A certain Nobel laureate has been pounding the drums lately (e.g. here), pointing out that the awful euro economies prove just how bad fiscal austerity is. In particular, the case of Ireland shows that–as our Keynesian friends like to put it–“contractionary policy is contractionary.”

Now in fairness, for all I know maybe lots of people have been pointing to Ireland as a shining success story. I don’t know of any Austrians who have done so, but maybe George Will or somebody has. (I come back to this in the Appendix below.)

If so, then said austerians were being sloppy, because Ireland at best is only relatively engaging in austerity. Here are the figures for its government budget surplus/deficit as a share of GDP:

2004…..0%

2005…..(0.3%)

2006…..1.3%

2007…..(0.9%)

2008…..(7.0%)

2009…..(14.8%)

2010…..(12.0%)

2011…..(10.8%)

So let’s review, to make sure you know how to understand how a Keynesian uses these types of labels. Herbert Hoover engaged in liquidationism, with his last budget deficit of 4.5% of GDP plunging the economy into the worst single-year performance in US history. In the following years, thank goodness FDR (though far too cautious at the time) allowed deficits that averaged 5.1% of GDP, which propelled the economy to its fastest expansion in history, an expansion that was unfortunately aborted when FDR chickened out in 1937 and tried to trim the deficit. When the Obama Administration ran a deficit of 10% of GDP in 2009, Krugman declared that “Big Government” (his words, not mine) had spared the US from another Depression. And now, when the Irish government runs deficits of 12% and 10.8%, this is a period demonstrating the utter failure of fiscal austerity. Everyone got that?

Incidentally, one might argue that it’s unfair for me to look at deficits. After all, the Keynesian argument is that cutting spending will hurt the economy, in turn making tax revenues fall–thus aggravating the original problem.

Sure, then let’s just look at government spending in absolute terms for the Irish government (billions of euros):

2003…..35.4

2004…..37.5

2005…..41.3

2006…..45.8

2007…..50.9

2008…..55.7

2009…..60.0

2010…..55.0

2011…..51.9

So when we are talking about the massive textbook fiscal austerity plans of the Irish government, note that they haven’t even cut spending back to 2007 levels, at the peak of the global boom. It’s true, the Irish government has actually cut the absolute amount of its spending the last two years, and admittedly that’s pretty amazing as far as governments go. But all it really means is that they are (just about) unwinding the huge increases in spending that no Austrian endorsed.

So for the final summary, it goes like this: In response to the global financial crash, the Irish government engaged in a massive bailout of its banks–a bailout that Krugman patted himself on the back for opposing, because Krugman said it was too expensive for Irish taxpayers to bear. Now that the Irish government is (over the course of two agonizing years) returning its spending to levels prevailing before this massive bailout that he opposed, Krugman is saying that the reckless Irish budget cuts prove that once again, people should have listened to his policy advice.

APPENDIX in which I acknowledge that people have used Ireland as an American football

It is true that before the global crash, free-market types were pointing to Ireland as a success story. I have no problem with that, and I think they would have continued to showcase the virtues of fiscal austerity had they not done stupid things like guaranteeing all of their bankers and running up ginormous budget deficits.

It is also true that more recently, people have been pointing to Ireland as a counterexample to Krugman (citing him by name). I am not responsible for what those people are saying. Nobody should point to Ireland in the last few years as a great example of austerity, except in the relative sense that it’s been more austere than what Krugman would have wanted. Also, no Austrian thinks raising taxes in the middle of a global recession is a great way to help the economy or taxpayers. That’s a cure worse than the disease. So the last two years have hardly been an experiment in fiscal austerity, as far as Austrians are concerned.

Finally: This is NOT me doing a Krugman move a la the Obama stimulus. I am NOT saying, “The Irish situation would have worked out, if only they had cut even more.” (I happen to believe that, if you also say they didn’t raise tax rates, but that’s not my point in the present post.) No, my point here is that under any reasonable criterion, the Irish government has been running massive budget deficits for the last 3 years, during the time it was supposedly engaging in harsh contractionary fiscal policy.

In contrast, by any reasonable criterion, the Obama Administration ran a large budget deficit and hence expansionary fiscal policy in 2009. If Krugman wants to say it wasn’t big enough, OK fine. But it is entirely fair for me to say that a (watered down) version of Krugman’s solution was tried and failed in 2009 in the US, whereas nothing at all like my solution was tried in Ireland. How can say that? Because the Irish “austerity” involved bigger deficits than the Obama “expansion.”

(Incidentally, here is a great post by David R. Henderson demonstrating some more of Krugman’s truthiness when it comes to this stuff. When Krugman makes a claim that seems to be based on objective numbers, you have to realize that he is using his Keynesian models to interpret those numbers. He thinks he’s just following the facts, when those “facts” are dependent on his theory of the world.)