Advocates of more aggressive fiscal stimulus efforts are pointing to Liz Alderman’s New York Times dispatch from Ireland as evidence that the Irish government was profoundly unwise to engage in fiscal belt-tightening:

“When our public finance situation blew wide open, the dominant consideration was ensuring that there was international investor confidence in Ireland so we could continue to borrow,” said Alan Barrett, chief economist at the Economic and Social Research Institute of Ireland. “A lot of the argument was, ‘Let’s get this over with quickly.’ ”
Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession.

The story is vividly written, and it includes a number of harrowing examples of urban decay and distress. One wonders, however, if we can judge the decision to embrace budget-cutting on this short a time horizon. Did anyone expect austerity policies to yield robust growth in the space of a few months? There is a tragedy here:

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.

But we don’t have a very good sense of the counterfactual. Would investors have rewarded Ireland for engaging in a major fiscal expansion? And will we see the so-called PIIGS diverge over the next few months as the various governments embrace different policy responses?