Auserity Measures

Via National Review, here’s an interesting article on Lithuania’s belt-tightening response to the financial crisis:

Faced with rising deficits that threatened to bankrupt the country, Lithuania cut public spending by 30 percent — including slashing public sector wages 20 to 30 percent and reducing pensions by as much as 11 percent. Even the prime minister, Andrius Kubilius, took a pay cut of 45 percent.

And the government didn’t stop there. It raised taxes on a wide variety of goods, like pharmaceutical products and alcohol. Corporate taxes rose to 20 percent, from 15 percent. The value-added tax rose to 21 percent, from 18 percent.

More interesting still is the muted political backlash:

Remarkably, for the most part, the austerity was imposed with the grudging support of Lithuania’s trade unions and opposition parties, and has yet to elicit the kind of protest expressed by the regular, widespread street demonstrations and strikes seen in Greece, Spain and Britain.

Leaving aside the merits of this approach (though things seem to be working out for Lithuania), it’s worth noting that this austerity program is literally unthinkable in an American context. Every political interest group imaginable – from business lobbies to labor unions – is adversely affected by tax hikes and spending cuts, and I can’t imagine any politician brave (or suicidal) enough to propose something akin to Lithuania’s response to the economic downturn.

All of which reminds me of this excellent column from Reihan Salam:

During the sharp recession of the early 1980s Ronald Reagan and Paul Volcker subjected American families to extreme economic pain, and hundreds of thousands of industrial jobs evaporated and never returned. Had Reagan and Volcker decided to do everything in their power to preserve the economy of the late 1970s in amber, the world would look very different today. To put it bluntly, there is good reason to believe that the United States would be an economic backwater, and that the most innovative firms would have taken root elsewhere. Many say that Barack Obama, like Reagan, will suffer a serious political reversal in the midterm elections if high rates of unemployment persist, as seems likely. This comparison belies an important distinction. Reagan and Volcker made the difficult decision to allow painful restructuring. The Obama administration has, in contrast, tried to cash-for-clunker its way over the economic abyss instead of staring into it.

The truth is that America has changed over the intervening years. In the 1980s a large number of Americans still remembered the extreme deprivation that defined the interwar years. Now, in contrast, few American adults have previously seen real economic pain. One can hardly blame the president for this broader cultural shift. He can be blamed, however, for failing to understand how the restructuring of that earlier era really worked.

Austerity measures pale in comparison to prolonged foreign occupation, and I suspect enough Lithuanian business leaders, politicians, and trade unionists remember life before the USSR collapsed to accept a degree of belt-tightening that would be unthinkable elsewhere. But I’m 25, and aside from a few months after September 11, I can’t remember a time when the economy wasn’t growing at a steady pace. My parents are boomers, and their only connections to economic deprivation are through half-remembered stories of the Great Depression. Are we too removed from real hardship to tighten our belts when it matters? The looming budget crisis has provoked plenty of talk about a dysfunctional political system, but maybe gridlock is symptomatic of a public that just isn’t acclimated to the idea of serious fiscal responsibility.

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32 thoughts on “Auserity Measures

  1. I am currently studying in Klaipeda, Lithuania and I can attest to the muted public response to these measures. In conversation with several Lithuanians there is a sort of “what must be done, must be done” mentality, be it cut backs or tax hikes, they recognize that EVERYONE must sacrifice before anything can get better. Quite refreshing if you ask me.

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    • Must indeed be tremendously refreshing to still be a young democracy scarcely out of the clutches of the USSR, feeling real gratitude for liberty and so sharply remembering the horrors of communism.

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  2. Will, your point is good.

    Shorter Salam: Thank goodness that Reagan made way for “painful restructuring” because, otherwise the US economy would be a backwater today; luckily though, it’s now an abyss instead. Way to go Reagan!

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  3. 1. Dereg started with Carter and had substantial bipartisan support. Please remember that bills start in the legislature.

    2. Innovative firms go elsewhere? Where, Russia / Germany?

    3. Cash-for-clunkers was a stupid bill but pennies on the dollar and is giving the auto industry a chance to rebuild.

    4. The health care legislation is critical to US competitiveness; it makes a major step in decoupling health care from employment.

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  4. It also might be worth pointing out that the problem in 1980 was considerably different than the problem in 2010, which just might suggest that there could be different solutions to those problems. Believe it or not, austerity may not be the right prescription for the US at this point.

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    • It’s laughable to suggest that Reagan had anything to do with “austerity measures” back in the 80s. What austerity measures did he produce that actually harmed his own electoral constituency? Reagan basically cut taxes and increased deficit spending. That’s a real austerity measure….right?

      Volcker took steps to kill inflation (and by extension stagflation) stone, cold dead, but in the process probably killed his boss(Carter, remember, not Reagan)’s political career.

