Paul Krugman has long been an advocate of Keynesian economics, and a proponent of aggressive and expansionary fiscal policy drawing parallels between Japan's decade-long deflation and the current Great Recession. Krugman also has also been writing quite extensively using Iceland as the poster child on the benefits of currency devaluation.
Krugman's latest endeavor on the so-called 'Icelandic Miracle' was when he posted on his NYT blog last month with the following chart showing the seemingly much better GDP growth from Iceland compared to Ireland, Estonia, Lativa, and Lithuania. He also rhetorically remarked:
"Looking at this, would you have expected that Latvia would be lionized as the hero of the crisis?"
|Chart Source: NYT/Paul Krugman, June 14, 2012|
|Chart Source: CFR, July 2, 2012|
|Chart Source: CFR, July 2, 2012|
This actually is the second round of the 'Icelandic Miracle' debate between Krugman and CFR. Round one took place in June 2010. Two years ago, Krugman used a similar chart showing a much higher GDP growth of Iceland relative to Ireland, Latvia, and Estonia since the 4th quarter of 2007 to support his declaration that Iceland is a "Post-Crisis Miracle." (We are not quite sure why Krugman dragged Lithuania in his 2012 post.)
In this second face-off, CFR laments:
"...Once again, Krugman has relied on a Potemkin-Village graphic to illustrate his wider claim, which is that Icelanders derive unambiguous net benefits from their government obliging them to hold and transact in a national currency that their trading partners will not accept. (80% of Greeks consistently reject going back to such a state.)"
"....the Baltic economies remain substantially poorer than Iceland and most euro-zone members and should therefore be expected to have a much faster rate of underlying growth thanks to the potential for catch-up. That they've essentially kept pace with rich Iceland rather than catching uppoints to the advantage of adjustment via devaluation, as does Iceland's good performance relative to Ireland."
On the other hand, The Economist also appears to say it was all but a number's game depending on the comparative elements involved with the following conclusion [emphasis ours]
"..... it is telling that to spin a story of growth via internal devaluation one has to resort to citing emerging markets—notably, ones that have managed very little catch up over the past 5-6 years at a time when other key emerging markets were marking enormous gains."
You might recall, Iceland suffered the biggest banking collapse in history by any country relative to its economic size in 2008 when its highly leverage banks lost access to the funding market. The tiny Nordic nation was eventually bailed out by the IMF and other Nordic countries, partly because too many Europeans had deposits into Icesave.
"The moral of the story seems to be that if you’re going to have a crisis, it’s better to have a really, really bad one. Otherwise, you’ll end up taking the advice of people who assure you that even more suffering [i.e. austerity and the resulted deflation] will cure what ails you."
Debunking Krugman's 'Icelandic Miracle' (July 2010)
New Mortgage Crisis in Iceland: Could U.S. Be Far Behind? (Oct. 2010)
© EconMattersby EconMatters
Paul Krugman has long been an advocate of Keynesian economics, and a proponent of aggressive and expansionary fiscal policy drawing parallels between Japan's decade-long deflation and the current Great Recession. Krugman also has also been