, inward investment and, of course, the construction industry Ireland was especially ill-placed to survive once the bad times came rolling in to town.

This being so, I'm not sure a policy of just pumping more money into the system (in as much as theyd have been able to do this anyway, what with the euro and all) would have done much to benefit Ireland. Nor is it actually obvious to me what the Irish could reasonably have spent this magic money on. More to the point, it seems heroically adventurous to suppose that there's a Right and a Wrong approach to these matters. More probable, it seems to me anyway, is that there's a choice of unpalatable measures all of which are likely to produce disappointing results. Saying, as Ezra does, that "Ireland made the wrong choice" and that "it didn't have to be this bad" seems both too certain and too optimistic.

In any case, given the nature and structure of the Irish economy I'm not sure there's much Ireland could have done to recover absent a global recovery. If that's the case - and it may not be! - chucking yet more money into the pot seems like playing poker on tilt. You might get lucky, but it's not a wise strategy.

Written byAlex Massie

Alex Massie is Scotland Editor of The Spectator. He also writes a column for The Times and is a regular contributor to the Scottish Daily Mail, The Scotsman and other publications.

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