Irish recovery from “austerity” update, not exactly the Keynesian story

The economy expanded at a faster rate than expected in the second quarter of the year, putting in its strongest quarterly growth performance since the recession began, according to new data published today.

The seasonally adjusted figures estimated that gross domestic product – the widest measure of economic activity –  rose by 1.6 per cent between the first and second quarters of 2011. Gross national product, which excludes the profits of multinational firms, increased by 1.1 per cent compared with the first quarter of the year.

Domestic demand, which excludes exports and imports, expanded too, growing by 0.8 per cent.

It is the first time since the recession began that GDP, GNP and domestic demand all grew in the same quarter.

And all that in some very bad times for the U.S. and Europe, two main buyers of Irish goods and services.  The link is here, sadly this progress probably will be swept away by the forthcoming European implosion, we will see.

Addendum: Megan McArdle hits the nail on the head.


So with this grand growth, Ireland will return to its pre-crisis GDP when? 2020? 2025? 2030? Yeah, hurrah for austerity!

Exactly, austerity caused the massive fall in GDP! Why listen to facts when you can make up your own narrative! Hurrah!

We now return you to your regularly scheduled narrative of "one quarter's number vindicates austerity!"

Well, the mainstream narrative is that austerity would destroy any economy so yes, one quarter's positive results are something to be considered as important.

Which quarter's unemployment rate should we look at in order to judge the success of Obama's 2009 stimulus?

No no, we don't look at unemployment. Only GDP.

It looks like it's come down from its peak, but it's hard to know the counterfactual. I guess we could look at Ireland's, though....

It's now two quarters.

And when, pray tell, will unemployment in Ireland fall to single digits?

The response to this that I've been hearing lately is that "there was nothing fundamentally wrong with the Irish economy in the first place. It would be even stronger now if the austerity had never been imposed."

It's Maddening.

No kidding. It's like people are under the impression they can will bond markets out of existence if they just pretend hard enough.

Thats the problem with Keynesianism. It isn't even wrong. Non-falsifiability makes it not even a theory something more akin to religion.

Dear Maddening,

More austerity. More austerity. More austerity.
It will get better with more austerity.

Yep, proof of that in what they're saying right here. Ireland got better with austerity, and the arguments seem to be either it didn't get better enough, or it hasn't been getting better long enough, or for whatever reason it doesn't matter that it got better. The notion that maybe austerity is working is something they're just not prepared to entertain.

Watch, if Ireland continues to improve even as less austere PIIGS are defaulting, the rhetoric will soon shift to "OK, maybe it worked, but even if it did work, it was too harsh and inflicted unnecessary pain, and was still a mistake."

Austerity has been good for fishing, agriculture, forestry and mining. Care to explain that. Half of Irish industrial production is computers and and pharmaceuticals, and unless you are claiming that the Irish are big consumers of their own drugs and buy lots of computer equipment, you would have to conclude the obvious: Per Reuters: ‘"On an annual basis, however, the data reinforces the view that Ireland’s economy is on a two-speed track with a growing export sector compensating for a domestic economy still stuck in the doldrums due to an unprecedented housing crash and prolonged austerity measures. “

Why shouldn't it be good for those sectors?

Or, more to the point, why isn't fiscal austerity supposed to destroy those sectors along with everything else?

Probably because changes in government spending tend to have less of an impact on the tradable goods sector. Especially in a small, open economy, which is subject to the vicissitudes of world demand -- in this case, to its benefit. Hopefully this will be enough to pull the Irish through their austerity program.

...which is what austerity advocates were saying: austerity won't be that bad for the Irish economy.

It's a problem with all macroeconomics - we never can observe the counter-factual.

And note, that just because you observe something that acts differently to what a first stab at theory would predict, doesn't mean that the theory itself is necessarily wrong. Helium-filled balloons' habit of rising up rather than falling down to the earth do not disprove the theory of gravity, the wrinkle is that the helium makes the balloons lighter than air.

But you can set up criteria where you say, "ok if this happens then x is a bad idea." Keynesianism isn't even vulnerable to that. Its not even a theory.
A philosophy? sure

It doesn't however make the cut for a theory as there really is no possible circumstances where its adherents will accept "ok it didn't work."

Perhaps you are confusing Keynesianism with the Austrian School, which actually does reject empirical evidence. I think that the Austrian School is unique in that regard.

As far as I know, Keynes only wrote about economic policy in countries that had their own currency, so the "Keynesian story" that Cowen refers to is not one I am familiar with. (I'm assuming that Cowen knows that Ireland is on the Euro.) But Cowen is clearly treating Keynesianism as an empirically testable theory, which it is, subject to the caveats listed by Tracy W above.

Krugman, who is probably the most widely known Keynesian economist, talks about the importance of making theories correspond to the data on a regular basis.

I think it would be more accurate to say the Austrians are skeptical of the ability of econometric to fully represent reality, and especially inductive reasoning based on such econometrics, and also question the utility of empirical methods based on such econometrics.

Krugman, unfortunately, seems much more interested in fitting evidence to theory than t'other way 'round, as his own ombudsman noted.

Tyler--To what do you attribute this Irish "turnaround". I've read that much of Irish debt burden is household, and most of that is floating rate. Could this be easing the burden of debt deflation and austerity, at least in the household sector?

Which country is more likely to choose a politically extreme option, the one that quickly hits bottom and returns to growth or the one that drags out the economic misery over several years? Had the Europeans taken their lumps quickly, the center-left center-right would have swapped positions, as they did anyway in the wake of the crisis. By dragging it out, fringe parties are building support. Look at France, last time Le Pen made it to the run-off he lost 82-18% because the left made sure he wouldn't win. Should Le Pen's daughter make it to the runoff next year, will French voters behave the same way? Or will many decide voting to keep the status quo is the untenable position?

