The luck of the Irish

Ireland now has had two quarters of considerably stronger than expected growth, it’s now both gnp and gdp, and domestic  demand (!) is up, and borrowing rates are down, though employment remains miserable.  Even I am surprised by the positive signs here (I never bought the doctrine of expansionary fiscal austerity, though I saw austerity as necessary for Ireland), and yet now Paul Krugman claims to have expected this all along:

Look, standard Keynesian models, open-economy version, tell a very clear story about what happens when a country pegs its exchange rate at a level that leaves its industry uncompetitive. The country doesn’t stay depressed forever: high unemployment leads to actual or at least relative deflation, which gradually improves cost-competitiveness, which leads to rising net exports and gradual expansion. In the long run, full employment is restored; it’s just that in the long run we’re all, well, you get the picture.

Somehow, reading Krugman, I had the expectation that fiscal austerity would lead to falling output and deflationary pressures and downward spirals for some time to come, at least for open economies with fixed exchange rates in suboptimal currency unions.  But put the generalities aside, what were the published claims and predictions about Ireland?:

Here Krugman says Ireland is “gaining nothing” and attacks Trichet for denying “stagnation.”  Late 2010 Krugman tells us that the “Irish are suffering from plunging incomes,” “confidence is not improving,” and investors are fleeing the country.  No mention of the just around the corner recovery in output and aggregate demand, maybe it didn’t fit the word count.  We were told, however, that “confidence just keeps draining away.”

Here is a March 2011 interview where Krugman says (this is the newspaper paraphrasing him, maybe he was misquoted):

Ireland, Greece and Britain are examples of how spending cuts have failed to bring a rise in confidence or benefit growth or the jobs market.

In early 2011 Krugman noted that Ireland’s “medium-term”  prospects look “desperate” and he calls it an especially hard case within the eurozone.  No mention of the pending recovery in output and aggregate demand.

April 2011, here we are told, discussing Ireland and Greece together, that contractionary policies will shrink output.  A similar point was made in 2009, concerning incomes.

Here he graphed the borrowing rate for Ireland and pointed out it was rising because of austerity; in reality the graph continued to update after his post and it shows the rate plunging right after the post was made; yes some of that was EU aid but that same aid has hardly led to falling rates for the other crisis countries.

About a week ago, Brad DeLong pointed out that for the vulgar Keynesian view the long run can stretch for as long as fifteen years.  That wasn’t an estimate of when unemployment would go back to normal, but rather of when some version of “classical” macro would start to hold again.

Sorry guys, it is better to admit you were wrong and have what I call a “Horatio moment.”  (Here Krugman claims that the austerity advocates have to invent a mythical version of Keynesian economics to claim a false victory.)

You still don’t have to believe that immediate fiscal contractions are expansionary; in general they’re not, but you can still have been wrong about Ireland.  The simplest lesson to at least try on is that internal devaluation sometimes does better on the AD side than we are inclined to think, or that real factors mattered more than expected, or a bit of both.  Or try Karl Smith’s ideas.  It’s not all about the downward spiral, although this was one scenario laid out in Keynes.  We should and will await more data, not to mention data revisions, but in the meantime it is correct to be surprised by the much-better-than-expected Irish growth performance, and at a difficult global time at that; you can’t claim the American and European growth locomotives pulled them out of the slump.  This expert on the Irish economy offers a sector-by-sector breakdown of the new numbers and he too admits he was surprised.

Addendum: No one is calling Ireland a “success,” nor should we be committed to the view that Ireland can survive the coming storm of eurozone defaults.  Don’t let anyone turn this into an “us vs. them” debate on austerity, but rather keep your eye on the ball, namely predictions about how Ireland would fare post-austerity.  Nor is the relevant comparison how much of the old output has been won back.  Start with the advent of the austerity, circa 2009, and graph your 2009 and 2010 predictions against what actually happened.  It ain’t a pretty picture, and I’ll be the first to admit (and apparently I am) that my predictions were incorrect.


