The Kilkenny economics festival is running from November 11-14. Details are here.
Author: Kevin O’Rourke
I have posted links to this piece in the comments section before, but never on the front page. This seems like a good time to do so, given that the question of what markets want is beginning to exercise people (see for example here, or here). The essential point is that markets understand that governments face political constraints, and take this into account when assessing the credibility of their economic policies. (And, moreover, market participants tend not to believe in tooth fairies or negative fiscal multipliers.)
We’ve known all along that fiscal adjustment here would be contractionary, and that our economy thus needed substantial export growth if it was to avoid falling into the hands of the IMF. That in turn requires a buoyant European economy; hence my alarm regarding austerity measures in countries like the UK and Germany. One of the key insights of Barry Eichengreen’s work is that you have to analyse international monetary arrangements as systems: it makes little sense to analyse policies in one country at a time as if countries are isolated from each other. Ireland has no choice right now concerning what policies to pursue, but other countries do, and if those with fiscal space (as measured by the interest rates at which they can borrow) choose to embark on contractionary policies now, for what appear to be nothing more than ideological reasons, then that is profoundly irresponsible from the point of view of the fragile system that is the European economy.
I don’t agree with everything in this article, by any means, but it is thought-provoking and topical. And I definitely agree with the authors about the brilliance of Albert Hirschman.
Besides, it gives me an excuse to post a link to this piece from April.
This is a very useful primer on interwar protectionism by the leading historian of US trade policy. (I had never heard of ‘Smoot Smites Smut’, which is worth the price of admission alone.) Although Doug could have usefully mentioned that the biggest costs of protectionism then were geopolitical, and those ended up being fairly catastrophic.
Economists sometimes assume that the right way to talk about protectionism is to moralize. I prefer analyzing the causes of protectionism: it may be a very bad idea, but sometimes, in democracies, it becomes inevitable. Doug, in a manner reminiscent of Adam Posen, argues that expansionary monetary policies in the US are a good way of keeping the protectionist wolf at bay there right now. The same logic applies to Europe as well.
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.
(Unless what?)
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?