A Lesson In Idiot Savant Economics For Economics Professors

Paul Krugman pauses in the middle of his vacation to make a point:

So, how’s it going? This article is typical of what you read: it describes the Irish as doing what has to be done, while the Spaniards dither. And it has good things to say about how the Irish response is working:

Much bitterness but also stoicism; markets impressed by Irish resolve to bite the austerity bullet.

Well, I guess that’s right — if by “markets impressed” you mean a CDS spread of 226 basis points, compared with 206 points for Spain; not to mention a 10-year bond rate of 5.11 percent, compared with 4.46 percent for Spain.

So, I’m glad to hear that Ireland’s stoic acceptance of austerity is reassuring markets; it must be true, because that’s what everyone says. Because if I didn’t know that, I might look at the data and conclude that markets actually have less confidence in Ireland than they do in Spain, and that austerity in the face of a deeply depressed economy doesn’t actually reassure markets at all.guess that’s right — if by “markets impressed” you mean a CDS spread of 226 basis points, compared with 206 points for Spain; not to mention a 10-year bond rate of 5.11 percent, compared with 4.46 percent for Spain.

Does Fiscal Austerity Reassure Markets?

All of which is more or less true. Now, you may be saying "But Cujo, as an Internet persona named after a rabid animal, surely you must be aware that this is an example of post hoc, ergo propter hoc reasoning." Yes, that's certainly true - Ireland and Spain are different countries, and at least based on what he wrote in that article, one might accuse Prof. Krugman of saying that all European countries are alike, which they naturally are not. (Read the article to see the quote in context, and follow the links I didn't bother to copy over.)

However, you'd be missing the larger point, which I think perhaps should be printed in bold letters:

The Irish are paying five percent interest!

I don't know about you, but nothing that I can get my hands on right now that is reasonably guaranteed to pay off pays five percent interest. Yet the Irish, and a good many other governments, are offering bonds at rates like this to "balance" their budgets. If I had a few million to throw around, I'd love to have a stable national government on the hook to pay me five percent interest.

That's what's really important about this, at least to me. It's the answer to the question "Who benefits from government austerity?" Usually, it's the folks who lend them the money.

That's something to keep in mind the next time you read or hear someone praising the fiscal austerity program of some government.