The Corner

‘A View Of Austerity’

Tyler Cowen sent me this article last night about the measures taken by Lithuania to face their debt burden. It’s quite impressive and goes against the Keynesian response around the world. According to the New York Times:

Faced with rising deficits that threatened to bankrupt the country, Lithuania cut public spending by 30 percent – including slashing public sector wages 20 to 30 percent and reducing pensions by as much as 11 percent. Even the prime minister, Andrius Kubilius, took a pay cut of 45 percent.

And the government didn’t stop there. It raised taxes on a wide variety of goods, like pharmaceutical products and alcohol. Corporate taxes rose to 20 percent, from 15 percent. The value-added tax rose to 21 percent, from 18 percent.

The net effect on this country’s finances was a savings equal to 9 percent of gross domestic product, the second-largest fiscal adjustment in a developed economy, after Latvia’s, since the credit crisis began.

Obviously, this response has its price, and it’s severe. But here is an even more interesting fact:

Remarkably, for the most part, the austerity was imposed with the grudging support of Lithuania’s trade unions and opposition parties, and has yet to elicit the kind of protest expressed by the regular, widespread street demonstrations and strikes seen in Greece, Spain and Britain.

Considering the financial situation of the United States and its unsustainability, it is interesting to think about the tradeoffs between ending up like Greece, or Lithuania.

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