Friday, November 26, 2010

Krugman on Ireland

Via IrishEconomy Paul Krugman on the Irish Economy. Krugman is arguing that the Irish taxpayer is practically being eaten to bail out reckless lenders and financial institutions.


Martin Ryan said...

Krugman's discussion of how Ireland might follow Iceland (re: the banks) aside; there is a still an implication in his writing that Ireland's fiscal austerity is misguided. Never mind that the austerity is not necessarily intended to cause growth; simply to balance the Exchequer.

Constantin Gurdgiev has pointed out that Krugman's point of view to date has largely ignored a key difference between Ireland and the United States (in relation to Exchequer balances):

"Tiny Ireland is one of the most open economies in the world, but it has no power to dictate to bond markets or print money. We simply do not wield anything like the kind of power to run up deficits and debts that America has," he said. "America can spend its way out of problems. We cannot ... So we must cut, and we must reassure our lenders."

Constantin: Ireland endures pain to conquer debt

On Paul Krugman's recent criticism of an ESRI report, Karl Whelan said:

"One by-product of Paul Krugman’s latest intervention on Ireland is that it will provide further ammunition for the many people who believe the government should abandon fiscal austerity and provide a stimulus package of new spending to boost the economy...

I know that the majority of Irish economists don’t agree with this idea but perhaps we’re not doing a very good job at communicating why, so here’s a brief explanation...

By the way, it gives me no joy whatsoever to write this. I would love to be in a position to recommend fiscal stimulus... However, the extent of the fiscal mis-management of the country means that there’s no room to do this."

Karl: Unpleasant Stimulus Arithmetic

Martin Ryan said...

In the post linked above (Unpleasant Stimulus Arithmetic), Karl Whelan also says:

"Like it or not, bond market participants go along with the boring mainstream analysis I described above: They believe stimulus packages would raise the deficit. If they see the Irish government acting in a way that, rather than reducing the deficit, would raise it for a number of years, they will just pack it in. Borrowing rates would either rise enough to offset any positive effect of stimulus or the bond market would just give up on lending to Ireland altogether."

This contrasts with Krugman's assertion (in his current article) that: "Investors have noticed that all those austerity measures are depressing the Irish economy — and are fleeing Irish debt because of that economic weakness."

Could it not be the case (running at odds with what Krugman says) that investors sold off Irish debt (bringing about a 9% 10-year bond yield on Govt. borrowing) because of the extent of Ireland's pseudo-stimulus for the financial-sector? And because of the fear that this stimulus was compromised by the Merkel loss-sharing (or "bail-in") proposal?