Ireland has bowed to the inevitable and accepted the necessity of a bailout. There will be a lot written about the causes and blame for the sorry state of affairs. Take your pick: Reckless bank lending, reckless corporate and individual borrowing, reckless State spending, reckless lack of regulation, etc. Folk will write very studious books on these events. The headline conclusions will be the same old broad themes they have been after every financial crisis in history. Initially people will earnestly take on board these lessons and kick off the new economic cycle. The age old truth that the ‘collective memory’ is shorter than the ‘economic cycle’ will then slowly kick-in. As time passes people will forget the lessons and again rationalise that the laws of economics ‘are different now’. The whole thing will rise and collapse again – probably more than once or twice in our lifetimes. It was ever thus.
Back in the here-and-now there are political points being scored as the Irish brown stuff hits the whirly thing. An argument gaining currency amongst leftist commentators is that the Irish humiliation shows that austerity measures (read government cuts) do not work. There is one example here. This needs to be taken head-on.
At first pass there does sound a clear logic to their argument. Ireland hit breaking point first so went first with austerity measures . The measures manifestly haven’t done the job given the need for this bail-out. Therefore, ‘logically’, austerity measures do not work. Therefore, ‘logically’, they would have been better to keep pumping more state money around the economy to avoid this final meltdown. Therefore, ‘logically’, the UK must take note and course correct.
It is a compelling narrative. It is also dangerous. If you stop and think about it this argument is no more or less a ‘logical’ as saying “A man was in a hole, he stopped digging, he found he was still in a hole, therefore he should have kept digging”.
We cannot let their spin distract us from the fundamental issue: the nation was spending four pounds for every three that it brought in. We have an unsustainable debt and government spending polices were making it worse. You don’t solve a problem and delaying the inevitable for longer. When you have a bubble – sadly you have to let it burst. Pouring more soap into it doesn’t let it down gently – it just makes for a bigger bang when it comes.