Compared to what

by Russ Roberts on June 12, 2012

in Debt and Deficits, Stimulus

Paul Krugman finds the claims for the beneficial effects of Estonian austerity to be overblown. He writes:

Since Estonia has suddenly become the poster child for austerity defenders — they’re on the euro and they’re booming! — I thought it might be useful to have a picture of what we’re talking about. Here’s real GDP, from Eurostat:

So, a terrible — Depression-level — slump, followed by a significant but still incomplete recovery. Better than no recovery at all, obviously — but this is what passes for economic triumph?

You can see what he means–the recovery is not so dramatic from the trough in the third quarter of 2009 and real GDP hasn’t returned to its peak in the 3rd quarter of 2007. But when deriding the Estonian recovery and the benefits of austerity, the right question would be, compared to what. Here is the latest data for all of Europe:

(Sorry this chart is so small–can’t get the thumbnail to work. The first five bars are various measures of Europe. Greece is the big negative bar. Estonia is two bars to the left of Greece).  This is the rate of growth in real GDP per capita in 2011. Estonia’s was 7.6%. That’s huge and especially compared to the rest of the EU which averaged just over 1%. And the plunge which Krugman shows in ’09 was horrific–a drop of 14%. That was much worse than the rest of the EU which was a drop of about 5%. So there’s no way of knowing whether Estonia’s recovery is due to the budget surplus it ran in 2010 (the so-called austerity) or just the ease of recovering from such a deep hole. But either way, Krugman’s dismissal of Estonian growth seems misplaced. I would also like to see data on Estonian government spending and not just its deficit or surplus.

By the way, the overall drop in real per capita GDP between the peak in 2007 through 2009 was about 5%. The growth between 2009 and 2011 for all of the EU is about 3%. So without austerity, Europe hasn’t recovered completely either. Meanwhile, growth is expected to be negative for the EU as a whole in 2012 while Estonia is expecting positive growth…

UPDATE: Craig Eyermann sends me this post on nominal spending and tax revenue with some interesting commentary. Basically nominal spending fell 2.8% in 2009 and 7.2% in 2010 (source: Eurostat). They ran a deficit in 2008 and 2009, a tiny surplus in 2010 and a bigger surplus in 2011…

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