Facts about Ireland

Yet despite cutbacks and tax rises, the country still chalked up a 1.3 per cent expansion in gross domestic product in the first three months of this year.

There is more here, and also here, maybe best of all is here.  Mind you, this is not a stunning performance.  Nor can we expect it to continue, if the eurozone and America are headed for broader troubles, as indeed appears to be the case.  Nonetheless it’s a result which most Keynesian theories very strongly predicted against.  Ireland also achieved this during a weak time for its major trading partners.  Since the crisis started, Ireland’s cumulative adjustment has been about thirteen percent of gdp and now they are growing again.  Yet we are not hearing a peep about this.

Comments

While the Overall GDP is growing, All of that growth is coming from the export sector.

While there has been a general Slow down in Europe and the United states, there is still need for the Irish service industry. During the Boom times ireland managed to get a large number of internet businesses to set up on our shores. From Ireland most of these companies run there european support desks (a prime example been E-bay which is continuing to expand its Irish Presence.

However this covers that if you exclude the export market from the GDP figures there has been a general contraction of the Irish economy. GNP for the same period fell by 4.3%

http://www.cso.ie/releasespublications/documents/economy/current/qna.pdf

That number isn't annualized either, correct, as is the European custom? The US data tends to be annualized, but not Europe, in my experience.

Didn't the FT article say that the growth was coming from the export industry? That doesn't sound particularly anti-Keynesian to me.

Before the anti-Keynesian's get too excited about this, let's understand some details about the Irish recovery, as related in this article in the Financial Times

http://www.ft.com/intl/cms/s/0/a098c038-ca8f-11e0-94d0-00144feabdc0.html#axzz1Vmbolm29

First of all this

"The recovery has been largely driven by exports. Last year, Ireland had record levels of sales by the largely foreign-owned IT, pharmaceuticals,and financial services companies based there. "

So unless we are talking about a world where everyone is a net exporter, one should not take too much guidance from Ireland's expansion.

But as far as Keynesian economics is concerned, consider this

"But Ireland’s main business organisation last week warned that this comeback could be at risk if calls for more aggressive austerity measures were heeded. Danny McCoy, director-general of the Irish Business and Employers Confederation (Ibec), said that “austerity measures greater than those already planned would be at odds with the economic needs of the country at this time”.

which is saying exactly what Keynesian economics would say, contractionary policy results in a contraction of the economy.

That doesn't really follow. Every country can increase their exports without any country changing their net exports. That's just an increase in trade.

Also, Keynesian predictions from IBEC aren't evidence of anything except Keynesian thinking at IBEC.

TD,

A cliche from the 1930s is that "beggar thy neighbor" devaluations damaged the world economy. Contemporary scholarships shows that the countries that left gold first expanded export and imports faster than they nations that stayed on gold. In other words, devaluations were a substantial net plus globally.

The contemporary version of this would be to let Greece adopt a New Drachma and let the ND crash against the Euro. The ND will enable Greece to expand exports and imports. The CV is that Greece must stay in the Eurozone to keep German exports to Greece competitive. However, the truth is that as long as Greece is tied to the Euro, relentless austerity will keep the Greek economy shrinking and German exports to Greece under pressure. Germany would be considerably better off with a Greek economy able to grow.

Someday the Germans will recognize this.

The Greek economy is small enough that austerity policies there matter little one way or the other. To the extent that it has any effect at all, Greek austerity promotes internal devaluation and expands the scope for monetary accommodation by the ECB, which furthers growth in all Eurozone countries (including Germany).

Anon,

Greece was an example. Letting the entire European periphery out of the Euro would be material and would be a net plus for Germany.

I don't think the German's are worried about their exports to Greece if it goes off the Euro - they are worried about the exposure of German banks. Which is why they are also cold on the idea of Greek bond holders taking a (managed) haircut.

DH,

"I don’t think the German’s are worried about their exports to Greece if it goes off the Euro – they are worried about the exposure of German banks"

In real life, you are no doubt correct. However, the political rationale for bailing out Greece is always some version of "Germans need to be told how much they benefit from the Euro" which means maintaining German export markets by forcing Greece to retain the Euro.

