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.
