Frank Shostak Of Fails On Estonian Austerity

In the know Libertarians have been enthusiastic about the so-called successes of austerity in Estonia. Perhaps they have felt like they finally have something to back up their constant non sequitur claims that the “truly free market” can fix any problem. As per usual they use (if they do) data and make claims that don’t take into account the really existing material conditions.

Frank Shostak of the Mises Institute is claiming that Estonia is winning in the European crisis. His claim is that the austerity measures are a success there because the unemployment rate “fell to 5.9 percent in August from 7.6 percent in January.” Interestingly he doesn’t give a source for where he is getting his information about the unemployment rate from.

His lack of a source is highly suspicious when a reliable source like is saying unemployment in the second quarter of 2012 was at 10.2%. In late 2011, it was at about 11%.

This is not to say that unemployment did not fall greatly in Estonia from 2010 to early 2011. In fact it went from about 20% to 13%. Free market fundamentalists have automatically attributed this to austerity and less government without investigating any other factors. It seems more likely that the drop in unemployment is actually due to the mass emigration of people out of the country rather than economic recovery.

“… all three [sc. Baltic states] have seen mass emigration over the last four years, particularly amongst the young. All three have the highest emigration rates in the EU, with 24 people out of every 1,000 leaving Lithuania in the last year. This, in turn, has restrained domestic unemployment; and while people should be free to go and find work where they can, their exit hardly counts as a ringing endorsement for the government.”
James Meadway, “The Myth of Successful Baltic Austerity,” New Economics Foundation, 18 July 2012.

Then Shostak turns around and says this in the article:

“Since Q2 2011 the government has reversed its stance and embarked on massive spending. The average of the yearly rate of growth between Q2 2011 and Q2 2012 stood at a positive figure of 11 percent. (Contrast this with the -7.4 percent during Q3 2009 to Q1 2011.) Furthermore, the yearly rate of growth of money supply has been displaying strong growth. The average of the yearly rate of growth between December 2009 and August 2012 stood at 8 percent. (Contrast this with the figure of -7.9 percent during May 2008 to November 2009.) Rather than persisting with the cleansing process, the government and the central bank have chosen to reverse the stance, thereby arresting the process of healing the economy.”
Frank Shostak, “Why Estonia Is Beating the Eurozone,” Mises Daily, October 18, 2012.

Actually Estonia, since the second quarter in 2011, has undergone some kind of fiscal expansion. But this fiscal expansion is actually in correlation to higher GDP growth rates that occurred from 2011:

Regardless of what it is and Shostak want to think, the growth rate and recovery of 2011 did not correlated with austerity. It was very likely the major contributing factor was export-led growth.

What market fundamentalists are declaring is insane. Essentially they are claiming that austerity is declining unemployment, when in fact people are just leaving the country due to the impact of austerity and economic devastation. Not to mention the domestic wage and price deflation from 2008–2011.

Maybe that is Austrian theory, the unemployment rate can be lowered by forcing people out of the country through poverty. So much for the Non-Aggression Principal.

Take this from the end of the article:

Summary and Conclusions

The Estonian case shows that a policy that removes bubble activities lays the foundation for healthy economic growth.

Any attempt to alter tighter fiscal and monetary policies brings back false, nonproductive activities and leads to an economic impoverishment.

It is not possible to generate something out of nothing.

Any attempt to do so results in an economic disaster.

“It is not possible to generate something out of nothing. Any attempt to do so results in an economic disaster.” I’m pretty sure that’s the essence of Austrian economics. A non-existent version of capitalism that when applied in real life causes devastation.

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Frank Shostak, “Why Estonia Is Beating the Eurozone,” Mises Daily, October 18, 2012. Estonian Unemployment Rate

James Meadway, The myth of successful Baltic austerity

Bloomberg News, “Baltic Exodus Tests Austerity Champion Tag After Cuts” Estonian Annual GDP Growth

Austrian use of the NAP