The Irish model of austerity

THE IRISH MODEL OF AUSTERITY…. The New York Times has a rather disheartening front-page piece today on Irish austerity measures, which I hope folks — especially federal policymakers — will read. Ireland responded to a sharp economic downturn with aggressive austerity measures — which has made the country’s economy worse.

Much of the world — and domestically, all of the Republican Party — believes the lesson to be learned is that belt-tightening and deficit reduction works. “Other European nations,” the NYT, “including Britain and Germany, are following Ireland’s lead.”

Paul Krugman helps highlight the larger context.

The key thing to bear in mind about calls for harsh austerity in the face of a depressed economy is that such calls depend on two propositions, not one. Not only do you have to believe that the invisible bond vigilantes are about to strike — that you must move to appease markets, even though right now bond buyers are willing to lend money to the United States at very low rates; you must also believe that short-term fiscal cutbacks will in fact appease the markets if they do, in fact, lose confidence.

That’s why the Irish debacle is so important. All that savage austerity was supposed to bring rewards; the conventional wisdom that this would happen is so strong that one often reads news reports claiming that it has, in fact, happened, that Ireland’s resolve has impressed and reassured the financial markets. But the reality is that nothing of the sort has taken place: virtuous, suffering Ireland is gaining nothing.

Of course, I know what will happen next: we’ll hear that the Irish just aren’t doing enough, and must do more. If we’ve been bleeding the patient, and he has nonetheless gotten sicker, well, we clearly need to bleed him some more.

Remember, here in the U.S., Republicans are desperate to do exactly what the Irish have done — respond to an economic downturn by taking money out of the economy, focusing on the deficit, fearing inflation that doesn’t exist, and taking steps to reassure investors — that don’t actually reassure investors.

It is, as Krugman noted yesterday, “the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.”

Postscript: I’d add, by the way, that if U.S. policymakers decide to follow Dublin over this easily-avoidable cliff, it will be after Dublin followed the U.S. over the last cliff. Henry Farrell had a great piece on this in the most recent issue of the Washington Monthly, highlighting the Irish’s combination of crony capitalism and worship of American-style market fundamentalism — and where it got them.