Once again Tyler tries to shift the goalposts to further his argument. It isn't GDP, it is unemployment:

http://www.washingtonpost.com/wp-dyn/content/article/2011/03/15/AR2011031502274.html

Tyler did this before when discussing Thatcher. Thatchernomics had increased growth in GDP but increased unemployment. Ireland has seen now the same pattern. Yet in discussing American economics it is all about unemployment and not GDP growth. Why is that? Because if we were to use a consistent metric then Obamanomics would far surpass the balanced budget approach Tyler favors.

Maybe this is why the Keynsians won? The evidence seems to be clearly on their side and the detractors more desperate to pursue dishonest arguments. Shame on you Tyler.

Tyler does not favor a balanced budget approach.

Then what does he favor?

He favors stimulus. Mainly monetary stimulus, but also well targeted fiscal stimulus like supporting state-level spending.

You mean Keynsian economics that he derides in this post? No, you are wrong.

Thanks, an excellent post on a topic that desperately needs more attention.

A 13% of GDP adjustment followed by growth? Clearly the Rahn curve matters, and austerity works.

http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_cd&idim=country:GBR&dl=en&hl=en&q=uk+gdp#ctype=l&strail=false&nselm=h&met_y=ny_gdp_mktp_cd&scale_y=lin&ind_y=false&rdim=country&idim=country:GBR&ifdim=country&hl=en&dl=en

Yes, that's why they needed austerity. The economy shrank in relation to the size fo the gov't.

Also, did you actually mean this...

http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_cd&idim=country:GBR&dl=en&hl=en&q=uk+gdp#ctype=l&strail=false&nselm=h&met_y=ny_gdp_mktp_cd&scale_y=lin&ind_y=false&rdim=country&idim=country:IRL&ifdim=country&hl=en&dl=en

Or maybe your point was something yet more obscure?

Which, after the 1.4% decline in Q4, still leaves Irish GDP down from two quarters prior. Their GDP is down almost 11.8% from Q4 2007.

This "not stunning" performance for just one quarter is even less so in context.

OTOH it's fairly impressive when considered in the context of sundry Keynesian predictions for worse performance.

The data are fully consistent with an economy that retooled on the productivity side in a tough period and also used internal devaluation. The historic pattern has been that gains for the export sector have benefited Ireland more generally and of course they kick in on the fiscal side in any case. In other words, the supply side matters, and internal devaluation (when combined with a semi-credible plan), and sticking with some good tax incentives, can *sometimes* work. If Ireland were just riding off the booms of other countries, the criticisms here would carry more weight.

TC,

A key point is that Ireland's economy has been export oriented for a long time. The post-2000 real estate bubble was an anomaly. From 1991 to 1999, Ireland ran small CA surpluses combined with huge trade surpluses. For example, in 1999 Ireland's exports were Euro 66.956 billion versus imports of Euro 44.327 billion for a surplus of Euro 22.629 billion. For 2010 the number are 89.217, 45.699, and 43.518. See http://www.cso.ie/statistics/botrade.htm for the source.

After 1999, the CA went into deficit bottoming at 5.65% of GDP in 2008 (IMF WEO 2011). The CA deficit predicted a crash which occurred more or less on schedule (see also the United States).

The correct inference is that flexible, export oriented economies can recover from large setbacks fairly quickly. However, much of the European periphery is neither flexible nor export oriented. As of 2011, every country in the European periphery was still running large CA deficits (except for Ireland). Greece and Portugal are running huge CA deficits (8%+). Spain has a 4.8% CA deficit and Italy is running a 3.4% deficit.

All of this bodes ill for the United States. The U.S. is clearly not export oriented and has a large CA deficit. The political focus (left and right) in the U.S. is almost entirely on expanding the domestic sector (tax cuts, housing, consumption, health care, education, infrastructure, etc.).

The Irish approach might work for the U.S. However, it is not even within the realm of political discourse.

Some good points.

The US is certainly helping its export sector by devaluing the dollar, as it's been doing for over a decade.

msgkings,

The U.S. reached its all-time high CA deficit of 5.99% of GDP in 2006. It is rather hard to find accurate measures of the trade weighted value of the dollar that incorporate U.S. versus foreign inflation and changes in productivity in the U.S. and abroad (simple indexes are readily available).