The entire french system of government was designed to keep Charles de Gaulle in power, I don't think ending the status quo is very likely or easy there.

And this proves what? Stimulus had GDP growth too here in America. What it didn't move was unemployment. And hey lookie, same story in Ireland:

"Ireland's seasonally adjusted unemployment rate rose to 14.2 percent in the second quarter from a slightly revised downward figure of 13.9 percent for January-March"

EU jobs cut short by austerity:

Irish growth may have slowed in the second quarter (story published yesterday):

You were saying something about the virtues of austerity?

It's interesting how the "unexpected" news seems to be positive for the Irish lately, whereas it's consistently been on the downside elsewhere. Too many Keynesian expectations?

Its always that way. The central planners' have their formulas wrong, so its always unexpected to them when austerity lead to increases, and increases in spending lead to poverty.

Right--a quarter of GDP growth during austerity is *impossible* in the Keynesians' models. They should all retire. While we're at it, though, let's also have all the supply-siders retire (the US had GDP growth during the stimulus, none of the high interest rate or inflation predictions have been born out, plus that whole Iceland dept-repudiation & capital controls thing, etc), just to be fair right? Cause fairness is what we're all about here?

Keep it up guys--the wisdom that your debates is shedding on the world is improving the lives of millions of global unemployed--er...or will be once every economist gets to implement his pet solution, I'm sure.

But then, it would probably help if ever, in the history of your field, one of you would stand up and say "some of my predictions have failed to be born out, therefore my model was wrong, while my colleague's model made correct predictions." But hey! What do we expect? It's not *science* right? Predictions are so adjunct to such a theoretical field like economics.

This exactly!

My daughter's off to Ireland this weekend to add a quantum of economic stimulus. I hope the airlines are still operating when she wants to fly back.

Next, The Great British Turnaround from the Austerity Elixir.

Wow, the comments section here has a taken a bit of a decline recently. Lots of ignorant people spouting meaningless rhetoric about Keynesianism, gratuitous references to religion, central planning. Maybe people could at least read his work before commenting (although Henry Hazlitt demonstrated the limits of that approach).

Anyway, in terms of Ireland:

- What are corporate borrowing rates looking like, long and short term? If they are low that might explain some of it.

- To what degree have exports been a factor in this recovery? I know domestic demand has expanded too, but if we take a look at say, the last year, what picture does it paint? It could be that money has flown into the country and there has been a subsequent expansion of domestic demand.

- Is Irish private debt increasing? If so this explains it.

Good questions.

From the article:

"Net exports were 23.9 per cent higher than the same period a year earlier, reaching €1.9 billion. However, domestic demand continued to lag, contracting by €714 million or 2.2 per cent.

Agriculture, forestry and fishing, and industry were the only sectors to record an annual rise in output, with the latter growing by 10 per cent and the former increasing by 6.9 per cent.

However, the Central Statistics Office noted the decline in the “other services” sector, which accounts for almost a half of GDP at factor cost, moderated during the three-month period, declining by 0.7 per cent."

Ireland probably isn't a good model for the US for many reasons. Also trying to rebut an entire economic theory on one quarter of data (especially when there are a few prominent counter-examples) seems a bit much. How would this square with the "zero-MP worker" theory?

I'm not sure you understand that people calling themselves Keynesians were predicting austerity was going to cause the Irish economy to be worse than what we're seeing.

Well, Keynes wasn't a Keynesian in the modern sense, especially towards the end of his life.

He certainly wasn't the characture of Keynesianism that Austrians like to straw man.

Euro depreciation has helped I think. It is about 6% down over the quarter.


How far below trendline, or even its peak is it?
What's the unemployment rate?

This "recovery" is just ridiculous.

Is the Pint of Guiness Half Empty or Half Full?

Has anyone read the article? They went DOWN for three years. Unless you are in agriculture, forestry or fisheries, these were the only sectors to increase output.

From the article:

"However, these figures are volatile and can be subject to significant revision. Nor do they take account of the deepening of the euro area financial crisis since July or the continued signs of weakening in economic activity globally since mid-year.

The slowdown in the world economy in the second quarter of the year was reflected in Irish export figures in today’s statistics. Exports of goods and services grew by 1 per cent quarter on quarter – the second lowest rate of expansion since exports began recovering at the beginning of 2010.

Consumer activity – which is the largest component of domestic demand - also expanded, if only slightly, in the second quarter of the year, by 0.3 per cent. Consumer spending has been on a downward trend since the beginning of 2008 and the growth in the second quarter was likely to be accounted for by the temporary boost provided by the car scrappage scheme.

Investment spending, which includes building activity, grew for the second consecutive quarter in the April-June period suggesting that the collapse of the construction sector may be bottoming out.

Over the year, GDP was 2.3 per cent higher.

Net exports were 23.9 per cent higher than the same period a year earlier, reaching €1.9 billion. However, domestic demand continued to lag, contracting by €714 million or 2.2 per cent.

Agriculture, forestry and fishing, and industry were the only sectors to record an annual rise in output, with the latter growing by 10 per cent and the former increasing by 6.9 per cent.

However, the Central Statistics Office noted the decline in the “other services” sector, which accounts for almost a half of GDP at factor cost, moderated during the three-month period, declining by 0.7 per cent.

"Even allowing for some slowdown in the second half of the year due to the weakening world economy and fall-off in global demand, we still think that Ireland will post positive average GDP growth of between 0.5 per cent and 1 per cent in 2011, which after three consecutive years of contraction, will be a major step in the right direction," said Bloxham chief economist Alan McQuaid.


