Monetary stimulus and fiscal austerity: Poland >> Latvia >> Greece

Tyler Cowen recently linked to an article comparing the recoveries (or not) in Latvia and Greece.

I think the debate over “austerity” is the wrong debate.  The demand-siders are right that many countries need more demand.  But if the central bank won’t allow more demand, then the best option might be to boost AS by making your economy as lean and mean as possible.  That might involve shrinking the government.

Poland reacted to the global demand shock by devaluing.  It did far better than Latvia, which stayed fixed to the euro.  And Latvia bit the bullet with austerity before Greece, and it’s doing far better than Greece.  These sorts of comparisons are full of lots of complications, ceteris is never paribus.  So maybe it doesn’t show much.  Let me just say that, given their policies, the relative performance of these three countries doesn’t surprise me.


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12 Responses to “Monetary stimulus and fiscal austerity: Poland >> Latvia >> Greece”

  1. Gravatar of Ralph Musgrave Ralph Musgrave
    12. January 2014 at 22:51

    It is meaningless to compare a country which issues its own currency (Poland) to countries which don’t (Latvia and Greece). A country with excess unemployment and an external balance, for example, can implement stimulus (monetary and/or fiscal). As to the resulting deterioration in its external position, that can be dealt with by devaluation.

    Latvia and Greece in contrast have to implement INTERNAL devaluation, a process which is extremely slow and painful and which is an inherent flaw in common currencies. For countries in that unenviable position, I agree it’s best to do the internal devaluation quickly rather than slowly. But to portray Latvia as some sort of “success” is a joke. 10% of its workforce has emigrated, and it still has 15% unemployment. See:

    http://www.youtube.com/watch?feature=player_embedded&v=kdLQ9L01CNU

    Also the Peterson Institute article to which Tyler Cowen links is obviously trying to suggest that because because austerity is the only option for uncompetitive Eurozone countries, that therefor austerity is desirable for countries with their own currencies. That’s nonsense. But then the Peterson Institute is a right wing propaganda organisation, so I wouldn’t expect anything else from them.

  2. Gravatar of Full Employment Hawk Full Employment Hawk
    13. January 2014 at 01:02

    Latvia and Greece are not an appropriate basis for comparison because Greece was in a lot worse shape and would have had serious problems even if there had not been a great recession. It had a very corrupt system and, once how bad its finances were had gotten out, it would have been in very serious difficulties. Being in the Euro system merely made its problems worse, since it could not devalue its currency against German money and default on its debt, which would have been made worse from the devaluation. With a devalued currency and the resulting very low prices in terms of German money, its tourist industry would have boomed.
    “austerity is the only option for uncompetitive Eurozone countries” Not so, leaving the Eurozone is an option which would probably have been better than internal devaluation for some countries, such as Spain. If Greece had gotten out early on it would probably also have been better off.
    Latvia has demonstrated that for a small country, one way to reduce its unemployment rate is to get as many of its workers as possible to emigrate. That may turn out to be the only solution for Greece.

  3. Gravatar of Mike Sax Mike Sax
    13. January 2014 at 03:19

    So it is a demand side problem but we should do supply side policies…

  4. Gravatar of Daniel Daniel
    13. January 2014 at 04:16

    Mike Sax,

    In whose graces are you trying to get ? Who are you trying to impress by saying dumb crap ? What socio-political tribe are you trying to gain acceptance into ?

  5. Gravatar of ssumner ssumner
    13. January 2014 at 04:45

    Ralph, You said;

    “It is meaningless to compare a country which issues its own currency (Poland) to countries which don’t (Latvia and Greece). A country with excess unemployment and an external balance, for example, can implement stimulus (monetary and/or fiscal). As to the resulting deterioration in its external position, that can be dealt with by devaluation.”

    Umm, you just compared them.

    And Latvia did have its own currency during the previous 5 years.

    And I didn’t say Latvia was a success.

    FEH, You said:

    “austerity is the only option for uncompetitive Eurozone countries” Not so, leaving the Eurozone is an option which would probably have been better than internal devaluation for some countries, such as Spain. If Greece had gotten out early on it would probably also have been better off.”

    That’s right. But then they wouldn’t be eurozone countries any more. The speaker presumably was assuming they stay in the eurozone.

    Mike, Are you simply incapable of understanding anything I said? What was the approach taken by Poland?

    Daniel, If I was a Keynesian I’d be horrified to have Mike on my side. Absolutely horrified. Perhaps the Koch brothers have planted him on that side, to make it look bad.

  6. Gravatar of John B. John B.
    13. January 2014 at 05:24

    I can see that the best way how to recover is to do absolutely nothing. They did it for the Vancouver housing market, and now are back on track.

    Austerity is probably a good option, if the government clearly decides what are the main goals. Hampering some sectors can prove quite dangerous in the long run.

    In the linked article, the author clearly considers a good move that a country GDP declines of 24 per cent in two years. Does he even realize that the government has to maintain some basic popularity, at least on the most basic level, to be able to carry out the reforms?

  7. Gravatar of Kevin Donoghue Kevin Donoghue
    13. January 2014 at 05:29

    Scott, did you (or Tyler) notice that that article is a year old? I’m not saying that invalidates your post, which I largely agree with; just wondering whether you noticed.

    On the same general theme, it’s mildly amusing that Fintan O’Toole (scourge of the Irish bourgeoisie) is in Princeton while Krugman is in Ireland receiving the James Joyce Award. I’m expecting some commentary on internal devaluation as a route out of the slump. It’s a crappy route, but it’s all we’ve got. Quitting the euro isn’t an option, it’s a desperation play.

  8. Gravatar of ssumner ssumner
    13. January 2014 at 05:49

    Kevin, I wrote that post a while ago, sometimes it takes me a while to post.

    On some occasions someone will send me an article and I’ll do a post without noticing the date, especially if the issues still seem relevant.

    I’d guess we would both agree that Ireland would have been better off not joining the euro, but as to what they should do now, I’m reluctant to give advice. I’d don’t feel I have a good enough grasp of the downside of leaving the euro–so you may well be right.

  9. Gravatar of Robert H. Robert H.
    13. January 2014 at 16:36

    Wouldn’t it be ceteris never *are* paribus? Or, for that matter, cetera never are paria? Or just cetera numquam paria sunt?

    I think 18th century academics had the right idea: to avoid these mistakes you should probably write all your posts in Latin.

  10. Gravatar of Mike Sax Mike Sax
    13. January 2014 at 17:39

    Sure I did something dumb-repeated what you said. I admit even from my mouth it sounds dumb this idea of stimulative austeirty.

    Even if Poland really is as impressive as you claim you haven’t shown causation.

  11. Gravatar of Mike Sax Mike Sax
    13. January 2014 at 17:39

    If I had to guess the trouble with me is that I’ve always understood you too well. I can see why you find it frustrating.

  12. Gravatar of Mark A. Sadowski Mark A. Sadowski
    15. January 2014 at 07:19

    Mike Sax,
    Marcus Nunes did a nice post on Poland three years back. Note that I am quoted in the post and reply in comments:

    http://thefaintofheart.wordpress.com/2011/02/27/poland-didn%C2%B4t-miss-many-beats/

    Poland was the only country among the 28 EU members that avoided a recession in 2008-09. Among the six countries not in the Euro Area with flexible exchange rates it devalued the most with respect to the euro (29.9%) between July 2008 and February 2009. For more information read the link.

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