A world in economic crisis

Proposed Austerity Measures for Ireland

The BBC reports that the Irish Government is set to unveil new austerity measures as required by the EU-IMF rescue plan.

  • It will be a 4 year austerity plan targeting cuts of $15billion euros or 11% of Ireland’s output;
  • the aim is to bring down Ireland’s budget to 3% of GDP;
  • reform of the banking sector just falling short of nationalization;
  • the IMF recommends that Ireland should gradually cut the benefits to the long term unemployed;
  • the IMF also recommends that Ireland should reduce its minimum wage to be in line with the general fall in wage levels in the Eurozone;

There are some concerns about the proposed austerity measures. First the Cowan government could lose the support of the Independents plus some of his own party’s backbenchers. Second, the measures may prove self-defeating.

As expected, the stupid economist Krugman claims that the spending cuts will lead to a deeper recession. However, is this necessarily true?

European countries such as Ireland are in deep trouble because of their generous welfare state benefits. As a result of the generous benefits these countries have attracted immigrants from other parts of Europe as well as the Middle East and the sub-continent. These immigrants have a tendency to bludge on welfare instead of becoming wage-earners and tax-payers. They have a tendency to scam the welfare system. Like some of the long term unemployed who prefer being on the dole rather than worker, these people do need to have welfare benefits reduced in order to encourage them to seek out real work.  These Governments cannot continue to pay for their welfare state without a corresponding increase in taxes, either through increasing the tax rate or by the entry of more wage-earners into the tax system.

The Keynesian economics that lies behind the Krugman concerns have already failed in the past. Long term welfare payments will not get an economy out of its malaise. On top of that there is always the possibility that in the longer term these welfare payments will contribute to a return to the days of stagflation – high unemployment, high inflation and high interest rates.  Just like in the 1970s, such a return to stagflation would be a disaster.


10 Responses

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  1. Carlyle said, on November 25, 2010 at 7:41 am

    More heart of the matter:

    “As expected, the stupid economist Krugman claims that the spending cuts will lead to a deeper recession. However, is this necessarily true? … The Keynesian economics that lies behind the Krugman concerns have already failed in the past.”

  2. Carlyle said, on November 29, 2010 at 12:05 pm

    Nigel Farage is a god –
    and maybe wisest man alive.

    Oh, dear me – would that we had a President like ol’ Nigel.
    He can even make a speech without a teleprompter.
    He can even think a complete thought without somebody whispering in his earpiece.
    And he has been RIGHT from day one and continues to be RIGHT.
    In fact he just gets RIGHTER and RIGHTER.

    As a little background, remember that Belgium is at the center of this.
    They have been trying to reclaim lost Glory – a glory they have not had
    since Victorian times – in which her important relatives were in Belgium,
    and some say were her puppet masters – at least through her early years.
    And don’t forget that Belgium was was once a great Colonial Power
    (remember the Belgian Congo, for instance!)

    And the most important positions in the EuroZone are staffed with Belgians.
    You know, the people who haven’t even been able to form a government
    for the last 6 months or more. In particular, the President, the Belgian
    Herman Van Rompuy is a major twit in the mold of Barney Frank. You
    can see him in the clip a couple of times, just in front of the #23.

    BTW – Since the adoption of the Euro as the common currency, there
    has not been a single audit, even though one is required by their own
    chartering documents once a year. The perpetual reason is that the
    “books are being cleaned up and reorganized and not quite ready yet”.


    This whole thing may be the biggest disaster in the history of the Universe.
    Thankful the US is not deeply embedded in this – but unfortunately we are
    thoroughly and shallowly embedded. The trouble of the Euro will ripple
    into us quite hard. Think: National Hurricane, but not National Abomb.

    • Aussie said, on December 13, 2010 at 6:59 am

      That was a very good and fiery speech. If you listen carefully Nigel makes some very good points regarding Democracy.

      To address Belgium though, I admit to never thinking of Belgium as a great colonial power. The UK was a greater power, as was Germany and even Holland.

      During my time away I saw a snippet of the movie “The Young Victoria”, and yes I understand how she and Prince Albert complemented each other.What I drew out of the beginning of the movie was the fact that the relatives in Belgium wanted to control her, and wanted her to sign away her right to be queen. It would seem to me that Belgium has always had these pretensions when it comes to the desire for power.

      I am still learning about all of these characters. I agree with Nigel Farage that the Euro experiment should be killed off. It has not brought about any of the desired results.

  3. Carlyle said, on November 30, 2010 at 4:54 am

    A good summary:


    “Big changes are coming in Europe – are we ready for them?”

