First, read the Paul Krugman column Patrick sidelighted as “The intellectual phoniness of ‘hard-headed’ ‘fiscal realism.’”
Onward to today’s story in the NYTimes: In Ireland, a Picture of the High Cost of Austerity:
DUBLIN — As Europe’s major economies focus on belt-tightening, they are following the path of Ireland. But the once thriving nation is struggling, with no sign of a rapid turnaround in sight.Malarkey. In the real real world, the one based on facts, deficit-driven austerity budgets are not the only way to deal with economic downturn, and there’s solid evidence that they do more damage than good.
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.At bottom, this isn’t terribly complicated. In a capitalistic system, your neighbor’s prosperity becomes your own, and their downturns and recessions likewise become yours, because we all sell goods and services to each other. The point of economic stimulus programs is to get prosperity started again. If you can do that, it’ll generate vastly more real wealth than you spent on the stimulus program.
Other European nations, including Britain and Germany, are following Ireland’s lead, arguing that the only way to restore growth is to convince investors and their own people that government borrowing will shrink.
The Group of 20 leaders set that in writing this weekend, vowing to make deficit reduction the top priority despite warnings from President Obama that too much austerity could choke a global recovery and warnings from a few economists about the possibility of a much sharper 1930s style downturn. …
Politicians [in Ireland] have raised taxes and cut salaries for nurses, professors and other public workers by up to 20 percent. About 30 billion euros ($37 billion) is being poured into zombie banks like Anglo Irish, which was nationalized after lavishing loans on developers.There’s money enough to bail out horrendously mismanaged banks—in effect paying a huge retroactive subsidy to the cynical and in some cases criminally negligent housing and mortgage industries that were the beneficiaries of the banks’ loans—but there’s not enough money to get your business’s customers working and earning again?
The budget went from surpluses in 2006 and 2007 to a staggering deficit of 14.3 percent of gross domestic product last year—worse than Greece. It continues to deteriorate. Drained of cash after an American-style housing boom went bust, Ireland has had to borrow billions; its once ultralow debt could rise to 77 percent of G.D.P. this year.
Don’t you believe it.
Note: If there’s anything I keep wishing the economic bloggers would explain in terms comprehensible to the general public, it’s that taxes are not the only way that government policies can cost them money.