Thu Jul 7th, 2011 at 06:55:02 AM EST
Seamus Coffey on Irish Economy points out, among other things, that despite a 20bn cut in government spending over the last few years the Irish exchequer current account balance is not falling.
This isn't a surprise to anyone who understands that cutting government spending also cuts government revenue.
Unfortunately, as Michael Taft writes, this doesn't include the Serious People, whether in Ireland, in Europe or in the US:
The current debate over fiscal policy is based on a fundamental confusion – that the finances of a government are analogous to household finances. When spending in the household, exceeds income, goes the argument, the household must reduce its expenditure. People go out less, buy less, take less holidays, postpone major purchases, etc. The key point here is that if I cut my spending, this doesn’t reduce my wage or income. My wage is unaffected by me buying less books. Therefore, spending reductions are a net gain. It is a rational act at household level.
However, governments are not households. When a government cuts its spending, it cuts its revenue as well – because it cuts the economy’s revenue. This is fairly straight-forward and the ESRI has published two studies on this subject. […]
Cutting public employment, government spending on contracts to private business and cutting social welfare only serves to deepen and accelerate the recession. We know this. They don't.
A related problem is that the debate confuses means and ends. The goal is to reduce the deficit. However, the debate obsesses over spending cuts and tax increases and measures success in the amount of (downward) fiscal adjustments we can come up with. This is known at the ‘arithmetic’ approach and we see this popping up everywhere. If we cut x, then we save x – but as we know, cuts do not equal savings. We do not debate fiscal effectiveness; we debate different numbers on the revenue and spending balance sheet and delude ourselves that we are discussing fiscal stability. As Seamus has shown, however, this is not happening.
Most crucially, we don’t even acknowledge that the nation’s balance sheet is made up of three elements – revenue, spending and investment. The latter is rarely referred to even though it has been the driving force in the Irish recession. Investment is a tool of fiscal consolidation – a down-payment on future income; an activity that drives up demand in the short-term and continues to contribute to economic growth and revenue raising in the long-term through its supply input.
We are left with a wholly inadequate framework with which to understand, never mind debate, the continuing economic and fiscal crisis. All we get, with every fresh round of bad economic and fiscal news, is call to ‘tighten’ our belt even more, take ‘tough’ decisions, and make ‘sacrifices’. It is depressing that those calls are part of the problem, not part of the solution.
This is madness. And it's not unique to Ireland: Paul Krugman believes
that President Obama is infected by the same mindset:
OK, here’s an unprofessional speculation: maybe it’s personal. Maybe the president just doesn’t like the kind of people who tell him counterintuitive things, who say that the government is not like a family, that it’s not right for the government to tighten its belt when Americans are tightening theirs, that unemployment is not caused by lack of the right skills. Certainly just about all the people who might have tried to make that argument have left the administration or are leaving soon.
The simple model of personal moral rectitude is seductive for people who can't or won't grasp the idea of feedback loops. We're screwed because we're terrible at thinking about systems, especially in public debate.