Why Ireland can’t borrow to stimulate

Karl Whelan explains why a Keynesian stimulus package isn’t feasible for Ireland in a blog post at Irish Economy

By the way, it gives me no joy whatsoever to write this. I would love to be in a position to recommend fiscal stimulus. The vast majority of us dismal mainstream economists believe that fiscal policy should be counter-cyclical, so that deficits are run up during recessions and run down during expansions. We would love to be recommending stimulus programs. However, the extent of the fiscal mis-management of the country means that there’s no room to do this.

He gives a clear very high level view of why a stimulus package would add rather than reduce the deficit in Ireland and continues –

These considerations mean that any attempt at fiscal stimulus will see the Irish budget deficit increase, not decrease. So what, I hear some of you say? We can pay back the debt over time. Well, you need to find someone to lend the money to you. Right now the bond market is very jittery about Ireland’s ability to pay back: For this reason, we’re paying three percent more on our debt than the Germans.

And like it or not, bond market participants go along with the boring mainstream analysis I described above: They believe stimulus packages would raise the deficit. If they see the Irish government acting in a way that, rather than reducing the deficit, would raise it for a number of years, they will just pack it in. Borrowing rates would either rise enough to offset any positive effect of stimulus or the bond market would just give up on lending to Ireland altogether.

Note that this isn’t a neoconservative conspiracy—the average market participant will always adopt the mainstream analysis, which in this case just means believing that stimulus packages tend to raise budget deficits.

It will be interesting to see the response from those economists advocating a stimulus package, is Karl Whelan right, or are our options truly limited?

P.S. For those who are interested, Keynes’ ‘The General Theory of Employment, Interest and Money’ is available via this link, at, em, Marxists.org.

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  • Glencoppagagh

    In any case the impetus from fiscal stimulation would be severely dissipated by imports because Ireland is such an open economy.

  • Mack

    Yep. That’s central to his argument.

  • Anon

    Hmmm, remind me – what is currently happening to the Irish deficit. Additionally, remind me what is happening to GDP growth. Bonus questions:

    1. What does this imply about the size of the deficit to GDP?
    2. If Ireland was growing at 3% pa, how much extra debt would imply the same deficit:GDP ratio?

    That said, Ireland is in a different position to the UK or US, where there is little evidence of the bond markets stirring yet. They’ve already decide on Ireland and would have a run at it if they pursued deficits regardles sof what it did on growth, and Ireland would bust. Even those bullish on US debt, like Brad De Long would (and have) made similar arguments for small open economies like Ireland.

    Whether it would actually be the sane policy assuming sane markets is another question entirely.

  • slug

    Part of being part of a single currency is much greater workforce migration. People will move from the places where there are not jobs to the places where there are jobs. If workforce migration is to be abated then greater fiscal centralisation needed. We knew all this at the time the euro was set up.

  • slug

    Irisheconomy.ie is a great blog I must say. And Mack your blogs here are also great. (Just thought I would give a little feedback since I am appreciative).

  • Glencoppagagh

    Sorry, Mack. I should have read the source article.

  • Mack

    Damned if you do, damned if you don’t…

  • aquifer

    It’s tight alright.

    What could persuade irish people to holiday at home, put off buying imports, use less imported energy?

    Time for some parties? Bigger pubs so more tourists can come to stare at the musicians? Hotel beds for longer stays at knock down rates? Turn NAMA into the biggest self-catering holiday and event management company in the world? Have householders spend money on insulation and better heating controls, with the finance secured and recovered as an addition to electricity bills over a few years?

  • Munsterview

    I concur regarding Mack’s bloggs appreciated here too and very informative. Keep up the good work.

    Incidently while on the weary subject of finance apparently David Mc Williams made the point yeaterday in I believe an Indo article that our banks financial ficasco have incurred costs so far that the entire estimated cost of the BP American disaster. A sobering thought if true!

