In addition, it is rarely about the man on the street. It is the person providing him credit, particularly revolving credit who needs to be convinced. He is little swayed by deficit spending.

WRT the argument over bund spreads - the end point of Irish austerity is still a good way away. The government have shown some style in the methods they have found to shovel money at the banks - 4% of GDP last year, maybe 8% this year. What is astonishing is that we haven’t been punished further - we still lag Greece and Portugal by some way, I believe. Even Spain, with a lower deficit and debt:GDP has a higher spread some days.

@Ribbit
I fear you are right. China and Japan are about to go through painful adjustments. That will have global consequences.

There are those who think Krugman is wrong there too. Paul Krugman is one of a view voices in the world today that has succeeded in truly influencing policy. I believe much of the fiscal stimulus madness we have suffered over the past few years is his fault.

The idea - espoused by some notables on this blog - that this somehow staved off recession is ludicrous.

Instead, we have merely transferred the credit bubble into the sovereign bond markets.

Depression is coming. For sure.

Krugman?

Print and be damned.

I’m glad you raised that, as of course the bank bailout/guarantees here were by far the largest of any industrialsied econonomy (=232%/228% of GDP, depending on who you read).

But the next highest bailout was Belgium, 90% of GDP. And Belgian yield spreads over Gemany have gone from 38bps to 68bps in the Sep 1 2008-July 21 2010 period). At the same time, Greek spreads have ballooned to double those even of Irish spreads. Yet their bank bailout is equivalent to 12% of GDP.

So there are many factors expressed in bond spreads, and they are always in flux. And I know you continue to do great work on exposing the bizarre logic of the hugely damaging bank bank bailout/NAMA here (which may yet have catastrophic consequences).

But, as yet, there is little comparative evidence to support the notion that a determining variable in anyone’s bond spread is the size of its bank support operation. No correlation. Although that may yet come to pass.

Until this year fiscal austerity was unique to Ireland and, to end 2009, its bond performance was the worst in the Euro Area. Things canged somewhat thereafter.

No support then, for ESRI’s contention that more of the same might produce a diametrically opposite outcome.

Wasn’t it Einstein who said repeating the same experiment and expecting to get a different result was madness?

I think a useful analysis of the interaction between fiscal adjustment and bond market spreads needs to be a bit more, let’s say multivariate than the simple observation “government cuts, spreads go up”. The fact that a massive sovereign exposure to banking sector losses were run up during the intervening period may have also played a role in the increase in spreads.

Karl, I think you are right to highlight this as the key issue.

But I think you are wrong to assess it in a timeframe from one Krugman article to the next. Not even he would argue that these are decisive events in the life of the Irish economy.

Surely an assessment of austerity’s effectiveness in reducing risking premium would begin when austerity began? On September 1 2008 Irish 10yr yields were yielding 47bps more than Germany, yesterday that was a premium of 282bps. While some of this should be attributed to a safe-haven effect on German bunds, Irish yield spreads have deterirated against all other Euro Area members with the exception of Greece.

So the ESRI’s consideration of what might happen runs in the opposite direction to what has actually happened. The risk premium has risen sharply, one factor helping to throttle domestic lending. In May private sector credit fell at a 10.4% annual rate, the sharpest slowdown since the slump began.

You’ll find that most of the people calling for austerity (on this site at least) do consider the banks a waste of money. Unfortunately FF don’t appear likely to put them on the menu though.

“One other point which Krugman made which hasn’t been addressed on this blog is: “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.” It seems a valid point to me.”

The document does discuss quantitatively what would have happened if no fiscal austerity had of taken place.

While it is too soon to be definite, the early indications support ESRI, not Krugman. At the time of the budget most left-wing economists and commentators predicted that it would tip Ireland into depression, through its effect on domestic spending. But, the opposite seems to be happening:

(1) The index of consumer confidence in Ireland has increased every month since December (from 42 in December to 68, a 30-month high, in May). It is true that ESRI partly produce Ireland’s consumer confidence index, so Krugman will no doubt say that they fixed it.

