Posted on 06/08/2012 8:24:58 AM PDT by Kaslin
I have great fondness for Estonia, in part because it was the first post-communist nation to adopt the flat tax, but also because of the countrys remarkable scenery.
Most recently, though, Ive been bragging about Estonia (along with Latvia and Lithuania, the other two Baltic nations) for implementing genuine spending cuts. Ive argued that Estonia is showing how a government can reignite growth by reducing the burden of government.
Not surprisingly, some people disagree with my analysis. Paul Krugman of the New York Times criticized Estonia yesterday, writing that the Baltic nation suffered a Depression-level slump in 2008 and has only managed an incomplete recovery over the past few years.
He blames this supposedly weak performance on austerity.
I have a positive and negative reaction to Krugmans post. My positive reaction is that hes talking about a nation that actually has cut spending, so theres real public-sector austerity (see Veronique de Rugys L.A. Times column to understand the critical difference between public-sector and private-sector austerity).
This is a sign of progress. In the past, he launched a silly attack on the U.K. for a government pullback that never happened, so what he wrote about Estonia at least is based on real events.
My negative reaction is that Krugman is very guilty of cherry-picking data. If you look at the chart that accompanies his post, Estonias economic performance isnt very impressive, but thats because hes only showing us the data from 2007-present.
The numbers are accurate, but theyre designed to mislead rather than inform (sort of as if I did a chart showing 2009-present).
But before exposing that bit of trickery, theres another mistake worth noting. Krugman presumably wants us to think that the downturn coincided with spending cuts. But his own chart shows that the economy hit the skids in 2008 a year in which government spending in Estonia soared by nearly 18 percent according to EU fiscal data!
It wasnt until 2009 that Estonian lawmakers began to reduce the burden of spending. So I guess Professor Krugman wants us to believe that the economy tanked in 2008 because of expectations of 2009 austerity. Or something like that.
Returning now to my complaint about cherry picking data, Krugman makes Estonia seem stagnant by looking only at data starting in 2007. But as you can see from this second chart, Estonias long-run economic performance is quite exemplary. It has doubled its economic output in just 15 years according to the International Monetary Fund. Over that entire period including the recent downturn, it has enjoyed one of the fastest growth rates in Europe.
This doesnt mean Estonia is perfect. It did experience a credit/real estate bubble, and there was a deep recession when the bubble burst. And the politicians let government spending explode during the bubble years, almost doubling the budget between 2004 and 2008.
But Estonia reacted to the overspending and the downturn in a very responsible fashion. Instead of using the weak economy as an excuse to further expand the burden of government spending in hopes that Keynesian economics would magically work (after failing for Hoover and Roosevelt in the 1930s, Japan in the 1990s, Bush in 2008, and Obama in 2009), the Estonians realized that they needed to cut spending.
And now that spending has been curtailed, its worth noting that growth has resumed.
What makes Krugmans rant especially amusing is that he wrote it just as the rest of the world is beginning to notice that Estonia is a role model. Heres some of what CNBC just posted.
Sixteen months after it joined the struggling currency bloc, Estonia is booming. The economy grew 7.6 percent last year, five times the euro-zone average. Estonia is the only euro-zone country with a budget surplus. National debt is just 6 percent of GDP, compared to 81 percent in virtuous Germany, or 165 percent in Greece. Shoppers throng Nordic design shops and cool new restaurants in Tallinn, the medieval capital, and cutting-edge tech firms complain they cant find people to fill their job vacancies. It all seems a long way from the gloom elsewhere in Europe. Estonias achievement is all the more remarkable when you consider that it was one of the countries hardest hit by the global financial crisis. How did they bounce back? I can answer in one word: austerity. Austerity, austerity, austerity, says Peeter Koppel, investment strategist at the SEB Bank. thats not exactly the message that Europeans further south want to hear. Estonia has also paid close attention to the fundamentals of establishing a favorable business environment: reducing and simplifying taxes, and making it easy and cheap to build companies.
Good policy makes a difference. But it also helps to have rational citizens (unlike France, where people vote for economic illiterates and protest against reality).
While spending cuts have triggered strikes, social unrest and the toppling of governments in countries from Ireland to Greece, Estonians have endured some of the harshest austerity measures with barely a murmur. They even re-elected the politicians that imposed them. It was very difficult, but we managed it, explains Economy Minister Juhan Parts. Everybody had to give a little bit. Salaries paid out of the budget were all cut, but we cut ministers salaries by 20 percent and the average civil servants by 10 percent, Parts told GlobalPost. As well as slashing public sector wages, the government responded to the 2008 crisis by raising the pension age, making it harder to claim health benefits and reducing job protection all measures that have been met with anger when proposed in Western Europe.
Its worth noting, by the way, that government is still far too big in Estonia. The public sector consumes about 39 percent of economic output, almost double the burden of government spending in Hong Kong and Singapore.
But, unlike certain American politicians, at least the Estonians understand the problem and are taking steps to move in the right direction. I hope they continue.
P.S. The President of Estonia, a Social Democrat named Toomas Hendrik Ilves, used his twitter account to kick the you-know-what out of Krugman yesterday. For amusement value, check out this HuffingtonPost article.
P.P.S. A few other nations, such as Canada and New Zealand, also imposed genuine spending restraint in recent decades and they also got good results.
BTTT
Kurgman was an ENRON advisor!! Enough said!!
Arguing with Krugman is like mud wrestling a pig.
Did ALL of these countries experience a housing bubble?
How can ALL of them collapse under the same idiocy at the same time-
Was this all part of some global ‘one world’ plan to collapse the worlds economies and institute one global government?
The last line of this is priceless..."Regardless, as noted above, we try to stay away from clogged toilets, especially ones that are stuck in reverse. Therefore, we hope this is the last time we discuss the pathological failure that is Paul Krugman."
A socialist democrat bending the truth, misrepresenting the facts and cherry picking the data for political purposes. I don’t believe it. Paul Krugman is a certified member of the HIDE THE DECLINE PARTY.
Because there was a world-wide banking practice of easy lending for real estate.
Krugman’s graph proves only that he’s a deceiver.
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