Ireland now has had two quarters of considerably stronger than expected growth, it’s now both gnp and gdp, and domestic demand (!) is up, and borrowing rates are down, though employment remains miserable. Even I am surprised by the positive signs here (I never bought the doctrine of expansionary fiscal austerity, though I saw austerity as necessary for Ireland), and yet now Paul Krugman claims to have expected this all along:

Look, standard Keynesian models, open-economy version, tell a very clear story about what happens when a country pegs its exchange rate at a level that leaves its industry uncompetitive. The country doesn’t stay depressed forever: high unemployment leads to actual or at least relative deflation, which gradually improves cost-competitiveness, which leads to rising net exports and gradual expansion. In the long run, full employment is restored; it’s just that in the long run we’re all, well, you get the picture.

Somehow, reading Krugman, I had the expectation that fiscal austerity would lead to falling output and deflationary pressures and downward spirals for some time to come, at least for open economies with fixed exchange rates in suboptimal currency unions. But put the generalities aside, what were the published claims and predictions about Ireland?:

Here Krugman says Ireland is “gaining nothing” and attacks Trichet for denying “stagnation.” Late 2010 Krugman tells us that the “Irish are suffering from plunging incomes,” “confidence is not improving,” and investors are fleeing the country. No mention of the just around the corner recovery in output and aggregate demand, maybe it didn’t fit the word count. We were told, however, that “confidence just keeps draining away.”

Here is a March 2011 interview where Krugman says (this is the newspaper paraphrasing him, maybe he was misquoted):

Ireland, Greece and Britain are examples of how spending cuts have failed to bring a rise in confidence or benefit growth or the jobs market.

In early 2011 Krugman noted that Ireland’s “medium-term” prospects look “desperate” and he calls it an especially hard case within the eurozone. No mention of the pending recovery in output and aggregate demand.

April 2011, here we are told, discussing Ireland and Greece together, that contractionary policies will shrink output. A similar point was made in 2009, concerning incomes.

Here he graphed the borrowing rate for Ireland and pointed out it was rising because of austerity; in reality the graph continued to update after his post and it shows the rate plunging right after the post was made; yes some of that was EU aid but that same aid has hardly led to falling rates for the other crisis countries.

About a week ago, Brad DeLong pointed out that for the vulgar Keynesian view the long run can stretch for as long as fifteen years. That wasn’t an estimate of when unemployment would go back to normal, but rather of when some version of “classical” macro would start to hold again.

Sorry guys, it is better to admit you were wrong and have what I call a “Horatio moment.” (Here Krugman claims that the austerity advocates have to invent a mythical version of Keynesian economics to claim a false victory.)

You still don’t have to believe that immediate fiscal contractions are expansionary; in general they’re not, but you can still have been wrong about Ireland. The simplest lesson to at least try on is that internal devaluation sometimes does better on the AD side than we are inclined to think, or that real factors mattered more than expected, or a bit of both. Or try Karl Smith’s ideas. It’s not all about the downward spiral, although this was one scenario laid out in Keynes. We should and will await more data, not to mention data revisions, but in the meantime it is correct to be surprised by the much-better-than-expected Irish growth performance, and at a difficult global time at that; you can’t claim the American and European growth locomotives pulled them out of the slump. This expert on the Irish economy offers a sector-by-sector breakdown of the new numbers and he too admits he was surprised.

Addendum: No one is calling Ireland a “success,” nor should we be committed to the view that Ireland can survive the coming storm of eurozone defaults. Don’t let anyone turn this into an “us vs. them” debate on austerity, but rather keep your eye on the ball, namely predictions about how Ireland would fare post-austerity. Nor is the relevant comparison how much of the old output has been won back. Start with the advent of the austerity, circa 2009, and graph your 2009 and 2010 predictions against what actually happened. It ain’t a pretty picture, and I’ll be the first to admit (and apparently I am) that my predictions were incorrect.