(2) New car sales are running at almost twice last year’s level.

(3) Retail sales, other than car sales, have been increasing slowly since December, up 2.5pc in April and May compared with December, which doesn’t seem much, but which, annualised, is a respectable 6pc.

(4) A survey of retailers (link below), reported in today’s Irish Examiner, states that 70pc of retailers say business is improving and a similar percentage say that they expect to hire new staff in coming months.

http://www.examiner.ie/business/kfcwojidojau/

(5) While spending on investment continued to fall in Q1, there was a large increase in imports in April. We need to wait for further information to know if this was partly caused by an increase in imports of machinery and equipment (we should know tomorrow when a detailed breakdown of the April import figures is published by the CSO) and, if so, whether or it is maintained in coming months.

All told, the early evidence supports ESRI, not Krugman.

However, he’s right to point to the lack of citation for this key claim, which (albeit including the reference you point to) is a little thin.

This is probably less a product of the ESRI overlooking research, as it is a lack of suitable studies for citing. Partly, because you are straying from the econometric into the realm of marketing. What will people buy, and how do we encourage them to buy?

Certainly, the link between overall debt, and bond yields is very questionable given international variations. Indeed, even the link between deficits and bond yields is not exactly transparent. As far as I can see, the editorial line of the Wall Street Journal is a more important factor than real improvements to deficit levels (although these are not unrelated either).

Sometimes, i think we talk about the global Bond markets as if they are a vast pool of well-informed actors, who calculate every variable to the last decimal place. Whereas in fact, we’re talking about quite a small pool of individuals who could not possibly soak in the details of every coutnry they deal with.

Further still, in many countries (Japan is the poster-boy, but Ireland being no exception), there is a decisive local component to the so-called “global” debt-market. Local actors, whose interest is bound up in the budgetary decisions of the State are significant purchasers of Government debt, which in turn goes to feed these deficits. Irish Life needs the State and the State needs Irish Life. Deficit reduction or expansion won’t change that.

Therefore, it’s not an easily measurable area of research.

However, even if we can’t measure the impact of increased borrowing on our risk premium; it is undeniable that borrowing at any time (especially in large deficits) is harmful to our credit rating, and generally harmful to our interests. It all has to be paid off sooner or later. Might as well take the pain now, and start working on reducing our new debt mountain (too bad we spent our youths paying off the last one).

Wouldn’t hurt to reform some of our more uncompetitive sectors either. That’s an easier way to improve competitiveness than bald wage deflation. The Competition Authorityu has dozens of cost-free recommendations in this regard.

@MarcusOC
It seems part and parcel of the US political sport that an academic economist can be one thing in the columns and another in the journals. At least that’s what I hope is going on here, because Krugman is too good an economist to lose to the columns!

Neither of those points seem sound or valid. The question isn’t why countries embracing austerity have seen their debt downgraded relative to other countries, it is what would have happened had they not embraced austerity? And what other countries other than Ireland would you be referring to?

Moreover, why is a quantitative assessment necessary? Flip the question around. Is Krugman suggesting that additional fiscal reductions would not reduce future debt burdens? Seems like an absurd deman to make.

I also think that Krugman (similar to many US economists) when viewing economic policy formulation and policy commentary in the established EU parliamentary democracies does so through the prism of political and economic governance in the US. Despite a decade of misgovernment and lax regulation there, the system of governance has demonstrated the ability to heal and renew the economy - though, perhaps, not doing so at the speed or to the extent he would like.

It is unlikely that he is fully aware of the extent to which a decade of even more egregious misgovernment and lax regulation has damaged the Irish economy - and of both the paucity of policy instruments and the inability of a broken system of democratic governance to repair the damage.

Thats a big “if”. Isn’t Krugman’s point that financial markets have not been rewarding austerity? Countries that have embraced austerity have seen their debt downgraded and their risk premiums rise. How big a reduction in our risk premium would have to materialise before we could see the deflationary effects of 3bn in spending cuts offset?

One other point which Krugman made which hasn’t been addressed on this blog is: “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.” It seems a valid point to me.