  4. Carlyle said, on December 4, 2010 at 10:11 am

    Tryin’ to keep things lively here in your absence:

    This goes along with your Keynes theme – discusses Keynes and Obama – explains a lot – very informative and enlightening – in so many ways:

    • Aussie said, on December 10, 2010 at 6:24 pm

      That clip was hilarious. I had seen it before of course. Those idiots do not know the difference between Keynesians and Kenyans !! Too funny.

  5. Aussie said, on December 10, 2010 at 6:23 pm

    I have returned from my holiday and hope to catch up with all of the news regarding the economic crisis in Europe – Ireland and Spain.

  6. Carlyle said, on December 12, 2010 at 1:46 pm

    At the risk of TOTALLY dominating this branch of your blog – here is some more “Keynes is not the answer to the problem” for you:

    If people don’t read and understand this stuff – they are destined to continue being led around by the ring in their nose – by perverse people who want to harm them –


    Taxing the PRODUCERS in the economy to give money to the CONSUMERS is the same as melting down the factory machinery to sell the scrap to buy food for the workers.

    I have mentioned before AUSTRIAN economics is RIGHT and KEYNESIAN economics is WRONG. This has been known for over 50 years. And, further, that the preferred economics taught in our lunatic liberal universities is KEYNESIAN – of course!

    Murray Rothbard was a prime apologist for correct economics and the Austrian School. His monumental work (over 700 pages) on this subject was first published in 1962 – more than a decade after Keynesian economics had been thoroughly discredited and demolished by his friend Henry Hazlitt.

    Re-reading that tome (for leisure and amusement!), I happened upon the following tidbit. If I may be so bold as to summarize:

    1. Focusing on “consumer spending” – i.e. trying to stimulate such spending – is ass backward. Such spending will have little effect on the core (the “engines”) of the economy.

    2. The interest rates (having them sufficiently high) is what stimulates production and industry. Artificially suppressed interest rates stifles the beneficial investment in the core of the economy.

    3. Such misguided stimulus might boost some economic indicators but, by starving production and industry, would have a flat or negative impact on jobs.

    Ever hear of a “jobless recovery”?
    Did the Austrians actually predict such a thing?

    Murray N. Rothbard
    Chapter 6.4, The Time Market and the Production Structure, P. 311

    A common fallacy, fostered directly by the net-income approach, holds that the important category of expenditures in the production system is consumers’ spending. Many writers have gone so far as to relate business prosperity directly to consumers’ spending, and depressions of business to declines in consumers’ spending. “Business cycle” considerations will be deferred to later chapters, but it is clear that there is little or no relationship between prosperity and consumers’ spending; indeed almost the reverse is true. For business prosperity, the important consideration is the price spreads between the various stages—i.e., the rate of interest return earned. It is this rate of interest that induces capitalists to save and invest present goods in productive factors. The rate of interest, as we have been demonstrating, is set by the configurations of the time preferences of individuals in the society. It is not the total quantity of money spent on consumption that is relevant to capitalists’ returns, but the margins, the spreads, between the product prices and the sum of factor prices at the various stages.

    There is, in fact, never any need to worry about the maintenance of consumer spending. There must always be consumption; as we have seen, after a certain amount of monetary saving, there is always an irreducible minimum of his monetary assets that every man will spend on current consumption. The fact of human action insures such an irreducible minimum. And as long as there is a monetary economy and money is in use, it will be spent on the purchase of consumers’ goods. The proportion spent on capital in its various stages and in toto gives a clue to the important consideration—the real output of consumers’ goods in the economy. The total amount of money spent, however, gives no clue at all. Money and its value will be systematically studied in a later chapter. It is obvious, however, that the number of units spent could vary enormously, depending on the quantity of the money commodity in circulation. One hundred or 1,000 or 10,000 or 100,000 ounces of gold might be spent on consumption, without signifying anything except that the quantity of money units available was less or greater. The total amount of money spent on consumption gives no clue to the quantity of goods the economy may purchase.

    The important consideration, therefore, is time preferences and the resultant proportion between expenditure on consumers’ and producers’ goods (investment). The lower the proportion of the former, the heavier will be the investment in capital structure, and, after a while, the more abundant the supply of consumers’ goods and the more productive the economy. The obverse of the coin is the determining effect of time preferences on the price spreads that set the rate of interest, and the income of the capitalist savers-investors in the economy.

  7. Tyrone said, on December 14, 2010 at 10:07 am

    I need to research this, but did not the famous DEMOCRAT U.S. president JFK lower taxes to spur economic growth? And if I remember correctly, it worked?

    Of course with comments like “Ask not what your country can do for you but rather, what you can do for your country” and his having been born into a life of luxury and privilege maybe today’s economists and pundits think he was one of those EEEE-vil Republicans??

  8. Frez said, on December 16, 2010 at 11:14 pm

    Hey thanks for yet another very good post. Where do you receive your inspiration for all this 12:14

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