The New York Times has an article about the Latvian experience with austerity. Latvia is one of the only governments in Europe to have implemented a substantial austerity program, and – shockingly – its economy “grew by more than 5 percent last year, making it the best performer in the 27-nation European Union.”
[I]nstead of taking to the streets to protest the cuts, Mr. Krumins, whose newborn child, in the meantime, needed major surgery, bought a tractor and began hauling wood to heating plants that needed fuel. Then, as Latvia’s economy began to pull out of its nose-dive, he returned to architecture and today employs 15 people — five more than he had before. “We have a different mentality here,” he said.
Latvia slashed its government sector by more than a third, and re-elected the prime minister who oversaw it. Even the IMF is praising its success. Still – and this is truly shocking – the article concludes:
Alf Vanags, director of the Baltic International Center for Economic Policy Studies here, is skeptical. “The idea of a Latvian ‘success story’ is ridiculous,” he said. “Latvia is not a model for anybody.”
Latvia’s high pain threshold and unusually open economy set it apart, enabling a relentless squeezing of wages, said Morten Hansen, head of the economics department at the Stockholm School of Economics in Riga.
“You can only do this in a country that is willing to take serious pain for some time and has a dramatic flexibility in the labor market,” he said. “The lesson of what Latvia has done is that there is no lesson.”
No lesson from Latvia? Listen to Mr. Krumins. The lesson is that the primary evil of welfarism is not fiscal unsustainability, but erosion of the norms of personal responsibility on which a free society depends. For this reason, we ought to fear welfare that works more than welfare that’s wasted. Had the Soviet government succeeded in its aim of cradle-to-grave care in Latvia instead of impoverishing them, who can doubt that there would now be no success story there? As Hayek put it, “One of the strongest arguments against [the establishment of welfare programs] is, indeed, that their introduction is the kind of politically irrevocable measure that will have to be continued, whether it proves a mistake or not.”
Perhaps this unwillingness to take “serious pain” is what the classical political philosophers called the corruption of a polity.
[I]f a city, which from its origin has enjoyed liberty but has of itself become corrupt, has great difficulties in devising good laws for the maintenance of liberty, it is not to be wondered at if a city that had its origin in servitude finds it, not only difficult, but actually impossible, ever to organize a government that will secure its liberty and tranquillity.
Discourses on Livy, ch. 49.