It is unclear if the dollar has actually fallen or not since 2000 (allowing for all of the additional factors). However, America's trade drastically declined after 2000. In 2000, the U.S. trade deficit in goods was $462 billion. By 2008 the deficit reached $848 billion. in 2008, goods exports were only 60% of imports. Note that the U.S. ran a services surplus of $139 billion in 2008.

Overall, the trade sector of the U.S. economy has been in decline since around 1980. We have expanded domestic consumption and debt to compensate. These are trends to don't have a happy ending. Indeed, they haven't.

That or a country that is exporting the unemployed:

http://www.irishtimes.com/newspaper/weekend/2011/0108/1224287020723.html

What would America look like if 1.5% of the population left every year?

Michigan is exporting a lot of its unemployed and it still isn't growing.

Michigan only lost a half a percent of the population over the last ten years, compared to Ireland losing over 3% in the last 2 years. But sure, a totally apt comparison. And of course it didn't help Michigan grow at all, did it? Except that isn't true at all:

http://www.mackinac.org/15182

"Michigan’s 2009-2010 state GDP growth rate was 2.9 percent, its best since 2002"

Troll fail!

Are you arguing people leaving is good for growth? Krugman was just telling us the exact opposite the other day.

It is riding off the "booms" of other countries because every Irish citizen who has some sort of job related skill can get a job in any English-speaking country no problem, start earning money and send some of that money back home. This type of emigration also eases the strain on public finances, so all in all, this is clearly irrelevant for US as Americans can't just get up and leave, there is too many of them.

Ireland's population is insignificant in size and rather homogeneous and there may well be factors at work that don't "work" in larger less homogeneous populations. Chances are that economic theory for small islands should take other factors into account. consider such islands/archipelagoes as Iceland, the American occupied Hawaiian Islands; Tahiti; New Zealand. Islands are different settings and theory needs to reflect it.

Does Australia count as an 'island setting'? How about Indonesia? Or Japan?

Krugman on Ireland six months ago:

http://krugman.blogs.nytimes.com/2011/02/26/iceland-ireland-again/#?wtoeid=growl1_r1_v1

And here he is in late April crowing about Ireland proving Keynesian economics right:

http://krugman.blogs.nytimes.com/2011/04/26/the-confidence-fairy-has-taken-a-leave-of-absence/#?wtoeid=growl1_r1_v1

The second link is especially amusing, because it looks like Krugman embedded a graph that continues to update to real-time... and the trend reversed shortly after he posted it, so it now neatly contradicts his premise.

TD,

You aren't being fair to Krugman. He has written that austerity can be successfully combined with export growth many times. See "Oy, Canada" (http://krugman.blogs.nytimes.com/2010/06/10/oy-canada/) for one example. I quote

"Yep, you can have fiscal austerity without contraction if you have a massive devaluation against your main trading partner."

Conversely, his April, 26 2011 post was ill considered precisely because Ireland is following the model that Krugman says will work. As other have pointed out, ever since Krugman abandoned academic economics for political polemics, he contradicts himself (and overtly errs) from time to time.

Fair points. OTOH, in the next sentence he says global austerity will lead to depression, so I don't feel too bad. :)

Which brings me thinking that really the argument with the Keynesians is about degree/timing. Sure, reducing gov't spending today will very likely have an immediate effect on GDP (though one can argue the true effect is smaller than the numbers suggest because gov't doesn't pay real prices in the sense other consumers do because it's not their money, and then there's the crowding our from the Harvard study, etc). The real questions are I think these:

1) What effect does austerity have on the trajectory of an economy in the medium-term? Keynesians seem to argue that the pain isn't just short-term, but will make things much worse even beyond the immediate impact of the cuts by exacerbating the contraction. Ireland seems to argue they're wrong.

2) Can gov't spend its way out of recession and into overall economic prosperity by taking on massive debt, and does this lead to a better eventual outcome than austerity? Thinking here of Krugman's (in)famous call for a $3-$4T U.S. stimulus, which could credibly have led to an immediate sovereign debt crisis in the U.S.