  • Damian O’Loan

    It seems to me that part of the contradiction mentioned by Mack among others, ‘damned if you do, damned if you don’t’, can be explained on two fronts.

    Firstly, that it’s not an either, or question between stimulus and debt reduction except in the biggest picture. For example, instead of quantitative easing, in places you could reduce VAT, as was done in France on food and drink in restaurants and will be on e-books. This avoids dissipation by channeling to local/national business and can be done within a framework of cuts. A successful recovery could depend on the nature of this balance, the criteria being that any stimulus measure has to clearly have a justifiable short-term boost effect, in the eyes of the market.

    Secondly, to say the markets will follow an orthodox belief is true, but this can equally be expressed as most trades are independent of human involvement, around three quarters being carried out on software instruction. This gives a bear market a lot more leverage, which can appear decisive. Since this bear market is liable to urge or punish measures in a national interest, decisions have to be made in light of how well this lobby is appeased compared with others. It could be difficult to build any long-term strategic recovery on a programme for government based on short-term measures.

    These two are linked in a way, but it would be reassuring to know that the Eurozone was acting within a framework based on a similar equilibrium in these kind of regards. Actually, in many ways, it does.

  • Mack


    Firstly, that it’s not an either, or question between stimulus and debt reduction except in the biggest picture

    The classic Keynesian stimulus should reduce the relative size of the debt. So it depends where you mean. In Ireland’s case Whelan is arguing it would increase both the absolute and relative debt, but for the USA – in theory – the stimulus should reduce the debt burden – at least relative to where it would otherwise be. I’m not sure the evidence is particularly supportive (clear cut) of this argument at the minute.

    Quantitive easing is a act of monetary stimulus, in that increases the supply of money while keeping it cheap. I’m not sure whether fiscal measures would be adequate alternatives in the face of monetary tightening. I.e. they’re not likely to keep the banks afloat.

    The other point, is that if the combination of debt reduction actions and stimulus actions are neutral / cancel each other out in terms of the amount of money being spent in the economy. The overall effect on the macro economy would be small (determined solely by the differential in fiscal multipliers for each action).

    That said in Ireland, if stimulus is feasible, both steps of actions together would be worthwhile. As part of our deficit is structural, and will remain in place even after the economy recovers.

    Elsewhere, though, it really is a choice between one or the other – at least at any given time. Nourel Roubini is calling for stimulus now, followed by austerity later. For the US and Germany at least..

  • Damian O’Loan

    “Elsewhere, though, it really is a choice between one or the other – at least at any given time.”

    That being a national view, as reflected by the two examples provided, I wanted to suggest that that will comprise a series of decisions reflecting both tendencies. That can also be viewed in the two primary debates around austerity – timing and severity – that have been taking place in respective countries.

    I compared fiscal stimulus with q. easing just to show that the breadth of broadly Keynesian measures extends in scope and nature, they will be a facet of even an austerity-led recovery.

    In Ireland, this could include timing of announcements on civil service pay and conditions: in the UK, I suspect the drive for cuts will be encouraged by the Q2 news today.

    I agree with Whelan’s argument. Because, though, I don’t think it amounts to justification for immediate debt reduction to zero, I’m interested in how the grey area is managed and why the Keynesian model appears not to have held up after such a short time – apart from the lack of savings, of course.

    Btw, this is a good blog, as slug and others mentioned. If I could suggest a somewhat-related subject I’ve not much seen covered, it’d be this: the recoveries all involve restructuring retirement funds and laws, and mostly increasing the age to sixty-something. At the same time, over fifties are facing huge pressures to retire early, or are considered unemployable when made redundant. Is this not quite a big circle and square situation?

  • Anon

    Elsewhere, though, it really is a choice between one or the other – at least at any given time. Nourel Roubini is calling for stimulus now, followed by austerity later. For the US and Germany at least..

    Strictly true? Given the political situation in the US, a couple of economists called for a stimulus with a zero impact, by shifting money from things with weak multipliers to things with stronger ones.In theory it should have spme effect