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Ireland and the Austerity Fairy



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On Friday, New York Times columnist Paul Krugman expressed his strong unhappiness with me and urged all of you to never believe a word I say — ever.  Then he proceeded to prove me wrong by showing that 1. Ireland has tried austerity, 2. Ireland did cut spending, and 3. increases in spending driven by automatic stabilizers or spent on bank bailouts shouldn’t be counted as spending increase.

As it turns out, I never said that there was no austerity in Ireland or that spending wasn’t cut. In fact, until today, I never wrote about Ireland. I haven’t said that there has been no austerity in Europe either. But his readers wouldn’t know since he failed to link to my work.

As you may recall from my previous posts, my position about austerity in Europe — and why it hasn’t worked– is that in most cases austerity measures have taken the form of some spending cuts mixed with tax increases. With rare exceptions like the Baltic states and Sweden (countries that are growing today), most countries have adopted the “balanced approach” to austerity. And yes, my position about austerity in Europe is that, contrary to the headlines or to Krugman himself, overall spending wasn’t “slashed” or the cuts weren’t “savage.

The same is true for Ireland: Eurostat data show that spending in the country went down between 2010 and 2011 by €27.9 billion, after going up by €25.7 billion the year before. That’s a €2.2 billion drop from 2009 to 2011.

#more#Now, Krugman wants to claim that the increase in spending in Ireland between 2009 and 2010 doesn’t count because it’s the product of both automatic stabilizers (like increases in unemployment-benefit payments) and bailout spending (in November 2010, Irish banks required a $113 billion bailout from the Irish government). Over at Cafe Hayek (where the title of this post comes from), George Mason University’s Russ Roberts isn’t convinced. He writes:

No, it doesn’t look like there’s much austerity, does it? That’s why I wrote this post. Silly me. I didn’t realize that in the Keynesian model it isn’t government spending that affects aggregate demand, but only certain kinds of government spending. Krugman goes on to show that much of the increase in spending in Ireland is due to bank bailouts and increases in transfers because of the “dire state of the Irish economy.” But I thought those transfers were supposed to stimulate the economy. Joseph Stiglitz taught me that it doesn’t matter what government spends money on, it’s all stimulus. And when Krugman was touting a two trillion stimulus package, I don’t remember hearing the part about making sure it was pushed through with the right kind of spending and the right kinds of motives. Who knew that government spending only stimulates when it springs from a desire for bigger government?

You can go read the rest of the charts in his post. But it’s straightforward–some kinds of government spending were slashed. Therefore, even though the total amount of spending is roughly the same as in 2009, that’s austerity.

Just a few days ago, Krugman was arguing that Europe had tried slashing spending and that we now know that that didn’t work. Now he’s admitting that spending wasn’t slashed but that it really was, even though you can’t see it. You just have to know where to look. This is the man who likes to say the confidence fairy doesn’t exist. I’m afraid it’s the austerity fairy that doesn’t exist.

Either way, this goes to show that to the extent that cuts took place in some areas, they weren’t spectacularly large, or they were balanced by increases in other areas. More interesting, Krugman, maybe for a first, does acknowledge that austerity has taken place on the tax side too. But, he downplays it by saying “So yes, Ireland has done austerity –some of it on the tax side, but much of it on the spending side.”

Here is some of the tax side to austerity in 2012:

1.  Standard VAT rate increased by two percentage points to 23 percent. (It was cut in December 2009 down to 20 percent from 21.5 percent)

2.  €100 household charge introduced to fund vital local services.

3.  Carbon tax increased from €15 to €20 per tonne effective from midnight, Budget Night, on petrol and diesel, and from May 1, 2012, on other fossil fuels, excluding solid fuels. This change equates to 1½c increase in cost of a litre of petrol & diesel.

4.  Excise tax on cigarettes up by 25 cents.

5.  Motor-tax rates increased.

6.  Capital acquisition tax, capital-gains tax and D.I.R.T. raised to 30 percent.

7.  Property-relief surcharge of 5 percent to apply to large investors.

That’s on top of the following:

OCTOBER 2008

Income of up to €100,100 hit with a 1% levy, rising to 2% over that amount

VAT increases 0.5% to 21.5%

Capital Gains Tax increases from 20% to 22%

APRIL 2009

Income levy rates double to 2% for those on more than €15,028 a year, 4% above €75,036 and 6% over €174,980-

Capital Gains Tax increased from 22% to 25%

DECEMBER 2009

Carbon tax of €15 per ton on petrol and diesel

Obviously, we can debate whether spending was cut more than taxes were raised. We could also debate whether the ECB would have accommodated large spending cuts, as is preferable for spending-cuts-only austerity packages to produce growth. But we can’t deny that austerity in Ireland took the form of both some spending cuts (modest) and tax increases. And that, we know through some 21 peer-reviewed studies, isn’t conducive to debt reductions.

My prescription for Ireland is the following: Implement real austerity in the public sector (cut spending) rather than austerity in the private sector (increase taxes). Better yet, implement austerity in the public sector (cut spending) and prosperity in the private sector (cut taxes).

Finally, Ireland should pursue austerity in the form of spending cuts not only for the quick economic-growth payoff, but because they are also desirable from a structural standpoint, since they would likely help avoid future fiscal crises.

Here is a good post by Tyler Cowen asking the question What is austerity? He writes:

In any case, austerity is a misleading and often misunderstood word.  It is better if we describe policies more concretely, and in fact that is not hard to do.  Furthermore, insisting on a clearer accounting should not be equated with “austerity denial.”



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