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Re: A Moderate Proposal for how to Manage the Crisis in Estonia

Wolfgang_Drechsler — Tue, 23 Jun 2009 04:39:48 -0000

PS: It seems at least the illustration of this posting preempted Edward Lucas in Foreign Policy (never mind the partially rather naive rest of the piece, especially as regards the historic description of the boom)...

http://www.foreignpolicy.co...

"Portraying the Baltic states in their current mess requires more than words and numbers. Only an old-fashioned chart, with a sea monster, a whirlpool, or perhaps a skull and crossbones, would begin to do justice to the plight of what were until recently the shining success stories of the ex-communist world. Eating a meal in a deserted restaurant in one of the fine old capital cities of Tallinn, Riga, or Vilnius gives a sense of the collapse. So does the silence of the half-finished construction sites, the rock-bottom rates in the glitzy hotels that shot up during the boom years, and the fall of a Latvian government under the weight of the current troubles. The Baltic states today are prime candidates to be the new basket cases of Europe, with their double-digit economic declines, beleaguered governments, and shriveling state spending."

Re: A Moderate Proposal for how to Manage the Crisis in Estonia

Wolfgang_Drechsler — Wed, 17 Jun 2009 02:15:04 -0000

Madis, questioning policy proposals is certainly legitimate even if one does not have a better plan oneself. However, any policy comes with risks – and this includes the no-policy policy just like any other. In times of great uncertainty, the risks are even bigger, but so is the necessity to be clear what one wants and how one could feasibly achieve that. I am sure you actually do see why I am proposing the measures in question; you just disapprove and/or disagree that they will work.

Very briefly once again, the combination of salary freeze and modest deflation is, among other things, designed to make the financial development of Estonia more certain, within and without, and hence stop a further slide downwards and even re-enable investment; after all, the Kroon is grossly overvalued. Somewhat risky? Yes. More so than doing nothing? No.

I know that wanting to cut public sector salaries is a knee-jerk reaction to almost anything in Estonia, including bad weather, but under the current circumstances, when one needs a particularly competent (senior) civil service, that’s particularly misguided. My concern is rather to retain and improve high administrative capacity, because without it, the current crisis cannot be overcome. If the private sector is anyway self-regulating its salaries on an ideal basis (I am not sure why it would; that requires faith in certain automatisms the crisis has shown do not exist), then there should be no problem with a freeze either. Genuine entrepreneurs are not salaried anyway, and already the original definitions of entrepreneur entails that he is not just motivated by money, often not even primarily.

Once again, sure the housing program is somewhat expensive, but any alternative would be more so, and it is ‘unfair’ only to the extent that the people who will suffer most from deflation and salary freeze will not be completely congruent with those who have taken too high mortgages (and yes, I agree that they shouldn’t have, but it was the mood of the times and they clearly were encouraged, though certainly not by myself). I admit that I am a bit queasy about that, but much less so if I consider the alternatives.

Finally, the entire proposal is precisely designed to enable Estonia to stay solvent (even) in the mid-term. To try doing so only by cutting expenses right away is the worst of all scenarios, as it will lead to disastrous side effects right away and later on as well. As a possibility of the very last resort and on a temporal basis, if really done across the board excepting the ‘net of decency’, it’s however exactly what I propose in the last point.

Re: A Moderate Proposal for how to Manage the Crisis in Estonia

Wolfgang_Drechsler — Tue, 16 Jun 2009 13:41:09 -0000

Jamie, anonymity is everyone’s individual choice. I think, however, and have said and written about that several times, that communication modes and platforms that enable it are in the end destructive, at least damaging, for public discourse (as the Estonian case shows very well), nor is there any reason for encouraging it (except in elections). Hence my principle to always just completely ignore anonymous comments. However, obviously, here I go again… :-)

