Via National Review, here’s an interesting article on Lithuania’s belt-tightening response to the financial crisis:
Faced with rising deficits that threatened to bankrupt the country, Lithuania cut public spending by 30 percent — including slashing public sector wages 20 to 30 percent and reducing pensions by as much as 11 percent. Even the prime minister, Andrius Kubilius, took a pay cut of 45 percent.
And the government didn’t stop there. It raised taxes on a wide variety of goods, like pharmaceutical products and alcohol. Corporate taxes rose to 20 percent, from 15 percent. The value-added tax rose to 21 percent, from 18 percent.
More interesting still is the muted political backlash:
Remarkably, for the most part, the austerity was imposed with the grudging support of Lithuania’s trade unions and opposition parties, and has yet to elicit the kind of protest expressed by the regular, widespread street demonstrations and strikes seen in Greece, Spain and Britain.
Leaving aside the merits of this approach (though things seem to be working out for Lithuania), it’s worth noting that this austerity program is literally unthinkable in an American context. Every political interest group imaginable – from business lobbies to labor unions – is adversely affected by tax hikes and spending cuts, and I can’t imagine any politician brave (or suicidal) enough to propose something akin to Lithuania’s response to the economic downturn.
All of which reminds me of this excellent column from Reihan Salam:
During the sharp recession of the early 1980s Ronald Reagan and Paul Volcker subjected American families to extreme economic pain, and hundreds of thousands of industrial jobs evaporated and never returned. Had Reagan and Volcker decided to do everything in their power to preserve the economy of the late 1970s in amber, the world would look very different today. To put it bluntly, there is good reason to believe that the United States would be an economic backwater, and that the most innovative firms would have taken root elsewhere. Many say that Barack Obama, like Reagan, will suffer a serious political reversal in the midterm elections if high rates of unemployment persist, as seems likely. This comparison belies an important distinction. Reagan and Volcker made the difficult decision to allow painful restructuring. The Obama administration has, in contrast, tried to cash-for-clunker its way over the economic abyss instead of staring into it.
The truth is that America has changed over the intervening years. In the 1980s a large number of Americans still remembered the extreme deprivation that defined the interwar years. Now, in contrast, few American adults have previously seen real economic pain. One can hardly blame the president for this broader cultural shift. He can be blamed, however, for failing to understand how the restructuring of that earlier era really worked.
Austerity measures pale in comparison to prolonged foreign occupation, and I suspect enough Lithuanian business leaders, politicians, and trade unionists remember life before the USSR collapsed to accept a degree of belt-tightening that would be unthinkable elsewhere. But I’m 25, and aside from a few months after September 11, I can’t remember a time when the economy wasn’t growing at a steady pace. My parents are boomers, and their only connections to economic deprivation are through half-remembered stories of the Great Depression. Are we too removed from real hardship to tighten our belts when it matters? The looming budget crisis has provoked plenty of talk about a dysfunctional political system, but maybe gridlock is symptomatic of a public that just isn’t acclimated to the idea of serious fiscal responsibility.