Liz Alderman reports on the failure of austerity budgeting in Ireland:
“When our public finance situation blew wide open, the dominant consideration was ensuring that there was international investor confidence in Ireland so we could continue to borrow,” said Alan Barrett, chief economist at the Economic and Social Research Institute of Ireland. “A lot of the argument was, ‘Let’s get this over with quickly.’ ”
Rather than being rewarded for its actions, though, Ireland is being penalized. Its downturn has certainly been sharper than if the government had spent more to keep people working. Lacking stimulus money, the Irish economy shrank 7.1 percent last year and remains in recession. […]
Despite its strenuous efforts, Ireland has been thrust into the same ignominious category as Portugal, Italy, Greece and Spain. It now pays a hefty three percentage points more than Germany on its benchmark bonds, in part because investors fear that the austerity program, by retarding growth and so far failing to reduce borrowing, will make it harder for Dublin to pay its bills rather than easier.
Other European nations, including Britain and Germany, are following Ireland’s lead, arguing that the only way to restore growth is to convince investors and their own people that government borrowing will shrink.
As Kevin Drum says, it’s not clear that Ireland had a ton of options because it’s stuck in the Euro. But the lesson is still clear enough—what gives confidence to investors is prospects for growth, and what countries need to do to instill confidence is to adopt pro-growth policies. The United States can get away with more short-term borrowing, and will ultimately have an easier time paying off the debts we’ve already accumulated if the economy grows.