Iceland President Olafur Ragnar Grimson on Economic Recovery

I love this guy:

http://www.zerohedge.com/news/2013-01-26/only-3-minutes-worth-listening-davos

This was an article linked in the comments, I don't know enough to verify anything it says, but it felt like a counterpoint:

http://studiotendra.com/2012/12/29/what-is-actually-going-on-in-iceland/

Where's Aeon221 when you need him?

Right off the bat that strikes me as... unreliable -- "Iceland followed the IMF's advice to a tee"? That's not what I recall, some vague link to IMF articles on Iceland not withstanding, nor does it stack up with the IMF's general austerity preaching. And seriously, the guy is using the IMF as source for saying the IMF did a good job? How... unlikely to be biased.

Not to mention the guy fails to give any specific cite, and instead send you off on a wild goose chase of indefinite "do your homework!". No -- if you want to make a point, then you need to make it. His general "well boohoo" asshole tone isn't exactly endearing either.

Before I went any further I took a gander up to see who this guy is... it's some random "Design, illustration, and publishing experiments" blog. Um, yeah. Sorry, but find a better source.


Now, I'm willing to be convinced that that there's more to Iceland's obviously complex situation than it at first seems, and I certainly don't take what Iceland's president says at face value, but I just don't see this guy as having either the authority or the clarity to be of any use.

Part of that stems from finding the link via my wife, who is an economist (albeit in the energy industry rather than finance), so perhaps I'm a bit biased, but seriously -- some random artist's blog?!

I'm not watching a three minute video without context and I'm especially not watching a three minute video from zero hedge without context. Can you elaborate on its contents?

Iceland basically defaulted on everything and devalued like no one's business, completely violating old-style IMF orthodoxy around austerity, and still really violating new more naunced IMF recommendations.

They could get away with it because they have an independent currency, their central bank is not all that independent, they have weak financial linkages to the outside world, and the banks have little influence domestically.

Their economy took a huge GDP hit, but they're slowly recovering. GDP. Where they've really overperformed is their unemployment rate, which is down to 5.3%.

How do you compare Iceland to Estonia? Two small countries, two different routes to recovery?

it's not "zero hedge". It's a 3 minute interviewlet from Al-Jazeera, if I see the logo correctly. is the bar for "here's an interesting video about the banking crisis" really under 3 minute now? You are a jaded, jaded man.

I saw zerohedge in the URL, which certeris paribus means its unlikely to be informative. :)

Beats me, I've never seen a really good summary of the specifics in Estonia other than "austerity and currency peg to Euro."

Estonia appears to be willing to do damn near anything to maintain that Euro peg so they can join. Given their history it's understandable.

No clue; I haven't looked at the specifics of their situations. Krugman's no fan of the Estonia method - they took a mega giant hit to GDP - but lots of people aren't a fan of Krugman so I guess pick whoever you like and go with it. Economics!

I'll take Bernanke for pallets and pallets of free money in return for my shitty "assets", thanks Alex!

Actually Estonia joined the Euro already, last year.

Yeah, but Krugman's been saying they would go the way of Argentina since 2008, and he hasn't changed his tune even after they keep posting record growth. I was just interested because it seems both countries have recovered pretty well, but both have followed opposite paths: Iceland decided to avoid austerity, allowed its currency to devalue and opted out of the Euro, while Estonia chose the Euro, austerity and an internal devaluation through wage cuts. Seems everyone thinks there's only one solution, and yet here we have two.

They made it! You can tell how closely I've been paying attention.....

Their "record growth" still hasn't got them back to parity on GDP, and just recovered part of the crash. Their unemployment rate is still 8%. Their situation was absolutely nightmarish for a couple of years, too, in contrast to Iceland; unemployment peaked at 16%.

My guess is that since they managed to drive down hourly labor costs by an incredible 25% in two years, they then used their improved labor costs to export like hell; their exports are 50% above the 2009 pre-crash peak, with a slightly smaller GDP, while imports are only up 20%.

"Everyone should just export way more" can't be a solution for every country, of course. I'd guess without the ability to dump their exports on the rest of the Eurozone it wouldn't have worked.

When Estonia closes its GDP gap you can make that case. Levels matter!

E.g.: were Estonia to destroy 75% of its capital stock, within a year or two it would experience phenomenal growth rates, but GDP level would be lower and life would be awful.

