Estonia vs Greece Austrian vs Keynesian Economics

Last week Apostle of the Church if Keynesian Economics Paul Krugman took a few swipes at Estonia (http://krugman.blogs.nytimes.com/2012/06/06/estonian-rhapsdoy/). It seems that Estonia is proving to be a great embarrasement to those who preach that the way out out of economic difficulty is paved with newly printed, depreciating currency. Greece's problems would go away if only they were they were on their own currency that they could print and devaluate. That way (their argument goes), everything inside the country would be cheaper so they would export more, and everything outside that country is more expensive so they import less. Problem solved.

They forget a number of things. One is that while you can print money, you can't print wealth. Secondly, specifically with Greece, Greece's economy is fraught with disfuntionality that cannot be papered over with new currency. Yada yada. I could go on. Arguement, counter argument. The keynesians are running the show everywhere you look, which makes it hard to make any headway with people who are firmly stuck in their economic worldview.

Except in the Baltic countries. The 2008 recession hit Estonia very hard, initially anyway. Economic output dropped by about 20%, unemployment shot to about 17%.

Faced with such a predicament, the best advice a Krugmann could give would be to increase public spending to stimulate the economy. But Estonia cut spending and they are currently running a budget surplus of 1% of GDP. Their total fiscal debt is the lowest in the EU at only 6.7% of GDP.

Estonia is one of the world's highest ranked countries in terms of economic freedom. They have a flat tax. But rather than wring their hands over their inability to devalue their currency, they allowed market forces to drive down wages. This is what would have happened in the old days, say a hundred years ago before the government began meddling with natural economic forces. The Estonian economy started growing again in the summer of 2009 and has been growing at an annual rate of about 6 or 7%.

This is a classic illustration of the Austrian Economics in action. From the Austrian Economic perspective, what triggers a recession or depression is when the costs to produce goods exceeds the price people are willing to pay for those goods. Recessions are then no more than market signals to producers that they need to tighten their belts to work out inefficiencies that have crept into their systems. To interfer with this process is counter productive and only serves to prolong the recession. To put it another way, it is totally counter-productive to subsidize entities that have become bloated and inefficient. When I say entities, that can mean anything from individual households to companies to whole countries or continents.

When you think of Greece, think country become completely disfunctional. I read just this past weeks the follow factoids:
- Tax avoidance has become something of a national past time with doctors for example typically reporting annual incomes of only about €10,000 per year,
- The government tried to increase their tax collections by attaching the tax bills to people electric bills,
- People began to not pay their electric bills, the electric company moved to cut off people who delinquent in their payments but the courts in Greece said that they could not cut off people when they do not pay their bills. So people in general stopped paying their bills,
- Now the gas company that supplies the electric company was complaining that the electric company was no longer paying its bill. Now apparently, the Greek government is paying the gas company for the gas it supplies the electric company.

This is what Germany is subsidizing. Nobody would subsidize that with their own money.

Who in their right minds would invest their own money intomthis situation? Nobody. So the obvious solution is to tax, borrow or print money to subsidize it.

The problem is the keynesians are philosophically ill equipped to deal with the situation that confronts them. They look at the world through socialist keynesian glasses. All they can see are typical socialist keynesian solutions.

Until natural market forces are allowed to bear on the situation in Greece, it will never get better. Only then will the Greek economy be cleansed of its inefficiencies and disfunctionalities and again become healthy.