This blog entry from Daniel J. Mitchell, from the Cato Institute, in Forbes Magazine, perhaps not surprisingly, came out on the side of Estonia, not Prof. Krugman! Here’s a couple of highlights:
Most recently, though, I’ve been bragging about Estonia (along with Latvia and Lithuania, the other two Baltic nations) for implementing genuine spending cuts. I’ve argued that Estonia is showing how a government can reignite growth by reducing the burden of government.
Prof. Krugman’s chart neither states the true facts nor goes far enough back for a real review of the Estonian economy:
But before exposing that bit of trickery, there’s another mistake worth noting. Krugman presumably wants us to think that the downturn coincided with spending cuts. But his own chart shows that the economy hit the skids in 2008 – a year in which government spending in Estonia soared by nearly 18 percent according to EU fiscal data!
It wasn’t until 2009 that Estonian lawmakers began to reduce the burden of spending. So I guess Professor Krugman wants us to believe that the economy tanked in 2008 because of expectations of 2009 austerity. Or something like that.
Returning now to my complaint about cherry picking data, Krugman makes Estonia seem stagnant by looking only at data starting in 2007. But as you can see from this second chart, Estonia’s long-run economic performance is quite exemplary. It has doubled its economic output in just 15 years according to the International Monetary Fund. Over that entire period – including the recent downturn, it has enjoyed one of the fastest growth rates in Europe.
OOPS! I understand the other two Baltic Republics have cut spending and raised taxes as well.