It’s not austerity, it’s classical economics

Remember classical economic theory, the stuff they used to teach before Keynes became the vogue sometime around 1936. Anyway, here is a story that ought to remind you why economics was once a subject worth studying. It is about Estonia and how they found their way out of the Global Financial Crisis the good old fashioned way.

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 can’t find people to fill their job vacancies.

It all seems a long way from the gloom elsewhere in Europe.

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.

How did they bounce back? ‘I can answer in one word: austerity. Austerity, austerity, austerity,’ says Peeter Koppel, investment strategist at the SEB Bank.

You know that old business about cutting your coat to suit your cloth. Well this is what they did adding in a few specifics:

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. . . .

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.

This stuff really works. Why others don’t try it stems from the economics education we tend to provide. Unless you teach ’em about entrepreneurs and the market economy, you might as well have not bothered.

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38 Responses to It’s not austerity, it’s classical economics

  1. Entropy

    Governments claiming to implement “austerity” are really just adopting a catch phrase as a general rule. Maybe Estonia took it seriously?

  2. Biota

    There needs to be a word other than austerity, maybe reality. Austerity carries overtones of doing it tough for a while after which you can again become profligate.

  3. John Comnenus

    How ridiculous, everyone knows that when you are broke, making massive interest payments and beset by a consequent economic slowdown that you borrow more money. Nothing creates prosperity and economic growth like more debt. You ask World’s greatest Treasurer Wayne Swan. You ask Kevin Rudd and Julia Gillard and Ken Henry. They all know, so do all the economists. You have to trust the economists and stop listening to free thinkers with other ideas. Stop being a debt = propserity denier! Sarc button now off.

  4. John Comnenus

    Biota that word is sanity! It prevailed in Wisconsin, let it prevail elsewhere.

  5. Token

    Nothing creates prosperity and economic growth like more debt. You ask World’s greatest Treasurer Wayne Swan. You ask Kevin Rudd and Julia Gillard and Ken Henry.

    Its a bit hard to get an appointment with that lot at the moment. They are busy celebrating an economic peak due to investment decisions made years ago.

    Unfortunately, as we saw with the brilliant work by our PM last week and the actions of Tony Burke in QLD, they are working hard to clog up the pipeline with green & union-red tape so the next government will not be able to repeat the numbers.

  6. ar

    Austerity is still a snap… compared to decades of Communism.

  7. Abu Chowdah

    Common sense.

    Getting your house in order.

  8. Ellen of Tasmania

    People with calculators.

  9. Winston SMITH

    Funny you say that, Ellen. I had a flashback to the start of the digital age and when calculators were becoming cheap. Arthur C Clarke wrote a short story rhapsodising about the gift of the easy to use calculator, saying that people would become numerate overnight as the ability to work out percentages and payout figures over different time rates would empower them in the market place.
    Flip to the present. People don’t bother doing the maths, despite the presence of calculators so cheap, they are everywhere.

  10. Rabz

    Living within your means.

    Uncool and old fashioned, I know, but hey, what the hell, where are those union subsidised hookers?!?!?

  11. .

    I keep banging on about this, but look at PNG’s macroeconomic performance since 2000. They are a low debt country. GDP growth over 6-7%.

    Austerity? No, if you really want to smear it, try the ABC favourite, “swingeing cuts”!

  12. coz

    Austerity seems to apply to the average person, but not the elite, take the Brit Jubilee for example, who paid for that extravaganza while the country is enacting ‘austerity’ measures.

    Tasmanian politicians want to give themselves a 38% pay rise, but the rest of us don’t get that.

  13. Rabz

    Tasmanian politicians want to give themselves a 38% pay rise

    WTF?

    A 38% pay cut seems more in order, short of sacking the lot of them.

  14. .

    That’s insane.

    They are virtually broke.

    They had 0.8% growth last year.

  15. Aburlad

    According to the last IMF report
    Estonia GDP fell 3.7% in 2008, fell by 14.3% in 2009 rose by 2.3% in 2010 and then by 7.5% in 2011 and is expected to rise by 3.1% in 2012.
    Unemployment in those years were 5.5%, 13.8%, 16.9%,13.5% and is expected to be 11.5% in 2012.

    The GDP deflator was 5.3%, -1.0%, 1.1%, 3.0% and is expected to be 2.4% in 2012.

    GDP hay yet to reach the level it was prior to the GFC.

    If you believe that success is experiencing a recession followed immediately by a depression then you are certifiable.

    I much prefer the ‘failure’ of Australia to the ‘success’ of Estonia.

  16. Token

    I keep saying it, it is time to fo the responsible thing and cut loose the malingering mendacious wastrel state so it can enjoy its carbon pure future in peace.

  17. Gab

    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.

    This. Anyone can set up a business with ease. Government interference is minimal and streamlined to encourage business. Government got out of the way of business creating jobs and wealth.

  18. .

    I much prefer the ‘failure’ of Australia to the ‘success’ of Estonia.

    Australia never really recovered. If you hold the participation rate/discouraged worker rate constant – the unemployment rate is around 8.5% – to which if you analysed the hours worked drop in 2007-2009, the equivalent fall in unemployment goes to 8% from 5.1%.