But Iceland hasn't closed the GDP gap yet either, Jason, and I'm only comparing the two. Has Iceland successfully recovered or not? If so, then so has Estonia. In fact Estonia is closer to its pre-recession GDP than Iceland. Their unemployment rate hasn't fallen so quickly, down 10% in the last two years to 9%, but that's been achieved without increasing debt - in fact they've run a surplus and are now back in the black.

Well if you say a country is going to collapse, then it's not levels that matter, but direction. And Estonia's been going up and up for years since Krugman made his prediction. In fact all the Baltic states that he claimed were screwed have gone in the opposite direction.

BTW, I'm not anti-Krugman at all - he's a smart guy and I generally favour his positions. I just think he made a bad call here, but he and a lot of his supporters seem to not want to admit it. It seems there always next year to prove Krugman right... :)

Like I said, I'm not too up on their comparative situations so I have no idea. A quick look at some data makes me suspect it might not even be able to make an apples to apples comparison between the two; Iceland seems to be a far more developed country. Also who said anything about collapse?

What was Krugman's actual prediction? If we're going to be comparing the prediction to reality, can we toss out a link to the source?

I don't know that he had an actual prediction so much as "Estonian austerity sucks."


Google "Estonia GDP" and "Iceland GDP" and you'll see the trouble. Obviously Iceland is way further behind Estonia in terms of recovering from their downturn. On the other hand, the 2000-2008 giant spike seems really abnormal; I'm pretty comfortable chalking that up to the financialization (and subsequent definancialization) of their economy. So in that sense, Iceland's roughly about where we'd expect them to be now that they've purged the evil of Big Finance.

Estonia, on the other hand, is a much stickier wicket. They too experienced an acceleration in growth during the 2000-2008 timeframe, but it's harder for me to just naively extrapolate where they "should" be in the way I did Iceland. And obviously I'm also cherry-picking dates and whatnot and etc etc and ECONOMICS!

edit: here is Krugman's original post: http://krugman.blogs.nytimes.com/2012/06/06/estonian-rhapsdoy/

So his critique is that a still incomplete recovery is being touted as a triumph of austerity? That's not even a prediction! It's just a statement of observed evidence! How does that qualify as "saying they're going to go the way of Argentina", banquo?

fwiw the intersection of economics and politics (which this very very much is) is probably not going to be very amenable to very literal truth-table styles of analysis; there's going to end up being a lot of fuzzy areas. In one sense, Krugman's right in that austerity has been a disaster for Estonia: the question is what were the counterfactuals. Would things be worse in Estonia if they'd taken some other course? What other course might they have taken?

Iceland gets brought up because in some regards they're superficially similar (small country in Europe). On the other hand they're also a much richer country and their economy went through a degree of financialization that Estonia's didn't. So who knows!

It's completely appropriate to ask banquo for a reference on his claim claim that Krugman said they'd go the way of Argentina (what does that even mean, anyway?). That's not "pedant-style analysis", except inasmuch as ever wanting to not put words in other peoples' mouths is pedantry.

Yeah I have no idea where the "go the way of Argentina" thing comes from. My point was more that we're going to end up dealing with mostly a bunch of gray areas that boil down to "is Iceland a valid counterfactual for Estonia," and that's just not going to end up being an easy question to answer.

Neither has recovered fully, but i think you're underweighting the effect of the unemployment rate trendline. Every point about NAIRU is total misery for the unemployment, in a way wage cuts and debt loads aren't.

On Krugman and Argentina, I think he predicted they'd have to abandon the currency-peg + internal devaluation strategy to join the Euro, because it's destroyed virtually every other country that tried it.

From a cursory reading, isn't Estonia another example of the same austerity miracle dream that so befuddled the Germans?

In that, if you can out-austerity everyone else in your relevant export markets, and thereby lower your costs of production significantly, you can both lower your levels of domestic demand (via tax rises and spending cuts) while simultaneously growing based on foreign cash income from exports. Which is what happened to Germany in the 80s and in slightly different ways in a few other countries over the years (if you have control over your currency you can also lower the costs of your exports through devaluing).

However it should be obvious (you would think) why this miracle plan for lowering debt and increasing growth doesn't work very well when applied globally or across an entire interdependent region like the E.U. In short everyone in the region gets into a race to the bottom and noone ends up on top (or in this case apparently Estonia ends up on top). So much of the relevant trade markets in EU countries are with other E.U. countries. So, even if you 'win' the race to have the lowest costs of production/exports, with most of your key export markets busy suppressing their domestic demand and trying the same tactic to reduce debt and export their way out there is noone left to actually buy the fucking exports.

