When Irish Growth Is Contracting

When Irish Growth Is Contracting

When Irish Growth Is Contracting

Moneybox
A blog about business and economics.
Dec. 16 2011 8:36 AM

When Irish Growth Is Contracting

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Photo by PETER MUHLY/AFP/Getty Images

Ireland is the best case scenario for an economy successfully adjusting to a recession via "internal devaluation" -- i.e. cuts in nominal wages and prices. It's unemployment rate has been hovering just below 15 percent for a while and some quarters its GDP goes up and ECB types, austerians, and "technocrats" celebrate. Then you get the other kind of quarters:

Ireland's economy contracted by 1.9 percent in the third quarter, far worse than expected, as global economic turmoil dented export growth, raising the stakes for its fiscal and debt targets under an EU-IMF bailout. Ireland was the worst performing economy in the euro zone in the third quarter apart from Greece, which no longer publishes seasonally adjusted figures, marking a stunning reversal of fortune from the second quarter, when it was the second-best in class after Estonia, official data on Friday showed.

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One point that Keynesians make about this kind of situation is simply that it's difficult, logistically, to adjust with nominal wage cuts. As a matter of empirical fact about the world, prices of most things are at least a little downwardly rigid and the price of labor (and houses, too, I might add) has a lot of downward rigidity. Rightwing times sometimes look at that and say "well haha Keynesians, how come you're not running around trying super-hard to cut nominal wages?" This is where the second issue comes in. If real wages decline via currency devaluation or monetary expansion then the real value of debts declines as well, and soon enough incomes are rising because fewer people are unemployed and employed people are working longer hours. If a debt burdened economy tries to adjust through a prolonged span of high unemployment and nominal wage cuts, incomes are falling, debt burdens are rising, and expectations of low demand and possible deflation get embedded into everyone's decision-making. If you're lucky, nominal wage cuts + foreign demand will equal a recovery anyway thanks to exports, but if you're unlucky with the foreign demand then you're just screwed.