1. Quote the WSJ about what happens to be happing right now.

2. Pretend to "ask": "Does that mean that Ireland's experience vindicates austerity over stimulus?

3. In the next sentence, answer your own "question" with a "Yes": "In your face, Mr. Fancypants Nobelprizewinner!"

4. Demonstrate how judicious you are compared to others by saying that what you just did ("Looking at a snapshot of what happens to be happening right now...") " not very useful."

I guess it's only useful when A) Megan does it and B) what happens to be happening right now can be construed (by Megan) to comport with Megan's priors.

Your comment on Megan might have been better if (3) weren't exactly the opposite of what she did, as the next sentence says.

The entire Keynesian argument against austerity is that it reduces output ceteris paribus (remember that IMF study debunking expansionary austerity by controlling for improvements in the trade balance and accomodative monetary policy). Given that McArdle points out that the "recovery" is entirely export driven I don't see how this is at odds with the Keynesian story.

Since she ends her commentary with "It's going to take the better part of a decade, at the very earliest, to untangle what has "worked" and what didn't in this crisis. Looking at a snapshot of what happens to be happening right now is not very useful." I find Tyler's commentary incredibly ironic.

"Why not slash deficits immediately? Because tax increases and cuts in government spending would depress economies further, worsening unemployment." The Keynesian story says things should be worse than this. The pro-austerity story has the Irish economy recovering due to increased confidence and less reliance on inefficient gov't spending, despite the short-term pain from austerity. Granted, we don't have much data yet.

The recovery is export-led, but demand is up too. I'm also not sure we should assume austerity couldn't be related to improved balance of trade -- Ireland's export partners generally have weaker growth but might be importing relatively more due to less reduction in gov't demand.


Go to the CSO website. What is up is agriculture, fishing, mining, and forestry. The "industrial" sector of Ireland--half of which is pharmaceuticals and computer electronics--is up, but it is export, and not domestic consumption. As Reuters said: "‘On an annual basis, however, the data reinforces the view that Ireland’s economy is on a two-speed track with a growing export sector compensating for a domestic economy still stuck in the doldrums due to an unprecedented housing crash and prolonged austerity measures. “

And your point is what?


The material speaks for itself and the point is clear. Don't pretend you don't understand.

You are not getting it TallDave.

Domestic irish demand got crushed by Austerity. Austerity can't increase exports- those increased because other countries are stimulating their economies which draws in imports from Ireland. Austerity had its expected effect, and then Ireland got lucky that other countries are buying lots of Irish imports. Get it now?

Bill -- you don't seem to understand that the information lacks a point. None of that makes any argument that austerity is not doing better than Keynesian predictions.

antiausterian -- No, demand grew by .8%. If Ireland is doing well despite austerity because of exports, then austerity was not a bad choice for Ireland. "Getting lucky" is a weak dodge.

Yes because Krugman is the only Keynesian in the world. Also unemployment is higher now than it was before austerity and the "improvement in demand" is fucking pathetic given how bad things crashed. Confidence? What confidence? would indicate that confidence is lower now than it was before austerity and has been flat the past few months. The "recovery" is all about exports and I would love to hear the mechanism through which austerity improves the trade balance. Really go ahead and try. The austerity crowd have never heard of control variables in their lives as the debunking of all those expansionary austerity papers has already demonstrated.

I just gave you the mechanism.

"Ireland’s export partners generally have weaker growth but might be importing relatively more due to less reduction in gov’t demand." is incomprehensible. What does that even mean? How does austerity in Ireland have any impact on what Ireland's trading partner choose to spend on imports? The only acceptable mechanism that has been presented in the past is via the exchange rate, but it is folly to suggest that Ireland has any direct control over the value of the Euro. As for your comments to Benny Lava about empiricism I find it amusing that you mention confidence despite the fact that the data I linked to on confidence demonstrates that consumer confidence deteriorated significantly and has still not recovered since austerity was implemented (same with employment). Furthermore you seem to be admitting that austerity causes "pain" immediately, but that that effect is eventually overwhelmed by other factors. If that is the case then austerity hasn't done shit as things still aren't better than before the package was implemented. Also is what happens when you can't rely on exports.

Well, first you didn't read it, now you don't understand it. I guess that's progress.

It's a fairly simple concept. The question was balance of trade. If my government is doing stupid things like paying the Chinese to build windmills in my state, we're going to have a worse balance of trade than if, due to the horror of austerity, the windmills were cancelled.

Employment has not gotten appreciably worse with austerity, and neither has GDP, which is what the anti-austerity crowd seemed to be predicting.

Also, you're a bit confused about "confidence." Confidence in this context has to do with bond rates, i.e. their confidence they will be paid back, and their willingness to therefore accept lower rates. Consumer confidence is something completely different.

I don't believe anyone anywhere disputes there is some immediate pain to fiscal cuts; this would be true even if those people affected were producing nothing. The question is whether austerity is worse than the alternatives. The anti-austerity crowd has perhaps been caught crying wolf here, if the trend continues.

As you can see the austerity crowd are more of a religion than anything else. America's problem is unemployment therefore austerity. Ireland's problem is not unemployment but GDP growth. Why? Because it is th only statistic that supports their conclusion. Unemployment is up. Heck they haven't even balanced their budgets with their austerity (hence the bond crisis). Of course when austerity proves to be less effective than advertised they will remeber this fact and suddenly the problem is that Ireland never really tried austerity you see.

Is this better or worse than what austerity opponents were prediction?

Religion is the absence of empiricism.

Worse. Because right now people like you and Tyler are blatantly ignoring lots of evidence that austerity is not working (see: unemployment). You and Tyler completely ignore unemployment as a metric. When Tyler touted Thatcher's austerity in the 80s I pointed out that, while it may have caused GDP to grow, it also then caused unemployment to grow. So what are we really talking about measuring here? Seems like the unemployment figures would vindicate the Keynesians but oh boy don't you act like a peacock crowing about how right you were regarding austerity!

