The policy of No Bondholder Left Behind, on which the European Central Bank insisted, has been staggeringly expensive. To put it in perspective, the European Union has just agreed to create a fund of $75 billion to deal with all future banking crises in its member states. Tiny Ireland has spent $85 billion bailing out its own banks [TC: with more to come, and note the bailouts are more to the creditors than to the banks themselves].
That is from Fintan O’Toole, who wrote a good paragraph there. Yet I do not agree with all of his framing, as he too often presents the Irish dilemma as a debate about austerity.
Let’s say that I, Tyler Cowen, accepted a debt obligation of $5 million, and in order to make some of the interest payments I cut back my spending on food, drink, and Amazon.com and my energy then so weakened that I could never write another book again. That would be bad for my income, since even at the individual level there may be “multiplier effects.” (Please note that by introducing this multiplier assumption I am restoring a kind of parity between the individual and collective cases, no need to snark on this point.)
One way to look at that episode would be to soft pedal the initial guarantee of the debt and focus on the consequences of my “austerity,” and attack the cuts in expenditure, while blaming the new commitments I took on only in passing. I would say that is a misleading interpretation of what happened.
A better way to look at the episode is to focus on the wisdom or foolishness of the guarantee of the $5 million. I would say such a guarantee would be foolish, either for me or for the much larger bank debt bailouts made by the Irish.
Another good and indeed scientific way to frame the question is to take the debt guarantee as given (albeit possibly mistaken), and ask whether my spending cuts should come quickly or be spread out more slowly over time. That is a perfectly fair question to ask and we should not expect the correct answer to be obvious, although of course postponing spending cuts would have meant, for the Irish, borrowing at double digit rates and also risking a full scale “sudden stop.” Furthermore, if we observe speedy rather than gradual spending cuts, the misery of the results does not in any way settle the question of which speed of adjustment would have been better. Pointing out “this isn’t going so well” does not — at all — militate against the speedier path of cuts or for that matter militate against “austerity.” At most it is an argument against the initial guarantee of debt (and even then we are not witnessing the counterfactual).
Nor does changing the topic by asserting “Germany should give Tyler the money” help us settle the right course of action in a world where Germany has no such intention. The same can be said for “Germany should tolerate three percent inflation,” even if that claim is correct.
These points are not even Econ 101, rather they are Propaedeutic to Logic.
Overall, it is amazing how the single largest extension in the responsibilities and fiscal obligations of the Irish state — ever — has been turned into a PR defeat for the idea of fiscal conservatism.
If nothing else, that is testament to how powerful an incorrect message can be if it is repeated enough times and without the proper context.
Addendum: Here is further information on the recent Irish ritual chess murder — Bishop takes lung? — involving by the way an aggressive Sicilian.