Iceland For The Win! Bloomberg Businessweek, hardly a den of Leftist Big Government, reported that Iceland’s approach to economic recovery — government social programs and legal punishment for the financial elites who drove the country into crisis — is propelling the country to economic health and widespread prosperity:
Iceland holds some key lessons for nations trying to survive bailouts after the island’s approach to its rescue led to a “surprisingly” strong recovery, the International Monetary Fund’s mission chief to the country said.
Iceland’s commitment to its program, a decision to push losses on to bondholders instead of taxpayers and the safeguarding of a welfare system that shielded the unemployed from penury helped propel the nation from collapse toward recovery, according to the Washington-based fund.
That this is being reported by Iceland’s main IMF official ought to give more credence to the idea that New Deal-style public programs, capital controls, and legal accountability for elite wrongdoing are superior to the austerity agenda when it comes to economic recovery. The country put their former Prime Minister on trial for financial mismanagement, and while he escaped the most serious penalties, he was found guilty of one charge, sending the message that irresponsibility will not be tolerated. Iceland also put the cost burden of recovery mainly on the wealthy bondholders who benefited when times were good:
Iceland refused to protect creditors in its banks, which failed in 2008 after their debts bloated to 10 times the size of the economy. The island’s subsequent decision to shield itself from a capital outflow by restricting currency movements allowed the government to ward off a speculative attack, cauterizing the economy’s hemorrhaging. That helped the authorities focus on supporting households and businesses.
The island’s steps to resurrect itself since 2008, when its banks defaulted on $85 billion, are proving effective. Iceland’s economy will this year outgrow the euro area and the developed world on average, the Organization for Economic Cooperation and Development estimates.
Meanwhile, following the austerity agenda, the United States slouches through it’s fourth year of the Great Recession, while Greece, Spain, and the Eurozone continue to teeter on catastrophe. Both the case of Iceland and the historical record show that Keynesianism works and neoliberalism doesn’t. Conclusion: if you are a pro-austerity economist and you have any aspiration to a healthy scientific respect for empirical evidence, it is your professional duty to abandon whatever doctrines you currently hold and adopt theories that accord with observation. Period.