Monday, December 19, 2011

Neoliberal Austerity in Ireland: A Disaster

Professor Bill Mitchell has an excellent post here on the continuing disaster of Ireland’s austerity:
Bill Mitchell, “How’s Poor Old Ireland, and How Does She Stand?,” Billy Blog, December 19, 2011.
What’s happened in Ireland?:
(1) Real GDP has contracted 1.9% in Q3 2011, while real GNP contracted by 2.2%. If growth in Q4 is negative for 2011, Ireland will officially slip back into recession. Of the 14 quarters since Q2 2008, only 4 have seen real GDP growth (28%), and 5 have seen real GNP growth (36%).

(2) Unemployment is a disaster. It has soared to over 14% in early 2011 and remains at 14.5%

(3) The domestic sectors of the economy are stagnant or depressed. It is only exports that have provided some positive real GDP/GNP growth. However, with austerity and possible demand for Ireland’s exports falling in its trade partners, even that source of growth will falter, which will probably plunge the economy back into severe contraction. A healthy economy has balanced growth in both the export and domestic sectors. Ireland’s economy is deeply sick, and the only cure for its depressed domestic sector is government spending.
All in all, a dismal result for all that austerity. This is not success: it is miserable failure.


  1. There's an artcle by Stephen Kinsella (sp?) on Irish austerity policies that shall be coming out in the Cambridge Journal of Economics. It also argues that austerity has been a disaster for Ireland.

  2. There is a SSRN version of it here:

  3. (1) On p. 11, there is a graph of the cuts to government spending since about early 2009. Overall total government spending has fallen since 2009 - deep fiscal contraction. Tax revenues have also collapsed since 2007, and the deficit is essentially caused by this tax revenue shortfall. Taxes have been raised, but overall tax revenue has just kept falling - as you expect. You would have to look at

    (1) overall government (federal and local) spending

    (2) overall tax increases, and

    (3) the level of GDP collapse

    to gauge how contractionary fiscal policy was since 2007.

    (2) The analysis of how the Irish fiscal contraction in the 1980s happened to coincide with growth is very useful (pp. 16-18): in essence, fiscal contraction in the 1980s occurred when the world overall was growing strongly, Ireland attacted foreign direct investment (with preferential taxes), and excess unemployment was reduced by people leaving! The notion of "expansionary fiscal contraction" is, as the author says, "shaky, at best". (p. 18).

  4. The tax hikes in Ireland were extraordinarily high, apparently

  5. What is the definition of insanity? Governments keep trying austerity with disastrous results. Why is there no major push for Keynesian stimulus instead of austerity?

  6. LK,

    Im curremtly reading on the Nordic model, you dont have posts on your view towards the Nordic model,do you?

  7. Economics-based justifications for expansionary fiscal policies aside, there is another very simple argument against austerity.

    Essentially, such policies involve people paying higher and higher taxes in order to receive fewer and fewer government benefits. For whom? For what? No flesh and blood human being benefits and no real, physical, or tangible benefit comes to anyone.

    It's like treating government as an altar of a pagan deity on whom money must be thrown endlessly to prove one's sacrifice. Everyone must become poorer to glorify a balance sheet. That too a balance sheet of a government, which is not even a real human entity, but just a channel through which real human beings address their needs. To treat the government balance sheet as an ends rather than a means is madness.

    There is no sense in making a government more "solvent". A government is not some household which becomes poorer as its net worth falls. We are meant to draw the benefits out of a government, instead of slaving ourselves to a government for the sake of slaving ourselves to a government.

    People wrongly call austerity to be a blow cast in a battle between an elite and the popular public. Actually, austerity benefits nobody - absolutely nobody. Not the rich, not the poor, not the middle class, not the professional class, not the working class, not the rentier class, not anybody. It's a misguided policy akin to sacrifice of Aztec citizens to appease sun gods.

  8. "Ireland’s economy is deeply sick, and the only cure for its depressed domestic sector is government spending."

    False. Government spending is not only not the only solution, but it will make the economy WORSE by making it dependent on inflation and more debt. You are, as expected, ignoring WHY the Irish economy is sick. The problem is not lack of spending.

