The Success of Irish Austerity: The Joke is on Krugman
During the late 1990s, Ireland's economy was booming. This was mostly due to a low corporate tax rate of just 12.5% and an international real estate bubble that boosted global Gross Domestic Product (GDP). For a myriad of reasons Ireland was a magnet for foreign direct investment and the envy of Europe.
Buoyed by cheap money, the Irish government embarked on a debt-fueled property boom from 1997 to 2006, which caused the price of an average house to jump more than four-fold. Flush with tax revenue the government also went on a spending binge: investment in Ireland's health service soared by five times and pay for government workers doubled.
Unfortunately, the world-wide financial crisis sent Ireland's boom economy to bust almost overnight; GDP declined more than 14% in the following two years. And, the government's budget went from surpluses during 2006 thru 2007, to a staggering deficit of 14.3% of its GDP in 2008.
In response to this economic crisis the Irish people and elected officials did something few countries are willing to do: they embraced fiscal austerity. The government slashed spending and raised taxes. Since 2008, seven budgets have taken €28 billion ($38 billion) out of the economy in spending cuts and tax hikes, which amounts to 17% of today's GDP.
Fiscal austerity runs counter to the popular Keynesian dogma that in times of crisis governments should spend their way out of economic downturns--regardless of the current level of debt. And while I would have preferred Ireland cut additional spending in lieu of raising taxes, I applaud the people's resolve to embrace smaller government in place of the reckless deficit spending that is in vogue today.
However, Ireland's belt tightening hasn't garnered similar favor by all economists. And it has particularly gotten under the skin of the king apologist for Keynesianism....Paul Krugman.
Krugman, who is completely chagrinned by Irish austerity, has devoted an inane amount of time and ink scolding Ireland's austerity plan and has consistently predicted the country's imminent economic demise. Even making it personal in a 2010 column where he mocked, "The best thing about the Irish right now is that there are so few of them." This leaves anyone familiar with the history of Ireland's sad past with famine that wiped out over one million people, justified to question the true conscious of this particular liberal.
Krugman asserts budget-cutting should be postponed until Ireland is no longer embroiled in a "liquidity trap". This liquidity trap he fears is in actuality the free market's way of healing the economy through debt reduction. However, Krugman is convinced that only reckless government deficit spending can free economies from this so called trap. And that Ireland should emulate Japan, which is suffering through its third recession in as many years, a multitude of lost economic decades, a cascading currency, and on the way to spending themselves into a debt to GDP ratio of 250%. That's a hell of a price to pay in order to avoid economic reality while patiently awaiting freedom from their "liquidity trap".
It is clear Krugman fears Ireland's success with austerity will serve to counter John Maynard Keynes's deficit spending doctrine. Thus, calling into question everything he holds dear. So let's have some fun and see who is faring better - the austere Emerald Island or the Land of the Rising Budget Deficits. After all, there is no better anti-austerity experiment than the nation of Japan.
In the immediate wake of its austerity plan, Ireland's economy expanded slowly during the 2010-12 period. However In 2014 the Irish economy grew at a pace of 4.8%, making it the fastest-growing country in the European Union, and with a faster growth rate than the United States in each year since the Great Recession. The Irish economy grew 1.9 % for the second quarter ending in June of 2015, following an upwardly revised 2.1% expansion in first quarter of 2015-which was way above Krugman's and the market's expectations.
Ireland achieved this growth while dragging their budget deficit down to 4.1% of GDP, from the 14.3% in 2008. The country was also the first Eurozone country to exit a rescue program by the IMF. Ireland's seasonally adjusted jobless rate fell below 9% for the first time since 2008, to 8.9% in October of 2015.
For a fleeting moment in December 1989, the Japanese stock market (Nikkei 225) surpassed the U.S. market in size as it hit its peak at 38,916 and a P/E ratio of 80 times; Japanese real estate accounted for half the value of all land on earth at US$24 trillion. When Japan's real estate and stock market bubble burst the Japanese were diligent Keynesians embarking on spending programs in the 1990's totaling more than 100 trillion yen. Where has all this spending gotten Japan? Two and one half consecutive lost decades and counting.
Much to Krugman's delight, in 2012 the Japanese embraced Abenomics, an economic strategy that doubled down on the same specious spending and money printing the Japanese were already engaged in. With one of Abe's three arrows directed at increasing government deficit spending, Japan is currently running a budget deficit that is 8% of GDP. With another arrow aimed at currency destruction to goose exports. However, we just learned that Japanese exports fell in October for the first time in fourteen months. And in fact, the only target Abe's arrows appears to be accurately hitting is a recession.
Most recently, the Japanese economy shrank 0.2% for the September of 2015 quarter and has been unable to provide a sustainable recovery in GDP growth since the end of the Great Recession.
More strikingly, Japanese GDP has gone nowhere in nominal terms during the past decade and, thanks to its currency debasement strategy, has sharply contracted in real terms.
But none of this dissuades Krugman from believing the only thing lacking in Abenomics is its conviction to do more of the same. Krugman selects to trust his lying eyes, preferring to pursue lost decades over a few austere years. In a column penned in 2013 he childishly blustered that, "The repeated invocation of Ireland as a role model has gotten to be a sick joke." Nevertheless...It appears this time the joke is on him.