Luck of the Irish vs. economic policy of the Irish

Silvio Berlusconi may have the last laugh — at Europe’s expense. Once the subject of German Chancellor Angela Merkel’s barely suppressed titters, the former Italian leader roared back from the political wasteland in yesterday’s election, blocking the formation of a new Italian government and fracturing the eurozone’s brittle newfound stability.

THIS week's print edition highlights some results from our survey of top economists in advance of America's presidential election. Due to space constraints, many entertaining, enlightening, and befuddling comments from the nation's dismal scientists could not be included in the body of the article. Fortunately, the IT revolution, if it has given us nothing else, allows us to share these insights with the general public.

There are two basic approaches to fixing our crappy economy. The first approach is called "austerity." This logic for this approach rests on the theory that the reason our economy is crappy is that our government is spending more than it takes in and that the resulting deficit is creating "uncertainty." Once this deficit spending is reduced, this theory goes, uncertainty will ease, and confidence will return. And then our economy can recover in earnest. The second approach is called "stimulus."

Central bankers respond to every debt crisis as if they were all created equal. As such, they are willing to pile debt and promises upon debt and promises. In cyclical recessions the strategy eventually "works" using the term loosely. In reality, such kick-the-can strategies will eventually blow sky high, which is precisely where we are today, with Bernanke is scratching his ass, wondering why his policies are not working.

AUSTERITY in the euro zone has been under attack ever since the first economist representing the troika (IMF, ECB, EU) set foot on Greek soil. Actually, the troika may become more of a duoika (?), according to Athens News (via Tim Duy), because the one-sided emphasis on austerity is enervating the IMF.

As you can see from Ireland, budget austerity doesn’t reassure financial markets if austerity doesn’t lead to growth:

By Peter Boone and Simon Johnson With the European Central Bank announcing that it has bought more than $20 billion of mostly high-risk euro zone government debt in one week, its new strategy is crystal clear: We will take the risk from bank balance sheets and give it to the central bank, and we expect Portugal-Ireland-Italy-Greece-Spain to cut fiscal spending sharply and pull themselves out of this mess through austerity.