July 01, 2010

On Ireland's Austerity Program

Corner post refuting the "lesson" that we should learn from Ireland is that Keneysian debt is good:
Here is the more important point not to lose sight of: Ireland got absolutely creamed by a property bubble that was much bigger than ours. Their budget deficit spiraled to 14.3 percent of GDP — worse than Greece's. Ireland chose austerity. Greece jumped on the stimulus bandwagon with everyone else in 2008. Ireland suffered a sharper economic contraction and higher unemployment than Greece, but Greece got stuck with the debt crisis. All this recent hand-wringing over Irish austerity blithely assumes that if Ireland hadn't moved to control her deficits, the bond vigilantes wouldn't have come for her instead. Given the severity of Ireland's problems, that is a heroic assumption indeed.

The bitter irony in all this, of course, is that Greece wasn't forced to live the consequences of profligacy: It got a bailout. Had Ireland's leaders known that the EU would crumble so readily, maybe they would have thought twice about going the austerity route. But the U.S. lacks even the luxury of taking a gamble. It is too big to bail, which is why it might be wise to put down the dice and back away from the table.

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