ESRI ECONOMIST Prof John FitzGerald has defended a recent publication by the institute after his US counterpart Paul Krugman criticised it in his blog with the New York Times.
Prof FitzGerald, lead author of the publication, said Mr Krugman probably did not understand Recovery Scenarios for Ireland: an Update was intended for public consumption. He said the views of the institute are, however, based on separately published research.
“The algebra is there. It was just that it wouldn’t be suitable to include it in a paper intended for a general readership.”
He said all the research indicated that a fiscal stimulus had a more limited effect on a small open economy such as Ireland’s than it did in major economies such as the US and Germany.
Already Ireland was paying higher interest rates because of its deficit and its banking problems, and borrowing more so as to stimulate the economy would only prompt an increase in the interest rate Ireland would have to pay on its borrowings. This could “turn on its head the relationship that Krugman would expect for places such as the US”, Prof FitzGerald said.
He said the relationship between more borrowing and the interest rate Ireland would have to pay couldn’t be estimated “econometrically”, but that didn’t mean it wasn’t “glaringly obvious”.
Prof FitzGerald said a person didn’t have to be an economist to understand that we are paying a high-risk premium on our borrowings because of the country’s borrowing requirements. This was something that was understood by the country’s senior trade unionists.
He said one of the reasons Spain was paying a higher-risk premium than Italy, even though the latter had a higher debt to GDP ratio, was that Spain was being “penalised” for trying to stimulate its economy with borrowings. Worries about its banks were also a factor.
UCD economist Prof Karl Whelan said the blog by Mr Krugman could “provide further ammunition for the many people who believe the Government should abandon fiscal austerity and provide a stimulus package of new spending to boost the economy”.
Writing on Irisheconomy.ie he said Irish economists could probably do a better job explaining to the public why this view was wrong.
It seemed Mr Krugman was “ESRI bashing” as part of his campaign against austerity measures in the US and Germany and, given past comments by the US economist, it might be that he didn’t really believe Ireland was in a position to abandon its austerity measures.
Krugman’s Blog: What He Said
Leprechauns and confidence fairies
THERE’S A new report out from Ireland’s Economic and Social Research Institute (ESRI) calling for even more austerity, arguing that this will lead to faster economic growth. And the report looks authoritative: it’s full of charts and tables, and frequently refers to an underlying quantitative model.
What the careless reader might miss, however, is the fact that the policy conclusions are not, in fact, derived from the analysis – they come out of thin air. The authors simply assert that more austerity now would lead to a lower risk premium and hence higher growth, based on no evidence I can see.
They don’t even offer any quantitative assessment of the extent to which more austerity while the economy is still depressed would reduce future debt burdens. In short, it’s a pure appeal to the confidence fairy.
One more thing: a key element in the ESRI analysis is the assumption that the financial crisis has permanently lowered Ireland’s growth track.
That may be so – but if it is, a large part of the reason is the effect of a prolonged slump on investment and structural unemployment (the long-term unemployed tend to stay that way even after recovery).
Now, some of us would argue that these effects suggest that government should do all they can to avoid prolonging the slump even further, that austerity may be self-defeating. But such concerns don’t even get mentioned.
The state of economic discourse these days, on both sides of the Atlantic, is deeply depressing – in at least two senses.
