Thursday, September 30, 2010

The Bloodletters

Haven’t you had enough economic anxiety in your life? If yes, I’m afraid this post won’t help. Let’s talk the bad luck of the Irish. They’re bailing out an already bailed-out bank, the Anglo-Irish Bank, which the Wall Street Journal reveals will cost them a tidy bundle:
The Central Bank of Ireland said early Thursday that the state-owned Anglo Irish Bank Corp., Ireland's most troubled financial institution, will need total capital of €34.3 billion ($46.75 billion) in a worst-case scenario.

The soaring costs of supporting the Irish banking system will cause the government's budget deficit to rise to 32% of gross domestic product this year, Mr. Lenihan said in a statement Thursday.

The size of the truly-big budget deficit will doubtlessly require more cuts, and some conservative-leaning people have said this proves the need for more austerity; in fact, Tyler Cowen and Alex Massie seem to believe this proves Ireland never tried austerity in the first place.

This is probably Internet-induced amnesia, with the events of six months to a year ago fading into some vague fog. Because of course people were praising the Irish austerity drive lustily during that time period. Examples? Of course.

April 7, 2009, The Telegraph, “Ireland imposes emergency cuts” (subhed: “Dublin has unveiled the harshest spending cuts in the history of the Irish Republic):
Brian Lenihan, the finance minister, outlined a grim package of 1930s-style retrenchment, slashing child benefit and allowances for jobseekers. Road and railways projects will be frozen. There will be a cull of junior ministers save costs. Two-thirds of the belt-tightening will come from tax rises. A pension levy of 1pc – imposed in the face of bitter protests in January – will be doubled to 2pc.

February 4, 2010, Reuters, “Ireland manages austerity, can others follow?”:
A year ago, markets were piling pressure on Ireland as its debt-fuelled property boom collapsed, with some investors speculating it could be forced out of the euro altogether. But harsh reforms have largely restored market confidence.

Crucially, the public looks to have reluctantly accepted the measures, including public sector pay cuts of between 5 and 15 percent. Fears the ruling coalition could collapse and spark elections have receded.

June 28, 2010, The New York Times, “In Ireland, a Picture of the High Cost of Austerity”:
While no one is marching in the streets, the Irish do have a tipping point: Prime Minister Cowen, whose popularity has plummeted, agreed last week not to cut public wages again in the next budget. Many voters, having experienced the pain of austerity, are expected to express their anger in the 2012 elections.

And, of course, the high priests of the austerity religion, the WSJ Editorial Page, "The Irish Example," June 1, 2010:
By April 2009 Ireland had cut public spending by €1.8 billion. It also managed to squeeze additional tax revenue out of its strapped citizens, though it achieved this largely by broadening the tax base, for instance by including minimum-wage earners, rather than targeting hikes only at the wealthy. Crucially, Ireland maintained its 12.5% corporate tax rate. By the end of last year Dublin had implemented spending cuts and tax hikes worth about 5% of GDP.

Turns out they had barely begun to slash. In July 2009, a special board commissioned by the government presented its report showing €5.3 billion in potential savings for that year alone. The suggestion that made Irish headlines was its recommendation that more than 17,300 public jobs could go, along with its note that the Department of Arts, Sports, and Tourism could be eliminated.

The government used the report to cut its 2010 budget by €4 billion and is going through its recommendations to find a further €3 billion in cuts for 2011. So far public workers have seen their pay slashed by up to 20%, the state's child benefits have been cut by roughly 10%, and unemployment and other welfare benefits have been similarly gutted.

Yes, Ireland has barely tried budget cuts. Clearly all they need to do is try harder.

Of course austerity advocates will always get new chances to advocate austerity if they get their way—they’re kind of like those medieval doctors whose only disease-fighting tool was bloodletting. Shockingly, when bleeding their patient didn’t work, this was only proof that more bleeding was needed. As you cut, the people who benefit from government spending most will find themselves with fewer resources, causing them to spend less, meaning less money in the economy, meaning that the government will get less in tax revenues, meaning it must cut more and you see where this is going, don’t you?

The idea is that the government cuts faster than the damage in the wider economy accrues, while the budget cuts force a revaluation of broader economy towards greater competitiveness, which fuels exports for an export-driven boom. Given that practically every economy of note in the world is trying some variation of the strategy, and given that not everyone can be a net exporter by definition, maybe advocating it everywhere is a less than helpful strategy?

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