Economists don’t get controlled experiments, so they have to take countries as they are. Right now, Estonia seems to show that monetary and fiscal restraint can, after pain, create growth. “If you look back, the crash is very good,” says Palmik.
Not surprisingly, Estonia, a country with 1.2 million people, has been offered as a model by advocates of austerity in Europe and elsewhere. On the far side of the Atlantic, however, Nobel prize-winning economist and New York Times columnist Paul Krugman has been arguing for years against this kind of restraint, saying it leads to pointless misery. The argument is central to the future of the U.S.—and most other countries, too.
On June 6, in a blog post titled “Estonian Rhapsody,” Krugman took on what he called “the poster child for austerity defenders.” In his post, he graphed real GDP from the height of the boom to the first quarter of this year to show that, even after a recovery, Estonia’s economy is still almost 10 percent below its peak in 2007. “This,” he wrote, “is what passes for economic triumph?”