3) Does the Rahn curve matter? After the Cold War, pretty much everyone agrees that gov't spending is inefficient, but there seems to be a substantial body of thought claiming that this doesn't matter during a recession perceived hard economic times, and that sort of thinking may have very bad consequences for long-term growth.

TD,

Before politics became the lens through which all economic debates are seen, I think the consensus was...

1. What effect does austerity have on the trajectory of an economy in the medium-term? Apparently, stimulus produces short-term output gains with no impact on long-term GDP. Unless economic responses are deeply asymmetric, austerity should cause short-term losses with no long-term impact.

2. Given point 1, even $3-4 trillion in stimulus shouldn't impact long-term GDP. Note we have already run $3-4 trillion in deficits (since 2009/01/01) with no notable shift improvement in economic performance. Of course, the converse is probably not true. Without $3-4 trillion in deficits things could have (would have) been a lot worse. Perhaps $6-8 trillion in deficits would have yielded a better outcome. However, you are correct in suggestion that debt limits exist. Even without a sovereign debt crisis, at some point debt overhang becomes a meaningful growth impediment.

3. Does the Rahn curve matter? - Probably does. However, it is a long-term issue.

That graph is priceless.

TallDave: I don't know too much about the Irish situation, but I note that Krugman in late April was quoting Alan Reynolds' comment from June 2010. In June 2010, the Irish 10-year was yielding about 5%. When Krugman wrote it, the rate was around 11%, pretty close to where it is today. The spike and its correction occurred after Krugman wrote his post.
(I'm cribbing from: http://www.tradingeconomics.com/ireland/government-bond-yield)
Similarly, the CDS spread Krugman references in your first citation, appears wider than it was when he wrote that post.
Neither of these points contradict Tyler's larger assertion about the growth in the Irish economy.

True, I just found the trend amusing. It's probably funnier if you come at it the way I did, at first trying to understand what the hell he could possibly mean, then realizing he couldn't have known the post-June trend in April.

Priceless!

Oh that we could revoke Nobel Peace Prizes from warmongering presidents and revoke Nobel Memorial Prizes in Economics from economists who don't even read their own books nor recount their failed predictions.

"Iceland, the American occupied Hawaiian Islands; Tahiti; New Zealand" are all mid-ocean islands. The Republic of Ireland is part of an island which is part of a populous archipelago which is on a Continental Shelf and is, at its nearest, only twenty-odd miles from France.

Tyler, I usually love your blog, but you're off on this one. Ireland is not riding off the booms of other nations, but the disparity between the performance in net exports and the domestic economy is shocking. If you index the performance of the components of GDP and GNP (in terms of both expenditure and income), you see a slight dip in export performance followed by a strong resurgence, almost continual declines in consumption of goods and services, plummeting gross fixed domestic capital formation, and (obviously) declining government expenditures, and annual growth only in the agricultural sector.

All the growth is coming from exports and at home we residents are seeing our fifth tax hike on January 1st, 2012. All is not lost, but the Irish situation is hardly a good news story being ignored by the media. The New York Times, Vanity Fair, and other publications have been covering Ireland on a near-quarterly basis.

Paddy, the issue isn't whether Ireland is all unicorns and rainbows now. The issue isn't suffering through withdrawal symptoms from a debt-created bubble.

The issue is that austerity in the midst of all the weak factors you cite is NOT plunging the nation into depression. That is precisely what PK, BDL, and Thoma are suggesting will happen here.

Exactly. I don't know why this is so hard to understand.

This is simple empiricism: did the predicted effect materialize? At least in this quarter, in Ireland, it did not.

ok i dont have a clue about economics, but since all the growth has been dependent upon multinationals and exports. and you'd expect these sectors to improve after a time of strong deflation. im not sure this disproves keynesianism or anything. i mean the rest of the economy is still getting absolutely hammered with no real end in sight. there has always been a big difference between irish gdp and gnp(15% comes to mind) and most worthwhile comment tends to deal in gnp rather than gdp, especially since the multinationals pay very little tax. its good that the export sector is thriving but nobody i read thinks it'ill be anything like a enough to drive the economy. there's only so much viagra and butter we can sell to the world.

