What distinguished Latvia’s experience from our own is that, once people recognized the gravity of the crisis, they came together to support the necessary, if harsh, policies to stop the free-fall and restore stability. The economy is now growing again, and although joblessness remains horrific (16.6 percent), it is gradually declining. There is renewed hope. The government that presided over the punishing measures that brought about recovery was reelected last October with an expanded majority.
The contrast with the United States is stark. Here, there is no agreement on what to do and no large sense of national purpose. Every day, our political leaders haggle and maneuver for narrow partisan advantage, their stature — whether Republican or Democrat — constantly shrinking. The rancor over raising the federal debt ceiling is but the latest example.
What explains the contrast?
To be sure, America’s leaders have legitimate policy disagreements. How much should budget deficits be cut? When? By tax increases or spending reductions? But Latvia had disagreements, too. The largest involved the currency, the lat. Should it be devalued to limit short-term unemployment or defended to defuse the financial crisis? The government rejected devaluation, and though that temporarily boosted unemployment, it now seems the right decision.
The larger reason for the contrast, I think, lies elsewhere. Until 1991, Latvia was an unwilling part of the Soviet Union; its citizens lacked freedom. As the severity of the crisis became apparent, the stakes transcended economics. “The public sense of crisis [became] profound and all embracing. The ultimate issue was Latvia’s national survival,” Valdis Dombrovskis, Latvia’s prime minister since March 2009, and economist Anders Aslund of the Peterson Institute, write in a new book, “How Latvia Came Through the Financial Crisis.”
This created a sense of seriousness and threat that galvanized political action. Latvians worried that, somehow, they might lose their freedom and national identity along with their jobs. As Dombrovskis and Aslund make clear, Latvian politics before the crisis was hardly pristine. Scandals, shortsightedness and pettiness were common. But the crisis changed the climate of opinion, permitting policies that otherwise might have been impossible. (The Dombrovskis government also softened the social consequences by extending unemployment insurance and creating a temporary jobs program.)
It is precisely this sense of seriousness and threat that is missing in the United States. Our politicians, though routinely issuing somber statements, don’t act genuinely worried or scared, as they did (for example) in late 2008 and early 2009 when the economy was in a tailspin. They are in a standard “blame game” mode, signaling that only a turn for the worse — another economic calamity — would cause them to behave differently.
The result is that we seem incapable of making changes far smaller than those accomplished by Latvians. Their basic problem was boom and bust. A flood of foreign money beginning after 2004 caused a boom, including a housing bubble, and when foreign inflows suddenly stopped in 2008, the economy collapsed. Government had expanded well beyond what could be supported. Through tax increases, layoffs, salary cuts and other spending reductions, Latvia trimmed its budget by 16 percent of GDP. About 29 percent of government workers were fired; wages for the rest were cut 26 percent.
By contrast, what Americans need to do is much smaller, though high by historical standards. In 2011, the federal budget deficit is reckoned to be about 9 percent of GDP. But part of the deficit reflects the weak economy and part reflects “stimulus” measures that, presumably, will end. Assuming the economy recovers, the underlying gap between spending and taxes is probably between 3 and 6 percent of GDP, depending on how the calculation is done. We can’t agree on how to bridge this gap, even if changes were phased in over, say, a decade.
Latvia used the economic crisis — maybe it had no choice — to make changes that, though initially painful, will ultimately strengthen its position. We haven’t done this. There has been (it must be obvious) a failure of political leadership. Once the immediate crisis passed, our leaders reverted to partisan form. Decisive action in Latvia helped restore confidence. Government could govern. In the United States, government has drifted. Its inconsistencies and indecision have corroded confidence and compromised recovery.