Monday, 20 April 2009

Erin Go Broke? Krugman's NT Times piece - and some reaction

Paul Krugman has an opinion piece in today's New York Times, arguing - among other points made - that "As far as responding to the recession goes, Ireland appears to be really, truly without options, other than to hope for an export-led recovery if and when the rest of the world bounces back".

Paul Sweeney comments in response that

"While I agree with much of Krugman’s analysis, he appears to contradict his own statement that “As far as responding to the recession goes, Ireland appears to be really, truly without options,” when he is also critical of the way the bank bailout is being handled by the Government. He seems to favour the bank nationalisation route, which the government is studiously avoiding at all costs. If nationalisation is the alternative route to NAMA, then Ireland does have options. The nationalisation path, which I and others have favoured for some months now and still think may come to pass, by necessity, is preferable (than the NAMA route) as it gives far greater control to the government, the paymaster. It is a clearer path and also allows property valuations to be determined later as the market begins to operate and is not dependent on the guesses of estate agents. The idea that government civil servants would run the banks as articulated by some opponents of full state control, is of course, a distraction. Boards would be set up - as independent as possible and far preferable to the current bunches of cosy capitalists which gambled, not just with the banks’ assets, but with those all citizens of this Irish Republic. It is interesting that Krugman is keeping an eye on us, if for all the wrong reasons."

Any other views?


Tomaltach said...

Perhaps in saying "as far as responding to the recession goes, Ireland appears to be really, truly without options" Krugman is referring to the "recession" in broad terms as opposed to the "financial crisis". I acknowledge the interlink (no bank fix means very little credit means sustained difficulty for businesses etc).

In that sense Ireland can do what it can to fix the banks, but, it could be argued, has limited options on the macro front because we painted ourselves into a corner with our over indulgence in the property feast that was fuelled by a sustained period of cheap money. Our government left us with a nasty structural fiscal crisis that, had they not got so many things wrong, might have been merely a cyclical fiscal contraction.

Yet despite all that, many valid arugments have been made on these pages and elsewhere that despite our fiscal horror, we could and should borrow big to stimulate instead of sucking further momentum out of the economy with taxes and cuts.

Anonymous said...

Why they have not, so far, taken the pragmatic route and nationalized the banks.-
-is that the finance industry has effectively captured our government—Simon Johnson (In Ireland, the financial industry, and property 'developers')

Conor McCabe said...

Krugman makes it clear in his article that he's basing his conclusions about Ireland not on any research he's undertaken, but on conversation he's had with Irish economists. And most Irish economists can only deal with economic reality once it's been sanitized into an appropriately simplified model. The fact that he treats Anglo Irish as if it was a normal "big" bank kinda sums up the depth of his piece. I think we can file this one under "1,000 word obligation deadline".

Anonymous said...

Krugman clearly believes that Ireland does not have the option of a Keynesian-type fiscal stimulus. Perhaps those Irish economists who believe in such a stimulus, such as Paul Sweeney, would correct his error.

Paul Sweeney said...

My views on a stimulus are more nuanced than they were in an Irish Times article heading some months ago. Clearly a small open economy like Ireland cannot stimulate demand on its own and so a European-wide stimulus is required. Until the German government recognises its vital role in this area, all Europe will continue to wait for the (delayed) upturn. On the other hand, while Irish government action on stimulating the economy is very limited, its actions can depress demand. The recent Budget took lots of tax and thus demand, out of the economy, but the extent of this unprecedented fiscal crisis is such that it had little choice. The NDP will provide some stimulus if maintained over the years to 2013, especially with falling costs. If it is focused on labour intensive areas, a very difficult agenda, it will be of help in maintaining demand