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Jul 9, 2010

Ireland Tries Economic Suicide

Fred:  Ireland is trying to recover without stimulus spending.
Mike:  Are they all drunk?
Fred:  It seems to be working.
Mike:  Are we all drunk?
- -
Fred:  Did you hear about the big bank robbery? The robbers have agreed to spend the stolen money within the town.
Mike:  They have all the luck. That stimulus spending will make them rich.
Fred:  Government is doing that for all of us, so we won't have to depend on bankrobbers.

The New York Times Reports Twice About Ireland
07/07/10 - Cafe Hayek by Russ Roberts

First, we learn that Ireland tried to commit economic suicide by not creating more debt to support stimulus spending.

NYTimes 6/29/10 [edited]:  An economic collapse forced Ireland two years ago to cut public spending and raise taxes.

Economist Alan Barrett: 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. We said "Let’s get this over with quickly."

Ireland is being penalized for its actions, not rewarded. 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% last year and remains in recession. The once thriving nation is struggling, with no sign of a rapid turnaround in sight.

The next day:

NYTimes 6/30/10 [edited]:  Ireland’s gross domestic product grew 2.7% in the first quarter of 2010. It was the first such rise since Q4 2007, when Ireland’s economy began to buckle amid a bursting bubble in construction and property speculation.

Economists are forecasting that Ireland’s GDP will grow in 2010, setting aside earlier predictions.

Ireland did the right thing in cutting government spending, and it had a good and fast result. Some people would point to raising taxes as somehow leading to economic growth. I don't see the mechanism in higher taxes that would do that. Raising taxes was probably a necessity forced on them by their past spending. If you borrow to spend more, then you must raise more tax later to pay off that borrowing.

The U.S. is going to carry out an experiment starting in 2011. We are raising taxes to support increased government spending, and probably will continue to spend more "stimulus". We will see how that works out. I say it won't be good.

Future News

Keynesian Bankrobbers Save Local Economy

The biggest bank robbery in Kennebrokeport history has left the people stunned. Criminals stole $12 million in cash and government notes, 12% of the town's annual economic output.

The robbers offered an interesting bargain. In exchange for a pardon, they will spend all of the cash within the town on restaurant meals and consumer goods, thus stimulating the local economyStimulus actually shrinks the economy by distorting markets to produce less efficiency. Town leaders are hopeful, and some are even pleased.

The mayor announced that this was a great opportunity to "jump-start" the economy in what are difficult economic times. "We will all start working and spending again. I think we all forgot how to consume. Now we will get back into the habit, and eventually we will all be rich".

The mayor continued "I have talked to government economists about the effect of this. They say we have lucked out, that we should get an economic boost of 1.5 timesStimulus confuses cause and effect. Prosperity leads to more spending. Spending does not create value, but only allocates it. the amount stolen and spent. We are actually going to make a lot of money on this deal. I didn't know that bank robbery could be so beneficial to the community. I'm thinking of changing our entire attitude toward this type of theft."

Townspeople are suspicious of the newcomers spending a lot of cash, but do not want to ruin their own economic future by prying into how they obtained the money. "We're just happy that someone is spending again, although they are not great tippers."


The few jobs created by stimulus spending are temporary, even the full-time jobs. Stimulus money is not going into wise investment to create the jobs of the future. It is being used for the projects that are already organized by federal, state, and local governments, like raises for government employees and road repair.

Road repair and the like are useful projects (but not in this case Miles of new sidewalks and empty stores), but they are not the high-value investments that create new and lasting job opportunities. Stimulus jobs will disappear when the stimulus spending stops. Meanwhile, government borrowing and taxes to pay for the stimulus are reducing the high-value investments that "the rich" would have made in response to the recession.

A Tested Stimulus PlanEasyOpinions 02/2009

The economic crisis is the result of a giant six year stimulus provided by housing loans. As we now know, it worked for a while and ended in disaster. What will the current so called stimulus plans produce when the money runs out? We know the answer: an economy like the current one, but somewhat worse.

Stimulus Does Not Cure a RecessionEasyOpinions 11/2008

Jobs change when people change what they want to buy or can afford. It is possible to keep people at their low-value or unneeded jobs for a bit longer, only by wasting the savings that should be financing a real recovery.

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