If Paul Krugman appears to be wrong, then you've clearly misunderstood his prediction, because Paul Krugman being wrong violates the first law of economics, which of course is "Paul Krugman cannot be wrong." Just ask Paul Krugman.

This about sums up the entire nature of the divide in the economics blogosphere.

This about sums up the divide in Paul Krugman's office when Mrs. Krugman is not present.

The more threatened he feels, the harder he rubs his Nobel medal. It's about the size of a quarter now.

"Don’t let anyone turn this into an “us vs. them” debate on austerity,"

Good luck with that.

I think you're being a bit cheeky here. Krugman is obviously taking umbrage at your attack on Keynsian economics and making the case that actually the story, which you accept is far from one of resounding success for austerity, is explicable in Keynsian terms. Since the Irish economy could also plausibly be shrinking according to the Keynsian story (and probably will be once the euro mess explodes properly), very modest growth it not a nail in the coffin for Keynes.

You are right of course that Krugman did not predict this but perhaps he is also right that you are too quick to say Keynsianism cannot explain this - which you seem to sort of accept.

So you're both right and wrong. Happy days.

It's not about "I told you so," it's about models!

It's about dire predictions of catastrophe if a government doesn't follow a particular line of advice derived from a model, cheaply given.

We don't need to make any claims or provide evidence other than the Irish are not starving to death to prove PK wrong.

PK perhaps but not Keynes, which is PK's point.

Krugman being wrong about how quickly a given society can adjust to austerity doesn't make the whole of Keynsian economics wrong. The Irish took the devaluation, they took real paycuts and lived with it. Good for them I suppose, their GDP is back to where it was three years ago and still below it's peak. Can't the rate at which aggregate supply is shifting still fit in the model? Can't it be faster for Ireland and much much slower for Greece with out putting a match to the text book?

What makes the whole of Keynesian economics wrong is when its adherents can't even admit that they might only be 99% right.

Well, the way I see it is that they don't admit it because the theory doesn't allow it. There is no falsifiability test for Keynesian economics - if the numbers don't look right you twist the inputs and twist the outputs (the whole debate between short and long term is clear evidence of that) and at the end of the day they are always 100% right.

The data from Ireland shows that domestic demand is still contracting (-3.1%) and that the growth in GDP is coming from strong net export growth (20.6%). See Not quite a refutation of Krugman.

Joe, you're looking at the Q1 data, which was released in June... The Q2 data, released last week, shows domestic demand finally growing (1.1%) due to increasing private consumption (+0.3%) and investment (+ 6.4%).

However, I agree that it's too early to celebrate an Irish recovery. With public expenditure having increased from around 37% of GDP back in 2007 to 67% of GDP in 2010, it's probably going to take some time before foreign companies and investors are ready to put their faith in the Celtic Tiger again. And as any 10-year-old would know, cleaning up a messy room is a painful but necessary process.

So let's get this straight: If the austerity program had led to a strong contraction, the Keynesians would have taken that as proof that Keynes was right. Krugman predicted a bad outcome from the austerity program.

So then the austerity program is put in place, and after a relatively short time the economy starts doing better. So now, by doing some logical twists and flips, this can be spun as being compatible with Keynesianism.

In the meantime, real-world data is showing that the countries that actually did try a Keynesian approach to fixing the economy have not had anywhere near the results they were hoping for, and in fact, it looks like we may be heading for a double-dip recession in many of these countries.

In the U.S. a trillion dollars of Keynesian stimulus plus all sorts of other monetary and fiscal gimmicks designed to goose demand have failed to do so.

At what point can we declare the Keynesian approach to be generally wrong at the current time? Just how does this theory get falsified? Is there any amount of evidence Keynesians will accept before declaring their approach to be a failure? Or are we doomed to just keep trying until the world economy completely collapses?

I think we all know that if the world economies had adopted austerity programs instead of Keynesian stimulus, and they led to the kind of outcomes we see today in the U.S. and Europe, Paul Krugman would be on the rooftops shouting "FAILURE!" with a megaphone.

