Austerity works (updated 14jun12)

June 2012
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Austerity works (updated 14jun12)

06 June 2012

George Rebane

RR has been focused on matters economic for some years now as the crises build here and in Europe. In their efforts to recover, I’ve tried to make the case that Europe and the US have actually been headed in opposite directions. Cutting to the chase, debt and socialist policies – entitlements, commerce throttling regulations, tax disincentives, and Keynesian theory – have been the culprits. And the most effective medicine is drastic cuts to spending as opposed to drastic tax increases on the productive sector.

An example of how this works is being demonstrated by Estonia, a country that is in the eurozone and suffered an 18% contraction of its economy when the Great Recession hit. Even Greece did not contract that much. Estonia fought back by putting in place what can only be considered as draconian austerity measures. One reason it could do that was that the Estonians came together as a nation and backed the very politicians who proposed such stern stuff. What, of course, helped was the cohesion of Estonian culture, but it is the rapid modification of their social policies and spending that turned the corner. Estonia is now the 'how to' poster child of European recovery. More details in this current CNBC summary that was sent to me by a correspondent.

While there is still a way to go, Estonia has demonstrated what Germany is telling Europe’s profligate economies – austerity works.

(Full disclosure – I was born in Estonia. RR has tracked other aspects of Estonian economic policy with respect to its tax code, technology, and monetary policy. These are available through either google or RR search.)

[14jun12 update] The WSJ blogged today, again highlighting the high-tech entrepreneurship of Estonians, and the country's government which is receptive to such economic activity (here). In short, they seem to understand that economic recovery needs both austerity (cut spending) and growth (start and build enterprises). What is conspicuously absent from the Estonian regimen is raising taxes to stifle work and risk taking. H/T to a correspondent for sending the link.

Posted in Culture Comments, Current Affairs, Our World

39 responses to “Austerity works (updated 14jun12)”

billy T

06 June 2012

What catch my eye in this article is that 2/3s of the Germans polled can’t wrap their minds around why Greece would oppose austerity measures. Language barriers I suppose. Meanwhile France announced it will lower its Social Security age. Never even gave it a try. ww.reuters.com/article/2012/06/05/us-eurozone-germany-greece-idUSBRE8540NT20120605

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billy T

06 June 2012

opps, try this http://www.reuters.com/article/2012/06/05/us-eurozone-germany-greece-idUSBRE8540NT20120605

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Douglas Keachie

06 June 2012

Any idea about what percentage of the voting age population of Estonia is female? There’s an imbalance there not unlike China’s, but in the opposite direction. Why is that and just how does that affect the economy?

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Ryan Mount

06 June 2012

Well obviously Greece’s population need to move to Estonia.

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George Rebane

06 June 2012

RyanM 1124am – they would like it there less than they do in their own country where one in four works for the government, and four in four want nothing to do with austerity and would rather get very large checks from Angela.

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Ryan Mount

06 June 2012

My snarky comment was directed at these Romance and other Mediterranean countries who have directed their citizenry to seek work elsewhere because their countries ain’t got none. I believe it was Portugal’s PM who advised his citizens to go elsewhere for work. Now that’s leadership. Not.
Some of the other Eurozone economies [cough, Germany, cough] have contingency plans on what to do with the impending “immigration problem.”