    We have not succeeded at all.

    Retail, PMV sales and house construction are flat.

    If you believe that success is experiencing a recession followed immediately by a depression then you are certifiable.

    But that is not what happened. You are defining Australia’s success by a continued downturn that is hidden by the vagaries of labour market statistics.

  19. Max

    People with calculators.

    The Keynesians Modern Prometheus??

  20. I love the story about Mart Laar’s transformation of the Estonian economy post the fall of the Soviet Union.

    Laar’s area of expertise were Europe’s 19th-century national movements. “It is very fortunate that I was not an economist,” he says. “I had read only one book on economics – Milton Friedman’s “Free to Choose.” I was so ignorant at the time that I thought that what Friedman wrote about the benefits of privatisation, the flat tax and the abolition of all customs rights, was the result of economic reforms that had been put into practice in the West. It seemed common sense to me and, as I thought it had already been done everywhere, I simply introduced it in Estonia, despite warnings from Estonian economists that it could not be done. They said it was as impossible as walking on water. We did it: we just walked on the water because we did not know that it was impossible.”

  21. Another reason I love Twitter:

    Political Math @politicalmath

    The president of Estonia is kicking Krugman’s butt on Twitter. This is a real thing. bit.ly/KSEExX

    Seriously – go have a look.

  22. JC

    When I read the Prez’s twitter attacks, I thought to myself this dude has living in America before because he’s attacking The Krugster like an American would.

    The Estonian prez has a decent educational pedigree and is getting stuck into the Krugster like an American would.

    Ilves was born in Stockholm, Sweden; his parents were Estonian refugees.[1] He grew up in the United States in Leonia, New Jersey and graduated from Leonia High School in 1972 as valedictorian.[2] He received a bachelor’s degree in psychology from Columbia University in 1976 and a master’s degree in the same subject from the University of Pennsylvania in 1978. In addition to his native Estonian, he is fluent in English, German and Spanish.

  23. JC

    oops

    …has been living..

  24. Actually, JC, I thought that might have been you guest-tweeting for him.

  25. Infidel Tiger

    I much prefer the ‘failure’ of Australia to the ‘success’ of Estonia.

    How about comparing apples with apples. How’s Estonia doing compared to its Keynesian Zombie neighbours in Europe?

  26. JC

    Actually, JC, I thought that might have been you guest-tweeting for him

    Lol

    I was doing twitter last week when Craig Emerson was having a brain spasm over “filthy liberals”.

    I asked him what’s like in cabinet meetings being a dude who’s bonked the PM and if he knew of others?

    This doesn’t like me much I think because he blocked me.

    Was I being insensitive perhaps?

    I like twitter as it suits me.

  27. What’s your account handle, JC?

  28. JC

    JC at jca12345

    Here another one I did.

    jc [email protected]

    @CraigEmersonMP @cynicq @phillipmanago Another on list of Craig’s accomplishments other than legging over the PM. Drama Queen.

  29. kingsley

    Aburlad even without giving the Estonians the benefit of compounding using your own figures they are on track to grow their economy nearly 13% over last 3 years. All this without any real natural resource endowment and an utterly Sovietised degraded infrastructure just 20 years ago. Plus as Infidel Tiger points out their nearest export markets is that “growth powerhouse” the EU.
    Well done Estonia!

  30. Eddystone

    Austerity seems to apply to the average person, but not the elite, take the Brit Jubilee for example, who paid for that extravaganza while the country is enacting ‘austerity’ measures.

    Apparently it was done on the cheap, as far as the taxpayer goes.

    (Via Tim Blair).

  31. jtfsoon

    I notice Homer has been trumpeting the Krugman line all over the blogs.

  32. jtfsoon

    Ironically the President of Estonia is a socialist

    In 2003, Ilves became an observer member of the European Parliament and, on 1 May 2004, a full member. In the 2004 elections to the European Parliament, Ilves was elected MEP in a landslide victory for the Estonian Social Democratic Party. He sat with the Party of European Socialists group in the Parliament. Katrin Saks took over his MEP seat when Ilves became President of Estonia

  33. ar

    The Estonian prez has a decent educational pedigree and is getting stuck into the Krugster like an American would.

    In addition to his native Estonian, he is fluent in English, German and Spanish.

    He throws around a bit of Latin too. Maybe spent some time in Latin America…

    Emerging from serfdom 200 years ago, surnames were recorded for the first time. Many Estonians get their names from common or everyday objects. Ilves means Lynx.

  34. JC

    I notice Homer has been trumpeting the Krugman line all over the blogs.

    Have you seen his attitude over at Clarke’s blog? This the guy who was stacking shelves at woolies a couple of months ago and fluked some job with a credit union. It’s coming from the guy that made Skanke ho famous.

    I really want to twist his ears if I have the misfortune of ever meeting him. Just grab them and keep twisting.

  35. Pingback: Estonia will recover but not so sure about Keynes at Catallaxy Files

  36. Pingback: Estonia is having a solid recovery in their economy but Paul Krugman disagrees with their method. The President of Estonia is in a Twitter war with Krugman. « InvestmentWatch

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