This analysis is unfair. First, as Tyler notes, Ireland is not doing well, it is just not in recession. If it was doing wonderfully well the Keynesians would have something to explain. Second, the UK is a perfect example of austerity that is not working at all. Finland, by contrast, borrowed a lot to keep people in jobs and was posting 3% growth this year. That will turn to recession next year because of this mess but it was working fine.

If you pick your data points you'll get the results you want. I'm not defending Keynesians here, I'm saying the data we have is inconclusive.

The UK's austerity is working reasonably well, thank you.

Some critics say it's not working because we want public spending cuts *and* growth, both at the same time.

That seems to be expecting too much. The purpose of the UK's austerity is to reduce the cost of the public sector and hence reduce the deficit and the debt and the interest payments. That's going more or less to plan.

Incidentally, one thing I've never read at Paul Krugman's blog is a post titled "this is who I think should pay for my recommended expansionary policy". The body of the post would list people and classes of people like "pensioners", "our children", "foreign bondholders" and so on.

If what you say is true, why has Osbourne had to revise UK growth down for the fourth time? Why is unemployment rising? You can't be serious.

Hmm - the British public seems to disagree with your assessment of 'austerity' working, but then, you can read about that at its own Wikipedia page -

It doesn't HAVE to work well. It just has to not work badly for the Keynesian model and leftist predictions to explode. It proves once and for all that government action is not necessary or sufficient for economic recovery, even from a deep recession.

Markets heal on their own, and government policy can slow that healing as much as speed it along. Austerity is even "worse" than doing nothing in the Keynesian book, and it hasn't yet caused catastrophic results. Even if catastrophe befell Ireland, one must show austerity as its cause, and not other factors.

I think this just supports the idea that Krugman-Keynesianism is unfalsifiable. If US Treasury rates rise, it's because investors are scared of needless US deficit mongering. If US Treasury rates plummet, it's because of, I don't know, European austerity? If Ireland contracts, the result was expected due to austerity. If Ireland doesn't contract, the result is either not because of austerity or is not really a result at all.

The world is more complicated than our models, which means that, like most ideologies, Keynesianism can be retrofitted to any past economic outcome but is relatively useless at predicting future economic outcomes. (Keynesians don't have a monopoly on this either. Just watch Austrians before and after last weekend's commodities rout.)

Didn't Krugman just do a post explaining gold's rise as primarily from the weak economy? Yes he did.

It is possible people are just wrong on their commodities thesis.

I've heard the rise of purchases from India and China actually explain it a lot better, though I really need to find a graph.

That would lead to the question of why purchases would be increasing so much from those countries, and my guess is they have a lot more fear than we do.

That's right. Just wrote the same thing (haven't read your comment until now). It is really a useless debate. Or like a lefty friend of mine defines it, it is very naive to think that economics and politics are independent from each other.

To me the basic principle is pretty simple. If you had created a government agency that, say, for example, had a legal monopoly on first-class postage (don't laugh, it could happen) and you closed it down tomorrow to cover, say, the Social Security deficit, because, well, "the government are us!" then yes, that would affect the economy, possibly negatively. Don't do that. Better yet, don't get in that sticky situation.

You are completely 100% wrong and Krugman is completely 100% right here.
Ireland is still a disaster and this is pure noise not recovery.
Tiny economies like Ireland and Latvia get noisy data.

That you don't even dare to plot Irish unemployment or gdp versus either trendline or even peak just shows it.
Facts disagree with you.

What exactly are you saying Tyler is wrong about? Is he wrong about saying that his predictions were incorrect? Are his links to Paul Krugman previous posts not actually written by Paul Krugman? Please elaborate.

For an ex Austrian, I am surprised you dont mention debt or the interest subsidy.

On a look through basis, Constantin Gurgiev has calculated that the average wage earner owes 40%+ to service public and private debt interest alone. Note that the interest Ireland is paying is not the market interest rate but a heavily subsidised one via the ECB and its agents.

