Baltics: growing because of or despite austerity

Posted: May 2, 2013 in Baltics, Economic Ideas
Tags: , , , , , , ,

Last June BBC 2’s ‘Newsnight’ had a kind of Paul Krugman special. The Nobel Laureate and arch supporter of Keynesianism was on the show for almost its entire duration. And a big hullaballoo it created too.

But one particular piece of controversy, relating to the Baltics and how their experience may provide evidence that austerity can work, won’t die down.

On the show, Krugman debated austerity with venture capitalist Jon Moulton and Tory MP Andrea Leadsom. Krugman made good points, and on balance probably won the argument, but then again, say critics, it was hardly fair, pitching a Nobel Laureate against two humble citizens – an MP and a man whose main claim to fame is that he is merely one of the UK’s most successful investors.

But in the debate Moulton did say something that appeared to stump Krugman. “What about Estonia?” asked Moulton. “Surely,” he said to Krugman, ”even you admit this country had growth while seeing austerity.”

To which Krugman muttered something under his breath, but it was clear he had been caught out. He didn’t know. So there you have it, a Nobel Laureate knew little about an economy as big and important as Estonia.

Ever since then, both Krugman and Martin Wolf – his ally at the ‘FT’ – have not missed a chance to point out why Estonia and the rest of the Baltics do not support the pro-austerity argument. Wolf was at it again, this week.

In essence, the argument presented by Krugman and Wolf is this. Sure, the Baltic economies are growing, but total production is well below peak. Since that is the case you can hardly count these countries as example of austerity working.

The debate rolls on, but to give Krugman credit, he does seem to have come up with a new and pretty impressive argument.

To the point that Baltics have not recovered lost output, the Austerians say that peak GDP was in fact illusionary, and thus you have to ignore the fall in GDP. But Krugman has responded.

If that is the case, and he says he doubts it is, and pre-recession GDP was not real, then that means Estonia didn’t – by definition – fall into depression.

This is an important point. Krugman and co say you can’t recover from depression while imposing austerity. The Austerians say you can, and cite Estonia as an example, but by their very own logic, Estonia never experienced depression in the first place.

Maybe it’s all academic, but it is worth noting.

Another point needs to be mentioned, however. The real problem with austerity is not that it can’t work when applied by a small country – maybe it can – rather it is that when the global economy applies austerity things start to become very dangerous.

© Investment & Business News 2013

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