Eli Dourado

Ireland tells us nothing about austerity

In 2008, the Keynesians emerged from hiding, where they had been since the mid-1980s. It was nice to see them, catch up, and so on. But now they won’t go away.

This week’s Buttonwood column in The Economist considers whether fiscal austerity is expansionary or contractionary. A sentence caught my eye.

Keynesian economists are also likely to counter the Canadian example [in which fiscal austerity was followed by prosperity] with that of Ireland today, where a willingness to appease the bond markets with budget cuts has been accompanied by a fall in nominal GDP of almost a fifth.

Last week in the New York Times, Christy Romer’s debut column claimed:

Ireland, Greece and Spain have all had rising unemployment after moving to cut deficits.

OK, I can agree that Ireland, Greece, and Spain all cut their deficits, and that they all had rising unemployment. I will leave aside, for this post, the question of what their unemployment rate would have been if they had not appeased the bond market, because in the US context it is irrelevant. The US is not yet on the immediate verge of a sovereign debt crisis.

What is important in the US context? Ireland, Greece, and Spain differ from the US in a way that is so inescapably essential in theory that it makes me want to revoke the credentials of any economist who cites them as evidence. Yes, dear reader, you guessed it, none of them runs its own monetary policy.

The monetary authority moves last. It incorporates the actions of the fiscal authority into its choices. If the fiscal authority decides to be austere, the monetary authority can be loose. The friendly Keynesians who cite the experiences of countries without their own currencies as evidence of the evil of austerity during a recession are trying to trick you.