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billy T

06 June 2012

Austerity works fine for many taxpayers in their personal finances.. There are many that say you can’t compare a household budget with a government budget because of things like street sweepers, treatment plants, national defense, etc. Fair enough. If you are running in the red in your household, the simple way (simple but not easy for the financial illiterate) is to reduce expenses, increase income and combinations of both. I see another austerity on the near horizon. The austerity (or shortage) of energy. Chevron Ceo announced yesterday that energy demand will rise 40% by 2030. GE announced also yesterday that is is building pipelines on docks in Asia to help them with the LNG (LP) shortage. China announced yesterday that its own EPA has cleared the way for building nuclear power plants. To many other news items along this topic to mention, including the cost of converting coal fired power plants to natural gas will drive the cost of energy up, up, up. That will force millions of households to practice austerity as solar and wind have not been able to consistently run manufacturing plants or factories or entire blocks of Main St. This is a worldwide problem rearing its head. European nations have cut subsidies to green energy because of the down turn in the economy. It all seemed grand when the good times were rolling. Cut the subsidies and you will end up like Solydra. The USA is imposing a 21% tariff on China for dumping solar panels here, causing concern of an impending tariff war. They dumped steel on us in the late 1990’s and some think Bane Capital is too blame. Austerity without grow is a bitter pill for Greece because they cannot grow their way out of this. Spending just keeps their problems status quo. Somebody has to take charge and bite the bullet, just like Scott Walker did. To pay the bills and avoid layoffs, the Gov of WI told the public service unions the State will pay 88% of their health care and 95% of their pension costs. Poor babies. Take it our leave it in these times. Of course Wisconsin has a much lower unemployment rate than CA so their austerity measures have less sting and instant results.

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George Rebane

06 June 2012

Re billyT’s 1148am – yes, all this government diktat green crap is running its course, and may well have run its course in the EU (at least for the near term). Flat broke countries don’t take care of the environment or anything else for that matter, like implementing the tenets of Agenda21.
Speaking of which, Alabama just passed the nation’s first anti-Agenda21 law. More here –
http://rebaneruminations.typepad.com/rebanes_ruminations/2012/06/lamestream-in-the-limelight.html

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Douglas Keachie

06 June 2012

Ah yes, let the poor and the middle class bite the bullet, more room on the freeways for the rich.

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Earl Crabb

06 June 2012

Here’s a good one. Be sure to read the tweets…
http://www.huffingtonpost.com/2012/06/06/estonia-krugman-toomas-hendrik-ilves_n_1575937.html

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Russ Steele

06 June 2012

Flame war of the year: Estonian president unloads on Paul Krugman on Twitter
Details at Hot Air
Here’s the Krugman post that set him off, which I think you’ll find notably mild compared to Krugs’s sleazier demagogic excrescences. That post was in turn a Keynesian belch at this widely linked Global Post story describing how Estonia managed to kickstart rapid economic growth while the rest of Europe got sucked into a black hole. Three words: “Austerity, austerity, austerity.”
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…
Estonia’s achievement is all the more remarkable when you consider that it was one of the countries hardest hit by the global financial crisis. In 2008-2009, its economy shrank by 18 percent. That’s a bigger contraction than Greece has suffered over the past five years…
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.
There is more at the Hot Air Link, including he Twitter exchanges.

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billy T

06 June 2012

In the spirit of having fun, lets have our Wounded Warriors pay for their own injuries through private insurance. That would be austerity for ObamaCare. Just a thought.http://www.sodahead.com/united-states/most-outrageous-statement-ever-made-by-a-public-official/blog-276167/

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billy T

06 June 2012

Don’t think Obama ever uttered those statements, but just having a bit of fun at how some think that austerity is something that will throw Mama off the train and have us all eating worms. Obama did say we all must make sacrifices…for the Fatherland or was it for the Mother Earth Land…I forget.

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Douglas Keachie

07 June 2012

Ponderosa Pine Needle Tea and acorn mash will be popular.

