You're Praising Us Wrong

Over the last decade or so, Estonia has frequently been the subject of praise from foreign commentators for its rapid growth and fiscal responsibility. This has increased since the start of the global financial crisis in 2008 - we were hit pretty bad in the property bust, but have recovered well. (I've compared data from March 2007 to March 2011, and the average wage has increased 20%, while the Consumer Price Index has increased 21%.) We're also competing with Luxembourg for the lowest public debt in the Union. All this looks like a really good situation to outside observers obsessed with debt and growth problems in the US and EU, so there have been a number of articles talking about how we've been Doing It Right.

I want to talk about what our fans are doing wrong. I want to talk about bits of the Estonian state which are not mentioned by commentators who are using us an example for their own ideology.

On the US side, the most obvious example of this I've seen recently is this article in something called the Washington Times, by a man called Richard Rahn, "a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth" - in other words, someone who lives in the US capital and talks for a living.

Estonia serves as an example - even for the United States - of what can be accomplished by keeping down deficits and debt, and utilizing a flat tax rather than a progressive income tax.

That is true enough. But to any member of the US right wing (which is quite different, ideologically, from the European and even Estonian right wings), I would recommend they remember this:

1) That flat tax really is flat, as in, it doesn't decrease for the top earners. It also makes no difference between wages, capital gains, stock options, or anything else. Captains of industry may manage to siphon cash into Swiss bank accounts, but all personal earnings are taxed at the same rate. In fact, because income tax is waived for the first little bit of money you earn, the effective rate actually grows the higher your income gets, although this is insignificant above average-wage level. The free-market beacon you offer up to the wayward US does not give tax breaks to the rich.

2) Universal healthcare for everyone. People can be unhappy with the quality of treatment, and occasionally rightly so, but it's almost impossible to end up without healthcare coverage. If you or your spouse are on someone's payroll (even at minimum wage), if you're a minor, if you're a college student, if you're registered as unemployed - you get health insurance. No tiers. You can pay to jump a queue, but you still see the same specialist who's working with the same equipment, and it's paid for by the state.

3) Free higher education. Not universal - because no economy needs too many college graduates - but the state sponsors enough spots that if you know what you want to do after school and have the talent for it, you won't have to pay tuition. Between special subsidized student loans and a tradition of part-time work in college, smart and capable kids from low-income families have no problem getting a high-quality education. Access to the entire EU's worth of universities certainly helps.

The arguments are somewhat different when talking about the praise heaped on Estonia from EU-centric sources; here's a representative article from The Economist. Europe's right-wingers point to Estonia as a paragon of austerity, but are quick to ascribe it to cleverness and low levels of bureaucracy. But the key quality here is patience and a willingness to suffer for ultimate long-term good. That latter is what's missing in Europe as a whole today. Lack of it is the cause of the European sovereign crisis. Its onset is the only way to resolve the issue.

Quite simply, Estonia does not spend more than it earns - and neither should other countries. The Eurozone crisis is about unsustainable government-sector borrowing. Sure, a lot of Estonia's post-independence development has been subsidized by EU structural funds - but the same goes for a lot of other EU states, old and new. The threat to the common currency, the threat of Greece or Spain or Italy or Portugal defaulting, is that afterwards, Eurozone states will no longer be able to borrow money at low rates. So stop borrowing.

Forget PIGS. Both Germany and France have government debt of over 80% of their GDP - the entire value produced in those countries in a year. The Eurozone average is 85%. All the countries in the EU except Estonia and and Sweden spent more in 2010 than they earned, so that debt is only getting bigger. The initial thinking was that deficit spending would be canceled out by growth; by the time a country had to repay the debts, it would be collecting so much more in taxes that repayment wouldn't be difficult, or at the very least there would be a net gain. But most European states are at the point now where it is extremely unlikely that they would ever be able to pay off their public debt, and they haven't even started. Greece and Ireland and the other Eurozone states who have been particularly reckless with their spending are the first to reach the point where nobody trust them to keep up payments any more - but every single country in the EU will get there within the foreseeable future.

Unless they stop deficit spending.

This will be very difficult for politicians to sell to their voters, because today's Europeans see prosperity as their birthright. But balanced, surplus budgets are the only way to deal with the crisis.

The EU's government debt issue is not as bad as America or Japan's, true. But America has a lot of fat to trim. There are vast reserves of inefficiency in its budget-sponsored industries, primarily military and healthcare. Sooner or later, push will come to shove, they will introduce a single-payer system that will cut healthcare costs by a massive margin, and stop shoveling quite so much money into their military-related industries. They will also raise taxes on the top earners, like they did to pay off their WWII debt. They had a surplus in the 90s. The reason they don't now is because of their politicians.

The reason the EU doesn't have a budget surplus is because of its voters. The politicians, I'm sure, are well aware that austerity is necessary - but the populations will not stand for it. The EU already has high taxes. Increasing them further may help, but EU taxpayers expect to get something back for their contribution, a higher level of services, higher government spending. And it's government spending that needs to be cut.

In 2010, Germany's government debt increased by 3.3% of GDP. France's increased by 7% of GDP. Ireland's government spent a third more in 2010 than the value of everything that every person and corporation in that country did or created, put together.

The only realistic way to repay Europe's debts is to cut spending. Some will find it easier than others. None will find it as easy as Estonia did.