Ireland has 99 problems, but austerity ain't one
Tyler Cowen reports in on how austerity is affecting Ireland:
Ireland now has had two quarters of considerably stronger than expected growth, it’s now both gnp and gdp [1.1% in Q1 and 1.6% in Q2], and domestic demand (!) is up, and borrowing rates are down, though employment remains miserable. Even I am surprised by the positive signs here (I never bought the doctrine of expansionary fiscal austerity, though I saw austerity as necessary for Ireland)
He follows up with a damning series of quotations from Paul Krugman, who repeatedly predicted that austerity would make Ireland's troubles even worse, but who now claims that he predicted Ireland's recovery all along. Cowen concludes:
You still don’t have to believe that immediate fiscal contractions are expansionary; in general they’re not, but you can still have been wrong about Ireland. The simplest lesson to at least try on is that internal devaluation sometimes does better on the AD side than we are inclined to think, or that real factors mattered more than expected, or a bit of both. Or try Karl Smith’s ideas. It’s not all about the downward spiral, although this was one scenario laid out in Keynes. We should and will await more data, not to mention data revisions, but in the meantime it is correct to be surprised by the much-better-than-expected Irish growth performance, and at a difficult global time at that; you can’t claim the American and European growth locomotives pulled them out of the slump. This expert on the Irish economy offers a sector-by-sector breakdown of the new numbers and he too admits he was surprised.
The basic point here is that Ireland has done surprisingly well out of austerity – far better than anybody hoped. But the Irish economy is still on life-support and its debt-to-GDP ratio is expected to reach 115% next year. Constantin Gurgdiev, an Irish-based economist who has been one of the few clear thinkers throughout Ireland's crisis, estimates that total public and private debt levels in Ireland are 494% of GNP. As the recession continues, mass mortgage defaults – possibly bailed out by taxpayers – grow ever more likely. And it's hard to know if Ireland can avoid default after Greece finally does so.
But, for the UK, the crucial point is that austerity has not produced the results for Ireland that most Keynesians predicted. One ray of light for Ireland was Twitter's decision to locate its international HQ in Dublin, despite intense lobbying from the Coalition government to locate in London. British growth is sluggish, but so is that of "stimulated" America. It looks like the key to growth is not government spending, but ease of doing business. It's a pity the Chancellor and the rest of the Coalition only know half that story.