Albert Einstein once said that insanity was doing the same thing over and over again and expecting different results, Michael Taft at Notes On The Front points out that government efforts to bridge the fiscal deficit by raising taxes and cutting spending are sucking money out of the economy, causing the economy to shrink and the deficit to grow! As previously discussed on Slugger, he is not alone as an economist in taking this view. Having tried this approach three times so far in less than 8 months, is it time for the Irish government to call a halt to tax rises & spending cuts?
Adds : Karl Whelan at irisheconomy.ie covers related ground when explaining why funding construction stimulus projects off-balance sheet is a bad idea.The argument in favour attempting to balance the budget is that it reduces (at least in absolute, but not apparently proportional terms) the amount of money the government must borrow via the bond market. By appearing fiscally responsible the government hopes that investors will be inclined to purchase Irish government debt and thus help fund the remainder of the deficit. Irish Liberty highlight a recent article in the Sindo reporting that Irish banks are making use of ECB facilities to purchase Irish government bonds. Rather indirectly, it appears that the ECB is underwriting Irish government debt. This fact, coupled with evidence that budget balancing measures are having the opposite effect suggests to me that Michael may be correct. Is it time to stop raising taxes and cutting public spending and take full advantage of our Eurozone membership to fund the fiscal deficit throughout this crisis? Once the crisis is over we will still need to take austerity measures to deal with the structural deficit caused by the collapse in transaction based tax revenues, but my feeling is we could pick a more opportune moment to do this than when unemployment is approaching 12% perhaps on it’s way to 20!
No bio, some books worth reading – The Rational Optimist: How Prosperity Evolves – Matt Ridley .
Crisis Economics: A Crash Course in the Future of Finance -Nouriel Roubini, Stephen Mihm