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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