NY Times - In Ireland, a Picture of the High Cost of Austerity

I.S.T.

http://www.nytimes.com/2010/06/29/business/global/29austerity.html?ref=business

RichardAnd

It came up in another thread and I had a read of it, it's not exactly reassuring stuff but it's also nothing we didn't already know.

George Orwell 1982

Krugman is right. Fiscal austerity has not improved Irelands’ credit ratings. In fact they have got worse. Ireland started a series of competitive devaluations across peripheral economies of the Eurozone - and it is not working. One day after Spain introduced a €15 bn austerity package it had its credit ratings downgraded from AAA to AA+ . Financial markets reward growth not austerity.

The Irish strategy is failing. It will not work. It is not 1987. It is 2010 and we do not have the equivalent of EU structural funds which acted as a mini stimulus in the 80’s. Furthermore if the Germany and France and the rest of the Eurozone move toward austerity our export led recovery will become a mirage.

It is not possible to deflate our way out of the crisis.

As Morgan Kelly said it is not a question of whether Ireland will go bust but when.

Sleepy

Krugman is speaking Ceterus Paribus. The major negative impact on Irish credit rating has been the behaviour of the Greeks imho.

We cannot borrow our way out of a debt problem. Increased Government borrowing would lead to even more inefficient spending on public services, a lost opportunity to reform in the public sector and the money would just either end up leaving our economy (like the money we're pissing in the wind on car scrappage schemes at the moment) or re-inflating a housing bubble that only the public sector or those who own companies that sell primarily to the public sector could afford to partake in.

When our government can balance it's books and have a little left over, we can stop with the austerity measures. Not until then though imho. I can think of plenty of capital projects we should be embarking on, whether our government are capable enough of running any of them is highly dubious though...

George Orwell 1982

Sleepy wrote: »

We cannot borrow our way out of a debt problem.

Exactly, we are damned if we do and damned if we don't.

Krugman did say on his blog:

“But there isn’t much disagreement about the need for fiscal austerity. As far as responding to the recession goes, Ireland appears to be really, truly without options, other than to hope for an export-led recovery if and when the rest of the world bounces back.”

http://www.nytimes.com/2009/04/20/opinion/20krugman.html?_r=1&ref=paulkrugman

LIZ ALDERMAN NYT

“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.”

Paul Krugman-

“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.”

Ireland had no choice but to try and reduce the ballooning deficit or the markets would close. But the strategy is leading to a deflationary spiral and the markets are giving us a thumbs down.

The_Honeybadger

If we hadn't introduced the austerity measures, does anybody really believe our cost of borrowing would be any lower? Our bond spreads are expensive because Europe has a debt crisis and our banks are insolvent without government support, does anybody actually believe more borrowing will help us convince investors that Ireland will be ok?

RichardAnd

George Orwell 1982 wrote: »

As Morgan Kelly said it is not a question of whether Ireland will go bust but when.

When I read his article, I didn't want to believe it but after reading up I can certainly see he was doing anything but trying to scare people. I suppose what happened to Argentina in the early 00's would be a good example of what could/will happen here?

George Orwell 1982

mickeyk wrote: »

If we hadn't introduced the austerity measures, does anybody really believe our cost of borrowing would be any lower? Our bond spreads are expensive because Europe has a debt crisis and our banks are insolvent without government support, does anybody actually believe more borrowing will help us convince investors that Ireland will be ok?

You are right, the hole we dug for ourselves in the years 2000-2007 is just too deep. Fasten your seat belts!

Sleepy

George Orwell 1982 wrote: »

Ireland had no choice but to try and reduce the ballooning deficit or the markets would close. But the strategy is leading to a deflationary spiral and the markets are giving us a thumbs down.

IMHO, if our government had actually taken austerity measures: an overall cut of the PS wage and pension bill by 20 - 25% (give the union the figures needed to be saved, tell 'em it's not open to negotiation but that their proposals for an equitable fashion for this to be done are welcome and will be considered in the decisions), similar reduction of Welfare levels, closure of non essential Public Services (think admin areas, quangos, duplicated roles etc. rather than beds in hospitals or cuts to anything in education or law enforcement beyond salaries and institutional wastage) we'd be seeing better spreads.

The_Honeybadger

George Orwell 1982 wrote: »

Exactly, we are damned if we do and damned if we don't.

Krugman did say on his blog:

http://www.nytimes.com/2009/04/20/opinion/20krugman.html?_r=1&ref=paulkrugman

LIZ ALDERMAN NYT


Paul Krugman-


Ireland had no choice but to try and reduce the ballooning deficit or the markets would close. But the strategy is leading to a deflationary spiral and the markets are giving us a thumbs down.

Damned if we do and damned if we don't... well put! Hard to see a good ending to this without a partial default or at least major debt restructuring. Krugman is basically saying we had no choice but to introduce the measures, but at the same time saying it is slowly killing the economy?

dan_d

Well that's basically what that article was saying...we introduced austerity measures and as a result the country has become a wasteland (which is a bit of an exaggeration in my opinion), but now other countries are following on 2 years later doing the same thing. We just realised we had to do it first.

