Dan Mitchell – Estonia Should Ignore Paul Krugman and Become the Hong Kong of Europe

Täna avaldati Äripäevas Cato Instituudi vanemteaduri Dan Mithcelli artikkel sellest, kuidas Eestil oleks mõistlik jäljendada Aasia tiigrite Singapuri ja Hongkongi eeskuju. Viimased on juba pikka aega kogenud püsivat tugevat kasvu. Osa sellest kasust põhineb tema sõnul just vähesel valitsuse kulutamisel ja maksukoormusel, mida ta soovitab ka Eestile. Avaldame siinkohal tema artikli inglise keelse originaali.

PS! Juba sel neljapäeval esineb Dan Mitchell ka Tallinnas

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Estonia Should Ignore Paul Krugman and Become the Hong Kong of Europe
by Dan Mitchell

The Baltic nations do not get much attention in the United States, but that changed recently when Paul Krugman attacked Estonia for its policy of spending restraint.

That attack backfired when several people, ranging from Estonia’s President to American economists, pointed out that Estonia was doing much better, in the short run and long run, than other European nations that got in trouble because of fiscal or financial problems. Krugman also lost credibility when it became clear that he presented data in a misleading fashion.

Krugman’s biggest mistake is that he claimed that spending cuts caused the downturn, even though the recession began in 2008 when government spending was rapidly expanding. It wasn’t until 2009 that the burden of government spending was reduced, and that was when the economy began to grow again.

In other words, Krugman’s Keynesian theory was completely wrong. The economy should have boomed in 2008 and suffered a recession beginning in 2009. Instead, the opposite has happened. But that’s no surprise. Keynesian spending didn’t work for the United States in the 1930s when Presidents Hoover and Roosevelt increased the burden of government. It didn’t work for Japan in the 1990s. It didn’t work for President Bush in 2008, and it didn’t work for President Obama in 2009.

Krugman also produced a chart showing Estonia’s economic performance from 2007-present. This deceptive chart made it look as if Estonia’s economy was stagnant. In reality, the nation’s long-run economic performance is quite exemplary. Economic output has doubled in just 15 years according to the International Monetary Fund. Over that entire period – including the recent downturn, it has enjoyed one of the fastest growth rates in Europe.

This doesn’t mean Estonia’s policy is perfect. Spending was reduced in 2009 and 2010, but now it is climbing again. This is unfortunate. Government spending consumes about 40 percent of GDP, which is a significant burden on the private sector.

To be sure, other nations such as France, Germany, and Sweden have public sectors that consume an even larger share of GDP. But Estonia shouldn’t use Western Europe as a benchmark. Instead, Estonia should copy the Asian Tiger economies of Singapore and Hong Kong. These jurisdictions have maintained very high growth for decades in part because the burden of the public sector is only about 20 percent of GDP.

Picking the right role models is important because Estonia suffered from decades of communist oppression and fell behind the developed world. Hong Kong and Singapore both used to be poor, and now they are richer than the United States because tax rates are low and government spending is limited.

If Estonia mimics Hong Kong and Singapore, it can enjoy the same strong sustained growth over several decades. But if it copies Germany, that won’t happen. It takes about 30 years to double economic output for a nation that grows between 2 percent and 3 percent per year. But a nation that grows by an average of 5 percent each year doubles its GDP in about 15 years.

Fortunately, it shouldn’t be that difficult to emulate the successful fiscal policies of Hong Kong and Singapore. Estonia already has a flat tax, which is very important for competitiveness. The key goal should be to impose a spending cap, perhaps similar to Switzerland’s very successful “debt brake.” Under the Swiss system, government spending is not allowed to grow faster than population plus inflation. And since nominal GDP usually expands at a faster rate, this means that the relative burden of government spending shrinks over time.

By slowly but surely reducing the amount of GDP diverted to fund government, this would enable policymakers to deal with the one area where Estonia’s tax system is very unfriendly. Social insurance taxes equal about one-fourth of the cost of hiring a worker, thus discouraging job creation and boosting the shadow economy.

Reducing the heavy burden of social insurance taxes should be part of a big reform to modernize programs for healthcare and the elderly. A major long-term challenge for Estonia is that the population is expected to shrink. The World Bank and the United Nations both show that fertility rates are well below the “replacement rate,” meaning that there will be fewer workers in the future. That’s a very compelling reason why it is important to expand personal retirement accounts and allow the “pre-funding” of healthcare. It’s a simple matter of demographic reality.

Estonia has done a decent job in the past couple of decades. But if it wants to take the next step toward prosperity and fiscal sustainability, it needs to deal with the remaining problems of too much spending and high social insurance taxes. With the right policies, Estonia can be the Hong Kong of Europe.

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