Unemployment has been fairly steady since the latest austerity package a year ago. The Keynesian predictions were that it would get worse.

And it did get worse, just as they predicted:

This further demonstrates that you are arguing theology and not empiricism.

It rose very slightly. It did not continue the previous trend of a sharp rise.

Again, please look at the graph, it is actually slightly lower than Nov 2010.

Official numbes appear to be 14.3% as of Nov 2010, when the latest austerity package was published, and now 14.2%

Very bad empiricism, Cardinal Benny :)

When I told you to go ahead and try and explain the mechanism through which austerity promotes improvements in the trade balance it was because I had read your "explanation" and thought it didn't make sense. All you've done is simply repeated something that isn't supported by the data. Why? Because the improvement in the trade balance was driven by an increase in EXPORTS so your little windmill story about decreased imports is nonsense. "Over the first six months of the year, exports rose by 7 per cent compared with the same period in 2010, up to €47.1 billion. ... Imports were 9 per cent higher at €25 billion" ( Furthermore the austerity package was a combination of increases in taxes and cuts in welfare programs (again not consistent with the windmill story).

Your story about bond yields is silly as well. Great so they are a bit lower than they were a few months ago. Guess what they are still higher than before austerity ( Unemployment isn't worse? Are you serious ( Really though continue to point to GDP even though it is being driven by factors that have nothing to do with austerity. Sigh...

Your original statement was in regard to IMF controlling for balance of trade, so I gave a logical mechanism for why that might not hold up. As to Ireland specifically, again -- "Ireland’s export partners generally have weaker growth but might be importing relatively more due to less reduction in gov’t demand." People on welfare buy imported goods as well.

The austerity package was passed at the peak of the bond yields. Also, austerity is not tax increases, or Krugman would be cheering them on.

See, for instance:

Over the six-month period, exports to the US increased by 14 per cent, but goods to Spain fell by 16 per cent. The US remained Ireland’s largest single export market, followed by Belgium and Britain.

This is exactly what my scenario predicts.

Oops, no, my mistake, the bond yields peaked over the summer, but then declined as it appeared Ireland would be able to pay its debts after all.

I think Tyler is right, though, if the bigger PIIGS default, and they probably will, it won't matter much.

Re unemployment, you should look at the graph, it has levelled off since Nov 2010. It is actually a bit lower today than when austerity was passed. I think anyone would have to agree this is not what Krugman and other austerity opponents were predicting.

Re GDP, if those factors are unaffected by austerity then that means austerity is not as bad as it was made out to be. You can't have it both ways -- either austerity is terrible for an economy, or it isn't.

The point of the IMF debunking is that just because austerity was associated with higher than expected growth does not mean it CAUSED the growth and that if you controlled for changes in monetary policy or the balance of trade the argument for expansionary austerity does not stand up to scrutiny. You are clutching at straws here trying to make the link between the trade balance (which we both agree is driving growth) and austerity. First your argument was that austerity reduced imports (the Irish government windmill buying story). Once I pointed out that exports were driving growth you are now claiming that austerity in Ireland increased imports of Irish goods in the US because... (oh yeah you just asserted it without providing any mechanism at all with some nonsensical reference to government demand in the US which again you have failed miserably to connect to fiscal policy in Ireland). What does "welfare" in the US have to do with fiscal policy in Ireland? Your "prediction" is irrelevant. In fact if your claim that countries that are importing Irish goods are doing so because they have had less reduction in their government demand was true it negates your entire argument because government demand in those countries (Ireland's trading partners) has NOTHING to do with Irish fiscal policy.

As for your argument about bond yields are you really going to argue that Ireland didn't pass any austerity packages until 2010. That is nonsense. They have been passing them since 2008 and the Krugman post that everyone is criticizing with the bond yield graphic was posted in April. Either way you look at it yields are still higher.

The austerity budgets included both spending cuts and tax increases. Criticizing my characterization of tax cuts is a distraction from the point that the nature of the spending cuts and tax increases were not consistent with your government buying windmill story along with the export data.

Again you keep pointing to GDP and saying "it's no so bad therefore austerity isn't bad for GDP". The entire argument here is that GDP is rising in spite of austerity (because of the balance of trade improvements which you have not linked to austerity in anything approaching a convincing fashion). All of the domestic data indicates that without the export rebound growth would be lower. Also stop saying unemployment did not get worse. You are wrong.

Remember, any evidence that contradicts Austerity must be ignored and discounted. Only evidence that supports Austerity can be considered. Any time a snake handler survives a snake bite it is evidence for snake handling. Any time a snake handler dies, it does not count because they were not true believers.

I'm not sure you understand the imports/exports math in question here. Whether imports increased as well is immaterial if we agree there is export-driven growth -- Ireland has a net trade surplus, so even if imports increased faster than exports on a % basis, the absolute increase in exports can still be greater than the aboslute increase in imports (if it wasn't, we would presumably not be seeing growth).

Yes, austerity can help the balance of trade. This should be extremely obvious, and I'm not sure why it is causing you so much confusion: gov't spending is consumption, and consumption drives imports, whether it be windmills or widgets.

Again, like most other anti-austerity commenters here you seem to be forgetting that austerity is supposed to be bad for the economy. To the extent that you identify things that happen in the economy that are unrelated to austerity, you are defeating your own argument. Austerity doesn't have to create growth, it merely has to fail to destroy it.

The earlier Irish austerity programs were insufficient -- Ireland suffered a very large and ongoing drop in production. Eventually, that levelled off and Ireland (thanks to austerity) may have weathered that storm. The Keynesian narrative has been that this is impossible, production should keep falling because of austerity. The feedbacks in that cycle appear to be smaller than the Keynesians have been arguing.

