Evil Consequences of Listening to the Pain Caucus

Calculated Risk:

Calculated Risk: Ireland: Austerity in Action: From Liz Alderman in the New York Times: In Ireland, a Picture of the High Cost of Austerity

As Europe’s major economies focus on belt-tightening, they are following the path of Ireland. But the once thriving nation is struggling, with no sign of a rapid turnaround in sight.

...

Rather than being rewarded for its actions, though, Ireland is being penalized. ... Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.

Joblessness in this country of 4.5 million is above 13 percent, and the ranks of the long-term unemployed — those out of work for a year or more — have more than doubled, to 5.3 percent.

...

The budget went from surpluses in 2006 and 2007 to a staggering deficit of 14.3 percent of gross domestic product last year — worse than Greece. It continues to deteriorate.

As the Irish government cut the budget, the economy contracted faster and the deficit as a percent of GDP increased.

And how will they break the downward cycle? Export to England and America ...

[T]he government is pinning nearly all its hopes on an export revival to lift the economy. Falling wage and energy costs, and a weaker euro, have improved competitiveness.

This approach works for one country - or a few - but not if every country is doing it.

And Duncan Black comments:

Austerity: The approach can work...if your currency can devalue. Ireland's currency is the Euro, which has devalued some, but not nearly as much as it "should" for the benefit of Ireland, Greece, Spain, etc. The bond vigilantes don't like economic policies which turn your economy to shit. This is very surprising!!

And Paul Krugman:

A Terrible Ugliness Is Born: Liz Alderman offers an excellent, if depressing, portrait of Ireland in austerity. To fully appreciate its significance, you want to juxtapose it with what the apostles of austerity are saying. Jean-Claude Trichet:

“As regards the economy, the idea that austerity measures could trigger stagnation is incorrect,” Trichet said, according to an English-language transcript published on the ECB’s Internet site. “I firmly believe that in the current circumstances, confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”

Uh-huh.

The key thing to bear in mind about calls for harsh austerity in the face of a 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.

And Ryan Avent is downright shrill:

From <>:

Markets: An ugly day: BUTTONWOOD has been, if anything, more bearish than I am, and markets keep reinforcing his outlook. Here he is this morning:

As I write, European markets have fallen more than 2% and are flirting with some round numbers that make headlines when they are broken (5,000 on the FTSE 100, 6,000 on the Dax). The Dow has opened with a near-200 point loss. Renewed fears about the health of European banks are one factor. Doubtless it doesn't help that the Greeks are on strike and that Nouriel Roubini has called in the FT for Greece to restructure its debt. And the sharp fall in US consumer confidence will just add to the worries. But the news of the day is from China, or rather from New York where the Conference Board has recalculated its estimate of the leading economic index from 1.7% to 0.3%. That's a miscalculation on a Uruguayan-referee scale. But investors have to cope with a lot of Chinese data which they fear may be massaged in an optimistic direction, so they are inclined to taske seriously any signs of weakness.

American markets have continued to head down and are off nearly 3% at present. A larger than expected decline in American consumer confidence has reinforced the initial downward movement. What's really troubling, however, is the related drop in commodity prices and the continued downward movement in Treasury rates. The 10-year is below 3%, and still falling.

This is not a good sign. This does not look like confidence in global recovery. And the sad thing is that this trajectory has been fairly obvious for months now, if not longer. Policymakers, and especially central bankers need to be doing more.