LOOKS like Keynes got it wrong. Arguments over what to do about the Great Contraction have swirled around the figure of the legendary economist John Maynard Keynes. What would he have said?
He might have said: "I told you so." One of his best-known observations is that most policies are slaves to some defunct economist. Just like JM Keynes.
But things have suddenly moved on. The fierce austerity debate is now at its fiercest among very live economists. Politicians, desperate for some idea about what to do next, are watching closely.
Now, as you may have noticed, two of the leading academics cited by the proponents of austerity have been found to have made a mistake.
Kenneth Rogoff and Carmen Reinhart of Harvard had found that economies with public debt greater than 90 per cent of annual output (GDP) tended to grow much more slowly, and often not at all.
In fact, after adjusting for the acknowledged technical errors, it appears that such economies do much better than the original calculations found, while some do no worse than economies with modest debt. So all that austerity to limit State debt, as well as doing damage, isn't even necessary.
That was the cry from the neo-Keynesians. Until now, they had relied on the IMF research, which found that the lost output from budgetary tightening was greater than had been thought. Now, they have the amended Rogoff paper.
Unfortunately, neither really applies to Ireland. The IMF found that lost output here from the €20bn fiscal correction was about what one would expect. It is a major loss – around €10bn – but it does not change the austerity argument, for or against.
Both versions of the Rogoff research find that the performance of debt-laden economies varies widely – which is just what the IMF found. Ireland might turn out to be one of those economies where high levels of debt do not seem to inhibit growth too much.
Or, given its high levels of private debt and crippled banks, it might be trapped in permanent low growth and stressed public finances.
There is what they call a delicious irony here. Some of the most vocal critics of current policy argue that present debt levels are unaffordable. If that is the case, Rogoff-Reinhart and the IMF research are irrelevant. Easing austerity without first dumping a lot of existing debt would be a road to nowhere.
As it happens, there was discouraging news on the debt burden last week. At 123 per cent of GDP last year, it was just above its intended maximum. It will require all the Government's austerity plans, including the Croke Park II savings, to prevent it growing further.
Listening to the arguments, one could come to the conclusion that this would not matter. That is precisely the case being made to Barack Obama, David Cameron and Europe in general, with wartime debt levels of 300 per cent of GDP being cited as examples of what is possible.
None of that applies to Ireland. Nobody would lend it that kind of money. Nor can it (if it ever could) print its own money in sufficient quantities to make up the difference.
The undoubted shift of mood in Europe does widen the options. Lower interest rates on EU loans and longer repayment dates would allow the country carry more debt – but how much more?
Serious money creation by the ECB (although I'll believe it when I see it) might be channelled into the credit system in ways which would do more for growth and an end to austerity than directly giving it to government.
The times are a-changing, but too much of what is being said is in the realms of fantasy. Ireland is still not in a position to have neutral budgets – which seems the only sensible definition of an "end to austerity".
But without the UK and EU growth, which might reasonably have been expected by now – and given the change of mood – the deficit targets for the next two years may be open to adjustment.
Nor, unless that growth arrives, are the present debt levels sustainable; at least under the old rules. The economist who can chart a return to EU growth is not only not defunct; she may not yet have arrived.