By Dave Anderson:
The Austerian and deficit peacocks in American politics are pointing to certain 'success' stories to argue that the US needs to dramatically cut back on social spending (but not military spending as that is a needed priapic aid nor increase taxes as that would hurt the very serious people's paychecks) to get out of the current recession. The two big success stories under this argument are Latvia and Ireland while Spain is one member of the ensemble cast of villains.
Here is Latvia's "success" from last February:
As evidence for just how much better Latvia is doing than Greece the
Economist cite the movements in the respective bond spreads, and of
course, the extra interest the Greek government has to pay to raise
money (with respect to equivalent German bonds) is now marginally more
than the extra interest Latvia has to pay, but then Greece has yet to go
to the IMF....
According to the latest available data from the Latvian Statistics
Office, average wages in Latvia were down 10% in September 2009 over
2008, but since wages in September 2008 were up 6.5% over wages in
September 2007, when the Latvian economy was already in deep trouble and
wages and prices were already seriously out of line, then they have
only actually fallen back some 4.15% over the two year period. I am sure
these cuts are painful (a 20% unemployment rate, and young people
emigrating is even more painful), but I would hardly call this a �deep
cut� yet awhile.
Latvia's success is basically doing a fast version of Detroit today, or Pittsburgh in 1983 --- shedding most of the economy and the next generation that has any option or ability to leave the region.
Now Ireland is the 'success' story of deep austerity instead of stimulus. One would imagine that if austerity was the right path forward for Ireland, the markets would recognize and reward that. Oops:
* Moody's Investors Service Monday downgraded Ireland's
government bond ratings to Aa2 from Aa1. The ratings agency said the
main drivers for the downgrade were: the government's gradual but
significant loss of financial strength, as reflected by the substantial
increase in the debt-to-GDP ratio and weakening debt affordability, and
Ireland's weakened growth prospects as a result of the severe downturn
in the financial services and real estate sectors and an ongoing
contraction in private sector credit.
Wahoo --- austerity promotes a debt downgrade because the debt to GDP ratio will increase, all else being equal, because GDP will be smaller under austerity than it would be under expansionary fiscal policy.
It might just be time to think that the Very Serious People are either wrong (shocking, I know after seeing the past decade's stirling record of success predictions and policies) or talking their own book.
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