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Home Publications Blogs Beat the Press 20 Percent Drops in GDP: Economists New Definition of Success

20 Percent Drops in GDP: Economists New Definition of Success

Tuesday, 25 May 2010 15:56

Back when I learned economics, companies were supposed to make profits and economies were supposed to grow. That doesn't seem to be the case anymore. We have "saavy" businessmen like Goldman Sachs CEO Lloyd Blankfein who took his company to the edge of bankruptcy only to be rescued by bailouts from the Fed and Treasury. Most of the crew of Wall Street multi-millionaires would be on the unemployment line today without the big helping hand from the Nanny State.

In the same vein, the NYT is now citing research from Deutsche Bank reporting : "that euro-area countries 'can learn some valuable lessons from the Baltics’ experience over recent quarters.' Those countries survived drastic budget consolidation without devaluing their currencies."

The article then continues to quote the Deutsche Bank experts: "Restoration of competitiveness and weighty fiscal consolidation in the absence of currency adjustment is difficult but doable ... as long as politicians and the general public are willing to accept some up-front pain in return to longer term gains.”

Just to give a clearer idea of what the Deutsche Bank crew is talking about, the IMF projects that GDP in each of the Baltic countries will drop by close to 20 percent from its 2007 levels. In the United States this would be equivalent to losing $3 trillion in annual output. By 2014, the last year for the projections, GDP is expected to be 7.1 percent lower than its 2007 level in Lithuania, 9.1 percent lower in Estonia, and 14.5 percent lower in Latvia. Unemployment in these countries is more than 15 percent in Estonia and Lithuania and more than 20 percent.

It is nice to see that German bankers applaud this pain. Needless to say, it is unlikely that many bankers will ever have the pleasure of making similar sacrifices for the long-term good of their own countries. Of course, it is not clear how long the Baltic countries will have to endure this pain before GDP is back on a healthy growth path and the unemployment rate is at a more normal level. The IMF tends to be overly optimistic in evaluating the prospects of the countries adopting policies it favors.

It would have been worth explicitly discussing the alternative strategy that some countries may wish to pursue -- devaluation and debt restructuring. Argentina pursued this path at the end of the 2001. While the IMF and virtually all economic authorities insisted that this path would lead to disaster, the economy only contracted for six more months. It then turned around and grew robustly for the next six years until it followed the world economy into recession. At its pre-recession peak in 2008 Argentina's economy was more than one-third larger than it had been in 1998 when its crisis first sent GDP downward.

While the bankers may be more inspired by the tales of sacrifice by the Baltic peoples, many non-bankers may find the Argentine experience more interesting. Responsible reporting should note both options.

Comments (5)Add Comment
written by izzatzo, May 25, 2010 7:47
Not to worry, the obvious misunderstanding in the press between corporate profit and corporate welfare will be cleared up shortly on June 26 in America Speaks!, a 20-city town hall meeting in the US funded by Pete Peterson et al.

"Whose Your Nanny" Dean Baker would have been the keynote speaker on "Military Keynesianism versus the Other Kind", until it was discovered that all the front row seats were reserved for organized chants of "Debt Debt Debt", just the way they brought down Bob Bennett in Utah with "TARP TARP TARP".

Stupid liberals.
written by Darren M, May 25, 2010 8:42
I was going to ask if "20007" was supposed to be 2017 until I read the absurd post above. Ignorance must truly be bliss.
Going to have to hit bottom...
written by scathew, May 25, 2010 10:21
I think we're just going to have to hit bottom again - I mean get to a world like Upton Sinclair's "Jungle". It's going to have to really suck all round until people start waking up.

Until then, they're slowly and silently killing us by degrees - sort of like bringing up the heat on a lobster until they don't realize it's too late.

Sad, but I don't see any other hope...
The Gift That Keeps On Giving
written by bobbyp, May 26, 2010 12:59
Depressions are the wealthy elite's gift to the little people.
written by Queen of Sheba, May 26, 2010 6:09
I am amazed and confounded how people making anywhere near the median income in this country could agree with, much less follow, Peter Peterson's prescription for healing what ails the economy - especially now, in the middle of a recession. The only explanation that makes any sense at all is that, because these people have to cut their household spending in these tough times, the government should too. That still doesn't explain how Peterson's insistence on shredding the social safety net has so many middle class adherents, though. Maybe it's the public's belief that, "He's wealthy - he must be right."

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.