Basically, it is a tactic that can economically only work for a handful of countries (allowing for the variety in exports) at once, and it works a lot better if the rest of the world economy is booming while you try and pull it off (see Germany in the 80s). Unfortunately global macro economic policy is driven more by folk memories, false analogies and the desires of wealthy political donators/lobbyists than it is by economic reality.

I think your barking up the wrong tree a bit there, Dan. Austerity has little to do with "beggar they neigbour" policies, rather that is deliberate devalutation. Krugman thought Estonia should leave the Euro and devalue its currency, which would lead to cheaper exports, but instead they stayed in the Euro mechanism and achieved an internal devaluation.

What austerity has achieved is a healthy bank balance. This, it has been argued, has led to the financial markets feeling confident in the Baltic countries. This has led to capital and liquidity flooding back into the countries. This has led to business regaining its lifeblood. This has led to the countries experiencing record growth.

Krugman argued debt spending stimulus was the solution. Now that's definitely true for some countries - it certainly seems to have worked for the US. But possibly for countries with low creditworthiness, like the Baltics, Cyprus, Slovenia, Hungary, etc., it isn't. Some argue that countries like Slovenia and Cyprus, who tried to spend their way out of trouble, are now on the rocks because lenders have lost faith in them and liquidity is a chronic problem.

BTW, Aaron, I included a link above that discusses Krugman's views from 2008 about the Baltic nations in regards to Argentina. It's actually pretty easy to Google.

Note that the causal chain that the austerians are claiming is rather long, and at points vague: "This, it has been argued, has led to the financial markets feeling confident in the Baltic countries. This has led to capital and liquidity flooding back into the countries. This has led to business regaining its lifeblood. This has led to the countries experiencing record growth."

That's not to say it's impossible, and you can certainly argue that way, but you're very very far away from proving anything. From my point of view, I'm generally skeptical of arguments that rely on "confidence," which is the vague term I mentioned. "Confidence" is one of those things that's basically immeasurable and we use post-hoc arguments to create the impression that it exists. Which isn't to say that it's a wrong argument, but it's certainly not one that can be proven. Which I guess makes this a pretty good macroeconomics discussion, because we're all just sitting around telling stories. :)

Okay, so he posted a one paragraph endorsement-by-analysis of someone else's blog post with regards to Latvia, and suddenly now this is a big deal when were talking about Estonia, and specifically his one-paragraph critique of the hyperbole surrounding the Estonian economic recovery?

I think it's hilarious that he's written apparently two paragraphs on this topic and it's framed as being some sort of super-serious prophecy of his. He didn't even make a prediction. He made an observation, one which appears to be correct, and everyone apparently freaked out and treated it as far more than it was. Far as I can tell, that's all that's happened.

I've been following a lot of what Krugman has been saying about Estonia, largely because my wife is Estonian. I assure you it's not just one paragraph. I get to hear about it every time he mentions Estonia and catastrophe, and that's a lot. It started some years back with him lumping in Estonia with Latvia, as if the two countries were basically the same, causing the prime minister Ansip to say, after politely remarking how flattered he was that someone as renowned as Krugman took an interest in such a small country, that unfortunately "he couldn't find his ass with both hands" to the more recent, and rude, tirade from the Estonian president Ilves basically telling Krugman to shove it up his ass.

As an aside, I almost got to meet Ilves as we were invited to the Estonian embassy the day he visited. Unfortunately my son decided to pick that day to be born.

Confidence in a country's financial viability is absolutely measurable and has absolute effects - it's not vague at all. The measurement is the cost of borrowing, and the effects of a high cost of borrowing can be devastating.

I'm not an "austerian" - I think that different approaches work for different countries. I think it's an interesting argument that smaller countries with lower creditor confidence might not do so well trying to spend their way out of a recession as compared to countries with solid AAA credit ratings.

From what I've read, Krugman never actually said that austerity will make Estonia unviable for all future or anything, just that austerity is an extremely harsh fix that hits the weakest in society the worst, and that there are other viable options that will reach the same or better results.
Obviously austerity can work better in some countries than others, and it certainly helps when you have a country of self-flagellators like Estonia.

