Austerity Works, And The Baltics Have Proven It


Europe is in the midst of a financial crisis brought on by exorbitant spending and hugely expensive social programs creating large budget deficits and driving huge amounts of debt creation.  Here in America we have a similar problem, though we’re a bit behind the curve in comparison to the Europeans.  We, too, have exorbitant levels of spending and unfunded obligations from programs like Social Security and Medicare that are almost un-payable.  Our budget deficit is over $1 trillion for the fourth consecutive year, and we’ve added more national debt under our current president than every other president in the history of the country.

And America’s credit rating just got downgraded.  Again.

Yet, in both Europe and America, the political left argues that the solution for these financial crises is more spending.  Spending to stimulate the economy.  Spending to maintain the social contract with the populace.  Spending to promote social justice.  We’re assured, by people like economist Paul Krugman, that if we just keep growing spending we will, in turn, stimulate the economy.

That this has yet to work anywhere it has been tried is, apparently, irrelevant.

But what has worked is austerity.  What has worked is cutting down to something that can be paid for with reasonable taxation on a broad base of taxpayers.  And three Baltic nations have proven it:

Amid the carnage of the European financial crisis, the Baltic countries, by and large, are doing quite well. Estonia, Latvia, and Lithuania are booming. Last year, their growth rates reached 7.6 percent, 5.5 percent, and 5.9 percent, respectively. The turnaround, driven largely by manufacturing exports, has been one of the most remarkable and promising stories of the crisis. In 2008-2009, all three countries were badly hit by a nearly complete liquidity freeze, which sank their economies by as much as 24 percent. Even so, only Latvia required an IMF and EU bailout, and all three returned to growth after only two years of recession. Today, all three Baltic countries have ample access to international financial markets, and their credit ratings have risen steadily since the summer of 2009. …

The simple explanation is that the Baltic countries have pursued the opposite policy of the southern Europeans. In 2009, the Baltic governments each carried out strict austerity, with a fiscal adjustmentof about 9.5 percent of GDP, mainly though expenditure cuts and substantial structural reforms. The southern Europeans, by contrast, delivered substantial fiscal stimulus in 2009.

The entire article is worth your time to read.

It never ceases to amaze me that this is even a controversial topic.  It doesn’t not take the work of great academics, or the scientific endeavors of economists, to conclude that the less burden the government and its spending/tax policies represents to a given economy the more healthy that economy will be.

Here in America the Democrats are adamant that we need higher taxes.  President Obama has even taken to mocking tax relief on the campaign trail, suggesting Republicans pitch it as a sort of cure-all snake oil.  And yet, we see from the Baltics that in this instance the “snake oil” is working.

Rob Port

Rob Port is the editor of In 2011 he was a finalist for the Watch Dog of the Year from the Sam Adams Alliance and winner of the Americans For Prosperity Award for Online Excellence. In 2013 the Washington Post named SAB one of the nation's top state-based political blogs, and named Rob one of the state's best political reporters.

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