Oh, and regarding the tax hikes -- I don't think the austerity opponents have argued against them much. It's the spending cuts that really define what opponents hate about austerity, because they are supposed to reduce output.

Oh, and on unemployment, official numbers appear to be 14.3% as of Nov 2010, when the latest austerity package was published, and now 14.2%. So no, unemployment did not get worse after the latest austerity package.

Reuters has a better article:

From Reuters: 'On an annual basis, however, the data reinforces the view that Ireland's economy is on a two-speed track with a growing export sector compensating for a domestic economy still stuck in the doldrums due to an unprecedented housing crash and prolonged austerity measures. "

The title of this item, "Irish recovery from “austerity” update, not exactly the Keynesian story," does not seem to mesh with the content. What does the title mean and/or how does it relate to the content?

What were the results of the control experiment?

Here's a helpful hint for pundits: When linking to a chart to make your partisan point, be careful not to link to an interactive object that will continue updating months after your post has been published:

(Courtesy of TallDave's link on Megan's blog).

Tyler, I tend to follow this blog: I think it's too early to decide what's really going on. That being said, I've no idea if it refutes Keynesian ideas, since I'm not sure what exactly they are any more. For example, it looks to me like Ireland is still spending plenty of Govt Money. When I looked at the recent posts and then at their sources, I was shocked by how many moving parts there are in trying to find out what's going on, including how to figure out just how much money the Irish Govt takes in and how much goes out.


???? The chart is ten year bond rates shown to be declining from 14 to 9%.

You do know about the EU financial assitance programs for Ireland and Portugal, don't you?

I guess not.

I thought the chart was gdp or employment, but it wasn't that either.

So, what you are saying that Krugman's chart shows EU assistance programs having an effect on reducing interest rates? I guess you and TallDave really ARE advocates of government intervention, or don't read the news..

Yes, how did that happen again? Someone remind me.

Ireland finalizing austerity plan to secure EU/IMF bailout

After Solyndra and GM, I can understand why this concept would confuse some people, but yes: even gov't lenders generally prefer lending to those who are likely to pay them back.

TallDave, I can direct you to the EU website with the history of its support and lending to Ireland. I see though that you are an active interventionist to support the banking system with government austerity.

So your argument is that Ireland would have been better off to spurn the EU and spend even more gov't money rather than cutting?

TallDave, Do you read what you write. Your claim was that austerity brought the interest rate down, not that the ECB intervened. And, guess what, low interest rates did nothing.

I'm not sure you understand that the ECB required austerity. This is like saying "We're not starving because we have eggs!" and claiming the chicken had nothing to do with it.

(Although, yes, interest rates also went down because the gov't was spending less, and therefore viewed as a better credit risk.)

Does it matter if a gov't defaults? I think it's hard to argue interest rates do "nothing."

This comment is directed to DanH.

The austerity plan hasn't worked out too well in Latvia either:

Internal devaluation has saved the (foreign) banks but made things worse for the local population. Countries are literally destroying themselves to repay huge debts. This isn't Keynsian economics (more debt); but repaying debt isn't working either. Default is the best way forward. Why should Latvia honor its debts to Swedish banks? Why should Greece honor its debts to German banks? Interest rates are already pricing in a default; it's madness to pretend otherwise.

Foreign-owned government debt is akin to war reparations. Reparations from the first world war are considered to be a contributing factor to the collapse of the German economy and the subsequent rise of nationalism and the Nazi party. (I hereby invoke Godwin's Law and call this debate to an end.) If Ireland, Latvia, Greece, etc. are forced to repay these debts, they will eventually rebel in unpredictable and unpleasant ways.

Interesting piece, but it seems to boil down to "austerity may have worked but it was unpopular and painful and therefore a bad idea." One does not expect the Guardian to come bearing praise for gov't cuts.

Also, Argentina's defaults didn't represent the systemic risk of the PIIGS. It's the difference between your local bank going under and Bear Stearns collapsing. Default is one of those things that don't work out as well when too many people do it.

Well, why are we excluding potential behavior from the economic picture? Austerity might make some banks whole, but it does so at the cost of local economies. If your infrastructure crumbles, if people are out of work for extended periods of time, if you're put in a position where the austerity encourages slack in the economy, well then you just end up on a never-ending treadmill of debt, because revenues go down, while the costs of dealing with the shortfall rise.

Sooner or later, folks are going to pick economic survival over self-enforced starvation. It isn't coincidence that many revolutions coincide with economic downturns, famines, or other shortfalls of basic means. Happy people don't overthrow governments, they mind their own business.

The real question, in my mind, is whether people are going to continue to have the patience to continue keeping this system on life support. The sensible thing to do would be to work out some arrangement, though some people might take a bath on it, because pursuing wishful thinking on the sustainability of the problem nation's debt is just going to lead you over the cliff of socially unsustainable policy. Fervent belief in the free market by policy makers is no substitute for a plan that can work in the real world.

Brad de Long's charts on Ireland:

Oh look, Ireland had a recession. Which proves that, um...


You didn't look at the direction of the statistics, did you.

I saw they had a recession, followed by the start of a weak recovery in the face of austerity.

What I would really like to see are the anti-austerity crowd's predictions for Irish economic.performance in which they say they expected it to be equal to or better than this., with austerity, so that we can all applaud their perspicacity and right-thinking in railing against austerity and the horror it hath wrought.

What the charts show is increasing unemployment rates.

What the interest rate charts show is that if you hammer an economy with fiscal austerity the interest rates will decline, with the assistance of your nervous neighbor who loan you money.

What the data shows is that austerity, according your views, is responsible for increases in agriculture, fishing, forestry and industrial production related to exported pharmaceuticals and computer equipment, and a continually contracting consumer spending on top of the increasing unemployment.