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Douglas Keachie

07 June 2012

Estonia 19% below the poverty line, USA 15% below the poverty line, Vietnam 10 % below the poverty line, Taiwan 1.16% below the poverty line, someone in the CIA draws some pretty funny lines…
Source: http://www.photius.com/rankings/economy/population_below_poverty_line_2012_0.html

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Ryan Mount

07 June 2012

Doug, please note that people who live below the poverty line in say Chad, are much worse off that people who live below the poverty line in say, Austria. These numbers, for that specific point, are a suspicious measurement.
http://krugman.blogs.nytimes.com/2012/06/06/estonian-rhapsdoy/
Here’s the smugness in question. Krugman’s rhetoric here is annoying. He almost agrees, but he can’t contain his sarcasm. It’s very hard to understand what Krugman is complaining about. I generally like Krugman, but he’s not omniscient and needs to concede when he’s wrong, rather than acting like my 16 year old.
Here’s the way I look at it. Some countries are just better fit for austerity than others for a number of varied reasons. Here’s a few:
1) more manageable populations (Estonia is pretty small at 1.3 million citizens)
2) massive aversion to paying taxes (Greece is famous for outing tax collectors in very public ways). Austerity is needed here because they are acting like spoiled teenagers
3) Entitlement history and programing. Once you feel entitled to something, it’s kinda hard to undo that despite the glaring fiscal situation (Greece again, see #2)
4) International Financial elites will short a country quickly with relative ease if they get spooked (See Spain). Austerity probably isn’t a good idea in Spain.

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George Rebane

07 June 2012

RyanM 850am – good points. I would add that Estonia’s 19% below poverty line reflects its continued national austerity program. We with our 15% below poverty have yet to deny ourselves anything; I wonder what our poverty fraction would be were we to practice a little austerity.

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Earl Crabb

07 June 2012

Ryan’s right…Size does matter. That’s why socialism works better in Vermont than it does in California. And isn’t Austeria a little country somewhere in the old Soviet boc? I think it’s next to its larger neighbor, Anemia.

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George Rebane

07 June 2012

EarlC 1033am – as these pages have contended for years, all forms of collectivism (socialism, communism, …) work ONLY in very small societies that are tightly bound by blood, race, culture, or survival. That is why it has worked in most families, isolated villages, communes, and early Christian communities. Imposing collectivism on large societies is a tried and true recipe for human disaster.

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Ryan Mount

07 June 2012

RL seems to be saying that social/collectivism works in smaller “states.” George seems to be saying the opposite.

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Gregory

07 June 2012

What works is a country spending no more than it expects to earn.
Whether large or small, politically directed economies tend towards less productivity and can be expected to do poorly over the long term.

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Paul Emery

07 June 2012

It’s assuring George that you support Estonia’s health care system which is a form of single payer with private options.
“Health care system in Estonia
The Health Insurance Fund covers the costs of health services required by the person in case of illness regardless of the amount of social tax paid for the person concerned. The purpose of health insurance in Estonia is to cover the costs of health services provided to insured persons, prevent and cure diseases, finance the purchase of medicinal products and medicinal technical aids, and provide the benefits for temporary incapacity for work and other benefits.”
http://www.ut.ee/en/studies/practical/before/health

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Ryan Mount

07 June 2012

Paul, it’s probably easier to contain costs with smaller populations. It is also easier to extend benefits to the same population, however I would question the breadth and quality that such as small economy might provide their citizens.
It seems when a state gets too big (um, to fail ;-)), it is much more difficult to manage in terms of spending and entitlements. Not to mention the relative Homogeneity a place like Estonia has which certainly simplifies this equation.
It’s probably not the best to compare Estonia with say, the USA on any unit of measure. But I appreciate George stirring the debate.

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George Rebane

07 June 2012

PaulE 127pm – RyanM’s points are on. But you won’t mind if I again don’t swallow the words you put in my mouth. Estonia’s healthcare system is undoubtedly one of the targets of austerity, and even in good times hard to sustain.
Estonia also has about 300K ethnic Russians who refused to go ‘home’ in 1991, knowing they would get a better life in Estonia. In the aggregate, for centuries Russian culture has not promoted the notion of being rewarded for individual initiative and hard work. Initially under the czars and then under the communists, Russians never came to accept the notion of win-win deals – everything to them is a zero sum game.
This explains away most of the problems with the Russian economy, and most importantly why the Russian cohort in Estonia is a drag on the economy. Who do you think makes up the mass of the 19% under the poverty line, and who is the major consumer of entitlements including healthcare in that country? Add to that the centuries old enmity between the nordic Estonians and the slavic Russians (Russians in Estonia remain loyal to Moscow), and you begin to appreciate the notion of a national scourge. And yet in spite of working with such a significant tumor … .

