globaleconomicanalysis.blogspot.com / By Mike “Mish” Shedlock / Wednesday, December 05, 2012 11:55 AM
The socialists and the Keynesians would have you believe that austerity is a bad thing, and that firing government workers when unemployment is already high is the wrong thing to do.
Anyone believing those myths needs to consider Euro Countries (and the IMF) Can Learn from Latvia’s Economic Success.
In 2008–09, Latvia lost 24 percent of its GDP. It was heading toward a budget deficit of 19 percent of GDP in 2009 without a program of radical austerity.
A new Latvian government came to power in March 2009, when GDP was in free fall. It told people how bad the situation was, and the various social partners responded by signing up to a truly radical austerity program. One-third of the civil servants were laid off; half the state agencies were closed, which prompted deregulation; the average public wage was cut by 26 percent in one year. But this was a socially considerate program. Top officials were hit more, with 35 percent in wage cuts, while in the end pensions were not cut. In particular, public servants were no longer allowed to sit on state corporate boards and earn more than from their salaries, a malpractice that is still common in many European countries. The government exposed high-level corruption. Yet, many schools and most of the hospitals were closed.