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Periscope by Niall O'Dowd

NY Times Paul Krugman says Republicans taking wrong message from Ireland

Posted on Saturday, January 29, 2011 at 08:29 AM

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Paul Krugman is once again using the Irish economic downfall to attack Republicans over their economic policies saying they are drawing the wrong lesson from it.

In his latest column in The New York Times the Nobel Prize winner lights out after Paul Ryan, the up and coming Republican leader in the house, who rebutted Barack Obama's State of the Union address.

He quotes Ryan as saying that government refusal to cut runaway spending was at the heart of the European malaise.

“Just take a look at what’s happening to Greece, Ireland, the United Kingdom and other nations in Europe. They didn’t act soon enough; and now their governments have been forced to impose painful austerity measures: large benefit cuts to seniors and huge tax increases on everybody.”

But Krugman says Ryan took exactly the wrong lesson from the Irish experience.

Krugman writes "On the eve of the financial crisis, conservatives had nothing but praise for Ireland, a low-tax, low-spending country by European standards. The Heritage Foundation’s Index of Economic Freedom ranked it above every other Western nation.

"In 2006, George Osborne, now Britain’s chancellor of the Exchequer, declared Ireland “a shining example of the art of the possible in long-term economic policy making.” And the truth was that in 2006-2007 Ireland was running a budget surplus, and had one of the lowest debt levels in the advanced world.

"So what went wrong? The answer is: out-of-control banks; Irish banks ran wild during the good years, creating a huge property bubble. When the bubble burst, revenue collapsed, causing the deficit to surge, while public debt exploded because the government ended up taking over bank debts. And harsh spending cuts, while they have led to huge job losses, have failed to restore confidence.

Krugman believes the lesson of Ireland have noting to do with the need for harsh cuts and much more to do with lack of oversight of banks

"The lesson of the Irish debacle, then, is very nearly the opposite of what Mr. Ryan would have us believe. It doesn’t say “cut spending now, or bad things will happen”; it says that balanced budgets won’t protect you from crisis if you don’t effectively regulate your banks — a point made in the newly released report of the Financial Crisis Inquiry Commission, which concludes that “30 years of deregulation and reliance on self-regulation” helped create our own catastrophe. Have I mentioned that Republicans are doing everything they can to undermine financial reform?"

He also points out that harsh cuts in Britain since the Tories came to power have resulted in negative economic growth in the last quarter---the same kind of policies he says Ryan and others are trying to bring in here ?

Who is right in this argument?

On the face of it it is difficlt to disagree with Krugman, draconian cuts do not lead to growth.

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bonjouryall | Jan 31, 2011, 09:52 PM EST

As I noted Bush started the bailout but Obama spent most of the money. And Obama supported it fully. Also, remember it was paraded as a credit measure -not a bailout- by Bush. Obama began the too big to fail bailouts. And Geithner was the one bailing out AIG. Also, there are a number of ways we bailed them out-loaning money, buying stock and assuming liabilities. There's no way for us readers to know how it's working out. Certainly the liberalization of credit portion did not work at all. Of course, Geithner is going to say everything he did was a resounding success and the govt made money off it all. I read the other day the GSA (I think) could no longer vouch for the integrity of the books of the USA.

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chesapeake | Jan 31, 2011, 11:56 AM EST

Ryan is straight on the mark with his comments. Krugman bleeds every time someone criticizes a liberal. The Republicans have yet to decide which areas will be cut; but education, government employees, and many other special interest programs will feel the pinch. The process should start with the Department of Education followed by the Deoartment of Energy and other entities that have damaged the ability of the USA to function as the great nation that it WAS.

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TheYank | Jan 31, 2011, 11:14 AM EST

NYCsheridan,

I agree that Obama didn't "bail out the banks", at least not begin that policy. He did, however, appoint Tim Geithner as Sec of the Treasury. Geithner was a 100% supporter of TARP.

And, despite my misgivings, TARP looks like a resounding success. It was estimated it would cost hundreds of billions of taxpayers' dollars, but now the cost is about 10% of that and Geitner says it may be even less in the end.

We in Ireland have our version of TARP called Nama, only Nama is going to be a lot more expensive than TARP - in real terms. If you take into account the differences in size between the US & Irish economies you can see why we're in such trouble.