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Douglas Keachie

07 June 2012

So Russians are the Mexicans of Estonia?

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George Rebane

07 June 2012

DougK 341pm – Only if you consider that Mexico has ability to roll over and conquer the United States in three hours.

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Douglas Keachie

07 June 2012

Good point!

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billy T

07 June 2012

I don’t think that we should dis Estonia out of hand. Yes, Estonia is not Germany nor a major influential country but any stretch of the imagination. Yours truly mentioned Iceland the other day as their woes started before the current global financial mess and got through it using austerity measures. Austerity is a dirty word in most left leaning circles. It is an issue that we are being dragged into because of the recovery that seems to never gets its legs. The Wisconsin election and the two voter decisions in San Diego and San Jose reveals the sophistication of the American informed voter. None of the three elections I mentioned are anti-union or anti-government worker per se. People know times are tough. People are fully aware that there are many interests and public needs chasing dwindling revenues. When voters in San Jose look to their Democrat mayor and city council and see fire stations sharing firetrucks and unmanned fire stations and the roads not being fixed, the intelligent voter knows that prioritizes need to be adjusted. Its not a blame game. It is because of declining revenues that expenses must be tightened for governments to sustain and deliver services. Not many want their city to take the easy way out and declare bankruptcy as Stockton did. We are already receiving dire warnings from the CBO and economists if the Bush tax cuts are allowed to expire come January. Somehow tough decisions must be tackled and survival takes precedence. If you cannot have the best, then going for second best is the next option in these current times. Wasn’t the Recovery Summer Tour with Joe Biden ready to launch 3 years ago? The economy has not cooperated as planned. A poster on RR whom I admire said awhile back that this is not Japan. Its beginning to look like Japan. Japan went through their housing bubble and bust a long time ago. The Japanese gov’t lowered their interest rate to near zero and opened the floodgates of spending. The results are known as the “lost decade”. Japan’s interest rates are about 0.7% as of this morning, the government has not let up on their stimulus spending and now Japan is approaching its second straight lost decade. Remember before China when everything was made in Japan and Japan was going to surpass the USA as the number one economic power on Earth and own us all with their massive buying of our Treasuries and prime real estate? Guess they never tried austerity. There is something about the word austerity that makes people recoil as a person recoils his hand when touching a hot flame. There is something about cutting one thin dime that is somehow immoral to those who believe government is the cure to all our woes. In recessions/depressions poor people get hurt. Rich people see their wealth decline and the middle gets squeezed, generally speaking of course. I don’t believe for a second that the current administration will ever seriously consider austerity or fundamental changes like our states and local municipalities are forced to. Dis Estonia and Iceland and other tiny countries to your heart’s content. They may not be Paradise on Earth, but they implemented necessary changes to get to the other side in the shortest time possible. Their futures looked uncertain at the time. It is not just a matter of going from point A to point B. For austerity to bring forth fruit it is foremost a matter of simply leaving point A.

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Scott Obermuller

08 June 2012

This makes it pretty clear –
http://www.washingtontimes.com/news/2012/jun/7/europe-in-denial/
What more needs to be said?

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Ryan Mount

08 June 2012

This oughta make people talk:
http://www.nytimes.com/2012/06/08/opinion/krugman-reagan-was-a-keynesian.html
Notably this:
“As many economists have pointed out, America is currently suffering from a classic case of debt deflation: all across the economy people are trying to pay down debt by slashing spending, but, in so doing, they are causing a depression that makes their debt problems even worse.”

