For months now the Noble-prize winning economist has been decrying the conventional wisdom that governments need to cut deficit spending, arguing that continuing stimulus is what’s needed to boost a still-shaky economy. Now the on-the-ground situation in Ireland seems to bolster his argument. Two years after the country imposed deep austerity measures, the country’s economy is in worse shape because of it.
Despite its strenuous efforts, Ireland has been thrust into the same ignominious category as Portugal, Italy, Greece and Spain. It now pays a hefty three percentage points more than Germany on its benchmark bonds, in part because investors fear that the austerity program, by retarding growth and so far failing to reduce borrowing, will make it harder for Dublin to pay its bills rather than easier.
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.
Unfortunately, as the New York Times reports, the leaders of the G-20 nations are continuing the “cut and ye shall be rewarded mania.” Hopefully we don’t all end up paying far more than whatever deficits would have been incurred.