Tuesday, June 29, 2010

The Irish Illustration Of the "Unleashed BS" Theorem

Austerity is supposed to benefit the economy by clamping down on government and "unleashing market forces", right?

Well, Ireland is the proverbial poster child for austerity. It's carved up its budget expenditures. So, how are those unleashed forces looking?

“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.
Oh. That sounds horrible.

Well, uh, certainly the market has rewarded Ireland for its austerity, right? For unleashing market forces and clamping down on the dead hand of government and all that?
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.
Oh. So there has been absolutely no benefit at all. The market was unleashed, and repaid Ireland by biting down and biting hard.
So how do they hope that they'll get out of this?
Now, the government is pinning nearly all its hopes on an export revival to lift the economy. Falling wage and energy costs, and a weaker euro, have improved competitiveness.
Well, hey, it worked for Canada in the 1990s, right? Sure, Canada had its own currency (which dropped like a stone) and used that to export to a surging American economy. Sure, it's literally impossible for everybody to export their way to prosperity, especially now that Americans are no longer the buyers of last resort. Sure, it doesn't seem to be paying any dividends now, and the market appears to be punishing austerity instead of rewarding it.
But if we just believe enough, the market will reward us! Right? Right?

That's why the "unleashed market" thing is BS. It's not economics. It's not even ideology. It's faith. It's Millenialism with math.  And while faith is a nice way to sort out your moral compass and think about your place in the universe, it's no damned way to run an economy.

Krugman sums it up:

The key thing to bear in mind about calls for harsh austerity in the face of a a depressed economy is that such calls depend on two propositions, not one. Not only do you have to believe that the invisible bond vigilantes are about to strike — that you must move to appease markets, even though right now bond buyers are willing to lend money to the United States at very low rates; you must also believe that short-term fiscal cutbacks will in fact appease the markets if they do, in fact, lose confidence.

That’s why the Irish debacle is so important. All that savage austerity was supposed to bring rewards; the conventional wisdom that this would happen is so strong that one often reads news reports claiming that it has, in fact, happened, that Ireland’s resolve has impressed and reassured the financial markets. But the reality is that nothing of the sort has taken place: virtuous, suffering Ireland is gaining nothing.

Of course, I know what will happen next: we’ll hear that the Irish just aren’t doing enough, and must do more. If we’ve been bleeding the patient, and he has nonetheless gotten sicker, well, we clearly need to bleed him some more.
Damned unbelievers.

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