Austerity is the Answer for U.S. and Euro Economic Woes

It is no secret that Europe is in an economic and fiscal mess. Faced with a debt bubble, European governments and central banks have resorted to bailouts, fiscal "stimulus," and money printing to patch up the problems, but still economic growth remains stagnant. Over the weekend, parties sympathetic to bailouts and the fiscal status quo dominated the Greek elections, promising as well to stay committed to the European Union and the euro. And while minor cuts in government spending have been proposed and enacted in much of Europe — incorrectly dubbed "austerity" — a look towards Eastern Europe reveals that real austerity is proving to be the answer.

In Estonia, once under the thumb of Soviet rule, austerity programs have allowed them to bounce back from the 2008 crash and recession and are now producing steady economic growth. Although it was one of the countries that was hardest hit, Estonia's economy grew by 7.6% last year (five times the euro zone average) and slashed its budget to 6% of GDP (compared to 81% in Germany and 165% in Greece). They did this, as Peeter Koppel, investment strategist at the SEB bank, explains, very simply,"I can answer in one word: austerity. Austerity, austerity, austerity." 

Ministers' salaries were cut by 20%, civil servants' salaries were cut by 10%, and they raised the retirement age, made it harder to claim benefits, and reduced job protection, according to Estonian Economy Minister Juhan Parts.

What is also noteable about the Estonian example is that immediately after the bubble burst in 2008, Estonia tried similar stimulus programs that Western Europe and the U.S. have tried. The result? It shrank the economy a staggering 18%. After this, Estonia decided to go against conventional wisdom and the advice hammered home by Paul Krugman and other Keynesian across the world and cut spending drastically, leading to clearing of bad debt and economic growth. This also led the president of Estonia, Toomas Hendrick, to stand up for himself against those who would advice against such "draconian cuts" by blasting Paul Krugman on Twitter. Hendrick, with a tint of sarcasm, attacked Krugman for ignoring and dismissing Estonia's successful example and for Krugman's supposed elitism.

Estonia is not the only country doing the opposite of what "mainstream" economic advice suggests. As Matthew Feeney explains in a recent article for Reason, up until the 1970s, Sweden had a long history of a free market economy, protection of private property, limited government, light regulation, a largely free banking sector, and has wisely avoided foreign wars. Then Sweden began moving towards a social-welfare state by increasing taxes, subsidizing industries, devalued their currency, and implemented burdensome employment regulations, leading to economic crisis and little economic growth. But since then, Sweden has instituted market reforms and economic liberalization that would make any libertarian cheer, including a popular school voucher program and the most market-friendly school system in the world. This has resulted in steady economic growth and budget surpluses.

What the recent economic crises facing the U.S. and Europe do is help discredit central banking, government management, the welfare state, and the ideology of statism itself. What a century of these policies have given us are booms-and-busts, devalued currencies, little economic growth, and an unsustainable amount of debt. They have failed for the same reasons Soviet Communism collapsed: economic calculation is impossible without the pricing system that markets provide, signals that provide coordination, order, and organization. Reversing this century-long course even slighty, as was done in Estonia and Sweden, resulted in a booming private sector responding to the demand left by the vacuum of cuts by providing creative and innovative ways to provide services at a price that consumers will voluntarily pay for. Additionally, the "Failed States Index" shows that about 70% of the 177 states around the world are in the "alert" and "warning" categories, which doesn't include most of the Western countries that face significant financial messes. Government management, control, and direction is proving itself to be just as costly and inadequate at solving the problems we face as classical liberals and libertarians have been saying for centuries.

The examples of Estonia and Sweden, combined with a knowledge of economics and how free markets create peace and prosperity, are proof that what Europe and the U.S. (and the rest of the world!) desperately need is a good dose of liberalization, economic freedom, and austerity. Unfortunately, austerity has been conflated with slight cuts in debt and to increases in government spending, like someone who after consuming 10,000 calories a day for decades, starts consuming 9,500 calories a day and wondering why he isn't healthy.

Real austerity is what allowed the U.S. recover after the depression of 1920 and after World War II. In today's context, here in the U.S., that would mean a balanced budget, stop printing money, massive reforms to entitlement programs, stop policing the world, cutting spending, and cutting taxes. And what the examples of Sweden and Estonia prove is that the quicker debt and spending is attacked, the quicker the recovery will be. Austerity may be tough at first, but the only thing tougher will be dealing with our economic woes down the line if the policies that created the crash - easy credit, central banking, deficits, and unsustainable debt - continue to be implemented and expanded.