Whoop de do.

Which sectors are supposed to be immune to the evils of austerity? I'd really like to get this written down somewhere, seems important.

The reason this has the anti-austerity crowd upset is they expected worse numbers than this, yes even in those sectors.

Scrolling down...

Now I do feel guilty: four years ago I should have started screaming that the banks had lost control of their derivatives books and that we needed to nationalize housing finance immediately, and kept on screaming. I did not. But, IMHO at least, Krugman has nothing to feel guilty for. I believe that he has been one of the world's great benefactors over the past four years.

BDL is just beyond parody.

Many events of potentially crucial importance occurred in Ireland in that period (a new 'national consensus' government came into office; there was an increase in the minimum wage; a property tax was announced; water taxes were mooted; speculation abound of a decrease in the bailout interest rates; enormous uncertainty about the future of the Euro; beating England at rugby) that trying to recover any signal from a single quarter's GDP growth statistic as to Keynesian effectiveness is stupid and laden with political bias.

Interesting discussion lads. As someone who is Irish, hopefully I can help cast some light on the statistics, our Central Statistics Office (CSO) tends to make the point that GDP & GNP are radically different here given the amount of FDI in the economy (a sign of our extremely open economy as noted above). The figures for GDP are buoyed up by the exports to EMEA of products like Prozac and Viagra as well as Intel and so on - Ireland being their main manufacturer (on a completely unrelated point to the production of Prozac and Viagra, Ireland also scores extremely high as a place where people are generally happy on a WW basis!). The GNP data (apologies if I am misusing economics terms) is dominated by agricultural exports due to the significant size of that industry in Ireland. Dairy and other farming being a significant player in our green and pleasant land :). Austerity has focused on indigenous industry and has pushed down wage costs and land values. The latter two factors are significant for our FDI industries thus giving them an economic advantage and helping to explain the growth. We are also seeing companies, particularly in the pharmaceuticals arena, pulling back manufacturing from places like India to Ireland due to the decreasing costs and also the highly skilled workforce which is available here. As to whether Keynes economics works or not I will leave that up to you all to debate! Good Morning from Dublin :)

As to pharma, do you believe the labor component of drug manufacturing is high (which it isn't), or do you believe differential taxation (which hasn't changed) is the cause?

Hi Bill, the labour component is not very high but it is one that the government focuses on. For instance Wyeth employs 1370 people in Ireland, mostly on very decent wages (they are talked of as 'value' jobs and are mainly scientists). Pfizer employs over 2000. Plus they reckon for every one job directly in the FDI companies there are three more created in the country. These figures would appear small but you have to remember that we have only 1.5m workers and it all adds up. A review of the industry is given here:

Here is a summary - hope it helps. Clearly the main financial value of the industry is in the tax raised and its being the main employer of scientists (our most skilled workers) in the country:

· In 2010 the Irish pharmaceutical and chemical sector exported products to the value of 50.8 billion, a 7.3% increase from 47.2 billion in 2009.
· Ireland’s pharmaceutical exports are the 7th largest in the world.

· Ireland is the largest net exporter of Pharmaceuticals in the World.

· Ireland ranks 9th in the world for the level of high-tech exports as a percentage of manufacturing exports.

· 45% of people between the age of 25 and 34 in Ireland have a 3rd level qualification placing Ireland 8th in the World for university education attainment., 1ST out of 10 European countries in a 2010 IMD ranking.
· Ireland ranks 4th globally for the availability of skilled labour and openness to new ideas.

· Ireland ranks 6th in the world for labour productivity per person employed per hour, (US$).

· Ireland’s labour market flexibility is ranked 9th in the world.

· 25,300 people are employed in the Irish pharma and chemical sector.

· 46% of which are third-level graduates.

· 25% of all PhD researchers in Irish industry are employed in the sector.

What is the delta in employment in the drug sector because of the austerity program?

Much of the debate nowadays focuses on the effects of pulling one lever as opposed to another, or flushing one pipe as opposed to another, then waiting a few months to see which works. That’s not helpful. There’s only one recipe. It ingredients are 1. market freedom, 2. impersonal predictably functioning legal, administrative, and political institutions, and, 3. last but not least in the present context, growing non-dependence on (‘Keynesian’) discretionary government pipes and levers. Austerity is presumably a euphemism for permanent measure in the third category. A lot of people assume that austerity is a lever you pull only until things get back to normal. It is better viewed as an institutional readjustment, a coming to terms that finds expression in decades-long patterns of transfer payments and budgetary positions that make a country less vulnerable to black swans and white swans and from which people learn to rely only lightly rather than routinely on state insurance. If FDI is alive that’s fantastic and must have something to do with successful Irish resistance to French insistance that they raise the corporation tax. But also to some confidence among investors that government is sticking to budget responsibility, and that the Irish are serious people. No doubt private investment will feed into employment.