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TheYank | Jan 31, 2011, 11:07 AM EST

OurselvesAlone,

I hope I don't disappoint you if I tell you that I had no "economic training" other than reading the business pages of the NY Times & WSJ when I lived in US and the Irish Times, Financial Times & London Times since I moved here.

I have a business degree, if that counts, but I've always told people that business degrees are 50% common sense and 50% nonsense. Much of what passes for economic comment is the same.

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NYCsheridan | Jan 31, 2011, 10:47 AM EST

bonjouryall, you are delusional. Obama did not bail out the banks. He was sworn in months after the bank bailouts. Get a grip, son.

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NYCsheridan | Jan 31, 2011, 10:47 AM EST

Listen to the Republicans in the USA if you want fear, obfuscation, dogma and stupidity to rule your financial future.

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OurselvesAlone | Jan 31, 2011, 10:43 AM EST

@Yank I was going to comment but probably could not have put it much better than you did in your last 2 comments to kevinhayes and bonjouryall. Your analysis that the real estate bubble tax revenue( from the stamp tax primarily, I might add)let the govt spend those revenues to bribe voters with free dental, free eye care, etc. The addiction of the politicians to spending caused them to take no action to deflate the bubble, like raising bank reserve requirements. The cost cutting that has just only really started is a form of devaluation, an internal one which is much more painful to a country than an external one (i.e., currency devaluation). As you stated, the euro prohibits a currency devaluation; Ireland's pain is just beginning I am afraid. Once again, let me compliment you on your informed analysis and comments; clearly, you have had some economic training along the line. Would you be willing to tutor your fellow blogger Cahir O'Doherty perhaps?

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TheYank | Jan 31, 2011, 08:31 AM EST

bonjouryall,

I can't remember the exact sequence now, but the Irish government issued its bank guarantee for all outstanding liabilities at the end of Sep 2008. I don't remember when the Bush administration took the various steps they took, but our banking problems became the taxpayers' before Obama had taken the oath of office.

Otherwise, you're right. The Germans are very reluctant to follow Obama's lead on dealing with this crisis because (a) they are net creditors, not debtors and (b) they have an almost pathological fear of inflation born in the 1920s/30s. {America has a similar fear, but it's of depression thanks to the '30s.}

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TheYank | Jan 31, 2011, 08:27 AM EST

kevinhayes,

Gotta disagree with you there. Krugman is only half right. Ryan is also half right. Yes Ireland's banking collapse has been heaped onto the taxpayers and that's a big part of our problem.

However, leaving the banks aside we are spending over €50bn and taking in €33bn. This budget deficit arose because the government spent like it was going out of style between '04 & '08 because they had all these extra property-related tax revenues. When the property market collapsed so did all those extra revenues. Of course, unemployment shot up and income tax revenues declined.

So we have to cut because we can't inflate/devalue our way out of the crisis. The killer is - and neither Ryan nor Krugman mention this because it suits neither - we have the wrong currency. One that fueled excessive growth and now demands severe austerity. The Euro is a big part of our problems.

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bonjouryall | Jan 30, 2011, 06:35 PM EST

Yes, there was a terrible lack of oversight of financial institutions. But also Bush allegedly wanted to get credit going again by bailing out large financial institutions (or just bail out his buddies). Obama bailed them out because they were too big to fail (according to the guys who created the mess). And neither made any effort to incorporate provisions to encourage credit. Instead, Obama pushed his the 'sky is falling' economics and his own don't ask, don't tell policy about what the government is getting into. He paraded overseas to get the Europeans to do the same while they still were fawning over him. Ireland followed his idea while the German economists thought he was an idiot. I saw at least two on TV politely saying this. So, guess who's bailing Europe out now and who's also requiring repayment. At least, the Europeans have more fight in them than the Americans. We're just turning into cows. But at least, we're now diverse in our stupidity and fatalism.

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kevinhayes | Jan 30, 2011, 02:17 PM EST

Paul Krugman is right on target with this analysis. It's the professor schooling the economically lightweight student. Ryan did not do his homework here and has been shown up for what he really is - a lazy partisan hack.

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hancock | Jan 30, 2011, 12:32 AM EST

Krugman is a partisan hack.

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LoyalCitizen | Jan 29, 2011, 04:56 PM EST

I do not see why any so called news website persists with these sort of articles. Politicians, Judges, Bankers, Media, Barristers, Developers , Accountants Etc are just common little thieves, especially when using opinions to hide their crimes. It's not really that hard to work out.

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