On demographics, even if it were a personal issue, as you make very clear in your last comment, parental compensation is not an economic or financial priority but a policy one. This is not what my proposal is about; it’s about stopping the bleeding. The same goes for your views on Estonia having in the end to export itself out of the crisis – I basically agree with you there (and would even say that if there is a clear example for policy failure regarding the Estonian economy, this aspect is it), but it’s not my topic right now but rather the next step – although the investment you mention clearly hinges on previous devaluation and most of all on some certainty about the future. There is none now, as you say, and that is the problem; no relevant entrepreneurship without financing, even in new and sensible fields. (Low wages alone don’t help at all in the Estonian case; they are always lower somewhere else.) Again, my main point is that quite moderate devaluation (which I doubt would necessarily be not be welcomed by the institutions you mention, even if unilaterally declared) and – it needs both – salary freeze, in synergy, are possible and will indeed have the desired effect of stopping the slide downwards if implemented right now. As regards the housing issue, real estate price correction would in essence mean eviction for too many people, so in some sense delaying it is precisely what the respective measure tries to accomplish, and the State can do that – and for less money than the alternative would cost in the end. Here, however, I would agree with you that the how and when is of crucial importance, and that there should be as much market n this process as possible.

And finally, I think that it would precisely be following this plan what would bring Estonia closer to the Euro (although, as you say, as I very much agree with, and as we can see right now, membership in the Eurozone will not solve all, I would say not even most, problems of the Estonian economy – this is just wishful thinking). Sitting there and doing nothing for the incredibly long time of 19 months you suggest, and during which we do not know what might happen in the Eurozone, on the other hand, would surely get the country farther away from the Euro than ever.

Re: A Moderate Proposal for how to Manage the Crisis in Estonia

Wolfgang_Drechsler — Tue, 16 Jun 2009 05:16:04 -0000

Marugusu, I think it would be great if Estonia would decide to devaluate before Latvia. I don’t think by any means that a race to the currency bottom would be necessary here (I can see the temptation of course); the situation of the two countries is, after all, different (and it is the main task of the Estonian government right now to keep it that way!), and it really depends how much the Kroon will actually be worth by then. But naturally, all depends on timing and global context.

Re: A Moderate Proposal for how to Manage the Crisis in Estonia

Wolfgang_Drechsler — Tue, 16 Jun 2009 04:55:03 -0000

Jamie, I am going against my firm principle here never to reply to anonymous comments, but very briefly and just once: As I said, I am proposing genuinely ambivalent measures, i.e. they do have uncertainties and negative effects. However, what’s a better option? The currently prevailing no-policy policy definitely is not viable. Yes, instant devaluation would be difficult (but actually not impossible) in Estonia, but what is the alternative to a slower one – keeping the peg as is? The Baltic states’ economic and fiscal unity is a myth detrimental to the interests of Estonia, especially in this case. The salary freeze must, in order to be synergetic with devaluation, be announced, imposed, and kept, but then it can easily have a sufficient effect already. Yes, it is difficult to tax increases, but again, saying it's difficult implies that it can be done (and anyway, a proportional income tax is somewhat nice, labor-saving, and easily collected, but that’s about it regarding the advantages). Sure there’ll be inflationary pressure regardless, but less, and that is all one can currently go for. Cheating is always a rational choice (which people don’t generally pursue anyway), so that’s not an argument against any policy measure, but rather for high implementation capacity (as is the taxation of salary increases mentioned above). And yes, I absolutely agree that helping out mortgage payers is not moral high-ground, but that’s not the point of this proposal either. It’s not “fun” but strikes me as socially necessary, especially in balance with the other measures. Financing running costs will most certainly be a temptation. And just because cutting across the board might be the mood of the times (I don’t think it is), this does not automatically mean that it’s wrong. Finally, I actually don’t agree with exempting parental compensation from cuts at all because that’s precisely a policy priority – and not part of the ‘net of decency –; it’s not meant to “produce” new taxpayers, which anyway is a problematic notion.