Damned if we do and damned if we don't. Just need to figure out what level of damned we're happy with.

RichardAnd

Sleepy wrote: »

IMHO, if our government had actually taken austerity measures: an overall cut of the PS wage and pension bill by 20 - 25% (give the union the figures needed to be saved, tell 'em it's not open to negotiation but that their proposals for an equitable fashion for this to be done are welcome and will be considered in the decisions), similar reduction of Welfare levels, closure of non essential Public Services (think admin areas, quangos, duplicated roles etc. rather than beds in hospitals or cuts to anything in education or law enforcement beyond salaries and institutional wastage) we'd be seeing better spreads.

The problem is a government afraid of the electorate and an electorate not knowing what's good for them. My solution wouldn't have been to cut PS wages persay but to raise taxes across the board so that everyone got a wage reduction of 25-30% (everyone). On top of this, SW should have been drastically cut to prevent people slipping onto the dole because they'd be "better off".

What would this have done? Well likely it would have caused havoc in the short term but if it had have been done in the 2007 budget, we could have avoided burying ourselves in a mountain of debt. Without that burden, we could have set about reducing our bills and whilst we'd be poorer, we'd wouldn't have dug ourselves into so deep a hole.

George Orwell 1982

Sleepy wrote: »

IMHO, if our government had actually taken austerity measures: an overall cut of the PS wage and pension bill by 20 - 25% (give the union the figures needed to be saved, tell 'em it's not open to negotiation but that their proposals for an equitable fashion for this to be done are welcome and will be considered in the decisions), similar reduction of Welfare levels, closure of non essential Public Services (think admin areas, quangos, duplicated roles etc. rather than beds in hospitals or cuts to anything in education or law enforcement beyond salaries and institutional wastage) we'd be seeing better spreads.

You're missing the key point. The point is that austerity is being punished by the markets.

Again from Krugman's blog:

Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.

It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.

So Irelands deficit is so big we have to bring it down if the markets are to lend to us, but then this leads to a deflationary spiral which means the markets will run away from us. In other words we are fúcked.

Sleepy

That would have left the government over-paying all it's staff compared to the going rate in the private sector and anyone in the private sector who could (myself included) leaving the country to work elsewhere.

professore

RichardAnd wrote: »

My solution wouldn't have been to cut PS wages persay but to raise taxes across the board so that everyone got a wage reduction of 25-30% (everyone).

Most private sector companies already have cut wages by this amount ; raising taxes on top of that again would have been a disaster, in fact many private sector workers would be much better off financially unemployed. The fact that taxes are raised would not mean that these pay cuts could be rescinded unlike the public sector.

George Orwell 1982

Sleepy wrote: »

That would have left the government over-paying all it's staff compared to the going rate in the private sector and anyone in the private sector who could (myself included) leaving the country to work elsewhere.

I think you are still missing the key point. Deficit reduction in a recession will not work.

The deficit reducing policy measures adopted here were designed to:

a. reduce the deficit
b. reassure the markets.

The deficit has doubled and bond yields have risen, both relatively and in absolute terms - in real terms the rise in yields has been disastrous.

The deflationary spiral - debt trap is real. We are in it.

Sleepy

I'm disagreeing with Krguman's point, not missing it.

1. We can't borrow enough money to fund a large scale capital project which would inflate the economy.

2. Even if we could, we'd most likely bungle and spend the money on current rather than capital expenditure (see current budget - it's exactly what our inept Govt. are doing). Or, we'd use it to finance someone's trophy project (e.g. Olympic Swimming Pools for Kilorglin and Athlone) rather than something which would see a payback to the state (e.g. better schools, better broadband infrastructure etc.)

3. Our economy was over-inflated based on our property bubble. We need to deflate it or we will remain uncompetitive for FDI and in the virtual absence of real home grown industry we're reliant upon it in the short to medium term.

4. So, we can't borrow more, ergo we should be looking to get our finances in order and pay back what we already owe. Government Spending has to fall and Income Taxes have to rise for this to happen. Any tax increases should be done in whatever fashion has the least negative impact on job creation e.g. broadening the tax net, increasing the income levy, reducing levls at which FIS is available etc.

5. When we're back to living on our means, we can easily repay our current debts and as such, are a lower risk, and as such, should face lower rates.

6. Since wages have been slashed, deflation should bring price levels (for both labour and goods) back to a level where we can compete with our European neighbours for FDI whilst trying to sort out our education system, health system, societal culture etc. in a fashion that might encourage home grown industry to start engaging in exports, leading to job creation and export led growth again...

7. Fianna Fail take power again in 2020 promising to turn water into wine and they and their coallition partner Labour (who'll have run on a platform of free money for everyone!) ensure we're back to the same place we are now by 2030

George Orwell 1982

Sleepy wrote: »

I'm disagreeing with Krguman's point, not missing it.

1. We can't borrow enough money to fund a large scale capital project which would inflate the economy.

Krugman has acknowledged that Ireland has no choice but to go for austerity. His key point is it will not work. Ireland is fecked either way.

He is using Ireland as an example to other countries as to why they should not go for austerity.