FDI is, as far as I am aware the number 1 in the Western World. Thats mainly due to the low corporate tax rate, English speaking, closeness to key markets and highly skilled workforce. Another key feature seldom remarked upon by US commentators (although key to much US FDI here) is that a Fortune 500 company CEO here can just ring the Taoiseach (Prime Minister) and give feedback on issues related to compliancy, legal environment and copyright and so on. They can also use that link to lobby within the EU. One successful example of this is EU Copyright law which protects US companies interests and came through the Dublin government. We are a small country (4m approx) and we understand the importance of environment for FDI investors. French insistence was always a red herring as the effective rate of corporate tax in France is less than 5% whereas in Ireland it is 12.5%. You can see that in the fact that the Germans never made any significant noises about it. Indeed French FDI brochures claim a rate of 4%. Also any FDI that did not come to Ireland would have gone to Poland or the Phillipines. France is notorious for its protectionism of its semi-state sector and also for being (how should I put this diplomatically?) difficult to deal with for outside cultures.
Confidence is demonstrated by the fact that government ministers and Irish corporate players have fanned out across the main US and UK cities to talk with business and explain what is being done. Furthermore the Irish body politic has been very strong with political debate restricted to the media (and the pub!) as well as electoral events. There have been no 'Greek' style events on the streets and the debate, although passionate, about austerity has been centred on how to protect the vulnerable and ensure that those not in employment are looked after.
The major concern for the country now is the dithering in Germany over bailing out Greece and saving the Eurozone and the impasse between the Tea Party and Obama. These are the key countries (EU and US although our exports to Greece are 10 times larger than vice versa - which given that Greece has almost three times the population is an interesting statistic) we export to and we want them to boom. :)

Great. Hope you can get the positive signalling effect over to the grumpy parts of Europe. Then maybe they would do what's needed to boost their own incoming FDI. Jumpy markets might go calm if investors find there are lots of similarly competitive places to put money to work creating jobs and boosting demand transnationally. They could dump their dull government bonds and gold! An FDI multiplier is a hundred times more effective than the bureaucratic Keynesian multiplier. I was in fact also going to say that the signalling effect of austerity is much neglected.

I think you are right Michael. But again its all about local culture. I speak German and have worked in Greece and in the UK. The Brits get our approach and have supported us both through the IMF and the European Group. Furthermore they gave us a unilateral loan of about £3.5 billion (a review of the reasons for the loan are given on this BBC page: and also have supported us in the EU discussions, at the IMF and with Washington. The German public does not understand credit and is minded of the Weimar Germany years (you may remember the photos of punters with wheel barrows of useless Deutschmarks of the time). They are extremely conservative around credit. Indeed I went to buy a €3.5k camera in one of their electronics chains (like Bestbuy I suppose, called Media markt) and proffered my Visa card. The manager and staff looked horrified as if I had mooned them! They told me they only ever take cash. Germans just do not like credit! Indeed the Cloud is causing massive challenges for Germany in that everyone else pays by credit card but many Germans dont have them and company credit cards are a rarity. So you can imagine how they feel about Greek profligacy.
The Greeks on the other hand have a very relaxed attitude to commitment. Many don't understand how they are perceived abroad and genuinely don't understand why Germany won't bail them out or why it expects them to honour the commitments they made to the Troika (EU, IMF & ECB) immediately. The Greek way is just to muddle along and is very much 'manana'. The culture is very much Middle Eastern and derived from having been under Turkish occupation for 200 years and then a military junta in the recent past. They take a long view so when a culture like Germany expects things done now and exactly as agreed there is culture shock.
Getting the news out about the country being a good place to invest in is already happening with Wilbur Ross making massive investment in Bank of Ireland (the only non-State owned bank left):

Doctorbob: It’s all interesting what you say. However cannot agree with you about culture I’m afraid. So many countries with different cultures have similar systemic approach to economy that to call the approach culture can become meaningless. Think of corruption. There is a difference between advanced country corruption and poor country corruption, but the mechanics are the same in Nigeria and Indonesia. I believe the Greek problem is ideology, and of course that ideology can become a habit, which you might want to call cultural, so often it’s a semantic difference. The point is both culture and ideology can change, and a change in formal institutions is sometimes the fastest vector for that, although creative leadership during a serious crisis is probably even faster in evolutionary terms. However the credit attitude in Germany is another matter. Debit cards are quite customary there. That seems okay to me. I’d put it in bourgeois ethic category. Your card works if immediately backed by funds agreed with the bank. A pretty reasonable ethic, not a fundamental problem for capitalism. Does not appear to have held back Germany to date. The Cloud however is frustrating the hell out me at the moment. Upload rates are incredibly slow where I currently live in the UK. You can’t even think about starting a business here that requires fast upload though all I want to do is store my podcast, music, film, and audiobook files somewhere in California. The big obstacle to Cloud seems to me here to be infrastructure and competition policy. It’s certainly not the payment system. Since Cloud and telecoms are today’s Schumpeterian carrier technologies (my periodization is not precise) I would say this is one of a small number of spheres of economic activity that probably genuinely justify government investment. To refer back to present discussion, it’s matter of discussing which are the natural monopolies at any particular point in time, and that includes who or what takes care of such things as economic stimulus.

Thanks for the feedback, Michael. I am learning lots:) ! You know I hadn't even considered debit cards! On the subject of Cloud I think that if you do upload to Google or Microsoft in the UK it will actually be sitting in a giant server in Ireland or the Netherlands most of the time. I think we are in early days in terms of the Cloud and the key challenge right now is driving trust in the product for all the players. When you consider that the US & UK military are having challenges with their own systems (and these are the lads driving the development to some extent) we have a long way to go. I recently invested in an iPhone and frankly am amazed at where we are now versus even 5 years ago. I actually have some responsibility for Cloud so if you want to e-mail me direct I might be able to give you some ideas (or probably reinforce your existing feelings on the subject) :) [email protected]

Thank you for your kind offer Doctorbob, but to tell you the truth I’ve had it up to here with the telecoms issue. It's slow, but it works...

"Mr. Fancypants Nobelprizewinner!"

Yes, fantastic - again - how Mr Cowen outsources silly sarcasm (is it?), because he himself, you know, does not like that. But McArdle hits the nail on the head, of course, because it's too early to say something now, we have to wait ten years. And this is the best "nail hitting head" argument she comes up with, based on Ireland, against a Keynesian worldview: something Keynesians did not "predict" or "expect" - not that it would contradict their arguments. Brad DeLong is unimpressed:

Let's just say Tyler Cowen becomes pretty much what is usually described as a hack when it comes to that issue - I'm just not sure if that issue is a Keynesian worldview or Krugman in persona. You know you've really lost it once your best argument is none at all plus a link to McArdle stating that, PLEASE, we can't say much SO SHUT UP, because Ireland Mr. Fancypants Nobelprizewinner Keynes Is Not Ayn Rand And I Was Right Krugman Wrong.

