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Recovery never came; Irish unemployment is more than 14 percent. Ireland's experience shows that austerity in the face of a depressed economy is a terrible mistake to be avoided if possible.
Let the record show that George W. Bush, as this site (and me personally) never tires of pointing out, was a big-government disaster, who broke the bank like an impulsive five-year-old smacking a piggy bank with a hammer. If Bush's free-spending ways were so stimulative, the question before us would be how can we restrain such fantastic economic growth and not how can we get anything going.
Like Obama, George Bush inherited a crap economy and a whopping 900,000 public-sector jobs were added in his first term, which was also known as a "jobless recovery." The feds went on a hiring and spending spree, of course, and so did state and local governments once the economy bounced back. Unlike Obama, Bush also inherited a surplus from which to at least pay for some of that spending. To insist that public-sector spending is the way to reduce unemployment really does mean forgetting that these jobs don't pay for themselves. The only way the government at any level makes payroll is by taxing now or borrowing now and taxing later to pay off debt.
A decade-plus after Bush first took office, debt at all levels has metastisized, which is another way of saying that the bill for runaway government spending—we're talking increases of 60 percent or more in inflation-adjusted dollars at the federal level and well over 50 percent at the state level between 2003 and 2007 alone—is coming due. So for Krugman and other stimulatarians to simply keep harping on public-sector employment levels really begs the questions of who's going to pay for those saved-or-created hires and what effect explicit or implicit tax increases have on the larger economy.
Which brings us to the related question of Irish austerity, which to Krugman's mind proves that firing public workers will hurt any economy. Contrary to Krugman, Irish public spending has been relatively flat in recent years, which is really nobody's idea of austerity, if by that term you mean taking a hatchet to a budget to reduce the debt to GDP or spending ratio. By the same token, Ireland has been happy to raise all sorts of taxes in recent years to attempt to close budget and debt gaps. As Reason columnist and Mercatus Center economist Veronique de Rugy has pointed out, an incomplete list of "austerity" tax increases in the Old Sod includes:
- Standard VAT rate increased by two percentage points to 23 percent. (It was cut in December 2009 down to 20 percent from 21.5 percent)
- €100 household charge introduced to fund vital local services.
- Carbon tax increased from €15 to €20 per tonne effective from midnight, Budget Night, on petrol and diesel, and from May 1, 2012, on other fossil fuels, excluding solid fuels. This change equates to 1½c increase in cost of a litre of petrol & diesel.
- Excise tax on cigarettes up by 25 cents.
- Motor-tax rates increased.
- Capital acquisition tax, capital-gains tax and D.I.R.T. raised to 30 percent.
- Property-relief surcharge of 5 percent to apply to large investors.
These levies, she notes, have been laid on top of a whole bunch more as well. Far from Krugman's suggestion that Irish austerity has taken the form of massive cuts in goverment spending and public-sector employment, most of it involves tax increases that are properly understood as "private-sector austerity." De Rugy has elsewhere pointed out that there are crystal-clear examples of how to shrink public-sector spending (and by extension, public-sector employment) which not only reduce debt-to-GDP ratios but correlate with economic growth. The key is to eschew "balanced approaches" that rely on some spending cuts and some tax hikes and to go whole hog on the spending cuts. Successful austerity plans—those that see debt-to-GDP decline by at least 4.5 percentage points after three or more years—contain an average of 80 percent of spending cuts and 20 percent tax increases. Rather than grapple with actual examples from the recent past, the stimulatarians either fudge weak arguments about how World War II ended the Depression ("the Great Depression ended largely thanks to a guy named Adolf Hitler") or how stimulative a Watchmen-style fake alien invasion would be.
And to answer Krugman's query about runaway spending causing rotten economic performance: Yes, there appears to be a pretty strong connection, especially when spending keeps the debt ratio from shrinking. According to Carmen Reinhart, Vincent Reinhart, and Ken Rogoff, "debt overhang"—defined as a country posting a debt-to-GDP ratio of 90 percent or more for five consecutive years—causes significant reductions in long-term economic growth. Economists such as University of California at San Diego's Valerie Ramey and Harvard's Robert Barro—not to mention former Obama adviser Christina Romer—have all made convincing empirical cases that fiscal stimulus doesn't work. Certainly we know this much: The Obama stimulus failed to deliver on its unemployment rate promises (and that would be true even if public-sector employment had not been cut).
The stimulatarians would keep increasing government expenditures and padding public payrolls as the one true route to prosperity. Tax increases are OK in this scenario (or at least not worthy of much serious discussion) because they might help to keep more folks on the public payroll which is, in Krugman's analysis, "the big difference this time."
But we plainly don't need more teachers, more cops, or more firemen to educate our kids, protect our streets, or put out our fires.
And hiring more public-sector employees is no way to reduce government spending, which is the best way to reduce the debt-to-GDP ratio.
Which is the best way right now to get the economy moving.
If only President Obama or Gov. Romney understood any part of that.
Nick Gillespie is the editor in chief of Reason.com and ReasonTV. He is co-author with Matt Welch of The Declaration of Independents: How Libertarian Politics Can Fix What's Wrong with America, out in paperback with a new introduction on June 26.