{"id":21073,"date":"2012-09-25T18:06:19","date_gmt":"2012-09-25T08:06:19","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=21073"},"modified":"2012-09-25T18:06:19","modified_gmt":"2012-09-25T08:06:19","slug":"the-celtic-poster-child-demonstrates-the-failure-of-austerity","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=21073","title":{"rendered":"The Celtic poster child demonstrates the failure of austerity"},"content":{"rendered":"

\t\t\t\tThe IMF boss claimed yesterday that her organisation believed that austerity and growth “can be reconciled and should not be mutually exclusive” (see analysis in blog). She lied just like the IMF has been lying regularly since the crisis began. She also claimed that the IMF forecasts have been trending down. The fact is that they keep revising them down because they are continually wrong. They want to dress their austerity bullying up in a favourable light by claiming growth will be higher. The reality is always different and growth, quite predictably, comes in lower. Their poster child – Ireland – was the first nation to succumb to the austerity narrative. The latest national accounts from Ireland released last week continue to provide a bleak outlook on what is happening there. Austerity is killing the economy – slowly but surely. Joseph Stiglitz said that fiscal austerity is tantamount to economic suicide. Ireland is leading the way. Despite massive austerity, Ireland is still going backwards and people are becoming poorer. Claims that Ireland’s austerity approach provides a model for other nations to follow because it produces growth cannot be sustained from the data. Further, as I will show in another blog – the poor economic performance is making it impossible for Ireland to achieve the ridiculous fiscal benchmarks that the Troika have imposed on it. It is folly all round. Pity the workers and the common folk.
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\nIn seasonally adjusted terms, Gross domestic fixed capital formation (that is, investment) in Ireland was valued at 37,196 million Euros in 2007 in constant price terms. In 2011, it was 16,390 million Euros a decline of 56 per cent. <\/p>\n

In 2007, Personal consumption by households was 85,936 million Euros in Ireland. By 2011 it had fallen 6.8 per cent to 80,056 million Euros.<\/p>\n

Public consumption spending fell 13.9 per cent between 2007 and 2011. Real GDP fell 6.9 per cent, while real GNP fell 11.2 per cent.<\/p>\n

Private consumption, government spending, private investment, real GDP has continued to fall in the first two quarters of 2012.<\/p>\n

That is what fiscal austerity does.<\/p>\n

Earlier this year, Joseph Stiglitz told an audience in Vienna, Austria that (Source<\/a>):<\/p>\n

\nI think Europe is headed to a suicide…There has never been any successful austerity program in any large country … Decreasing growth is causing the deficit, not the other way around. I think that austerity approach is going to lead to high levels of unemployment that will be politically unacceptable and make deficits get worse.\n<\/p><\/blockquote>\n

Compare that to the babble from the highly-paid IMF boss yesterday (September 24, 2012). In a speech to participants at the bastion of free market for others, government handouts for them – the Peterson Institute for International Economics – Promises to Keep: The Policy Actions Needed to Secure Global Recovery<\/a> – the IMF boss said:<\/p>\n

\nOn the Fund’s part, we are favorably considering that this be done in as timely and flexible a manner as possible … above all, keeping the emphasis not just on austerity, but also on growth as we believe that the two can be reconciled and should not be mutually exclusive.\n<\/p><\/blockquote>\n

That is the new mantra – folks you can have everything – massive cuts in aggregate demand but economic growth at the same time – the fiscal contraction expansion.<\/p>\n

Fiscal austerity and growth are impossible if the non-government sector reacts to the austerity by cutting their own spending. For too long the IMF and others have been trying to kid us that the opposite happens – that the private sector gets a burst of confidence as austerity is imposed because they hate deficits so much and go crazy spending up big even though unemployment is rising and businesses are folding on a daily basis.<\/p>\n

The fiscal contraction expansion myth – dressed up sometimes as the “Ricardian Equivalence” theory – which underpins the stated claim that fiscal austerity will be good for growth because the private sector will be revitalised by the boost in confidence that comes from knowing that the budget deficit is being cut – denies basic human psychology.<\/p>\n

It is obvious that spending growth is needed to restore overall economic growth in Europe and elsewhere. So the debate is about where that spending growth will come from.<\/p>\n

At last count there were two broad macroeconomic sectors – the government and the non-government. The non-government sector can be decomposed into the private domestic sector and the external sector. The private domestic sector can be further decomposed into households who consume and firms who invest (in productive capital).<\/p>\n

Macroeconomics is easy. There are two broad spending sectors and then some more detail.<\/p>\n

So if the IMF proposed “reconciliation” between austerity and growth is to be realised then we should expect to find positive private domestic sector spending surges accompanying the fiscal cutbacks.<\/p>\n

Remember this interview on the US NPR (April 30, 2012) – Austerity Measures Cost Some Politicians Their Jobs<\/a> – with one John Peet, who is the Europe Editor of The Economist Magazine.<\/p>\n

The topic of the segment was the “backlash against austerity measures” in Europe and he was asked whether there was “any country that seems to be leading the way out of here”, to which he replied:<\/p>\n

\n… And of the countries that were in trouble, I would say Ireland looks as if it’s the best at the moment because Ireland has implemented very heavy austerity programs, but is now beginning to grow again. So there are some examples …\n<\/p><\/blockquote>\n

To which I would reply – Ireland is an example of how much damage fiscal austerity causes. It was the first of the Euro nations to impose a fiscal austerity package. It is still not growing and private spending is collapsing.<\/p>\n

The most recent (June quarter 2012) – National Accounts<\/a> – data for Ireland issued last week (September 20, 2012) by Ireland’s Central Statistics Office tell a very bleak story.<\/p>\n

Consider the following graph which shows the evolution of personal consumption, government consumption and investment (indexed at 100 in the March 2008 quarter peak) to the June quarter 2012.<\/p>\n

Investment now has an index number of 36 compared to 100 in the peak quarter March 2008. Both public and private spending have consistently headed in the same direction since fiscal austerity was imposed.<\/p>\n

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The following graph shows quarterly growth rates in real Gross Domestic Product (GDP) and Gross National Product (GNP) from the first quarter 2007 to the June 2012 quarter. Real GDP declined by 0.7 per cent in the first quarter of 2012 and showed zero growth in the second quarter (seasonally adjusted). Real GNP declined by 0.1 per cent in the first quarter of 2012 but grew by 4.3 per cent in the June quarter.<\/p>\n

So real GDP is flat and hasn’t grown at all since austerity was imposed but real GNP rose in the June quarter. What does that mean?<\/p>\n

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First, you need to first understand the difference between GDP and GNP. This is a particularly important point when it comes to understanding the Irish predicament (both before the crisis and now).<\/p>\n

You can gain a thorough understanding of these concepts from this excellent publication from the Australian Bureau of Statistics – Australian National Accounts: Concepts, Sources and Methods, 2000<\/a><\/p>\n

The two concepts are defined as such:<\/p>\n