And also, most important, Krugman was wrong.

Is Cowen serious? On the basis of these numbers Ireland is experiencing an economic recovery that is likely going to be derailed because wider European problems. Two years ago Ireland barely had a pulse and a miniscule improvement in GNP signals the onset of a full recovery? And this guy is an economics professor?

This is WHY he's an Economics Professor. He's a very good economics professor he's remember all along that the first and foremost mission of his career is to be an apologist for big-business and Right-Wing economic policies

Have the Polish plumbers moved back yet?

Or Ireland's own twentysomethings ( )?


Hey Brian, the Poles who came to Ireland (estimated at up to 100-200k people) have mostly left in that they were low skilled builders. Relatively few had trades such as plumbing. Plumbers tended to go to the UK. The article is a bit all over the place. For instance there are no fees for university in Ireland (at least at the moment). The key challenge for non-skilled labour (the majority of whom are unemployed) is the collapse of the construction industry. Most of the people quoted in the article relate to that. The construction industry was out of all proportion with the economy (employing approx 300k people at its highpoint out of a national workforce of 2m) and was based, as is well known, on a property bubble.

On the twenty somethings it is a standard rite of passage for Irish people in that age group to travel to either the UK, US or Australia for work experience and also to experience different cultures. Most Irish people in the workforce have a wide knowledge of other cultures and how they do things and this experience is harnessed by the FDI companies with their HQ mainly being in Ireland for EMEA. Although noone wants to see these kids leaving I think for their own sakes its actually a good experience so that when we get the economy back up and running they can come back with their experiences and skills. The unfortunate aspect is where older people with families have to leave as the construction industry has collapsed with numbers employed more than halved in two years. Here is a site which is very useful about employment and financial facts for Ireland:

Not really. Irish emigration was traditionally a reflection of the weak Irish economy:

The rise in Irish emigration is due to rising unemployment, not cultural values. During the Celtic Tiger years Ireland was not exporting the youth.

Apologies Benny if I have been confusing. In the 80s (before the boom) some 50k people left each year - a sign of the poor Irish economy of the time, as you say. They were 99% Irish. Since the Celtic Tiger bit the bullet the numbers leaving, who are Irish, is about half that. Of the 30k leaving, at least half that would be in the 20 something bracket or higher. They are going to get jobs but we are hopeful that they will come back. The period from about 1997 to 2008 was an anomaly in Irish history in that people started either coming back from abroad or else EU nationals came here for jobs. If, and its a big if, the economy can come back and the world economy stabilises it's believed that these 20 somethings will come back. As someone who emigrated in 1992 it was partially an economic decision and also partially a cultural one. I think that is still true for many people. BTW that article makes this point too.

Thank you for the reply, it certainly clarifies things.

From your article,

"Of the 65,300 people who left the country in the 12 months to April 2010, 27,700 were Irish citizens. About 19,900 were eastern European; 8,100 were originally from states outside the EU. In the previous 12-month period just 18,400 of the 65,100 emigrants were Irish citizens, while a staggering 30,100 central and eastern Europeans left. So in terms of absolute numbers of Irish citizens leaving, things aren’t as bad as they seem.

Nor is unemployment the sole driver of emigration, a fact underlined by continuing emigration during Celtic Tiger years, when labour shortages prompted many firms to recruit overseas.

“Even during the boom a lot of people, particularly well-qualified graduates, left the country. Not because they had to but because they wanted to,” says Dr James Wickham, director of the employment research centre at Trinity College Dublin." >> Search String >> Found it! >> "Not really..." >> Got em!

Advice: Read it first.

I didn't say it was the sole driver of emigration.

Advice: read what I wrote first!

Yes. Last time Tyler posted on the virtues of Austerity I pointed out that Ireland was losing something like 1.5% of the working population to emigration every year.

If the American labor force were emigrating at such a rate unemployment would probably be around 7% right now and we would be talking about Obama's slam dunk reelection.

Instead, they're migrating to Texas.

Yeah, Texas isn't part of the US>

TallDave- not the brightest bulb in the pack, eh?

Did you not understand that "instead" implied migration within the country to an area with better economic conditions?

Was my point really that hard to understand? I guess I have to spell it out: they're migrating to Texas because that's where the jobs are.

If Texas were a separate country, ceteris paribus, the U.S. would have lost even more net jobs and Obama's perceived incompetence would be even greater.

As a Texan, I can inform you that much of his job growth was in government jobs, and much of the other growth was in low paying work. Texas also benefited greatly from the Stimulus program, so you'll have to tell me how Texas represents some free market triumph of the will.

I've probably spent too much time on this already, but it's interesting to note before moving on how astonishingly threatening a couple quarters of unexpectedly decent economic news from one small country are to the anti-austerity crowd.

I think reasonable people must look at this evidence and say "Well, it looks like austerity has, at a minimum, reached a stabilizing point where GDP, unemployment, and bond rates have become fairly steady. The 'strong Keynesian' arguments that austerity must cause these to decline further are called into question by this result, though a firmer judgement must await further data."

So if we see renewed Irish deterioration unrelated to wider euro troubles, then the anti-austerity advocates have something to point to and that should be taken as evidence for their position. If the other PIIGS who did not cut as quickly continue to default and Europe overall slumps into worse shape because of it, the pro-austerity crowd can point to that and say "See, austerity was the lesser of evils."

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