If you want to win a football game, it makes sense to study past wins, to try to figure out what produced a win, and study past losses, to figure out what actions led to a loss. So if America would like to see our economy recover, we should look at other ailing economies which eventually recovered, and we should study actions which led to worsening economies. Over the weekend a Wall Street Journal article offered an interview with Leszek Balcerowicz of Poland. In the 1990’s he successfully implemented a debt ceiling for Poland, and “from 2001 to 2007, his hard-money policies avoided a credit boom and likely bust”. Poland avoided the 2009 recession which hit the rest of the European Union, and since has been the fastest growing EU economy.
Asked about the economic situation of America, Balcerowicz marveled that federal spending has risen since the financial crisis, when according to him, taxes and spending need to be decreased in these economic downturns, because taxes are already too high, and contribute to the problems currently facing world economies.
Greece focused on raising taxes, putting off expenditure cuts. They got it backward, says Mr. Balcerowicz. “If you reduce through reform current spending, which is too excessive, you are far more likely to be successful with fiscal consolidation than if you increase taxes, which are already too high.”
He adds: “Somehow the impression for many people is that increasing taxes is correct and reducing spending is incorrect. It is ideologically loaded.” This applies in Greece, most of Europe and the current debate in the U.S.
Greece, as we know, is still facing economic turmoil, despite having received an EU bailout. Countries which were not given bailouts had to deal with the problem on their own, which meant more serious solutions. In Latvia, which did not receive a bailout, “Public spending was slashed, including for government salaries. The adjustment hurt but recovery came by 2010”. Initially Latvia suffered a nearly 20% drop in economic production, yet soon after, their economy is booming, having followed similar tactics used to avoid economic disaster in Poland. Greece on the other hand, is deciding where to go from here, but they might already be out of the woods if they had swallowed hard and did what needed to be done in ways of reform. Instead they were “rescued” by the coddling arms of the EU, and doomed to economic calamity.
Balcerowicz separates the EU countries whose economies wavered into two groups, the ones who were given bailouts by the EU (or considered for bailouts therefore making reforms come about more slowly), and the ones who were left to their own devices to fix their economy. The one whose sweeping reforms seemed initially disastrous are now doing better than the countries who were “saved” from economic disaster. The ones who did not initiate “harsh” reforms did not initially see as steep a decline, yet their slow downward slope continued. These countries are referred to as PIGS (Portugal Italy Greece Spain). The countries which initiated harsh reforms–what are referred to as BELL (Bulgaria Estonia Latvia Lithuania)–initially saw a deep decline in the economy, which was quickly replaced by a steep incline in economic productivity.
This chart is not a scientific representation of what happened, but merely represents the effect to which Balcerowicz refers. The BELLs initiated harsh reform which initially hurt the economy, but shortly later saw a broad recovery. The PIGS put off reform, and dragged their feet, preferring to raise taxes, and refusing to cut spending. As a result their steady decline continued. The BELLs are represented by the blue line, and the PIGS by the red line.
Not only did this harsh reform approach lead to a better economy in the long run, but it restored confidence in markets. The “confidence effect” led to costs of borrowing to plummet, because people felt more certain that their government and economy would remain viable for a long time to come.
And despite all the success that Balcerowicz’s policies had for Poland, and later similar policies for the BELLs, he was still a politically unpopular figure.
During his various stints in government in Poland, the name Balcerowicz was often a curse word. In the 1990s, he was twice deputy prime minister and led the Freedom Union party. As a pol, his cool and abrasive style won him little love and cost him votes, even as his policies worked. At the central bank, he took lots of political heat for his tight monetary policy and wasn’t asked to stay on after his term ended in 2007.
Mr. Balcerowicz admits he was an easy scapegoat. “People tend to personalize reforms. I don’t mind. I take responsibility for the reforms I launched.” He says he “understands politicians when they give in [on reform], but I do not accept it.” It’s up to the proponents of the free market to fight for their ideas and make politicians aware of the electoral cost of not reforming.
Balcerowicz goes on to discuss why there is so much confusion over what will lead to strong economies, and what leads to staggering economies. Essentially intellectuals like to blame markets, and capitalism for economic downturns that are in fact caused by government intrusion into the markets. He cites feds printing money, the “too big to fail” attitude, and housing market intrusion through Fannie Mae. This last one, the housing market, should be one of the most obvious examples of government intrusion failing, introducing policy meant to make home ownership more attainable, but leading instead to extreme foreclosure rates–a boom and bust. Before the government got involved in markets, they would recover quicker after economic downturns than when the government began “fixing” these “problems”.
Going back to the 19th century, industrializing economies recovered best after a crisis with no or limited intervention. Yet Keynesians continue to insist that only the state can compensate for the flaws of the market, he says.
“This idea that markets tend to fall into self-perpetuating crises and only wise government can extract the country out of this crisis implicitly assumes that you have two kinds of people. Normal people who are operating in the markets, and better people who work for the state. They deny human nature.”
America simply cannot ignore the issue any longer. We have a choice to make of whether to go the way of Poland, or Greece. Do we want to suck it up and take a small economic downturn in the short run, but usher in a new century of economic boom? Or do we want to ignore the root issue, pretend things will work out, and continue a downward economic slope indefinitely? Based on the failures and successes of economic recover in other countries in recent years, the next step should be quite obvious. Unfortunately Balcerowicz’s economically beneficial policies made him unpopular, which can clue us in on why American politicians seem completely unwilling to implement policies which would improve our economy, but might ruin their career.