    The Irish economy has had a tremendously bloated public sector, which has stifled innovation and entrepreneurship, which then reduced its competitiveness.

    In order to finance the large budget, the government imposed ridiculous taxation. The lowest income earners pay no tax at all, and the wealthiest pay 40%.

    Despite all this, Ireland was a relative success story. Free market reforms during the 1990s accelerated the growth of the economy, where it reached the top 5 wealthiest countries in the world, surpassing the US in real GDP per capita.

    As is so typical however, the central bank of Europe (ECB) kept interest rates too low for too long in the 2000s, which when coupled with the local Irish inflation rate, made real interest rates in Ireland negative. Credit expansion skyrocketed, and created a huge housing bubble, so big in fact that that the average price of a house reached upwards of €300,000 by the peak in 2008.

    Once again, artificially low interest rates and credit expansion, coupled with big government, distorted yet another economy, which is now being subjected yet again to government spending in a misguided attempt to repair what only liquidation of malinvestment and capital reallocation can accomplish.

    The Irish economy doesn't need more government spending. It needs less spending, less taxes, and less regulations, and most importantly sound money. Ireland is an example of why welfare states and bank bailouts fail.

  9. "In the Irish property bubble, around 2006 more than a fifth of the Irish workforce was employed building houses. The Irish construction industry had swollen to become nearly a quarter of the country’s G.D.P.—compared with less than 10 percent in a normal economy—and Ireland was building half as many new houses a year as the United Kingdom, which had almost 15 times as many people to house. Since 1994 the average price for a Dublin home had risen more than 500 percent. In parts of the city, rents had fallen to less than 1 percent of the purchase price—that is, you could rent a million-dollar home for less than $833 a month. The investment returns on Irish land were ridiculously low: it made no sense for capital to flow into Ireland to develop more of it. Irish home prices implied an economic growth rate that would leave Ireland, in 25 years, three times as rich as the United States. By 2007, Irish banks were lending 40 percent more to property developers than they had to the entire Irish population seven years earlier. Morgan Kelly, a professor of economics at University College Dublin, predicted the Irish real-estate prices could fell relative to income—by 40 to 50 per cent, and they did.
    Many of housing developments are called "ghost estates" because they’re empty. According to the audit of Ireland’s Department of the Environment published in October, 2010, of the nearly 180,000 units that had been granted planning permission, only 78,195 were completed and occupied. Others are occupied but remain unfinished. Virtually all construction has ceased. There were never enough people in Ireland to fill the new houses."

  10. "Unemployment is a disaster. It has soared to over 14% in early 2011 and remains at 14.5%"

    As expected, no mention of minimum wage laws, or unemployment benefits.

    The Irish government doles out money to those unemployed at a standard rate of €188 per week. For each adult dependent, another €124.80 is added; and for each child dependent, another €29.80 is added.

    There is additional tax-payer money that goes to the unemployed. These include the Rent Supplement, the Mortgage Interest Supplement, Fuel Allowance and the Smokeless Fuel Allowance, among others.

    Along with this free money, the government practises what can only be described as a "don't ask don't tell" policy of unemployment money. There are no questions asked and there are no obligations.

    There is also a minimum wage law enforced in Ireland, which effectively shuts out those are able and willing to work for less than the minimum wage. The minimum wage in Ireland is €1,461.85 per month, as of 2007. This price floor was established at the peak of the bubble in 2007, and yet it was still being enforced during the 2008 collapse and thereafter, after the housing collapse and after the increased cash holding that took place.

    Instead of legitimately trying to understand why unemployment in Ireland is over 14%, you are just shoehorning in your fallacious worldview of "government must print more and spend more money", no matter what the details happen to be.

    Is there ANY contribution being made to economics at all in this blog? Or is it going to be nothing but "Government must print more and spend more and regulate more?"

  11. "The Irish government doles out money to those unemployed at a standard rate of €188 per week. For each adult dependent, another €124.80 is added; and for each child dependent, another €29.80 is added.

    There is additional tax-payer money that goes to the unemployed."

    (1) Wicked government! Obviously, the solution is to let them starve and drive them overseas! That'll fix unemployment.

