United Liberty

Paul Krugman may have picked a fight with the wrong country. Desparately trying to show that austerity doesn’t work, Krugman posted a graph showing stale GDP growth in Estonia, a tiny Eastern European country, during the worldwide recession. This caught the eye of Estonian President Toomas Hendrik Ilves, who blasted Krugman on over four separate tweets earlier this week:

Let’s write about something we know nothing about & be smug, overbearing & patronizing: after all, they’re just wogs: http://krugman.blogs.nytimes.com/2012/06/06/estonian-rhapsdoy/

Guess a Nobel in trade means you can pontificate on fiscal matters & declare my country a “wasteland”. Must be a Princeton vs Columbia thing [Ilves went to Columbia for undergrad.]

But yes, what do we know? We’re just dumb & silly East Europeans. Unenlightened. Someday we too will understand. Nostra culpa.

Let’s sh*t on East Europeans: their English is bad, won’t respond & actually do what they’ve agreed to & reelect govts that are responsible.

The problem with Krugman’s conclusion is that Estonia is actually one of the few Eurozone countries that is doing quite well; a point that Dan Mitchell, an economist at the Cato Institute, noted yesterday:

The numbers are accurate, but they’re designed to mislead rather than inform (sort of as if I did a chart showing 2009-present).

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.

This doesn’t mean Estonia is perfect. It did experience a credit/real estate bubble, and there was a deep recession when the bubble burst. And the politicians let government spending explode during the bubble years, almost doubling the budget between 2004 and 2008.

But Estonia reacted to the overspending and the downturn in a very responsible fashion. Instead of using the weak economy as an excuse to further expand the burden of government spending in hopes that Keynesian economics would magically work (after failing for Hoover and Roosevelt in the 1930s, Japan in the 1990s, Bush in 2008, and Obama in 2009), the Estonians realized that they needed to cut spending.

And now that spending has been curtailed, it’s worth noting that growth has resumed.

Krugman has responded to Ilves, but it’s nothing substantive. He posted a graph of GDP growth in the United States from 1929 to 1937, after the passage of New Deal legislation. This is apparently is supposed to prove his belief that “promoting unions, raising wages, and increasing government employment” is the key to economic growth. However, Krugman noticably didn’t show the numbers from the 1937 recession, which sent the country reeling once again. Again, he’s cherry-picking data.

Perhaps even more important, Krugman doesn’t even acknowledge empirical data showing that the New Deal actually prolonged the Great Depression. I guess smugness and arrogance mean more than, you know, being honest.