Last week’s news was terrible, but I felt even more depressed the week before. If we enter a spiral in which we get worse news on GDP and GNP than expected, and then conclude that we will have to push through even more deflationary budgets than previously planned, then we have entered a doom loop from which there is no escape.
Unless the cavalry comes charging to the rescue, is what. Unless Ireland is bailed out economically by the rest of the world, via a world trade boom that allows us to export our way to recovery.
Unfortunately, there are lots of question marks hanging over this scenario right now. The cavalry is uncertain as to where it is headed, and for every piece of good news we get from overseas, there is a corresponding piece of bad news (and vice versa). Any honest forecast of where we are headed in the immediate future will have extremely wide confidence bands associated with it, which in the Irish case will surely straddle the zero axis.
This is why it is so utterly in Ireland’s interests that policy makers overseas listen carefully to Adam Posen (short version here, longer version here). I strongly urge people to read the full speech. It is a carefully argued (and, for a central banker, passionate) plea for further stimulus measures, as well as for a certain way of thinking about the macroeconomy. It is nice to know that some central bankers, at least, understand how serious are the downside risks facing the world economy right now.
I am sure that our political leaders enjoyed their moment in the sun this spring as poster boys for austerity. But insofar as they contributed to a feeling that austerity was the right policy everywhere — and not just in basket cases like Greece and Ireland — they did their country a disservice. Far better to have a quiet word with their colleagues in more solvent states, pointing out to them our nine successive quarters of shrinking real GNP, and to say to them: this is what austerity can do, even in an economy as small and open as ours. Are you really sure you want to follow suit?