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THEMIKEYMCD

08 June 2012

America is not “suffering from debt deflation” as quoted in this opinion piece. America is suffering from the manipulations of the Federal Reserve (zero % interest rates, QE1, QE2, QE3, etc), excessive tax rates (property tax, income tax, SS tax, sales, medicare tax, etc) and paralyzing economic uncertainty (by watching drunkards in elected office try to solve debt problems by adding insane amounts of debt). Krugman is a terrorist.

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Scott Obermuller

08 June 2012

Ryan, that piece by Krugman triggers in me at least a couple of pages of refutation, but I haven’t got the time. Like most lefties, he ignores productivity and output. He also thinks that folks operate like the fed govt. Broke? Just print more money. I know that my wife and I don’t participate more in the economy when our taxes go up, but somehow Krugman thinks we will. He gives only a passing nod to the fact that Reagan didn’t push interest rates down to zero and implies that the rates now are that low by some kind of happenstance. We also have a far different world economy right now. Krugman always picks and chooses facts that support his ideas and ignores the the whole picture. He thinks we should just keep printing money to create jobs, until the private sector can heal. But that very activity by the govt as well as an anti-capitalistic attitude guarantees that the private sector will never recover.

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Ryan Mount

08 June 2012

I think Krugman does a pretty good job of articulating the dove (demand) argument, whether you agree or not with his demand-side observations.
But as a revisionist junkie, I think Krugman is indeed right about one thing: adjusted for a number of factors Reagan outspent Obama. It’s a popular way to novelize Reagan, that’s for sure as a small government type. (oh but it was the Congress’s fault! Or whatever. Yawn.)
And you’ll note that Krugman here also criticized the Fed in the 1980s, but is not criticizing it now. He blames the usual dove suspects. I believe the Fed has a lot to do with screwing up this economy as does the government(us). We like to blame the banks or whatever, but the plain truth is that we (our government) and that private Central Bank has enabled and in some cases encouraged this behavior.

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billy T

13 June 2012

Austerity does not always pay. Try to do the green thing to save the planet will get you big fines in The Empire State. Thought carpooling was promoted as good…er…as long as it enables Big Brother to shake every last penny out of you. Dr Rebane may be correct. It is not about saving the planet, its about money and power. Doing the friendly austere thing will cost ya. http://online.wsj.com/article/SB10001424052702304707604577424323234703722.html?mod=WSJ_NY_MIDDLELEADNewsCollection

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Todd Juvinall

13 June 2012

I am a bit confused. The liberals tell us to lose weight, stop drinking soda pop and big macs so we can live longer while they tell us our carbon footprint is wrecking the planet. Wouldn’t it make more sense for them to want us to croak from too much soda pop and diminish the “footprint”? I am just plain cornfused.

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George Rebane

13 June 2012

ToddJ 646pm – you’ve raised a good point. Agenda21’s major tenet is the reduction of world population. That makes all their other ‘pack n’ stack’ prescriptions easier to achieve. Why don’t the progressives allow us to do it in an enjoyable way? The alternative is to march us into re-education camps like the Chinese, Vietnamese, Cambodians, and North Koreans did.

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Douglas Keachie

13 June 2012

Hey they alternative to an overcrowded planet might well be a radioactive one.

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Douglas Keachie

13 June 2012

Teacher have missed something, overtime, and we sure put in plenty of it, all unpaid:
“But to those without the time or energy to walk, the crackdown on carpools smacks of a revenue-grab by the Port Authority, which has been criticized for lavish pay and benefits. With extensive overtime, some toll collectors make more than $100,000, while salaries for several officers working at the bridge topped $200,000 last year.”
Same link as BillyT above.

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George Rebane

13 June 2012

DougK, I took out your 728pm. Please stay on topic and keep your comments within the scope of what other commenters contribute. Your cut and paste from other sites, and multiple entries make for a very confusing and often boring reads. If you see them gone, please understand the reason.

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