Ireland - Austerity's Petrie Dish

The debate rages about whether the West, just seemingly emerging from the great recession, needs austerity or more stimulus.   Fancy pants Nobel Prize economists like Stiglitz and Krugman insist this is no time for austerity.  They warn governments could trigger a "double dip recession" or possibly even a depression if they opt for austerity instead of further stimulus.

Now the same people who ignored guys like Krugman and Stiglitz in the years while they were warning a global meltdown was looming have decided there's no reason to listen to them now either.  They're gambling on austerity to lead them out of this mess.

It shouldn't be long until we get a practical lesson in the miracle of austerity thanks to the Emerald Isle, the now mangy Celtic Tiger, Ireland.   The government of the Irish Republic has announced it will slash its budget by 15-billion Euros to get its deficit under control.   The goal is to have Ireland's deficit down to 3% of GDP by 2014.

So, what's the starting point?  This year's Irish budget deficit is expected to come in at 32% of GDP.  That's, like, a lot.  U.S. GDP is getting close to $15-trillion.  On Ireland's rate, that would be like running a 5-trillion dollar deficit and then would Obama have trouble!

The Irish government says savings will be effected through a combination of spending cuts and tax increases that will impact the living standards of all.  That last bit may be an understatement.  Trying to get a depressed economy moving again through tax increases wouldn't seem to make much sense.  Topping that off with government spending (stimulus) cuts is surely the double whammy.

Even those who favour the Irish approach warn the government "may find it has more of a detrimental effect [on growth] than they're expecting."

Let's hope they don't get hit with another potato famine.