Sure, but you can't grow an economy on gov't spending, either.

This doesn't "disprove Keynesianism" but it argues against one of its predictions.

This is great news, first off. Whoever it proves or does not prove "right" there is less suffering in the world if this trend holds.

So what is driving the growth? You'd be inclined to say that internal devaluation - i.e. deflation - had run its course and this was, in effect, like a monetary-driven stimulus without a change in monetary policy (this is consistent with the export growth noted above). Maybe the austerity sped along the deflation? I.e. maybe countries with austerity responses suffer more but for shorter periods?

I'm just speculating here and don't really have time to dig in. Would be fascinating if that was what happened.

They had a similiar bonunce in 2009. One quarter of growth doesn't mean much, nor does it disprove anything.... could be a blip, a sudden one-time export surge (in a country as small as Ireland, a very big deal)...maybe you should wait before declaring victory over the Keynesians based on this..;)

Everything said against this article is noise. The bottom line is that austerity measures did NOT result in economic contraction as Keynesians would predict.

Maybe it makes perfect sense for a nation on a sound fiscal path to increase debt to see it through he other ide of a recesion. But a nation saddled with debt only dig its hole deeper without stimulating the economy. While agents in a prudent economy will allow themselves to be fooled, agents in a debt-heavy nation won't be.

Um, yes it did. See here: http://online.wsj.com/article/SB10001424052748703384204575509363426865000.html

This is why it is so hard to take Keynsian detractors seriously, they just make things up. Irish GDP started growing for the first time in a long time, and only by a trickle. And this is the great refutation?

Not as Keynesians WOULD PREDICT. There's no argument the policy is contractionary. The debt doves were predicting catastrophe, not a slowdown. It might be too early to tell- it might get pretty bad in Ireland, but I doubt it will be a depression.

When Volcker contracted money supply and caused the 1982 recession, that was tough medicine to swallow. But ultimately he controlled inflation and the economy recovered. That took balls of steel for both Volcker and Reagan, but they got it done. Keynesians were predicting a Great Depression back then if I recall. Their prescription was exactly the opposite of Volcker's move.

Ireland is in for some pain.

"Keynesians were predicting a Great Depression back then if I recall. Their prescription was exactly the opposite of Volcker’s move."

Who did? (please restrict to economists from reputable schools; there's *always* a crank predicting *anything*).

Second, if you please note, we had the worst recession since the Great Depression back then (although it's now been displaced by the current fun and games).

Are we counting Krugman and BDL as reputable, or are they cranks?

Speaking of noise... this is a relatively small shift, in the midst of a larger downward trend, isolated to a limited segment of the economy that won't hold up to the region-wide crisis. Probably not a good basis for rejecting textbook economic theory.

Wait for the long run. Ireland will be dead.

I don't know much about economics but if this is an example of a "gotcha" against a Keynesian prediction, it makes me think that Keynesian predictions are normally accurate. I've assumed that economics is more like handicapping horses than predicting eclipses.

Or is the point that we don't often get to see natural experiments like this?

Unfortunately (or fortunately, depending where you live) as best I can tell none of the PIIGS has actually tried saying “Screw the bond markets, the hell with austerity, we’re raising gov’t spending by 20%!" so we can’t say for certain what would happen if a country did the opposite of austerity. But in the interest of (dismal) science, I hope Brad can convince someone to try it. Either way, we'll learn something.

In economics, every data point is evidence that I was right all along and that the stupid other side was wrong again.

Keynesian predictions did really well in the 1970s, early 1980s, not.

The debate here suggests that questions of scale and framing, as well as straw men, are at work on both sides.

Keynsians can point out that Ireland is a small part of a larger system, for which, they will maintain, their predictions are holding up quite well (Net austerity in the EU is leading to net decline in GDP, rises in unemployment). The Keynsians will say, with some justice, one island of minor anomaly (which can be explained with local particulars) does not undermine the larger trends: it's a matter of picking the right scale.

