A View Of Austerity {lessons from Lithuania}

The Corner via Ibstapundit ^ | 2 Apr 2010 | Veronique de Rugy

[shove_it]

Tyler Cowen sent me this article last night about the measures taken by Lithuania to face their debt burden. It's quite impressive and goes against the Keynesian response around the world. According to the New York Times:

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.

The net effect on this country’s finances was a savings equal to 9 percent of gross domestic product, the second-largest fiscal adjustment in a developed economy, after Latvia’s, since the credit crisis began.

Obviously, this response has its price, and it's severe. But here is an even more interesting fact:

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.

Considering the financial situation of the United States and its unsustainability, it is interesting to think about the tradeoffs between ending up like Greece, or Lithuania.

[SeeSharp]

The spending cuts are the right thing to do. Raising taxes is the wrong thing to do. They should have lowered taxes and cut public spending even further. Recovery can only be brought about by private sector investments. Who is going to invest when they know their profits are just going to be taxed away?

[glorgau]

The Lithuanians and Latvians are motivated by the ever present bogeyman to the East. They know the penalty for failure to maintain independence is high. The other countries of Europe don’t quite remember that lesson so clearly.

[shove_it]

Agreed. They (and we) need to lop off government bureaucracies that obstruct free enterprise - the list of them is staggering:

http://www.usa.gov/Agencies/Federal/All_Agencies/index.shtml

[CORedneck]

Make the bureaucrats look for a real job in the private sector. An easier way to implement cuts is through attrition. A gov’t employee leaves his job, the position goes away. Also implement the freezing of pensions as well. It’s happening in the private sector. Many companies are freezing pensions or doing away with them all together with grandfathering.