What Lesson Should We Take From Ireland’s Austerity Experience?

BY Anna Shoup  July 16, 2010 at 4:19 PM EDT

Question: What lesson should we take from the experience of Ireland in attempting to take the path of austerity to bolster its economy. Why is the world hearkening back to Herbert Hoover economics? I hope your current series on the debt crises will deal with these questions.

Paul Solman: If you saw our recent interviews with Greek Prime Minister George Papandreou and the French Finance Minister, Christine Lagarde, you’ll know that this question is much on my mind.

I’m in the “we’re between a rock and hard place” camp — no stimulus is dangerous but so is added debt. Papandreou is too (or so he said). Lagarde thinks we can have our cake and eat it too. Her new word in French: “ri-lance”: “ri” for “rigueur” (austerity); “lance” for “relance” (plan de relance is “stimulus plan” in French).

The view I’ve heard most often from economists was stated succinctly by legendary deficit hawk David Walker at the Aspen Ideas Festival recently: We have to stimulate short term to avoid the dreaded “double-dip” recession, meaning the federal extension of unemployment benefits and helping out state and local governments so they don’t engage in massive layoffs. Such programs will add to the annual deficit and thus the national debt.

Longer term, says Walker, we must rein in entitlements — or the debt will explode, interest rates will skyrocket, and we’ll be doomed.