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      • It reads perfectly accurate to me Nob, reply or not. Salam is far from partial so it’s no big surprise that he leaves out that Regan was pretty much the ur-Republican borrow-and-spender. Now having read the literature on the era I’m not certain he was wrong, a lot of work had to be done on the tax system and the tax cuts probably did help the economy a lot but we’re in an entirely different situation now. Taxes are pretty low historically. Even once Bush Minors (reconciliation passed) tax cuts expire we’re still be at unremarkable levels of taxation. It seems obvious to me that we’re going to have to preferably follow Lithuania’s lead in cutting spending AND raising taxes. Obama has a tricky needle to thread of course, too much cutting to crudely and abruptly could put the economy down. Same with tax increases. If he can oversee some kind of winding down of Iraq and Afghanistan there’s some good money to be saved there. At the very least he needs to get spending down to below the level of economic growth. I’m watching with great interest/worry at what he does next. He has his left wing legacy legislation in the form of HCR. I hope he starts focusing on the finances now. If he goes for something like climate change or immigration reform instead I’m going to start seriously worrying.

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  5. There’s a very obvious and strong general pattern that most of the Former Soviet Block countries have, in general, become very economically conservative.

    Nearly all countries that have adopted a Flat tax system have been from Eastern Europe http://en.wikipedia.org/wiki/Flat_tax#Eastern_Europe

    Some countries such as Poland have really begun to see the benefits of heavy privatization, ease of starting businesses, and other forms of economic liberalization.

    In 2009 they were the only economy that never entered a recession or declined in GDP. Before the downturn they had had a 6% per year GDP growth. They’re now 21st worldwide in GDP and almost certain to move upwards.

    http://en.wikipedia.org/wiki/Economy_of_Poland

    It will be fascinating to see Eastern Europe continue to grow quickly in GDP as most of the Western European countries have stagnated and are expected to grow significantly more slowly than even the United States. That’s what the free market does for you.

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  6. Will, what Reihan says is a reasonable invention, but it is entirely an invention, and we limit our exercises in historical counterfactuals for good reason. Especially when, as is the case here, they so flatter our preferred vision of the world. You’ve got to be less credulous towards things that you agree with.

    Also– what Mike Schilling said, times ten– it’s easy to advocate austerity when you and I won’t be the ones experience what genuine austerity means; what Rufus said; praising Reagan for his “economic austerity” when he was one of the most stunningly profligate and fiscally irresponsible world leaders of the 20th century is just daft; it is in fact a matter of controversy whether the US economy has actually been growing for most of your life, or if in fact we have maintained the appearance of such through creative accounting; and real “restructuring,” Will? Yeah. I’m all aboard. But I doubt you, or Reihan Salam, will like it.

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    • I think Rufus really nails it – what fundamental transformation did Reagan usher in other than de-unionization and deregulation that ushered in an industrial transformation allowing the prevailing economic order to be maintained that proved lasting? (I’m sure I will get answers to that question; how convincing they’ll be is another question.) Moreover, where would we be without the information and globalization revolutions that characterized the following decade? (Again, there will be those who say all such roads lead to Reagan as well…)

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  7. Anyway, back to the real point that perhaps, maybe 70 years of both relative affluence and drastically improved living conditions have significantly changed our cultural (broad-sense) and individual view of what is and is not acceptable w/r/t spending obligations in a way that is divorced from reality.

    Or at the very least encumbers our ability to self-govern in any sustainable fashion.

    Will, it doesn’t seem crazy.

    Also, really, aren’t we past “what about the poor!?” comments/insinuations of callousness? I mean it’s not like the commenters here have taken a vow of poverty and commit every waking moment of their lives to improving the lives of the needy.

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    • Also, really, aren’t we past “what about the poor!?” comments/insinuations of callousness?

      More like obliviousness. If you’re going to get on your high horse about how spoiled people are these days, it’s useful to remember that some people aren’t.

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      • @Mike Schilling,

        The only obliviousness here is quibbling over how a qualified, exclusive statement, doesn’t reference the people its directly not talking about.

        Can anyone here point to how a mention of not-wealthy Americans substantively affects the salient points of Will’s post?

        If Will had modified two sentences, it would’ve mitigated half the comments on this post but changed the substance not one bit.

        That’s the issue I have, here. You say it’s instructive that’s Will doesn’t mention them, then fail to elaborate on anything of substance. You say he was dismissive of the poor, but the poor aren’t terribly germane to the point and it’s clear he’s not dismissing the poor outside of the limited context of the point so unless you have some wonderfully insightful, contributory comment that can connect the two, the comments made seem small, borderline petty.

        As for remembering that some people aren’t spoiled – I think first that’s both subjective and obvious. Of course some people aren’t spoiled. Some people aren’t tall. Some people aren’t Latino. Some people aren’t men. Some people aren’t depressed. Some people aren’t any number of categories…(again, waiting for the insightful comment illustrating how pointing out the poor exist contributes meaningfully here.)

        Second, (and personally) I have a hard time buying the argument that many (if any) Americans aren’t spoiled to some degree. Sure Hartford is bad, but is it Congo bad? Detroit’s bad but is it DPRK bad? Appalachia is bad but is it rural China bad?

        If you expand the context, it’s hard to see how the “what about the poor?” bandwagon isn’t just as obliviously exclusionary as Will was being, if you believe he was in the first place.

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