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The Latvian Laboratory



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Some vindictive bastard at the New York Times has ensured that Paul Krugman’s New Year’s hangover is maximally painful with this headline: “Used to Hardship, Latvia Accepts Austerity, and Its Pain Eases.”

The article itself is basically fiscal erotica for the libertarian set. When we had newly minted Cato president John Allison into NRHQ a couple of months ago I remarked that it was a shame we didn’t have a live laboratory to test the hands-off approach to the fiscal crisis he’d long advocated. And we still don’t, really, not for the part about whether letting financial-sector consolidation run its brutal course sans bailouts would have resulted in a deeper recession but a quicker and more robust recovery. But Latvia has shown that tough austerity measures, in a population with an insanely strong work ethic and a high capacity for sacrifice, can work:

Hardship has long been common here — and still is. But in just four years, the country has gone from the European Union’s worst economic disaster zone to a model of what the International Monetary Fund hails as the healing properties of deep budget cuts. Latvia’s economy, after shriveling by more than 20 percent from its peak, grew by about 5 percent last year, making it the best performer in the 27-nation European Union. Its budget deficit is down sharply and exports are soaring. . . .

In Greece and Spain, cuts in salaries, jobs and state services have pushed tempers beyond the boiling point, with angry citizens staging frequent protests and strikes. Britain, Portugal, Italy and also Latvia’s neighbor Lithuania, meanwhile, have bubbled with discontent over austerity.

But in Latvia, where the government laid off a third of its civil servants, slashed wages for the rest and sharply reduced support for hospitals, people mostly accepted the bitter medicine. Prime Minister Valdis Dombrovskis, who presided over the austerity, was re-elected, not thrown out of office, as many of his counterparts elsewhere have been.

The cuts calmed fears on financial markets that the country was about to go bankrupt, and this meant that the government and private companies could again get the loans they needed to stay afloat. At the same time, private businesses followed the government in slashing wages, which made the country’s labor force more competitive by reducing the prices of its goods. As exports grew, companies began to rehire workers.

That’s basically the blueprint for what Krugman derisively dismisses as “the pain caucus.” And it has yielded the strongest recovery in the euro zone. Yes, Latvia is a precious, unique snowflake, with little labor lobby to speak of, where anti-Communism is still the prism through which both politics and culture are refracted, but it’s a data point nonetheless.



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