Baltic Business Cycles, Continued - NYTimes.com

I noted yesterday that my mild observation that a partial bounceback from a severe slump is not exactly an economic triumph apparently elicited rage in Estonia. Simon Wren-Lewis, writing about Latvia, is more caustic:

An extraordinary success story: after an 18% decline in GDP in 2009, and flat GDP in 2010, we now have 5.5% growth in 2011. But surely I?m being economical with my quotes here. Isn?t the 5.5% growth last year just the beginning, with the economy achieving a new dynamism. Mr. Asmussen does not provide any additional evidence on this. Perhaps wisely, as the IMF are predicting 2% growth this year, and 2.5% next year. So the 5.5% growth last year is all we have.

Mr. Asmussen could have talked about unemployment, which has also fallen rapidly, from a peak of 20% to 15% currently. Perhaps he did not, because unemployment shows more clearly what has actually happened. We have had a huge recession, followed by a much more modest recovery. And, as we might guess, there is apparently much more talk about structural unemployment in Latvia today. For a rather more objective account of the Latvian experience of internal devaluation, see this (US) CEPR study, or a number of Paul Krugman?s posts.

Earlier this year I wrote that when growth returned, some would say this proved those pessimistic Keynesians had been all wrong. I must admit the ?some? I had in mind were politicians and journalists, not senior central bankers. By this logic, an even better strategy is to close the whole economy down for a year. The following year we could get fantastic growth as the economy starts up again.

While I?m at it, let me address another issue. Quite a few people say that it?s wrong ? or, as some say, ?dishonest? ? to look only at the decline since the peak. After all, didn?t the Baltics have very good growth in the years preceding the peak?

Yes, they did. So did America before the Great Depression. Long-run growth and business cycles are different things: long-run growth represents rising economic potential, slumps reflect a shortfall of output below that potential. Since the austerity/stimulus debate is about slumps, not long-run growth, talking about growth before the crisis is just irrelevant.

Anyway, I?m for the Wren-Lewis proposal: let?s collapse the economy for a year, so we can have great growth the year following.

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