As for exports, note that Ireland is the centre for many corporations who enjoy the 12.5% tax rate. What has an increase in Google or Facebook's earnings in Ireland (great for exports and GDP!) got to do with Ireland and its austerity or Krugman?

Sloppy analysis = sloppy conclusions.

predictions about how Ireland would fare post-austerity.

Exactly, this is how empiricism works: your model makes predictions, then you judge the predictions against reality.

The more interesting question at this point is why austerity is working in Ireland. It looks like Ireland has reached a point where the reduction in output from austerity is no longer sufficient to drive a vicious cycle of less private output leading to further austerity cuts, but I think it's not clear why, and it might be important to understand. Greece has perhaps not yet reached this point, and further default seems likely there.

Another way to ask this might be: What is the negative multiplier for austerity? The answer is going to vary from country to country, but in Ireland it seems it may be small enough for them to avoid default.

Also, if we accept that the stimulus/austerity multiplier is smaller for more per-capita productive economies (i.e., gov't spending can have a larger multiplier in less efficient economies (since the losses to gov't inefficiency are relatively smaller), which seems to have been demonstrated in the immediate aftermath of the fall of Communism in Europe, and the patterns of growth in S Korea and China) we can draw some interesting conclusions about what policies are indicated for different situations.

People do realize that Ireland's population is roughly the same as that of the DC metro region, right?

Oops - the second half of that observation being that Ireland is really a very small ripple in a very large pool - and it remains fascinating how no one comments at how deeply Ireland's (financial) economy remains tied not to the eurozone, but to the UK's. And yet, no one seems to talk the UK, oddly - perhaps because like Ireland, the UK is in a real mess, but unlike Ireland, the ECB really cares nothing about what happens to the pound?

Ireland is not really very indicative of much - making predictions in this sort of debate concerning the UK and its policies would be much more interesting. After all, the Irish (and Spanish, to a major if lesser and different extent) property bubble was as much due to ties to the UK as it was to anything relating to eurozone policies.

Indirect animal spirit impacts of austerity on growth is also relevant I believe.

The 2009 paper by Alesina & Ardagna said “spending needs to be kept under tight control otherwise increasing taxes running after ever increasing spending will not work”, the suggestion being that tax cuts are more likely to stimulate economic growth than spending. It was limited to that.

The argument that the rationale for austerity is expansion is really rather far fetched and might not be serious at all. Austerity cuts debt, nothing more nothing less. Investors, though they might like the best of both worlds in an after-hours fantasy land, shout at their day desks that their foresight problem relates most fundamentally to the uncertainty generated by out-of-control budget deficits. So austerity, though not sufficient in itself, is one necessary form of future-oriented institutional signaling to encourage the movement of cash into production and jobs. If austerity also facilitates Schumpeterian liquidation I am certain that is also necessary and good, but no one would pretend this quickly raises animal spirits across the board.

Tyler, Good analysis.

Trolling is a art.

So, you're saying you are the Jeff Koons of trolling?

Change title to "Smackdown watch"

or "Department of HUH???"


What a load. We grew during the depression too, and among the fastest ever, but we were far from anything one could deem normal. The downward spiral was limited to 3 years even then. That is not how depressions are measured and pretending otherwise is foolish.

You can believe this, or you can believe the market.

If you believe this, go out and buy, buy, buy some Irish government bonds. They yield over 9 percent with ECB support, wherease US bonds are scaping the bottom.

Buy more gold while you're at it too.

Prosperity is just around the corner.

And, visit Ireland. (We will be this spring.) With 14% unemployment, we expect to get great personal service.

So, you are saying the numbers are wrong? If so, Krugman just said those numbers are what Keynesianism would predict. So Krugman is wrong??

Or are you just saying the numbers don't matter? In that case, your comment is irrelevant because this post is about Krugman predicting one thing and then, when he opposite happens, claiming he predicted that instead.

I read the Krugman posts, and nowhere did he say that Ireland would decline forever. Nor would anyone say that, even Keynes.