Meanwhile, Prof. Cowen's post seems to posit a fairly extreme version of Keynsianism, in which supply-side factors have _zero_ applicability in a deflationary bubble-popping recession/depression. (Sometimes Krugman seems to take this view, from my observations, if only because a 400 word column allows only so much nuance and complexity). But modern Keynsians, while they may take that view at the systemic level, could easily return to the scale problem and demur: "of course supply matters in economic transactions at some scales", they will say, but if the entire economic system, globally, is in a deflationary oversupply situation, such local supply-side effects will not contradict the global policy prediction that demand must be stimulated.

In short: for all of its claims to be a 'predictive science', yadda yadda yadda, economics, as a human science, is in fact another method of story-telling, with equations. And stories depend on selectivity, narrative conventions, and other methodological elements ultimately distinct from predictive sciences. There are no controls, and no 'natural experiments', in the end: we're humans in a human world.

Some Keynesian predicted that export based Ireland is in a liquidity trap or what?

Brad DeLong posts, you know - a graph:

http://delong.typepad.com/sdj/2011/08/department-of-huh-irish-economy-edition.html

That's an excellent example of confusing the issue with irrelevancies.

The relevant portion of the graph is the last three months; the rest doesn't mean much. Keynesian prediction was negative growth for the last Q. Instead, we got positive growth.

BDL seems to be arguing... well, I can't tell what he's arguing, to be honest. That Keynesianism doesn't predict worse performance that this? Huh?

This is kind of crazy. This particular three months of economic data hasn't even been subjected to meaningful revisions yet. Not to mention that we are talking about three months!!! I am having a hard time finding the economist that staked his or her reputation on what was going to be in this quarter of data.

That is because anyone who stakes their reputation on a quarter of data is either busy running a hedge fund or simply an idiot (not necessarily exclusive).

God knows what factors were at play last year or even two years ago that are manifesting themselves in the three years of data we are talking about. Lets not get too worked up until we have a little more data.

To paraphrase a great man: you have to measure with the data you have, not the data you wish you had, or the data you might have at a future time.

Now, sure: maybe this is a blip and later evidence will show that. Maybe even this anemic Q will later be revised to something more like -5%. But as it stands, it tends to argue against the Keynesian interpretation of events, even as a small data point.

But let's not pretend a severely negative number would not have been met with more cries of "See! See what horror austerity hath wrought!"

Ken Houghton said on Brad's blog:

"Cowen appears to be using John Taylor as his oracle; since no economist in their right mind (Richard Fisher is not an economist) can even pretend to find "green shoots," you look for a ransom data point that might become a "trend" and then write as if it were one.

The more subject to revision/correction the data point is, the better, apparently.

In this case, the height of Irish tourist season produced less than 0.5% growth. (1.3/4; I'm really trying to be generous). So for 3% to work, you're already 0.25% (really closer to 0.40%) down, with that pretty much matching your best performance in 2.5 years.

Maybe O'Rourke is assuming leaving the EMU? But if Cowen really believes that a blip of subpar "growth" after a point of Real Drag refutes "Keynesian economics," it's time for him to schedule an EEG."

Again, what do Keynesian theories predict for that Q?

jeesus christ almighty
It is ONE DATA POINT
I'm just a stupid biologist, who can barely do a linear regression, let alone analyze time series data with a nonparametric powerspectrum, yet I know enough to know that one data point is
one data point
don't you all have something better to do ??
I mean seriously....
btw, even stupid biologist like me, whose math stopped at 1D calc, know that data has error bars and revisions....

The euro depreciated around 7% during the 4Q of 2010. Not a great surprise that Ireland's net exports contributed to GDP growth Q1 2011.

Peter Schaeffer August 22, 2011 at 4:44 pm

" The U.S. reached its all-time high CA deficit of 5.99% of GDP in 2006. It is rather hard to find accurate measures of the trade weighted value of the dollar that incorporate U.S. versus foreign inflation and changes in productivity in the U.S. and abroad (simple indexes are readily available).

It is unclear if the dollar has actually fallen or not since 2000 (allowing for all of the additional factors). "

What you want to look at is the real effective exchange rate ( REER ) that the central banks use. You will probably find it on the World Bank or Fed site.

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