    (2) The idea that flexible wages and prices eliminate unemployment is completely false. Business expectations in Irleand are shocked, not just by a poor outlook but by deleveraging contracting AD. With insufficient demand there'll be insufficient investment and jobs offerred will be vastly smaller than jobs demanded.

    (3) The belief that miniminal wage laws cause unemployment is just another piece of idiocy. The empirical evidence is non-existent:

    The OECD found that:

    - There is no significant correlation between unemployment and employment protection legislation;
    - The level of the minimum wage has no significant direct impact on unemployment; and
    - Highly centralised wage bargaining significantly reduces unemployment.

  12. "Once again, artificially low interest rates and credit expansion, coupled with big government, distorted yet another economy, "

    No, deregulated financial markets and bubble economics distorted the economy. The asset bubble can fall and malinvestments clear without depression.

  13. On empirical and meta-analytical work regarding minimum wages: the conclusions of David Card and Alan Krueger have stood the test of time, even as more recent researchers have further refined the techniques used to replicate their results.

  14. Anonymous:

    "On empirical and meta-analytical work regarding minimum wages: the conclusions of David Card and Alan Krueger have stood the test of time, even as more recent researchers have further refined the techniques used to replicate their results."

    Card and Krueger's work contradicts logical necessities in economic science, and is full of sloppiness.

  15. Any peer-reviewed sources to that effect? Or are we going to have to rely on the word of a think tank that admits it's not even using the same dataset?

  16. Card & Krueger replied to Neumark et al (and also Berman) in a Dec. 2000 AER article.

  17. I've always heard Austrians claiming that minimum wage will only help teenagers working in the fast food industry and a small handful of other people. They ask us why we should help such a small minority who are teenagers living with mom and dad. Then, they claim that the reason the economy can't return to full employment is because we have minimum wage laws. Why would a handful of teenager working at McDonalds prevent the economy returning to full employment?

    But this just brings up another question. Why wouldn't Austrians focus on high CEO pay rather than minimum wage laws?


  18. "The problem is not lack of spending"

    The problem is entirely a lack of spending. Any deleveraging event causes a lack of spending in an economy since it is necessarily destroying money in circulation.

    Spending equals income equals output which generates employment.

  19. "Any peer-reviewed sources to that effect?"

    What makes you think peer-review has any effect on quality in economics?

    Peer-review in economics is like having 'effectiveness of contraception' papers reviewed by Catholic priests.

  20. In terms of the quality I was referencing, it can make a difference, yes. Those weary of the mainstream are right to be skeptical of the citadel when it's clear that there are major sinkholes beneath it. It doesn't matter how many people affirm that the math checks out on a general equilibrium model when its premises and inability to recognize entire system-states of the economy render it dubious even in the best light.

    However, for narrowly-focused empirical/statistical matters like this, the parameters of the experiment are largely separated from the major methodological contentions of the field. It doesn't matter if you think macroeconomics MUST have microfoundations or not if your task is "evaluate this dataset derived from a handful of fast food restaurants and make sure that our conclusions do indeed follow from it." It's an area where review should yield fairly unequivocal results.

    Communists stack boxes just as well as capitalists. Trade unionists can do algebra well as anti-collectivists. Red Sox fans can use English as articulately as fans of the rest of the league.

    Well, okay, maybe I'm stretching it on that last one.

  21. Christof's post has the merit of trying to be a coherent and complete explanation of the Austrian/free market perspective on the crisis. And, if you look at Ireland in isolation, it may look somewhat plausible. But if you start looking at countries that weathered the crisis much better, the entire explanation crumbles to nothing.

    "Big government", progressive taxation, low interest rates, unemployment benefits... this applies to all western countries to one degree or another. In fact, in comparison to other countries, Ireland's government wasn't particularly big, the business tax was very low and the taxation system itself wasn't particularly progressive. So then why does Ireland does so much worse than other countries? And why do some countries with much bigger governments and much more progressive taxation systems like Sweden and Norway do so much better?

    Ultimately, the conclusion after observing the facts is that Christof's explanation is fundamentally wrong.