Krugman vs. Estonia: my take

Having been out of town for some weeks, I only just now got around to reading the Businessweek article about the mud-slinging between Princeton economist Paul Krugman and Estonia, esp. its President Toomas Ilves.In short, in June Krugman published a blog post saying that because Estonia's austerity program shrank the country's GDP by almost 15% and that the small Baltic nation's GDP hadn't regained its 2007 levels, that proved that austerity doesn't work and that Estonia should have adopted a Krumanite program of currency devaluation and inflation to move forward from the crisis. Estonia and austerity proponents believe that the country's quick turnaround:  2.3% GDP growth in 2010 followed by 8% or so in 2011, make it a poster child for austerity. In response to Krugman, Ilves did some Tweeting from the hip that generated a lot of discussion in both Estonia and Econoblogospheria.

Here's what I think: On balance, Estonians seems happy with what they did, and that demonstrates that the sort of GDP-obsessed economic determinism for which Krugman is a mouthpiece may not be all that it's cracked up to be. Estonians are used to hardship.  Around 25% of the population died during WWII, and the memory of the Great Patriotic War is still present there and throughout the European part of the former USSR (admittedly, I haven't been back there since '98, but I'm sure they still work it like Giuliani works 9/11).

Estonia's small size and relative ethnic homogeneity (70% Estonian, and almost everybody else is some kind of Slav) and relatively low income disparity (2009 CIA Gini coefficient 31.4 as compared to EU average 30.4 or the US's 45) makes austerity relatively palatable. When people who look like you suffer like you, and it's much less bad than it used to be in WWII or under the Soviet Union, it doesn't feel so bad. Monty Python's knight would have said "It's only a flesh wound."

It's not clear how austerity would play out in larger, more ethnically mixed places where there's always somebody who looks different and sounds funny to blame things on. I think the question gets much more complicated there, or, as is the case, here.