But, I also looked at current Irish statistics, both GDP, GNP, exports, and domestic consumption. You should go to my comments on Tyler's previous post, look at the statistics deLong collected (even if you dislike him) here: You should also read the Irish CSO press release and the Reuters news article on the Irish economy.

This discussion reminds me of my youth: when the Catholics did not talk to the Lutherans, with each believing their faith had all the answers. Watching people comment and in two lines dissing Krugman but without reading the materials or looking up the facts for themselves might reinforce groupthink and make people comfortable with their mindviews, but it will not reveal reality.

Do your own reasearch and think for yourself. Or, you can genuflect to your beliefs, but you will have to ignore the facts.

Spoken by the guy who wears knee pads all day long just in case PK, BDL, or Thoma has a Snausage to balance on your nose.

Mike, You have no proof of what you say. I certainly do not accept uncritically what is thrown before me.

You should get in the habit of doing your own research, checking sources, and looking at what other people say as well.

I believe it was you who said: "I don’t waste much precious limited lifespan reading anything BDL has to say, especially not when recommended by one of his cheerleaders. Each time I do, I want those minutes of my life back. BDL hasn’t lived in the real world a day in his life."

So, you don't seem to search out other views.

Any surprise you don't like them when someone else points them out?

No, Bill, I search other people's views enough to know where I should no longer waste my time.

And if you paid a little more attention, you'd realize I give YOUR views greater attention and respect than BDL or Krugman. You aren't condescending when you present a POV.

I like when you post Bill more than anything else.

I've read enough of other people's thoughts to know that most theoretical models have unrealistic assumptions and most empirical models have faulty data and modeling techniques. In the end its just noise.

As the old Chinese saying goes, 'If you understand, the world is the way it is. If you do not understand, the world is the way it is."

I've lived enough in the real world to understand from experience how it works. I've seen successful and failed paradigms. I have no confidence in the views of people who never had a real job in their lives, never ran a business, was never unemployed, never worked at minimum wage, never suffered from a cyclical downturn, or never risked their lives for the sake of another.

These Nobel prize winners and tenured professors couldn't operate a profitable whorehouse near a shipyard. They're not qualified to render advice on how to rescue a failed economy. It's above their experience level. I'm not easily taken in by frauds.

'...namely predictions about how Ireland would fare post-austerity'
You know, it just occurred to me that this encapsulates what makes essentially all American reporting about things outside of America so irritating - American economists debating about American policy debates, while using Ireland as a proxy.

If one is curious about how Ireland is faring post-austerity (for example, I'm pretty sure that virtually no one in Ireland would believe they are actually living in a post-austerity phase, though since there are no more banks left to actually collapse, one 'crisis' seems over - through nationalization), maybe one should ask the Irish?

After all, the French just provided an opinion about their economic state in barely day old elections - the left won its biggest victory in roughly two generations, as a matter of fact.

Hasn´t Krugman, on multiple occasions, said that austerity and depreciation of your currency (or lowering of wages) can, and on multiple occasion have, worked for individual countries?

The problem is that everybody can´t take that route at the same time.

'The problem is that everybody can´t take that route at the same time.'
Well, sure you can - as this mainstream Irish news source points out -
'Net exports grew by €1.9bn, since the second quarter in 2010, while domestic demand declined by €714m over the same period.

Agriculture, forestry, fishing and industry (excluding building and construction) were the only sectors to grow, according to the figures from the Central Statistics Office. '

Just export your way into growth - it seems to be working for the Irish, so why shouldn't it work for everybody?

Sorry - it is just so many people like to say that devaluing a currency is a fine way to increase exports and provide growth, but let's face it - that method is also just an extended shell game, unless one really thinks Irish butter to be the highest achievement of the butter making arts. (Not disparaging Irish butter, by the way - when hand made, it can be really quite enjoyable, though that butter is not exportable.)

Well, everyone can't lower relative wages, but we can all lower wages together, and everyone can engage in austerity.

