The Doctor Is In, America: Get With the Estonian Program

by Matthew Melchiorre on May 7, 2013

in Economy, Employment, International, Stimulus to Nowhere

Don’t let the optimism surrounding last month’s job numbers fool you. The unemployment rate’s decline from 7.6 percent in March to 7.5 percent in April is more statistical artifact than progress.  Like that of our Western European neighbors—and the U.K. in particular—the U.S. economy is stuck in a rut. Why? The answer is simple. Government profligacy overburdens the economy while propping up private inefficiencies, as I explain in Investors Business Daily.

Since 2008, Washington policymakers have been pacing around the doctor’s office too afraid to take the bitter but effective pill America needs: slash federal spending and end the U.S. Fed’s life support for zombie banks.

Economically stagnant Britain shows us where this continued procrastination leads. Instead of dashing after our tea-drinking transatlantic neighbors, American policymakers should look to Estonia, which took its austerity meds and quickly returned to prosperity.

Although media relentlessly talks of supposed “austerity” in the U.K. and the rest of Europe, cuts to spending and taxation are starkly absent in budget data. That is, of course, until looking to Estonia.

In the four quarters following the British government’s announcement of austerity in June 2010, general government spending increased by 4.3%, a rate of growth that has increased since then.

Some “austerity.”

Whitehall also has been squeezing more taxes out of British citizens, with revenues increasing by 7.8% the first year and the rate of growth shooting up into double digits the next two.

And the Bank of England’s balance sheet has grown 334% since September 2008, as it’s tried to prop up bad assets held at London banks.

For a better way forward, let’s look at Estonia, which took its medicine as soon as the global financial crisis broke. It cut government spending relative to its pre-crisis level drastically — 2.8% in 2009 and 9.5% in 2010 — and is now one of Europe’s fastest growing economies.

Tax revenues fell, too. Moreover, Estonia’s central bank refused to prop up banks that shipwrecked on the rocks of a real estate bubble.

Unsurprisingly, Estonia has had greater net economic gains since 2008 and is set to outpace the U.K. into the future.

Austerity works, but as the case of Estonia shows, it must be real austerity. In order to facilitate the natural market process of resources moving to their most efficient use, the public sector must shrink as the private endures recession. Government must not continue to gorge itself on a smarting private economy while simultaneously propping up its inefficiencies.

Read my in-depth statistical report on U.S. lessons from European austerity here.

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