It’s not quite Keynes v. Hayek, but Paul Krugman, no stranger to macroeconomic melees, has now set off a world leader, the president of Estonia. In a blog item this morning, Krugman criticized those who claim that Estonia is proof that austerity can work. He describes their situation as “a terrible — Depression-level — slump, followed by a significant but still incomplete recovery. Better than no recovery at all, obviously — but this is what passes for economic triumph?”
This afternoon, Estonian president Toomas Hendrik Ilves took to Twitter to castigate Krugman for his criticisms:
Then, later:
Finally, he notes that his government’s austere policies are merely in accordance with the EU budget rules, which most other countries are flagrantly violating:
Veronique de Rugy noted this morning how IMF chief Christine Lagarde has praised Latvia for its commitment to fiscal responsibility, and the commendable results. Estonia has followed (as Krugman grudgingly admits) a roughly similar path: After a Great Depression–scale drop in GDP, the government attempted to keep the budget balanced (partly in the hopes of joining the euro) and has since seen 6 and 7 percent economic growth, though this has stalled recently, since their economy is heavily dependent on exports to the laggard euro zone.
UPDATE: Krugman has responded, saying:
I’m hearing from various sources that my rather mild-mannered post on Estonia has generated a vitriolic response from the nation’s president. I’m not going to try to track the thing down.
Let me instead ask the following. Since some people insist that Estonia’s partial — but only partial — recovery from a severe economic crisis demonstrates the wonders of austerity, would they also agree that the evidence below demonstrates the incredible success of FDR’s New Deal policies of promoting unions, raising wages, and increasing government employment?
He provides the graph below:
I suppose they don’t have FRED for Finland’s southern neighbor, but it seems that Krugman should offer a better response than, essentially, people who don’t like the New Deal can’t say Estonia has recovered.