How Do Keynesians Deal With This?

I’m not taunting them. I genuinely want to know.

Mish reports on a recent study of the case of Latvia:

In 2008–09, Latvia lost 24 percent of its GDP. It was heading toward a budget deficit of 19 percent of GDP in 2009 without a program of radical austerity.

A new Latvian government came to power in March 2009, when GDP was in free fall. It told people how bad the situation was, and the various social partners responded by signing up to a truly radical austerity program. One-third of the civil servants were laid off; half the state agencies were closed, which prompted deregulation; the average public wage was cut by 26 percent in one year. But this was a socially considerate program. Top officials were hit more, with 35 percent in wage cuts, while in the end pensions were not cut. In particular, public servants were no longer allowed to sit on state corporate boards and earn more than from their salaries, a malpractice that is still common in many European countries. The government exposed high-level corruption. Yet, many schools and most of the hospitals were closed.

This was a truly front-loaded program. Of a total fiscal adjustment of 17 percent of GDP, 9.5 percent of GDP was carried out in 2009. Two-thirds of the adjustment was expenditure cuts that are more easily executed in a crisis, and only one-third revenue increases, mainly through consumption taxes. The low corporate profit tax of 15 percent was maintained to stimulate business. Latvia needed international financial support, and fortunately the IMF, the European Union, and neighboring countries did both commit and deliver on time.

At the outset of the crisis, the IMF favored devaluation, but the Latvians resisted firmly with strong popular support. Throughout the crisis, the Latvian government has insisted on maintaining its flat personal income tax, as most other East European countries have….

Latvia’s economy continues to recover strongly. Following real GDP growth of 5.5 percent in 2011, growth is expected to exceed 5 percent again this year despite recession in the euro area. Labor market conditions are improving. The unemployment rate fell from 16.3 percent at the beginning of the year to 13.5 percent at the end of the third quarter, despite an increase in participation rates. Real wage growth remains restrained. Consumer price inflation has declined sharply, easing to 1.6 percent at end-October after peaking at 4¾ percent in mid-2011. Robust export growth is expected to keep the current account deficit at about 2 percent despite recovering import demand.

Luke Sunderland

My guess is that they deal with it by either ignoring it or saying that it’s absolutely barbaric because it lead to some schools and hospitals being closed.
http://www.facebook.com/profile.php?id=4941417 Ed O’Donnell

Sure unemployment is falling, but what that they don’t tell you is that all those people have to go to this stupid thing called a job five days a week.
http://www.facebook.com/profile.php?id=6112838 Andrew Mackenzie

Krugman appears with a chart whose starting point is selectively pinned at the very start of the crisis and says “See? Latvia had a deeper slump than those parts of Europe that didn’t have austerity and unemployment was higher!” and conveniently ignores that in the long run, over the course of one or several business cycles, Latvia will probably destroy the other European countries in terms of GDP growth (I realize there are issues with GDP as a metric to begin with, but that’s what he’ll use).

He did the same exact thing with Estonia.
http://krugman.blogs.nytimes.com/2012/06/06/estonian-rhapsdoy/

But if you look at the data since a few years earlier…
http://www.globalpost.com/sites/default/files/imagecache/gp3_full_article/picture_26_1.png

The chart shows GDP across many countries in Europe normalized to 2005 levels. Anyone can clearly see that Estonia’s and Latvia’s respective GDPs have risen much faster over time than the rest of Europe over time, in spite of the fact that they experienced steeper declines on a very short term basis. This isn’t only because of the way they handled the crash, it’s also because the two countries have significantly freer markets than most other European countries.

Not all Keynesians would respond similarly, but I’m certain that Krugman would spin it like that.
George

Krugman is like Disco Stu!

“Did you know that disco
record sales were up 400/ for the year ending 1976? If these
trends continue… A-y-y-y!”
Anonymous

Wow, a Mish article, The guy who attacked Schiff to steal his customers by using short term data in a very underhanded manner. It’s sad when someone who in the past has repeatedly demonstrated a lack of moral fiber writes something you agree with for the most part. Kinda like how republican’s often sound a stop X horn, but you don’t want to get onboard with them because of all the other negative baggage.
http://www.facebook.com/profile.php?id=6112838 Andrew Mackenzie

Agreed. Mish is a total tool for his treatment of Peter Schiff.
http://www.TomWoods.com Tom Woods

I read Schiff’s summary of that affair after posting this. But in any case, Mish didn’t write this. The IMF did.
JP

Tom are you going to say anything about the union thuggery yesterday.
http://www.TomWoods.com Tom Woods

I don’t have anything to add, really.
http://www.TomWoods.com Tom Woods

I don’t have anything to add, really.
Anonymous

This sounds like a replay of the 1920 depression when the US government slashed spending, cut taxes and let the mal investments liquidate at market prices. Initially, 1920 depression was worse than the 1929 crash with higher increases in unemployment, deeper drops in the prices of real estate and commodities. The recovery was swift in the US, but in other countries where the governments tinkered with their economies, there was an extended depression that lasted right into the 1929 crash and the worldwide Hoover/FDR depression.
Anonymous

Ah, I stand pleasantly corrected On his page he didn’t attribute the comments to the IMF(that I saw) so I figured that he wrote them.
Guest

Just more evidence that Mish is a fraud.
Anonymous

… in the end pensions were not cut.

This part of the story is not reassuring, even if the whole story does give the Keynesians fits. If pensions are not cut, how do I know that “top officials” lose anything? Maybe they just fatten their pensions while “cutting” their wages by 35%, and if a former top official has no wage, because he retired from state employment at 45 and never bothered to work again, he loses nothing.
Anonymous

All those people without pensions …
devo

how do keynsians usually deal with objections to their doctrine? as far as i can tell they convince themselves how it actually goes WITH their ideas and plans, and then they tell everyone else how right they always are.
Anonymous

How will the current crop of Keynsians explain it? Uhh, I’d guess by crying “racisim”?