Deficit reduction in a recession leads to a deflationary spiral. Falling taxes, higher unemployment, higher interest rates on debt, etc.

doc_17

It's the Nama, stupid!

ragg

George Orwell 1982 wrote: »

Krugman is right. Fiscal austerity has not improved Irelands’ credit ratings. In fact they have got worse. Ireland started a series of competitive devaluations across peripheral economies of the Eurozone - and it is not working. One day after Spain introduced a €15 bn austerity package it had its credit ratings downgraded from AAA to AA+ . Financial markets reward growth not austerity.

The Irish strategy is failing. It will not work. It is not 1987. It is 2010 and we do not have the equivalent of EU structural funds which acted as a mini stimulus in the 80’s. Furthermore if the Germany and France and the rest of the Eurozone move toward austerity our export led recovery will become a mirage.

It is not possible to deflate our way out of the crisis.

As Morgan Kelly said it is not a question of whether Ireland will go bust but when.

ha ha - im guessing you havn't read ernst & youngs recent forcast for Ireland.
2nd highest growth in the eurozone by next year. the governments policys, however cobbled together HAVE worked

George Orwell 1982

ragg wrote: »

ha ha - im guessing you havn't read ernst & youngs recent forcast for Ireland.
2nd highest growth in the eurozone by next year. the governments policys, however cobbled together HAVE worked

As I said on another thread Ernst & Young were the guys who audited Anglo in 2007 and gave them the all clear. http://www.independent.ie/business/irish/were-the-bank-auditors-conflicted-2151671.html

They are forecasting growth in GDP, but it is growth in exports from multinationals which we can't tax very much and it won't create jobs. In other words it won't change our debt dynamics one bit.

thebman

George Orwell 1982 wrote: »

I think you are still missing the key point. Deficit reduction in a recession will not work.

The deficit reducing policy measures adopted here were designed to:

a. reduce the deficit
b. reassure the markets.

The deficit has doubled and bond yields have risen, both relatively and in absolute terms - in real terms the rise in yields has been disastrous.

The deflationary spiral - debt trap is real. We are in it.

The markets however are more reassured than they would be if we had kept borrowing.

So the markets have responded positively but it won't be enough. Markets do react positively to sensible policy but Ireland was careless for too long and is paying the prices as a result.

Its not current policy that is causing the problem but why we are pursuing it. We are pursuing it because we have no choice, not because having a balanced budget is the right thing to do.

maninasia

ragg wrote: »

ha ha - im guessing you havn't read ernst & youngs recent forcast for Ireland.
2nd highest growth in the eurozone by next year. the governments policys, however cobbled together HAVE worked

There is an absolute lack of logic in this statement. It all depends on how far the drop was in the first place! And comparing one drunken sailor to another...wow that's smart.

Show me the numbers before and after, show me the comparison with the rest of the world.

amacachi

People are afraid to buy Ireland's debt for a guaranteed interest rate while the country's actual growth is retarding? If I had some cash I know where it'd be going.


People can talk all they want about the cuts, they have to happen, growth has to be slashed/pushed towards negativity, we have to take our medicine for being retards and voting retards into power.

Aidan1

Krugman has acknowledged that Ireland has no choice but to go for austerity. His key point is it will not work. Ireland is fecked either way.

Krugman's larger argument is really about the US economy - he is merely using Ireland in this case to illustrate the dangers of fiscal tightening at this stage in the economic recovery. This is the meta argument he has been running with in his column for the last few months. The fact that the Irish and US economies are substantially different, both in terms of nature and scale, is almost beside the point from that perspective.

In reality, we don't have a choice, we have to cut Govt expenditure. It may not work, but we can say for certain that not doing it will definitely make things a lot worse. We know this because it was tried before, in 1977 -stimulus spending has a limited effect here because of our very limited manufacturing base and very open economy. Essentially a very large amount of it leaks abroad (some does have an effect in certain areas, but not enough to justify counter cyclical expansion, and certainly not when we have to borrow every extra cent of public money).

Also, to be fair - there is a reasonable chance that fiscal tightening and chasing competitiveness will work - we're a tiny economy, and it will only take a small percentage of the annual global FDI to turn the corner for us. We're not like the US or Germany - we don't need a global expansion of demand to drive exports - we can get by with a lot less. Risky, yes, but we have to bite the bullet anyways.

Critically, a lot of those people who are now unemployed will probably find it very difficult to get jobs - our experiences in the early and mid 1990s shows that FDI is (a) more likely to locate in major urban areas, (b) require trained and educated staff. Unfortunately, the figures for the unemployed show that in many cases they are victims of the property bubble - young people, often male, who left school/college with little or no qualifications to work in the building trade (or a related sector) and are based across the country. So while the recession may have ended, and while the overall numbers of unemployed will probably start to fall at some point in the next 2-3 years, we are still likely to be left with a significant and new structural unemployment problem.

I know this has probably been posted here before, but it's good enough to bear repetition;

http://www.ronanlyons.com/2010/02/09/more-than-half-of-all-jobs-for-young-men-have-disappeared/