Okay, so link me to it. I found one paragraph which asserted that the recovery was being hailed as miraculous but that the reality was somewhat underwhelming. You linked a giant diatribe which was based on, again, one paragraph, this one an endorsement-by-analysis of someone else's writing. If you're not willing to back up your assertions, may I suggest the Sanctum Santorum as a more appropriate venue?

Foreign Policy has an interesting article on why Krugman got the Baltics so wrong. They think that he is simply advocating for what would work in the US.

Since that's paywalled, I'm sure someone else can go find the citations that the article clearly provides for which countries have had to accept international bailouts, and the rationale for why Baltic states performing fiscal stimulus would wind up in the same position as Greece.

Here you go, Aaron. It was from a Nobel lecture, not a blog post:

"Now most of what has gone wrong with the world these past two years has not taken the form of classical currency crises (though give it time – the Baltic nations, in particular, seem well positioned to follow in Argentina’s footsteps)."

This is the lecture that Ansip, whom I quoted above, was responding to. It's pretty obvious that Krugman has long held the belief that the Baltic nations were going the way of Argentina, and not just Latvia, because they were all following the same policy which he proscribed. I mean do you really think that he would describe the "tragedy" of Latvia's attempts to achieve recovery through internal devaluation and not think the same of Estonia when they followed the exact same path?

Foreign Policy isn't pay walled, Aaron. But it does seem that you have to register after a certain number of page views. FT is pay walled, however, which meant it took me a very long time to find that article you insisted I link, because most of the time I clicked earlier I only got a page displaying their subscription rates. Yes, that is a sarcastic thank you for wasting my time this evening.

OK briefly cuz I have to catch a bus:

The case for Estonian austerity (Eusterity?) working is a basic post-hoc ergo propter-hoc argument: Estonia did austerity, and then the second derivative of the production function went positive (viz, growth accelerated).

Nobody's actually proven that austerity caused the production function's second derivative to go positive. They've posited some transmission mechanisms and told some stories, but that's about it. Welcome to macroeconomics. While there are some (IMO not very good) models that show austerity being consistent with the second derivative of the production function becoming positive, there are also (IMO slightly less not very good) models that show otherwise.

That's the state of the art of the discussion as it pertains to Estonia: mostly it's a matter of who knows. Krugman's point is that using Estonia as an example of how great austerity works is misguided because what happened to Estonia sucked. They took a giant real hit to their overall economic welfare that, almost five years later, they still have not recovered from. That's not just a matter of some numbers or derivatives, it means life for the people of Estonia was and still is worse than it once was. If that's really what austerity gets us, then fuck austerity, there is no good reason that people should have to suffer like that.

Obviously the discussion gets a lot more complicated from there; you get into various counterfactuals and various (still IMO not very good) models that can demonstrate one counterfactual over another.

banquo here is an honest question: another way to get the second derivative of your production function to go positive is to light half of your capital stock on fire. You'll take an enormous hit in terms of welfare levels, but you'll then see some seriously accelerating growth as you start to replenish your capital stock. Based purely on the context of the discussion thus far (viz, austerity in Estonia worked because following it growth accelerated), do you think that lighting half of your capital stock on fire is a viable way to get out of a global financial crisis?

Also: that "interesting" FP article is pretty dumb.

Well, I certainly wasn't going to go do your research for you. I'm not even willing to register on a site, even if registration is free, to read an article whose quoted bits I find suspect but that someone on the internet thinks is interesting. So it looks like your time was largely wasted because I don't place enough social capitol in you or FP/FT to go through the registration process. :)

Err... austerity didn't cause Estonia's economic collapse - that was the same financial calamity that struck everyone the world over. The remedy to that was always going to be painful. If they devalued then they would lose out on the Euro, inflation would go up (because of more expensive imports) and probably worse of all: their Euro denominated loans and mortgages would go up in value, leaving individuals screwed like they were Hungary where house prices collapsed while mortgage payments went through the roof. Austerity wasn't really an issue with Estonia as they had no debt going into the crisis anyway, so they actually did spend a little more at first, before going back into the black a few years later. The most painful part of the process was the internal devaluation that cut wages across the board.

And seriously, I know a lot of Estonians: It didn't suck that much. The worst pain was the damage done by the financial crisis, and not the cure. It certainly sucks a lot more for my Hungarian friends, where I lived for over 3 years during the worst of the crisis. And the situation now in Estonia is much better than in many other countries similarly hit, and that's the point.

If their way of doing things worked for them, and they are better off than countries in similar situations, how can you argue that they are worse off because of it?