It probably doesn't work as well as when one country does it, but the same is even more true of spending our way into default.

What does he man by 'deflation'?

So, borrowing heavily at 9% WOULD cause a rapid snap back to full employment?

Krugman not only contradicts his past self, but his argument also fails to explain how a 1pp difference in inflation rates (using EU's HICP) is enough to achieve "internal devaluation". The man is just delusional.

The thing that confuses me is how the comments on Krugman's blogs are universally positive. Why does that happen on left-leaning economics blogs?

I know BDL's is scrubbed of thoughtcrime. Not sure about Krugman's.

Yeah DeLong and Quiggin both crush any dissent (I believe Brad has done it to Tyler, actually. Denied it though. Was funny). Krugman is just by far the most well known and the NYT is pretty left leaning anyway, with a left leaning readership. So the comments are full of sycophants.

If Krugman blogged for the WSJ for example his comments wouldn't be very positive.

DeLong believes in removing whatever he feels shows him in a bad light - he has been doing it for years, but since removing comments tends to show him in a bad light, he tends to remove even his own comments which might actually show him being actively engaged in deletion.

I don't believe Krugman scrubs his comments. For a while there, people were posting very long (5,000 word) reasonably sophisticated (charts and references, etc.) rebuttals to nearly every thing he wrote. The comment length was then severly restricted to eliminate this. While it does preclude complete rebuttals, If the comments were being scrubbed, there would be no reason to restrict the length like this.

Part of the explanation is the selection of comments.

Another part is the limited time to post and the low value of the sycophants' time.

The third component is their impatient wait for their daily Scooby Snacks.

There is a recording of a nice little presentation of last week's data postedat the end of this. Very informative.

Looking at the Irish GDP data, the main source of growth has been the improvement in net exports, which was probably more than Krugman expected. One of the problems with Keynesianism is that international factors are under-considered in practice. Even Krugman, who supposedly received his Nobel for his international trade insights, is sporadic about giving international factors their due. Forecasting international trade and investment is very hard and requires a lot of independant variables that most economic models do not include.

"When the facts change, I change my mind." --John Maynard Keynes

I think where we've really all gotten tangled up is that, at different times, most US commentators have tried to draw lessons from Ireland for the US, or dismissed others' supposed lessons. And Ireland is simply very different. It's small, and very open, and the Irish experience doesn't say much that's informative about whether the US or even the larger European economies should pursue austerity vs. Keynesian stimulus policies (as if those were the only options).

Neither did the Irish experience ever have much to say about optimal US rates for corporate tax, or deregulation.

The one inarguable lesson from Ireland - don't let idiot bankers blow up your economy - does have some general applicability.

Congratulations to a further Krugman obsessed post, Mr Cowen. Krugman points out why, in his opinion, what you say about the Irish economy does not at all refute Keynesian economics. And you get a hissy fit wildly throwing in old Krugman quotes. "BUT KRUGMAN WAS WRONG!!! BUT KRUGMAN WAS WRONG!!! BUT KRUGMAN WAS WRONG!!!"

And, most important, Krugman was wrong.


sycophant so mad

sycophant so mischievous? martin so sad! sycophant so mad = so not true. sycophant so mean, martin now SOOOOO cry.

Great post. All I'd add is that internal devaluation boosts SRAS, not AD. It boosts the quantity of AD, by moving you down and to the right along a fixed AD curve.

In general, it is a big challenge for 'old Keynesian economics' to justify why deflationary death spirals are not more common, or why hyperinflation and sovereign defaults are more common.

My intution is basically microeconomic. Ireland is looking up, because its competition in the bend of backwards for business and have a low wage structure within Europe segment of redeployable, tarrif sensitive manufacturing is looking better than competitors like Greece, Portugal, Spain and perhaps even Italy, all of which face great uncertainty regarding their economic prospects and the kind of fiscal action that will be taken by national governments. Ireland, but biting the bullet and resolving that uncertainty first has made itself more attractive relative to these competitors within the E.U.

Comments for this post are closed